Welcome to the Royal Philips First Quarter 2022 Results Conference Call on Monday, April 25, 2022. During the call, hosted by Mr. Frans van Houten, CEO; and Mr. Abhijit Bhattacharya, CFO; all participants will be in a listen-only mode. After the introduction, there would be an opportunity to ask questions. [Operator Instructions] 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 Mazzoni, Head of Investor Relations. Please go ahead, sir.

Hi, everyone. Welcome to the Philips first quarter 2022 results call. Our CEO, Frans van Houten; and our CFO, Abhijit Bhattacharya, will take you through our strategic and financial highlights for the period. And after that, we will take your questions. Our press release, slide deck as well as frequently asked questions on the Respironics recall were published at 7 a.m. CET this morning on our Investor Relations website. The full transcript of this call will also be made available today on the website. As mentioned in the press release, adjusted EBITA is defined as income from operations, excluding amortization of acquired intangible assets, impairment of goodwill and other intangible assets, restructuring charges, acquisition-related costs and significant one-off items. Comparable growth for sales and orders are adjusted for currency and portfolio changes. With that, I'll turn the call to Frans.

Yes. Thanks, Leandro and thanks, everyone, for joining us this morning. There are three factors shaping our Q1 results and outlook today. Number one, it's the continued strong delivery of our strategy and operational performance, leading to an increased order book despite the very challenging backdrop; two are obviously the shortages and dislocation in the supply chain, geopolitical challenges and increasing inflationary environment; and three, the huge undertaking at Philips Respironics to do everything to deliver a solution to patients and caregivers affected as fast as we can. Patient well-being remains at the heart of everything that we do at Philips. Now, let me unpack these three factors. Our strategy and portfolio continue to resonate very well with customers and consumers and we again experienced solid demand for our products and solutions. Order intake grew 5% in the quarter for the group or 8%, excluding the Sleep & Respiratory Care business, driven by strengths across the Diagnosis & Treatment businesses, Hospital Patient Monitoring and Connected Care Informatics, to just name a few. This further builds on the good order intake growth in recent quarters, resulting in an all-time high equipment order book for Philips, in fact more than 30% higher than a year ago, as shown on Page 27 of our presentation. During the first quarter, we also signed 12 more long-term strategic partnerships across the world, demonstrating the trust hospital leaders have in our ability to help them enhance health outcomes, lower the cost of care, improve patient and staff experience. Also, in China, we signed an agreement with Shanghai East Hospital to provide its hospitals in the Shandong and Hainan provinces with a broad range of advanced imaging and critical care solutions. Thanks to the hard work of our people, we recorded sales of €3.9 billion in the quarter in these challenging circumstances with a 4% comparable sales decline which exceeded our prior guidance of a high single-digit decline. Adjusted EBITA was 6.2% of sales. I am also pleased with the 8% comparable sales growth for our Personal Health businesses which demonstrates strong consumer demand for our propositions in this segment. We continue to face severe supply chain disruptions across our businesses primarily related to the shortage of electronic components, increased shipping times and now, again, COVID affecting suppliers. We expect these headwinds to continue in the coming quarters but we are taking decisive actions with daily management to mitigate the impact. We had already expanded the long-term orders with our suppliers and increased spot buying. Our R&D teams are adjusting product designs to diversify sourcing of components. Moreover, we are calling on suppliers and governments at senior levels to prioritize health care products in the supply of components. While we see some positive effects of these actions, visibility in component availability remains poor due to lack of visibility from suppliers which makes difficult to forecast accurately. We are concerned about the lockdowns in China which pose additional uncertainty on the outlook for the year both in terms of domestic sales as well as for the global supply chain. The Russia-Ukraine war which we strongly condemn, has so far a small negative effect on our overall revenues for the year and we continue to monitor the situation closely. The current macroeconomic, geopolitical and supply chain environment also leads to mounting inflationary pressure, so we are implementing price increases and taking additional cost measures to mitigate these headwinds. Now, let me speak about the Respironics recall. As I said, we are deeply committed to supporting the community of patients who rely on our sleep and respiratory care solutions and the physicians and customers who are dedicated to meeting patient needs. The repair and replacement program is underway globally and we have produced more than 2.2 million repair kits and replacement devices to date. We have increased our weekly production output more than threefold over recent months and are accelerating further despite the global supply chain challenges. We recorded a €65 million increase in the field action provision in the quarter which is mainly related to a higher expected volume of devices eligible for remediation and higher communication costs. Since there have been increases over the last two quarters, it is important to explain how the device registration process works. For most markets outside of the United States, the equipment is owned by our customers, the durable medical equipment providers. And hence, we have fairly accurate view of the quantities to be remediated in their installed base. In the United States, after an initial rental period, ownership of CPAP devices transfers to the patient. As a result, unless the patients registers the units, it's very challenging to make an accurate estimation. It is for this reason that we have used a regression model which looks at the existing pattern of weekly patient registrations to project the total number of units that will likely need to be remediated. As you can see from the chart on Page 33 of our presentation, around mid-February, when there was extensive communication around the recall, there was an increase in the number of daily registrations which has subsequently reduced. This increase in registrations led us to revise the U.S. regression model based on which we now anticipate an additional 300,000 units which will need to be remediated. Given the increased number of devices, we now expect to complete over 90% of the production and shipment to customers in 2022. Additionally, a further €100 million provision was recorded for potentially higher cost of execution, such as inflationary pressures and to ensure the speed of the program in a volatile environment as we strive to get a solution to patients as fast as possible. I would like to reiterate that we have a strong program management in place to ensure the field action is executed with speed. As I explained last time, we have a strong team working under the leadership of Roy Jakobs. We have