Earnings Call: Q2 2018

Jul 23, 2018

Welcome to the Royal Philips Second Quarter 2018 Results Conference Call on Monday, July 23, 2018. During the introduction hosted by Mr. Franz Van Houten, CEO and Mr. Abhijit Bhattacharya, CFO, all participants will be in a listen only mode. After the introduction, there will be an Please note that this call will be recorded and is available by webcast on the website of Royal Philips. I will now hand the conference over to Mr. Pim Prisman, Head of Investor Relations. Thank you, and good morning, ladies and gentlemen. Welcome to Philips' Q2 2018 results conference call. I'm here with our CEO, Frans van Houten and our CFO, Abhijit Patasharia. On today's call, Frans will take you through our strategic and financial highlights for the period and Abhijit will then provide you more detail on the financial performance and market dynamics. After that, we will take your questions. Our press release and the related information slide deck were published at 7 a. M. CET this morning. Both documents are now available for download from our Investor Relations website. A full transcript of this conference call will be made available by end of today on our website. I would like to remind you that Philips' shareholding in SignifAI, formerly Philips Lighting, is currently 18% of SignifAI's issued share capital. The stake is presented as an investment included in assets held for sale in the financial statements of Royal Philips as from the end of November 2017. We provided you with guidance for the expected FX translation combined with the consolidation and deconsolidation impact on sales during the respective quarter and for full year 2018. We will continue to do so this twice a quarter, once immediately after this analyst call and once during the last week of the quarter. Both these updates will be available on our IR website. Finally, 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 current currency and portfolio changes. With that, I would like to hand over to Frans. Yes. Thanks, Pim, and thank you all for joining us today. In the Q2, we delivered 4% comparable sales growth, a strong 9% order intake growth and a solid 100 basis points improvement in operational performance driven by growth and productivity programs. We continued the good traction of the new products and solutions that we introduced last year, and this contributed to 8% comparable sales growth for the Diagnosis and Treatment businesses. The Connected Care and Health Informatics businesses grew 2% compared to last year with an encouraging mid single digit order intake growth. As mentioned during the last two quarters, we continue to expect further improvement to be in the second half of the year. The Personal Health businesses grew 2% with high single digit growth in Sleep and Respiratory Care and low single digit growth in personal care. The growth of the personal health businesses was impacted by a high single digit decline in China, mainly due to an inventory alignment at our online distributors and lower demand in the air purification market. After a slow start, the Personal Health businesses gained momentum in the quarter, and we expect this to continue in the second half of the year. The increase in margin was mainly driven by growth, our productivity program and operational improvements, contributing to an adjusted EBITDA margin increase of 100 basis points. Our Diagnosis and Treatment businesses and our Personal Health businesses delivered strong margin improvements with adjusted EBITDA improving by 180 and 80 basis points, respectively, versus last year. The Connected Care and Health Informatics businesses improved adjusted EBITDA margin with 40 basis points as the results for the quarter were impacted negatively by 2 one off items. In the quarter, we continued to make good progress with our productivity programs. Additionally, we took action to further reduce our interest expense. Let me now expand a bit on our strategic journey to leadership in HealthTech. As outlined at last Capital Markets Day last year's Capital Markets Day, our value creation story is built around 3 key levers. I will now proceed to give you examples on how we have made further progress on them in the Q2. On the first lever, by creating value in our core businesses by gaining market share through deeper and more comprehensive customer partnerships, through innovative solutions and by pursuing growth through increasing geographical coverage. On this first lever, innovation partnerships and increased geographical coverage were important drivers of the strong sales growth of 8% and the continued momentum in order intake growth of 12 percent in the Diagnosis and Treatment businesses. Across our markets, we continue to see strong customer interest in our innovations. For example, the installed base of our XS CT, which we introduced last year, continues to grow rapidly. And at a lower total cost of ownership, the Philips XS CT provides consistent image quality across a diverse patient population and a wide range of exam types, enabling health care organizations to expand care capabilities to treat more patients. We are also seeing continued growth for our Icon spectral CT and Vereos Digital PET CT systems, augmented with clinical decision support applications for enhanced patient care and operational performance management services to drive productivity. Following the rollout of our new Ingenia Elition 3 Tesla MR with Compressed SENSE and 3 d APT in Europe earlier this year, we now also obtained the 510 clearance from the U. S. FDA for these innovations. The Ingenia Elition enables clinicians to perform exams up to 50% faster, increase diagnostic confidence and improve the patient experience. We completed the first installation in the United States at Hennepin Healthcare, a comprehensive health care system in Minneapolis. I'm also pleased with the continued success of our EPIC and Affinity ultrasound systems and advanced informatics across the cardiology, OBGYN and General Imaging clinical segments. The recently introduced transducer that is optimized for OBGYN and General Imaging provides exceptional image quality for these specific clinical applications as well as the previously introduced 3 d cardiac ultrasound transducer contributed to strong growth. Recently, we enhanced the LUMIFY app based ultrasound solution with face to face conversation, along with simultaneous viewing of live ultrasound images and guided probe positioning is driving strong growth for us in the point of care ultrasound market. Our customers recognize