Welcome to the Royal Philips fourth quarter and full year 2016 results conference call on Tuesday, the 24th of January 2017. During the introduction hosted by Mr. Frans van Houten, CEO, and Mr. Abhijit Bhattacharya, CFO, all participants will be in a listen-only mode. After the introduction, there will be an opportunity to ask questions. If any participant has difficulty hearing the conference at any time, please press the star followed by the zero on your telephone for operator assistance. 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 Preesman, Head of Investor Relations. Please go ahead, sir.
Thank you. Good morning, ladies and gentlemen. Welcome to Philips' fourth quarter and fiscal year 2016 results conference call. I'm here with our CEO, Frans van Houten, and our CFO, Abhijit Bhattacharya. On today's call, Frans will take you through our strategic and financial highlights for the period. Abhijit will provide more detail on financial performance and market dynamics. After that, we will take your questions. Our press release and related information slide deck were published at 7:00 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 tomorrow on our investor relations website. Before I turn the call over to Frans, I would like to remind you of a few things.
First, as you know, Philips retains a 71.225 stake in Philips Lighting and therefore continues to consolidate Philips Lighting's results. However, since Philips Lighting reported its Q4 and full year 2016 results on January 23, we will focus our commentary on today's call as much as possible on the performance of our Health Tech portfolio. We encourage you to review Philips Lighting's fourth quarter and annual results materials, which are available on the Philips Lighting IR website. Second, as a reminder, following the decision in 2014 to combine our Lumileds and Automotive Lighting businesses into a standalone company, the profit and loss of these combined businesses is reported under discontinued operations, and the net assets for the business in the balance sheet on the line assets held for sale. The cash flow of the combined Lumileds Automotive businesses is reported under cash flow from discontinued operations.
Finally, when we refer to adjusted EBITDA on this call, this represents EBITDA excluding restructuring costs, acquisition-related charges, and other charges and gains above EUR 20 million. With that, I would like to hand over the call to Frans.
Thanks, Pim, and thank you everyone for joining us today. 2016 was a defining year for Philips in which we completed our transformation into innovative HealthTech leader with key competitive differentiators and a solid platform for profitable growth. During 2016, we executed on significant milestones of our strategic roadmap. We successfully listed our lighting business in May after extensive preparations where we executed on the separation project on time and below cost. This has given Philips Lighting the opportunity to further build on its leadership position in the exciting lighting industry. Secondly, after battling difficult circumstances and a limited buyer universe, we are pleased that we have found a good home for our combined Lumileds and Automotive businesses and are on track to close the transaction.
It is important to note that the combined Lumileds and Automotive businesses had a very strong second half of the year, as we had expected, and have ended the year with good momentum with an adjusted EBITDA for the year of 20%. We have successfully integrated the Volcano business, which had a stagnant top line at the time of the acquisition in 2015, and it has delivered double-digit growth in the last four quarters and also contributed to the double-digit sales growth in our image-guided therapy business overall for the last two quarters of 2016. Moreover, we have reduced over EUR 40 million in cost to drive the Volcano business to profitability. We have successfully acquired and integrated PathXL, a Northern Ireland-based leader in digital pathology image analysis, workflow software, and educational tools.
PathXL's image analysis and tissue pathology software will complement Philips' digital pathology solutions offering and help expand our leadership in this fast-growing field. We have acquired Wellcentive, a leading U.S.-based provider of population health management software solutions. With this strategic acquisition, we strengthen our population health management business and leadership as health systems gradually shift from volume to value-based care and provide more preventative and chronic care services also outside of the hospital. These moves, as I've described them, have positioned us well to capture the tremendous opportunities that we see in the HealthTech domain. We are pleased with the performance of our HealthTech portfolio in the fourth quarter. Growth and margin improvements across all of our HealthTech operating segments drove comparable sales growth of 5% for the fourth consecutive quarter and 190 basis point increase in adjusted EBITDA margin to 15.3% for the quarter.
