Koninklijke Philips N.V. NY Registry Shares

Hi, everyone. Welcome to Philips' fourth quarter and full year 2023 results webcast. I'm here today with our CEO, Roy Jacobs, and our CFO, Abhijit Bhattacharya. The press release, investor decks, 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 the statement in the presentation published on our website. In today's call, you will get our results as well as the progress on the actions we're taking across different areas to drive performance improvement. I would like to hand over to Roy.

Good morning. Welcome. Great to be with you today. I want to start with the key highlights of this morning's release. We delivered a year of strong sales growth, improved profitability, and very strong cash flow. The improved operational performance is a result of the solid execution of our plan to create value with sustainable impact. We are making progress on all our three priorities, enhancing patient safety and quality, strengthening supply chain reliability, and simplifying our operating model. supporting significant productivity and margins. Patient safety and quality remain our highest priority across the company. We agree with the FDA on the terms of a content decree focused on Phillips Respironics in the US, which provides clarity and a roadmap for us to demonstrate compliance and restore the business. We are confident in delivering the previously stated plan for 2023 to 2025, which now takes the consent decree into account and remains unchanged, although recognizing that certainties remain in a volatile geopolitical environment. Based upon our ongoing actions to enhance execution, we expect further performance improvement in 2024. On to the key financial highlights. Comparable sales growth was 7% in the full year, excluding the impact of provisions charged to sales, mainly in connection with the Respironics Consent Decree, which we will explain later in the call. Sales growth was 11% in D&T, 5% in Connected Care, and 3% in Personal Health. Group comparable sales growth, including the impact of the provisions, mainly in connection with the Respironics Consent Decree, was 6% for the full year. The adjusted EBITDA margin was 10.5% in the full year, excluding the impact of the provisions mainly in connection with the Respironics Consent Decree. This is a strong improvement of 310 basis points versus 2022. Adjusted EBITDA margin, including the impact of those provisions, was 10.6%. Free cash flow saw a strong inflow of 1.6 billion euros in 2023, and we significantly strengthened our balance sheet in the year. Restructuring and order charges were high in 2023. This was a result of our focus on resolving the consequences of the Respironics recall, the content decree, and the important interventions we are making in the company as part of our plan to create value with sustainable impact. Order intake was lower in 2023 due to the exceptionally high comparison base in the last two to three years, lower China and Russia, and lower order to delivery lead times. We saw sequential improvement in Q4 as anticipated, and we remain focused on implementing the necessary actions to reduce lead times and leverage our enhanced operating model and our AI-driven innovations to improve order intake. It's important to note that our order book, which accounts for 40% of group sales, is 15% higher than when the global supply chain crisis started. and we will continue to support revenues with that Water Book as planned for 2024. This morning, we announced that Philips agrees with the FDA on the terms of a consent decree, which is now being finalized and will be submitted to the relevant U.S. court for approval. The decree is mainly focused on Philips Respironics in the U.S. and will provide a roadmap of defined actions, milestones, and deliverables to demonstrate compliance with regulatory requirements and to restore the business. In the U.S., Philips Respironics will continue to service sleep and respiratory care devices already with healthcare providers and patients and supply accessories, patient interfaces, consumables, and replacement parts. Philips Respironics will not sell new CPAP or BiPAP sleep therapy devices or other respiratory care devices in the U.S. until meeting the relevant requirements of the consent decree. Outside of the U.S., Phyllis Respironics will continue to provide new sleep and respiratory care devices, accessories, patient interfaces, consumables, replacement parts, and services subject to certain requirements. Further details will become available once the consent decree has been finalized and submitted to the relevant U.S. court for approval. We are not able to provide more information on the consent decree at this time. Looking ahead, we remain confident in our plan and in the financial outlook. The previously stated 20 to 23 to 25 group financial outlook of mid-single-digit sales growth, low-teens adjusted EBITDA, and 1.4 to 1.6 billion free cash flow in 2025 now takes the consent decree fully into account and the plan remains unchanged. This outlook excludes the impact of ongoing litigation and investigation by the U.S. DOJ related to the Respironics field action. In 2024, we expect to deliver further performance improvement, with 3 to 5% comparable sales growth, building on a strong 2023 comparison base, and an adjusted EBITDA margin of 11 to 11.5%. We expect free cash flow of between 0.8 to 1 billion euros. This excludes the expected remaining cash-out related to the previously announced resolution of the economic loss class action in the US. While we continue to see hospitals and healthcare systems exhibit some cautious buying behavior, we expect this to develop positively in the course of 2024, driven by improving hospital financials and more procedures. In China, the government-imposed anti-corruption measures continue to impact short-term decision-making by hospitals. but this is not expected to impact fundamental demand. Our order funnel remains very active in the country, and we expect order growth to resume in China in the second half of 2024, following a very difficult comparison base in the first half of this year. Overall, based on the gradually improving market environment and our ongoing actions to improve order intake, we expect to see positive order intake growth in the full year 2024. let me now provide you with some of the recent customer and innovation milestones during the quarter. We signed an eight-year, $150 million agreement with NYU Langone Health in the US to provide patient monitoring, AI-enabled diagnostic imaging, digital pathology, and enterprise informatics solutions to its latest hospital. Our program to expand access to maternal health through AI-powered ultrasound aims to address the shortage of healthcare workers by putting a diagnostic tool previously reserved for expert technicians in the hands of midwives. This program also received funding of $60 million from the Bill and Melinda Gates Foundation. Our innovations are focused on empowering clinicians with artificial intelligence for deeper clinical insights, improved workflow and productivity. For example, we recently launched Philips HealthSuite Imaging, a cloud-based next generation of Philips ViewPacks, that offers AI-enabled workflow orchestration, high-speed remote access for diagnostic reading, and integrated reporting. In personal health, we launched premium S9000 shapers with breakthrough closed-shape technology in the U.S., Western Europe, and China. In 2023, we were again recognized with a prestigious A-score for climate action leadership by global environment nonprofit carbon disclosure project. and as one of the top health technology companies in the Dow Jones sustainability indices list. 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.