strengthened management's responsibility and oversight with organizational changes made in Sleep & Respiratory Care as well as in the Quality & Regulatory affair teams throughout 2021. These teams are laser focused on resolving this legacy issue whilst ensuring airtight procedures are in place for the future. We have also bolstered staffing and expertise around post-market surveillance, medical affairs, biocompatibility and toxicology within Philips. As you know, Philips Respironics is a defendant in several class-action lawsuits and individual personal injury claims. As the litigation is still in its early stages, it is too early to draw any conclusions on the ultimate outcomes. Ultimately, this science will be very important. And as you know, we are conducting a comprehensive test program to characterize the potential risks associated with the use of the devices. We plan to provide an update on testing in the second quarter. We also referenced the Canadian study which should be reassuring for patients as it does not show any correlation between the occurrence of cancer and the use of Respironics devices based on an epidemiological study amongst almost 7,000 users. Building on the foundation of work already done and the material quality improvements already made over recent years, we are using this pivotal moment to reinforce the focus on patient safety across the company and to cross-check learnings from the sleep recall, where relevant, across the enterprise. We have also further stepped up scrutiny and have relooked at past severe incidents and are reviewing all products and complaints which has not led to the discovery of additional significant quality issues over the ones already announced earlier. Last quarter, I mentioned that we recorded a provision in relation to two voluntary recalls in smaller business lines in the Connected Care portfolio with a well-defined scope. Both field actions are under execution in alignment with customers and regulators globally since earlier in the year. Importantly, we continue to engage and work closely with regulators globally, including the FDA, to clarify and follow up on the inspectional findings and requests in the Form 483. Philips Respironics and certain Philips subsidiaries in the United States recently received a subpoena from the U.S. Department of Justice to provide information related to the events leading to the Respironics recall. Receiving a request for information under these circumstances is not out of the ordinary. At this time, the subpoena is a request for information focused on Philips Respironics to support their investigation and we are not aware of any specific allegations. Respironics and other U.S. subsidiaries are fully cooperating. At this point in time, there's no further information on this subject. As Leandro mentioned, we have published frequently asked questions, FAQs, on the recall to provide details and clarification on the progress. You will also find information on the topic on our presentation and the Investor Relations website. There are some areas particularly related to litigation where we are not able to provide further details at this time. We will share information in a transparent and timely manner as the situation evolves. Now, I would like to provide some color on how we are supporting the needs of today's hospital leaders across the globe as they plan for the future. In the first quarter, we expanded our leading Ultrasound portfolio with advanced hemodynamic measurement capabilities on our handheld ultrasound, Lumify, enabling clinicians to quantify blood flow in a wide range of point-of-care applications, including cardiology, obstetrics and gynecology. During the first quarter, we enjoyed strong growth in our Enterprise Diagnostic Informatics portfolio. Next to winning several customers for our enterprise imaging suite of solutions, we also entered into several partnerships with health care providers, among which in the U.K. and Germany, to deliver our vendor-neutral Radiology Operations Command Center which enables remote collaboration between technologists, radiologists and imaging operation teams across multiple sites, thereby helping to increase productivity and expand access to, for example, MR- and CT-based diagnoses. Our MR business delivered strong, double-digit order intake growth once again in the quarter and continued to deliver market share gains. In fact, our team installed more than 500 helium-free Ingenia Ambition MRI systems to date, highlighting the success of our unique portfolio. In Image-Guided Therapy, we are successfully expanding into interventional oncology with the installation of our lung cancer Diagnosis & Treatment solution called Lung Suite in Belgium, France, Israel and in the U.K. Based on Philips Azurion, this solution enhances the accuracy of biopsy procedures and provides a therapy option to immediately treat early-stage lung cancer patients. We continue to see strong traction for our Image-Guided Therapy suite of solutions which delivers interventional procedures, speed and efficacy. We see strong growth of our portfolio of smart devices, for example OmniWire which is the world's first solid core pressure wire which combines a workhorse design with iFR-proven outcomes and iFR co-registration compatibility, making it easy-to-use physiology throughout the case. OmniWire is a game changer and we see 20% to 30% uplift in our sales volumes in accounts that are already adopting this innovation. In Personal Health, we continue to invest in new products and completed the global introduction of the new Philips Shaver S9000 with SkinIQ which is driving accelerated sales growth for the category. Moreover, our Oral Healthcare business recorded strong, double-digit growth in the quarter with very strong performance in North America and China. This is a result of the successful refresh of our entry-range and premium-range electric toothbrushes as well as the recent launch of innovative interdental cleaning devices. To round off, looking ahead, the strong customer demand and order book, coupled with our first quarter sales performance, support our range of 3% to 5% comparable sales growth and 40 to 90 basis points adjusted EBITA margin improvement for the year, as provided in January. At the same time, it is important that we recognize the increasing risk related to the COVID-19 situation, the Russia-Ukraine war, supply chain challenges and inflationary pressures which may potentially impact our ability to convert our strong order book to sales and achieve our margin target if conditions deteriorate further. Our teams, however, are fully focused on everyday execution, delivering on the customer demand and strong order book and are addressing the supply chain risks. Moreover, we are implementing additional cost measures as well as price increases to mitigate the inflationary headwinds. We will, of course, provide further color or updates as appropriate as the year progresses. Our journey to leadership in health technology continues and I remain confident about our potential to grow and create value. Our customers tell us we are very relevant to them and that we have a stronger-than-ever portfolio. We are fully focused on execution and operational excellence to manage the near-term headwinds that we are facing and to unlock higher growth and margin in the medium term. As I mentioned before, we plan to provide more color on our medium-term performance road map in the summer. Over to you, Abhijit.