the value of these tele ultrasound capabilities that enable remote collaboration and virtual training. In Connected Care and Health Informatics, we partnered with the Shoah University to launch the 1st teleintensivist care eICU program in Japan. This platform, which has already been successfully implemented in the United States, the United Kingdom, Australia and the Middle East, delivers near real time remote patient monitoring and early intervention possibility through predictive analytics and advanced audiovisual technology. Funded by the Japanese government, the deployment of the EICU program in Japan addresses the shortage of critical care expert physicians in Japan and will drive efficiencies in the delivery of critical care. In Europe, the Dutch Rheinstadter Hospital chose Philips as its health technology partner to design and implement a regional care network and expand the delivery of care beyond the walls of the hospital. Philips' latest monitoring and connected health technologies will be at the heart of this new concept. From a virtual care coordination center and advanced central command hub, care providers will remotely monitor the health of patients both inside and outside of the hospital. This new collaboration builds on the successful existing long term strategic partnership between Philips and Rheinstad Hospital in the field of diagnostic imaging solutions. In the quarter, we signed 7 new long term strategic partnership agreements across United States, Europe and Africa. In the United States, Philips and Jackson Health System, one of the largest public health systems in North America, entered into an agreement involving an industry first enterprise patient monitoring as a service business model. This will enable Jackson Health to standardize patient monitoring at all acuity levels for each care setting across its entire network on a per patient fee basis. In Germany, Philips announced 2 multiyear agreements with a combined value of approximately €140,000,000 1 with the clinics of Cologne and the other with Munich Municipal Hospital. Philips will deliver medical imaging solutions to support precision diagnosis and therapy, innovation and productivity improvements to these institutions. We also signed a 7 year agreement to equip Ethiopia's 1st specialized cardiac care center for state of the art diagnosis and treatment of cardiac disease. Our investments over the past years focused on building solutions, selling capabilities, are now paying off, and we have a healthy pipeline of pending partnerships. Let me now move to our Personal Health business. Following the successful launch of the DreamWear full face mask in the United States at the end of the Q1, The rollout of this new mask in other markets resulted in double digit growth for Philips in this largest mask segment. Moreover, to further drive growth in the emerging sleep therapy market in China, Philips launched the Connected Dream family solution there. In Personal Care, we celebrated the sale of 1 of our 1,000,000,000 male grooming product, and we continued the 1 Blade success story as we rolled out the Philips 1 Blade face and body in further markets. In the second half of twenty eighteen, growth will be supported through the rollout of 1 Blade in additional markets within the Americas, Asia Pacific region and Eastern Europe. Furthermore, we will bring a new innovation into electric shaving with the launch of our Series 9000 Prestige shaver, promising unbeatable closeness and skin comfort even on a 7 day beard. On the second lever of creating value in adjacencies through organic investments, partnerships and selective M and A, we further expanded our global leadership in digital pathology solutions for primary diagnostics use. Our solution is commercially available in the United States, Europe and many countries in Asia, including Japan and most recently in Korea. In the United States, we teamed up with Life Sciences leader, LabCorp Corporation, to fully digitize pathology workflows for LabCorp clinical laboratory and drug development services. We also partnered with the Dana Farber Cancer Institute to deploy best practices in cancer care. The incorporation of the institute's clinical pathways in our IntelliSpace Oncology platform will help oncologists reach the most appropriate cancer treatments for patients based on a unified view of the patient across diagnostic modalities and the embedded knowledge of both partners. IntelliSpace Oncology is our new cloud based platform for the integration of information across different clinical domains such as radiology, pathology, EHR systems and genomics. All key patient data is seamlessly incorporated into one work environment, one location to provide a clear intuitive view of patient status in its disease and state context, which facilitates data driven and fast decision making. In addition to these and other organic growth initiatives, we further strengthened selected businesses through targeted acquisitions. For example, we acquired Remote Diagnostic Technologies, or RDT, a U. K.-based leading innovator of advanced solutions for the prehospital market, providing monitoring, cardiac therapy and data management. RDT's portfolio of comprehensive connected emergency care solutions will complement our emergency care response business and strengthen our leadership position in the €1,400,000,000 resuscitation and emergency care market. We continue to further strengthen our Image Guided Therapy business To drive the expansion into the adjacent €2,000,000,000 market for image guided treatment of cardiac arrhythmia, we acquired EPD Solutions, an innovator in image guided procedures for cardiac arrhythmias or heart rhythm disorders. EPD's cardiac imaging and navigation system will help electrophysiologists navigate the heart by generating a detailed three d image of the cardiac anatomy while pinpointing the location and orientation of catheters during the diagnostic and therapeutic procedure to ablate the cardiac arrhythmia. This breakthrough technology has the potential to greatly simplify navigation and treatment, immediately assess the treatment results and ultimately enhance procedure efficacy and patient outcomes. Thirdly, we create value by improving margins through customer and operational excellence. Our self help initiatives to drive €1,200,000,000 in savings for the period 2017 to 2019 remain on track as we delivered €105,000,000 savings during the Q2. The main three programs, I. E, procurement savings, manufacturing, productivity and overhead cost reductions, all delivered on their