Overall, the Philips Group had 3% comparable sales growth and 190 basis point increase in adjusted EBITDA margin in the fourth quarter, driven by higher volumes and cost productivity in each of the segments, partly offset by a higher level of investment in growth initiatives and innovation. We achieved an adjusted EBITDA of 10.5% for 2016, which is a year-on-year improvement of 130 basis points and at the low end of our guidance of an adjusted EBITDA of around 11%. During 2016, our three accelerate cost-saving programs all delivered ahead of plan, with EUR 269 million of gross savings in overhead cost, EUR 418 million of gross savings in procurement, and EUR 204 million of productivity savings driven by the end-to-end process improvement program. There are significant opportunities ahead as a focused HealthTech company, and we are delivering on these opportunities through three key strategic initiatives going forward.
First, we will continue to improve margins by better serving customers and improving productivity. More specifically, we are continuing the self-help journey that we began with our Accelerate program in order to improve quality, operational excellence, and productivity on an ongoing basis by lowering our cost of goods and non-manufacturing cost. Along with these efficiency improvements, we will continue to lead the digital transformation in connected health care. We are unlocking value for both patients and providers by delivering more effective, coordinated, and personalized care. Our customers and partners know that they can turn to us and our HealthSuite platform to manage patient health by leveraging real-time patient data and clinical analytics. This leads us to the second initiative. We are boosting growth in our core business by extending relationships to capture opportunities in all geographies and deepening partnerships through consultative customer partnerships and business models.
Finally, we are able to do this because of our third initiative. We are developing and delivering winning innovative solutions across the health continuum. Philips integrated suite of systems, smart devices, software, and services are improving outcomes and productivity, which is driving growth through portfolio extensions and through organic investments, partnerships, as supplemented with focused M&A. The performance of our HealthTech portfolio in 2016 demonstrates that our strategic focus is paying off. Order intake growth in the fourth quarter was flat, which is in line with our expectations and comes actually on the back of a strong double-digit order intake growth during the fourth quarter of 2015, as well as an 8% order intake growth in the third quarter of 2016.
We are particularly pleased with the strong order intake in China and Latin America in 2016, which after a weak 2015, showed strong double-digit comparable order intake for the year. Overall order intake growth in the year was 1%, with the second half of the year gaining momentum with growth of 3%. The personal health businesses grew by 7% on a comparable basis, aided by the sell-in for Chinese New Year, which is in January 2017 compared to February in 2016. There was growth across the portfolio led by double-digit growth in health and wellness and high single-digit growth in domestic appliances, while the adjusted EBITDA margin improved by 100 basis points in the fourth quarter. For the personal health businesses in mature geographies, we had comparable sales growth in the high single digits, driven by double-digit growth in Western Europe and high single-digit growth in North America.
This was partly offset by a low single-digit decline in other mature geographies. In growth geographies, we had mid-single digit growth driven by double-digit growth in China, Central and Eastern Europe, and Middle East and Turkey, partly offset by a double-digit decline in India, which was largely due to the effects of what is called demonetization. We remain committed to sustaining a mid to high single-digit sales growth in personal health enabled by our strong innovation pipeline. Through our focus on locally relevant value propositions and ability to leverage our digital capabilities, the personal health businesses posted strong double-digit growth. Online sales grows in China, and that was driven by oral care and air businesses where Philips is the number one brand in China.
Building on the success of the Philips integrated Dream Family solution in the U.S., Europe, and Japan, we recently introduced the Philips DreamStation Go portable CPAP solution. DreamStation Go is a compact and lightweight device designed to provide sleep therapy for travelers with obstructive sleep apnea. Switching to our Diagnosis & Treatment business, which posted comparable sales growth of 3% and the adjusted EBITDA margin improved by 280 basis points, driven by double-digit growth in image-guided therapy, where we are benefiting from ongoing synergies from integrating Volcano in image-guided therapy. Our improvements in Cleveland continued and our investments to augment our quality standards remain on track. For the full year, Cleveland-related activities contributed improvements of approximately EUR 76 million to the adjusted EBITDA. Our investments in innovations are paying off within Diagnosis & Treatment, where we are enabling first-time right diagnosis, precision interventions, and therapy, all foundational to precision medicine.