Thank you, Frans and good morning, everyone. Let me provide some color on the comparable order intake growth. The Diagnosis & Treatment order intake grew 7% in the quarter driven by strong, double-digit growth in magnetic resonance imaging and Image-Guided Therapy as well as a strong performance in Ultrasound and Enterprise Diagnostic Imaging -- Informatics. Connected Care order intake was in line with the. First quarter of 2021 with strong growth in Hospital Patient Monitoring and Connected Care Informatics. This was offset by a steep decline in Sleep & Respiratory Care on the back of the spike in COVID-19-generated demand in Q1 2021. Excluding Sleep & Respiratory Care, Connected Care order intake grew by 9%. And I'm very pleased that we continue to see a fundamental demand shift in adoption of our patient care management solutions and expanding market shares. Also important to realize that activity levels remained double digit above 2019 in the Connected Care business with mid-single-digit three year CAGR. Group comparable sales declined 4% in the quarter which exceeds our prior Q1 guidance of high single-digit decline. In addition to the high comparable base of Q1 2021 and the headwinds in our Sleep business, we continue to face supply chain disruptions. The impact is relevant across all modalities but particularly strong on the higher-volume and high-margin businesses like patient monitoring, Ultrasound and Image-Guided Therapy. Adjusted EBITA for the quarter was 6.2% of sales, impacted by the lower sales and higher supply costs, including extraordinarily high pricing on spot buys. This was partly offset by cost productivity measures and higher IP income. The increasing supply chain cost and overall inflationary pressure was 250 basis points in the quarter, of which 150 basis points was wage inflation and 100 basis points was increase in supply chain costs. We are driving additional cost measures as well as price increases across the portfolio to mitigate these headwinds. Diagnosis & Treatment comparable sales declined 2% in the first quarter. High single-digit growth in Image-Guided Therapy was more than offset by a decline in Ultrasound and in Diagnostic Imaging due to supply chain shortages and on the back of strong growth in these businesses last year. The adjusted EBITA margin decreased to 5.9% in the quarter in Diagnosis & Treatment mainly due to lower sales and supply chain costs. The comparable sales for the Connected Care business declined by 21% in the first quarter driven mainly by the substantial decline in the Sleep & Respiratory Care business on the back of the recall and by supply chain headwinds in patient monitoring. The adjusted EBITA margin amounted to 0.4% mainly due to lower sales. Personal Health comparable sales grew a strong 8% in the first quarter on the back of 17% growth last year driven by double-digit growth in Oral Healthcare. Underlying consumer demand for our strong portfolio remains very solid. The adjusted EBITA margin increased to 15.3% in Personal Health in the quarter, mainly driven by growth, partly offset by supply chain costs. We continue to focus on driving productivity initiatives that delivered gross margin savings of €97 million in the first quarter. After deducting the impact of cost increases related to freight cost and spot purchases, net savings amounted to €8 million in the quarter. As Frans mentioned, we are driving additional cost measures of between €150 million to €200 million for the year in response to the mounting inflationary headwinds. We are tightening the belt with tactically -- with tactical discretionary cost savings as well as acceleration of structural productivity programs and further procurement and indirect spend management. Adjusting items were higher than guidance in the quarter mainly due to €165 million provisions related to the recall that Frans mentioned earlier as well as restructuring and portfolio alignment actions of around €85 million resulting from the overall quality remediation efforts in Sleep & Respiratory Care. We decided, for example, to cease manufacturing of hospital respiratory care products in the Carlsbad facility in the U.S. and we'll consolidate those activities under the broader Respironics footprint. Free cash outflow of €402 million in the quarter due to increased working capital resulting from higher inventories as well as higher income tax paid. On capital allocation, we renewed our €1 billion revolving credit facility with an interest rate linked to the company's year-on-year ESG performance improvement. The revolving facility matures in 2027 and substitutes the previous facility which had a maturity date in 2024. Let me provide some guidance for the segment Other. We had an adjusted EBITA loss of around €80 million in this segment in 2022 which is €20 million better than our previous guidance due to higher license income and cost productivity measures. At EBITA level, we expect a net cost of around €140 million for the full year 2022. For Q2, we expect a net cost of around €30 million at the adjusted EBITA level and around €50 million at the EBITA level. We currently expect an effective tax rate in the high teens for 2022, lower than our midterm guidance of 24% to 26% mainly due to lower income and one-off tax gains. To conclude, I'd like to take you through how we expect the year to progress in a little more detail. We exceeded our sales plan for the first quarter and are on track to achieve the mid-single-digit sales decline that we communicated in January for the first half of 2022 on the back of 9% growth in the first half of 2021. We continue to expect a strong recovery in the second half of the year, supported by customer demand and our strong order book. At the same time, we see very challenging external environment and increased uncertainties related to the COVID-19 situation in China, the Russia-Ukraine war, ongoing supply chain challenges and higher inflationary pressures, as mentioned by Frans. We are actively monitoring the situation and our teams are working very hard on delivering on our order book and mitigating the impact of the headwinds. Our focus is continuing with good progress on the repair and replace program, mitigating the global headwinds and remaining laser focused on our strategic improvement targets so that we can realize the growth and profitability supported by our record order book. With that, Frans and I will take your questions. Thank you.

