Earnings Call: Q2 2017

Jul 24, 2017

Good morning, ladies and gentlemen, and welcome to Philips' 2nd Quarter 2017 Results Conference Call. I'm here with our CEO, Frans van Houten and our CFO, Abhijit Batasharia. On today's call, Frans will take you through our strategic and financial highlights for the period. Abhijit will then provide more detail on 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. 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 Investor Relations website. Before I turn over the call to Frans, I would like to remind you of an accounting update regarding Phillips Lighting. Following a sell down on April 25, 2017, Philips' shareholding in Philips Lighting was 41.16% of the issued and outstanding share capital by end of the second quarter and results continue to be consolidated under IFRS. Our loss of control is highly probable within 1 year due to further sell downs. Phillips Lighting is presented as a discontinued operation in the financial statements of Philips as of the Q2 of 2017. Discontinued operations treatment means that the profit and loss of the Lighting business is reported into discontinued operations. And for the balance sheet, the assets and liabilities of the business are reported on the lines assets held for sale and liabilities held for sales respectively. Cash flows are reported in the line cash flow from discontinued operations. We've also published a reporting update to reflect the treatment of lighting as discontinued operations. This document is also available for download from our Investor Relations website. The combined Lumulets and Automotive Lighting businesses continue to be reported under discontinued operations, including the deal results following the completion of the sale of an 80.1% stake on June 30, 2017. In the Q3, the remaining 19.9% stake will be reported as an available for sale financial asset. 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. With that, I would like to hand over the call to Frans. Yes. Thank you, Pim, and thank you all for joining us here today. Philips' performance in the Q2 of 2017 was solid with a 4% comparable sales growth driven by Western Europe, North America and China and a strong 8% increase in our order intake. We achieved further operational improvements resulting in a 90 basis point increase in the adjusted EBITDA margin. After covering some of the key results in the Q2, I will share with you some recent highlights of our exciting HealthTech journey. But let me first start with our results. Our 2nd quarter results demonstrate our progress in creating value. Philips comparable sales growth of 4%, which was led by the Personal Health segment, which showed a continued strong 6% growth in the quarter, while Diagnosis and Treatment in Connected Care and Health Informatics grew by 3% and 1%, respectively. We were able to further expand our backlog with a comparable order intake growth of 7% in Diagnosis and Treatment with all businesses contributing. And in the Connected Care and Health Informatics businesses, the comparable order intake increased by 8%. Geographically, our 4% comparable sales growth in mature geographies was driven by 8% growth in Western Europe. North America recorded 4% growth, partly offset by a 7% decline in other mature geographies. In gross geographies, sales increased by 3% on a nominal and comparable basis, driven by high single digit growth in China and Latin America. Moving to profitability. Adjusted EBITDA was 10.2% of sales this quarter compared to 9.3% previous year. That's a 90 basis point improvement. The increase in margins was driven by higher volumes, operational improvements and cost productivity. Personal Health delivered 120 basis points of margin improvement. And maybe that's a good moment to come back to the announcement that Peter Nota, the Chief Business Leader of our Personal Health businesses and Chief Marketing Officer, will be leaving Philips. Peter and I have worked very well together for 6 years, and it is with regret that I see him leave after a successful tenure with Philips. Based on our strong internal talent pipeline, however, we expect to announce Peter's successor in the coming weeks, who we are sure will be able to build on the growth and margin expansion momentum achieved over the last couple of years in Personal Health. Coming back to the performance. In a soft health care market, our Diagnosis and Treatment businesses improved margins by 80 basis points and the Connected Care and Health Informatics businesses improved by 90 basis points. I'm confident that the performance of the Professional Health businesses will continue to improve in the second half of the year based on the strength of their order book. Let me expand a bit on our strategic journey to leadership in Health Technology. As outlined at last Capital Markets Day, our HealthTech value creation story is built on 3 key levers. Firstly, we create value by improving margins through better serving customers and raising operational productivity. Secondly, we create value in our core businesses by gaining market share through deeper, more comprehensive customer partnerships and pursuing growth by increasing the geographic coverage. Thirdly, we create value by expanding our innovative solutions along the health continuum through R and D investments, co creation with customers and partners and selective M and A. Let me detail that a bit further. On the first lever, our self help productivity program continues to be an important margin contributor. And for the next 3 years, we have committed a cumulative total net saving of €1,200,000,000 2019, averaging productivity savings of approximately €400,000,000 per year. In the second quarter, procurement savings amounted to €61,000,000 The other productivity programs resulted in savings of €48,000,000 So overall, we are well on track to deliver the yearly savings amount. We continue to drive the digital transformation to serve our customers better and unlock value for them in Philips. For example, the Philips SoniCare DiamondClean Smart Connected Toothbrush reached a 94% customer satisfaction rating out of a full score of 100% with top online retailer jd.com in China, with consumers highlighting the benefits of the coaching app and the premium design. With this connected toothbrush, we can directly engage with consumers. And by leveraging the data related to the usage of the toothbrush, we plan to enhance the brush head replacement rates. While staying on top on the topic of digital and online marketing and sales, I can tell you that already 27% of revenue of our consumer categories are sold online, a number that doubled over the last 3 years. Part of our digital agenda is to increase the online relationship and intimacy with our customers and users of our products, through which we expect to stimulate recurring revenues of our products and services. With the acquisition of U. K.