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by JLROhio » Thu Aug 05, 2021 11:31 pm
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Royal Philips NV (PHG) Q2 2021 Earnings Call Transcript Jul 26, 2021
Frans van Houten -- Chief Executive Officer, Chairman of the Board of Management and the Executive Committee
Yeah, thanks. Hey, hello everyone and thank you for joining us today. I hope that you and your families are keeping safe and well. Let me upfront mention the upcoming field actions related to the component quality issue in our sleep apnea therapy devices that we announced back in June. Alright, I value to talk about that first, as you understand, because of the impact that it is having on patients as well as their well-being, which is at the heart of everything we do at Philips. I want you to know that we have mobilized the necessary resources across the Company to address this issue effectively, and I will come back later in this call with more details.
...Let me now speak about the planned field actions in Sleep and Respiratory Care. This is of course a major correction, and we take it very seriously. As mentioned, we have mobilized the necessary resources across the Company to address the issue. This is done due to possible risk of degradation of the sound abatement foam embedded in the devices. At the same time, we realize that the field action itself has temporarily also a significant impact to patients.
We are fully prepared to start with comprehensive repair and replacement actions for the affected units. We are still in discussions with the relevant regulatory authorities to obtain authorization to start deploying the repair kits and replacement devices that we are producing. For example, we have submitted the relevant applications to the FDA in June. We've already increased the overall production of DreamStation 1 and DreamStation 2 devices as well as repair kits from 30,000 units per week to 55,000 units per week as of the start of the third quarter. And we expect to reach 80,000 units per week in the fourth quarter, which underpins our expectation to address all devices in scope within 12 months of regulatory approval.
As a consequence of the prioritization of the repair and replace actions. We are currently not taking new orders for sleep therapy systems, while masks and other consumables, of course, continue to be sold. As a reference, before COVID-19, the annual revenue in our sleep business was close to EUR1.1 billion with approximately 60% from systems and 40% from masks and consumables.
In the longer term, we do not expect this issue to have a substantial impact on the fundamentals of our Sleep and Respiratory Care business, nor on the gross dynamics of this market. We have a market-leading innovative product portfolio in these businesses and continue to work closely and transparently with physicians, customers and patients to ensure that we address this issue as quickly as possible.
Following our voluntary field safety notice for which we have assumed a worst-case scenario, we are still conducting research and further tests to get insights, so that we are better able to scope possible patient risk. To be clear, we do not have data at this point such as preclinical or clinical study results, indicating that exposure to the particulates or emitted chemicals related to the sound abatement foam will lead to disease, while at this point we cannot exclude it either.
The various regulators around the world have made their own interpretation of the field safety notice in the data, also weighing the patient risks and benefits. As a result, we are seeing some variance in what regulators are advising patients in this matter. I would like to point you to the table in the investor presentation. As I know this is on your mind, I can say that some civil complaints and personal injury claims have been filed in courts against Philips. It is however far too early to draw any conclusion to talk about the merits of the claims or speculate about Philips' exposure.
In due course, we will be able to assess the merits of any claim and we intend to defend our position vigorously supported by the further test data that we are gathering. Obviously, the timelines that may apply to the handling of claims is not yet clear. I also want to talk about the broader context of quality across Philips. In the last few years, we have made strong progress in our quality culture and approach, improved design controls, improved post-market surveillance and improvements in the way that we handle corrective and preventative actions.
The effective products were designed and have been in full compliance with appropriate standards at the time of release and commercialization and the component issue was identified through our own post-market surveillance processes. Overall, the robustness of our processes has increased a lot. That doesn't mean, of course, that we are done, this journey remains a top priority for all of us at Philips. I want again to reiterate that patient well-being is at the heart of everything we do.
To round off, looking ahead, while we continue to see uncertainty related to the impact of COVID across the world and the impact of electronic component shortages, our overall financial guidance remains within the earlier guided range. I'm pleased with the progress that we're making on the strategic roadmap, as well as the strong performance momentum in all our businesses except for Sleep and Respiratory Care.
Questions and Answers:
Operator: Thank you, sir. [Operator Instructions]. The first question comes from Veronika Dubajova from Goldman Sachs. Please state your question.
Veronika Dubajova -- Goldman Sachs -- Analyst
Hi, guys. Good morning, and I hope you're doing well. Two questions from me, please. The first one just is just an update Frans, and when do you think you will get the Emergency Use Authorization in U.S. to commence the repairs?