[Operator Instructions] We will now take our first question from Hassan Al-Wakeel from Barclays. Please go ahead. Please make sure the mute function on your telephone is unmuted. Hassan Al-Wakeel: Hello? Can you hear me?

We can.

Yes, Hassan, we hear you. Go ahead. Hassan Al-Wakeel: Apologies. Thank you for taking my questions; I have two, please. Firstly, a broader question around guidance to start. It would be helpful if you can discuss how some of your underlying assumptions have changed, if at all, since initially guiding the market, given arguably stronger demand than the top line but margin weakness owing to supply chain pressures and inflation. Do you expect supply chain issues to persist for longer? And how do you think about the margin target range and whether the lower end of this range is more realistic in your view? Secondly, could you please talk about the hospital CapEx environment as investor concerns here increase with hospitals facing rising OpEx costs and whether you're seeing any impact here at all?

Yes, thanks. Fully understand the question, Hassan. So let's first talk a bit more about guidance. You're right to point out that with the ongoing strong order intake, we actually see further underpinning of our growth potential. So that is good news. And the growth range of 3% to 5% of course reflects in a way contingency from the high end to the low end, right and, if everything would go well, the strong order book which would definitely allow us to perform a very strong growth. The -- if you look at the first quarter, thanks to hard work, we were able to mitigate a lot of the supply chain challenges but not all. If we would have been able to mitigate everything, the sales could have been even higher in the first quarter. So in a way, it is day by day, week by week working the issues. We have a strong sustaining engineering team in India that is also able to redesign parts and find alternate suppliers and all of that helps to overcome supply chain challenges. So if I look back at the guidance that we gave in January, then we are on the right path with regards to revenue. And although I do expect that supply chain issues will persist longer, I think I was a bit more hopeful in January, we should not discount our ability to find solutions. It's just that the volatility is quite significant. As Abhijit and I were discussing ahead of this call, we also thought that it would be valuable for you to know that we expect to deliver higher volumes in the second half year versus the first half year, right? In other words, our normal seasonality, where we expect higher volumes in the second half year, we expect to be able to deliver that and deliver a stronger second half of the year. Now I realize that your question was actually also pointing to margin, right? Now you know that in our business, we are operating with high margin but also high fixed cost businesses. And therefore, volume is a key driver towards profitability. And this certainly applies to us and the second half of the year is always a higher profitability than the first half. The range that we guided for is doable, especially also because we have taken additional measure to increase prices. On Personal Health, this is already starting to come through and we will take further measures in the second quarter. On our recurring revenue base in health care, we have implemented indexation some years ago and therefore, we are able to pass on some of the higher costs. Of course, that leaves the order book, especially on the tender business, where last years were still partly last year's prices. For more book-and-bill business like Ultrasound, we are able to pass on prices -- increase prices already now. Moreover, we have taken additional cost measures because we are very cognizant of the inflationary pressures, as also mentioned in the introductory speech. So driving an additional €150 million to €200 million will also help us offset that higher inflation that we mentioned. So we are and we aim to communicate that clearly, while we see volatility and risks, we also radiate the possibility -- the possibilities. And we are -- we stick with our guidance as we have given in January. And then on the second part, hospital CapEx, we continue to see strong demand but I see that there is a high priority from the C-suite of all the hospitals and that is staff productivity. As staff cost goes through the roof, especially in the United States, more than ever, every decision to invest needs to drive efficiency of the hospital system and reduce the dependence on OpEx or staffing. Now here comes in the Philips strategy around care pathway optimization, clinical decision support, higher throughput time the whole story around Quadruple Aim resonates completely with the hospitals. The fact that, for example, with our MRIs or that -- even the upgrades to the installed base, we can half the scan time, that means better staff productivity. So we see that there is CapEx available with hospitals for the right innovations. And of course, I'm implying here that we have those right innovations. We also see hospital building more ambulatory surgical centers, right, focused on helping patients in an ambulatory setting with shorter hospital stays or even day interventions. So there's definitely orders to be gotten. And at this time, I'm not -- we are not reducing our confidence in the market resilience. Hassan Al-Wakeel: That's very helpful, Frans. If I could just follow up on the top line. Could you talk about how installations are trending and whether you're seeing any improvement here globally, presumably maybe a worsening situation in China?

Yes, we definitely see a worsening situation in China, where, at least in the cities where there's a lockdown, we see the slowdown. Now we hope that Shanghai will come out of the lockdown in the course of May and then we can still do a lot in the remaining part of the quarter. But globally, installations are going well. The only thing that affects installations are incomplete supply chain deliveries, where, I must say, customers are very understanding and are really trying to lean in, in accepting installations and thereby also helping us to realize our revenue. Hassan Al-Wakeel: Perfect. Thank you.

You’re welcome.

We will now take our next question from Veronika Dubajova from Goldman Sachs. Please go ahead.