Thanks, Roy. Good morning, everyone, and thank you for joining us on the call. Let me start by providing you some clarification on the charges we took in the fourth quarter connected with the consent decree and explaining its accounting consequences as well. In the fourth quarter, we recognized 363 million in charges connected to the consent decree. This includes provisions charged to sales for field action activities mainly related to the ongoing remediation of ventilators and provisions charged to costs for the remediation activities inventory write downs and onerous contract provisions. Technically, this had a negative impact of around 100 basis points on the comparable sales growth for the full year and 350 basis points for the fourth quarter. It also resulted in a positive impact of 10 basis points on adjusted EBITDA margin for the full year and 40 basis points for the fourth quarter as the same absolute adjusted EBITDA was divided by a lower sales figure. I understand there can be some confusion about our operational performance due to these impacts and have noticed some headlines mentioning a miss compared to our outlook. I want to make clear that we came at the top end of our upgraded comparable sales growth outlook of 6% to 7%. and at the midpoint of the upgraded adjusted EBITDA margin outlook of 10 to 11% provided in October. And free cash flow was significantly above our outlook. I hope the above aforementioned explanation helps to clarify. For comparison purposes during this call, I will refer to figures excluding the impact of these provisions as it will help to compare operational performance against the outlook provided earlier last year. In this morning's press release as well, as the slide deck, you will find the reconciliation between the metrics including and excluding the impact of these charges. Let me now move on to our performance by segment. In diagnosis and treatment, comparable sales increased 11% in the full year, driven by double digit growth in image guided therapy and ultrasound. In the fourth quarter, comparable sales growth was a solid 5% on the back of tough comps in the previous year. Full year adjusted EBITDA margin for diagnosis and treatment was 11.6%, an increase of 210 basis points compared to 2022, driven by higher sales, pricing, and productivity measures partly offset by cost inflation. In Q4, the adjusted EBITDA margin was 10.4%, impacted by an unfavorable mix and phasing of production as we reduced inventory, as well as the phasing of costs. This follows the strong adjusted EBITDA margin in the first half that was driven by strong ultrasound and image guided therapy sales. Connected care comparable sales increased 5% in the year driven by double digit growth in monitoring. Q4 comparable sales were flat as high single digit growth in enterprise informatics was offset by negative sales growth in monitoring on the back of around 20% growth in the fourth quarter of last year. Sleep and respiratory care sales grew low single digit in the quarter driven by growth in sleep systems and patient interface, partly offset by lower ventilator sales. Additionally, a few days ago, we communicated to customers our decision to discontinue the manufacture and sale of certain product lines in the U.S., primarily within respiratory care. Full-year adjusted EBITDA margin for connected care improved 480 basis points to 6.9%, mainly driven by higher sales and productivity measures. In Q4, the adjusted EBITDA margin improved 170 basis points to 13.3%, driven by a strong performance in monitoring and improvement in sleep and respiratory care. Personal health delivered a 3% comparable sales increase in the full year and a strong 7% in the fourth quarter, driven by strength in the personal care business. Geographically, growth in Q4 was driven by China, Western Europe, and other growth geographies. Overall, consumer sentiment remained subdued, but is expected to improve in the course of 2024. Full year adjusted EBITDA margin for personal health improved by 180 basis points to 16.6%, mainly driven by higher sales, pricing, and productivity measures. In Q4, the adjusted EBITDA margin improved 290 basis points to 19.9%. We have been very disciplined in cost management, and our productivity initiatives delivered savings of 956 million in the year, of which the operating model savings were 496 million, procurement savings were 219 million, and other productivity programs delivered 241 million. Productivity savings in the fourth quarter amounted to 271 million. The adjusted EBITDA margin for the group increased by 310 basis points to 10.5% in the year. Wage and component price inflation was more than offset by operational leverage and by our productivity program and pricing actions. In the quarter, the adjusted EBITDA margin for the group increased 50 basis points to 12.5%. We delivered significant cash flow improvement with a free cash inflow of 1.1 billion in the fourth quarter and 1.6 billion for the full year. This included a cash outflow of around 150 million euros related to the resolution of the economic loss class action in the US in Q4. Excluding this, the operational free cash flow was very strong with 1.75 billion euros in 2023. The strong free cash flow was driven by higher earnings and improved working capital. We saw a further sequential reduction of inventory in the fourth quarter and accounts receivables were significantly lower due to a strong performance in collections and favorable sales phasing throughout the year. This resulted in an improvement in our leverage from three times to two times on a net debt to adjusted EBITDA basis compared to the start of the year. On capital allocation, we canceled more than 15 million shares in the fourth quarter of 2023 from the share buyback program started in 2021, which resulted in a total reduction of 1.5% of the outstanding shares in the quarter. We will submit a proposal to maintain the dividend at 85 cents per share to be distributed in shares as part of our measures to further shore up our liquidity position. Moving to our order book, as mentioned by Roy, it is significantly higher than the period before the global supply chain constraints. and we expect it to continue to support the sales growth in the coming quarters. It is important to note that orders and order book account for around 40% of our revenue. The remaining 60% comes mainly from recurring revenue streams such as services and consumables and from the book and bill businesses and from personal health. As you can see on the slide, absolute levels of order intake remain healthy, but we see a steep increase in sales levels in 2023 due to the enhanced order book to sales conversion following the supply chain and execution improvements. Based on the strong order book, improving order intake, and the ongoing actions to enhance execution, we expect to deliver further performance improvement in 2024. with a 3 to 5% comparable sales growth and an adjusted EBITDA margin between 11 and 11.5%, recognizing that uncertainties remain. We expect to see this growth of 3 to 5% and adjusted EBITDA margin improvement across all our businesses. We anticipate order intake and sales growth to be slightly 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 both on orders and sales, favorable diagnosis and treatment product mix, and high royalty income in the first half of 2023. We also see consumer spending increasing gradually through the year. Operationally, we aim to deliver a free cash inflow between 800 million to 1 billion euros this year, with higher earnings partly offset by higher working capital due to growth and consent decree costs. This excludes the expected remaining cash out related to the previous announced resolution of the economic loss class action in the US, as well as ongoing litigation and the investigation by the U.S. Department of Justice related to the Respironics field action. Restructuring charges are expected to be 100 basis points in 2024, driven by overall workforce reduction program as well as the reductions in the sleep and respiratory care business. Acquisition-related costs are expected to be around 30 basis points Other costs are expected to be around 200 basis points and include 100 basis points of charges connected to the consent decree remediation activities and disgorgement payments and 100 basis points, Respironics field action running costs and other quality related charges. Financial income and expenses are expected to be a net cost of around 290 million euros in 2024. The effective tax rate is expected to be within our mid-term range of 24 to 26%. We expect sales of 550 to 580 million euros in segment other in 2024, with a loss of about 50 million at the adjusted EBITDA levels, which is 20 million better than in 2023. and 100 million at an EBITDA level, which is 80 million better than in 2020. With that, let me hand it back to Roy.