And I guess, maybe if you can comment on some of the other major markets, and what the time frame is looking like at this stage for you to commence the works, that would be really helpful. And if you've had any feedback so far from the regulatory agencies on the repair process and their thoughts on that. Apologies, I know it's pretty broad, but it's a big theme of focus.
Frans van Houten -- Chief Executive Officer, Chairman of the Board of Management and the Executive Committee
Yeah, hi, Veronika. Good morning to you, and let me try to tell you as much as possible on all the ins and outs of the field action. And first of all, we have engaged with all the regulators around the world on the field safety notice, and it's interesting today observe differences in the risk-benefit interpretation that regulators didn't take, right. And that's why we have included the page that some regulators for inspection of -- guide for continued use while waiting for the repair and others point to the doctor.
Then on the repair procedures, let me point out that, there is multiple devices within the platform family of DreamStation 1. We have submitted multiple packages to the FDA for regulatory approval. That's so called 806 Form for the emergency field action. The FDA has engaged on these submissions, and we have already had several rounds of queries on those procedures which asks for more data and so on.
I cannot exactly predict when we get approval. I can only say that FDA is on top of it, and working very diligently. Let's say experience would show that kind of an eight-week approximate throughput time on an 806 could be expected. But that's out of prior experience, not necessarily related to this case.
In anticipation, we have already produced repair kits and we've also even placed stocks in bonded warehouses in a few countries in the world, so that we can move quickly out of the gate, alright? And, so we are all ready to go, alright? And I would expect that imminently, we should be able to give updates on that.
Does that answer your question on the upgrade process, Veronika, maybe let you react immediately on that?
Veronika Dubajova -- Goldman Sachs -- Analyst
No, that's really helpful. Thanks, Frans.
Veronika Dubajova -- Goldman Sachs -- Analyst
Excellent. Thank you, both. And Frans, if I can just quickly on the -- you sort of said, you've had some conversations with the FDA on the EUA. Just kind of curious anything surprising? I'm not familiar with how much back and forth happens on these things, but I'm just curious if you're hearing anything from them, that would make you less confident on that eight-week timeline for the EUA?
Frans van Houten -- Chief Executive Officer, Chairman of the Board of Management and the Executive Committee
I think all the questions are completely understandable and legitimate, and I think they point to the complexity of this whole area around VOCs, right. I'm sure that we'll get other questions during these calls. But let's say, the FDA has asked us to provide data that the replacement material is safe and sound, right? I mean, if you boil it all down, then everybody wants to ensure that if you go out with a repair and replace action on a couple of million of devices, that you do that in the full knowledge that it is a sound -- is a good solution. I think that, in my own words, if I put it like that, it describes it. And so I think it is diligent and the only unfortunate thing is it takes time. And patients are wanting to get this dealt with as soon as possible because not using the therapy is also giving a lot of discomfort and harm.
Veronika Dubajova -- Goldman Sachs -- Analyst
Understood. Thank you, guys so much. Super helpful.
Operator
Our next question comes from Patrick Wood from Bank of America. Please state your question.
Patrick Wood -- Bank of America -- Analyst
Perfect. Thank you very much. I'll just ask the two upfront, if that's all right. So I guess, tediously on the Sleep side as well, just curious how the order book sort of developed through the quarter and the revenue line.
Obviously, thank you, Abhijit, for commenting around the Group numbers with and without Sleep. Sort of playing around with that, I get the sense that toward the end of the month, presumably the Sleep hardware business was down like 90% or something, but I could be wrong with my math. I'm just curious how that business developed during the quarter, and whether you think that reflects just purely the repair action or a little bit the kind of consumer anger I guess on the issue?
Abhijit Bhattacharya -- Executive Vice President, Chief Financial Officer
Yeah. No, overall, the Sleep business developed as we expected. Once we announced the repair action, then basically, we didn't sell any more of the systems, right? So the mask sales continued. Actually, mask sales were pretty good. So there, we don't have an issue. And normally, the Sleep Systems businesses toward the end of the quarter, bulk of the deals are done. So yes, you're right, Patrick, toward the end of the quarter, you really see the comparable decrease year-on-year. But not something that we were not expecting to happen. So no surprises there.
