Koninklijke Philips N.V. (NYSE:PHG) Q1 2024 Earnings Call Transcript

Koninklijke Philips N.V. (NYSE:PHG) Q1 2024 Earnings Call Transcript April 29, 2024

Koninklijke Philips N.V. beats earnings expectations. Reported EPS is $0.28, expectations were $0.26. Koninklijke Philips N.V. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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

Leandro Mazzoni: Hi, everyone. Welcome to Philips’ first quarter 2024 results webcast. I’m here with our CEO, Roy Jakobs, and our CFO, Abhijit Bhattacharya. The press release, investor deck and the frequently asked questions on the Respironics field action were published on our Investor Relations website this morning. The replay and full transcript of this webcast will be made available on the website after the call. Before we start, I want to draw your attention to our safe harbor statement on screen. You will also find a statement in the presentation published on the website. Roy, over to you.

Roy Jakobs: Good morning, everyone and warm welcome. Great to be with you today. I want to start with the key highlights of this morning’s release. We delivered results in line with our performance improvement plan with 2.4% comparable sales growth and strong margin improvement in the quarter and order intake growth turning positive outside of China, especially in North America. This was a result of continued strong focus and progress on our three execution priorities. Secondly, we have taken several very important steps in resolving the consequences of the Respironics recall. The consent decree was signed and approved in court. We received final court approval for the previously announced economic loss settlement. We reached an agreement to resolve the personal injury and medical monitoring litigation in U.S. And we also concluded an agreement with insurers to cover Respironics recall related product liability claims.

Following the remediation of sleep therapy devices, and reassuring test results to-date, these are very important milestones to provide further clarity on the way forward for Philips. Supported by key innovation launches and our ongoing actions to enhance its execution, we are confident in our performance improvement plan for 2024. Onto the key financial highlights. Comparable sales growth was 2.4% in the quarter, driven by 3% growth in the Diagnosis & Treatment and Personal Health segments, partly offset by a 1% decline in Connected Care against very tough comps in monitoring. Group sales grew 2% in mature geographies. Growth geographies sales grew 3% despite a decline in China. The adjusted EBITDA margin improved significantly to 9.4% in the quarter.

Free cash flow was an outflow of EUR 336 million, in line with normal quarterly phasing. Order intake in the quarter declined, as anticipated, due to situation in China, this was driven by the impact of the entry-wide anticorruption measures and the comparison against an exceptionally high order intake base from last year. Importantly, order intake grew outside of China with encouraging performance in North America. We remain focused on implementing the necessary actions to strengthen quality delivery, reduce lead times, leverage our enhanced operating model and market our AI-driven innovations to improve order intake. Overall, based on the gradually improving market environment in the U.S. as well as expected improvement of the situation in China, our exciting innovation launches and our ongoing actions we continue to expect positive order intake growth in the full-year 2024.

In China, the government imposed anticorruption measures continue to impact short-term decision-making by hospitals, but we do not expect it to impact the fundamental demand as China remains an attractive market. Our order funnel is very active in the country, and we expect order growth to resume in China in the second half of 2024, also supported by the newly launched government program for medical equipment upgrades. It’s important to note that our order book, which accounts for around 40% of group sales remains strong and is further being built down to expected normalized levels. I’ve met many of our customers and partners in the last few months. And it’s absolutely clear that we are a preferred strategic and innovation partner to provide imaging, therapy, and monitoring solutions, supported by strong enterprise informatics and AI suite.

This has been, again, amplified by how strongly our solutions resonated with customers at the recent ViVE, ECR, and HIMSS global health care events, which I attended during this quarter. Let me you with some of the recent customer innovation milestones during the quarter. We launched the new Azurion Image-Guided Therapy system and advanced informatics as well as the new AI-enabled CT 5300 designed for more accurate and reliable imaging results, while enhancing productivity using up to 80% lower radiation dose. We were also recognized as a Clarivate Top 100 Global Innovator for the 11th consecutive year and ranked as a top medical technology patent applicant at the European Patent Office in 2023. We continue to see strong customer pull for solutions and signed several long-term agreements across the world in the quarter.