Thanks, Abhijit. I would like to continue with some of the progress we have made on our execution priorities and focus areas for the year ahead. First, we're taking the learnings of the Respironics field action to raise patient safety and quality to the highest standards across Philips. A year ago, I elevated patient safety and quality to the executive committee by creating a new leadership position to drive this priority across the company. We drove significant simplification of the way how we work by further reducing the number of quality management systems, which is already 50% down since the inception of the program, against our target of reducing them by 65%. We added significant capabilities and talent across the businesses and continue to invest in our systems capabilities and in training and education. We also improved our CAPA closures by strengthening processes, capabilities, and governance around it. Looking ahead, we will remain focused on driving the culture shift to deliver the highest quality innovations and put safety and quality at the center of everything we do, with a greater level of accountability within the businesses. With respect to the supply chain, in 2023, we reshaped our setup. and move to customer-centric end-to-end teams aligned to our businesses. We significantly reduced materials and component risks, resulting in a 20% increase in service levels, reduced lead times, and improved sales conversion rates. For example, we redesigned more than 75% of the planned PCBs and de-risked all high-risk components identified at the end of 2022. We will continue leveraging and regionalizing our end-to-end supply chain and further reduce lead times in 2024, enhancing reliability and service levels. Finally, our new operating model with prime accountability in the businesses has been live for nine months now, and we have fully completed the realignment of the workforce roles and reporting lines. This enabled more effective ways of working across the company, resulting in significant productivity improvements, It also included the difficult but necessary reduction of over 8,000 roles today out of a planned reduction of 10,000 roles by 2025 versus a plan of 7,000 roles in 2023. At the same time, we started a cultural journey to drive impact with care and attracted over 900 talents with health tech background this past year. As you have seen in the results we presented today, I am pleased to see that the actions we have taken continue to positively impact our performance. We are very focused on our priorities and on executing with excellence to keep improving when needed to deliver our AI-fueled innovations to our consumers and customers. We remain confident that our focused growth strategy for scalable innovation will further strengthen our business and results going forward. And we see huge potential to make a difference helping more healthcare providers help more patients in an efficient and sustainable way, and making it easier for more people to take care of their health and well-being. Let me close out by repeating the key messages of today's announcement. We delivered a strong year of improved operational performance as a result of the solid execution of our plan to create value with sustainable impact. We are making progress on all three priorities, enhancing patient safety and quality, strengthening supply chain reliability, and simplifying our operating model. Patient safety and quality remains our highest priority across the company, and the constant degree provides clarity and a roadmap for us to demonstrate compliance and restore the business. Looking ahead, we are fully on track with the plan for 23 to 25, although recognizing uncertainties remain. The progress we are making reinforces our confidence to deliver further performance improvement in 2024. I would like to thank you for joining the call and we will now take your questions.

Thank you, sir. If any participant would like to ask a question, please press the star followed by two times one on your telephone. Due to the time, please limit yourselves to one question. This will give more people the opportunity to ask questions. There'll be a short pause while participants register for questions.

Thank you.

The first question comes from the line of Hassan Alwakil from Barclays. Please go ahead.

