Koninklijke Philips - Earnings Call - Q1 2025

Transcript

Operator (participant)

Welcome to the Royal Philips first quarter 2025 results conference call on Tuesday, May 6, 2025. During the call, hosted by Mr. Roy Jakobs, CEO, and Ms. Charlotte Hanneman, CFO, all participants will be in a listen-only mode. After the introduction, there will be an opportunity to ask questions. Please note that this call will be recorded, and replay will be available on the Investor Relations website of Royal Philips. I'll now hand the conference over to Ms. Durga Doraisamy, Head of Investor Relations. Thank you. Please go ahead, ma'am.

Durga Doraisamy (Head of Investor Relations)

Hello everyone. Welcome to Philips Results Webcast for the first quarter of 2025. I'm here with our CEO, Roy Jakobs, and our CFO, Charlotte Hanneman. The press release and the investor presentation 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 this 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 Investor Relations website. I will now hand it over to Roy.

Roy Jakobs (CEO)

Good morning, everyone. Thank you for joining our results call for the first quarter of 2025. I will walk you through our Q1 performance and the macro trends shaping our 2025 outlook. I know tariffs are top of mind, and we will address them shortly. Our CFO, Charlotte Hanneman, will then provide more detail on the quarter and four-year guidance, and we will close with Q&A. I want to start with the key highlights of this morning's press release. Order intake grew despite a double-digit decline in China, driven by double-digit order intake growth in North America and strength in diagnosis and treatment. We exited the quarter with momentum, even against the backdrop of increasing macro uncertainty. Sales performance exceeded the outlook we provided in February, driven by personal health growth and royalty phasing. Our innovations and productivity measures drove a step-up in gross margin.

An adjusted EBITDA margin delivery was resilient despite lower sales. Thus, Bronex U.S. settlement around EUR 1 billion was paid, which completes the U.S. personal injury and medical monitoring settlement. I would now like to discuss our four-year outlook for 2025. It incorporates our encouraging Q1 performance and the impact of announced tariffs, net of the comprehensive and significant mitigation actions we're deploying. Our sales outlook for 2025 remains the same: comparable growth between 1%-3%. Adjusted EBITDA margin is now expected to range between 10.8%-11.3%, a 100 basis points adjustment reflecting the impact of tariffs, net of substantial mitigations. Free cash flow is projected to be slightly positive. Let's now look at the operational and strategic drivers behind our Q1 performance. Let's dive into orders first.

Strong customer demand for innovations, along with improved operational execution, sustained the momentum we built last year through Q1 as we enter Q2. Excluding a double-digit decline in China, comparable order intake increased by 4% in Q1, with strong growth in diagnosis and treatment. Like last year, we saw continued double-digit order intake growth in North America. This number excludes service order intake, which was also positive, very positive in the quarter. At the group level, diagnosis and treatment orders grew mid-single digits globally, with order intake growth in both image-guided therapy and precision diagnosis. In image-guided therapy, we continue to see strong demand for our competitive Azurion platform, which now also has the AI-driven neuro solution. In precision diagnosis, we saw strong order growth in computed tomography, driven by CT 5300, our productivity workhorse with AI-enabled workflow, and our clinically practical Spectral CT 7500 systems.

We also saw good momentum in MRI, driven by our industry-first helium-free system, which is supported by our AI engines, increasing access to MR technology. We expect this positive order intake momentum in diagnosis and treatment to continue into Q2. In connected care, hospital patient monitoring delivered solid growth, particularly in North America, fueled by customer partnerships and our strong PIC iX platform, including cybersecurity and interoperability. Enterprise Informatics order funnel remained healthy, underpinned by partnerships, including AWS, which we expect to drive strong order intake growth in the second half of the year. Orders and order book account for around 40% of our revenue. Importantly, our order book has steadily increased with an improved margin profile in recent quarters. Innovation is a key driver, as reflected in a significant gross margin improvement we delivered in Q1, building on the 2024 step-up.

Our customers rely on our innovations as a critical enabler of their ability to drive efficiency and productivity. Today, more than 50% of our sales are fueled by AI-driven innovations from new and upgraded products launched in the last three years. This progress showcases the power of our innovation strategy and our partnerships. A great example is our work with AWS. We are bringing cutting-edge generative AI into our HealthSuite Imaging platform. Our future AI innovations will automatically summarize prior studies, auto-generate conclusions, and even perform real-time quality checks. By automating these tasks, we enable radiologists to focus on strengthening care quality and improving throughput, which ultimately drives sustainable growth for Philips. To further strengthen AI leadership in MRI, in February, we announced the launch of SmartSpeed Precise with dual AI engines, which advances image quality while accelerating scan time at the same time.

It also extends AI-driven efficiency across the entire Philips MR portfolio. This includes our full portfolio of helium-free MRI scanners, both installed-base and new systems, so all customers can benefit from the speed and improved image quality next to the access and total cost of ownership advantages that it brings. These are just two further examples of how our innovation pipeline is working and building a stronger, more competitive future for both our business and our customers. In parallel, we are making strong progress on our execution priorities, with continued progress in patient safety and quality, supply chain resilience, and simplification across our operating model and portfolio. Here are a few highlights. Through simplification, we are on track to reduce the number of quality management systems by 70% this year.

Supply chain lead times and service levels continue to improve, and we are now at par with industry standards, while we are at the same time adjusting in real time to new tariff realities unfolding, which I will touch upon shortly. We are simplifying our platforms and number of SKUs across our businesses, now focusing on hospital patient monitoring and CT after strong results in image-guided therapy, ultrasound, and MR. Finally, we continue to remove complexity and build a lean organization through our simplified operating model. Together with our strengthened performance management, this is driving accountability, agility, and enhanced focus on growth, and it delivered EUR 42 million of productivity in Q1. We are well-positioned to adapt decisively as the macro environment evolves, ensuring we stay ahead and deliver with focus.

I'm deeply proud of our teams around the world who are driving to advance our operational priorities and the results it delivers by focusing on what we can control amid such a dynamic environment. Looking ahead, the fundamentals of the markets we serve remain strong, but the dynamics are different by region. Starting with North America, similar to last year, we are still seeing steady fundamental hospital demand. We are well-positioned, as seen in the strong double-digit order intake, and have not observed major shifts in CapEx plans. That said, we are closely monitoring the environment. In China, while stimulus activity is picking up and our funnel is progressing, we have not yet seen a trigger that would significantly change the market dynamics in line with our expectations going into the year. Generally, hospital CapEx remains solid across the rest of the world, with also increasing demand in Europe.

