Earnings Call: Q4 2020

Jan 25, 2021

Welcome to the Royal Philips 4th Quarter and Full Year 2020 Results Conference Call on Monday, January 25, 2021. During the call hosted by Mr. Franz Van Houten, CEO and Mr. Abhijit Operator Assistance. Please note that this call will be recorded and replay will be made available on the Investor Relations website of Royal Philips. I will now hand the conference over to Mr. Leandro Mazzoni, Head of Investor Relations. Please go ahead, sir. Good morning, ladies and gentlemen. Welcome to Phillips' 4th quarter and full year 2020 results conference call. I'm here with our CEO, Frans van Houten and our CFO, Abhijit Bhattacharya. On today's call, Frans will take you through our strategic and financial highlights for the period. Abhijit will then provide more detail on the financial performance and after that we will take your questions. Our press release and the related information slide deck were published at 7 am CET this morning. Both are available on our Investor Relations website. A full transcript of this conference call will also be made available today on the website. As mentioned in the press release, Adjusted EBITDA is defined as income from operations excluding amortization of acquired intangible assets, impairment of goodwill and other intangible assets, restructuring charges, acquisition related costs and other significant items. Comparable growth for sales and orders are adjusted for currency and portfolio changes. Finally, forward looking projections excludes the Domestic Appliances business. With that, I would like to hand over to Frans. Yes. Thanks, Leandro. Hi, everybody. Good morning to you. I hope that you and your families are keeping safe and well. It's clear that COVID-nineteen pandemic is far from over, and my thoughts go out to the caregivers and patients as we battle the virus altogether. In this environment, we at Philips are proud of our role to support care providers and patients. I'm pleased with how we have performed under these challenging circumstances as our teams remain focused on delivering against what we call the triple duty of care, meeting critical customer needs, safeguarding the health and safety of our employees and ensuring business continuity. The work we are doing to support health care providers, medical staff, patients and consumers has our top priority. In close collaboration with our suppliers and partners, we have ramped up the production volumes of products and solutions to help diagnose, treat, monitor and manage COVID-nineteen patients throughout 2020. We have also rapidly responded to the increased demand For telehealth solutions like tele ICU, teleradiology, telepathology, teledentistry services, which aid virtual working among care professionals as well as move care into the community. Very important, we have continue to deepen our engagement and relationships with customers through consultative partnerships, strategic partnerships, leading to a higher degree of recurring revenues, superior service and stronger customer loyalty. As a result of these efforts, I'm pleased that we have recorded comparable sales growth of 7% in Q4. Connected Care grew a very strong 24%, driven by the demand for patient monitors and respiratory care. Our Diagnosis and Treatment businesses delivered encouraging sequential improvement and returned to growth with a 1% comparable sales increase. Sales for Personal Health grew a solid 5%. Comparable equipment order intake grew 7% in Q4 with double digit growth in Connected Care and 3% growth in Diagnosis and Treatment. This was driven by strong demand for patient monitors, hospital ventilators, radiology informatics, computed tomography, x-ray and ultrasound systems. Customer response to our innovative products and solutions remains very positive, resulting in market share gains and strong year end order book in both Connected Care and Diagnosis and Treatment. Adjusted EBITDA margin was 19% in the 4th quarter, which is 110 basis points higher than in 2019, and free cash flow increased to over €1,000,000,000 As a result of our strong performance in the second half of the year, for the full year 2020, we delivered 3% comparable sales growth and an adjusted EBITDA margin of 13.2%. Quarter intake grew a further 9% in 2020. Moreover, we achieved a free cash flow of almost €1,900,000,000 in the year, ahead of our target of €1,500,000,000 Looking ahead, we continue to see uncertainty related to the impact of COVID-nineteen across the world. For 2021, As guided at CMD, we plan to deliver overall low single digit sales growth, driven by solid growth in Diagnosis Treatment and Personal Health, but partly offset by lower Connected Care sales as demand in these businesses will normalize from the spike in COVID-nineteen generated demand in 2020. We also aim to deliver an adjusted EBITA margin improvement of 60 to 80 basis points in 2021. Now I would like to provide some color on some of our initiatives to respond to customer needs and support health care professionals and consumers. In the quarter, we expanded our range of patient centric solutions for the home with the launch of the BiPAP A40 noninvasive ventilator. With this introduction, we extend our Respiratory Care solutions with a new ventilation therapy feature To treat COPD patients with expiratory flow limitation or EFL, Our unique EXPERA FLOW technology detects EFL more accurately and automatically optimizes ventilation to the individual needs of the patient. This enables more effective treatment of patients at home and ultimately avoids hospital readmissions. Highlighting our strength in Enterprise Imaging Informatics Solutions, we created a single Cloud assessable system for all 12 hospitals of the region of Southern Denmark for storing, retrieving and viewing radiology and nuclear medicines and data. The unified imaging informatics ecosystem, which Philips which comprises Philips' vendor neutral archive and universal viewer aims to improve collaboration and enhance patient care for a population of over 1,200,000 people. At the RSNA Annual Meeting in December, We also launched an industry's first vendor neutral multimodality and AI supported radiology operations command center to enable real time remote collaboration between radiologists, technologists and imaging operation teams across multiple sites. This was the aim to increase radiology productivity, minimize issues with image quality expand access to MR and CT based diagnosis. We also expanded our Image Guided Therapy portfolio through the launch of major extensions to our industry leading Azurion platform as well as new diagnostic and therapeutic devices. As we are excited that later today we are also excited that later today, the 5 year ILLUMINATE EU RCT and pivotal study results of the Philips Stellarex drug coated balloon will be presented. Stellarex, with its low dose and unique drug coating composition, is an important treatment choice for health care providers treating patients with peripheral arterial disease, and we have a lot of confidence in its potential. That's enhanced by the study that I just referred to. Very important, we continue to drive market share in our core businesses through deeper, more comprehensive customer partnerships to enhance patient care and improve care provider productivity. During the Q4, we signed 25 new long term strategic partnerships