Hi. Morning. Thank you for taking my questions. I have three, please, if we can take them in turn. Firstly, can you talk about the portfolio pruning in Connected Care and why you've chosen to exit some of these businesses in the U.S.? Was this directed by the FDA? And what is the combined revenue from these devices and how should we think about 2024 revenue growth in Connected Care on a clean basis?

Thank you, Assam. Let me take that question. So we have been starting to prune our portfolio on an ongoing basis. And we did that across the portfolio of Philips, which we have seen in various products, but also businesses. We also did that in sleep and respiratory care. What is important to understand is that actually these prunings actually are aimed to accelerate our performance. And so far, as you have seen also in 2023, that is actually what they do. So also for the sleep and respiratory care business, and also what you have seen in terms of the pruning that we take there, it's aiming at the same objective. We see that sleep and respiratory care bottomed in terms of the $1 billion of revenues. And with the clarity that we have now with the consent decree and the roadmap to get to compliance and to restore the business, actually we are able to build from there. And actually that is also why we were happy to announce that actually we could now confirm that we remain on our plan, including any consent decree implication, for 2023 to 2025. And I think, as you remember, when we started last year with the plan, and we said that we have a three-year trajectory, there were questions around what consent decree would still mean. Now, we can take that clarity off the table, and we remain very committed. And based upon a first year where we actually over-delivered, first-to-first-year plan, because let me also remember where we started. We said low single-digit growth, where we did 7% growth. We said we would do high single-digit EBITDA. We did 10.5% EBITDA, and we committed to $700 million to $900 million of cash. We did $1.6 billion cash. That actually was excluding insights of the consent decree. Now we continue including the consent decree, and we remain fully committed to the plan as we have.

I'm sorry, just the combined revenue from these devices and the expectation for connected growth, care-to-care growth in 24?

So it's really immaterial. That's also why we would not disclose. We remain very committed to the 3% to 5% growth for 2024, and that includes any impact of any pooling that we did in 2023. And that was not only in SRC, we also did it in DNC, We also did some pruning in personal health. So actually we have been pruning across the portfolios, but actually what we do is to focus our efforts on the innovations that we can scale faster and better, right, so that we have less fragmented portfolio and the portfolio that we have does make a better impact and also that helps us to drive better margins because we said also if you kind of consolidate your portfolio more, you will be able to get more leverage and that will support your margin transaction as well.

Perfect. And then secondly, so another on the consent decree, could you help us understand the timeline of your return to market in the U.S., given you talk about a multi-year process and the duration of profit disgorgement and whether you see any risks to selling OUS?

So on the first piece, so we have and will not be provided to kind of give a timeline on that. I think we are committed to work through the consent decree as soon as possible. We're also taking all measures needed. We have a team lined up to do that. We will come forward with the details of the consent decree once it's court approved, so then you will also have further insight in what it means. But I would say the following. We got, as of when we come back, we will deliver on our plan. So actually, we have been taking charge of the rest of the You know that kind of we have $18 billion of revenue, $1 billion is as I see, but actually we will drive all of Philips to deliver on our commitment. And actually that therefore also gives us the opportunity to work through this and comply as we need to do. And there's no dependence on that trajectory for delivery of Philips. Outside of U.S., as you have seen already in 2023, we started to resume and come back into the market. Actually, that will continue because we got the regulatory approvals. We already started to sell new CPAP and BiPAP devices. And we were continuing already earlier to service the market with the consumer models, the patient interface, and we saw actually in the patient interface also some good performance. So actually, we will continue that track. But what for me is the most important piece is if you look to the totality of Philips in 2023, we have been growing every single segment, D&T, connected care, personal health, We have been pulling growth out of every geography, China, Europe, and Americas, and we will continue to drive that total performance in 2024, and especially also based on the strong cash performance that we showed in Q4 and for the full year. That, of course, gives also very strong base to move forward in kind of investing the business, prepared for anything that comes. And the margin improvement of 310 bps in 2023, we of course need to continue. We said also we have a target now of 11 to 11.5%, and that's also underpinned by further growth momentum, but also the productivity measures that you saw. We took almost one billion of productivity that we realized in 2023. Now we take another thousand rolls out in 2024, And we continue to work also on wider productivity because we see also some market easing on, for example, the procurement side that will help us to also drive further productivity to support the margin step-up.

Very helpful. And then finally on guidance, can you help us understand the breakdown and the rationale for 3% to 5% growth given the provision had an additional 1 percentage point drag in 2023? Is there anything driving caution here or are you trying to retain your more conservative approach to guidance? And then on the margins, how should we think about the 50 to 100 basis point margin levers by business segment?

Hi, Hassan. Good morning. This is Abhijit. No, yes, while there is a bit of benefit because of the provision that went against sales this year, but we also over-delivered. At the top end of our guidance for 2023, so if you net the two, it's a few tens of basis points, and given the wide range of 3% to 5%, I think there was no need to further change that range. That's one. I think on the profit improvement, you will see that across businesses like you've seen that this year. So we will continue to drive margins up in diagnosis and treatment, of course, connected care as well, but also personal health. And... Yeah, I think we'll leave it at that.

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

Hey, guys. Hope you can hear me okay. So first question really is just on the consent decree. I know it's a bit difficult. In fact, you're still waiting on the court decision, but maybe it's beyond this year. I just wondered if the ongoing costs particularly related to profit discordant, will still be recognised below the line. I just want to get an idea of how much the headwinds we're going to see below the line in terms of the cost to be on this year. And then secondly, you put towards productivity initiative savings of about $960 million so far this year, but your overall EBITDA is only up $600 million. So I just wanted to get your point towards the underlying headwinds, please. Thank you.