-based Health and Parenting, we have strengthened our global digital mother and child care platform, uGrow. The health and parenting team creates easy to use and helpful apps to guide expecting parents through pregnancy and into parenthood. Its leading product is the Pregnancy Plus app, which is one of the world's most downloaded pregnancy apps with approximately 12,000,000 downloads from the Apple App Store and Google Play Store. Over 1,000,000 active users and in the U. K, approximately 1 out of 2 expectant mothers use the app. Building on the second lever of creating value is through building on the second lever of creating value through deeper customer partnerships and increasing geographical spread. I can tell you that in the Q2, we signed multiple long term strategic partnerships or as we abbreviated LSPs. For example, in France, we signed a 10 year managed equipment services contract for patient monitoring systems with the Confluence Private Hospital. The agreement with the top 3 ranked French hospital for cardiovascular solutions includes maintenance, replacement and upgrades of patient monitoring systems as well as biomedical and clinical training. In Singapore, we entered into a multiyear partnership with ICON Spectral CT and Varios Digital PETCT including the Icon Spectral CT and Varios Digital PETCT systems combined with clinical informatics and services. Our funnel for LSPs for the remainder of the year and next year is strong. We are pleased with the success of OneBlade, the innovative new product that taps into the growing market trend of male facial hair styling. OneBlade effectively broadens the reach of our male grooming portfolio. Leveraging our capabilities as the world's leading electric male grooming brand, OneBlade is on track for its rapid rollout and is currently available in 14 countries worldwide. Thirdly, on the 3rd lever, we create value by expanding our innovative solutions along the health continuum through R and D investments, co creation with customers and partners and selective M and A. Our breakthrough R and D investments are delivering tangible results as we received regulatory clearance from the FDA for the Philips IntelliCyte Pathology Solution, which is the 1st and currently only digital pathology solution for primary diagnostic use enabling us to market the solution in the United States. This further confirms our position as a leader in digital pathology, an important solution that is used in the diagnosis of complex diseases such as cancer. We also received FDA clearance for our IntelliSpace Portal 9.0 and a range of innovative applications for radiology. The platform gives clinicians a comprehensive overview of each patient, helping them to diagnose conditions using advanced analytics and quantification of medical images. During the previous quarter, I spoke about the loans of Azurion within the Image Guided Therapy business. Azurion is a major breakthrough and is our next gen image guided therapy platform. The solution has been very well received by our customers, and we are able to grow market share in the Q1 and strengthen our number one position in that market. In the Q2, we further strengthened the leadership position of our Image Guided Therapy business by expanding our portfolio of therapy devices with the agreement to acquire the SpectroNetX Corporation. SpectroNetix has an impressive product portfolio of catheters for the treatment of coronary artery disease and peripheral vascular diseases. This involves the opening of obstructed blood vessels around the heart and in the legs with devices such as the laser atherectomy catheters and drug coated balloons. In addition, they are the market leader in the minimally invasive removal of implanted pacemaker and internal defibrillator leads. SpectroNetic's highly complementary portfolio, including this laser atherectomy catheters and the Angiosculptax drug coated scoring balloon, the Stellarex drug coated balloon will all support Philips' expansion in image guided therapy devices. The combined SpectroNetx and Philips image guided therapy device business, Philips Volcano, is expected to grow by strong double digits to approximately €1,000,000,000 by 2020. This transaction is expected to be accretive to Phillips adjusted EBITDA and adjusted EPS by 2018, mainly driven by sales growth, channel synergies and overhead reductions, while we expect limited integration complexity. With the acquisition of SpectroNetics, we are building on our successful track record of integrating acquisitions and rapidly improving growth and profitability. To remind you, Volcano had a stagnant top line at the time of the acquisition in 2015. It reached double digit growth rate in 2016, and we are continuing that trajectory. In addition, we have reduced over $40,000,000 in cost to drive the business to profitability. The acquisition of Cardioporlific will further strengthen our longer term innovation pipeline of catheter based therapy devices. The development of Cardioprolytics differentiated thrombectomy technologies, combined with our suite of image guided therapy solutions, will help our customers drive the procedural innovation for the treatment of peripheral vascular disease. Furthermore, to reinforce our leading position in ultrasound, Philips acquired Tomtek Imaging Systems, a leading provider of clinical applications and intelligent image analysis software. This acquisition will strengthen our number one position in cardiac ultrasound and will support a further expansion in other clinical areas such as obstetrics and gynecology or OBGYN. Tomtek will be accretive to growth and margins as of the 1st year. Within the Personal Health segment in Sleep and Respiratory Care, we signed an agreement to acquire RespirTech, a U. S.-based provider of an innovative airway clearance solution for patients with chronic respiratory conditions. Highly complementary products to our existing portfolio to help those patients to receive the care they need at home. Also, RespirTech will be accretive to growth and margins as of the 1st year. As you have seen, we signed agreements for a significant number of bolt on and strategic acquisitions during the last quarter. We have been following these companies for a long time and we are pleased to reach final agreements, which coincidentally all came together in the Q2. Spectranetics is obviously the only acquisition of real significant size. And with these acquisitions, we are executing on our strategy. In line with our earlier guidance on June 30, we announced completion of the sale of an 80.1 percent stake in the combined Lumilets and Automotive businesses. With the completion of this transaction and the recent sell down of our stake in Philips Lighting, we are nearing the completion of Philips' transformation into a focused health technology company. Additionally, we announced a new €1,500,000,000 share buyback program to be initiated in the Q3 of 2017 and to be completed in 2 years. This comes in addition to the €3,500,000,000 in share buybacks that were already completed between 2011 2016. The program is intended to more than offset the share dilution in connection with Philips' long term incentive programs and dividend in shares. Philips intends to execute part of the program through a series of individual forward transactions unevenly distributed over the 2 year period. The buyback is in line with our capital allocation policy, which aims at a balanced mix of investments in organic and inorganic growth opportunities, actions to drive balance sheet efficiency and