For example, we signed a 10-year agreement with the Nicklaus Children’s Health System in the U.S. to provide AI-enabled technologies such as helium-free MRI, ultrasound and monitoring solutions for deeper clinical insights and improved workflow and productivity. Now on Respironics. As I said, we have taken very important steps in resolving the consequences of the Respironics recall in the quarter. As said before, we do regret that patients — that concern that patients may have experienced. Let me call out the milestones reached. First, Philips and Plaintiffs leadership supported by a court-appointed mediator, have reached an agreement that resolves the personal injury litigation at a medical monitoring class action in the U.S. This settlement ends the uncertainty associated with litigation in the U.S. It should be noted that Philips and Philips Respironics do not admit any fault or liability or that any injuries were caused by Respironics devices.

Philips Respironics has agreed to pay a total cap amount of $1.1 billion. The related payments are expected in 2025 and to be fully funded from Philips cash flow generation. You will find more details of the agreement in the Respironics field action deck published on our Investor Relations website this morning, which underscores the high degree of confidence from all parties in achieving closure and finality with the settlement. Also important, earlier this month, the Philips Respironics consent decree was approved by U.S. court. As communicated before, the decree primarily focuses on Respironics business operations in U.S. And we now have made the road map to demonstrate compliance with regulatory requirements in order to restore the business in U.S. and grow outside of U.S. Moreover, Philips Respironics obtained the final court approval for the previously announced economic loss settlement in U.S., for which a provision was recognized in Q1 2023.

We continue to work on order of Philips Respironics related legal proceedings, including the investigation by the U.S. Department of Justice. And we also concluded an agreement with insurers to pay Phillips in relation to Philips Respironics recall related product liability claims. Therefore, following the remediation of sleep therapy devices and the reassuring test results to date, these important milestones on litigation, consent decree and insurance provide Philips with a clear path forward for sustainable value creation. Looking ahead, we remain confident in our plan and financial outlook. In 2024, we expect to deliver 3% to 5% comparable sales growth, building on a strong comparison base of last year and an adjusted EBITDA margin of 11% to 11.5%.

The free cash flow expectation is now increased to EUR 0.9 billion to EUR 1.1 billion in 2024. Factor and the receipt from insurers that I just mentioned and the remaining payments related to the economic loss settlement. I will now hand it over to Abhijit to take us through the financials in more detail. After which, I will come back on our execution priorities.

Abhijit Bhattacharya: Thanks, Roy. Good morning, everyone. Let me start with our performance by segment. In Diagnosis & Treatment comparable sales increased by 3%, driven by growth in precision diagnosis and image-guided therapy. And this was against strong double-digit growth in Q1 2023. The adjusted EBITDA margin was 9.2%, including an impact of 100 basis points from an accounts receivable provision. The adjusted EBITDA margin was lower than last year, mainly due to the normalization of the product mix as anticipated. To remind you, the increase in profitability in Q1 last year was around 600 basis points due to the easing of supply chain constraints on our most profitable modalities of ultrasound and image-guided therapy systems.

Connected Care comparable sales declined by 1% as high-single digit growth in Enterprise Informatics was offset by negative sales growth in monitoring on the back of around mid-teens growth in Q1 2023. We saw strong growth in sleep systems and patient interface driven by performance outside of the U.S., while ventilator sales were lower. Connected Care adjusted EBITDA margin improved significantly to 6.4%, driven by solid performance in monitoring and an improvement in Sleep and Respiratory Care. Personal Health delivered a 3% comparable sales increase driven by strength in the Personal Care business. The adjusted EBITDA margin for the segment improved to 15.2% this quarter, mainly due to operational leverage and productivity. Geographically, sales in Personal Health was driven by mature geographies, while growth geographies were flat mainly due to China.

Overall, consumer sentiment remains subdued, but is expected to improve in the course of 2024. Segment other sales increased by EUR 25 million in the first quarter mainly from higher royalty income due to phasing. We have been very disciplined in cost management, and our productivity initiatives delivered savings of EUR 151 million in the quarter, of which operating model savings were EUR 55 million, procurement savings were EUR 40 million and other productivity programs delivered EUR 56 million. The adjusted EBITDA margin for the group increased by 80 basis points to 9.4% in the quarter as our productivity and pricing actions more than offset inflation. Free cash was an outflow of EUR 336 million in the quarter due to the normalization of working capital phasing, partly offset by higher cash earnings.