milestones. We continue to make progress in line with the terms of the consent decree, which is primarily focused on the defibrillator manufacturing in the United States and which included inspections by a number of independent auditors and the continued shipments of our FRx and FR3 AEDs to markets outside of the U. S. Overall, we continue to expect our markets to grow at a 3% to 5% clip, which is on a comparable basis in 2018. I would like to reiterate our midterm targets of 4% to 6% comparable sales growth and an average annual 100 basis points improvement in the adjusted EBITDA margin. And with that, I will turn the call over to Abhijit, who will provide more detail on financial performance and market dynamics. Thank you, Frans. Good morning to all of you on the call and the webcast. Let me start by providing some color on the 2nd quarter comparable growth of 4%. The Diagnosis and Treatment businesses delivered an 8% comparable sales growth with solid growth in all the businesses: Diagnostic Imaging, Ultrasound and Image Guided Therapy. We are very pleased to see the continued strong traction of these businesses, specifically in Image Guided Therapy with strong double digit sales growth driven by both our Azulium platform and our devices portfolio. Comparable sales growth in Connected Care and Health Informatics businesses was 2%. High single digit growth in Health Care Informatics and low single digit growth in Monitoring and Analytics were partly offset by a low single digit decline in Therapeutic Care, which includes the impact of the consent decree on our defibrillator manufacturing in the U. S. Given the phasing of our order book, we continue to expect improved sales growth during the second half of the year. The Personal Health businesses delivered 2% comparable sales growth driven by high single digit growth in Sleep and Respiratory Care. Frans mentioned earlier already the main reasons for the lower growth, visible mainly in the Health and Wellness and Domestic Appliances businesses. As we have said earlier, we expect the second half of the year to be stronger than the first half. In China, the inventory alignment at our online distributors took place in the Q2. Additionally, we have a number of new product launches and rollouts to new markets, which will be well supported by advertising campaigns. For example, within Health and Wellness, we will be rolling out the midrange Philips Sonicare ProtectiveClean powered toothbrush to markets outside North America. Tran's mentioned already further rollouts of the DreamWear full face mask, 1 Blade and the introduction of our new high end shaver range. Sales in mature geographies increased by 3% on a comparable basis, reflecting 8% growth in other major geographies and 2% growth in North America and Western Europe. Sales increased by 6% on a comparable basis in our growth geographies, reflecting double digit growth in Middle East and Turkey, high single digit growth in Latin America and low single digit growth in China. As Frans mentioned, comparable order intake grew overall by 9%. I would like to remind you that the comparable order intake growth in the prior year was 8% in Q2. The Diagnosis and Treatment businesses showed 12% growth, where the North America and China markets were again particularly strong. The Connected Care and Health Informatics businesses grew mid single digit. Excluding the defibrillator business where we expected a decline, comparable order intake grew high single digit. In Growth Geographies, comparable order intake grew mid single digit compared to Q2 2017, while comparable order intake in North America and Western Europe posted both 10% comparable growth in the 2nd quarter. Now let me turn to the EBITDA development for the group in the 2nd quarter. The adjusted EBITDA margin of 11 point 2% in the quarter was 100 basis points higher than the year before, including a negative 20 basis points impact from currency. This margin increase was driven by strong margin improvement of 180 basis points in Diagnosis and Treatment mainly through growth and operational improvements. For the first half of the year, the improvement was 160 basis points. In Connected Care and Health Informatics, margins improved by 40 basis points, mainly due to operational improvements partly offset by 2 one off items. For the first half of this year, the improvement was 120 basis points. Personal Health improved by 80 basis points, again due to operational improvements. And for the first half, this improvement was 50 basis points. Our productivity programs delivered €105,000,000 in net savings. More specifically, net overhead cost reduction amounted to €17,000,000 in nonmanufacturing costs. The productivity program contributed €21,000,000 to the gross margin. And productivity sorry, and procurement savings, in part driven by our Design for Excellence program, delivered €67,000,000 of bill of materials savings year on year. In the segment Other, the adjusted EBITDA amounted to a loss of €45,000,000 which was in line with the guidance. In Q2, income tax expenses increased by €19,000,000 mainly due to higher income and lower release of tax provisions compared to the Q2 of 2017. Our effective tax rate in the Q2 was 25%. We expect to be at the lower end of our guidance of 26% to 28% for the full year of 2018. As part of the actions to reduce interest expenses and extend maturities, we completed the early redemption of a number of bonds. We also successfully placed an aggregate principal amount of €1,000,000,000 of notes due in 20242028. Combined, these actions will reduce interest expenses by over €20,000,000 from 2019. In line with our policy of de risking our pension liabilities, today we will make of $150,000,000 to the Phillips U. S. Pension fund to further improve the funding ratio. This will decrease interest cost and the PBGC premiums going forward. Discontinued operations was a loss of $184,000,000 as it included a net loss of 177,000,000 dollars mainly related to the value adjustment of 18% interest in SignifAI, formerly Phillips Lighting. Operating working capital increased by 30 basis points year over year, driven by higher inventories in Personal Health due to the lower sales. Net cash flow from operating activities improved by €57,000,000 mainly due to higher earnings from continuing operations and lower working capital related outflows. Let me now provide you with an update on the U. S. Health care market and our outlook for Western European and the China health care markets. The 2nd quarter saw North American Health Care customers continue