Hi, David. Couple of points. So regarding the guidance, we said the 100 basis points will be below the line this year for the whole remediation, including the profit disgorgement. Details of how much is for what we will come with only once we have the signed court order. To your second part of the question, yeah, of course, we delivered, like we said, the billion order of productivity. But, of course, there was also inflation in cost, in wages, et cetera, et cetera. So the net is what you see back in the P&L. So you will see that also in our bridge.

Thanks, everybody. Just to follow up on the consent decree, should we expect some below-the-line items in 2025 and beyond?

Sorry, see what?

On the consent decree – Should we expect some more items in 2025 and beyond?

Yes, but we will come to, we provide more clarity later as we get more information. And the other thing may be important to understand is the 100 dips that we talked about, the additional cost, that's all included in the cash outlook for 2024 and 2025. So we are not changing the cash outlook for 2024 or 2025. So this all included in that.

Thank you.

Thank you. The next question comes from the line of Richard Felton from Goldman Sachs. Please go ahead.

Thanks. Good morning. Two questions for me, please. The first one's on D&T margin in Q4. So can you provide maybe a little bit of color around the mixed impact in the quarter? I know strong growth in ultrasound had been a tailwind through the year, which I don't think was the case in Q4. But can you maybe help us quantify that impact, please? Then the other driver that you call out in D&T margin for Q4 was the phasing of production and costs. Can you maybe explain what the phasing actually was related to and quantify the impact? Just trying to get a sense of the underlying margin trajectory for that part of the business. Then my second question is a little bit more of a medium term one on sleep and respiratory care margins. Look, now that you have a little bit more visibility on the consent decree and I see more detail on what remediation activities are gonna look like, what level of profitability do you think is achievable for that part of the business in the medium term? Thank you.

Yeah, hi. Richard, let me take the first one on the Q4 impact on on diagnostic imaging. So couple of things. One is the mix is not just on ultrasound, but it was a combined mix of a few things. So we had not only the mix of lower ultrasound, because last year we had, let's say, the backlog that we cleared, but also the geographic mix. So we sold more this year outside the US and China. So that was another impact and then also the mix between equipment and services was also slightly adverse compared to the year ago because we sold, you know, we had good sales in MR, et cetera, so that's equipment sales which comes at a slightly lower margin. So that was the mix impact. Now regarding the phasing of production, that was, you know, we have also brought down inventory big time. So as you do that, you taper off production so that we start next year with a healthy inventory but not too high and that results in slightly lower coverage of our factory costs. So that impacted the margin in the fourth quarter. And then there was some phasing of costs between through the year and most significantly, you know, in 2022, the annual incentive payments were very low because or non existent because of the poor performance. That, of course, comes as a cost this year, so that's the difference between the two years. So those are the three big buckets that impacted the margin in the fourth quarter. Your second question on SRC outlook, look, for sure we will get back to profitability, but we are not giving separate guidance on every business. I think you should see a significant step up. in the overall connected care profitability that we have given in our guidance and as part of that is also the improvement that we will drive in sleep and respiratory care.

Thank you.

Thank you. The next question comes from the line of Veronica from Citi.

Please go ahead. Hi, good morning, Roy, Abhijit, Leandro, and thank you so much for taking my questions. I will keep it to two, please. One, we'd just love to get your take on China and your current expectations as far as your installations in China are concerned and what's embedded in the guidance for D&T, both from a sales and a profitability perspective. Obviously, China is a very important and highly margin-accretive market, so I'm just curious how you're thinking about the anti-corruption aspect activity and how that plays out in terms of the China revenue impact this year. Your commentary in order has been very clear. I'm really just curious about the P&L and what you've kind of factored it in there. And then I'll have a follow-up after that if that's okay, but let's get this out of the way first.

Sure. Thank you, Veronica, for the question on China. I think China has been always an important part of our business, also will remain an important part of our business. I think it's fair to say that we know that China is going through a difficult phase. Macroeconomically, from a growth perspective, where the growth is lower with around 3% to 5% for the country, as they have normally been kind of customized to, that has a consumer impact, but it also has an impact in healthcare. And there, in particular, on top, we have seen, of course, the anti-corruption measures. Now, what we know is that on the anti-corruption, they're working through – country program to actually go state by state. So what we have seen is that they have partly finished that program, or at least they made a lot of progress on that in 2023, but we do expect that to continue into 2024. And therefore, actually, we are seeing that China is back and loaded for 2024. We see gradual improvement in China. It will continue to contribute to our total plan, and it's also embedded in the guidance to 5%. I think what is important from an order of perspective, it's only 5% of our global sales, mainly in V&T, and also that on the consumer side, we have seen them coming back to growth, but we expect that to surely but slowly come further up. So China will strengthen throughout the year is our expectation. The government actions are not finished, and they will still need to complete their program.

Okay, that's helpful. And would you expect China for D&T to be flat, to grow, or to be down for the full year?

No, it should grow. So we expect it to. It should grow, okay. Yeah, yeah, it should grow.

Okay, that's great. And then my second question was, and I think where you alluded to this in your prepared remarks, some of the geopolitical risks, obviously, you know, thinking about shipping and freight costs Obviously, you have some very localized manufacturing in the Middle East for the CT business. Just kind of curious how much of your wiggle room, if I can use that very highly technical term, have you embedded around those risks when you've given the 2024 guidance? And I guess what is for you the single most significant area of concern that you have? Maybe Abhijit can chime in also on the freight side of things there. Thank you, guys.

