Koninklijke Philips Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 23, 2023

There are 13 speakers on the call.

Operator

Welcome to the Royal Philips Third Quarter 2023 Results Conference Call on Monday, October 23, 2023. 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 Royal Philips. I will now hand the conference over to Mr. Leandro Mazzuni, Head of Investor Relations. Please go ahead, sir.

Speaker 1

Hi, everyone. Welcome to Philips' 3rd quarter 2023 results webcast. I have here with me our CEO, Roy Jacobs and our CFO, Abhijit Bhattacharya. The press release and slide deck as well as the deck on the Respironics recall were published on our Investor Relations website this morning. The replay and full transcript of this webcast will be made available on the website as well.

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 our Investor Relations website. In today's call, we will discuss our results as well as the progress on the actions we're taking across different areas to drive performance improvement. I would like to hand over to Roy.

Speaker 2

Good morning, everyone, and welcome to the webcast. Before we go into the numbers, I want to say that our hearts go out to everyone affected by the terrible events ongoing in the Middle East. As of today, I'm thankful to report that all our colleagues based in the region are currently safe. Now starting the key highlights for Q3. We delivered another quarter of improved operational performance.

Speaker 2

With strong 11% sales growth, doubling our profitability and strong cash flow. The improvements were across all business segments at all regions and the result of our ongoing actions to strengthen execution. We're making progress on all our three priorities, enhancing patient safety and quality, tracking supply chain reliability and establishing a simplified more agile operating model, supporting our productivity and our margins. Completing the Responics recall remains our highest priority with the remediation of the sleep therapy devices almost complete. We are in discussions with the FDA on the details of further testing.

Speaker 2

The litigation, investigation by the U. S. DOJ as well as the discussions on the proposed consent decree are ongoing without further updates to share. Based upon our improved performance, we are further raising the outlook for both sales and profitability for the full year 2023. Although recognizing uncertainties remain in increasingly volatile geopolitical environment.

Speaker 2

Our improved performance reinforces the confidence we have in delivering also the next 2 years of our 3 years plan to create value with sustainable impact. On to the financial highlights. The strong comparable sales growth of 11% was driven by 14% growth in Diagnosis and Treatment, 10% growth in Connected Care and 7% in Personal Health. Our adjusted EBITDA margin was 10.2%, a strong improvement of 5.40 basis points versus a year ago. Operating cash saw an inflow of €489,000,000 an increase of approximately €670,000,000 versus last year.

Speaker 2

Order intake, which accounts for around 40% of group sales was lower in the quarter, mainly due to the comparison base related to the exceptionally high orders in 2021 2022, substantially lower China and longer order to delivery lead times. We continue to see hospital healthcare systems in the U. S. And other mature geographies exhibit cautious buying behavior in the short term and China is heavily impacted by the government initiated anti corruption measures. But I look at the future with confidence.

Speaker 2

Our order book remains strong. The fundamentals of the markets in which we operate as well as our order funnel are healthy and our innovation portfolio is strategically positioned to help hospitals address their staffing shortages, enhance productivity and improve patient outcomes. Let me qualify what I mean with a strong order book. The order book remains around 20% higher than in Q3 2021 when the global supply chain crisis started and will continue to support revenue growth. At the same time, we are implementing the necessary actions to improve order intake by reducing lead times from order to delivery and leveraging our operating model change and our innovations.

Speaker 2

Based on the flow of orders that are in the pipeline and the visibility we have as of now, we expect to see sequential improvement in order intake in Q4. While there remain the uncertainty and geopolitical volatility we have outlined. Let me provide you with some of the key customer and innovation milestones during the quarter. We signed a 10 year over €100,000,000 Enterprise Monitoring as a Service an informatics agreement with 1 of the largest health systems in the U. S.

Speaker 2

Covering 20 hospitals with over 3,000 beds. We expanded our leading image guided therapy portfolio with the launch of the mobile Sion System 3000, which contains workflow enhancing features to help alleviate staff shortages faced by many hospitals. We introduced our ambulatory monitoring offering in Japan, combining Philips ePatch Holter monitors with ECG analysis to AI and advanced algorithms. And in Personal Health, we launched Sonicare DiamondClean 7,900 series in China, which debuted as the number 1 high end Tubersch on Alibaba's Tmall. We celebrated 100 years of successful presence and collaboration in China, where we are known as Filippo and have a leading position, a strong local team of over 7,000 employees and an extensive footprint covering manufacturing, Innovation, Sales and Services.

Speaker 2

And with that, I would like to give the floor to Abhijit to take us through Q3 in more detail, after which I will come back with the progress on our execution priorities.

Speaker 3

Thanks, Roy. Good morning, everyone. Let's begin by looking at the segment highlights for the quarter. In Diagnosis and Treatment, comparable sales increased 14% driven by double digit growth across Diagnostic Imaging, Ultrasound and Image Guided Therapy. Adjusted EBITDA margin was 12.7 percent, an increase of 2 30 basis points, mainly driven by operational leverage, pricing and productivity measures.