On capital allocation, in April, we completed the EUR 1.5 billion share buyback program for capital reduction purposes announced on July 26, 2021. In the second quarter, we intend to cancel the 4.4 million shares acquired this year. Moving to orders. It’s important to note that the absolute order intake levels remain healthy although lower than the exceptionally high comparison base of the last two to three years. Order intake grew outside China with an encouraging performance in North America and general improvement in market dynamics, which is expected to continue in the coming quarters. Our funnel of opportunities remain strong. The order book is significantly higher than the period before the global supply chain crisis. As a reminder, orders and order book accounts for around 40% of our revenue.

The remaining 60% comes mainly from recurring revenue streams, such as services and consumables from book-to-bill business and from personal health. As mentioned in our previous earnings call, we anticipate sales growth to be back-end loaded in 2024 due to the tougher comparison base in the first half of the year resulting mainly from the strong China performance in the first half of 2023 and the anticorruption measures ongoing in the first half of this year. Our expectation for sales growth in the second quarter remains soft as a result of this difficult comparison base as Q2 2023 grew by 9.4% as well as the impact of the phasing of royalty revenues. We expect sales in segment others to be around EUR 120 million in the second quarter; EUR 75 million lower than in the second quarter of 2023 due to a large royalty deal recorded last year and the impact of royalty revenue phasing between the first and second quarter of 2024, that I just mentioned.

This difference in royalty sales alone results in a negative impact of around 170 basis points on the growth of the group in the second quarter. Note that there is no change to full-year outlook of segment other provided in January, both in terms of sales and adjusted EBITDA. Based on our order book, improving order intake and the ongoing actions to enhance its execution, we expect to deliver 3% to 5% comparable sales growth and an adjusted EBITDA margin between 11% and 11.5% for the full-year. As Roy mentioned, under the settlement to resolve the personal injury and medical monitoring litigation in the U.S. Philips litigation — Philips Respironics has agreed to pay a total of $1.1 billion. The related payments are expected in 2025 and to be funded from Philips’ cash flow generation.

Moreover, we received the final court approval for the previously announced economic loss settlement in the U.S., at the time we announced the settlement in Q1, we recognized a provision of EUR 575 million based on assumptions about the number of claimants that we expected to participate. Now a year later, based on the actual claims that we are seeing, these assumptions turn out to be accurate and we fully expect the settlement to stay within the amount provided for. This month, we also concluded an agreement with the insurers to pay us EUR 540 million to cover Respironics recall related product liability claims. This income is expected to be recognized in Q2 2024 and payment is expected during 2024. As a result, we have increased our free cash flow outlook for this year to EUR 0.9 billion to EUR 1.1 billion, now including the payment from insurers as well as the cash out of around EUR 430 million related to the remaining payment of the economic loss settlement.

With that, I’d like to hand it back to Roy.

Roy Jakobs: Thanks, Abhijit. I would like to continue with the progress we have made on our execution priorities. On patient safety and quality, we saw substantial improvement in CAPA closures in the quarter, driven by stronger processes, capabilities and governance around it. We also continue to drive significant simplification of the way we work and we further reduced the number of quality management systems. We are well on track to achieve our target of 65% reduction in 2024. And we continue to invest in quality improvement across the portfolio, acting fast on post-market surveillance signals. With respect to supply chain, we have now redesigned more than 80% of the planned PCBs and further reduced materials and component risks in the quarter.

We will continue leveraging and regionalizing our end-to-end supply chain to further reduce lead times and strengthen first-time-right deliveries. Finally, our new operating model with prime accountability in the businesses has been live for a year now, resulting in significant productivity improvements. We have reduced over 8,500 roles to-date. At the same time, we continue the culture journey to drive impact with care and attracted over 300 talents with HealthTech backgrounds this quarter alone. Let me close out by repeating the key messages of today’s announcement. First, we delivered results in line with our performance improvement plan as a result of continued strong focus and progress on our three execution priorities. Secondly, we have taken very important steps in resolving the vast majority of the consequences of the Respironics recall.