Yeah, I think we alluded to the uncertainty because we just learned that the world around us is and remains volatile. I think the guidance that we have been given, the 3 to 5%, we are very confident in, based on the execution improvements that we have been putting in into 2023, because that gave us more agility, also to adapt to situations like we see today. It gave us productivity to absorb some of potential cost increases. And I would also put into perspective kind of, yes, there is Red Sea, for example, developments, but if you look to the total freight cost that we have, this is an immaterial impact that we currently foresee. There might be some delivery times challenges, but actually that's what we're also overcoming because we are preempting that and we're working already through mitigation. So we are vigilant of what could happen to the world. So far, we are on top of the developments both in Middle East And I think the bigger concern that I think, and you alluded to it earlier, is that we need a strong global economy and we need all the geographies to contribute. And therefore China getting stronger I think is something that of course we all welcome. But also rest of world, we see some strengthening in 2024. North America should be a bit stronger than in 2023. And we see also focus of growth that we go after in Asia, for example, with Indonesia and Japan. And also Saudi, we see some good opportunity. So we watch the world carefully. I think by adjusting our operating model, we have become more agile. to adapt to situations if they would occur. Currently we are dealing with any known issues well and they are taken into the guidance as you have seen.

Thanks, Guy.

Thank you. The next question comes from the line of, one moment please, comes from the line of Lisa Clive from Bernstein. Please go ahead. Hi, thanks very much.

Just a question on your order book and the matchup of inflation and cost increases. I know fairly early on as inflation picked up, you did manage to put through price increases. And just wondering if you could just remind us roughly what quarter that started and when that started coming through your backlog. And after that initial round of price increases, have you been able to continue moving prices up as inflation has not yet abated?

Yeah, I think what we did was we saw first a small bit coming into Q3 and then Q4 a little bit more, but I think most of the, let's say, price increases you will see coming in in 2024. That is what we had planned. So in pH, we don't see further strengthening of prices. So we are where we are. Our margins are at a good level. We are driving productivity, et cetera, to drive costs down. In selected areas in health systems, we continue with the price increases that we've had, but we are also seeing component pricing and other things coming down. We will manage that as a mix into the pricing strategy for 2024.

Okay. And then just a question on your sleep apnea business. Novo Nordisk will have a readout from an OSA trial for their GLP-1. And, you know, clearly obesity is a major contributor to sleep apnea, although, on the other hand, it's a very underdiagnosed condition. So just thinking about how the world seemingly has changed in the last few months around GLP-1s and, you know, the potential for even better drugs, the potential for eventually generics to help lower the price point. Does that change your long-term view on the sleep apnea business, particularly in light of the fact that you're actually just even going to be out of the market for a year or two as well, at least in the U.S.? Obviously, you're able to sell OUS, but the U.S. has historically been your biggest market.

Yeah, thank you, Lisa. I think... We don't see it's changing structurally the market opportunity. We believe that there is a significant patient base out there, as you say, that's undiagnosed. Yes, I think there will be medication that will help address some of the causes of sleep apnea. We also know that, on average, a sleep apnea patient has five comorbidities. Obesity is one of those. So this will help, but will not take the root causes away. We also know that CPAP and BiPAP is by far the most effective therapy that is preferred and also in use and in demand. So we are committed to that segment. We also see the opportunity strong. We're fully focused on working through now the clarified roadmap for the U.S. and outside of U.S., of course, we are already coming back into play. So we believe that there is a strong road ahead that we will work through based on the improved clarity that we now have.

Great. Thanks for that.

Thank you. As a final reminder, if you would like to ask a question, please press star followed by 2 times 1.

One moment, please. We will now go to the next question. And the next question comes from the line of Seski Izona from HSDC. Please go ahead. Hello, Seski. Is your line on mute? Due to no response, I will go to the next question.

And your next question comes from the line of Graham Doyle From UBS, please go ahead.

Good morning. Thanks for taking my questions. Just two kind of areas. So firstly, just in terms of the adjustments and sort of the restructuring charge and secondly around the consent decree. In terms of the adjustments, kind of quick housekeeping one. Could you maybe elaborate on what the 81 million of D&T remediations related to in Q4 23? And then just for 2024, it looks like if you... do the sums, roughly 100 basis points of the expected adjustments to EBIT is going to be related to the recall, again, which it just seems a large number, given you also say in the statement that more than 99% of the sleep recall is done. So could you give us a sense on when these adjustments will end, I suppose? And then separately to that, just on the consent decree, Is there anything in your 2025 guide for sleep and respiratory sales in the US? I know you don't want to comment on the specific products that were withdrawn on Friday, but given the quantum and the previous breakdown of revenue from these products, it seems like a fairly sizable headwind, particularly in the first couple of quarters next year when maybe you don't have the tailwinds coming through in revenue. So how should we be thinking about that H2 waiting that Abhijit just referred to for 2024? Thank you.

Yeah, let me take the first one on the 81 million in charge that we took. So as I said, when we start to plan patient safety and quality is an important focus area for us. And we will put in due efforts to actually improve quality across the portfolio. That actually is where these charges reside from. because we are also taking action across a lot of businesses. And in this case, it was in the area that we took the quality action. And that is part of the improvement of quality. We also signaled that as part of the plan. We would invest behind that. These are some of these charges that you currently see coming through.