to focus on priorities around the quadruple aim, that is lower costs while delivering better outcomes with improved patient and employee experience. We see positive momentum around value based care based on the priorities of new leadership at the Department of Health and Human Services. This underscores the importance of our strategic priority to bring value based solutions to the market. Overall, we expect the U. S. Health care market to be in the lowtomidsingledigit while we closely monitor further developments. In Western Europe, we expect modest low single digit Healthcare market growth. In China, we expect high single digit market growth for 2018, mainly driven by government policies to further increase access to care via existing Tier II and Tier I hospitals. Let me now provide you some additional 2018 guidance for certain areas of our business. In the segment Others, we expect net cost of approximately €50,000,000 in the 3rd quarter and expect approximately €125,000,000 for the full year 2018 both at EBITDA level. This is an improvement of €40,000,000 over the previous guidance. Included in these numbers are €10,000,000 restructuring costs and other incidental items in the 3rd quarter and approximately €10,000,000 for the full year. On an adjusted EBITDA level, we continue to expect full year cost at €115,000,000 which is an improvement of €42,000,000 versus last year. This is in line with our previous guidance. Overall, restructuring for 2018 is expected to be approximately 90 basis points. Acquisition related costs are expected to be approximately 50 basis points. As a consequence of the consent decree, mainly related to our defibrillator business, we continue to anticipate an EBITDA impact of approximately €60,000,000 in 2018, of which approximately €15,000,000 was in the Q3 of 2018. With an order intake growth of 10%, a comparable sales growth of 4.5% and an adjusted EBITDA margin improvement of 120 basis points for the first half of the year, we remain confident that we will deliver on our midterm targets of 4% to 6% comparable sales growth and average annual 100 basis points improvement in adjusted EBITDA margin and the free cash flow between €1,000,000,000 to €1,500,000,000 With that, we'll now open the lines for your questions. Thank you. Thank you, sir. Sir. The first question comes from Ian Douglas Pennant from UBS. Please state your question. Yes, thanks very much. It's Ian Douglas Fennant, UBS. So on your guidance, please, at the beginning of the year, and I think you just reiterated it, today you said margin improvement would be H2 weighted. Given you've reiterated that this morning, are you deliberately saying that there is upside risk to the 100 basis points of margin improvement this year or is that just accidental? No, we are not flagging that. We are steadily improving and there is no change in the story. We still expect a stronger second half of the year. Anything to add, Amit? No, no. I think there's no second meaning to that, Iain. Okay. Given it's a very quick answer, then maybe I could just ask another one. On the personal health slowdown, it seems like, especially in Health and Wellness, but also all the other subdivisions within Personal Health, the growth rate has slowed to low single digit from comfortably double digit pre-twenty 16. This seems like more than a product issue. This seems like a structural change in the growth rates that you're able to achieve. What gives you confidence that a new product is going to fix this? Well, actually, let's dissect that a little bit. So Health and Wellness, we continue to see as a high growth opportunity. Sleep and Respiratory Care, we see as a high growth opportunity. And then Personal Care and Domestic Appliances are more mature areas where you see somewhat lower growth. We clearly reiterate today that we continue to see Personal Health in total as a mid to high single digit growth opportunity. And we have flagged that the second half of the year will be stronger than the first half. And we believe we can still then in the aggregate get to be within the range indicated, right? We also said that already during the Q2, we saw growth rates picking up again, and we have planned several product campaigns for the 3rd quarter with tied in A and P advertising and promotion investments that we believe will support this outlook. So overall, continued belief in this business. I just wanted to be very clear about that. Okay. And the range indicated is organic growth of 4% to 6% for that division. Is that what you're saying or high single digit? The range indicated was mid- to high single digits. So it's a wider guidance. And yes, historically, we were on the upper hand upper side of that guidance. But we believe that with a strong second half year for the full year, we will still be in that guidance. Forget. I'll let the next question take over. Thank you. All right. Thanks, Ian. All right, next person. The next question comes from Veronika Dubajova from Goldman Sachs. Please go ahead. Good morning, gentlemen, and thank you for taking my questions. I also want to go back to the personal health dynamics. And I think Abhijit and Frans, both of you have flagged that you saw the momentum accelerate as you moved through the quarter. Can you help us understand what the exit rate was for the business? And as you look to the second half of the year, what is the single biggest risk to your ability to come within this mid to high single digit range that you're targeting? Well, that's a very detailed question, Veronika. Let's say, the exit rate in Q2 supports the given guidance of at least mid single digit growth for the full year, right? And the confidence that we have is that we believe that the China impact in Q2 was largely a one off. It was the inventory alignment with our online distributors. But we believe that the underlying demand remains strong. We also expect that the traction in North America in the second half of the year on the back of the products and the campaigns that I've referenced will be strong. And then of course, Sleep and Respiratory Care all along has demonstrated high growth as well. That's very clear. Thank you. And if I can just ask a follow-up, I think there's been quite a lot of concerns around a tariff escalation and a trade war. I'm wondering, Franz, Abhijit, if you can help us understand what that might mean for your business if we were to see a broader tariff regime imposed on all imports from China? Thank you very much. Yes. Thanks, Veronika. Well, let's say, the first wave of measures have a modest effect