with hospitals in the U. S, Europe and Asia with the aim of helping them achieve their clinical and operational goals. For example, we signed a 5 year technology and innovation partnership with the Rennes University Hospital, one of the top hospitals in France with 4 sites and more than 1800 beds. Philips will deliver integrated solutions support precision diagnosis, image guided therapies and patient monitoring and management. The partnership also includes consultancy services, Informatics Solutions and visualization and analysis tools to drive quality and efficiency improvements and enhance diagnostic confidence. Moreover, I'm encouraged that our strategy to win with solutions continues to work very well. When we set out to increase focus on solutions in 2015, it represented about a quarter of the company. We ended 2020 around 37% and expect Solutions sales to continue to grow double digit and represents slightly less than half the company by 2025. In Personal Health, we continue to invest in innovation and new product introductions to capitalize on recovery opportunities. In the Q4, we broadened our leading male grooming portfolio with An exciting launch of the Philips Shaver Series 1000 in China, a proposition that is customized to specifically address the personal care needs of young Gen Z men. Also exciting, we took important steps in our strategy to become a leading solutions provider with the acquisitions of BioTelemetry Incorporated and Capsule Technologies in Q4. BioTelemetry has a market leading Cardiac Diagnostics and Monitoring solution comprised of wearable connected heart monitors, AI based data analytics and state of the art monitoring and services center. The combination of our own leading patient monitoring position in with BioTelemetry's leading cardiac diagnostics and monitoring outside of the hospital will result in a global leader in patient care management solutions with much potential for further expansion. Capsule is a leading provider of medical device integration and data technologies for hospitals and health care organizations. Its medical device information platform is comprised of device integration, vital signs monitoring and clinical surveillance services, and it connects almost all medical devices 2 EMRs in the hospitals through a vendor neutral system that captures streaming clinical data and transforms it into actionable information to enhance patient care management. These acquisitions will further broaden, and Rich and scale Philips Patient Care Management Solutions. Both acquisitions will be accretive to sales growth and adjusted EBITA margin in 2021. Upon completion of the transactions, which is Expected to happen in the Q1 of 2021, BioTelemetry and Capsule employees will become part of our Connected Care business segment. I'm also proud, very proud that we've delivered on all targets set out in our 2016, 2020 Healthy People Sustainable Planets program and that our products and solutions improved the lives of 1,750,000,000 people in 2020, including 207,000,000 people in underserved communities. As shared with you last quarter, We also reinforced our commitments as a purpose driven company with a comprehensive new set of initiatives and 2025 targets across the entire spectrum of environmental, social and corporate governance activities. Let me give you an update on the current status of the divestment of the Domestic Appliances business. The separation process is on track and expected to be completed in the Q3 of 2021. As planned, we have sent the information memorandum and started to engage with interested parties in the fall of 2020. Domestic Appliances is a strong business and has returned to robust growth with increasing margins in the second half of twenty twenty based on a strong portfolio with market leading positions. We continue to see good interest for the asset and remain open to different divestment options to deliver the best value for the company. To round off, I'm pleased with the way that We have handled the crisis. I'm very grateful to our employees and proud of the resourcefulness and hard work that they and we altogether have been able to put in to deliver to the plan in 2020. And while we have been working hard on managing the business, We continue to progress on our strategic and performance road map for the coming years. Our journey to HealthTech leadership continues as We innovate to drive growth, improve operational excellence and become a leading health tech solutions company. We have a clear strategy to help transform care along the health continuum, combining smart systems, devices, informatics, data and services. This strategy strongly resonates with customers and has been further validated during the COVID-nineteen crisis, And I'm convinced that the growth and the margin profile of our company is well underpinned. And with that, I'll turn the call to Abhijit. Thank you, Frans, and thank you all for joining us today. Let me start with providing some color on the 4th quarter comparable sales. Comparable sales for Diagnosis and Treatment businesses grew 1% in the quarter. Diagnostic Imaging sales grew high single digit driven by double digit growth in computed tomography and diagnostic X-ray. Enterprise Diagnostic Informatics sales also grew double digit in the 4th quarter as we continue to successfully roll out our world class enterprise imaging platform resulting from our R and D programs and the integration of the Carestream business. Ultrasound and Image Guided Therapy sales declined mid single digit in the quarter mainly due to pushouts of installations in the U. S. The volume of elective procedures was close to pre COVID-nineteen levels in October November but went down to around 80% of pre COVID levels in December, mainly driven by the U. S. We expect the elective procedure volumes to gradually recover in the course of the Q1. Services sales for our Diagnosis and Treatment businesses grew a solid mid single digit compared to the same period in 2019. Let me remind you that recurring revenues from solutions and services represent more than 45% of the total sales of Diagnosis and Treatment. For the full year 2020, sales for Diagnosis and Treatment businesses declined 2% on the back of 5% growth in 2019. The sales for Connected Care businesses grew a strong 24% in Q4 driven by patient monitoring and respiratory care solutions. We were also pleased to see double digit growth in our therapeutic care business and a solid sequential improvement in the sleep business driven by growth in patient interface. In the full year, comparable sales for Connected Care grew 22% with double digit growth in both Monitoring and Analytics and Sleep and Respiratory Care. Order intake for Connected Care grew strong double digits in the full year. For Personal Health, we saw solid demand in the quarter with a comparable sales increase of 5%. Domestic Appliances grew double digit, and Personal Care grew mid single digit. Oral Health Care comparable sales declined low single digit on the back of mid teens growth in Q4 2019, mainly in China. In the full year 2020, Personal Health sales declined 4% compared to 2019. Consumer sales through digital channels grew double digit in Q4 and represent 39% of total sales of Personal Health. Our shift to digital and adoption of new business models of direct to consumer resonate very well. Important to note