Hi Frans, Abhijit, hope you can hear me okay. Two questions from me. I think, Frans, you mentioned this in your prepared remarks and obviously also in the press release this morning saying that you expect to achieve the guidance if there's no further deterioration in the current conditions and I just was hoping you could clarify this a little bit for us. And does this mean if we see that current cost pressures and inflation pressures persist through the remainder of the year, you can still make the guidance but if they get worse you can't? Or is your expectations that they must improve? And if they don't improve, then you don't make the guidance? Just a little bit of clarity around this. I mean I think we all appreciate the world has changed a lot since you gave this guide in early Jan but I think we're struggling to reconcile that a little bit. And then my second question is just on the DOJ request. And I appreciate there's not a lot you can say here but just what are your expectations, I guess maybe more broadly, for further action from the regulatory agencies in U.S.? I'm thinking warning letter, consent decree and potential fines. What are your assumptions, your expectations? And when do you expect to have more clarity on all of those things?

Where to start? The -- on the guidance, the volatility affects the parts availability. That's our number one priority. And while that volatility persists, we have also shown in Q1 an ability to overcome some of those headwinds and I remain confident that we can convert enough of our order book to be in that bandwidth of the 3% to 5% comparable sales growth. Of course, if all goes well, we would be at the high end of that because the order book is so significant that it could achieve that. So in a way, the 3% to 5% represents already a contingency on revenue that I feel good about. Now we do flag the risks out there. Frankly speaking, I don't know what China is going to do. And I would love to meet somebody who can exactly predict what will happen in China and what will the consequences be on the global supply chain. We don't know. I mean the -- clearly, the harbor in Shanghai needs to reopen. And otherwise, the whole world will suffer from that. So we have not taken that into further account, yes? Other than that, I can repeat to you that our revenue plan has quite some redundancies in the plan. Now then, I think you're also asking for the margin side. I already indicated that realizing the growth is quite fundamental to profit expansion. Raising prices and tightening the belt on cost, in our view, can offset the inflationary pressures that we are facing today, right? And I think Abhijit mentioned around 2.5%...

Yes.

That is in the numbers. That is what we are counting on. We don't see at this time further deterioration on that. So we will work with the 2.5% assumption and with the price rises and cost tightening offset that, while then the volume and mix will help us on the profit expansion. That's your first question, Veronika. Then...

Yes. I have a follow-up but I'll let you answer the DOJ part first.

Yes. On the DOJ, I can be shorter because at this time, it's a subpoena for information, right? And that means they are preparing an investigation and we just have to accept that. As we said in the introductory speech, that is not uncommon for a situation of this magnitude. What to expect from the regulatory agencies? We are in close collaboration and contact with them. Like us, they feel the pressure from the patients and they are very focused on working with us to achieve the remediation as fast as possible. That is what the conversations are about, let's say. That's priority number one in all our conversations. Secondly, there is keen interest in the testing that's going on and what we expect to share in the second quarter. At this time, there is nothing to be concluded, what I would point to. You asked me about could that be a warning letter. I don't exclude anything. But the measures that we have taken voluntarily are of such a significance that it has gotten the attention of the FDA and they appreciate those measures ranging from closing the site in Carlsbad to retiring some of the older product ranges, to a slate of activities to relook at patient signals from the field. And of course, we are sharing all those findings with them. So we are doing a lot and I think that will help very much on how the agency will judge us. So it's work in progress.

All right, understood. Understood. And so just circling back to your first -- to my first question for Abhijit. Is it fair to say that the revenues remain the single biggest variable? And I guess if you can get to 3%, you can show some margin improvement year-on-year, again assuming there is no further step-up in cost inflation?

Yes. And Abhijit, you're immediately nodding, so why don't you answer it?

No, I think it's how you explain, Frans. I think the biggest risk that we have is on the top line. If we get the top line for our business, as actually Frans mentioned, once we cross the breakeven point, then the drop to the bottom line is pretty strong. And we are struggling in the mainly our high-margin businesses. So in Image-Guided Therapy, patient monitoring, Ultrasound. Once these go above a certain threshold, the profitability goes very high and that's the biggest risk.

Yes. But we did tell you that we expect higher volumes in the second half versus the first half despite the supply chain challenges.

Understood. Thanks, guys. I’ll just go back in the queue.

Thanks.

We will now take our next question from David Adlington from JPMorgan. Please go ahead.

Good morning, Frans. One question, please [ph]. Just on Personal Health, I just wondered if you saw any stocking in the quarter ahead of the price increases and if you're able to quantify that. And within that 7.7% growth number, just wondered how much was volume versus price has contributed to that?

Let me be straight up on stocking. We have not seen any stocking happening. In fact, there is good sell-out and good consumer traction. Then I look at my team with regards to volume versus price.

I think it's largely volume. So the price agreements were made in February. So by the time, new supplies in March with the new pricing. So I think largely volume, David, that's how you should look at it. Very small part in price.

Great. Thank you.

We will now take our next question from Julien Dormois from BNP Paribas. Please go ahead.

Hi, good morning Frans and Abhijit. Thanks for taking my questions. The first one relates to the growth assumptions that you have for the full year but dissected by division. I think you provided some -- after the full year numbers. At the time, if I remember well, you reflected high single-digit growth in D&T, low single-digit decline in CC and mid-single-digit growth in PH. Does that still hold through looking at the -- after the Q1 numbers? So that would be the first question. And the second question is more specific on D&T because you started, unfortunately, with a decline in that business and the comps are getting tougher in Q2 and Q3, particularly in IGT. So just curious to understand why -- what we may see in this division to get to the full year number.

Yes. I think on the first question, those growth assumptions stay largely the same.