And in this quarter alone, we had major milestones on litigation, consent decree and insurance, providing further clarity on the way forward for Philips. Thirdly, the progress we are making reinforces our confidence to deliver further performance improvements in 2024 and we are on track with the plan for 2025. I would like to thank you for joining the call, and we will now take your questions.

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Q&A Session

Operator: Thank you, sir. [Operator Instructions]. We will now go to our first question. And your first question comes from the line of Richard Felton, Goldman Sachs. Please go ahead.

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

Abhijit Bhattacharya: Hey Richard, good morning. This is Abhijit. On the PD margins or maybe because we gave diagnosis and treatment margins, last year we had a big increase. As I mentioned just now in the speech as well of 600 basis points that was because we supplied in the first two quarters of last year, a lot of our high more profitable modalities. The supply chain constraints are now mostly gone. The last part that is left is on MR, where we still have slightly longer lead times than we would like. That doesn’t mean a lot for the margins. It just hampers order intake a little bit for the time being. And in the second half of the year, we should go past that. As far as the margins for D&T this year are concerned, we have said that we are going to grow margins this year, and that will — the phasing between the first half and second half is distorted because of last year.

So we will grow margins for the year, and you will see improvements coming in the second half over last year for diagnosis and treatment. For Sleep and Respiratory Care, you’re right. That’s what we’ve always said that once we get clarity on the CD, we will take cost actions to make this business a profitable business. Even at a EUR 1 billion revenue, I think the good news is that we are already profitable. So we have taken most of those cost actions, further actions to come. But already in Q1, we are profitable in Sleep and Respiratory Care, which is why also you see the turnaround and the increase in connected care margins.

Richard Felton: Great. Thanks very much.

Abhijit Bhattacharya: Thank you.

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

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

Roy Jakobs: Thank you, Hassan. Let me take the first question. So remediation part of the CD. So I think as we said, we are very happy that we now have clarity. In essence, we have a very clear road map in terms of what we need to do to get back into the U.S. market. As you know, we already providing patients in the U.S. with patient interfaces and also some of the respiratory device. So it’s not that we are fully out of that market. But to get fully back, of course, we need to comply with the remediation requirements as set in the CD, including the recall plan. Now we haven’t put a time line out. We also will not speculate on that. We will, of course, work very hard to get there. We also are not starting now. We have indeed been actioning already on that earlier.

As Abhijit said, if you look to the totality of SoC, we are growing outside of U.S. And also we have been bringing it back into profitability. So the Sleep and Respiratory Care business will show an improvement and contribution trajectory into Philips, which we are very positive about. But we will not put any specific time line on any injunction because that also is, of course, collaboration with the FDA that we need to achieve that. Secondly, on your question on the clarity that we get now also on cash and cash profile and bolt-on M&A. As part of the plan that we started last year, I’ve been very clear how important cash generation is. Now we were very happy with the EUR 1.6 billion cash flow last year. Now we see that also this year, we will have a strong cash flow profile of EUR 1 billion.

We opted-based upon the clarity we now have on the economic loss payments we need to do, but also the insurance inflow we have in the year. And the litigation settlement we have today, we can actually pay in full out of our operational cash flow. That also means that we will indeed be able to do bolt-on acquisitions. Of course, those need to be the right ones, and we do kind of need to look at our own priorities first, which meaning extracting value out of the current portfolio of assets that we have because we have a lot of potential there. But that doesn’t mean that if we see the right target, we could do that and we will remain active. And of course, if we then think of which areas, those will be areas where we are strong either whether it’s IGT-domain, which we kind of see potential, but it could also be in monitoring or what we said did as bolt-on acquisition in ultrasound, where we had portfolio of AI solutions that we added there that actually will be coming to market as part of the innovation lounge in ultrasound actually mid this year.

So that will also bolster our profile and our portfolio towards the market. Maybe order intake, Abhijit, you can take.