Our strong solutions capabilities resulted in significant expansion of our long-term strategic partnerships. We entered into 15 new multi-year contracts with an aggregate value of approximately EUR 900 million. I see many more opportunities for Philips to grow by leveraging our deep clinical and consumer insights to deliver innovative healthcare solutions to our customers. In the fourth quarter, we entered into a 10-year, EUR 74 million agreement with the Expert Group of Companies, one of Russia's leading network of healthcare centers and clinics, to modernize the regional healthcare infrastructures and make the delivery of patient care in Russia. This partnership is very much in line with our strategy to forge multi-year strategic customer partnerships. They'll provide solutions combining advanced imaging systems with clinical informatics to improve cardiac care.
As the network's technology partner, we will also provide deep clinical expertise, consulting services, and technology planning for multidisciplinary medical centers and specialized cardiac centers. Building on the successful collaboration between Philips and the U.S. health system, Banner Health, in the area of remote monitoring of acute patients in intensive care units and remote monitoring of high-risk chronic patients at home, we now have entered into a 15-year strategic partnership to provide insights into the needs of greater patient populations through the use of our diagnostic imaging solutions, which will be a major focus of the partnership. Together, Banner Health and Philips will conduct an end-to-end analysis of Banner's extensive inpatient and outpatient imaging capabilities to drive operational efficiencies and create a connected clinical environment to support population health management programs.
Further, we are continuing to deepen our market penetration in image-guided therapy solutions, where we saw strong growth of peripheral imaging and therapy catheters in the U.S., and we are expanding in new geographical markets such as Asia-Pacific. In October, we incorporated our Volcano catheter-based imaging and measurement solutions into our robust portfolio of interventional cardiology solutions in Canada, where we serve 85% of Canadian hospitals with cardiology solutions. In image-guided therapy systems, we have developed an industry-first augmented reality navigation technology to guide minimally invasive spine surgery, a fast-growing new market for Philips. Turning to the Connected Care & Health Informatics business, comparable sales increased 4%, driven by mid-single digit growth in patient care and monitoring solutions and population health management, and the adjusted EBITDA margin improved by 50 basis points.
In the mature geographies, we had mid-single-digit comparable sales growth, driven by double-digit growth in Western Europe and other mature geographies, while North America posted low-single-digit growth. Growth geographies showed a mid-single-digit decline, with double-digit growth in Latin America offset by a double-digit decline in China, Middle East, and Turkey. In today's healthcare environment, it is more important than ever to seamlessly connect consumers and care professionals to provide actionable insight and better health and economic outcomes. In the fourth quarter within patient care and monitoring solutions, we launched the latest version of our IntelliVue Guardian solution in Europe, which has expanded our global leadership in patient monitoring solutions beyond acute care settings.
Our solution comprises of smart devices such as wearable biosensors and clinical decision support software and services that help clinicians to recognize early, subtle signs of patient deterioration in hospitals' general wards, allowing for timely intervention and improved patient outcomes. In healthcare informatics solutions and services, we are the global leader in advanced clinical informatics. We have made great progress in turning the business model to a so-called Platform as a Service, or PaaS, and Software as a Service, SaaS, business model, which are higher margin models with recurring revenue streams. Therefore, we expect to continually improve the margins of the business. At RSNA 2016, the largest radiology show in the world, we launched the high-performance universal data manager. Our new solution helps healthcare enterprises to organize large data sets, including millions of images and other data from multiple sources.
This complements our Philips IntelliSpace healthcare informatics portfolio, which consists of our Illumeo adaptive intelligence and IntelliSpace Portal 9.0 advanced visualization and quantification platform. At the RSNA, we also launched PerformanceBridge, a new suite of operational performance improvement software and services for radiology departments. Finally, as part of our focus on oncology, we extended our genomics analytics activity in the fourth quarter, driven by the strength of our Philips IntelliSpace Genomics clinical informatics platform. First of all, we are teaming up with Illumina, a leader in DNA sequencing technologies, to offer integrated solutions for genomics data in cancer research. Together, we are acquiring, analyzing, annotating, and interpreting genomics data in oncology cases. In addition, we have launched a collaboration with the company N-of-One, a molecular decision support leader, to accelerate innovation in the clinical interpretation of cancer genomics.