that our current online market share is even higher than that in the traditional offline channels. Moving to orders. As mentioned by Frans, order intake grew by 7% in the 4th quarter. This builds on double digit growth seen in the 1st 3 quarters of the year, resulting in 9% growth in the year and a strong order book as depicted in Page 33 of the presentation. Diagnosis and treatment comparable order intake grew 3% in the 4th quarter, showing solid sequential improvement. Diagnostic Imaging orders grew mid single digit, Ultrasound orders grew high single digit, and Enterprise Digital Informatics orders grew double digit in the quarter. This was partly offset by a mid single digit decline in Image Guided Therapy. Order intake for Diagnosis and Treatment grew mid single digit in growth geographies, driven by double digit growth in China and was in line with Q4 2019 in mature geographies with overall slow momentum in North America. Comparable order intake in Connected Care grew by 17% in Q4. I'm particularly encouraged by another strong quarter and Analytics and in our Therapeutic Care businesses. Let me now turn to the profitability development in the 4th quarter. Adjusted EBITDA for the group increased 110 basis points to 19% of sales. In the full year, the adjusted EBITA margin was 13.2%, in line with our guidance. Looking at the business segments, Connected Care delivered an adjusted EBITDA margin of 27.2 percent of sales compared to 19.4% in the Q4 of 2019. This was mainly due to operating leverage and the productivity programs. In Diagnosis and Treatment, the adjusted EBITDA decreased to 14% of sales. This was mainly a result of unfavorable product mix driven by lower growth of cardiac ultrasound and image guided therapy portfolios. In Personal Health, adjusted EBITDA was 20%, in line with Q4 2019. Sales growth and cost savings were offset by planned higher investments in advertising. Adjusted EBITDA in the 4th quarter was impacted by lower license income in the segment Other of around 30,000,000 We continue to relentlessly focus on driving productivity and delivered close to €450,000,000 savings in 2020 and over GBP 1,900,000,000 savings for the overall 2017 to 2020 period, exceeding our target of GBP 1,800,000,000. At our Capital Markets Day, we provided the details around the productivity initiatives that will deliver additional cumulative net savings of €2,000,000,000 by 2025 through procurement programs, supply chain productivity and overhead cost reduction. Net income increased by 9% to €677,000,000 in the quarter and includes a charge of GBP 144,000,000 related to an impairment of goodwill mainly due to revisions to the financial forecast of our Personal Emergency Response System business due to lower demand. Financial income and expenses resulted in an expense of €20,000,000 compared to €57,000,000 in Q4 2019. This decrease is mainly due to the increase in value of 1 of our minority participations. The adjusted diluted EPS from continuing operations increased by 13% in the 4th quarter and it was in line with 2019 for the full year. Free cash flow was an inflow of €1,000,000,000 compared to 959 €1,000,000 in Q4 2019. In the full year 2020, our free cash flow generation was €1,852,000,000 as a result of strong working capital performance, notably in accounts receivable. This was driven by a significant reduction of overdue receivables and a shorter collection cycle in the Connected Care businesses due to the shift in product mix. Further, in the second half of the year, we saw a higher than normal proportion of sales in Q3 compared to Q4, which positively contributed to the cash flow generation for the year. Free cash flow also includes over $250,000,000 inflow from the domestic appliances business. Let me now provide you some guidance for certain areas of our business. In the segment Other, we expect an adjusted EBITDA loss of around €120,000,000 in 2021, an improvement of $25,000,000 versus 20.20 mainly due to higher license income. At the EBITDA level, we expect a net cost of around €240,000,000 for the full year compared to €262,000,000 in 2020. This includes €80,000,000 to €100,000,000 of costs related to the separation of domestic appliances in 2021. For Q1, we expect a net cost of around €65,000,000 at the adjusted EBITDA level, broadly in line with Q1 2020 and around €100,000,000 at the EBITDA level. Restructuring charges are expected to be 70 to 80 basis points and acquisition related costs to be around 100 basis points in 2021. We expect onetime EU MDR and consent decree related costs of around €40,000,000 in the year compared to over €80,000,000 in 2020. Financial income and expenses are expected to be a net cost of around €180,000,000 in 2021, excluding incidentals. On the topic of share buybacks, I would like to remind you that as of the end of 2020, we have completed over 50% of our €1,500,000,000 share buyback program for capital reduction purposes that was announced in January 20 19. The remaining 50% will be completed during the course of 2021. To conclude, After a challenging second quarter due to the impact of COVID-nineteen, our performance continued to improve through the second half of the year, And we delivered a Q4 with 7% sales growth, 7% order intake growth, 110 basis points adjusted margin EBITA margin improvement and a free cash flow of over €1,000,000,000 For the full year, we delivered 3% comparable sales growth, 13.2% adjusted EBITDA margin, a strong cash flow of €1,900,000,000 Moreover, driven by a 9% comparable order intake growth, we continued to gain market share in our Healthcare businesses in 20 and ended the year with a strong order book. We will submit a proposal for dividend of €0.85 per share against the net income of 2019 in cash or shares at the option of shareholders. This is within the targeted payout ratio of 40% to 50% of continuing net income. In 2021, we continue to see uncertainty related to COVID-nineteen. We plan to deliver low single digit comparable sales growth and an adjusted EBITA margin improvement of 60 to 80 basis points in this year, in line with the guidance given at the Capital Markets Day. We expect overall sales growth to be driven by solid growth in Diagnosis and Treatment and Personal Health within our guided range of 5% to 6%. This will be partly offset by a decline in Connected Care sales in the high single digit range. Given the comparison base of 2020, we expect overall performance to be stronger in the first half of twenty twenty one. With that, I'm happy to take your questions along with Frans. Thank you. Thank you, sir. And we can now take our first question from Veronika Dubajova from Goldman Sachs. Please go ahead. Good morning and thank you for taking my question and I hope you're both keeping well And healthy. Just wanted to kind of dive in a little bit into the dynamics that you're seeing across the healthcare businesses both for D and T and Connected Care. Just curious, Franz Abhijit, can you discuss a little bit where the backlog stands when you look at it at the end of the Q4? And I guess in the context of the current trading dynamics, it would seem to me that there should be fairly healthy backlog for both of these businesses That might imply a bit more growth than what's assumed in the guidance. So just if you can kind of walk us through your thinking on that And what are some of the risks, but