Abhijit Bhattacharya: Yes. So I think, yes, we had a decline in China in Q1, and that is what we expected. It was in the high-double digits because last year, we had a growth of in the mid-30s last year, right? So you had mid-30s growth last year that was with the incentives coming out of COVID, and then you had really the counterbalancing this year with the anticorruption measures, which of course, slowed things down. The good news, as Roy mentioned, outside of China, we have returned to growth and most positively is that North America grew nicely for us in the quarter. We are not going to, at this stage, give specific numbers there because, let’s say that’s not something that is even shared by our competitors. But I think we are pleased with the momentum in North America, and that also gives us the confidence for the remaining part of the year.

We expect also China, as we said, to contribute in the second half of the year, Roy was in China recently, and with the new incentives that the government is planning to give, that should give, let’s say, good impetus. So overall, I think there’s no change in our view on China. It fundamentally remains an attractive market. For the short-term, consumer sentiment is subdued. We expect that to improve through the year. Hospitals will continue to work through the industry-wide anticorruption measures. And then we will — we expect to see more hospitals putting in orders. And yes, so therefore, that the second half, we expect China to contribute. And so far, we’ve kind of started the year on plan.

Hassan Al-Wakeel: Thank you very much.

Abhijit Bhattacharya: Thanks, Hassan.

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

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

Abhijit Bhattacharya: Yes. So I think a couple of things. So let’s say, the 100 basis points I talked about was that was a provision for receivables where certain — with a certain customers. So there’s no — it’s not an operational performance in a factory or anything to do with the cost structure of the business, but just a part provision on a receivable with a particular customers. I think if you look at the overall productivity, of course, in that productivity is compensating for our cost inflation. So you will see that we have a bridge in the deck on Slide 13, where you see 2% is going towards cost inflation that is a negative. Therefore, you don’t see all of it back, but you see a significant portion. And then the part that I mentioned, the 100 bps on D&T, of course, has an overall impact on Philips as well.

On cash dividend, I think it’s a bit too early to comment now. So let’s first get through this year and then at the end of the year, we will decide on how we will deal with our dividend for next year. But as Roy mentioned, the good news is that we can deal with our cash obligations with regard to the litigation from our operating cash flow. And that also gets us let’s say, to our — very close to our targeted leverage next year, which would be actually a very good performance after paying off all the fines.

David Adlington: Thanks guys.

Abhijit Bhattacharya: Thank you.

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

Veronika Dubajova: Hi guys. Good morning. And thank you for taking my questions. I have two, please, if I can. The first one is just that Abhijit, you sort of alluded to this, but the margin progression that you expect in D&T in particular through the year, if you could outline a little bit sort of how we should be thinking about that? I think you’ve talked about the sort of maybe 50 basis points or more margin improvement for the full-year. Do you still expect margins to be down in the second quarter? And then I guess if the improvement in the back half of the year, particularly pronounced in Q3 versus Q4, just because last year was such an unusual year, if you could help us understand that. And maybe just a comment on growth, of course, as well for D&T?

And then I have a separate question on the settlement announced this morning. And just to maybe give us all reassurance, I guess I would love to understand what extent they’re kind of exception? So is this all-encompassing? Does it include situations like death as well as injury? And just if you can talk to sort of what are some of the instances where you could see separate litigation that is outside of the scope of the settlement? And then to finalize the settlement, what are the steps that are remaining both in terms of the courts and discussions with the plaintiffs. And when can we sort of consider this completely done invested that would be — some color around that would be very helpful? Thank you guys.

Abhijit Bhattacharya: Hi, Veronika. Good morning. Let me take the first question, and then I pass it on to Roy for the second one. So the first two quarters of last year, we had very strong improvement in the margins of D&T. If I remember right, quarter one was 600 basis points. First half of the year was 500 basis points. And we said at that time itself that that’s a bit of an unusual pattern. So for this year, the way you should read it is that we will improve in the first — in the second half and the first half will be lower, so including Q2 will be lower than last year. But then Q3, Q4 you will see the improvements and then you see the improvement for the full-year. Important to note that the guided range for 2025 is low teens. We are already in that range. So we will make further progress into the range this year, and then progress in the range next year as well. So we are on a good track with D&T. On the litigation, maybe Roy?