Personal health delivered strong growth across Europe and other growth markets, excluding China in Q1, and momentum continued in those markets as we exited the quarter. In China, the consumer environment remains subdued as we anticipated. We are closely monitoring consumer dynamics and sentiment globally, particularly in the U.S., where they currently remain stable. Looking to the rest of 2025, we remain vigilant about the macro environment we operate in, and the progress we have made on our execution priorities puts us in a stronger position to navigate change with speed and agility. For several years now, we have taken proactive steps to build a more resilient supply chain, including diversifying and regionalizing key operations, especially in China, well ahead of recent developments. You have seen this in our improved supply chain metrics and our performance in recent periods.

In the current environment, we are further accelerating those efforts, especially towards the U.S. Also, we are going beyond shifting geographies. Our mitigation actions include supply and network and manufacturing optimization, holding the right levels of inventory, pursuing exemptions, selective pricing, and building greater operational agility and resilience. We view these as necessary to maintain our competitiveness, protect margins, and secure long-term growth. We have cross-functional teams actively working across our supply chain and business to further mitigate the impact of tariffs, both in the near term but also looking ahead to 2026. In parallel, we are razor-focused on what we can control, applying strong cost discipline as we tightly manage discretionary and overhead spending while staying committed to our long-term innovation priorities. Our focus remains on the levers within our control to protect margins and cash flow.

On a net basis, we expect the impact of tariffs, as announced, net of substantial mitigations to range between EUR 250 million-EUR 300 million. We are also intensifying our engagement with governments and regulatory bodies worldwide, advocating for open markets and the free flow of medical goods and manufacturing essentials to ensure patient access to critical medtech supplies and our innovations. Charlotte will now discuss our first-quarter performance and outlook for 2025.

Charlotte Hanneman (CFO)

Thanks, Roy. In diagnosis and treatment, comparable sales decreased 4% in the quarter, reflecting a double-digit decline in China, as expected, and on the back of a high two-year comparison base. Image-guided therapy continued its strong performance, reinforcing its leadership position in minimally invasive therapy. Precision diagnosis declined, mainly due to China and a particularly high comparison base in magnetic resonance, which had benefited from prior year supply chain improvements.

Adjusted EBITDA margin improved by 30 basis points to 9.5%, despite lower sales driven by productivity measures, favorable mix effects, and innovation. Improvement was partially offset by lower fixed cost absorption given lower sales. Moving to Connected Care, comparable sales were broadly flat across businesses. Hospital patient monitoring sales increased, driven by higher installations in both North America and Europe. We continue to see healthy demand in this business, driven by the ongoing shift toward an as-a-service model and large standardized monitoring partnerships with integrated delivery networks and health systems. Adjusted EBITDA margin declined to 3.5%, mainly due to the impact of unfavorable mix and cost phasing, partially offset by productivity measures and innovation. We were very pleased to see Personal Health sales return to growth in Q1, with 1% on a comparable basis.

We saw double-digit growth across Europe and growth markets excluding China and slight growth in the U.S. This was largely offset by a double-digit decline in China, as expected. Consumer sentiment remained strong across Europe and growth markets, China excluded, with robust sell-out trends. China remained subdued, as anticipated. Adjusted EBITDA margin was in line with the prior year at 15.2%. Sales in segment Other totaled EUR 140 million, which was EUR 17 million lower than the first quarter of 2024. This was above our Q1 outlook range of EUR 100-120 million due to royalty phasing effects. Turning to our group results and operating highlights in the quarter, sales performance exceeded our expectation of mid-single-digit decline, mostly driven by the strong performance of Personal Health and further supported by royalty phasing in segment Other.

Group comparable sales decreased 2%, reflecting double-digit declines across all our segments in China and on the back of a high two-year comparison base in diagnosis and treatment globally. Comparable sales increased slightly outside of China, mainly driven by the strength of personal health across the international region. Adjusted EBITDA margin decreased 80 basis points to 8.6%, remaining resilient despite the decline in sales. This was partially offset by higher gross margin from innovation value and productivity measures. We have been very disciplined in cost management and productivity initiatives, which delivered savings of EUR 147 million in the quarter. We are on track to deliver on EUR 800 million productivity savings in 2025, with the bulk of savings from the programs underway expected in the latter half of the year. Restructuring, acquisition-related, and other items totaled EUR 143 million in line with our expectations.

Net income increased by EUR 1.1 billion in the quarter to EUR 72 million. As mentioned, Q1 2024 included EUR 982 million for the Respironics litigation provision. Income tax expense decreased by EUR 78 million compared to Q1 2024, mainly due to the tax effect on the Respironics litigation provision in Q1 2024, partially offset by the tax impact of higher income in this quarter. Financial income and expenses decreased by EUR 22 million. This was mainly driven by higher interest income on cash balances and lower losses on non-current financial assets. Our full-year outlook is now expected to be EUR 260 million compared to EUR 275 million as communicated in February. Adjusted diluted EPS from continuing operations was EUR 0.25 and remained in line with last year despite lower sales.

Moving to cash flow and balance sheets, free cash flow was an outflow of EUR 1.1 billion, primarily due to a EUR 1 billion payment related to the Respironics recall-related settlements in the U.S. Excluding this payment, the free cash flow increased by EUR 270 million year-on-year, primarily driven by higher earnings and lower working capital outflows. The payment was fully funded by cash on hand, and our leverage ratio remained in line with Q1 2024 at 2.2 times on a net debt-to-adjusted EBITDA basis, reflecting our continued focus on deleveraging. Now turning to the outlook, our full-year 2025 outlook factors in Q1 performance relative to our expectations and the impact of tariffs, as announced, and net of substantial mitigation actions. Our comparable sales growth outlook remains unchanged at 1%-3%, back-end loaded as we previously expected.

Adjusted EBITDA margin percentage, with the impact of the announced tariffs, net of mitigations, is expected to be 10.8%-11.3%, a 100 basis point adjustment compared to our previous outlook of 11.8%-12.3%. Our free cash flow is expected to be slightly positive and includes a EUR 1 billion outflow related to the Respironics settlement, which was paid in Q1. Our approach to estimating the impact of tariffs is based on the announced measures, including the bilateral U.S.-China tariffs, rest of world tariffs, and the resumption of the past U.S. tariffs on July 9. We estimate an annual net cost impact of EUR 250 million-EUR 300 million after substantial mitigation. U.S. and China tariffs account for most of the impact, reflecting the elevated levels applied in those markets.

We anticipate that tariffs will have a more pronounced effect in the second half of the year, reflecting the natural lag between inventory cost increases and their recognition in the profit and loss statement. As Roy mentioned, we have significant actions underway, including optimizing network flexibility, effective inventory management, pursuing exceptions, selective pricing, and leveraging our disciplined cost management and productivity program. We continue to monitor the tariff situation closely and will update the market as developments unfold. In line with the outlook we provided in February, we continue to expect sales and adjusted EBITDA in Q2 to modestly improve compared to Q1. This is due to a double-digit sales decline in China, mainly driven by personal health, as the impact of inventory destocking we previously highlighted concludes in the quarter.