Both of these partnerships are significant steps forward for our oncology initiatives, where we are unlocking the value of genomics for a much wider group of laboratories and care providers, advancing genomics initiatives at a greater speed with the aim of better patient outcomes. As you all know, our products and related services are subject to various regulations and standards. We are committed to quality, and over the last years, we have made investments enabling significant progress in this area. We are currently in discussions on a civil matter with the U.S. Department of Justice , representing the U.S. Food and Drug Administration , arising from past inspections in and before 2015, focusing primarily on our external defibrillator business in the United States.
To give you some additional color, the size of this business globally is less than EUR 290 million, and the part under discussion is less than half of that business. That is not a proxy to estimate financial impact, which cannot be made until the discussions are concluded. However, we do anticipate a meaningful impact on the operations of this particular business. Since the matter is under discussion, we are unable to give any further details at this moment. Ladies and gentlemen, looking back, we have made significant progress during 2016. We have made significant strides in executing on our strategic agenda, and we have delivered strong improvements in our operational performance. Our improvement in adjusted EBITA margin of 130 basis points during the year, combined with a 5% growth in our HealthTech portfolio, provides evidence that our strategy of focusing on the HealthTech domain is delivering results.
For 2017, despite elevated uncertainty in the markets in which we operate, we will continue to improve our underlying performance and target to deliver 4%-6% comparable sales growth and on average, 100 basis point improvement in the adjusted EBITA per year for the next three to four years for our HealthTech portfolio. As mentioned earlier, our order book development had strong momentum in the second half of 2016, and as a result, we expect 2017 to be a back-end loaded year as well. With that, I'll turn the call 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 fourth quarter growth of 5% for the HealthTech portfolio. On a geographic basis, mature geographies delivered mid-single digit comparable sales growth, with both Western Europe and North America growing mid-single digit, while other mature markets achieved double-digit growth. Personal Health recorded high single-digit growth, Connected Care & Health Informatics mid-single digit growth, and Diagnosis & Treatment, low single-digit comparable sales growth. In the growth geography, mid-single digit comparable sales growth was largely driven by double-digit growth in countries like Argentina, Mexico, Chile, Turkey, Indonesia, and Singapore, and partly offset by double-digit decline in India. In the growth geographies, Personal Health and Diagnosis & Treatment recorded mid-single digit growth for the quarter.
In HealthTech Other, sales increased by EUR 27 million, mainly due to higher royalty income and one-time patent license deals. Turning to order intake, comparable currency order intake was flat year-on-year, as expected, on the back of a strong double-digit comparable sales growth in the fourth quarter of 2015. Connected Care & Health Informatics grew in the low single digit, while Diagnosis & Treatment recorded a low single-digit decline. In growth geographies, order intake on a currency comparable basis showed high single-digit growth driven by Latin America. North America posted low single-digit growth. Western Europe posted a double-digit decline compared to a strong double-digit growth in the fourth quarter of 2015. Let me now turn to the EBITA development for the group in the fourth quarter. The adjusted EBITA margin of 13.8% in the quarter was 190 basis points higher than the year before.
This strong margin increase was driven by an improvement of 100 basis points in Personal Health, 280 basis points in Diagnosis & Treatment, 50 basis points in Connected Care & Health Informatics, and 180 basis points in Lighting. Our underlying operational performance contributed 160 basis points to the adjusted margin in the fourth quarter as our Accelerate program continues to improve operational performance and drive efficiencies. More specifically, overhead and end-to-end productivity programs amounted to EUR 152 million, partly offset by investments in new business areas, brand campaign, cybersecurity, et cetera, which led to a net contribution of EUR 34 million. Design for Excellence or DFX, delivered EUR 163 million of additional bill of material savings year-on-year, which is on top of our normal run rate procurement savings of EUR 96 million.
In addition to the operational improvement of 160 basis points, the improvement in adjusted margin was supported by 50 basis points of positive financial contribution from Cleveland, which was partially offset by negative impact of currency translation effects of 30 basis points. In HealthTech Other, adjusted EBITDA was in line with the fourth quarter of 2015 and reflected higher royalty income from one-time patent license deals, partly offset by investments in innovation, brand campaigns, and cybersecurity. In the fourth quarter, the income tax expense was EUR 198 million, which was an increase of EUR 46 million compared to the fourth quarter of 2015. The increase was mainly due to higher earnings, partly offset by one-off tax benefits. On December 20th, 2016, we announced our intention to redeem the outstanding 5.75% notes due in 2018 with an aggregate principal amount of $1.25 billion.