returns to shareholders. As stated in the press release and as previously reported, we continue to be in discussions on a civil matter with the U. S. Department of Justice, representing the FDA. The discussions are focusing primarily on the external defibrillator business in the United States and are arising from past inspections by the FDA in and prior to 2015. Despite continued volatility in the markets in which we operate, our outlook for 2017 remains unchanged as we expect further operational improvements and comparable sales growth in the year to be back end loaded, this supported by a strong order book. We are on track to deliver the 4% to 6% comparable sales growth and an improvement in adjusted EBITDA margin of around 100 basis points per year. And with that, I would like to turn the call to Abhijit, who will provide more detail on financial performance and market dynamics. Thank you, Frans, and good morning to all of you on the call and webcast. Let me start by providing some color on the 2nd quarter growth of 4%. On a geographic basis, mature geographies delivered 4% comparable sales growth. Western Europe showed a strong 8% comparable sales growth, mainly driven by the Netherlands, Iberia, Denmark and Norway with double digit growth. North America grew 4%, while other mature markets posted a 7% decline, driven mainly by Japan. In mature geographies, diagnosis and treatment grew high single digit and Connected Care and Health Informatics and Personal Health posted low single digit growth. In the growth geographies, 3% comparable sales growth was largely driven by strong double digit growth in countries like Russia, Turkey, Indonesia, Thailand and Argentina. We are pleased with the continued high single digit growth in China in the quarter. In the growth geographies, Personal Health recorded double digit growth, Connected Care and Health Informatics low single digit sales growth and Diagnosis and Treatment mid single digit decline compared to Q2 of 2016. In HealthTechOther, net sales decreased by €9,000,000 as royalty income decreased by €14,000,000 due to the foreseen expiry of licenses. This gave us a headwind of 30 basis points for the overall growth of the group in the 2nd quarter. Turning to order intake. As Frans mentioned, comparable order intake overall grew by 8%. The Diagnosis and Treatment businesses grew by 7% with Image Guided Therapy business growing mid single digit and both Diagnostic Imaging and Ultrasound growing at high single digit rates. The Connected Care and Health Informatics businesses grew by 8%, recovering from a slower start in the Q1. In growth geographies, order intake on a comparable basis grew mid teens compared to Q2 2016, mainly driven by Latin America, India, Russia and Middle East and Turkey. Comparable order intake in Western Europe declined with 8% on the back of double digit growth in the previous quarter, while North America posted a strong 9% growth. On the last 12 month basis, comparable order intake grew with over 4%. Let me now turn to the EBITDA development for the group in the 2nd quarter. Adjusted EBITDA margin of 10.2% in the quarter was 90 basis points higher than the year before. This margin increase was driven by an improvement of 120 basis points in Personal Health, mainly attributable to the operational leverage from growth. In Diagnosis and Treatment, the margin increased by 80 basis points, mainly due to higher volumes and product mix. In Connected Care and Health Informatics, the margin improved by 90 basis points, mainly due to cost productivity. In order to further improve our financial disclosure and to align with our new peer group, we have included an adjusted EBITDA metric as from Q2 2017 in our press release, which also includes the bridge from income from operations and provides historical numbers for 2016. Our performance improvement in the Q2 is driven by higher volumes, improved operational performance and meeting our cost productivity targets. More specifically, net overhead cost reduction amounted €15,000,000 in non manufacturing costs. The productivity program contributed €33,000,000 to the gross margin and procurement savings, in part driven by our Design for Excellence program, delivered €61,000,000 of bill of material savings year on year. In HealthTechOther, the adjusted EBITDA of minus €32,000,000 was €8,000,000 better than our guidance. The decline of €18,000,000 compared to Q2 2016 was driven by lower royalty income. In the Q2, the income tax expense was €44,000,000 which was a decrease of €19,000,000 compared to the Q2 of 2016. The decrease was mainly due to the release of tax provisions, partly offset by higher tax charges resulting from the higher income. Q2 2016 also included tax costs related to the Lighting separation. Overall, net financial expenses decreased by €43,000,000 year on year, mainly due to lower net interest expenses as we redeemed bonds of in a total of $1,500,000,000 during Q4 2016 and Q1 2017. Net income from discontinued operations, which now includes the results of Philips Lighting along with Lumiled's and Automotive businesses, decreased by €185,000,000 year on year, mainly due to the FUNAI Arbitration Award in Q2 2016. Net income of the LumiLabs and Automotive business decreased by €42,000,000 This was mainly due to EUR 66,000,000 net loss from the sale of the 80.1% stake in the combined LumiLED and Automotive business. Taking into account the gain related to the sale of real estate of this business, which was recognized as income from continuing operations in Q1 2017. And in addition, trademark license revenues, which will be recognized in income from continuing operations in the future, the sale of the combined businesses will result in an overall net gain. Return on invested capital, which is calculated on a 5 quarter MAT basis, was 15.4%, which is a 7.1percent point improvement sorry, which is 7.1 percentage points above our WACC and improved by 8.4% compared to Q2 2016. Our drive to increase working capital efficiencies continued to yield results as inventory as a percentage of sales from operating activities decreased by €104,000,000 mainly due to higher working capital compared to Q1 due to seasonality and higher tax paid. Let me now provide you with an update on the U. S. Market and our outlook for Western European and China markets. Healthcare in the U. S. Is undergoing fundamental change. With our scope and scale in the U. S, we are well positioned to support public and private health care organizations to reduce health care cost, improve the quality and outcomes of care and move from a volume based to a value based system of reimbursement and service delivery. For example, with the help of our intensive ambulatory care program, Banner Health in hospitalizations for chronically ill patients with multiple conditions by nearly 50%, reducing overall cost of care by more than onethree. The market uncertainties stemming from the ACA legislative process continued in Q2, particularly around larger and longer term customer commitments. We continue to monitor events closely and stay focused on the needs of our customers. We saw continued slowdown of government spending. Given these uncertainties, we continue to expect the U. S. Market