Yes. I think maybe -- and so we said mid-single digit for Connected Care and high single for D&T. I think that remains. Yes but also for D&T, we had said high single digit.

Yes.

And for PH, we had said mid-single digits. So we will be there or slightly higher. But Connected Care will be, yes, mid-single-digit decline. Yes. So then on the D&T, Julien, we are held back really on supply chain. So the order book is -- and you talk about IGT but the order book in IGT continues to grow. So despite the tough comps, if we are able to get the supplies of critical components that we are looking for, the second half of the year will be strong with good growth.

Okay, thank you.

So you will also see growth coming back in Q2 but the second half will be also very strong.

We will now take our next question from Graham Doyle from UBS. Please go ahead.

Good morning. Thanks for taking my call -- my questions. Just on the recall, we haven't talked about it so much today. And I just noticed on Slide 33 you talked about a spike in registrations in February. And it's kind of interesting because you obviously then published a statement in regards to an FDA update on March 10 where they're asking you to communicate more effectively with patients. So is there a risk that maybe that starts to tick through and we get another spike at some point soon? And can you kind of square that for me just in terms of the communication with the FDA coming after you've seen the spike? And then lastly, just a follow-up to that which is you talk about 90% of production for these devices being complete by the end of this year which sort of implies that there will be further production in the recall in 2023. Does that mean we should assume there will be some point in 2023 when you are not selling systems commercially? That's the first question, please.

Yes. It's true that the intensified communication in -- around February led to more patients registering. But immediately afterwards, there was, again, a reduction of the weekly rate. So the spike up was not very significant. Now to be on the safe side, when you imagine an asymptotic kind of regression model that keeps, let's say, reducing as is shown in the slide, when you raise that curve a little bit, it already adds up to a higher assumption on numbers. So let me be clear, at this time, those 300,000 additional patients have not materialized yet but it's the consequence of using a regression model. And with the slightly higher registrations in the first quarter, it means that you lift the whole tail, right? But the characteristics of that curve are firmly confirmed. I mean that sounds a bit funny, firmly confirmed but, I mean, solidly confirmed, right? So we see the decline continuing on a week-by-week basis, right? That also gives us belief that there is not going to be a radical different insight as time progresses. In fact, the model becomes more accurate as time progresses. The -- and so the €65 million additional is only, in part, for the extra volume. In part, it is for the fact that we decided to keep a higher level of patient communication out there into next year which we then provided for. The current view on production and deliveries, because this is not only about production but also the delivery into the field, is that we will exceed 90% by the end of 2022. And I add the word delivery because before it reaches the patient, it takes time, right? That also implies that we will be earlier done in the internal factory than the last unit arriving in the field with the patient, right? So there is some fluidity there. I think we said also that we expect, depending on the geography, to finish either by the end of this year or in early Q1 next year. That would also imply that around that time, commercial activities can resume, right? And also there, there can be some variation by country because if we are done in a certain country, then we can also start preparing for the resumption of sales. Look, there is no hard signs about an exact week or date but we are pretty confident that we are progressing very well with the recall. And yes, please allow us some weeks' back and forth because it's a huge volume. But we are proud of the fact how we have ramped up and we see further ramping up during the year. Now we have taken an additional €100 million as a sort of contingency to deal with unforeseens, such as suppliers wanting expediting charges or whatever other measure we need to take to keep the speed up, right? And we didn't want to come back time and again with surprises there. And therefore, with this decision to reserve €100 million, we feel that we are well provided for.

And maybe just a quick follow-up. In terms of the sort of go or no-go decision about when you can start selling commercially, obviously, depending on geography, how much certainty do you need to have? And how do you have certainty that you have reached all the patients that require the machine to be replaced or repaired?

I think it starts first with a moral obligation to treat patients first. And therefore, we want to get very far in, let's say, in delivering against the registered patients. And maybe that's where the core of your question is: could somebody register even next year? Yes. And then we will deal with it, right? But if there's a late registrant, it will not make a huge impact. So we see that, that moral gate relates to having done the registered patients. And yes, then given logistical consequences, it needs to be somewhere in the high 90s, by which time we feel that we have fulfilled on that obligation and that resuming commercial activities is justified. And as I said, that's somewhere end of the year, early next year with the current looks of it.

Okay, that’s very clear. Thanks a lot for taking my questions.

You’re welcome.

We will now take our next question from Delphine Le Louet from Societe General. Please go ahead.

Yes. Hi, good morning everybody. Thank you for taking my question. I’ve got two. I was wondering regarding the price hikes that you're going to pass on across the year. What sort of a flexibility do you have on a divisional basis? Can you be more specific if we stick with this 2% to 3% percentage figure that you gave? Do you see far more flexibility into the PH division than into the CC, for instance, or D&T? Second question deals with the cost saving -- additional cost-saving program you're putting in place. Can you clarify which division is going to be the most impacted by this €150 million to €200 million envelope?

Yes. Let me take it. In terms of flexibility, I presume you mean elasticity?

Yes.

So I think we have the ability to increase prices across because the inflation is so widespread it is happening everywhere. So it's not that we have particular businesses where we cannot raise prices. The only thing you need to understand is the impact of the price increase differs in timing. So as Frans mentioned earlier, in Personal Health, you see the impact in the P&L earlier. Whereas in the, let's say, the longer-order-book businesses, you first have to get through the order book that have been taken at pre-price increase prices and then the new orders will kick in. So it's a timing issue but we don't have a problem in terms of increasing prices anywhere. The other thing is, even for the health systems businesses in the service -- and services business, we have the ability to raise prices at reasonably short notice and that is what we are currently in the process of doing.