Regarding the adjustment of 100 bits, let me clarify. There are two parts. One is related to the consent decree where we have running costs of the remediation. The second that we mentioned is regarding overall remediation in respiratory care, but also for the rest of the company. Now, part of that is the legal costs will continue. There is some testing costs that will continue. So, yes, we are at 99% on the remediation of sleep. There is a very small portion that is left. We still have to do the ventilators for which we have a provision now. But let's say the last part of the legal costs and testing and other related costs will continue into next year. Your last question was on the sizable headwinds. I also saw it in your note. You talked about 400 million of headwinds. I think Roy has clarified. The 1 billion is the bottom that we see, that was the revenue for 2023, and that is the bottom. So we don't see any further headwinds to that revenue number going forward. And in our outlook, all of this is taken into consideration.

Okay, super helpful. Maybe just on the, that point, the last point on the 1 billion of sleep respiratory, You have given us plenty of disclosure in the past, so we can kind of easily estimate what masks is. It gets us to a number of 700 million or something in that region for all of the other non-mask, non-sleep revenue in this division. And if I just go to the U.S. website, pretty much every product has been removed by the bypass, which are now not selling. It just seems like a large number. Even if it's half that number or half of that number, it's still a big number. That's why I'm asking you, is there something that we're missing in terms of sales that's coming from a different part of sleep and respiratory that I've overlooked or analysts have overlooked? That would be quite helpful to know, and that obviously helps to bridge that 25 gap.

Yeah, maybe, Graham. So first, let me start from what obviously you said, right? The 1 billion, that's the number that we built back from. When we talk about this is the roadmap to compliance to restore business, that's where we start from. What you see, of course, is there are makeshift underneath. We already stopped selling a lot in the U.S., right? So, actually, we are building there from already a base that actually was out there, right? We continue with patient interface, which was the biggest part, which already was in the forecast, including consumables. Furthermore, as you know, we are building back outside of the U.S., right? So that's something that comes actually on top of what we're doing because that was not in the earlier guidance. So I think, yes, we have published a list of pruning products, but that's not part of kind of lowering guidance. No, actually we have taken that into the guidance and we will be building back from here. So I think that's where we just really want to be clear. that there should be no misunderstanding that, A, we have taken all in the guidance. So, actually, we've delivered the 3% to 5%, including the pooling that we did in SRC, but also the pooling that we did in other businesses. B, that we have reached the bottom and we will build back. So, we will make sure we comply, as well as that we further restore the business. And what we also said, kind of, as well, we will kind of have now included this as part of our guidance and the plan 2023-2025. we will not go into specific breakdowns per product line of a business because that's what we don't do in any business. And it should also not be of your concern as actually reiterated that we have a strong outlook, right, and that we are committed to deliver that 3% to 5% growth, that profit further step up to 11% to 11.5%, and the cash, which is really important focus area. You saw that we are very much focused on that. We had a very strong close on cash. and we will continue that cash discipline moving forward. And that totality of Phillips, that actually we see strengthening, and after a strong first year where we over-delivered on our plan significantly versus what we came out with in January, we want to continue that performance trajectory in 2024.

Maybe... Sorry, Abhishek, go ahead. The cost of repetition. Roy mentioned earlier pruning parts of our portfolio is something that we have been doing for a while also to focus on our high growth drivers and to get our innovations out there and put scale behind our winning products. So maybe there is a heightened sense of sensitivity around the pruning in sleep and respiratory, but just look at it as part of stuff that we do across the portfolio, across the company.

All right. No, that's really helpful. I'll follow up with Leandro just to make sure I haven't misunderstood. Thanks a lot, guys. Sure. Thank you.

Thank you. The next question comes from the line of Sesky Azona from HSBC. Please go ahead.

I'm so sorry about a few seconds ago. I hope you can hear me now. I will have two questions, please, and thanks for taking them. One of them on the respiratory care portfolio. You said you will... About this continuation of the sales of these products, you had said in the past that in order to deal with the recall, you had quadrupled capacity of CPAP, BPAP production. I know you've been undergoing a lot of changes, restructuring. How much of that capacity has been built away, or how much of that will you be able to utilize in OUS sales or in other products? And if we think about long-term profitability of connected care, my impression was that sleep and respiratory care had higher profitability than patient monitoring. How does that impact your long-term margins for these segments? And my second question will be, you're showing much lower inventory levels in all of your segments at the end of year end. Do you expect further downsides, or are these inventory levels sustainable? Should we pencil in some rise going forward?

Yeah, I think on the capacity, you know, what we have done, the additional capacity that we put in was flex capacity with co-makers, so they were kind of not on our own plans, but we did it with co-makers. Those have been wound down as we have progressed with the remediation. So that's not something that will remain as an overhang. In terms of SRC profitability, it was never higher than monitoring. Monitoring, of course, is a very highly profitable business. SRC in the past was a mid to high teens profitability business. It will probably not get back there, but we will improve profitability over the period so that we get into the guided range for connected care as we have given for 2025. Regarding the inventory, yes, we have done a big reduction last year. There are still a couple of areas that we would want to reduce this year. So, yes, we will have a couple of hundred million reduction this year as well on inventory so that we get our supply chain then working at an optimal level.

Thanks very much.

Thank you. The next question is a follow-up question and comes from the line of Veronica from Citi. Please go ahead.