growth to be in the low single digits, while we closely monitor further developments. At the same time, we are currently able to increase market share as we expect in the Q2 and hence remain confident in our ability to grow revenues. In Western Europe, we expect modest low single digit market growth and in China, we expect mid to high single digit market growth for 2017. Overall, we estimate the global market growth to be in the low single digit range for 2017. Let me now give you some guidance on HealthTech Other and legacy items. In the HealthTech Other segment, we continue to expect approximately €60,000,000 net cost at adjusted EBITDA level for the full year. On an EBITDA level, we now expect approximately €70,000,000 of net cost for the year. The increase compared to the previous guidance of €40,000,000 reflects higher restructuring charges and incidental items. For the Q3, we expect a net cost of approximately €15,000,000 at an adjusted EBITDA level. In legacy items, we expect to we expect remaining lighting separation costs for the second half to be around €10,000,000 and remain with our guidance for separation costs of €30,000,000 for the full year. Other legacy items are expected to be €5,000,000 for the second half. We now expect approximately €95,000,000 of net cost at the reported EBITDA level, an increase of €30,000,000 almost fully driven by the CRT legal settlement in Q3. And adjusted EBITDA level, we expect EUR 40,000,000 net cost for the year. Mid July, we made a contribution of $250,000,000 to the U. S. Pension fund to further improve the funding ratio. This will further decrease Phillips' interest costs going forward. In summary, we are pleased with the solid first half of the year with mid single digit order intake growth, earnings improvement, working capital improvement and our cash flow performance. With the scheduled product launches and the development in our order book, we continue to expect further improvements in our operating margins for 2017 to be at the back end of the year. We continue to target a performance trajectory to deliver 4% to 6% comparable sales growth and around 100 basis points improvement in adjusted EBITDA per year. With that, we'll now open the lines for your questions. Thank you. Thank you, The first question comes from Ms. Veronika Dubajova from Goldman Sachs. Please state your question, madam. Good morning, gentlemen, and thank you for taking my questions. I have one and one follow-up please. My main question is around the outlook for the remainder of the year. If I look at the organic revenue growth is at 3.2%, but in spite of that you've already delivered 90 basis points of margin improvement year on year. So I'm just trying to understand if we do see growth acceleration into the second half of the year, how much of that incremental growth would you expect to drive operating leverage above and beyond the ninety basis points that you already delivered in the first half of this year? And then my quick follow-up is just on the M and A transaction so far year to date. Obviously, it's been a very busy Q2 for you. And Frans, maybe can you just talk about to what extent you feel that your team, both on the business development side of things and integration, has capacity and capability to do more than the 7 transactions that you've announced year to date? Yes. Hi, Veronika. Good morning. Let me take the M and A question and then turn to Abhijit for the outlook question. So let's say a condition for me that I always apply is that the business group needs to be ready to absorb an acquisition. Our Image Guided Therapy business group on the leadership of Bert van Meers has proven with the Volcano acquisition that they are capable to handle that. The Volcano integration is mostly completed and they are ready to take on SpectroNetX. The Cardioprolyphic is a very small team and doesn't require real integration. Tomtek goes into the ultrasound business group. That's a high performing business group with very capable management, Vitor Roja, and they can handle this. Moreover, Tomtek, besides they will also continue with serving the external customers. So I consider the integration not to be very complicated. And then, for example, RespirTech and APSS both go into Sleep and Respiratory Care, again a high performing business group that is delivering steady mid single digit growth and high profitability. They are very capable to absorb these acquisitions. And then lastly, Health and Parenting is a very small team goes in our high performing health and well-being business group on the leadership of Egbert Verach. So what you can derive from that is that we have looked for a spread. We have not piled everything in the same unit. And I can hold individual business group leaders accountable for delivering results exactly what we did before. So I think we are well positioned to take this along. Obviously, our focus will be on execution. We have said that this will all be growth and adjusted EBITDA and adjusted EPS accretive next year in the aggregate and for the most important ones like SpectroNetics and TomTech. So that is now the name of the game. Everybody focused on execution, right? So for now, I think our plate has been filled. Abhijit, what about you? So I think on the outlook, Veronika, for the first half, the growth was at 3% or 3.2%. We were slightly handicapped because of license revenue that impacted us by 30 bps on the overall growth of the group. So if you see, when we talked about the 100 basis points year on year improvement, we had said we expect about 100 bps from volume, 190 bps from gross margin and about 50 bps from overhead reduction, which would be compensated then by price erosion of 130 bps and inflation of 110 bps. In the first half, because our growth has been slightly shy of the 4%, our volume impact is around 80 bps. So as the growth picks up in the second half, we expect then the volume impact to go up by about 20 bps compared to the first half. And then for the first half, we are about 85 to 86 bps improvement. So we have to drive slightly over 100 bps in the second half to make the average 100 for the year, which we are pretty confident in doing partly because we expect the volume growth in the second half, as I just mentioned. And then, of course, our productivity programs will gather further steam as the year goes on. That's very helpful. And can I just quickly ask, CMS announced a review of MRI imaging in the U? S. Any thoughts you have on that, Frans, or expectations for what that might mean for your business? And I'll jump back into the queue on that. No, I need to study it further, Veronika. So no comment now. Excellent. Thanks very much. The next question comes from Andreas Willey from JPMorgan. Please state your question, sir. Yes. Good morning, gentlemen. My main question is on Connected Care and Health Informatics. We've had a period now of pretty lackluster organic sales growth as you have better orders now. You talked a lot about the product rollout, the breakthrough R and D you have spent there. Should we now go into a period of a more sustained kind of mid single digit organic sales growth trend? Or will this remain a bit more lumpy in terms of getting the confidence that