Yes.

Regarding the additional cost savings, they actually happen across the enterprise. So it happens through -- in group costs, it happens in respective businesses. So there is not one particular business which there will be a spike. So you will see that across all businesses, just like inflation is hitting the businesses across the board.

Thank you.

We will now take our next question from James Vane-Tempest from Jefferies. Please go ahead. James Vane-Tempest: I have two, if I can, please. Firstly, just on the existing contracts. Can you remind us how many of them have an indexation clause so you can pass on some of those higher costs versus those where you need to perhaps absorb some of the higher inflation? And I guess although you have a strong order book, are you seeing any signs installations are getting delayed due to hospitals' own higher costs, especially labor? Second question is if I can just follow up on the €150 million to €200 million savings and the timing for those. Just curious, is this muscle of the business that these savings were not identified earlier? And can you give us some examples of potential tactical discretionary savings which, I think, how you refer to them? Also, without those, my math implies margins would otherwise be going down this year. So I'm just curious of the timing and phasing of those through the year as well.

Yes. Let me first take the first question, James and then Abhijit can talk about the second one. Most of our service contracts have indexation clauses. And therefore, prices can be adjusted on a regular basis. And as Abhijit said just a bit before, we are working on implementing those price raises. On the Equipment business, much go through tendering -- tenders. And therefore, it takes a whole order sequence cycle before the new prices are in. So I think that paints the picture. And I think Abhijit said, look, there's usually then a significant time lag on equipment before you see the new prices come through. For book-and-bill business, such as Ultrasound and some other shorter-cycle health care system businesses, we can be almost immediate, right? So as we take -- as we currently take orders, it is going to be against higher prices. So three buckets: services, fairly immediate; book-and-bill business, fairly immediate; and then the large, tender-driven businesses, Diagnostic Imaging and IGT, it takes a longer time. I think I covered that. Abhijit?

Yes. I think in terms of cost savings, the plan is to get the savings this year, right? So it's still in the remaining three quarters. If you look at the discretionary or tactical savings we talked of, be it in travel, be it in exhibitions or shows that we conduct, it's also looking at our temporary labor force to see where we can flex it. We also have factories which are idle for a certain amount of time because of the lack of parts availability. So we have programs running there. So it's a multitude of actions that we take. But to your concern on timing, the amount that we talked about, the €150 million to €200 million, is a mitigation that we are expecting within this year.

Yes. And then I realize I have not answered your question on are customers delaying orders. Customers also struggle with access to parts and materials from supply chain. And if they have a renovation project in their hospital, we have seen some delays in room readiness. But that's much more a logistical constraint than a desire to delay. In fact, I see no desire to delay. Hospitals want the additional capacity. They want the increased productivity. And I did also say they have understanding from when we come with a delay and we are, therefore, not being bombarded with requests for penalties or -- and so on. So there is, I think, a good coexistence there. James Vane-Tempest: Thank you.

We will take our next question from Kate Kalashnikova from Citi. Please go ahead.

Hello Frans, Abhijit, Kate Kalashnikova from Citi here. I've got two questions. So firstly, looking at the comparable order intake growth chart in the presentation, North America order intake looks like it decelerated on what was an easy comp in Q1. What gives you confidence that there's no deterioration in demand? And by that, I mean, hospital CapEx trend in the U.S. And then secondly, in a typical year, 70% of order book is converted to sales in the next 12 months. What is your current expectation given ongoing supply chain challenges? How much of the current order book do you expect to convert to sales in the next 12 months?

Yes. I -- in terms of the order book development in North America, if you look -- the overall order growth is low single digit. But if you look at Precision Diagnosis, for example, we have double-digit order intake growth. It's only in Connected Care where, let's say, we have -- so overall, for Diagnosis & Treatment, IGT was a little bit lower compared to last year because we had, if you'll remember last year, an 82% order intake growth last year in Q1. So there, the comparables are tough. So we don't see really a decline. And in Connected Care, of course, in the hospital respiratory business, you see a decline. But in patient monitoring, we continue to see robust growth. So that's how you should look at it. We don't see any kind of slowdown or reprioritization in North America.

Conversion?

In terms of conversion, I think, again, it's a question of availability. So the longer order book will lengthen the conversion time a little bit. I don't have a precise number, Kate, so maybe I need to come back to you. But it will be a touch lower than we have traditionally seen simply because the order book is so -- were big and the supplies are constraining us. So it will be a slightly longer period before we can convert all of that into sales.

Okay, understood. And then for North America CapEx part?

Yes. And we continue to see good momentum in Q2 in North America as well.

Great. Thanks.

We will now take our next question from Sezgi Oezener from HSBC. Please go ahead.

Hi, Abhijit. Hi, Frans. Thanks for taking my questions; I have two please. First of all, the restructuring plans that you've mentioned. You specifically mentioned that you're going to see production of hospital restoration products in one plant. But my question is, how do you expect these restructuring plans to evolve? Does it only concern hospital future products or more? And do you expect any revenue consequences from that? And my second question relates -- is more generally related to your overall quality checks. You mentioned that you have conducted extensive quality checks in the Connected Care segment. And as a result, some new areas erupted where you wanted to take precautions. Do you -- how do you see the risk of an issue coming out from other segments such as that -- D&T kind of adding to this? Or did your program, quality check program, also cover D&T area as well as all areas that you're active in?