Roy Jakobs: Yes, let me take that one. Veronika, thank you. I think important question on indeed this finality, I think we are very firm that we believe that for the U.S., this is as final as it can get. The settlement addresses, all the 60,000 known claimants as part of the Census registry, including the 700 filed cases that were active. We do not believe that there is a meaningful number of plaintiffs out there that will still come forward. That’s also the view of the plaintiffs themselves. And if they do, they will be subject to a so-called Lone Pine order, which requires them to bring forward the full case at once or else they will be dismissed, and also they will need to kind of comfort with all the individual evidence as everything that was gathered as part of this process now will cease to exist.

There are six months that actually people can still come forward after the six months, actually, the whole class action or the whole MDL ceased to exist. And that’s also why it was important that this was court approved and — or not yet court approved, but there was a mediator from the court that actually was part of this whole process. She has been very, I think affirmative of this deal. You also saw that in our announcement. She will also make sure that this will be going through the court proceedings. Now we don’t know exactly when that will be, but we don’t expect that will take too long. And so we are actually very confident that this will really put an end to this. And that’s very important because then with ending economic loss, economic personal injury and medical monitoring, we really have put the vast majority of these cases behind us with finality and clarity, and therefore, this provides us with a way forward and which we can focus on really running the business and growing Philips and bringing it back to where it belongs.

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

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

Veronika Dubajova: That’s fine. Great, thanks guys so much.

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

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

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

Hugo Solvet: Yes, on China, the possible impact from the stimulus — is it reflected already in your guidance or in your expectations for D&T and the acceleration throughout the rest of the year?

Abhijit Bhattacharya: Okay. So first, on the provision, yes, we cannot give, of course, details in public that’s between us and the customers. So even for privacy reasons, we cannot disclose that. I think on China, you can make it reasonably simple, yes, we — that is part of our guidance. So we had anticipated that there would be a recovery in China, the stimulus only substantiates that expectation. So it is part of that — of our overall guidance for the year.

Roy Jakobs: Maybe the sort of question on the China warning letter. I think you also referred to that. I think we are working fully through the kind of follow-up actions with the FDA on it. We don’t expect any current operational impact from that is process remediation. Of course, we take it very serious, like we take any finding that comes out of any site visit. There are both. There were two findings both related to process compliance. There were no reports of patient harm. So I think it’s important to also mention that, and we do not see any kind of impact from it. In terms of settlement ex-U.S., I think it’s important that, that’s also why there’s such a breakthrough this quarter that actually this is by far the vast majority of cases.

Secondly, what is very important that we do not admit any guilt as part of the settlement, neither towards patients or diseases. Also we refer to, the earlier testing that showed that no harm was done. So also, we look at full confidence to any cases outside of the U.S. that still might happen that we bring that to a good conclusion. But as said, before, the most important is that the vast majority of cases was in the U.S. And also as we all know, the U.S. legal system is in a particular way, and that’s why it was so important to end this certainty or — end the uncertainty and create clarity on the way forward by getting settlement on this specific case in U.S.

Hugo Solvet: Okay, thank you.

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

Graham Doyle: Good morning guys. Hopefully, you can hear me. Thanks for taking these questions. Just two for me. First, obviously, congratulations on the settlement. I think that’s a lot of clarity that probably clearly soon people were expecting. Just one sort of regulation to that, Roy, when you look at the P&L for the last few years, and I suspect even the next couple of years, there’s obviously a lot of adjustments and cash charges and things like that. Is that the next focus once we get through the next year or two to sort of square that, so that you reported and adjusted EBIT won’t be so different going forward and kind of lift that, that cash generation obviously going forward. That’s just question number one. And then question number two, you actually gave us a really good insight in terms of like explaining how the unlock or the improvement in China was occurring as these investigations progressed, and you had the sort of regional committee set up.

And could you give us another update as to how you’re seeing that? And is everything still tracking as you’d expect? And what does that mean in terms of order flow, even sequentially, say Q1 versus Q4, just to get a sense of how well things are moving in China? Thank you.