Frans van Houten -- Chief Executive Officer, Chairman of the Board of Management and the Executive Committee
Yeah, and then Patrick on your second question, already several years ago, as we moved from a conglomerate organization with a holding model toward an operating company focused on health technology, we did change our Q&R organization. At that time, and think of it, I don't know exactly or recall it exactly, but think of it like five years ago, we moved the reporting line of all quality and regulatory people to the functional leader of Q&R, right?
So we have a Chief Medical Officer, we have a Chief Quality and Regulatory Officer and the Chief Quality and Regulatory Officer reports directly to me, alright? And all the resources, all 4,000 of them in the Company, functionally report into the head of Quality and Regulatory. So that's my first point.
Second point, the learnings out of previous audits, 483s and inspections have pointed to the need to strengthen what is called Post Market Surveillance, right, PMS. And here, we have made actually a ton of progress. We've also implemented a Companywide information system called Trackwise, where all complaints are registered -- and thanks to IT, can also be analyzed more easily, alright? Now we get a couple of million data points into that system per year, alright? So you need to do a lot of analytics.
The post-market surveillance process has led us to detect the issue at hand here, right? So remember, we have since inception sold more than 10 million, 12 million of these devices. We track complaints coming in. And then at some point in time, you notice that there is a pattern instead of just incidents, alright? So in the beginning you get one complaint here, one complaint there. It's not a pattern, it doesn't get recognized as a pattern. But as more recently, we detected it as a pattern. We did an additional investigations like you are expected to, and that led us to come out in Q1 -- in Q2 with the information that you know.
So this is something we detected through our own PMS processes. And I would say that is to be expected from a HealthTech company and that process is working. Then you initiate your corrective and preventative actions, that leads to further insights, for example, around design controls and how robust these design controls are.
I think, and I claim that over the last several years we have made a ton of progress, right? That doesn't mean that the journey is over, but I feel good about how this will stand up to scrutiny, and for sure, we are anticipating that we will get regulatory investigations to please explain to us what exactly has happened. Also such a regulatory investigation is normal and should be expected with a field safety notice of this magnitude.
But, I think we are prepared for that. We -- I think with the -- to the best of our knowledge and integrity, we have acted in a way we should act. So therefore, I don't anticipate a need for a change of -- change of ways of working. And your specific point, how does information move? Well, we think that information gets reported up quickly and transparently in the Company. I have no other information at this time to assume the opposite to that. So, hopefully that helps you a bit.
Patrick Wood -- Bank of America -- Analyst
It does. Thank you for the commentary, guys.
Operator
The next question comes from Hassan Al-Wakeel from Barclays. Please state your question.
Hassan Al-Wakeel -- Barclays Capital Securities Ltd -- Analyst
Thanks for taking my questions. I have three please. Firstly, could you talk about current manufacturing capacity within Sleep, and where this sits relative to your 3.5 million installed base? What are the costs to increase capacity here?
Frans van Houten -- Chief Executive Officer, Chairman of the Board of Management and the Executive Committee
Great questions as usual, Hassan. Well, let me first reiterate what I said about manufacturing capacity, and I mentioned that we are ramping up capacity for the replacement and repair actions from 30,000 to already 55,000 a week currently aiming at 80,000 by the beginning of the fourth quarter, right? And now if you multiply that times the number of weeks, then you get to somewhere between 3.5 million or 4 million units, alright, and hence, the 12 months expected throughput time on this.
We have not, let's say, specifically mentioned the cost of increasing capacity. But I would reassure you that, that is not the big issue here. We would be able to go faster if, from a supply constraint point of view we would get our hands on the scarce materials from some of our suppliers.
So we have been helping our suppliers with mould capacity, etc, so that they can ramp up faster. And if we see that they can go faster, then we aim to shorten the 12 months, right, if possible. It's too early to speculate on that, but certainly, that would be our aim because that's better for patients. But obviously, the sooner we can resume sales, that's better for our own business.
Maybe on the back of it, I would like to share with you the feedback that we have been getting from distributors and doctors. They all say that the manner in which we deal with this issue is more important than the issue itself, alright? They realize that a technical component issue can happen, but the way we deal with it is important. And so far, we have only been getting positive feedback in the way we have been able to handle it. Also, the supplemental clinical information that was provided to doctors in a couple of weeks ago, I assume that you have seen it, it was very much appreciated.
