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

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

Yes. Thanks, Leandro and thanks, everyone, for joining us this morning. There are three factors shaping our Q1 results and outlook today. Number one, it's the continued strong delivery of our strategy and operational performance, leading to an increased order book despite the very challenging backdrop; two are obviously the shortages and dislocation in the supply chain, geopolitical challenges and increasing inflationary environment; and three, the huge undertaking at Philips Respironics to do everything to deliver a solution to patients and caregivers affected as fast as we can. Patient well-being remains at the heart of everything that we do at Philips. Now, let me unpack these three factors. Our strategy and portfolio continue to resonate very well with customers and consumers and we again experienced solid demand for our products and solutions. Order intake grew 5% in the quarter for the group or 8%, excluding the Sleep & Respiratory Care business, driven by strengths across the Diagnosis & Treatment businesses, Hospital Patient Monitoring and Connected Care Informatics, to just name a few. This further builds on the good order intake growth in recent quarters, resulting in an all-time high equipment order book for Philips, in fact more than 30% higher than a year ago, as shown on Page 27 of our presentation. During the first quarter, we also signed 12 more long-term strategic partnerships across the world, demonstrating the trust hospital leaders have in our ability to help them enhance health outcomes, lower the cost of care, improve patient and staff experience. Also, in China, we signed an agreement with Shanghai East Hospital to provide its hospitals in the Shandong and Hainan provinces with a broad range of advanced imaging and critical care solutions. Thanks to the hard work of our people, we recorded sales of €3.9 billion in the…

Thank you, Frans and good morning, everyone. Let me provide some color on the comparable order intake growth. The Diagnosis & Treatment order intake grew 7% in the quarter driven by strong, double-digit growth in magnetic resonance imaging and Image-Guided Therapy as well as a strong performance in Ultrasound and Enterprise Diagnostic Imaging -- Informatics. Connected Care order intake was in line with the. First quarter of 2021 with strong growth in Hospital Patient Monitoring and Connected Care Informatics. This was offset by a steep decline in Sleep & Respiratory Care on the back of the spike in COVID-19-generated demand in Q1 2021. Excluding Sleep & Respiratory Care, Connected Care order intake grew by 9%. And I'm very pleased that we continue to see a fundamental demand shift in adoption of our patient care management solutions and expanding market shares. Also important to realize that activity levels remained double digit above 2019 in the Connected Care business with mid-single-digit three year CAGR. Group comparable sales declined 4% in the quarter which exceeds our prior Q1 guidance of high single-digit decline. In addition to the high comparable base of Q1 2021 and the headwinds in our Sleep business, we continue to face supply chain disruptions. The impact is relevant across all modalities but particularly strong on the higher-volume and high-margin businesses like patient monitoring, Ultrasound and Image-Guided Therapy. Adjusted EBITA for the quarter was 6.2% of sales, impacted by the lower sales and higher supply costs, including extraordinarily high pricing on spot buys. This was partly offset by cost productivity measures and higher IP income. The increasing supply chain cost and overall inflationary pressure was 250 basis points in the quarter, of which 150 basis points was wage inflation and 100 basis points was increase in supply chain costs. We are…

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

Hello? Can you hear me?

We can.

Yes, Hassan, we hear you. Go ahead.

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

Yes, thanks. Fully understand the question, Hassan. So let's first talk a bit more about guidance. You're right to point out that with the ongoing strong order intake, we actually see further underpinning of our growth potential. So that is good news. And the growth range of 3% to 5% of course reflects in a way contingency from the high end to the low end, right and, if everything would go well, the strong order book which would definitely allow us to perform a very strong growth. The -- if you look at the first quarter, thanks to hard work, we were able to mitigate a lot of the supply chain challenges but not all. If we would have been able to mitigate everything, the sales could have been even higher in the first quarter. So in a way, it is day by day, week by week working the issues. We have a strong sustaining engineering team in India that is also able to redesign parts and find alternate suppliers and all of that helps to overcome supply chain challenges. So if I look back at the guidance that we gave in January, then we are on the right path with regards to revenue. And although I do expect that supply chain issues will persist longer, I think I was a bit more hopeful in January, we should not discount our ability to find solutions. It's just that the volatility is quite significant. As Abhijit and I were discussing ahead of this call, we also thought that it would be valuable for you to know that we expect to deliver higher volumes in the second half year versus the first half year, right? In other words, our normal seasonality, where we expect higher volumes in the second half year, we…

That's very helpful, Frans. If I could just follow up on the top line. Could you talk about how installations are trending and whether you're seeing any improvement here globally, presumably maybe a worsening situation in China?

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

Perfect. Thank you.

You’re welcome.

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

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

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

Yes.

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

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

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

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

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

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

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

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

Thanks.

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

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

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

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

Great. Thank you.

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

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

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

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

Yes.

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

Okay, thank you.

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

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

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

Yes. It's true that the intensified communication in -- around February led to more patients registering. But immediately afterwards, there was, again, a reduction of the weekly rate. So the spike up was not very significant. Now to be on the safe side, when you imagine an asymptotic kind of regression model that keeps, let's say, reducing as is shown in the slide, when you raise that curve a little bit, it already adds up to a higher assumption on numbers. So let me be clear, at this time, those 300,000 additional patients have not materialized yet but it's the consequence of using a regression model. And with the slightly higher registrations in the first quarter, it means that you lift the whole tail, right? But the characteristics of that curve are firmly confirmed. I mean that sounds a bit funny, firmly confirmed but, I mean, solidly confirmed, right? So we see the decline continuing on a week-by-week basis, right? That also gives us belief that there is not going to be a radical different insight as time progresses. In fact, the model becomes more accurate as time progresses. The -- and so the €65 million additional is only, in part, for the extra volume. In part, it is for the fact that we decided to keep a higher level of patient communication out there into next year which we then provided for. The current view on production and deliveries, because this is not only about production but also the delivery into the field, is that we will exceed 90% by the end of 2022. And I add the word delivery because before it reaches the patient, it takes time, right? That also implies that we will be earlier done in the internal factory than the last unit arriving in…

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

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

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

You’re welcome.

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

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

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

Yes.

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

Yes.

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

Thank you.

We will now take our next question from James Vane-Tempest from Jefferies. Please go ahead.

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

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

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

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

Thank you.

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

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

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

Conversion?

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

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

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

Great. Thanks.

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

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

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

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

That's correct.

Okay. Good to hear. Thank you.

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

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

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

Okay. Thank you.

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

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

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

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

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

Understood. Thank you very much.

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

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

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