The redemption resulted in a charge in the fourth quarter of EUR 62 million reflected in the financial income and expenses line. The cash outflow in the first quarter of 2017 will be approximately EUR 1.2 billion, excluding accrued interest. This transaction contributes to Philips' plan to reduce its annual interest expenses by approximately EUR 100 million in 2017. Despite this charge, overall net financial expenses decreased by EUR 50 million in the quarter. This was driven by lower interest charges related to the Masimo agreement and fourth quarter of 2015 valuation allowance charges. Net income from discontinued operations was EUR 17 million higher than the fourth quarter of 2015, mainly due to the improved operational performance of the combined Lumileds and Automotive Lighting business. The Return on Invested Capital, which is calculated on a five-quarter math basis, was 13.6%, which is almost five percentage points above our WACC.
ROIC on total Philips excluding Lighting amounted to 14.7%. Our drive to increase working capital efficiencies continue to yield results as inventories as a percentage of sales decreased to 13.8% year-on-year, an improvement of 15 basis points. On a currency comparable basis, the improvement was 90 basis points. As we discussed during our Capital Markets Day, our dividend policy is aimed at dividend stability. As such, a proposal will be submitted to the annual general meeting of shareholders to be held on May 11th, 2017, to declare a distribution of EUR 0.80 per common share in cash or shares at the option of the shareholder. Further details can be found in our fourth quarter press release. The Philips Group delivered significant improvements in 2016 as we delivered 3% comparable sales growth and adjusted EBITDA margin improvement of 130 basis points.
I'm pleased that our focus on cash and working capital efficiency resulted in a cash flow from operating activities of EUR 1.9 billion. Let me now provide you with some healthcare market perspectives for the U.S., Western Europe, and China. We see some uncertainty in the U.S. market with regards to the Affordable Care Act. With the passage of the fiscal year 2016 budget resolution in mid-January, the Republican-controlled Congress has begun the process to repeal and replace the Affordable Care Act. The policy and political uncertainties around the ACA repeal and replace effort center on a number of areas, including the lack of a single clear Republican alternative to the ACA. These uncertainties, which are likely to continue for some time, were underscored with a broad executive order stating that it is the policy of the new administration to seek the prompt repeal of the ACA.
Even with this recent development, several questions remain, including what will happen to those who participated in the ACA's expanded health insurance coverage, and of course, how long will this process take. Nevertheless, fundamentally, we believe that the imperatives that drove the adoption of the ACA in 2009, that is controlling healthcare cost, improving the quality of care, increasing the number of Americans with healthcare coverage, are still at work. These imperatives will compel political efforts in this arena, continue the focus on value-based care, and resolve the current uncertainties in the U.S. market. Because Philips solutions and strategies are aimed at addressing these imperatives and leveraging value-based care, we believe we continue to be well-positioned in the U.S. market.
In other areas of healthcare policies, we regard Medicare reforms, including MACRA Which incents or incentivizes physicians to transition from fee for service to value-based payment programs and similar value-based models introduced by the Center for Medicare and Medicaid Innovation to remain in effect. Given these dynamics, we expect the U.S. market growth to be in the low single digits while we closely monitor further development. Looking at Europe, a declining market in 2016 can be attributed to flat growth in the larger markets such as Germany, Switzerland, and Austria, combined with high single-digit decline in smaller markets such as Central and Eastern Europe, the U.K., and Ireland. In Central and Eastern Europe, transition from legacy healthcare funding programs is negatively impacting the market. In the U.K. and NHS, budget cut, combined with uncertainty associated with the Brexit, are primary contributors to a weaker market in 2016.
For 2017, we expect modest low single-digit market growth in Europe. In China, a key growth driver is the government's focus on improvement of the level of care provided in existing Tier 2 and Tier 1 hospitals. In Tier 3 hospitals, we continue to see a gradual shift in demand to more integrated enterprise-wide solutions and emerging contemplation of population health management. Based on this, we expect market growth to be in the mid-single digit for 2017. Overall, we estimate the global healthcare market growth to be in the low single-digit range for 2017. Let me now turn to our 2017 guidance for HealthTech portfolio of businesses. Overall, restructuring for 2017 is expected to be approximately 65 basis points, which is in line with our Capital Markets Day guidance. Acquisition-related costs are expected to be approximately 20 basis points.