What we also hear is that nobody has appetite for a monopolistic market situation, and they expect Philips to be able to quickly recover its position in the market and resume, let's say, our strong preference. What doctors also point to is the strong analytical capacity of the -- of our systems, helping them to understand the trend line of patients, so the whole informatics part of our devices, and as they provide information to the doctors is quoted as a strength, alright? So we are under the conviction that we will regain our market position or at least close to, pretty fast after we are able to resume production for commercial purposes, and as said, we will do that as fast as possible.
Operator
The next question comes from Michael Jungling from Morgan Stanley. Please state your question.
Michael Jungling -- Morgan Stanley -- Analyst
Thank you, and good morning. I have two questions, please. Firstly on the recall, you highlighted in your slide deck that 2.2 million people have registered out of the 3.5 million machines. Do you know what proportion of those 2.2 million are in the U.S.? How many patients highlighted that they actually have an issue with the DreamStation 1?
And are you surprised that it's no higher than the 2.2 million at this stage? And then question number two is also on the recall, but really focused on the foam of the DreamStation 1. Was that foam FDA approved by the vendor who you sourced it from? And are you able to tell us who the manufacturer is of that foam? Thank you.
Frans van Houten -- Chief Executive Officer, Chairman of the Board of Management and the Executive Committee
The 2.2 million registrations are more in the U.S. than the normal proportion of our business was, right? So over, what was it? [Speech Overlap] 65% of the expectedly affected devices are in U.S., but the proportion of registrations in the U.S. is higher. That's also because we were out of the gate faster with the patient engagement program and the network of DMEs is very strong in the U.S., whereas in some of the international markets, it takes a bit longer to reach people, but we expect that to catch up soon.
Obviously, most of the reports are with DS1 because that's by far the vast majority of devices affected. So unless I misunderstand your question, it's logical that the vast majority of these registrations are DS1 users. On the foam, I value to state that when the product DS1 was released, it was tested against all the standards in place, including VOC standards at that time, right? And the product, of course, met all those standards. Otherwise, it would never have been released.
The foam has been used for over ten years, and we never had any issue with it. Whether the manufacturer itself had its own approvals, I am over asked here at this moment. But I repeat that we have been using this foam for ten years in DreamStation 1 and prior generations and never had issues with it.
Michael Jungling -- Morgan Stanley -- Analyst
Okay. Thanks, Frans. Can I follow-up on the question that I asked about, of the 2.2 million patients who have registered, have you been able to collect data to see what the issue is, why they have filed or to register?
Frans van Houten -- Chief Executive Officer, Chairman of the Board of Management and the Executive Committee
We are still doing analytics on that database. The -- so I cannot give you more data than that. We have just done the first pass of analytics to take out duplicates, because that was the first issue that we needed to deal with. And now we are mapping it on registrations and when the products were produced and so on, I prefer to do a thorough job on analytics before I answer your question.
Michael Jungling -- Morgan Stanley -- Analyst
Okay. And Frans, you didn't answer the question about who the foam manufacturer is? Can you highlight that, please? Could you mention that?
Frans van Houten -- Chief Executive Officer, Chairman of the Board of Management and the Executive Committee
Yes, I realized that I didn't answer that. But -- so I'm not going to answer that.
Michael Jungling -- Morgan Stanley -- Analyst
Okay, thank you.
Operator
The next question comes from Kate Kalashnikova from Citi. Please state your question.
Kate Kalashnikova -- Citi -- Analyst
Hello, this is Kate Kalashnikova from Citi. I've got three questions on Sleep, I'm afraid. So firstly, Philips supplemental information sheet sent to doctors in July, it mentioned cytotoxicity was noted for the extraction concentration. And also the two genotoxicity assays showed a positive mutagenic response. What chemicals specifically is the document referring to? Because the chemical specifically mentioned in the release, such as CG, CGI and GEG, they're not proven carcinogens in humans. So it would be very helpful if you could clarify that.
And secondly, Philips changed the sound abatement foam in DreamStation 2 to silicon. Why have you made the decision if there are no safety risks identified or PE-PUR foam in DreamStation 1? And finally, what proportion of patients normally start sleep therapy and then discontinue perhaps even while in their first sleep device? And what proportion of users in the U.S. regularly use ozone cleaner? Thank you.
Frans van Houten -- Chief Executive Officer, Chairman of the Board of Management and the Executive Committee
Wow. Hi, Kate. The -- with regards to the characterization of the volatile organic compounds, that is a very complex matter and the supplemental information that we refer to indeed mentioned several gases, and we also observe that some people have misinterpreted the type of gases and therefore, took a more, let's say, serious interpretation than perhaps was justified.