on Philips, and we have mitigated any increase in duties within our results, and therefore, we don't really talk about it. Subsequent waves of tariffs and potentially the tit for tat reaction from other regions are more difficult to estimate. Of course, we do our scenarios, but also the underlying good flows are likely to be affected. So at this time, we don't want to get ahead of ourselves in forecasting what it will mean other than that this will have to be passed on to consumers and hospitals through increased pricing. That's very clear. Thank you. You're welcome. The next question comes from Michael Jungling from Morgan Stanley. Please state your questions. Good morning, everyone, and thanks for taking my call. And the question I have is a follow-up really on the tariffs. We now have the product list for the additional €200,000,000,000 and it seems it includes hair clippers, blades, cutting heads on shavers with self contained motors and some domestic appliances. Can you comment on what impact this would have on your business? What percentage or what revenues are currently at risk of having a 10% tariff? And secondly, your ability to pass this on to the consumer because you mentioned before you could pass it on. But for you to be able to say that, I guess, you don't know the competitive environment to see whether other companies may have an advantage. So can you comment on your competitive advantage versus your other players on your ability to Yes, sure, Michael. I will answer that. We believe that even this second wave, that is still manageable. Let me, 1st of all, clarify that blades and shavers for North America are manufactured in Europe and therefore not affected. That potentially can give us also a competitive advantage because we are not linked to China there versus our competitors to the degree that products are touched. I'm thinking about the hair clippers, for example, which off the top of my head do come out of China, we will definitely reflect any duties in the pricing as we believe that our competitors are in the same situation. Great. And can I just please follow-up? On the free cash flow, I think your guidance is €1,000,000,000 to €1,500,000,000 If I look at Page 16, I think your free cash flow for the first half is minus €88,000,000 At what point do you think you're able to get to €1,000,000,000 or so run rate in terms of free cash flow? Yes. Our cash flow, Michael, is largely Q4 driven, right? So we will get, let's say, most part of the cash flow in Q4. The reason why it's minus in the first half was, of course, we ended last year very well on working capital. And then you build up a little bit for the selling season in the second half and of course, the slower sales in PH. So once those are addressed in the second half, we will see that coming back to the €1,000,000,000 to €1,500,000,000 range for this year. So by the end of this year, we'll be around about €1,000,000,000 Is that a fair comment? Yes, yes, yes. Above €1,000,000,000 late. The next question comes from David Adlington from JPMorgan. Please state your question, sir. Good morning, champs. Thanks for taking the question. Again, just coming back to Personal Healthcare. Just wondered if you're able to quantify the Chinese destocking and what drove that? You talked about end market being pretty decent demand. But I just wondered if your distributors were looking at potentially slowing down in the end market? Thanks. Let's say the original assumption on consumer growth turned out to be a bit too optimistic. And what we had underestimated is that the traditional seasonality in China is changing with all the marketing that online channels do. Let me explain that a bit. So these online channels have these special days for singles and for and other days, and it basically shifts the traditional seasonality away from traditional Chinese New Year and so on. We had perhaps counted too much on the old seasonality when looking at supplying our online distributors. By the way, in the meantime, online is 60% of total PH business, excluding Sleep and Respiratory Care. And so given the shift in seasonality in China, we saw a slower sell in in Q2. And we expect, let's say, a higher seasonality now in the second half of the year through these online channels. Understood. Thank you. And then maybe just a quick follow-up on air purification. Obviously, I had bigger headwind in the Q1, but I thought seasonally the 2nd quarter was a lighter quarter. Maybe you could just sort of pull out the issues there. Thank you. Yes. The impact was significantly lower, if I remember right. I think first quarter was 150 bps. The second quarter was less than half of that. So but the impact was still there. And again, like we said, it's a small business, but especially with this inventory realignment, I think that just added to it in the Q2. But again, for the rest of the year, overall for the PH business in China, we see good growth coming in. Understood. Thanks very much. And maybe, David, also to further clarify, this kind of realignment on in online channels is not the first time that it happens. We've seen that happening in India before. These are quick corrections that are made because the online channel grows so rapidly and dramatically that you have to sometimes be very quick to adjust. It's not something that we see as a structural issue. Great. Thanks. The next question comes from Yi Dang Wang from Deutsche Bank. Please go ahead, madam. Thank you very much. Two questions. One follow-up on the Personal Health business. If I were to look at the growth by region, it seems that there was quite a large weakness in developed markets, so Western Europe and North America in the Q1. And then in the Q2, North America picked up, but Western Europe is still showing a low single digit decline. So I mean, I don't expect those regions to be growing at low single digits relatively steadily. So could you comment on the dynamics there and what we should be expecting in those regions going forward? And then secondly, on the D and T business, so the order intake was 9% for the group as a whole and double digit for D and T. Can you give us the order intake for the different parts of D and T, so D and I, ultrasound and also IGT? That will be great. Okay. Let me start with the D and T question, and Abhijit will answer the Personal Health question. Yes, so very pleased with the continued order strength in D and T, thanks to a slate of strong innovations and solutions coupled with health informatics. In DI, we continue to see a mid to high single digit order growth