Our Q2 and full-year 2025 outlook excludes potential wider economic impacts and the ongoing Philips Respironics-related proceedings, including the investigation by the Department of Justice. With that, I would like to hand it back to Roy for his closing remarks.

Roy Jakobs (CEO)

In an uncertain macro environment that has intensified due to the potential impact of tariffs, we are driving profitable growth, and we are focusing on what we can control. Our proven ability to navigate change, disruption, and uncertainty underscores our capacity to lead decisively, adapt rapidly, and perform effectively under pressure. We are taking decisive cost actions and improving our supply chain agility to serve our customers and consumers across the globe. We delivered a better-than-expected start to the year, driven by strong execution, growing demand for hospital solutions, and personal health returning to growth. Our innovation is helping hospitals solve staffing shortages, boost productivity, and improve outcomes.

Sustained order growth shows that we are making real impact. As our teams deliver against a robust order book, they are also expanding margins to fuel long-term sustainable growth and enable better care for more people now and into the future. The strength of our business fundamentals, our innovation capability, combined with our customer-first mindset, gives us confidence in our ability to navigate change and deliver on long-term value. Let me open for Q&A.

Operator (participant)

Thank you, sir. If any participants would like to ask a question, please press the star followed by 11 on your telephone. Due to the time, please limit yourself to one question and one follow-up. This will give more people the opportunity to ask questions. There will be a short pause while participants register for questions. The first question comes from Mr. Richard Felton from Goldman Sachs. Please state your question.

Richard Felton (Analyst)

Thank you very much. Just two questions from me, please. The first one is on the tariff mitigation efforts. Can you perhaps elaborate a little more on what you're trying to do with your supply chain as it relates to network optimization? I'd be very interested to know what you're trying to move and to where. Within your guidance, how quickly do you assume that you're able to execute on those plans? That's the first question. The second one is on China, and it's specifically on ultrasound. During the quarter, we've heard a few reports about VBP being implemented by certain provinces. Have you seen any impact on that on your business during this quarter, or any thoughts to contextualize that as a factor going forward? Thank you.

Roy Jakobs (CEO)

Thank you, Richard, for your questions. Let me start with the first one. In terms of the network mitigation, this actually builds on the program that we are running for the last two years, where we are further regionalizing our footprint. You have heard me speak since 2022 that in building supply chain resilience, we are strengthening our footprints in Asia for Asia, China for China in particular, where we are 90% now localized, Europe for Europe, and Americas for America. What the current situation asks for is that we accelerate, in particular, the localization into the U.S., which builds on an already strong footprint that we have. We have 46 locations in the U.S. We have billions of spend in the U.S. every year. We produce, as you know, part of our ultrasound, our monitoring, and also our imaging equipment in the U.S.

We plan to bring more of that. We also already announced a multi-million investment in Minnesota for cardiac devices, and we also leverage existing footprint to expand. Regarding your time, there are already actions that we are implementing as we speak. We also know that if you want to add more structural strengthening, this will take some time. This will be a phased-in advantage that will come to bear in terms of our current footprint strengthening. It builds on what we have already been doing. On China VBP, let me.

Charlotte Hanneman (CFO)

Oh, yeah, maybe I just had a comment on the first one, Richard. Maybe in addition, if you think about our mitigation actions, it's worth several hundreds of million euros. If I then just give you a sense of what it really includes, roughly half of that is really related to inventory management that we're doing and also the exemptions we're pursuing, including the Nairobi Protocol and including duty drawback. That gives you a sense of how we're thinking about the mitigation actions in 2025.

Roy Jakobs (CEO)

Yeah, maybe going to the China VBP. I was again in China a month ago, spoke to government customers, and also indeed engaged around what we see happening around the procurement environment. If you talk about the VBP, we actually see it more as a centralized procurement initiative than a pure value-based procurement that is heading more towards kind of standardized high-volume purchases and a lot of pricing pressure. As we have been sharing, we have seen China moving towards these central procurement offices for some time.

The procurement model is evolving towards a more balanced consideration between price and quality. Actually, if you zoom in on ultrasound, we were actually happy to see that ultrasound in Q1 did actually well in China in orders. That also was built on the new innovation that we launched with the new VM Platform, where the AI solutions really getting traction and built on our global leadership position in the cardiovascular ultrasound space, where it is much more difficult to standardize compared to general imaging. If you then look at also what happened in the quarter, the Chinese government issued a 2025 action plan to stabilize foreign investment. Also, when I was speaking to them, they clearly affirmed that, A, they want to have foreign investment continue to flow into the company.

They want us to continue to operate in China, and they will also support in fighting kind of unfair practices in procurement. That actually was encouraging from what I heard from Vice President Han personally. Of course, we will continue to work on our innovations to be as relevant as possible in China to support a strong market, which we know fundamentally has a huge patient demand, and we also expect to strengthen over time. We also found it reassuring that the first quarter came in in line with our expectation, and it's now the second quarter that actually it has been predictable and delivering in line with our plan and also in line with expectations. That is something that also strengthens our confidence in the rest of year outlook for China, which we expect to unfold in line with what we earlier guided towards.

Richard Felton (Analyst)

Great. Thank you very much.

Operator (participant)

Thank you. Our next question comes from the line of Mr. David Adlington from JPMorgan. Please state your question.

David Adlington (Analyst)

The first one is, again, a focus on tariffs. The EUR 250 million-EUR 300 million impact for this year, I'm just wondering how we should be thinking about that as an annualized impact. On inventory, I was just wondering if you saw any pre-stocking of inventory ahead of the tariffs coming in in the first quarter. Thirdly, personal healthcare, you talked about modest growth in North. I just wondered what the trends were like through the quarter that deteriorated towards the end of the quarter. Finally, just also again on personal health, I just wondered how much price contributed to that. Thank you.

Charlotte Hanneman (CFO)

David, it's very hard to hear you. You're breaking up.

Roy Jakobs (CEO)

Yeah, your questions didn't come through. Maybe try to repeat the questions so that we fully understand what you were asking.

David Adlington (Analyst)

Yeah, sorry. Is that better?

Roy Jakobs (CEO)

Yeah, slightly better. Yeah.

David Adlington (Analyst)

Right. Perfect. Okay. Okay. The first one, I'm afraid on tariffs again, the EUR 250 million-EUR 300 million impact for this year, I just wondered how we should be thinking about the annualized impact in 2026. Secondly, I'll just give it to, did you see any pre-purchasing of inventory in the first quarter ahead of the tariffs coming in? Thank you.