Speaker 3

Year to date, adjusted EBITDA margin for Diagnosis Connected Care comparable sales increased by 10% driven by double digit growth in monitoring and mid single digit growth in Enterprise Informatics. Sleep and Respiratory Care sales were flattish. In the quarter, we started gradually to serve new sleep therapy patients in several countries outside the U. S. Connected Care adjusted EBITDA margin was 3.7 percent, over 1100 basis points improvement from last year, mainly driven by increased sales and productivity measures.

Speaker 3

Personal Health delivered a 7% comparable sales increase. This was driven by high single digit growth in Personal Care and Oral Healthcare and included the positive impact of price increases. Comparable sales grew high single digit in North America and in growth geographies, mid single digit in Western Europe and low single digit in China. Overall consumer sentiment remains subdued. Adjusted EBITDA margin for Personal Health was 18.7 percent, an increase of 4 increased by 540 basis points to 10.2%.

Speaker 3

Wage and component price inflation came in at 2 50 basis points, slightly better than a year ago. However, this was more than offset by 2 40 basis points from operational leverage and by our productivity and pricing actions, which contributed a further 5.40 basis points. We delivered significant improved cash flow with a free cash flow of €333,000,000 in the quarter. This was driven by higher earnings and improved working capital management. We saw a sequential reduction in inventory volumes in the Q3, and we will see continued improvement in the coming quarter as well.

Speaker 3

Year to date free cash was an inflow of €454,000,000 This resulted in an improvement of our leverage from 3.6 times to 2.9 times on an adjusted EBITDA to gross debt basis compared to the start of the year. We have been very disciplined in cost management, and our productivity initiatives have delivered savings of $258,000,000 in the quarter. Operating model productivity savings were 142,000,000 Procurement savings were €59,000,000 and other productivity programs delivered €57,000,000 Year to date, our productivity initiatives have delivered savings of GBP 685,000,000 Moving to our order book. As Roy mentioned, it remains significantly higher than the period before the supply chain constraints kicked in. We expect the order book to remain strong and continue to support sales growth in the coming quarters.

Speaker 3

It's very important to note that orders and order book account for around 40% of our revenue. The remaining 60% come from recurring revenue streams such as services and consumables and book to bill businesses and from the Personal Health Business. As you can see on the page on the screen, Absolute levels of order intake remain healthy, but we see a steep increase in sales level year to date due to the enhanced Order book to sales conversion following supply chain and execution improvements. Also important to note, order intake growth in Q3 2021 was 47%, which is why the comparison base is highly elevated. At the same time, as Roy just said, we continue to implement the necessary actions to improve order intake by reducing lead times and leveraging our innovations.

Speaker 3

In Diagnosis and Treatment, comparable order intake declined low double digit following high order intake in Q3 2022, significantly lower orders in China and Russia as well as longer order to delivery lead times. In China, the lower orders are due to the impact of the recent government imposed anti corruption measures. We have seen similar initiatives before, which we support. This impacted short term decision making by hospitals as they work through the government measures, resulting in a substantially lower order intake year on year. Based on our previous experience, this is not expected to impact fundamental demand in the China market, and our order funnel remains very active in the country.

Speaker 3

As explained in the last quarter, the Russia impact is due to the longer order lead time because of additional export control procedures that have been put in place recently. Order intake was mid single digit lower year on year in Connected Care due to the tough comps in hospital patient monitoring after the expansion and renewal of the installed base in the last few years. For context, Connected Care orders continue to run at absolute levels, double digit higher than pre COVID levels. Moving to capital allocation. In the 3rd quarter, we issued €500,000,000 of Fixed rate notes due in 2,031, which were used to pay off the short term debt.

Speaker 3

This has a debt neutral effect while further strengthening our debt maturity profile. During the quarter, we settled a number of forward purchase transaction entered into under the 1,500,000,000 share buyback program announced in 2021, Following further settlements in Q4 2023, we plan to cancel more than 15,000,000 shares in December, which will result in a reduction of over 1.5% of the outstanding shares. As Roy mentioned, we have raised the full year outlook to 6% to 7% comparable sales growth and an adjusted EBITDA margin between 10% and 11% for the group, while recognizing uncertainties remain in an increasingly Volatile Geopolitical Environment. As we had mentioned earlier, Q4 will have tougher comparison base as we delivered over 6% growth in Diagnosis and Treatment Businesses and over 20% growth in Hospital Patient Monitoring in Q4 of last year. Personal Health will continue to have healthy growth as well.

Speaker 3

This just reiterates how we saw the second half of year unfolding, and I want to be clear that we are not seeing, not flagging any different dynamics than what we've said before for the Q4. As we had said before, the improvements in the supply chain front end loaded growth for the year. With that, I would like to hand back to Roy.

Speaker 2

Thanks, Abhijit. I would like to continue with the topic of the Respironics recall. Globally, over 99% of the sleep therapy devices registrations that are complete and actionable have been remediated. The remediation of ventilators is ongoing. Based upon the test results to date, Philips Respironics and third party experts concluded that use of our sleep therapy devices is not expected to result in appreciable harm to health in patients.