also the opportunities that you see for both of these as you think about 2021? Yes. Hi, Veronika. Great to hear you. Let me start and Abhijit can complement if I forget something. Look, I feel quite encouraged about how hospitals Are looking at the future, we have seen no cancellation of orders, only some postponements. We are getting new orders, right? The 7% order intake in 4th quarter is also a sign of confidence in the future. Those orders were partially related to Connected Care. But for example, Precision Diagnosis recorded an 8% order growth in the quarter, right, which is all looking at the future. We know from C suites that they are interested to expand ambulatory surgery centers, OBLs, but also invest in telehealth and remote patient monitoring. I'm sure we'll come to talk about biotelemetry later on, and that bodes well. Also, you could say that to get 25 new strategic long term partnerships is a validation of the Philips strategy. Hospitals want help, need help in transforming health care as they need to do more with less. They need to support more patients with stable budgets, and they realize that they need to invest in technology to do so, Right. And I don't recall a quarter where we had 25 agreements in a single quarter. So it is a bit of a signal for confidence. So and then on the backlog, Veronika, indeed, the order book that we have is very high, partly because of the delays in installments installations in 2020, partly because of the new orders. And so if I would sum it all up, then we expect a strong start of the year, a strong Q1, strong second quarter. In the Q1, of course, the pandemic is still raging, but we will continue to deliver Acute Care equipment. We also expect that D and T, despite the pandemic, will still have a Good start of the year, especially driven by precision diagnosis. Elective procedures are a risk. I think this was also picked up by the JPMorgan Conference in January where I was asked To comment on it, I think we should not take this out of context. It's pretty normal that elective procedures are rescheduled when Hospitals are full of COVID patients. I would turn it around and actually say we should take some encouragement that At this time, it is only 20% to 30% down, while back in April, it was 70% down, All right. So hospitals are much better able to cope with the pandemic than before. And I would also expect a quick rebound of elective procedures the moment, let's say, regions go from red to orange kind of risk status. Therefore, the IGT business It's maybe a bit more later in the quarter showing strength, Diagnostics and Connected Care immediately now. We also expect a good start of the year for Personal Health. Of course, there are risks. Of course, there are opportunities. Maybe I'll look now to my right. Abhijit, anything to No, I think it was very comprehensive. Just for the order book, it's the order book itself is double digit higher than the end of 2019. So that's So what gives us the confidence that we will start 2021 well and that growth is across, right? So Connected Care is up Double digit Precision Diagnosis, close to double digit. And Image Guided Therapy is a bit lower. So it's still higher than the end of 2019, but it's a low single digit growth, and that's primarily because the of the U. S. Where orders have been slow in coming. But Frans, you will remember to the end of Q3 when we were thinking that pandemic is going to abate, The discussions around IGTs rapidly picked up and then again got pushed out with the 2nd wave. So we have Good confidence that when the pandemic does abate, IGT will come back strongly. Yes. And as Sam and Elias noted in the commentary, of course, You then temporarily have a mix change towards diagnosis versus treatment, and that, of course, has a little bit of impact on the profitability as such, But that's all temporary. That should be fairly comprehensive answer, Veronica. I was going to say, I think we've covered pretty much everything. I guess just a quick follow-up, if I can. Just looking at your guidance, because obviously you guys gave that out in early November and the world has changed A bit since then. Just curious kind of at this point in time and given where the Q4 came in, your degree of confidence in that guidance, has it increased Or stayed the same or worsened? If you can just briefly speak to that, and then I'll jump back into the queue. Thank you both. I think it stayed the same. And I think we talked about CMD also around risks. And then I think I flagged that if pandemic second wave would happen, that you would probably see a bit more Connected Care sales early on at the expense of elective procedures. Now that's exactly, of course, what we just discussed. But then We all expect a strong recovery later in the year of the interventional procedures. So All in all, we confirm our guidance. I don't think that materially the risk has changed. And so We are off to a good start of the year. I'm reminded here by Leandro to also mention that We would see the upside the uptake of sleep as the pandemic, let's say, gets more under control Because there's certainly a lot of unmet needs in the sleep market. And Abhijit mentioned in his speech part that we saw good traction on the patient interface, which, of course, is a theme that is always high on your attention list as well. Does this answer your question, madam? Yes. Let's go to the next question. Great. Thank you. Thank you so much. And our next question comes from Patrick Wood from Bank of America. Perfect. Thank you very much. I'll just pass my 2 upfront if I can please. I guess the first one would be specifically around Personal Health And the Q4 exit rate, which seemed a bit better than certainly we were expecting. And when you think about the 2021 guide, I mean, that guide essentially implies that organically revenues are still below 2019, even adjusting for FX. I guess why what is it that you're seeing that's causing you to think about worries or issues? You've got a good Full product pipeline, everything seems to be going well. And the Q4 exit rate seems to imply a better result than that. I'm just kind of curious some of the puts and takes you're thinking of when you think about the consumer 21? That's just the first question. And the second question, obviously, even though you guys have done some interesting M and A very recently, The divestiture of DA, after that, the balance sheet should still be in very good shape by the end of this year. Just curious how you guys are thinking about capital allocation. Are you thinking about a similar sort of balance between buybacks and M and A? Or is it more wasted one way or the other? I'm just curious. Thank you. All right. Patrick, maybe, Abhijit, why don't you start straight away with the Q4 exit rate and the PH discussion? Yes. We've guided for 5% to 6% growth in PH for next year, which I think is a pretty good growth rate actually. And The last two quarters, let's say, Q3 had very strong growth because of Q2 decline. So we are not, say, going above that at this stage would not be wise. And also, the longer the pandemic continues, there will be economic impacts on people and their spending ability. So I think if we end next year with a 5% to 6 Growth, that's a very healthy growth for PH. Although we expect to start the first half a bit stronger. Yes. And then perhaps also we can link