In the healthcare other segment, we expect net cost of approximately EUR 40 million in the first quarter and approximately EUR 100 million for the full year 2017, both at EBITA level. Included in these numbers are negligible restructuring costs and other incidental items in the first quarter and approximately EUR 40 million for the full year. IP royalties are expected to be EUR 25 million to EUR 35 million lower compared to last year, in large part during the first half of the year. Following the successful IPO of Philips Lighting in May last year, we expect remaining separation costs for the first quarter to be EUR 20 million and approximately EUR 30 million for the full year 2017. Other legacy items are expected to be EUR 15 million in the first quarter and approximately EUR 35 million for the full year 2017.
For 2017, we expect an effective tax rate to be around 30%. Given our order book development as well as the potential one-off margin impact related to our external defibrillator business, we expect improvements in 2017 to be at the back end of the year. As laid out during our Capital Markets Day in November, and as mentioned by Frans earlier, we continue to target a performance trajectory to deliver 4%-6% comparable sales growth and on average, 100 basis points improvement in adjusted EBITA per year for the next three to four years. With that, we will open the line for your questions. Thank you.
Thank you, sir. If any participant would like to ask a question, please press the star followed by the one on your telephone. If you wish to cancel this request, please press the star followed by the two. Would you please limit yourself to one question with a maximum of one follow-up? This will give more people the opportunity to ask questions. If you are using speaker equipment today, please lift the handset before making your selection. There will be a short pause while participants register for a question. We will now take our first question from Ian Douglas-Pennant from UBS. Please go ahead.
Thanks very much for taking my question. It is Ian Douglas-Pennant at UBS. My question is on the defibrillator DOJ issue. If it is okay, I have got one question with three, what I hope are short subparts. The key thing is, how can we be comfortable this is not indicative of systemic quality controls issue at Philips? Obviously, Cleveland has taken longer to resolve than we hoped. I appreciate this is small in the direct impact, but how can we get comfort that this is not wider problems? Perhaps you could talk about the changes you made after Cleveland across the group rather than just in that one division. The two shorter follow-ups would be, did this impact Q4 results? Secondly, will you include the cost of resolving this issue in EBITA adjusted, or will you exclude them as one-off issues going forward? Thank you.
Hi, good morning, Ian. This is Frans. Let me answer the first question, and the other two, I will ask Abhijit to elucidate. As I said, the discussion with DOJ, FDA relates to findings of past inspections.
Years and more in the past, relate primarily to compliance to quality management system regulations. As such, there is no concern on product quality. In fact, our products are market leading, also in the area of quality, and are highly appreciated by our customers. Over the last two and a half years, basically since the major interventions in our healthcare division, we have invested all across our sites and made significant impact on quality and quality compliance everywhere. I feel confident about that. The impact of the past inspections and the subsequent dialogue with DOJ means that we will have now the consequences of these past issues, and will relate to, let's say, some impact in the business during 2017, as well as expenses on that business. That is as much as I can say about it. It is unfortunate.
It is certainly not comparable to a Cleveland. It's a much smaller business. The global business in defibrillators is around EUR 290 million. Less than half of that is in the United States. We need to see it in that context. We will work diligently to get through this discussion. When the discussion with DOJ ends, we will, of course, immediately inform the market. At this time, we cannot give further detail. You need to appreciate that as we are in negotiations, that is a sensitive matter. Rest assured, we take it very seriously. Now I'd like to ask Abhijit to talk about the financial side.
Yeah. Building on what Frans said, there is no impact in the Q4 results since we are unable to estimate at this point of time what the potential impact could be. As far as the adjusted or not, I think we will continue to use our standard definition. If there are impacts which are larger than EUR 20 million, we take that out of adjusted EBITDA, which are one-time impacts. For the rest, it will be so. Once we know exactly what the conclusion is, then we will give you those further details here.