Speaker 2

Following ongoing communications with the FDA, Philips Respironics has agreed to implement additional testing to supplement current testing data on PE Perform. The FDA acknowledged that current testing is extensive and conducted with independent parties and expressed no concerns with its validity or objectivity. They did ask for more testing to supplement it. Felasradronix is in discussions with the FDA on the details of the further testing. Earlier this month, we received preliminary court approval for the settlement agreement to resolve all economic loss claims in the U.

Speaker 2

S. MDL, for which we had recorded a provision of €575,000,000 the Q1 of this year. The litigation and investigation by the U. S. DOJ related to the Respironics field action as well as the discussions on the proposed consent decree are ongoing without further updates to share.

Speaker 2

Now I would like to highlight some of the progress we have made in the quarter on our execution priorities. First on patient safety and quality. As part of strengthening our patient safety and quality culture, 2 weeks ago, we kicked off our company wide time out for the topic, where we spent a full day talking to all 70,000 employees worldwide about how we are moving forward with patient safety and quality, the progress we've made to date and how we take it further. Patient Safety and quality reviews are fully integrated in the new business performance management cadence, and we opened 1 of the largest electromagnetic compatibility labs in Europe, specialized in testing health technology. With respect to supply chain, we continue to make progress to reduce materials and component risks.

Speaker 2

For example, We've now completed around 70% of the redesigns of printed circuit boards. We are on track to meet our target to derisk all our high risk components by year end. And as you have seen in the results today, I'm pleased to see that the actions we have been taking to date continue to have positive impact on our sales as well as our service levels. We are monitoring the situation in Israel closely as we have manufacturing and R and D activities in the country, but currently business continuity is guaranteed. Finally, our new operating model with prime accountability in the businesses went live in April this year and we have completed the realignment of the workforce roles and reporting lines.

Speaker 2

This included also the difficult but necessary reduction of 7,500 rolls to date out of the planned reduction of 10,000 rolls by 2025. Let me close out by repeating the key messages of the quarter. We delivered another quarter of improved operational performance with strong sales growth, better profitability and better cash flow. We're making progress on our 3 priorities: enhance patient safety and quality strengthen our supply chain reliability and establish a simplified more agile operating model. Completing the Respironics recall for patients remains our highest priority.

Speaker 2

And looking ahead, we have further raised the full year outlook for both sales and profitability, although recognizing that uncertainties remain in an increasingly volatile geopolitical environment. The progress we are making reinforces our confidence in delivering the next 2 years of our 3 years plan to create value with sustainable impact. I would like to thank you for joining the call and we will now take your questions.

Operator

Thank you, There will be a short pause while participants register for questions. Thank you. The first question comes from the line of Hassan Iwaqil from Barclays. Please go ahead.

Speaker 4

Hi. Good morning and thank you for taking I have 3, please. Firstly, can I start on orders given Q3 is down 9% and year to date orders are down 6? How are you thinking about the current order backlog substantiating growth next year? Do you think you can still achieve mid single digit growth in 2024 in line with your midterm growth guidance and is end market demand changing at all?

Speaker 4

Secondly, can you talk about the strong profitability in D and T and your expectations for Q4 given this is typically a higher volume quarter. You already said that your 2025 target of low teens in terms And I wonder how you're thinking about upside to the current 12% margin that you've done year to date over the next 2 years. And then finally, can you talk about the FDA's update on your testing and whether this to your mind changes the scope of the consent decree potentially or drives any further delays here. What extra tests do you need to do? And how long will this take?

Speaker 4

And do you think this has any impact in terms of timing on the litigation process? Thank you.

Speaker 2

Thank you, Asa. Let me take the first one to start off with. So on the orders, you saw that we have presented the minus 9% in the quarter. I want to put that in context. So as said by Abhijit, First of all, we have still a very strong order book, which is 20% higher than 2 years ago.

Speaker 2

That also is fueling our strong sales performance to date and 4 quarters of improved sales growth. Secondly, we have an improvement where we see that the order intake, as we also mentioned earlier, will come off in Q4 and also we expect that to continue in 2024. As the underlying fundamentals of the market and our positioning has not changed. But we're coming off a very high comparable growth in Q3 in this year where we had 47% growth 2 years ago. So the comparable base also played part.

Speaker 2

And then on top, we are kind of taking actions to continue to work on improved order intake. Therefore, I also mentioned that actually We are ahead of the 1st year of our 3 year plan. And actually this has given us further confidence in also executing the 2nd and third year of the plan that I presented in January. And as you know, we presented a plan in which we started with low single digit growth in year 1, mid single digit growth in year 2 and onwards. That's where we also stick to as part of the execution of our plan.

Speaker 2

Last point I think to mention, which is important that the order intake as we report is impacting 40% of our total business. And that's maybe a bit of a different profile that we have for some other companies because we have 20% of our total business coming off PH, which you saw coming back to strong growth. Secondly, 40% It's tied to services but also software subscription revenue. And then the remaining 40% is on the CapEx business where this kind of affects the current profile. So that's kind of what I would say about order intake.