there the China performance. So we were not very happy with the China performance in 2020, Yes. All right. And we are off to a good start in 2021. In 2021. Yes. So we had mentioned that in Q3, See, we have some work to do. I think most of it is now dealt with. So we will return to growth, and then that gives us the confidence for a Full year growth. Yes, we don't catch up to 2019 but maybe a bit longer. And if things are All very good. Then maybe there is a chance. But for now, 5% to 6% is a good guidance. And then, Patrick, on the M and A question. Well, we are indeed proud of a good cash generation. I think was also about time that we were generating more cash. And yes, we have a healthy balance sheet, but that's also our policy, right? I mean, we think that, that is the way to go. So we now with biotelemetry and capsule, we'll have a significant cash outflow in the Q1. And then as we are on schedule with DA, then domestic appliances then that gets replenished later in the year, expected to be in the Q3. So then we are Indeed, a healthy company with a healthy balance sheet, and I like it like that. The capital allocation strategy remains unchanged In the way we have discussed it also at Capital Markets Day, so it will be a combination of organic growth, M and A, continuing our dividend strategy as well as capital buybacks or share buybacks. So We have, I think, a healthy balance at the moment. We continue to be active on the M and A front, But the plan of the 5% to 6% growth is all on the basis of organic growth. Therefore, we will be selective on M and A only when it strengthens our core business and it has a good return path we'll reconsider it now. On the two examples that we discussed earlier, biotelemetry capsule, they'll both be accretive in to growth and EBITDA in 2021. Of course, they are Not part of the comparable reporting because Abhijit always takes everything out for a 12 month horizon. Very clear. Thanks, Franz. Thanks, Abhijit. Thanks, Patrick. Next question comes from Michael Jungling from Morgan Stanley. Please go ahead. Thank you and good morning everyone. I have two questions. I'll ask them in front if you don't mind. Firstly, on domestic appliances, are you able to provide some more insights into The cost of synergies coming from the sale of domestic appliances, you threw a lot of numbers at us at the call and I think I missed some, apologies for that. But just a reminder of the magnitude of these cost synergies and how you will treat them in terms of Are they recurring costs in the way that you will disclose them? Or are they going to be recorded as ongoing restructuring costs for a number of years until You're able to somehow get rid of them. And then secondly, on the marketing and sales budget, in light of COVID-nineteen restrictions sort of continuing at a high level, are you intending to sort of rework your budgets giving sort of a 2021 opportunity to over deliver on your margin expansion targets of 60 to 80 basis points less travel, etcetera, that's perhaps a different situation than when you first guided for 2021 back in November? So Michael, let me take the first part on the The synergy is coming from DA. Now we in the past for lighting and other businesses, we don't adjust it out. So that remains part of the P and L. We expect that to be, let's say, over a 2 year period, normally between 2 to 2.5 years, we reduced that cost because that's the time it takes also to wind down that activity. So again, it remains part of the adjusted EBITDA and will be, let's say, dealt with or removed over 2, 2.5 year period. Moving to the sales and marketing maybe. Yes. So let's say we have a marketing transformation ongoing. That marketing transformation is aimed at raising our advertising budget and proportional spend, which we think is a structural matter because of the higher proportion of online sales and our desire to have a deeper consumer engagement. So we think that investing more in advertising is a good thing. Now we are, at the same time, transforming our fixed Selling expenses, we will reduce that as we are more targeted targeting the online market where there is a higher customer concentration. And we can leverage more also online to be portals for what you can call the long tail of traditional retailers. So altogether, marketing and sales will become more efficient, also more effective. It should help us generate a higher growth rate and eventually then the operating leverage. So then eventually, you will, I think, see that margin expansion. But it is not just by cutting the budget. It is more by changing the budget mix. The travel expense is an interesting question. We are striving to keep travel lower than the 2019 levels. Of course, at this time, nobody is traveling. But anyway, structurally, If we succeed in that longer term, then it will disproportionately benefit our Health Systems businesses More than only the Personal Health business because the travel rate in Health Systems was certainly more intense than on the Personal Health side. At this time, we are not changing our guidance of the 60 to 80 basis points, right? I mean you can definitely identify opportunities to save such as in travel, but there is also areas where we may need to adapt. So and then maybe interesting comment related to the area, and that How we engage with customers, we do that increasingly through virtual means, not only for marketing and sales but also for service. We find that the remote service works very well and that we can also then do data analytics on all of that. So it's also something to stay. So also on that area, on the service area, we expect eventually productivity gains. Michael, I Yes, go ahead. Just going to ask Abhijit, just on the 60 to 80 basis points of margin improvement this year, is it more likely that we'll see upside than downside from lower Spend on sales and marketing, is that the right way of looking about it? Or would you just reinvest whatever is on top because of the restrictions that we're facing today, Less travel, etcetera? Just some clarity on that, please. Look, Michael, the guidance is 60 to 80, right? We are Today, on the 25th January, we have 11 months and more to go through a fairly turbulent time. So I think we are not going to now start speculating whether it's upper or lower. In terms of our overall plan, it is to drive growth from 2022 onwards. So whatever we need to invest to drive that growth, we have planned for that. If Things turn very positive. It doesn't mean that we will whatever extra margin we make, we are going to simply reinvest. So We have plans to make our growth for next year. And that's all well funded within the 60 to 80 basis points profit improvement. Our next question comes from Hassan Alwakim from Barclays. Please go ahead. Thank you for taking my questions. I have a couple, please. You talked about gaining share in the Healthcare business. Could you expand on the dynamics within D and T in which modalities and products you feel are the most significant drivers of this? And then secondly, on the sleep business, could you talk about the performance here and the degree to which you have seen an improvement in new patients? Thank you. Yes. Hi, Anson. Yes, in our calculations and data sources, we have gained market share in diagnosis, in treatment and in Connected Care. So That's good news. And in Connected Care, it was