these investments are driving superior revenue growth going forward? Yes. Thanks. Hi Andreas. You're right. We will now go into a more sustainable growth period. In fact, we talked about it before that some of these orders deal with more complex larger scale installations that at enterprise level in the IDNs need to be signed off and integrated. In fact, some of the revenues again was pushed out into the 3rd quarter. So you're right, we should expect a much stronger revenue level in the second half year versus the first half, so that we can make up for the slowness and overall land in a good growth rate in the same target area as we have guided. And my follow-up is for Abhijit on Healthcare. Other, obviously, the run rate and the Q3 guidance implies quite an improvement than also needed for Q4. How much visibility do you have on the licensing income, which I guess is part of the positive you kind of imply for Q4 and the generally better results for the second half? Yes. We got a bit of a knock there in Q2. But for license income, we are close to flat for the second half. So the decline in the year was largely in the first half. And therefore, you will see the second half year on year comparison being better than the first on theirs. So we lost, I think, dollars 28,000,000 in the first half year and the second half will be about flat. Thank you very much. Thanks. The next question comes from Marc Traumann from Bank of America Merrill Lynch. Please state your question, sir. Yes. Thank you very much. Good morning, everybody. Question please on pricing, France. 90 bps in the quarter, I think, from your profit bridge. And the long term sort of guesstimate seems to be SEK 130,000,000 a bit more than that. I wonder if you could comment on the pricing environment and maybe how that is developing by category. You always do it obviously, there's some innovation, but you're trying to do more system selling, there's more IGT. So is there a better pricing mix that we can expect? In other words, can we expect a little bit more robust performance in that pricing variable in the bridge? Thanks very much. Yes. It was a little bit lower than our longer term guidance, but I would not say that that's a trend break. As you know, we work very hard to move towards more of a solutions orientation, looking to have a combination of systems software and services that improved mix that improves the mix, but it also takes the direct attention away from a naked box sale. So maybe that's part of the explanation. But I'm not able to promise you that 90 basis points is the new normal. We will stick for now with our longer term guidance. Okay. And just one quick follow-up. On where are you seeing the most share gains? You comment about market share gains. Is that Cleveland? Or is that across other businesses other than that? The stormwater intake in North America clearly outpaced the low single digit market growth. And that is why we also believe we are gaining share. The order intake growth was across the board, so also for DI Diagnostic Imaging. And notably strong was the order intake for the enterprise informatics, health care informatics area. Patient monitoring. Patient monitoring also, yes. So across the board basically. Now the official reporting in North America will undoubtedly confirm this, but let's say our overall track record of growth bodes well. Great. Thanks. The next question comes from Mr. Patrick Wood from Citi. Please state your question, sir. Perfect. Thank you very much and good morning everybody. Thank you for taking my questions. The first one I guess would be on the oral care and personal care category. You guys have been taking share fairly considerably and consistently for quite some time versus sort of the FMCG peers. I wonder how long you feel you can keep doing that and whether that is, is that pure innovation? Is that NPD? What's really driving the share gains and how confident are you that those can keep going? And you that those can keep going? And just as a quick follow-up as well, if I may, maybe following up on the North American Imaging side of things, a bit stronger than I think some of us expected. Have the conversations with hospitals changed at all? There's a lot of uncertainty surrounding healthcare reform in the U. S. And it's surprising that I guess you and peers have had pretty robust growth and you've been taking share back. Have you had any change of discussion as this pent demand? Or what's really driving that North American market growth that you're seeing? Thanks. Yes. All right. Thanks, Patrick. Well, Auroch, so your question was specifically first is the FMCG guys, right? So in Oral Care, you see an ongoing shift from manual brushing to electrical brushing. That is a macro trend that will continue. So that creates a fundamental for our oral care business that is very, very healthy. Moreover, we have completely overhauled the product range in oral health care and we have been stepping up our investments in advertising and promotion. So and lastly, we are still adding countries to our franchise, right? I mean to address the geographical expansion. So this is a potent recipe that has been working extremely well for us and can continue to drive, let's say, the growth rate that we have been enjoying. Then on Personal Care, a few years ago, we kind of anticipated that male shaving with the traditional electrical razor was not necessarily appealing to young men. And we started to invent the OneBlade. Now OneBlade is a kind of a hybrid particularly targeted towards this grooming area. We are selling the 1 blade in the traditional shaving aisle basically where the wet shaving classical competitors are, right? So it's for us an extension of our market reach into a new segment and it is in our opinion taking share away from the classical categories in shaving. Then moreover, we entered into let's say beauty segments. So again, because of this strategy, we can sustain growth in Personal Care. We said in the introductory speech that OneBlade has just increased its geographical coverage to 14 countries, up from last year 6. That means we are still in the ramp up phase and we expect more growth to come. So that is I think where this growth is coming from. And for at least the foreseeable future, we expect this to continue. Then your second question on hospitals, let's say, in North America, there is a lot of uncertainty around the ACA. And the conversations with hospital C suite is that people are concerned, especially if you have a high exposure to Medicare and Medicaid, then your funding is at risk. This is in the market slowing down overall investments. Moreover, it has there is a slowdown at the Veterans Administration due to their procurement rules that favor small veteran owned companies. All of that has not stopped us from driving hard, let's say, our innovations and gaining some share. I do see more reluctance in the near term for long term large scale project commitments. And so that is something that I think we need to be a little bit more conservative in our estimations on because nobody is going to commit themselves structurally in this uncertain situation. So I hope that answers your question, Patrick. That's very helpful. Thank