around 6%. IGT, even low 20s and ultrasound around 13%. So basically, the story continues. These products are very well received. And I dare say, as we now will get more word-of-mouth marketing support from the adopters of these technologies, it will become a self driven story. Maybe also interesting is that the MAT, the moving annual total order growth for D and T stands now at 11%, right? So we are building up a nice order book. And then at the same time, we now also see the order growth for Connected Care and Health Informatics pickup, which is great. So also there, we expect perhaps finally a stronger momentum coming in the second half year. Abhijit? Yes. Also on pH, yes, so I think it's good to understand the dynamics because we have a large number of new product introductions in the second half. Therefore, we also hold back some of your advertising firepower to basically strengthen the launch of these products, which by definition means that you go a bit slow before your new products come into the market, which is why we said in the beginning of the year that we expected the second half to be stronger. We expect both NAM and Western Europe to be in positive territory in the second half. So they will resume growth. And that will contribute, let's say, to the overall PH business getting back to good growth in Q3 and Q4. Okay. Thank you very much. Yes. Our next question is from Scott Bardo from Berenberg. Please state your So first question please just relates to the Diagnostics and Treatment division. Obviously, seeing some relatively nice growth in the first half met by order book. Given that your orders are largely longer cycle with your interventional imaging and MRI and those orders are still to be booked, I understand. I guess, can you share some comments about the sustainability of these current high growth rates into the back half of the year? Is this sort of growth rate something that we should expect? Just following on please for this division. You announced during the quarter the acquisition of EPD, which was a relatively reasonable consideration, I think, of about $500,000,000 with contingency payments. So just wondering if you could share a little bit of thoughts actually as to how and when that business will start to contribute to revenues and profitability for the company. Yes. Scott. Yes, let me once again reiterate that the product portfolio of Diagnosis and Treatment was renewed to about 60% of the total portfolio. And even this first half, we introduced several new products such as, for example, the new MR systems that have 50% lower scanning time or shorter scanning time, which is a great productivity driver for hospitals. We expect the order growth to sustain. I pointed to the question of Yi already that the MAT order growth was 11%, And we expect this momentum to continue. On your question of EPD, we will obviously invest in this business in order to get the products to the market. Currently, we already have the CE mark. We are anticipating the FDA mark also. Next year, it will already have positive revenue to Philips, but still a operating a modest operating loss that will be absorbed within the D and T business. And then, let's say, towards 2021, we expect a positive profit contribution. And we, of course, throughout the period expect a very high growth rate. We think that EPD has the opportunity to become the new standard of care for ablation or for electrophysiology, an area that really needs a strong innovative disruption. The EPD technology does not only provide a much better navigation while doing the ablation procedure by having real time visibility of the anatomy of the heart, but also the ability to validate whether the ablation was first time right successful, which is very important because today often a patient that is ablated needs to come back 1 or 2 times to treat the spots that were ineffective. So we think that overall also for from the point of view of insurance companies that this will be a highly preferred standard of care, which of course needs to be proven in the next 2, 3 years, but then it will be a very profitable franchise. Thank you, Alex. Just a quick clarification. I haven't seen any financial accounts from EPD. So could you just give us a rough indication of what revenue would be realistic to assume for next year? Is this sort of €30,000,000 €40,000,000 or so? Or could it be higher? And lastly, can you just confirm that your transfer of production from Cleveland is still targeted for the second half of the year? And that you still expect to resume shipments of the AEDs into North America in the back half, too? Thanks. Yes. Well, on the EPD, this is a very small company today, which then already gives you a view on the size of the revenue. It's a new innovation that is in start up mode, so we expect a rapid growth but from a low base. Let's say, the progression of the Diagnostic Imaging business is going well. We are progressing on Cleveland as per plan. We also expect that the R and D activities will move to Downtown Cleveland, and the remaining facility will focus on customer service only. And all of this is expected to happen by the end of the year. The next question is from Ed Ridley Day from Redburn. Please state your questions. Hi, good morning. Thank you. Firstly, on CT, give us some nice detail in terms of your product growth there. Can you give us a little bit of an idea about how much quicker than the market you feel you're now growing in CT? That would be my first question. Well, maybe you give us your second question while we look up that detail and then come back to you. Great. And then the other one would be on monitoring. Apart from 1 or 2 strong quarters last year, you've obviously got a great position in monitoring in the hospital, but you do appear to be growing slower than the overall market. So, give us a bit more color about why that is and how you can turn that around. I mean, clearly, you've got your agreement with Masimo. You have taken some initiatives. But what has been the sort of operational issue there? And how can you get back to a market which is going to continue to grow very strongly? On monitoring, we have seen quite good order growth over the last 12 months. Orders tend to become bigger and more lumpy, and this relates to the fact that monitoring solutions become enterprise solutions, which also means that the CIO of the hospital is much more involved than in the past. I don't see any impediment to this business. It's we are a market leader. We are outgrowing competition, especially in the market segments