partly our ability to, that's a ramp up in acute care equipment. But also structurally, especially monitoring, You see hospitals standardize on one architecture, on one standard and increasingly, we see enterprise wide agreements coming through and where given our strength of the portfolio, we are often the winner. And now that we are further strengthening the out of hospital monitoring, which will seamlessly integrate with the in hospital monitoring architecture, I think you can expect or at least we target to further drive those kind of share gains. If I then pivot to diagnosis for a moment, I feel that thanks to the renewal of the portfolio that we have a very strong portfolio. We have of course, the MR market was down last year. But in that down market, we gained share basically in all geographies. And it comes on the back of innovations such as the sealed magnet, the helium free operation, but also innovations like Compressed SENSE and the inboard camera function to apply AI to the Image acquisition. The speed of our MR, thanks to Compressed SENSE, whereby you can reduce the scan time by 40% to 50%, is a very well innovation. On the CT side, I'm really pleased to see that From a reputation point of view and a competitive point of view, we are fully accepted Now so the Cleveland era is behind us. We see market share gains ranging from the United States to China, where we are performing very well with our CT portfolio. Ultrasound, We go from strength to strength. In cardiovascular, of course, where we are the market leader, it's going very well. We did See a bit of dynamics in 2020 from the mix shift between point of care ultrasound and general Ultrasound versus cardiovascular, that was obviously less prioritized by hospitals. But we expect also in 2021 that our strong portfolio will We will be having a lot of traction. Also there, applying AI is very well received, which aids the confidence of the sonographer and even allows for less trained sonographers to still do a very confident diagnosis. If I then switch to Image Enterprise Informatics, the Carestream acquisition is really doing fantastic. We saw strong order growth in the 4th quarter. The integration between our traditional eyesight packs and the Carestream PAX, we have a very good evolution path for our existing customers, whereas we are also winning net new names into the franchise. So that looks good. And then finalizing with Image Guided Therapy, We continue on our strategy to innovate the procedure. This resonates very well with the interventionists, doing more patients in a day, doing it more confidently, doing it more efficiently is exactly what they need. Azurion's upgrades are helping us to continue to gain market share. And then on the devices side, we are running very well with Differentiating devices. I made a passing statement with regards to the safety study that is now has now completed its 5th year. We are under NDA, and the results will only be published at 1 today. But I am authorized to tell you that they are very positive for us. And that also lends us to make the statement that we expect relative to competitors that Stellarex will continue to gain in traction. I also see intervention is becoming more comfortable regardless of what the FDA kind of publishes to use Tel RX. And the longer balloon makes it also an economically attractive or more attractive solution. So If that's basically a view of the horizon, Hassan, I think these are all drivers For continued market share gain. And maybe finishing off on China because there, it's not just innovation that plays a role, but also geopolitics, Styx, right? Last year, we talked a couple of times about what about the locals. But the fact that we had strong double digit order growth In China, in the D and T area, just also shows that we are navigating that kind of local presence thing quite well. Then on the sleep business, Not oh yes, you asked, are there new patients coming in? Well, the sleep centers are still mostly closed. And therefore, patient diagnostics in the sleep centers is difficult. However, we have launched remote diagnostic and home sleep tests. We have also launched the remote fitting of the mask using mobile phone photography, which is then interpreted through AI to I kind of recommend a perfectly fitting mask. Then it gives us confidence that we can compete well in sleep. We also feel that we are now at least on par with our competitor on the Carestream Orchestrator, the informatics ecosystem for sleep. And so we feel that we are well set up for sleep in 2021. Rajit, do you want to turn it over? Yes. Maybe we see the pickup coming. So Q2, Q3, we had double digit declines. So we have now Q4 was flat year on year. So procedure volumes or new patient volumes are around 70% to 80% of what they were pre COVID. But as Frans mentioned, the masks or patient interface, as we call it, has shown good growth, which brings us to flat for the quarter, which is pretty good. And in terms of share, we believe also in North America and international markets, we have made good progress in gaining share there. That's helpful. Thank you. Thanks, Russell. We can now take our next Question from David Adlington from JPMorgan. Good morning, guys. Thanks for the question. So I just wanted to get your thoughts on the pricing environment, across your hospital experience franchises and your personal health care franchises. Just wondering if you're seeing or expecting any change to the pricing environment? We expect it to be the same. And so in the investor deck, you have the standard page, the bridge that kind of talks about the normalized Abhijit? Yes. We normally talk to about a 1% price erosion in a year. And as Frans said, we don't expect anything different from that. Yes. And then of course, there are the occasional kind of bulk tenders, whether it's Russia or China, where people buy higher volumes. But then that is offset by add on sales afterwards and or, let's say, the efficiency of serving those customers. And therefore, it would not lead to a stronger or let's say, an impact on profitability. So overall, I feel confident that we should not expect anything extraordinary on the pricing front. Now on the Personal Health side, we basically have not experienced price erosion there because it's always offset by new product introductions that keep us whole on the margin. We are now adding both in male grooming and in oral care also products in the lower priced segments like the Shaver 1000 that I referred to in the introductory speech or the Philips 1 by Sonicare, which is entry level. But those are all add ons to the existing portfolio and lead us to bring new users into the franchise. And also there, it's not a pricing effect on the existing portfolio. It's just product line extension, it leads to new customers coming in. So it will also not have a negative effect on margins. Great. Thanks so much. Next question comes from Scott Ardo from Berenberg. Yes, good morning. Thanks very much for taking my questions. 