Speaker 2

And then maybe Abhijit can take the D and T question on profitability.

Speaker 3

Yes. Hassan, I think as you rightly pointed out, we are Pleased with the progress we've made on margins in D and T. That has been something that we have been constantly working And in fact, even challenged on. Now the good news is that you see it back in the numbers. Of course, Q4, we expect sequential The improvement because that's our biggest quarter.

Speaker 3

Regarding the overall guidance, I think we are just into the 1st year. We have given a range. So there is still the upside of the range to go to. So we will look at that as we progress through the period. It's a bit too early now to change anything on guidance.

Speaker 2

Let me take the 3rd question on testing and how that relates to kind of the content degree. So let me Be outright in saying that the testing track and the content degree track are 2 separate tracks. So they are not correlated. As I said, we are in continuous dialogue on the content decree. There's no further update to share.

Speaker 2

At the moment we have it, we will come forward. On testing, we are currently in active discussion with the FDA to kind of finalize what exact testing needs to be done, so that actually we can supplement the current testing that we have. And also there at the moment we have that finalized and we can come forward with further news, We will bring that, of course, to you as we have always been doing.

Speaker 4

That's very helpful. Roy, if I could just follow-up, I mean, do you expect You talked about an improvement in orders in Q4. Is that to say that you expect orders to be flat or up in Q4? And how should we be thinking about 2024?

Speaker 3

Yes. Asar, let me take that. We have said we expect sequential improvement. Now we also talked about the uncertainty, especially what you see in China, right? So therefore, we don't want to be very specific, but we Are fairly confident to see good improvement in the Q4.

Speaker 2

Very helpful. Thank you.

Speaker 3

Thank you.

Operator

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

Speaker 5

Good morning, guys. Thanks for the questions. Maybe just firstly on orders again. Obviously, China, I just wanted to get your thoughts in terms of when we might be through The anti corruption slowdown where we might be through the other side, just getting various different bits of commentary in terms of when you might be through that. And then secondly, just on Personal Health, How much of that 7% growth was due to price?

Speaker 5

And maybe you could take your thoughts on pricing going forward from here, please?

Speaker 2

Okay. Thank you, David. Let me take the first question on China. So We had a very strong start of the year in China as you have seen, right? We grew orders and revenue double digit.

Speaker 2

And that was good market momentum that we saw because of pent demand and also strong progress we made on our local for local portfolio. We also expect that to continue. That indeed there is this current short term slowdown as hospitals work through the anti corruption measures. It is a phasing issue, right? We don't see any cancellations coming through.

Speaker 2

It's hard to predict exactly when it will be fully worked through. We have seen this earlier as well. It took a few quarters. So I think there will be some ongoing activity in the next few quarters. That's to be expected.

Speaker 2

Now it's hard to say how exactly it will pan out, But we are very confident on the Chinese market and that it will resume and that will also we will be able to then resume our trajectory that we had in China as it's fundamentally very attractive and we see great prospects. And as I said, we celebrate 100 years. We will continue to work on that because we see also another 100 years in China up for us. So that's work to capture the full opportunity. Also the consumer side of China is important.

Speaker 2

We also saw that coming back to growth in Q3. So that's also I think an important part of the China opportunity, and we will continue to work both sides of it.

Speaker 3

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

Speaker 6

That's right, Abhijit, yes.

Speaker 3

Yes. So I would say a couple of percent came from pricing, the rest came from volumes. That's how you would look at it.

Speaker 5

And your thoughts on pricing from here?

Speaker 3

I think We are not going to make big price increases now. I think we have also stabilized in terms of our raw material pricing, etcetera. So If we are able to hold the current level of pricing, we are at a in a good zone for our margins. So I don't see further price raises.

Speaker 7

Perfect. Thank you.

Operator

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

Speaker 8

Thank you. Good morning. Just a follow-up on your lead times. So, Yigal's comment on which modalities are lead time still an issue? And how much visibility or control do you have to drive further improvement from here?

Speaker 8

Any sense of how long the process might take to return your lead time to standard in line with peers would be very helpful. That's my first one. My second one is a follow-up on D and T margin. You called out pricing as one of the drivers for margin progression in the quarter. Is there any color you can share on the size of the pricing impact?

Speaker 8

And then also how should we think about pricing as a driver for D and T margin in coming quarters?

Speaker 2

Thank you, Richard. Let me take the first one on lead times. So I think When I started, I said supply chain improvement is very important for us. And I'm very happy to see also that supply Chain improvements have been materializing and that actually is driving the 11% sales growth realization in the quarter. So We have been making a lot of strides.