Charlotte Hanneman (CFO)

Yeah. Thanks, David. I think we got your questions. We got your questions now. First of all, on the tariff impact and the net impact, what I would say is actually two things. Maybe start with our assumptions again, what we assumed. We assume our bilateral U.S. and China impact of EUR 145 million and EUR 125 million.

We assume that to remain that in at current levels. The U.S. and the rest of the world at 10%, and then we revert to the pre-pause levels after 90 days. We have significant mitigations in place, several hundreds of millions. We are continuing to work on those mitigations as we speak. We also expect that going forward, those mitigation actions will increase in size. Again, drilling down on the type of mitigation actions that we are looking at, some are related to inventory management, as I referred to earlier. Quite a big chunk is related to duty drawbacks and things like the Nairobi Protocol, which is particularly relevant for SNRC business. We continue also with our very disciplined cost management and productivity actions and are also looking into selective pricing actions, obviously taking the competitive environment into account there.

Roy Jakobs (CEO)

Maybe on your inventory question, David, a few comments. One, we did see some orders coming in on the back end of Q1, where I do think that kind of people are preempting some of potential pricing impact. At the same time, actually, if you see our sellout momentum, you see actually that we are really strong in personal health. Because this was in personal health, where we have very strong double-digit momentum in the growth markets, that actually supports this outlook for the full year, where we actually feel that the personal health coming back to growth and building up momentum is really strong. As we also mentioned, actually in China, on the other end of the spectrum, we finalized the impact of destocking of inventory that was, of course, significantly having an impact into our results.

As we see personal health going into the year, we are very happy to see them coming back into growth. We believe that's fundamental because the growth momentum also exiting the quarter into the second is strong. Of course, we keep remaining monitoring the wider macroeconomic environment as well. What we see in terms of demand for innovations, actually we are very encouraged what we saw happening in personal health in Q1.

Charlotte Hanneman (CFO)

Yeah. Maybe, David, adding to that a little bit on inventory just in general. In Q1, our inventory versus last year Q1 actually went down. We continue to go after inventory reductions as part of our very stringent working capital planning that we have. Of course, versus Q4, it went up a little bit, but this is just normal course of business. As I said, we do have some inventory management in our planning as part of our mitigation strategies, but it is not overly significant as we are still fully focused on underlying reducing our inventory levels over time.

Operator (participant)

Thank you. Your next question comes from the line of Miss Veronika Dubajova from Citi. Please state your questions, ma'am.

Veronika Dubajova (Analyst)

Hi. Good morning, Roy and Charlotte. Thank you for taking my questions. I hope you can hear me okay. I'll keep it to two, please. My first one is on the tariff guidance that you've given today. I'd love to understand what the gross versus the net numbers that you have in mind, just how much work you guys are putting in to offset this. Related to that, if you can give us a little bit of color here in terms of the geographies that are driving that EUR 250 million-EUR 300 million. I'm asking this just in case we end up in a situation where the world looks a little bit different and we don't have a 145% tariff on China, or we don't go back to the Liberation Day tariffs.

If you can give us a little bit of a roadmap for how to think about Europe versus China and what's driving that impact. That's my first question. My second question is just on the competitive dynamics that you're seeing in your hospital CapEx businesses. Looking at the order growth, obviously, you've called out really strong performance in the U.S. If I look at the kind of comparative growth for you versus your peers, you are still underperforming overall in order growth. Just curious, what are the areas of softness that you're seeing in competitive pressures, obviously China aside, that are leaving you still at a gap versus what we might see from some of your peers? Thanks, guys.

Charlotte Hanneman (CFO)

Thanks, Veronika. Maybe I'll start with your question on the tariff guidance. I'd say a few things. If we think about our 2025 net cost impact, it's around EUR 250 million-EUR 300 million. The majority of that impact comes from our U.S.-China flows. Maybe I'll unpack that a little bit more because over the last few years, we've done a lot to de-risk our U.S. and China flows, but there are still flows. There are still component flows. There are still other flows. Now, given the very high level of tariffs, 125% and 145%, that just increases that impact tremendously. That's what we're seeing. That is what we're seeing, that the majority of that net EUR 250 million-EUR 300 million impact is actually coming from the U.S. and China flows.

Of course, Europe is also a relevant factor in it, but it's because the tariffs are so much lower, that impact is less relevant for us at this point in time based on our current assumptions. If you ask us to break it down a little bit more on gross versus net, I would say that we have hundreds of millions of mitigations, including in this net number of EUR 250 million-EUR 300 million. Again, a large part is the inventory management, also the duty drawbacks, the Nairobi Protocol. In addition to that, we continue to look at selective pricing actions and also productivity, which we already started and are continuing to do. A lot of these mitigation actions are already in effect and are already ongoing, and we're executing on those very successfully.

Roy Jakobs (CEO)

Maybe on the competitive situation and maybe some compare. As you felt, kind of we are very encouraged, and you heard kind of very encouraged by what we see happening both in the first quarter as order momentum, but also what we see as order funnel and order kind of trajectory into the year. Now, what does that build upon? I think that's just to give a few data points. We shared that we have double-digit growth in North America. That follows the double-digit growth that we had in 2024. North America remains very strong. We had mid-single-digit D&T order intake growth. This excludes because different companies have different ways how they calculate their orders.

We exclude service orders that were also double-digit for us in the quarter. I would say on a competitive direct compare, we feel that actually we have good momentum. We also saw that in some preliminary market share numbers for Q1. Actually, we are driving the innovations that we have been launching hard. We see this 50% of our sales now coming from new innovations, really also showing the uptake of our latest launches. We share that kind of CT is doing really well based upon the latest launch, which also is clearly playing to the current need for productivity because I've been also in the U.S. talking to customers. Of course, they are looking for productivity measures to offset what they also expect as inflationary impact that will hit the hospital.

We are, with our kind of monitoring platform, with our imaging platform and interventional platform, really looking at kind of how we can help them do more procedures, but also work at the cost and making it efficient. That is what kind of gives us also kind of a real good look into the year that therefore led to this reconfirmation of our sales outlook because that is where kind of ultimately this will result into.

Operator (participant)

Thank you for the questions. The next question comes from Mr. Hassan Al-Wakeel from Barclays. Please state your question, sir.