you very much. You're welcome. The next question comes from Mr. Ian Douglas Pennant from UBS. Please state your question, sir. Hi. Thanks for having me on. So the first is on the process improvement costs in CC and HI. Can we should we take this as a sign that you are acting in response to the concerns that FDA raised and the DOJ may or may not enforce already. I don't know whether you can give any comments on that or how new those costs have been how quickly those costs have been rolled out and how recently? And then the follow-up question is to Sorry, Ian, did you say process improvement cost? I'm not sure I heard the word that you used. That's what I said, yes. Okay. If that's not exactly the same language as it is in your release, I apologize. Okay. No problem. And then the other one is a follow-up question related to after Veronika's question earlier. I wasn't quite sure what you were guiding for. Were you saying that you're going to hit the 100 basis points of margin improvement this year or by the second half this year you're going to be annualizing at 100 basis points as in if that makes sense. There's quite a big difference for the run rate for next year. Well, we carefully phrased 100 bps per year as an average. So it could be 1 year at 90, another year at 110, averaging across the years at around €100,000,000 For this year, we have said that the second half year will be stronger in terms of revenue growth than the first half. We have not specifically guided on what that does for profitability other than saying that for the full year, we intend to be around the 100 bps without further precision. On your first question, in CCHI, a couple of things going on. Yes, we are stepping up a bit to cost for to be ready for regulatory inspections. We are always ready, but you can certainly do more when you are in the situation as we are in. And that specifically relates to the Basel and Andover sites. Moreover, in CCHI, we also have a restructuring. And I turn to Abhijit to maybe say a few words about that. Yes. No, but the restructuring is part of the, let's say, overall footprint program that we are running, but we are also stopping one particular product, which leads to a slightly higher restructuring in this quarter. Okay? And the reason for that product discontinuation, is this just a standard SKU reduction or is this Yes, yes. It has nothing to do with has nothing to do with the defibrillator or anything like that? No. It has nothing to do with the whole FDA thing. It would have happened anyway. Okay. That's fine. Thank you very much. I've got some other ones, but I'll jump back in the queue. Okay. Thanks, Ian. The next question comes from Mr. Max Yates from Credit Suisse. Please state your question, sir. Hi. Thank you. Just my first question is on Personal Health. You've obviously shown another quarter of very strong growth against a tough comp. You also talked about, I think, having advertising revenues that were burdening this quarter's margin. So should we be thinking that kind of as we move into the second half, if we can sustain similar growth rates that we should get a greater amount of margin expansion? Or do you expect to have some further advertising costs and product launch costs in the second half as well? There's no reason to expect a stronger second half than the first half. If we can continue to perform at this rate, that will be outstanding in my book. Okay. And just the follow-up was just on China and what's happening there. I think you're sort of talking about the market growing at mid- to high single digit, and I think your business has been growing double digit for the last couple of quarters. So I think you've talked about in the past kind of the government or the government favoring local players there, yet you seem to sort of continuously be actually outperforming the underlying market that you talk about. So could you give us a little bit of feel for how Healthcare in China is developing? And maybe sort of explaining sort of your ongoing strong performance there and how sustainable that is? Yes. A couple of years ago, there were several issues, one of which was the local players and the preference that they were being given by in some provinces and some hospitals. The other one was the kind of clampdown on procurement methods in hospitals. The latter factor has gone away. The China 5 year plan clearly identifies health care as a growth area, in particular in the more rural areas and also favoring private hospitals expansion. Right? The share of private hospitals is expected to increase from around 10% to 25% in the next 4 or 5 years. That is good for us because private hospitals are not bound to this kind of political game in certain provinces with favoring local vendors. Nevertheless, this local preference thing has not gone away. We occasionally bump into that. And then we cannot really participate, especially when it is some larger bundled deals. So it's a reality that we try to work around. The strategy that we have to become more of a solutions provider also is at work in China. And that increasingly is well received, in particular also with the private hospitals who look for solutions and are not necessarily keen to be a systems integrator in their own right. So we have somewhat outperformed the China market not by a lot I would say. We talk about the market being mid to high single digit and we are kind of hovering around the 10% growth. So it's nice performance. It also means we have recovered from 2015 when we were much slower. I must say that Andy Hall and his management team are doing a great job. That's our leader for China. And I for the foreseeable future, I see this as sustainable growth, right? So I'm confident about our ability to perform at least, let's say, for the foreseeable horizon. Longer term, look I read The Economist and other magazines and then you can say longer term is there a macroeconomic issue, but at least nothing that we near term need to worry about. Okay. And actually just while I'm on this one number that would be really helpful. You talked about in Personal Health trying to do more to increase your recurring revenue and customer sort of relationships. Would you be able to give us an update of how much of Personal Health is now recurring revenue or at least on the sort of toothbrush and You're welcome. The next question comes from Mr. David Voss from Barclays. Please state your question, sir. Good morning, gents. Thanks for taking my question. The first one is on the Healthcare other line actually, where you expect quite a bit of a break in the trend between H1 and H2. Could you just comment on that? And particularly in relation to the innovation line, is that also stepping down quite a lot? And if that's the case, is that done because you now feel that you need to invest less and therefore we can expect a similar amount going forward, I. E, a lower amount? And I'll ask the second question after that. Thank you. Maybe you ask your second question now so that we can look up the first question. Okay. That's also fine. The second question was more of a housekeeping one around LumoLED. If you could confirm already what the expected net cash amount in will be once you recognize that in