Speaker 2

I also share that actually we were working on high risk components because what we were facing is that because of the misses of some components we could not complete and then not deliver. Now actually we reworked 70% of the high risk components already year to date and we expect to complete the program by year end towards 100 percent of the high risk components. That also means that you will see therefore that further improvement of the lead times. Actually, if you look to lead times of many of our businesses, they are already fully in line with market. The single biggest one that we called out earlier that we need to work through to fully get in line with market is MR.

Speaker 2

That's the one where we have been working it further. The good news there is that on the grading call issues that we have, we also now resolved that. So we're making progress and we will get back to the lead time improve from there also towards year end. Overall, what we see also from demand in the market and discussions with customers is that we are well positioned to capture demand. You saw the deal, for example, that we took in monitoring, which is a great show, €100,000,000 10 years deal, taking our full platform, including AI, to deliver productivity gains also with a flexible CapEx and OpEx model.

Speaker 2

We're also having significant discussions with other Big systems on major deals. So we are well positioned with growth. But yes, we will continue to work on our supply chain to get that fully back in track.

Speaker 3

Yes. Richard, on D and T pricing, we have been saying all along that the pricing was coming in the order book and it would Start coming into the P and L from the Q3. That's exactly what has happened, right? So we see the first Signs of it coming into the P and L, maybe give or take 100 basis points in Q3. And as we go into the coming quarters, you will See that increasing.

Speaker 3

So we'll probably get to somewhere between 2, 2.5 over time.

Speaker 8

Thank you very

Operator

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

Speaker 9

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

Speaker 3

Yes. So if you exclude D and T, if you exclude China, it's still a decline this year in the Q3. But again, I think it's important to understand the momentum of order intake through the year. So if you just look at the absolute amount of order intake, we had a bigger because the comparisons get Year on year start creating a picture because of how you did the previous year. But Q2 was stronger than Q1.

Speaker 3

Q3 was in line with Q2 if you take out China. So overall, I think the order intake momentum It continues to be good, which is why we have an order book, which is 20% higher than we had 2 years ago. So I think It's important because we have said it now a few times about the 40% of our sales being governed by the order book. You need to be clear that there is a break between order intake growth and sales growth. So we continue to deliver good sales growth despite, let's say, the year on year decline.

Speaker 3

But in absolute Order intake amount, the momentum through the year has been reasonable. Then Your point on lead times is exactly correct. So if we are able to supply an MR in a year and competitors able to do it quicker And the hospital has that need to get a quicker system, then it doesn't help us in terms of securing the order. And that's why Now most of our modalities are back, except for MR, which we are working through.

Speaker 9

Very clear. Thank you.

Operator

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

Speaker 10

Yes, good morning. Thanks for taking my questions. My first one was just around the evolution of order book. I think you'd cited in your presentation back the order book being 20% higher than 3Q of 2021. And that was going to kind of cover you as despite the sort of negative trajectory in orders at the moment.

Speaker 10

My question is, as we look into sort of 2024, are you expecting that order book to kind of normalize back down to sort of pre disruption levels through the end of the year, I. E. Is that sort of negative run rate on orders going to get canceled out by the end of the year and we're sort of exiting 2024 at a sort of normalized order book level? That was First question around declining order books. The second one was just around the testing and whether in terms of the feedback from the FDA, Have they told you exactly what they want in terms of additional testing?

Speaker 10

And have you made any initial estimates for how long that additional testing will take to get the answers to? And then the final one was just in terms of where you've returned to market in sleep business outside the U. S, just be curious what you're doing in terms of those products versus some of the peers in the sort of non U. S. Markets.

Speaker 10

Thank you.

Speaker 2

Thank you, Robert. Let me start with the first question. So on the order book. So I think as you indeed call out, it's important to recognize that we are Still working through a kind of normalization of the order book where on one hand we have this higher percentage of order book that kind of we are building down as we dial up our sales, whilst in the meanwhile, we also kind of improve our order intake. And then in that mix, you see that kind of we will in 2024 indeed cross the line where we will kind of normalize and build down that order book to a rate where we want it to be because in some way it is kind of strange that, yes, you have a too high order book and that holds you back in certain elements to kind of capture the full opportunity in the market.

Speaker 2

So that's kind of something that we are forecasting that in 2024, we will get fully back on track with. Then on the testing, in terms of the feedback, we are working through that exactly as we speak. That's also what I mentioned. We are in active dialogue. Now I think it's positive that we have that dialogue because the moment we can clarify, we can then test, we can also satisfy their needs.

Speaker 2

And that's what we are all focused on. We both have the same objective. We want to get to an outcome here. So far, we have A strong testing program executed where they also acknowledged that this was extensive. This was with 3rd party independent test houses.

Speaker 2

Now they have formulated that there are some more testing that they want to be done. We will agree with them on that and then we will, of course, Pursue that and conduct it in the best possible and fastest manner, but taking the patient interest first and foremost. The third one on the return to market. What we do see actually, I would see is encouraging. Firstly, we see customers really welcoming us back.

Speaker 2

And that also means that the welcoming does not go with significant pricing differences versus what we have seen before. There is still significant demand. They welcome actually competition in the market. And therefore, there is no special program of discounts or anything like that happening or needed for us to get back in play. Of course, we will work our way back into these markets in a gradual way as we have been out for some time, but the first steps back into the market, I would say, are encouraging.