where hospitals see the value of this AI driven analytics and forecasting of what will happen to patients in markets where there is shortage of staff, which applies to North America, applies to Europe, increasingly to Asia. The only market that is still quite price driven is China, but it is not affecting our business outlook at all. So overall, a high confidence in the monitoring business. It's just that it's a bit lumpy, and we will come back to nice growth rates there. CT, high single digit growth in the quarter, which we believe is a lot faster than market growth. We are claiming clawing back market share. Of course, that was always the intent. By the way, the same message applies to all of Diagnostic Imaging, where we believe we are significantly outgrowing competition. Of course, we did the comparison to the company that announced last Friday, and we believe actually that our order growth is at least twice as high as theirs. So we are quite happy with our product and team performance, and I think our hospitals are recognizing that we are competitive. And maybe I can also underline that we are proud of winning orders in Munich with the Munich City Hospital as well as in Cologne. Great. Thank you for the additional color. Sure. Anytime. The next question comes from Max Yates from Credit Suisse. Please state your question. Thank you. My first question would just be around the D and T margin expansion. Could you talk a little bit about the sub segments within that division and whether for the 180 bps margin expansion, one of the subsegments was the key driver or whether it was sort of fairly broad based across image guided therapy, diagnostic imaging and ultrasound? Yes. Hi, Max. I would say it's across all the 3 sub segments. Okay. And just follow-up with that. Maybe the drivers are slightly different. So if you look at DI, right, there we have a big productivity program which is helping to drive it, Whereas in ultrasound and in IGT, these are high margin businesses which get tremendous operating leverage for this rapid growth. So DI is a combination of growth plus productivity. There is productivity in the others but maybe a tad less. And those are high margin businesses which are driving improvement in profitability through the operating leverage that we get, if that gives you a little more color. In any case, let me underline, Max, that we are keenly aware of the, let's say, the comparative difference in profitability versus our 2 main competitors. And let's say, D and T is also designed to expand profit faster than the average of Philips, right, in order to get closer to closing that gap over the next years. Okay. Just the follow-up would be on Personal Health. So when you've talked about the inventory rebalancing, are you sort of relatively confident that you haven't lost market share with the distributors and this is just a fact that they took on too much inventory? Or do you think there have been instances across the Chinese end market or the Chinese market where you may have lost some share? And I guess linked to that, have you adjusted your pricing at all to reflect any moves in the currency there that may have potentially impacted this? No. Widely across the portfolio, we are not we don't see shifts in market share. I mean on an individual category, it can always fluctuate through the year depending on how, let's say, competitors come out with products. But we feel very confident about our brand strengths in China and about our position with the And then on the question of currency, maybe Abhijit you would like to answer that. Yes. No, no. We have not made any particular price adjustments. A large part of our sales in China are also produced in China. We had actually taken quite some actions few quarters ago to renegotiate a lot of Chinese purchases, which we did in U. S. Dollars, which caused a currency fluctuation to basically Chinese purchases in renminbi so that we match our end exposures to our sales. So I think all that is giving us the benefits now. So if you look at, let's say, the currency impact of some of the other competitors versus us, we are, I think, on the much better side. Okay. Maybe just sort of a one word answer. Just on Connected Care, you mentioned a lot you mentioned there were a couple of one offs in the margin. Would you just be able to give us how much in basis points that impacted the margin in the quarter? It was actually very small in terms of amount, but it was actually a small release last year and a small booking this year. So that affects roughly 60 basis points. So if you take that out, it would have been so it's not in the millions. It's probably less than $5,000,000 but it would have got us 100 bps in CCHI without those. Okay. Perfect. Thank you. Our next question comes from Daniel Wendorff from Commerzbank. Please state your question, sir. Yes. Thanks for taking my question. It's on the Diagnose and Treatment division. Again, if I look at the order intake growth and the sales growth in the quarter, can you potentially dissect this into what is coming from market growth and what is coming from your new product introductions? And what is maybe coming from a better operational or even a better regional setup? That would be my first question. And the second question is also a follow-up on the margin development in the Diagnose and Treatment division. Given that you expect order intake to stay in this region with all the consequences on sales? Is the 180 basis point margin improvement year on year in the second quarter also good hint for what is going to happen in the second half? Thank you. Yes, Daniel. We estimate market growth to be in the lowtomidsingledigit. And we are basically growing almost twice as fast as the market across the D and T segments. I think earlier questions during this call with regards to margin development in D and T, I answered that D and T should, let's say, expand profitability faster than the other two segments given their competitors. And of course, with strong order and revenue growth, we should also expect margin development to continue to be strong. The next question comes from Wim Gille from ABN Ambrog Bank. Please state your question. Yes, good morning. I've got a question on the depreciation and amortization because that increased quite a bit and then expected according to consensus expectations and then in particular the depreciation and amortization in the other segment. So can you give me a bit of feeling where it is coming from and whether or not this is sticky or a temporary item? Yes. Wim, this is Abhijit. It's