2 upfront then, please. Obviously, pleasing to see some strong dynamics for your long term enterprise partnerships this quarter. Our own survey work suggests that appetite for these sorts of contracts has been growing throughout the COVID crisis. Wonder if you could share your views of whether you think that's the case or whether this is simply a one off or company specific phenomenon that we see in the Q4. So I'd be interested to hear your thoughts there, please, Frans. And second question for Abhijit, please. Free cash flow of close to €1,900,000,000 very good this year, particularly in light of your 2025 guidance of over €2,000,000,000 So I wonder, Abhijit, can you help us understand throughout 2021, is it likely that we see some correction or some lower free cash flow dynamics for the group as compared to what seems a relatively high watermark in 2020? Scott, I would agree with you that there is growing appetite or let's call it a growing realization by hospitals, especially the larger chains that are run by a C suite That they need to make a change to their procurement strategies. Historically, many suppliers all with point solutions or that are not integrating and that doesn't lead to the breakthroughs in results that these hospitals need. I mean, yes, they can put pricing pressure by that approach, but they cannot get the necessary support in their transformation. And I think they realized that in the during the crisis that Their largest suppliers were much better able to take them through the crisis. For example, I've been receiving compliments from hospital CEOs on how we have stood up during the crisis. We're creative with solutions. For example, we realized remote COVID patient monitors monitoring so that patients could be discharged faster while the hospital kept them into site. So that agility and that resourcefulness doesn't come through if you have a classical procurement strategy because you don't even get to the creativity necessarily of the solution. So I would agree with you. There is, across the board, a general growing appetite, and I think that's a good thing. Within that, I think Philips is better positioned than our competitors because we have been going at this for 5, 6, 7 years, And we have a clear strategy of integrating technology across the different functional silos of our hospital. We are strong in Health Care Informatics. We are strong in workflow optimization. We are strong in analytics of care processes. We have now fleet management solutions. So we can bring a whole arsenal of weapons to the game, whereas some of our competitors are still much more traditional in their equipment focus as opposed to solutions focus. So let the results be the judge of this, but I feel good about the ongoing strategy. In fact, today, we are going to send out the 1st win of the year already with regards to the next LSP that we have just signed, so it's going to be good. On your cash flow question, Abhijit, Okay. So Scott, on the cash flow, so we have GBP 1,850,000,000 Let's say, about More than GBP 250,000,000 of that is for DA. So if you take that out because that's not going to be there going forward, we will be around the GBP 1,600,000,000 Then I mentioned a few things, right? We have reduced our overdue this year with Many, many actions by about GBP 150,000,000. So that, of course, will not repeat every year. And then we had a Phasing benefit as well as a benefit because we had much larger Connected Care sales where the receivables came in earlier or it has a shorter payment cycle than the diagnosis and treatment part. That's another couple of €100,000,000 So As I had mentioned right at the start of 2020, between 2020 2021, there will be flux. We were I think we did well that we did a big collection this year. So excluding DEA, around 1.6 And we are still aiming to be, let's say, around the GBP 3,000,000,000 cash flow over the 2 years of 2020 2021. So this year, a bit higher, next year, a bit lower. But overall, still on an average, 1.5, excluding DA, which is a very, very Strong performance. Thanks very much guys. Thanks Scott. Next question comes from Lisa Klein from Bernstein. Please go ahead. Hi. Two questions. Just first, Abhijit, thanks for the detailed guidance on the other category. Just given your comments that the cost of synergies for sales DA remain in your adjusted EBITDA figures. Can we assume that the specific items you mentioned that will add to the cost And the other category for DA, for the separation are fully one off in 2021 and that the cost thus in the future years will be lower, Obviously, borrowing in a future one off costs. And then also just a small follow-up on that, the weaker performance in the other category in Q4, is this just a Timing issue where Q1 will be higher. And then second topic, just on China, can you remind us of the impact of the current tariffs, Excluding DA, and if the tariffs were reversed, would all of this come back? Or are some of the mitigation strategies that you put in place more permanent. I suppose just giving us a net impact would be helpful. Okay. The first one was the cost in other for the DA separation. That is a onetime. So once the separation is done, that cost will stop. The second was in HealthTech Other The license income that moved from Q4, yes, that is a timing issue. So there were a couple of deals that we were going to We were hoping to settle in Q4, which didn't happen. So that should come This year? But not necessarily in Q1, right? No, no, no. We're clear. It's not a miss of a week. Yes. So it will come later in the year. Exactly. And your third question, could you repeat that? China tariffs. Oh yes, China tariff impact. So let's say we have The gross impact of the tariffs were substantial. We have mitigated that down to a level of around 25,000,000 If tariffs are rolled back, then that should be a net positive for us. However, I don't see that happening anytime soon, right? So it's an area to continue to watch. And we have now made the changes to the supply chain to mitigate some of this. There's no expectation that we would roll back those measures anytime soon. So it remains Okay. Great. Thank you. Next question comes from Julien Dormois from Exane. Please go ahead. Yes. Hi, Frans. Hi, Abhijit. Thanks for taking my question. I also have 2. So the first one is a broad question. You've mentioned that Hospital will need to do more with stable budget. Based on the discussion with the C suites, as you get, any anecdotal evidence or early signal that the hospitals are becoming more optimistic about getting higher budgets in the future and that is obviously in the context of the stimulus money that could be Spread in the coming years in Europe and in the U. S? And the second question is on the Oral Healthcare business. In PharmaRite, you've seen broadly flat sales in absolute terms in that business in 2015, and we've seen pretty significant yearly variations in that line of business. So how do you see the division going forward? Is it still part of your of the core business of Philips? And do you see that as a potential drag on your ambition to accelerate sales growth to 5%, 6%. Yes. Julien, The sentiment in hospitals, I would say, yes, has become a bit more optimistic because In many countries in the world, there is a backstop for the losses that they have incurred as they focused on COVID. Of course, the scheme in which that is done differs by country. Sometimes it's the insurance companies. Sometimes it is the governments themselves. But I think largely, you will see that hospitals are going to be compensated for the cost that they have incurred. That would then also suggest that In many countries, the hospitals are not impaired for future investments. And I