Speaker 10

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

Speaker 3

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

Speaker 10

Got it. Okay. Thank you.

Operator

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

Speaker 9

I have 3, please. The first one is very sort of short term, but the Q4, if I look at the guidance, there is still about a €200,000,000 delta in the adjusted EBITA number in Q4. Abhijit, I was just wondering if you can give us some insights into what you see as the biggest moving, biggest sources of risk and whether you feel more comfortable at the upper or the lower end of that number would be super helpful. Then my second question is just trying to understand a little bit more about sort of the FDA's motivation for the If it's disconnected from the consent decree, can you give us a little bit more insights into what the FDA would like to understand from the Is this about your ability to return to market with DS-one? Is this about how the recall is classified?

Speaker 9

Just what exactly Is it that they are looking to do with the testing data? I appreciate that you can't tell us what exactly you have to test, but just would be great to understand that. And then my third question is just kind of more conceptually, obviously, the market share losses that you've seen in DNT. Other than lead times being back to normal, is there anything else that you can do to reaccelerate momentum as we move into 2024. I'm thinking product launches, is there something we should be thinking about in terms of what comes in RS and A or beyond?

Speaker 9

Kind of what else is in your toolbox to get you guys to see some better growth momentum in 2024? Thank you.

Speaker 2

Thank you, Verijka. Let me start with the second question, then, Ojeet can take the first one. So on the FDA motivation for testing. I think as you also have read from the FDA, actually what they are looking into is a question to clarify further the testing data to support our conclusions of no appreciable harm, right? We have done very extensive testing with independent labs That came to the conclusion that no appreciable harm was done to patients, which is a very important outcome of that.

Speaker 2

They have been looking into that data. They also have been actually already commenting along the way. And now they have posed some additional questions, And they're kind of currently defining exactly what they want to ensure that they can supplement the data with any data they want to kind of come to hopefully same conclusions as we also share the same objective and that we want to ensure that whatever is out there is patient safe. So that's what the FDA is after. That's what we are after.

Speaker 2

That's what the testing program is after, and that's also what we will continue to work on to ensure that we address any outstanding question on that note.

Speaker 3

Yes. Veronika, let me take the first question because I was wondering this €200,000,000 you take that 1% of our sales and I guess that's how you come to that And that's exactly why we've given a range. Q4 is a big quarter. There are also a lot of uncertainties out there as we have highlighted. So Therefore, giving now a specific amount or a specific number where the upper end or middle is maybe too early, But we are comfortable in this range of 10% to 11%.

Speaker 9

Yes, Abhijit, I

Speaker 6

was just

Speaker 9

going to say that The 200 items, I get it from a sales perspective, but it's also $200,000,000 on adjusted EBITDA. Yes, that's fine. I guess that's a pretty A high drop through rate between the 2.

Speaker 3

Yes. So it's not just a Q4 upside of $200,000,000 right? It is also linked to how we have performed so far in the year. So therefore, there is a big part that we have let's say, we have had a good start to the year. And therefore, we expect Quarter over quarter, of course, improvement in Q4, but we are not specifying whether we are going to be to the last amount at this stage, Like I said, because of the uncertainties that we have.

Speaker 3

But fundamentally, The factors that we told you about and we have been saying from the start of the year, the Improvement in the supply chain on patient safety and quality and productivity. You see that quarter on quarter that coming back. You see also pricing coming back and that's what gives us then the confidence to increase now for the 2nd time the guidance for the year.

Speaker 2

And maybe let me take the 3rd one in terms of the D and T expectation. So I think we need to be specific that, of course, in our D and T businesses, there are several businesses where actually we are From a market share perspective, very strong and also leading and winning. So if you look to the IGT side, if you look to ultrasound, we have very strong positions. And actually also Even this year, we continue to see that progress. Now then indeed, we had the MR pressure on lead time.

Speaker 2

We are improving that. But even in MR and for example, look at one of the markets that were on a bigger distress now in Q3 like China, we had a very strong order intake actually in the first half In MR and in CT, where actually they love our Blue Seal, they love our spectral and actually having that localized Now available and also even the Epic Ultrasound really made a big jump in order intake happening in China. So We see the momentum there coming back. Now, RS and A is, of course, another kind of exciting moment to come forward with our innovation. I will not Fully disclose what we will bring there.

Speaker 2

What is for sure part of what we will bring as important innovation is how our innovations drive productivity in a distressed situation that the current health system is, focusing on the workflow, focusing on how our software AI solutions actually both the combination of hardware, software and doing it across different vendors is something that really differentiates us and that others don't have. The radiology operations command center, The tele ICU solution, but also tele radiology, the digital pathology. So those are all elements that kind of flank what we do in our core, and that's something that really works well. IGT, we launched our new C arm. You saw that it's really spot on in terms of clinical workflow.