a one off. It's related to an acquisition made a long time ago where it was the Povos acquisition that we made. We have moved, let's say, all the platforms and the manufacturing, the product range now to Philips, and there was, let's say, a certain residual capitalized goodwill, which we took off because we have now given that brand to somebody else in China, and therefore, we will get a brand license fee for that. But it's a one off. All right. Thank you. And then my follow-up would be on IFRS 16. You indicated in the appendix that you expect the impact on the debt or you're still working out kind of what the impact of IFRS 16 is going to be, but you do give a feeling about the increase on net debt to be about $745,000,000 in discounted. Can you also give us a bit of feeling where you expect the EBITDA to end up roughly speaking? Yes. We are still working on that. So we will come back to you in the coming quarters on that win because there are quite a few moving parts, and we need to get, let's say, a good idea on that, work it with the auditors before we give something externally. All right. That's fair. Thank you very much. Thanks. We have a follow-up question from Mr. Ian Douglas Pennant from UBS. Please state your question. Hi. Yes, thank you. It seems like from looking at your competitors numbers and yours that the imaging market has accelerated in the last year or so. But I've never heard a convincing explanation as to why that's the case. Do you have one? Please? Yes. I would agree with you that it has accelerated somewhat because both in Europe and the United States 2, 3 years ago, we were looking at low single digit. And in relation to, I think, Daniel's question, I said we have been outgrowing the market by almost a factor 2. Then given our growth, that would imply that the imaging market would be growing at the higher end of the guidance or the market expectation of lowtomidsingle digits. So let's assume then that the imaging market currently is growing around 4% or so. That indeed would be an acceleration over where the market was 2, 3 years ago. I dare say there are 2 potential explanations. One is that the installed base is really old and therefore it needs to be replaced. And we have also ourselves active installed base upgrade programs. I can only imagine that our competitors do the same. Secondly, many of the hospitals in North America have been so busy with consolidation and some of their CapEx was going to IT systems, I think we are seeing that the let's say, the EHR market is slowing a bit, right? They mean the electronic health record market is slowing a bit, and there's more capital available now for imaging. Moreover then finally, but that explains why we are growing faster than the competition, that our innovations are in hot demand across the 3 sub segments in D and T. And that then explains why we are growing faster than competition. Thank you. We have a follow-up question from Ms. Yi Dang Wok from Deutsche Bank. Please state your question. Yes. Thank you very much. Some are surprised that you commented CT was growing at high single digit given that diagnostic imaging, I think you reported around mid single digits. So could you also give us the growth rate for MR and digital X-ray and provide some color on the reason for the numbers there? And then secondly for ultrasound, I think point of care you're mentioning again as a highlight versus gynecology which we've known to be a driver for it. So in terms of ultrasound, can you also give us some sense of how the existing business is doing versus point of care and gynecology and relative contributions of those businesses to ultrasound would also be helpful into for putting those comments into context. Thank you. Shall we send you a whole Excel table, Yoon? That will be perfect. That will be perfect. But some nice comments will be helpful. Thank you. All right, all right. Let me give you a try let me give it a try. First of all, on ultrasound, please realize that our cardiac ultrasound is a very big market, and our position in general imaging point of care, OBGYN is a much smaller business, right? Therefore, even with very nice high growth in OBGYN and point of care, we would never hit the overall growth numbers in ultrasound if cardiac imaging would not be very successful. So let me assure you that cardiac imaging is also good growth. And then the icing on the cake is the very high growth in OBGYN and GI. I look now at my colleagues to what extent we have appetite to give. Yes. I mean, we are anyway give far more than a lot of others. I think when we said CT sales were at the high single digit and overall is at mid single digit, the gap is a couple of percent. So 7, 8, 9 is high single digit. That's where you see CT at around 7% and the others are a tad lower. So overall, it's still a good mid single the higher end of the mid single digit but with CT being a little bit higher than the rest. Also there, I think it's helpful to know that our MR business is far larger than the CT business. And of course, in a weighted average, even if CT is a lot higher than MR is still growing. Otherwise, we don't get to that number. Exactly. And the innovation that Frans spoke about in the new launches in MR, that gives us a position where we have an almost complete new range in MR now. And with this kind of 50% faster scanning than the older range, we expect there to get really good momentum going forward in the coming quarters as well. Okay. Thank you very much. It's just a housekeeping one. Can you just remind us how much of your Personal Health sales are made in China, just to assess the sensitivity of the rebound in Something that we need to look up. We probably I'll ask Pim to give you a call, Julian, and give you that information, take it offline. Okay. Thank you. But the rebound of the second half is less to do with where production is. It's more to do fundamentally with the new product launches and the momentum we expect from that. Right. Okay. Thank you, Mr. Van Aerten and Mr. Bhattacharya. That was the last question. There are no further questions. Please continue. Okay. Well, I appreciate everybody dialing in. Let me reiterate once again, solid quarter, still some work to do, high order growth. This is very encouraging, and we maintain our expectations for a stronger second half year. And overall, we are absolutely confident about our ability to deliver that. Thank you. This concludes the Royal Philips Second Quarter 2018 Results Conference Call on Monday, 23rd July, 2018. 18. Thank you for participating. You may now disconnect.