Roy Jakobs: Yes. Thank you, Graham. I think good questions. So on the first, I think we were sure recognize that, of course, we had significant hit into the P&L that went into headlines towards adjusted items. Now also the clarity of today helps to actually further provide guidance around the adjusted items going forward. We had many of the adjusted items in the last years that were unfortunately tied to the recall, as you know. So that has been really significantly impacting it. Now as we have the vast majority of Regal now behind us, we remediated the sleep therapy devices. We have kind of clarity on the settlements as we’ve now been providing for that really will allow us to kind of really bring that number substantially down.

We also, of course, took restructuring to get productivity in. You also have seen that contribution into our margin improvement. But also there, as you have seen, we are well on track with the 8,500 roles that we reduced by now. That does mean that we still have [indiscernible] approximately remaining. So there will be some restructuring that will come with that. And we also as Abhijit said, keep working as ours to get that into the best possible shape. So there’s still some of that to come, but it will be of different dimensions than unfortunately big numbers we have seen. So that is for sure a focus. Then secondly, in terms of China, I was actually in China a month ago. I’ve been talking to the Vice President, myself, of course, talking to a lot of customers and looking at the situation on the ground.

So and I saw two parts of the story. One was a continued impact from these anticorruption industry measures that were taken by the government. And as I said before, they are working through this. They’re doing that region by region, but it is not done yet. And that we said already when we came into the year, we still see that also, therefore, impacting as we speak. Our expectation is unchanged that actually, we do expect that towards the second half of the year, we will see real improvement coming in, but it’s too early actually in the first half to really count on that. And that’s also something that we, of course, saw happening in the first quarter. Now I think the positive for me was this new stimulus program because that indeed was not yet there.

And I also learn more about that, they’re specifically targeting to give subsidy to hospitals that can come forward to upgrade their installed base that is aged, and we also have seen customers putting in their requests. Of course, it will take time before they have kind of worked through those lists, approve it and the market will benefit from it. That’s also why we say, yes, it’s kind of — this will benefit the mid- to long-term attractiveness of the market because it will just help accelerate some of the replacement orders that will come into play when the market opens up more.

Graham Doyle: Great, that’s very clear. Thanks a lot guys.

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

Julien Dormois: Good morning, Roy. Good morning, Abhijit. Thanks for taking my questions and congrats on the settlement. The first one relates to the midterm outlook. There was no confirmation of the midterm outlook in your material, unless I missed it. So is this an indication that maybe you are currently reviewing it? And especially now that you have more clarity on Respironics, that maybe that could lead to an upgrade on that side? My second question is more of a housekeeping one on the order book, just to better understand what was the split in the order book between D&T and CC in the first quarter? I mean last year, obviously, there was a very diverging trend. So — just trying to understand whether we’re talking about maybe a double-digit decline in D&T and some growth in CC in the first quarter of 2024?

And my last question, sorry, last question in London. The growth in the U.S. in the quarter, you basically had a 0% growth in the U.S. So just trying to better understand which division was the most impacted and how we should think about the U.S. into the remaining quarters of 2024? Thank you very much.

Abhijit Bhattacharya: Yes, hi, Julien, regarding the midterm outlook, I think you missed it. So it is in the outlook. If you look at our press release, the first sentence in the outlook says we reiterate our confidence in delivering the 2025 plan. So that is already there. It’s already there also in the company deck, et cetera. So we have — we confirmed our outlook for 2025. And you said whether there’s an upgrade post the litigation. If you remember, when we gave the guidance, we had excluded litigation-related charges. So we’ve not only confirmed the outlook for the midterm plan, but also for this year, right? So both of them have been done, and we have upped our cash flow guidance for the year. Your second question on the order book, I think, yes, it was I guess, split between both of them, so I don’t want to go into all regional and other differences, but this was let’s say, overall impacted mainly by China.

So rather than modalities, I think the big thing to realize is that the impact was really from China. And China, bulk of the business is in D&T. So therefore, the impact on D&T is slightly higher than CC. And for the U.S. In terms of sales, I think the main reason there is the comps compared to last year because we went out of the blocks with a huge growth last year in Q1 and that’s what makes it difficult in terms of the comps for this year. And that was largely, as I mentioned earlier, Ultrasound and ITT.