Speaker 2

So actually we have a lot of exciting dialogues with customers. I look forward also to continue those at RS and A. And there will be some specific news that yes, that you will see when you join us on stage. And I would all invite you there to come and have a look at the Great Phillips presence.

Speaker 9

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

Operator

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

Speaker 7

Hi, hello. Thanks for taking the questions. I have a First on China, when you will expect China to and demand in China to recover, what's Your level of confidence to see some pent up demand and maybe a broader question on this, but would you expect the intensity of local competition to increase in the aftermath of the anti corruption campaign. 2nd on Respironics, follow-up on your question. But as you start to serve new sleep patients outside of the U.

Speaker 7

S, Just to understand the manufacturing footprint, are devices for outside of the U. S. Patient manufactured Outside of the U. S. Or are still primarily coming from the U.

Speaker 7

S? And then lastly, we've had a lot of in the past weeks on GLP-one. Just keen to have your views on And it might be early days, but on what the impact of this drug class could have on the sleep apnea market? Thank you.

Speaker 2

Thank you, Jugo. Let me start off with your first question on China. So as I said earlier, we did See very strong momentum and actually pent up demand from even the COVID period. Now we actually haven't satisfied that in full, and we see that now actually adding to the backlog in China that we will step into once they work through this anti corruption measures that they currently have deployed. We do expect that that will improve in The current quarters, but it's hard to predict exactly what it is.

Speaker 2

But the confidence levels that we have in China are high. We also saw it materializing the moment was an open market and we were there with our local relevant solutions. We had a very significant uptake. We also actually have orders waiting to be signed. So also we're looking into our funnel.

Speaker 2

We have confidence in the China market moving forward and also our Specific innovations that I called out like the Spectral, like the Helium 3 really have a lot of traction there. And also IGT Something that has spanned up demand. So yes, we're working through with the local team. We have a strong presence there with also Strong government relations. Last point on that, I think actually this can also benefit companies like us Because from a compliance perspective, of course, we have very strong standards on compliance and integrity.

Speaker 2

So that's also something we use in these kind of circumstances. That on the recall, we indeed do produce the devices outside of the U. S. Also to be used in the rest of the world. So we have a manufacturing base which is diversified.

Speaker 2

We have in the U. S, but we also have outside of the U. S. And we also use that actively as we speak for the markets outside of the U. S.

Speaker 2

And then on your GLP-one impact on the CPAP market, that's something that Currently, we don't see as a major impact. We do think it's flanking the therapy, as we said earlier, That's something that we believe will help certain patient groups, but there's such a big undiagnosed patient group in sleep that actually we do believe that And our sleep devices are very much in need. Also important to acknowledge that when we talk about EZUR C in Philips, It's SEK 1,000,000,000 out of SEK 19,000,000,000. And as you have seen in the Q3, but also as I announced when we started the program for the 3 year value creation plan. It's very important that we get all of Philips working very strongly and well, dialing up profit, dialing up growth.

Speaker 2

And then also we deal with any opportunity that, of course, will come to sleep business, but we are for sure not dependent only on that because we take charge of growing the other pieces of our business.

Speaker 7

Thank you very much.

Operator

Thank you. We will now go to our next question. And your next question comes from the line of Graham Doyle from UBS. Please go ahead.

Speaker 6

Good morning, guys. Thanks for taking the questions. Just one on the consent decree and then just one on the testing. With regards to consent decree, You very helpfully gave us a bit of an update in terms of the dynamics. About 2 months ago, we sort

Speaker 2

of

Speaker 6

I think, obviously, you were describing as a process whereby the The DA is reaching out every month or so and asking you some questions about new topics and then updating the draft consent decree. I'd just love to get an understanding as to where we are in relation to that. So are we still in that process of more questions, more answers and another update to the draft Or have we pushed on beyond that? And then secondly, with relation to the testing, so I think it's kind of interesting you're still referring to the data showing no appreciable It just seems there's a bit of a gap between that and then obviously the statement the FDA put out around requiring more tests fully evaluate the risk posed to users. So is there a gap between you two guys?

Speaker 6

Or am I sort of misunderstanding that? Thank you.

Speaker 3

Hi, Graham. Let me take the first one. We've I think this whole speculation on the timing of the CD and the progress of the CD creates a lot of unnecessary ripple, which is why we said we don't control the time line, and we will update you as soon as We know that the CDE is done. So I think we'd just like to leave it there. As soon as we the CDE is signed and it's done, You will get to know all the details what the impact is on us.

Speaker 3

And in the meantime, we just don't want to give any further update because it creates just much unnecessary speculation.

Speaker 2

Yes, maybe I'll take the second one. On the testing, so I think what's important is that The FDA did not disqualify our testing to date, right? They acknowledge it's extensive. It's done with 3rd parties. And actually, they have also been looking into the data in great detail.

Speaker 2

The fact that they have some additional questions to be answered, actually I see as very positive because actually if we Can satisfy those, we can come to the same conclusions hopefully. And that's in the interest of the patient and patient safety and kind of underwriting then the outcomes that we also have been presenting to date. So we are very confident in that because we put all the efforts in. We have a very scientific rigorous process followed To come to those tests that there are additional questions, we are happy to address those. We will do that in full collaboration.