think that statement would then correlate with the higher order intake already in Q4 for, for example, diagnosis. I do think that there will be some shift in priority. What I hear is that the word productivity is very high on the priority list of hospitals. So Unlocking that and having a business, every investment needs to have a business case that generates that return. I think you will see less capital expenditure just for, Oh, I need to have this state of the art piece of technology, and it doesn't matter what it costs. I that is going to be under pressure, but that is not our business. Our business is very much where we can provide the healthy economic evidence that results can be obtained. The Hospitals are also talking about doing more on care management, care orchestration, Both in and outside of the hospital because that's what they need for productivity gains and for remote patient engagement. Telehealth will become structurally much more on the forefront also because reimbursement is now in place in more countries on a structural basis. So I think you will be able to see that evolve. So that is, I think, what explains the somewhat better or somewhat higher optimism. On Oral Care, look, we have had a tremendous ride with Oral Healthcare. We are not completely satisfied with our performance in the last quarter where we saw a negative growth in China. But that was on the back of strong double digit growth in Q4 2019. And With the new product launches, with the expansion into other price segments, We expect to see a strong performance in 2021. We see oral health care as core of our portfolio. We have absolutely no intentions whatsoever to even think about not having that in our portfolio. And we see also an increasing interest from insurance companies, from integrated delivery networks in what consumers do at home, Because behavioral health, I mean, personal health and the behavior, it all correlates. And in fact, this Philips strategy to be both in Professional Health Care and in Consumer or Personal Health is something that is recognized as very important. It's a skill base that I value that I would admit we can still build further integration as we go forward, but it's certainly something that we are working very hard on. Very helpful. Thank you very much, Hans. Your next Question comes from Falco Friedrich from Deutsche Bank. Please go ahead. Thank you and good morning everyone. I have questions please. Firstly, have you been able to secure all the service contracts for all the new ventilator sales you realized last And then secondly, on biotelemetry and this overall trend of moving monitoring outside of the hospital. Now that appears to be a pretty interesting space for the bigger technology companies of this world as well, the Apples and the like. What is your view on the developments here? And could those big technology companies become a threat over the next 3 years? Or is there even a possibility for some early partnerships? Any thoughts here would be appreciated. Yes. Falko, we are working very hard to secure service contracts for this vast installed base that is now in place. We also are working with governments who have stockpile programs to remind them that just having it in the stockpile is not a recipe for success. You need to maintain it. I think this was a lesson also observed in the United States. I would say Still some potential there to do more, but definitely possible. Now in any case, It usually takes a year between a delivery and a service contract to have an impact on Philips because the 1st year is like warranty and everything else, but we are working on it. And then On the biotelemetry side, so first of all, let's indeed confirm that it's going to be a very important space to manage vast cohorts of patients that have chronic disease, remote patient monitoring and remote patient care is the way to go. And I emphasize that this is very often about chronic patients and not only, let's say, behavioral health or health coaching in the preventive space. And I would position the tech companies foremost in that lifestyle segment of preventative care. Very important, by the way, and I would encourage them to be in it. But it gives assurance and feedback to people who are generally healthy, whereas the health care systems require more information, deeper analytics and also more services around this. And I see BioTelemetry not just as a company with exciting devices. I see BioTelemetry as a services platform company that engages with referring doctors that rolls out these diagnostic services to individual patients that then digests and analyzes the data and comes with a confident diagnosis. So it's a much wider game than just a smart device. I could eventually also see that data from other devices will be complementary to what we do. Our data architecture is designed to be open and to take the data from anybody's device into the equation. So in that extent, we can also expect collaboration. Already today, the data from HealthWatch, if you put the privacy settings To allow that, then the data can be uploaded into the Philips HealthSuite architecture and made available to your doctor, Right. And I think increasingly in the future, that will be rather the norm than the exception. And therefore, having a platform play where we are the data integrator and that where we are able to provide services and not just a clever gadget is the way where the business is going. So you should also expect that use BioTelemetry as a platform play where we will expand it beyond the long term halter. I'm very pleased that BioTelemetry is also in the outpatient monitoring business. And with their recent ePatch launch, we also expect to gain share against some of the competitors in the space. And I can also anticipate that over time, we will expand biotelemetry to other disease profiles beyond cardiovascular. So lots to do, lots of excitement. We expect strong double digit growth, And we also expect further profit enhancement, and we are very happy that we were able to buy the market leader. Okay. Thank you. Due to time, the last question will come From Scott Bardo from Berenberg. Thanks very much for the quick follow-up. Yes. I just wonder if you could help us, Abhijit, in understanding the potential royalty flow that should be expected from the exit from domestic appliances. I suspect that's mismodeled. And I wonder if you could help confirm then that given your guidance excludes domestic appliances, does any way your margin improvement of 60 to 80 basis points this year include any benefit from additional royalties from the exit of DA? Yes. I think, Scott, the way you should look at it is the Royalty income initially will be used to offset the standard cost that we will have. And then, Let's say, in the future years would be a potential benefit. So the 60 to 80 basis points profit improvement includes potential license revenue from DA. Okay. Very clear. Thanks, guys. Thanks, Scott. All right. I'd like to thank everybody for your contribution and questions. And I'd like to summarize that we look with confidence at 2021 and that the year for us is already in full swing, being 4 weeks in, and we look to already delivering a very good Q1. Thanks very much, everybody. Bye bye. This concludes the Royal Philips 4th quarter and full year 20 20 Results Conference Call on Monday, January 25, 2021.