Q3? And then also if you expect the stranded costs to run-in the $5,000,000 range for the Yes. So maybe let me just address your first question on HealthTech Other. There is no real significant change in the run rate on innovation between the first half and the second, maybe a little bit. It's more that in the first half, we had certain one off charges, which we will not have in the second. And the other thing is in the first half, we had compared to last year a deterioration in the license income and therefore the EBITDA related to that for about $28,000,000 which is not there in the second half. Yes. I see that, Abhijit. But I struggle a little bit to make the bridge then between a first half in which you've done kind of a €70,000,000 negative and the second half, which should be €10,000,000 positive to reach the €60,000,000 adjusted EBITDA guidance unless I took that number down in the wrong way. I'm not really sure how we get there. Let me I'm more than happy to give you that offline and here as well. Like I said, the first half was more severely impacted by the license income. So if we give you, let's say, on a call separately, the view on license income for the second half. And in the first half, we also, like I said, had some one offs in the quarter, which you see in the HealthTech other line of $10,000,000 that also will not repeat in the second half. So I think those are the 2 big and we have quite a big quarter in Q4 on license revenue. So although year on year, it remains flat, but through the year, the license revenue in the second half of the year is significantly more than the first half. And that also is what creates this additional income in the second half. Okay. Let's take that offline then. Yes. So if you keep the innovation cost the same, but if you have much larger license revenue, you will have a much better income for the second half. And the cash amount for Lumilez? And the cash amount for Lumilez has already come in, was I think the $1,350,000,000 So it was what we had announced earlier, and that money has come in, in Q2. Coming in Q2. Okay. That's true. Yes. And the sorry, what was your question on the Lumilets standard cost? Oh, the stranded cost, yes. You mentioned $5,000,000 in the other items in legacy. Is that a 1 or 4? Is that Yes. That used to be there as standard cost, but now that Lumilets is gone, we will get rid of that cost. So that will disappear in the coming months. Okay, perfect. Thank you so much, gentlemen. The next question comes from Mr. Yi Dan Wang from Deutsche Bank. Please state your question, sir. Hi. This is Yi Dan from Deutsche Bank. Just one quick question. Can you provide a bit more color on the performance in the other mature markets? It seems to be a lot weaker than mature markets in general. And what are you doing there? When could we expect that to that performance to improve? That would be great. Thank you. Yes. That's I can be quick about it. That's mainly driven by a sales decline in Japan. What is now good is that in the second quarter, we had a very strong positive order growth. And what is now good is that in the Q2, we had a very strong positive order growth. And therefore, we are going to be able to turn around our performance in Japan and get back to positive sales growth in the coming quarters. So that's just quarterly fluctuations rather than something in the quarter? Well, I would call it a little bit more than a quarterly fluctuation because in fact our Japan performance has been a little bit on the soft side for the last several quarters. And we appointed new management about 3 quarters of a year ago. And we are now seeing the positive impact of that new management. Very pleased with the strong very strong order growth in the Q2. And therefore, I'm optimistic that going forward we will see a much more steady performance. What was wrong with it? And what did they do to turn it around? It's just a matter of new energy leadership into the team. I mean there was no specific single root cause other than that a newly appointed leader brings new energy and takes the team forward. Okay. So products are fine, but there was a management issue? Exactly. Okay. Thank you. The next question comes from Mr. Scott Bardo from Berenberg. Please state your question, sir. Good morning. Thanks very much for taking my questions. First question just relates to the order book bounce back of 8% this quarter, which is encouraging and good to see. But I just wanted to understand in historical context because it appears that North America was a major driver of the rebound, but it was against the comp, which I think was one of the worst growth comps for order book that the company had for some time. I think you were down something like 10% in the prior year. So I mean is this effect, to a large extent normalization rather than market share gains? Perhaps you could comment a little bit about how we put that in context of history. Well, if we take last 12 months order growth for Philips as a whole, then we are a little over 4%, I think 4.1% off the top of my head. That I would say is a little bit above global market growth. With the strong order growth in the second quarter, we probably will see this LTM average go up a little bit. North America specifically is also at a 4% LTM. And I like to point out that this year we have not yet had orders from the VA given that the VA is withholding all orders due to this legislative issue around giving preference to small VA operated veterans operated enterprises. There are hearings going on with regards to this and we hope this will be resolved later this year. We are not certain yet. Philips has a very strong market share in the VA. So this is material for us. Notwithstanding the VA not ordering, we had 8% order intake growth. Hence, my conviction about market share performance. 9% even. 9%. Yes, 9%. Yes. Okay. Thanks, Scott. And just maybe just one follow-up, if possible, please. So free cash flow generation, I think, in the first half was about $165,000,000 which is perhaps a little bit softer, the trajectory for $1,000,000,000 $1,500,000,000 that you outlined for HealthTech. Can you talk a little bit about the drivers of free cash flow in the second half? And following on this, if Abhijit could take a stab at what the net debt position for the business will be at the end of the year considering the LumaEdge inflow and in the absence of further sell down for lighting, that will be very helpful for us to get a feeling for balance sheet position? Thanks very much. So I think from a cash flow perspective, we are pretty good, well placed if you look at the first half of this year versus the first half of last year. As a business, our cash flow largely comes in Q3 and Q4. So we are actually pretty okay with the $1,000,000,000 to $1,500,000,000 guidance that we've given. Regarding the net debt, we probably will be on the lower side of the $1,000,000,000 to 1.5 turns of net debt to EBITDA that we target, so closer to the 1 than the 1.5. That's excluding Spectranetics, Abhijit, or No, that's including. I mean, we will pay for Spectranetics now, right? So we will fund that as well. Okay. Thanks so much guys. Next question comes from Mr. James Moore from Redburn. Please