Speaker 2

And we also see This is a positive development because the clear we can get on what's still outstanding to be answered, actually that helps us to take those questions off the table. And we, of course, we remain at full disposal to do so.

Speaker 6

Okay. Super. Just one quick question on medical monitoring. I think, again, it sort of flagged as a 2024, potential update around that. And that always seemed a bit more procedural to me.

Speaker 6

Is that progressing as you'd expect? And Is that a H1 event or is that more H2 as well?

Speaker 2

No, I think it's as we said, it's progressing as we expected. So the steps are taken by the judge and in the process. But we I think it's not very useful to speculate on exact timing because it's very hard to judge upon it. What we said is we really hope that we can come forward in 2024 with some news around this part of the follow-up of the recall. And that's probably best to leave it there.

Speaker 2

When we have news, we will share it.

Speaker 6

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

Operator

Thank you. We will now go to the next question. And the next question comes from the line of Seske Bais Ozuna from HSBC Germany.

Speaker 11

I will also have 2, please. First of all, the one on first of all, a very detailed one actually. In Connected Care, you had Further remediation costs and quality costs this quarter, just would like to find out specifically what They relate to. And my second question is on the D and T side, the improvement you have seen this quarter despite China. Can you detail which parts were in the forefront as you described that lead times are increasing in MRI.

Speaker 11

It looks more like image guided therapy and probably ultrasound to me, but some details as well as what the pricing impact within this growth was? That would be very helpful. Thank you.

Speaker 3

So on the remediation cost, it was slightly higher this Quarter that was on certain smaller product lines, which we decided not to remediate because the cost of remediation would just to outdo the benefits that we would get. So there was some inventory that we wrote off related to that. So that triggered a slightly higher cost. On your question on DNT China, I think we are mixing a couple of things because In China, the issue is on order intake, right? There is no problem in terms of access to hospitals delivering on the order book, which is why China also grew pretty well in D and T in the quarter.

Speaker 3

So that is not an issue. The issue that we flagged is for order intake given the new Procedures that are in place in China, it just takes longer for it to come into our order intake. The funnel, as Roy mentioned, continues to remain very strong. What was the last part of your did I answer your question, Salsky? Or is there a part that I missed out?

Speaker 11

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

Speaker 3

Sorry, I mentioned

Operator

that The strong growth figures.

Speaker 3

Yes. Sorry, I mentioned that earlier, the pricing impact in the 3rd quarter was about 1% or so, and that will pick up. This is the first time we See that the pricing from the order book starts coming into the P and L, and we will see that coming, let's say, in further quarters a little bit more.

Speaker 11

Okay. Thank you. I thought this was mentioned, but for Personal Health only, if you realize it was company wide comments. Okay. Thank you.

Speaker 3

Yes. Thanks, Shirley.

Operator

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

Speaker 12

Thank you very much. Good morning. A few follow ups please. Firstly, Abhijit, did I understand your comment on order intake correct that Q4 should still be negative, but less negative than in Q3? Then secondly, could you update us on the number of patients in the census register, those people that could potentially sue you And how many of those have found themselves a lawyer at this point?

Speaker 12

And then the third question, could you just give us a few examples of the countries where you have returned to the market with your sleep and respiratory care products? Thank you.

Speaker 3

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

Speaker 2

On the census registry, so currently, Falko, we have 54,000 people Registered. But out of those, only 670 currently are in the process with a judge with a lawyer in terms of claiming anything. So those are the two numbers which are the latest to date. And then on the third one, and return to market, which Countries are you selling? Now this is starting across the globe.

Speaker 2

So Japan is an important market for us, of course, that we are very strong in. We have a full suite. We also started to enter in China. We have Australia, Latin America but also in the EU. So actually we are working now through the process with every regulator across the globe to kind of go through.

Speaker 2

And actually we are getting a very positive support in many of the markets and that's also where we see us coming back into.

Speaker 12

Okay. Thank you.

Operator

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

Speaker 2

Yes. Thank you all for great questioning and the dialogue we had around it. So just to close. So what you have heard us discuss is a very strong performance and a strong performance improvement this year so far. We had a strong Q3 where we delivered 11% growth, doubling our profit and strong cash flow.

Speaker 2

There was a 4th quarter of growth that you have seen. And that actually really increases our confidence to also increase the guidance second time this year towards the strong close of this year, which will bring us ahead of the 1st year plan that we announced in January. It also gives us confidence in the execution of the 2nd and third year of our plan. As we see the actions we are taking really having an impact both on supporting strong sales, supporting also margin improvement and productivity you see dialing back into our profitability step up. So that with the actions on order intake will give us a lot of confidence in continuing to work on our trajectory to bring Philips back where it belongs.

Speaker 2

Thank you so much for your attention and looking forward to connect with you soon.

Operator

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

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