Hassan Al-Wakeel (Analyst)

Hi, good morning. Thank you for taking my questions. I have three, please. Following up on tariff, can you help us understand how the net impact splits by business division, please? Is the bulk in personal health, and what are you embedding in for exemptions, and what is the percentage of U.S. personal health sales derived from China? Secondly, you talk about modest improvement in Q2 relative to Q1. Is flat growth a realistic assumption for the second quarter? If not, have your assumptions changed meaningfully around business performance for Q2 since full year results? Finally, on PH specifically, are you seeing any pull forward of sales because of tariff, and how are you thinking about price as part of mitigation? Just really trying to understand your confidence in the PH improvement over the course of the year, particularly given the intensifying macro uncertainty. Thank you.

Charlotte Hanneman (CFO)

Thanks, Hassan, for your questions. Let me start with the net impact split by business. Overall, if you look at the net cost impact of EUR 250 million-EUR 300 million, and if you think about how that splits out at the business segment level, what I would tell you is that Diagnosis and Treatment, as well as PH, are most affected, again, given this higher U.S.-China trade between them. Connected Care, as a result, is a little less affected because there is less trade between the U.S. and China. As you remember, probably our Connected Care business is less exposed to China, just to begin with. That is a little bit the way you should look at it from a business level.

If you then think your second question around Q2 and the modest improvement, I would say nothing has really changed versus when we started the year and gave guidance in February. We're still seeing everything play out as we expected, apart from obviously the tariffs, but everything else is on track and on plan. Nothing else to call out there at this point. Your third question around the personal health, any pull forward? If you unpack our personal health business in a little bit more detail, you see that a lot of the strength comes from our international regions, excluding China. Excluding China, we saw high single-digit growth in personal health in Q1. If you look back at last year and look at those regions, all the international regions excluding China, we saw great momentum in those markets already in Q3 and in Q4. That is continuing into Q1.

The only thing that has changed in personal health is that that big impact from China in personal health has reduced as we're getting towards the end of our destocking in PH, as Roy already mentioned as well. At this point in time, we do not see any big pull-ins. We are obviously closely monitoring the economic situation as it stands today.

Roy Jakobs (CEO)

Maybe on the pricing, Hassan. Of course, we watch what is right to do. At the moment, we are actually more inclined to spend more in A&P because we see the demand increasing, and therefore the activation of successful innovations is a priority versus kind of clawing it back through price because we want to remain competitive. Also, we see kind of margin resilience. In that sense, kind of that's how we play it out. Of course, we also look at pricing as a measure where it makes sense. As said, we prioritize currently how we drive growth, still profitable growth. You have seen that the PH margin has shown very strong resilience at the same time. We know how to play that game. Especially if growth comes in, that will be a big support for the whole group.

Operator (participant)

Thank you. Your next question comes from Mr. Graham Doyle from UBS. Please state your question, sir.

Graham Doyle (Analyst)

Morning. Thanks, guys. Just one question on tariffs again and one on personal health. Just on tariffs, if we just take the EUR 250 million-EUR 300 million, that's for 2025. In case I've missed it, just for 2026, do we just annualize that up, or do we assume that the mitigation efforts basically mean we just take the EUR 250 million-EUR 300 million and assume that for 2026 earnings? On personal health, would you be able to give us a little bit more color on the China destock? How soon do you think you are to seeing that basically complete within Q2? Therefore, obviously, you see a return to growth. That will be super helpful. Thanks, guys.

Charlotte Hanneman (CFO)

Yeah. Thank you, Graham. First, on the 2026 tariff impact, what I'd tell you is that I think you should expect the benefit from mitigations to increase over time. We just went through the whole list of mitigations that we're working on. It's a comprehensive set of mitigations we're looking at. At this point, it's early to provide an outlook for 2026 because we are laser-focused on delivering the mitigations that we just spoke about. On your second question around destocking in PH, we expect the impact of the destocking in PH to be finalized at the end of Q2. In other words, we still expect a decline in PH in China in Q2 as we're finalizing the impact of that destocking.

In the second half of the year, also because the comparable becomes much easier, you will see a mechanical, almost mechanical uplift in sales in China in personal health. Just to be clear, if you think about the consumer sentiment in China, it hasn't changed versus our expectations. It remains rather subdued and no real change. It's playing exactly out as we had expected.

Operator (participant)

Thank you. The next question comes from the line of Ms. Lisa Clive from Bernstein. Please state your question, ma'am.

Lisa Clive (Analyst)

Hi. Just a question on China profitability. My understanding is that it's a fairly high-margin market for you, for D&T. Is this due to business mix, perhaps more ultrasound and IGT? I'm just wondering what the levers are there and also the fact that profitability has held up nicely despite China declining. Second question, there's a lot of disruption at the FDA going on right now. Just wondering if that's had any effect on your interactions with them relating to the Respironics consent decree. Thanks.

Charlotte Hanneman (CFO)

Yeah. Thanks, Lisa. Let me take your first question on the China profitability. And you're absolutely right. China has been and is a profitable market for us. We've seen some good margins over time and also some very profitable mix, indeed, as you mentioned, in the products we sell, both in diagnosis and treatment, but also very much in personal health as well. What we really see in China is that there's a willingness from Chinese consumers and customers and health systems to pay for good innovation. If you think about the innovations we brought to the China market, there are some really good ones, including ultrasounds that Roy already talked about, the VM11 and 12 platforms, and some other innovations as well, including the MR BlueSeal and the CT platforms, where we've seen a good uptick in China, particularly in Q1 as well.

Roy Jakobs (CEO)

Maybe let me then take the FDA one. FDA is indeed having, as we all read, and also we have in constant engagement with them, there are quite some impact as well from what's happening. Actually, we don't see that yet impacting our engagement on the consent decree. What we are more concerned about would be longer-term approval cycles that could prolong on new innovations. That is also what we stay tight on with them to see kind of that we keep them abreast of what we're developing. On the consent decree mitigation, we are very active dialogue. As we shared earlier, we are making good progress. We're fully in line with what we said we would do until now. That has continued, including very frequent engagement with the FDA on this, as well as with the third party that's engaged.

Operator (participant)

Thank you. Your next question comes from Mr. Julien Dormois from Jefferies. Please state your question, sir.

Julien Dormois (Analyst)

Hi, good morning, Roy. Good morning, Charlotte. Thanks for taking my questions. The first one relates, is actually a follow-up to Hassan's question on the modest improvement of Q2 versus Q1. Just curious whether we should still expect organic sales growth to be in negative territory in the second quarter, and maybe margin being flat to slightly declining. Is that a fair assumption? Just to be sure that we align with you in terms of what to expect in the second quarter. The second question relates to D&T. Obviously, you had a 4% organic sales decline in the first quarter, but you mentioned that IGT grew in the quarter. Is it fair to assume that the rest of the business, namely imaging, went down by high single digits, low double digits? Happy to understand what are the reasons behind this market fall, mainly beyond China.