Yes. The restructuring and cost measures go across Philips. Specifically, we indeed called out the closure of the Carlsbad site. But we have also other measures where we are seeing opportunities to accelerate savings. Think about high-wage versus low-wage transitions, reduction of complexity, reducing the long tail of projects and SKUs, et cetera. There's no direct revenue impact from these measures because they're already included in our plans, right? So for your modeling, there's no new news. Other than that, we try to accelerate cost savings and measures. Now on your second question, the expansive relook at post-market surveillance data that I spoke about in January applies to the whole company and not just only to Connected Care. And broadly speaking, we have made good progress with that relook to post-market surveillance data and severe incidents and we have not found new issues coming out. In January, we already flagged the quality issues in Connected Care that by now you have seen the field safety notices for, among which the defibrillator and the V60, right? And so that's basically the follow-up on what we already referred to and took a provision for in the Q4 results. Yes, that, I think, covers your question. Did I miss anything, Sezgi?

No, you didn't miss anything. Just as a follow-up then, is it safe to conclude that this relook at quality actually covers the whole of D&T as well and you haven't actually come out any incidents worthy of mentioning?

That's correct.

Okay. Good to hear. Thank you.

We will now take our next question from Falko Friedrichs from Deutsche Bank. Please go ahead.

Thank you. Good morning, everyone. I also have two questions, please. Firstly, how good is your visibility into actually getting those comprehensive test results of the recall devices in Q2 of this year, that -- which you guided? Are there any fixed contractual agreements that those labs have to and are actually on track to deliver these results in Q2? Or how are the agreements in this instance? And then my second question is going back to the DOJ request. It -- to me, it sounded as if they're essentially requesting that you simply submit some paperwork for now. But are you able to share with us how much time you have been given to provide all of that information so that we might be able to develop some kind of an understanding for the beginning of a potential investigation?

Yes. There are many tests underway since last year. And sometimes, tests result in more tests as you have to go deeper. There are no compulsory time lines on these tests because we need to give it the time that the experts require. And these are external test houses, external experts, that will not let them be chased, so to speak. I mean we need to give it the time it takes. It's our expectation that we are going to be able to deliver those test results in the second quarter. But when you have thousands and thousands of data points from -- coming out of these tests, it's all about the interpretation of the test results by an expert panel, right? Now all of that is planned out. All of it is expected to come through in the second quarter. But you can see in the way I answer it that we are highly dependent on those external expert panels and test houses, right? So we are confident with the current plan but it is not an ironclad guarantee because I can only publish the results when those expert panels have drawn their conclusions. Yes. Then on the DOJ, look, I'm only able to share that there is a subpoena for information related to an investigation by the DOJ and I cannot predict anything else. And I'm also -- yes, I'm unable to predict how this will go. I'm sorry, I understand why you want to know but there's nothing more that I can share today.

Okay. Thank you.

We will now take our next question from Max Yates from Crédit Suisse. Please go ahead.

Thank you. Just my first question is on cash flow. So I just wanted to understand, given the current environment, do you think you will have to hold structurally more inventories going forward given kind of what looks like ongoing disruption to supply chains? And I guess how does that view on working capital and inventory differ to when you previously talked about free cash flow guidance? And as an extension of that, could you just help us with, of the provisions that you've taken for the product recall which I think is about €890 million, how much cash has actually come out of that? And how much is still to come over the next few quarters?

Yes. So at this present moment, we are probably at the peak of holding our inventory. It's at an all-time high primarily because we are holding unbalanced inventory, right? So we have, let's say, 98% of the parts available. And then for 2%, you can't complete it and, therefore, you cannot ship. So I think our inventories will come down but there is not a, let's say -- I don't expect us to hold structurally significantly higher inventory that will affect our cash flow guidance in the outer years when we are back to normal running. Now on the second point in terms of the cash utilization, let's say last year, we used about €175 million in terms of cash. And this year, we will spend about another €650 million-or-so cash. So the incremental over last year will be about close to €500 million or so.

Okay. And maybe just my second question would be, I think at the time kind of when the issues around the product recall first started, you highlighted this being about a €1.1 billion business around -- sort of 2/3 of it was the systems, 1/3 of it was the masks. So I just wanted to understand that obviously, you're not selling the systems externally. But in terms of the mask sales, how have those been affected through the last 12 or through, I guess, the last 9 months, 12 months since this issue arose? Are you -- I think you previously said 30% to 40% were linked to new machines. Obviously, maybe those aren't being sold. But I guess the replacement masks business, I'd be keen to understand how that's been affected through this period.

Actually, we've done pretty well there. So like you said, about 30% to 40% was going with new systems. So that has declined but the overall decline is far less than that. So we are just about kind of a double-digit decline so -- in the overall mask business. So actually, our sales force, since we are not selling the complete machine, is entirely focused on the mask business and they have done actually a pretty remarkable job to keep the decline down to just about 10% or so.

Understood. Thank you very much.

Thank you. Mr. Van Houten and Mr. Bhattacharya, that was the last question. Please continue.

All right. Then I appreciate everybody's attendance and thank you very much for your questions. Rest assured we remain laser focused on the execution of our plan. Despite the challenging environment, we are full of confidence about the opportunities ahead. Thank you very much.

This concludes the Royal Philips first quarter 2022 results conference call on Monday, April 25, 2022. Thank you for participating. You may now disconnect.