Hi, guys. Thank you so much for squeezing me in for a follow-up. I'm going to go back to the topic that I think a bunch of people have asked. Just maybe for clarification, we can close the circle. But I think when you gave the guidance back last year, the midterm guidance, you had assumed a 10% CAGR for SNRC sales. I just want to confirm whether that still stands, or should our working assumption be different? And maybe just to confirm that S&RC sales went from 1.3 to 1,022,023, just so we have the right starting point, that would be great. Thank you.

Yeah, I think the 1 billion sales for 2023 is what we have said now multiple times in this call. So it's confirmed and reconfirmed again, Veronica. Regarding the growth rate for sleep and respiratory, we are not giving a separate guidance at this point of time. We have the overall guidance for connected care. And within that, we will manage the sleep and respiratory monitoring enterprise informatics and all of the businesses to get to the target that we have set for ourselves. And you see there's quite a big step up in profitability from where we are now, and we have high confidence of getting there in the next two years.

That's very clear. Thank you, Abhijit. And the $1 billion, are you able to give us a flavor for U.S. versus O.U.S. in terms of the breakdown of that?

The $1 billion is the $1 billion, and then we build from there.

But let me ask it differently. Ferris is more OUS than US at this stage, correct?

Veronica, I appreciate you asking differently, but let me answer in the same way the $1 billion is the $1 billion, right? So we don't want to give more because it gets into level of so much detail that it creates more confusion than clarity. So I think if we take this as the starting base, I think your models will be simpler and easier to get through.

I just had to try anyhow. Thanks, guys.

Sorry, 10 months for trying, Veronica. Well done.

Thank you. We will now go to our last question for today, and the question comes from the line of Julien Dormois from Jefferies. Please go ahead.

Hi. Good morning, Roy. Good morning, Abhijit, and thanks for squeezing me in. I'm left with three questions, if that's okay, but they should be fairly short. The first one, and sorry if you've provided it, but I was just wondering whether you could provide us with the splits on the order book between DMT and CC. Second question relates to the imaging or to the DMT business, sorry, and given the normalization in the backlog in that division, do you see anything that could prevent you from returning to the same sort of margin that you exhibited in Fulia 19, which was a margin of, let's say, between 12% and 13%? And more specifically into this, if you could give us a sense of where your imaging business currently sits. Are we now in the double-digit range for that segment? And the last question is for the consent decree. Was wondering whether you could give us any sense of when you expect the terms of the consent decree to be formally signed off. Are we talking about a few days, weeks, or could this be months? Thank you very much.

Yeah, thank you. Yeah.

So maybe on the split, on terms of the... Yeah, on the split between DNT and Connected Care, it's pretty much similar, right? We start Connected Care also in monitoring with actually a very strong order book that gives us confidence for the growth in 2025. DNT, look, I think we ended at 11.6, so we are very close to the 12 to 13. So with the profit improvement of this year, we will get to... the peak ranges of 2019, as you pointed out, and then on the consent decree, when you expect it to be signed, Roy, maybe you can take that, but we don't have really a date there because that is a court process.

Depending on the FDA and the court, so that is a due process, so we cannot give you a date on that. So that's something that is running. Of course, people will try to expedite to make sure that this gets clarified and closed. But I think there's no date that we could give you here.

Okay. Thank you very much. Just for the sake of clarity on the order intake that was down 3% in the fourth quarter, that number would be pretty similar between DNT and CC. Did I get it right?

Yeah.

Okay. Thank you. Thank you very much.

And important to know, right, Julian, and you probably know that In terms of the order book, it supports 40% of the sales that we have, right? And we have 60%, which is in services, consumables, recurring revenue, and personal health. And actually, we also saw good growth there. You saw it in the personal health growth, but also in the services and software growth. So, of course, we all want to improve the number. That's our target. We have the actions in place. But I think it's also important to kind of put it into perspective of total $18 billion and what this supports. Furthermore, I said 15% higher order book. So actually, if you look to the ratio of conversion going into 2024, we are still actually higher and above the supply chain and COVID crisis numbers in terms of our underpinning of the sales by the ratio of the order book. So that also gives us the confidence going into the year for the 3% to 5%.

Crystal clear. Thanks.

Thank you.

Thank you. Gentlemen, that was the last question. Please continue.

Okay. Thank you all for your questions. I think reiterating, I think, the key messages of today. We came out with our full year results, where if you compare to where we started here and the guidance of the plan, we had a strong beat on sales, where we did 7% versus a guidance of low single digit, where we had 10%. profit improvement of 310 dips, which actually was high single-digit target, and we delivered 10.5. And we had a cash flow target of 7 to 9 million, where we did 1.6 billion. That was on the back of strong execution of our plan, where we focused on patient safety and quality, supply chain, and the operating model. Now, we continue to execute that plan. That also gives us the confidence into 2024, where we said that actually we give you a range of 3 to 5 percent of sales growth as our target, then 11 to 11.5% profit improvement, so we continue our trajectory as well in profit, and then a strong cash generation of 800 to 1 billion. We also provide you with clarity on the concept degree, which I think is a very important milestone that we have all been longing for, and also what important message there is. On one hand, we have now roadmap to comply, tools to restore the business, But most importantly, that actually we stay fully committed to the plan that we have and the financial guidance that we put out there that now includes the full consequences of the consent decree. And actually, therefore, we are kind of now building from that in terms of further delivery of the plan. So we're looking forward to further dialogue around how we progress. We will remain focused on executing our plan and delivering continuous improvement. Thank you so much for dialing in and looking forward to talk to you soon.