Charlotte Hanneman (CFO)

Thank you, Julien, for your questions. Let me take them. I think your qualification of Q2 for Q1 is appropriate. We see a modest improvement. This is exactly the way we saw it play out in the beginning of the year. Also, as we said, we see our sales outlook being backhand loaded. In Q1, we exceeded our expectations. We are working on improving that phasing. For what we see in Q2 is a modest sequential improvement versus Q1. I think you are in the ballpark there with your assumptions. Taking your next question on the -4% in D&T and the impact that we then see in Precision Diagnosis. Again, this played out exactly in line with our expectations.

We expected a decline in Precision Diagnosis because of, first of all, because of China, where we've obviously had some challenges. The other big driver is this high comparison in MR, which was double-digit up in Q1 2024, as our supply chain started to unlock. We saw a significant improvement as a result there. There is nothing else I would say today than what I told you in February. It is playing out as intended. In fact, what we are seeing is that there is a further pull from innovation. That is what we see play out in our order intake and our mid-single digit growth in orders. That relates to our gross margin. Also, from a D&T perspective, what we really see is we see an increase in EBITDA margin, 30 basis points improvement.

That really shows that our fundamental progress on execution that we've been talking about a lot is sustainable and really playing out, particularly driven again by the step-up in gross margin. We see the innovation value. Roy spoke about the CT 5300, the Spectral CT, MR BlueSeal, and also the Azurion biplane. We see that all play out, as well as continued operational improvements, as well as productivity.

Operator (participant)

Thank you. The next question comes from Mr. Robert Davis from Morgan Stanley. Please state your question, sir.

Robert Davis (Analyst)

Yes. Thanks for taking my questions. Three. One was just on the outlook for the U.S. hospital CapEx environment. Maybe I know you sort of called out ongoing strengths, but just be curious in terms of what the customers are saying to you in terms of the current environment. Are there any indications of anything moving around on consumables or sort of spending intentions, ordering activity? That was my first question.

The second was just on, I think, one of your slides. You called out the order book growth in the quarter. Just how to think about the phasing through the rest of the year, particularly we've obviously started with a minus 2% growth in the quarter, and you're expecting positive over the year. How backhand loaded are you expecting the year? Are you expecting a particularly heavy fourth quarter waiting? And then my final one was just on increasing the sort of level of production manufacturing in the U.S. Is that any new sites that you're going to plan to open or start construction on, or is that more kind of boosting production through existing facilities? Thank you.

Roy Jakobs (CEO)

Maybe let me start with the hospital CapEx. I was also in the U.S., actually, a few weeks ago with a round of customers. What I'm hearing is that actually underlying demand is still very strong, right? The patient kind of volumes are strong. Procedures are still increasing. There are still wait lines. That is also what you see reflected in the order intake in the U.S., right? People are investing to keep up with the demand. As we also mentioned, they are, of course, monitoring the environment as they should to see kind of what could happen. They are first and foremost focused on how they can fulfill the current demand and how they can expand with that. That is where we are very well positioned because also they are really looking, as I mentioned earlier, for productivity partners.

Our innovations across the platforms that actually support them in a standardized way of providing care that is more efficient really is getting momentum. That is kind of what we see reflected. That is probably the best I can qualify it as we speak. North America started strong. We expect to be strong. Of course, we keep a close pulse on it. The order growth in the quarter?

Charlotte Hanneman (CFO)

Yeah. I'll take that question. Thank you. If we think about the phasing of our order intake growth, we feel very good about our order intake and the momentum that we're seeing. If you think about Q2, two things I'd call out. We expect momentum to continue into Q2. We see strong growth in our D&T segment. Our connected care business, we feel good about the momentum, but it's impacted by a very high comparison base in Q2 2024 because we saw a very big order there that we included at that point in time. Otherwise, we see strong momentum, and we expect that momentum to continue in Q3 and Q4 as well.

Operator (participant)

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

Roy Jakobs (CEO)

Sorry, maybe there was also a follow-up question on the manufacturing sites in the U.S. Maybe I can still answer that one. On the new sites, indeed, Julien, we are leveraging our current footprint to expand. That's also the fastest way we can mitigate, given the approval cycles and the regulatory processes because you have then the quality management systems in place that you can use. That's what we already did immediately. Also, as I mentioned, we are investing in some other kind of expansion facilities. Minnesota is also an example of that. Yes, there will be a mix, but we have a strong footprint that we will leverage for the max to kind of ensure we can do it with speed and also with lower cost and lower capital requirements. That is exactly the way how we go about it.

Operator (participant)

Thank you. Your next question comes from the line of Mr. Hugo Solvet from BNP Paribas Exane. Please ask your question.

Hugo Solvet (Analyst)

Hi, hello. Thanks for taking my question. I have three pieces. First, on tariff or secondary relative of tariff. Can you please discuss the sourcing of rare earths and minerals and your exposure to China, please, and how that impacts your supply chain? Second, obviously, with tariff and volatility and consumer trend, you're pulling forward a lot of efficiency measures. Can you help us understand how we should think about margin expansion going forward and excluding any operating leverage, what's left to extract? And lastly, on hospital CapEx, I think, Roy, you called out slight improvement in Europe. Can you maybe discuss the modalities and the countries driving this trend? Thank you.

Roy Jakobs (CEO)

Okay. Thank you for the questions, Hugo. Let me start with rare earth export restrictions. There has been a stance taken by the Chinese government, but they also kind of have been talking about where they want to exclude the impact. When we have been looking at the newly implemented export controls, we understand, and we are working to understand better what it actually means. Currently, we don't have an impact, or we don't see disruptions to our supply chain. We engage with our suppliers, and they are well kind of sourced for any need that would kind of potentially have an impact on our production or products. For the moment, we have no impact from rare earth metal export restrictions.

Charlotte Hanneman (CFO)

Yeah. On your second question, Hugo, on the margin expansion going forward in the context of tariffs, I think what I'd say there is that fundamentally, there continues to be a margin improvement opportunity. That has not changed. The fundamentals haven't changed. The way we go after that are a few different things. We continue to go after those mitigations that we spoke about earlier today. Some of it is short-term. Some of it is a little bit more long-term if you also think about supplier footprint. Thirdly, the productivity component is going to be there.

You remember, in February, we increased our three-year productivity plan from EUR 2 billion to EUR 2.5 billion, as we are confident that there's more to go after, more simplification to go after, and more just operational leverage to go after that we will continue to double down on. We've done so in Q1. There are a lot of programs in place that will deliver in the remainder of the year. Last, of course, as I said earlier as well, innovation will continue to be a big contributor to margin expansion as well, as we're seeing that the innovations that we've recently launched are already contributing to our gross margin and our gross margin expansion.