We have also request of the regulators started a slate of additional tests to further characterize what gases are to be determined, and to how to characterize them. I can tell you that we have not detected TDI or TDA in those samples that were tested in the lab, alright? But as I said, further research is ongoing.
Now, with regards to the change of the foam from DreamStation 1 to DreamStation 2, you may recall that in June 2018, a new standard was published that had, let's say, heightened or different requirements on VOCs than the previous standard. The new standard did have a grandfather clause for existing equipment, and therefore, products that were already being produced in the past that were approved in past did not have to be retested against the new standard. Of course, that is provided that you don't have data and insights that your device would not be safe.
I can tell you that at the time of the release of that standard and -- that we did not have, in fact, the complaint rates coming out of our post-market surveillance, and therefore, we did not initiate a design change of the DS 1 at the time because there was no reason to, right?
And let's say, routinely in the medical device industry, you are faced with new standards being applied to new generations of products, and you're not going to retrofit old systems because that would be an impossible task, alright? You only do that when there is a safety concern, and as I said, when this new standard came out, we did not have that. And therefore, the grandfather clause in the standard of June 2018 applied.
Then the proportion of people using ozone cleaning is, of course, we don't know that exactly, but we can tell you that aggressive marketing has taken place even to the extent that the FDA issued their own warning in the beginning of 2020. Now, if we look at the correlation, or let's say, when did we start seeing complaints coming in United States, then the vast majority of the complaints are in 2020, right, and therefore -- and also geography-wise, we can, let's say, correlate to the regions where ozone cleaning was marketed more strongly. So that is where we stand.
Obviously, as we -- to the question of Michael as we get more data from the registration, we will be able to do more analytics and then maybe, Kate, we can come back to your question in due course.
Kate Kalashnikova -- Citi -- Analyst
Thanks for that. Just to clarify your answer to the first question. If you hopefully saw the TDA and TDI, they're not detected in the test done to date. DEG won't detect it, but it's not cytotoxic. So what chemicals is responsible for the potential -- reported potential cytotoxicity, if not TDI, TDA, and given that DEG is not cytotoxic. I'm just trying to understand if you can help us with this, it will be very helpful.
Frans van Houten -- Chief Executive Officer, Chairman of the Board of Management and the Executive Committee
I am now getting assistance here from Steve [Phonetic].
Steve
Hi. We need to further identify those compounds. So this was done on lab degraded foams, so that the foam was not, let's say, aged in the field. We artificially aged it to simulate the degradation. And then we did an extraction and we analyzed all the compounds in there. We could detect diethylene glycol. We -- there were a number of unidentified compounds that they are now further investigating, but we did not detect TDI or TDA.
Kate Kalashnikova -- Citi -- Analyst
Okay.
Operator
The next question comes from... [Speech Overlap]
Frans van Houten -- Chief Executive Officer, Chairman of the Board of Management and the Executive Committee
So let's say, rounding it up, Kate, I think it is way too early to conclude that you know the gases have really a severe health impact. We took a worst case approach back in April and June, because that is what is expected from, let's say, a responsible manufacturer, right?
If you don't know all the finite consequence, you go out first with a reasonably worst case scenario and then as data becomes available later, you can always reduce that rating, right. But it's -- that's what we need to do according to our own quality management system, alright?
And the supplemental, medical information already, let's say, gave a more balanced view on it, that was appreciated, and the further tests that we are conducting on a far bigger sample and also on aged -- normally and naturally aged products, will also determine whether the VOCs are more initially coming out of the machine, when they are coming from the production line or whether in the installed base, this is still an issue, alright?
I think this is one of the critical questions to answer, whether patients are really exposed to VOCs or not. So -- but taking a reasonably worst-case approach is, I think, the responsible way to go about it, and then we'll deal with the further information as it comes.
Kate Kalashnikova -- Citi -- Analyst
Thank you very much, Frans. And just very briefly, if I may, have you got any data that shows how ozone is accelerating foam degradation?
Frans van Houten -- Chief Executive Officer, Chairman of the Board of Management and the Executive Committee
Yeah, that we do. We have tested that, and we see a 40 times factor of acceleration of degradation when ozone is being used. And that's on an average use of ozone cleaning. And if people do that every day, of course, it goes even faster, right? But the acceleration factor caused by ozone cleaning is very, very significant, right? And otherwise, we would not call it out. It's a very aggressive cleaning method that should not be used on medical devices at all.