state your question. Good morning, everyone. I wonder if I could ask a little bit about the profitability in DNT progressing nicely, but maybe a little slower than consensus was expecting, perhaps we were all a bit too high. But I was wondering if you could perhaps provide a little color on the year on year development for margin between the units DI, IGT, ultrasound. Specifically, I'm trying to understand how much big iron is coming up with or without Cleveland and whether ultrasound, the step back that we saw last year, whether that stopped or is still continuing? Yes, Rodrigo. So if you look at DI and the improvements in the first half, we see that actually pretty much across the board. So you see, we have improvements in DI for sure, because also the improvements in the CT and AMI results. We have had good improvement in the results of IGT. And what is also very good is that we have good improvements in the results of ultrasound because ultrasound growth is back. And therefore, these are high margin businesses which have very strong operating leverage. So I think that is helping us. And also the added growth so far from IGT and ultrasound gives us a positive mix impact in the overall numbers. So CT AMI coming, cost reductions on track, good volume so far and then a bit of mix that comes from the ultrasound and IGT business is growing fast. Very helpful. Thank you. And third question was on trademark license revenues. I might have misheard you earlier, but will there be a change in the sales or profit and could you size the impact going forward from either lighting or Lumiled's auto? Sorry, I didn't mention anything. The brand licensing, Tom. Tom. No, I didn't mention anything about that. So we had we have said there are certain licenses which expire, and we had guided to that earlier that we would lose this year around $28,000,000 to $30,000,000 The loss of that revenue is basically in the first half of the year. So the second half year on year will be close to flat. But so Lumilets will start contributing to the brand license income going forward now that they are from Q3 being deconsolidated. And that's what I was trying to understand. We got this dropping out and then Lumiled is coming in. But basically, big picture, if we look at next year versus this year, license income, is it broadly similar? Or how should we think about that? Brand license income is seeing a steady increase over time. And in terms of the profit impact of that, does it move with it? The things we need to think about? So you see within the licensing portfolio that we are losing license income from intellectual property patents and we are gaining license income from the brand. In terms of profitability, it's probably similar. And Abhijit already said that the decline of IPNS was primarily in the first half, whereas the second half year on year is more comparable. Very helpful. Thank you. Yes. All right. We have a follow-up question from Ms. Veronika Dubajova from Goldman Sachs. Please state your question, madam. Thank you, gentlemen, for squeezing me in at the end. I just wanted to ask a question about the order book growth and the 4 plus percent that you're running it over the last 12 month period. How sustainable do you think that is? Other than U. S. CapEx, which you have flagged as a sort of maybe an area of concern, are there any other risks that you see to that 4% growth rate? Thank you. Yes. Hi, Veronika. That is sustainable. In fact, I would like to have the order growth to be in the same bracket as our guidance for revenue growth. And we see that we have done that over the last 12 months. I flagged that Q2 will help that average. And also looking forward, looking at our opportunity funnel, we use salesforce.com, so we can actually analyze our opportunity funnel pretty well. I feel confident about our ability to do that. That's great. Thank you. You're welcome. Okay. Are there any other questions? And we have a follow-up question from Andreas Willey from JPMorgan. Please state your question. Yes. Thank you very much. I just wanted to ask about foreign exchange and the sensitivity to it. Obviously, we have a translation impact from the strong euro, but historically, Phillips had, at times, quite a material impact on the transaction side. I mean a weaker dollar should generally be good for some of your sourcing costs, but maybe you could just talk about that a bit more in terms of what some of the implications are of the big currency moves we are currently seeing, how far out you're hedged and whether we should expect much in the earnings bridge in terms of margin impact in the second half and into next year? Yes. I think for the second half, not really anything significant. If you see, we are largely hedged in terms of our position. If there is just a strengthening of a dollar, you will get an impact both on the sales as well as on the absolute amount of EBITDA, but from a margin perspective, not too much. So we have changed quite a bit on our hedging strategies in the past. So therefore, you've seen in the last couple of years, we don't call that out as large as it used to be. Of course, if emerging market currencies fluctuate big time, that could have an impact. But if it's just the euro dollar, we should be okay for this year and then for next year, it's a bit too long term to see, but then we'd hedge accordingly as well or take pricing action, so one of the 2. But did you have a big net exposure? I guess you export some products from Europe, you export others from the U. S. Is there a big net exposure prior to that? No, not big no, no, no, no, not Thank you very much. Yes? Okay. The next question comes from Mr. Scott Bardo from Berenberg. Please state your question, sir. Thanks very much for taking my follow-up. Yes, it just relates to the ongoing regulatory discussion with the U. S. Department of Justice. Obviously, this is an overhang and it's been kicking on for some time now. I just wonder if you could I appreciate there's limited things you can share here, but can you share some sort of feeling as to the likelihood that these discussions culminate in the consent decree with the regulator? And perhaps you could share some thoughts there. Thank you. Hi, Scott. Well, discussions are still going on with the DOJ. And obviously, discussions with the DOJ are serious, right? Otherwise, you wouldn't have them. So we take it very seriously. Now it affects primarily the defibrillator business. And therefore, the impact of any measures would be targeted to let's say parts of the PCMS business group. Other than that, I really don't want to run ahead of ourselves and first come to a conclusion with that discussion, which is taking a little bit of time. So but let's take it when it comes and then we will inform you in detail on the next steps. Okay. Thanks very much, Fran. All right. Thank you. Mr. Van Oosten and Mr. Bhattacharya, that was the last question. Please continue. Okay. Well, then I'd like to say to everybody, thank you for attending. We had a strong, let's say, quarter. We look with confidence at the future. That is what we wanted to radiate. And we will stay very focused on execution. And that's what you can expect from us. Thank you very much for attending.