Roy Jakobs (CEO)

Maybe the last point there to add, as you know, we are driving our strategy of the 70/30. We have 70% of our businesses that are already in higher margin territory there. We're driving both their growth up as well as the margin expansion that it drives for the group. We have specific areas where we are driving also margin expansion, accelerated rate of the group. For example, as I see, we have called out before, of course, was dipped significantly in margin. We already got back into profitability last year. We continue to expand that margin to actually bring it back to where we have seen it before. Actually, we see both the underlying improvement happening in the year as we speak, but also we see the leeway ahead of us that was earlier tied to what we also put out as a longer-term perspective for Philips.

We have not seen that change through some of the dynamics that currently are ongoing in the market because the fundamentals of the demand, as well as how we are kind of supplying our innovations, actually show that we can robustly perform in there.

Operator (participant)

Thank you. The next question comes from Mr. Wilmkill from ABN-Oddo. Please state your question, sir.

Yes. Very good morning. This is Wilmkill from ABN-Oddo. I have got two questions. The first one is for Charlotte. You basically said during one of the questions that nothing changed compared to the February call. I would like to challenge that. If I look at the impact of the tariffs, the net impact is EUR 250 million-EUR 300 million. This is a range of 1.3%-1.5% of sales, where you are lowering the guidance by 1% only. That means that there's an underlying increase of 40 basis points. In addition to that, if I look at your February comments on PH, look at the results in PH and the comments that you make today, I cannot help but basically argue that PH is actually doing much better than what you anticipated in February.

Also, your order intake momentum is clearly gaining strength, and you have good margins in the order book. Is it fair to say that you're actually getting more bullish as we progress throughout the year if we exclude any impacts from the tariffs? The second question is related to the PH business. Can you give us a bit of a feeling on where the exit rates were per region at the end of Q4 and at the end of Q1? If you can quantify the impact of any forward buying that might have happened at the end of Q1. Thanks.

Charlotte Hanneman (CFO)

Thank you, Wim. I'll take your first question on nothing changed versus the February call. If you look at our guidance, and as I also called out in my prepared remarks, there are really two drivers of our changed guidance. One is tariffs, which is the EUR 250 million-EUR 300 million net impact that we discussed. The other one is our Q1 performance versus our expectations. Those are the two drivers that drive the change in our guidance. That is what I would say about that. If you talk about PH and saying it's better than anticipated, we are very pleased with our Q1 in personal health. That's absolutely true. We saw double-digit growth across the international region.

We had great results in Europe, in Latin America, in India. We saw the momentum really pick up. For instance, in some parts of the world, we have put new innovations to market. We did more on AMP and more influencers that we hired, which has been working well. Having said all of that, it is early days. It's only at the end of Q1. We're only at the end of Q1. It is really difficult to, at this point in time, look forward and take that as sustainable momentum. That is what I would say around your questions there. You had a second question on the exit rates for personal health, Q4 versus Q1. Again, maybe a few things I'd say there. In China, no real change in consumer demand. Consumer demand remains subdued.

I was also in China a month or so ago, and we see no meaningful change to what we were expecting or what we have been seeing. We expect that momentum in China between Q1 and Q2 to remain fairly similar. Also, the momentum in the international region outside of China, as I just discussed, is very, very strong. In the U.S., we've seen some slight growth in the U.S. We see so far that consumer sentiment is stable, but we're obviously monitoring that very, very closely. Just to be very explicit on that, that has not been the major growth driver for us. That has really been the international regions.

Operator (participant)

Thank you. Your next questions come from Mr. Julien Ouaddour from Bank of America. Please state your question, sir.

Julien Ouaddour (Analyst)

Good morning. Thank you very much for squeezing me in. I'm slightly going in the opposite direction of the previous question, and just sorry to press on that point. It's clear that you need pretty strong acceleration in sales and profit in Q4 just to make even the lower end of the guidance. Could you just remind me what are the main drivers, what gives you confidence in such very uncertain macro situation, especially given I think you talked about being vigilant during the opening remark, and I mean, you mentioned slight improvement today quite early. That's the first question.

The second one, it seems that you're also cutting the free cash flow guidance by more or less EUR 400 million for this year. Can you just tell me what part of the cut is tariff? I mean, is it 100%, and is it different from the P&L impact of the EUR 250 million-EUR 300 million? Thank you.

Charlotte Hanneman (CFO)

Yep. Thank you, Julien, for your questions. First of all, on the acceleration of the year and the back-end loaded outlook, and maybe take you back to what happened in Q3 2024, what we saw was obviously some challenges in China. If you now think about the phasing in this year, in the second half of the year, the comparable becomes much easier, both in personal health in China as well as in health systems in China. That is almost mechanical that we get an uplift in sales growth. Roy already said it. We are taking a cautious view of the market environment in China. We have taken that in our previous outlook. We are confirming that today. We do not see any change there. We will, just because of the comparable, see an uplift in our numbers in the second half of the year.

Roy Jakobs (CEO)

Maybe how I summarize it. If you look kind of through the year, and that's also when we kind of the year is actually in the fundamentals really playing out as we predicted in terms of how we came into Q1, actually slightly better. We have a better-filled order book. I think that is fair to say. That momentum we also feel continues. That actually kind of gives reassurance also for the second half. Still also building on the comment that it's still early days, but that gives us, of course, an early indicator that actually we have the underpinning coming next to PH, where also we, of course, are happy with the growth coming back into the business. We also still know that there it's early days, and we know that we have the second half mechanical effect that will kind of kick in to kind of support that.

That is in line with the plan. I think therefore you have seen us sticking to our sales guidance because that is really where we believe we have firm underpinning for at what we currently know. We have then also taken the tariffs on what we currently know, also acknowledging that this is still fluid, so can change. We have taken very substantial measures on the kind of announced tariffs on the 2nd of April. We will work hard to have those also kicking in as soon as possible, and that will dial up throughout the year. That is then also the totality of how we look into the year unfolding.

The two stories of the fundamentals are really playing out well, both in terms of market as well as how we deliver in that with great innovations and also our cost productivity measures to kind of manage the year what is in our own control, whilst we need to remain vigilant on the things that are beyond our control, where we need to just take the realities as known into account, which are tariffs. We need to monitor the wider economy closely as we keep doing.

Charlotte Hanneman (CFO)

Yeah. Julien, I'll take your free cash flow question. Our updated outlook has free cash flow as slightly positive after the EUR 1 billion Respironics settlement that we've just completed in Q1 versus previously the lower end of the EUR 0.4 billion-EUR 0.6 billion. The impact versus our previous outlook is entirely driven by tariffs. The way we see the tariffs play out is it essentially hits our cash flow before it hits our P&L. That is the way to think about it really because the duty payments, we pay them upfront. Some of the mitigation is timing in the year. We also capitalize some of these duties and then release them in the P&L over inventory turns. There is a little bit of a time delay there as well.