Operator
The next question comes from Scott Bardo from Berenberg. Please state your question.
Scott Bardo -- Berenberg -- Analyst
Yeah, thanks very much guys. Sorry, again to focus on the Sleep and Respiratory business, please. Frans, you mentioned a lot of volatile organic compounds and I understand why. I think this is potentially the bigger consideration as compared to a particular matter. The MHRA, in the UK, conducted the biological safety assessment and highlighted that they did not see any volatile organic compounds of concern after 24 hours, suggesting that this was a first out-of-the-box usage issue rather than something that was sort of sustainable over a prolonged period. I wonder if you could confirm in your initial safety assessment and clinical studies, whether you would agree with that observation, please.
Second question, please, Frans. I wonder if you could provide a little bit more details about how you intend to repair and replace. Can you give us some sort of split between repair and replacement? And does the alter between geographies, perhaps give us some sense of what you expect the profit impact as a result of no sales for CPAP devices to be for Philips, including mitigating factors.
And last question, please. Frans, you seem confident and pleased to hear about the ability to remediate this issue within 12 months or so. Am I right in saying then Frans, there is no reason at this point to deter from your 2022 provisional outlook for, say, 5%, 6% topline growth, 60 basis points to 80 basis points margin expansion? Thank you.
Frans van Houten -- Chief Executive Officer, Chairman of the Board of Management and the Executive Committee
Yeah, brilliant questions, Scott. Let me indeed cover them. Look, the MHRA test in the UK is very encouraging. And as I said, we have taken an initial worst case approach to it, because in the lab tests, our resident lab -- well not resident, but our partner that does the tests for our Sleep and Respiratory Care business, this is where we discovered the VOCs, and that's on a relatively small sample size, right?
And on that basis, we took the action, all right, because we could not do otherwise, right? We have found those gases in those -- in that limited sample, and consequently, we took a reasonable worst case approach. I told you that we have initiated a much wider sample testing, but also we've asked multiple labs to do the testing, because you know, we want to know the repeatability of the test in different test environments to exclude that potentially this one lab has a different approach, right. So all of that is still in the making.
Now you may say, why does it take so long? Well, these tests run for multiple weeks and then on multiple devices, and then all the molecules need to be characterized and measured for the, let's say, of the qualification. In a way that frustrates me as well, and because I would like to do this much faster and much better.
Steve, also just mentioned that in the initial tests, we have taken an accelerated aging approach, which these are also message that you -- that regulators will challenge us on too, say, maybe you should also consider other simulation environments. So in a way, it doesn't surprise me that if you -- in the UK, this sample test was done, and I find it encouraging that no VOCs were found, right?
But as I have not seen the raw data of the test, me not personally, of course, but our specialists, we cannot just draw conclusions on such a high level statement. We need to go into the reads of that assessment. But, rest assured that we're throwing all our analytics capacity to this, because clearly we need to characterize the risks and hopefully also come to insights that the worst-case approach was indeed what the word says worst-case.
Then, the repair and replace split, when we built the provision on the basis of our estimates of repair and replace, we assumed approximately 60-40.
Abhijit Bhattacharya -- Executive Vice President, Chief Financial Officer
Two-thirds/one-third.
Frans van Houten -- Chief Executive Officer, Chairman of the Board of Management and the Executive Committee
Thank you, Abhijit. Two-thirds/one-thirds of replace versus repair, right? And part of the 806 approval that we need from the FDA relates to the repair procedure and not just to the repair material, right? The repair procedure needs to demonstrate that after repair, you have a safe machine, right? So you can imagine that the amount of work that you need to do on a repair action is also to validate that after the repair, the machine is good to use.
And if you give the machine back to the original user, the standard there is lower than if you give a repair machine to a different patient, right? So all of this goes to the complexity of the repair process. And if we are optimistic, and then all our proposals on the repair procedure will work out and then the proportion of repair can actually go up, right? And we have also heard from DMEs, the distributors, that they actually prefer repair over replace in many instances. And you can imagine, I mean, you can make your own interpretation why they want that, but I think it's quite obvious.
And then, the revenue impact, so we are dedicating our production capacity in Sleep to the repair and replace action, right? And that takes also then into account this assumed proportion of repair and replace of: replace, two-thirds; repair one-third. If we can go faster there, of course, that would be helpful.
But for now, we have taken into account that we would lose the revenue for at least 12 months after the start of the field action. And Abhijit has, I think, at some point already said that, or we have said that the Sleep business is EUR1.1 billion, of which approximately 60% is systems and 40% is masks and consumables.
So then you can do your math and take out the 60% of the systems as lost revenue. Then -- and of course, we compensate that lost revenue by strength in our other businesses. On your last question, we believe that in 2022, we can maintain our Capital Market Day guidance of 5% to 6% revenue growth and 60 basis points to 80 basis points of profit expansion.
Scott Bardo -- Berenberg -- Analyst
Very fair answer. Thanks, Frans.
Frans van Houten -- Chief Executive Officer, Chairman of the Board of Management and the Executive Committee
You're welcome.
Operator
The next question comes from Wim Gille from ABN ODDO. Please state your question.
Wim Gille -- ABN AMRO-ODDO BHF -- Analyst
Hi. Good morning. This is Wim Gille from ABN AMRO-ODDO. I got two questions. ....
And as a follow-up there, the ozone is clearly a part of the problem, the ozone cleaning. Is there a case to start legal action against the companies that have marketed ozone cleaning and try to recoup some of the costs that you are incurring for this thing?
bhijit Bhattacharya -- Executive Vice President, Chief Financial Officer
I can take all of them. So the provision, as Frans mentioned, we've taken two-thirds/one-third on a repair/replacement basis. So, and in that, we have not included any provision for legal cases, right, so we are not able to estimate that, so we cannot take any reasonable estimate at this stage.
In addition to this, there are multiple other costs, a big chunk of that pertains to the whole communication cost as well as the follow-up and managing the database that will cost us a lot of money. There is of course, within each of those categories, there is material cost, there is labor cost and all of that. So it's quite an extensive calculation, but does not include any cost taken for legal claims.
Frans van Houten -- Chief Executive Officer, Chairman of the Board of Management and the Executive Committee
And then on the question of the ozone manufacturers, really not this time in place to discuss our legal actions, maybe somewhere in the future, when we have studied it more and we know more of the details.
Wim Gille -- ABN AMRO-ODDO BHF -- Analyst
Thank you very much.
Operator
Unfortunately, we only have time left for one more question. The last question comes from Sezgi Ozener from HSBC. Please state your question.
Sezgi Ozener -- HSBC -- Analyst
Hi. Thanks for taking the time to taking my question. My question relates to, again, the first batches of repair and replacement kits that were shipped or already shipped out. As we're still waiting for the EUA to be approved, which material was used? And are you able to estimate a cost based on the replacement and repair cost in these devices? And how do these compare to the EUR500 million roughly of provisions that you've set aside?
And my second question is about a few of -- we saw a few positive one-offs this quarter, like a remeasurement of environmental liabilities and the favorable result in legal matters. I was just going to ask if you could elaborate a little bit on those. Thank you.
Frans van Houten -- Chief Executive Officer, Chairman of the Board of Management and the Executive Committee
Yeah, hi. Good morning. With regards to your first question, I'm afraid you may be reading too much into the first batches of repair kits that were shipped. I called it bonded warehouse because it's an extension of the Pittsburgh facilities in a foreign location. That is the only way to do it under the regulations. And we are obviously not kind of measuring cost on a per batch basis. I mean, that would go too far, but -- and certainly, have no intention to disclose the cost of every batch of repair kits. So, sorry I can't do much with your first question.
Frans van Houten -- Chief Executive Officer, Chairman of the Board of Management and the Executive Committee
Yeah. Thanks very much everybody. Look, I fully appreciate the concern around all the open issues. I want to assure you that we are on top of it, as we take all the appropriate actions to deal with the patient situation as fast as we can. In the meantime, the business goes on, right? There is a lot of resilience in our other businesses, and that's also why we can maintain our guidance, and we look with optimism to the future.
I thank you very much for staying with us and covering us. Have a great day.
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* This is the internet - what I write will probably NOT come across as it would in person; where one can read a person's face.
My posts are
sometimes tongue & cheek w/some snarky sarcasm mixed in.
I leave it up to you to figure it out!
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Philips is a publicly traded company - surely they'd have an earnings call - and I'm sure there would be nuggets of info there that the company has to disclose to their investors and the analysts who rate/rank the companies...especially after they financial hit they are going to take with the recall.