I think it is important to mention that we are fully focused on continued working capital management. We have seen inventory reduce year-over-year significantly. We continue to focus on other elements of working capital as well, see overdues reduce. We have now, with the Respironics settlement, removed an important overhang. Just maybe as a reminder, you know we're offering dividends in either cash or shares up to a 50% cap for cash, which brings us back to at least partially a cash dividend, which we're very pleased by because it just signals the return to normality and also our strong fundamentals that underpin this.

Operator (participant)

Thank you. Your next questions come from July of Ms. Sezgi Ozener from HSBC. Please state your questions, ma'am.

Sezgi Ozener (Analyst)

Hi. Thanks for taking my questions. I will have three please. First of all, on the 70/30 division, how would that division look if we consider the health system segment? So if you left out personal health. Second question, you mentioned the gross impact, the net impact of tariffs. Thanks very much. EUR 250 million-EUR 300 million. How would the gross impact look? What should we expect if these tariffs, the China tariffs, for example, were to be reverted, were to be taken back? Lastly, on your presentation, thanks for giving us guidance on what the restructuring costs and other items for Q2 might be. Can you give us some color on what, especially connected care restructuring costs, which are higher, bordering EUR 500 million, are concretely driven from? Can we start expecting a decline in these restructuring and other costs in the second half of the year?

Roy Jakobs (CEO)

Yeah. Let me say to you, thank you for your question. Let me take the first one. You know personal health is 20% of our business, right? That is in essence kind of what you have to take out. You get to around 60/40 in terms of the percentage of mix in terms of how that translates. On the gross impact on tariffs, if they would reverse, yeah, I think you can imagine that this would be beneficial. That kind of it's also where we have been taking current realities into account. We know that negotiations are ongoing, but it's just very hard to predict how they will kind of conclude.

Therefore, we took what we know. The majority of impact, as you also heard earlier said by us, is from U.S.-China. Those are important tariffs to continue to watch how they evolve and the impact they have, but also rest of the world. I think we took the prudent approach by actually acting now fast on what we know are the 2nd of April tariffs. We kind of will adapt as we go, both in terms of what that could mean up or down as we evolve into the year. We'll keep you updated later on.

Charlotte Hanneman (CFO)

Yeah. On your last question on the adjusted items for Q2, particularly related to Connected Care, the majority of the costs there are related to our consent decree, and we're working through our consent decree and the costs related to that. That is the main driver that we have there. Just as a reminder, we signed the consent decree in April of 2024, and we're still working through it. We're pleased with the progress. We're working through all the different steps, but it's too early to conclude on when it will finalize. Just as a reminder, Q1 restructuring costs were in line with the guidance and in line with our expectations.

The last remark I'd make is just in the connected care line, we are very focused on making sure we do the right thing from a patient safety and quality perspective, and as a result, working diligently through all the steps of the consent decree.

Roy Jakobs (CEO)

I think it's also, we heard you, I think, already, and we said it earlier, loud and clear that incidentals are at elevated levels for a big part and a majority of this SRC impact. We are actually improving over time. That's also what we are going after in the fullest across all businesses. Of course, we also had restructuring costs that we're featuring. We have been working through the majority of that. On the excluding consent decree cost, we have raised a focus to kind of make sure that that goes down over time, whilst at the same time, we keep also going after the cost and the productivity measures as we have been kind of informing you about. This EUR 1.9 billion to date is a big contributor, and we will continue to expand that productivity lever as well.

Operator (participant)

Thank you. The last questions come from the line of Falko Friedrichs. Please open your line for questions. Thank you.

Falko Friedrichs (Analyst)

Thank you. I have a few quick ones left. Firstly, you mentioned that you saw preliminary Q1 market share data. Can you confirm that you did not lose any share in medical imaging, so excluding IGT? Secondly, what is your updated thinking on growth in China for the full year, and has that thinking changed after Q1? Last but not least, can you be a little bit more specific in terms of which products and components are flowing between China and the U.S.? Thank you.

Roy Jakobs (CEO)

Thank you, Falko. On the first, I can confirm that what we have seen actually is that we would be up in medical imaging share. We were referring to the strong momentum that we see in ultrasound, but also in particular CT and MR. I think that that was, and you also saw that in the quarter underpinning. We spoke about the mid-single digit growth, including China, where there is still significant China in there. We are very encouraged by the market share momentum we have seen in medical imaging.

Charlotte Hanneman (CFO)

Yeah. Your question on growth in China for the full year, nothing has really changed versus February. We continue to expect a mid-single digit to high-single digit decline, primarily due to the double-digit decline in the first half of the year. That is, again, driven by personal health, where we have both subdued consumer demand as well as the destocking that will and the impact of that will finalize at the end of Q2. Just to be clear, we're not betting on a rebound in China in the second half at all. We take a cautious view of the market environment in China for the remainder of the year. Just almost mathematically, we will see a pickup in growth rate just because the comparison basis is going down. Your last question on the products and the flows between China and U.S.

As I mentioned earlier as well, the two segments that we see are most impacted by tariffs in general are both our Personal Health segment as well as our Diagnosis and Treatment segment, primarily because of the U.S.-China flows in those segments. You need to, in your modeling, that's something that you need to take into account for those two businesses. Just taking you back, we've de-risked our China-U.S. flows a lot over time, also since the first tariff war. Given the tariffs are so elevated, 125% and 140% price, that just becomes a very big number as a result of that.

Operator (participant)

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

Roy Jakobs (CEO)

Thank you for your questions. As you heard us say, in an uncertain macroeconomic environment that has intensified due to potential impact of tariffs, we continue to drive profitable growth, focusing on what we can control. For that part, we really feel strong for the year. We iterated our sales guidance to 1%-3% based on strong order book momentum as well as personal health coming back to growth. We are taking the current realities of tariffs into account, driving substantial mitigation, and we will continue to do so for the rest of the year. Most importantly, we remain razor-focused on supporting our patients, our customers, and consumers because actually the situation in healthcare has not changed and has not improved.

The pressure is still very high on the healthcare system itself, and we need to support within our innovations. We see also consumers really kind of appreciating our innovations. We remain focused on driving impactful innovations to deliver better and more care to people worldwide. Thank you so much. Talk soon.

Operator (participant)

This concludes the Royal Philips First Quarter 2025 Results Conference Call on Tuesday, May 6, 2025. Thank you for participating. You may now disconnect.