Maybe one more addition to everybody in the call. Also, we have now given quite extensive discussion on this. We are not able to give more information at this time about this matter. With that, I also hope that you appreciate that there's not a lot of point in going back to this point. Thank you.
Could I just violate your request that you've literally just made?
Of course.
Just confirm, have you stopped selling products that you were selling before? Is the impact entirely a cost issue, or are we looking at an opportunity cost in terms of lost revenues as well? Then I promise to stop talking after that.
No, I fully understand, Ian. After all, it's your job to inquire. I appreciate that. At this time, it's business as usual. We have not concluded with DOJ, and we can at this time not give you an estimate of the impact on the business. I have to leave it at that.
As things stand today, there is no impact on revenues, but that might change in the future depending on what DOJ say.
Correct.
Exactly.
That's correct.
We will now take our next question from Mark Troman from Bank of America Merrill Lynch. Please go ahead.
Thank you. Good morning, Frans. Good morning, Abhijit. Just sticking with the defibrillator subject for a second, Frans, I know we don't know the impact, but could you say that the issues that are being addressed, are they similar to what we saw in Cleveland? This is all about procedures and is it that the remedies that you need to implement, is it a similar sort of process to Cleveland, albeit it seems like the business is a lot smaller? That's question number one. Question number two, more one on demand. In terms of your order pipeline, I know you've given your outlook for the regions.
In terms of your order pipeline, have you seen any changes, I guess, post the presidential change in the U.S., any uncertainties coming through in terms of the U.S. demand profile in the near term, or is it sort of business as usual? Thank you.
All right, Mark. I'm violating my own statement now. It is not similar to Cleveland. We have made tremendous progress over the last two years through our investments in quality improvement and quality management systems improvement. In that context, we are in much better shape than what we were in 2014. We have made investments in all healthcare sites across the world, and we believe we can stand up to any scrutiny that will come our way. Also scrutiny as part of, let's say, this discussion with the DOJ. On top of that, as you said, it's a smaller business. We believe that the quality of our defibrillators is actually market leading. We measure that in the sense through, let's say, what we see as field call rates and what have you. Our customers are very happy with these products. It is different.
Nevertheless, it is a little bump in the road here that we need to deal with. Now to your second question. There's a lot of uncertainty in the market related to potential policy changes in the United States. To your question, we have not seen changes in order behavior in the U.S. market so far. In fact, we are proud that we have gained market share, all across the world and also in the U.S., outgrowing, on average, competition. We also feel very encouraged with 15 large-scale deals last year, through the year. That kind of underlines that our strategy is very well-received and that our innovations are spot on. At this moment, the sentiment is okay. Now, I did speak with several hospital CEOs last week in Davos and the week before at the conference in San Francisco. I think everybody talks about it.
Hospital CEOs are concerned what effect this may have on their Medicare, Medicaid patients. Depending on the hospital, that proportion of their business differs anywhere between 20% and 50%, depending on which region they operate in. I think caution is necessary, and if we really see impacts, then of course we will flag that to the market. At this time, I think we just need to be cautious.
Okay. Thank you very much, Frans.
Welcome.
We will now take our next question from Ben Uglow from Morgan Stanley. Please go ahead.
Well, good morning, Frans. Good morning, Abhijit. Thank you for taking the question. Look, I'm sorry to labor the same point as I have been for a little while, but I wanted to understand the order trajectory, what is happening on the ground, if you like, in diagnosis and treatment. The reason why I look at this particularly, it's a EUR 7 billion business, so it is most material part, or a very material part, I should say, of health tech. If we look through 2016, over the course of the year, if the maths is right, and obviously we don't have the absolute numbers, you're ending the year low single digit down in orders.
What I just want to understand is, given the resumption at Cleveland and given the pickup we saw in China in the market generally, why have we not yet seen a sort of stronger reactivation in your diagnosis and treatment business? Why do you think that you're not posting the same level of order growth in imaging that we see at peers and that we see in the market overall? That was question number one. Question number two, and fairly obviously it relates to this is, your order book conversion is typically around 70%, something like that. Are there other factors that you see in the diagnosis and treatment division this year that would bridge you towards 4%-6% growth? If we put to one side this order book issue, what other factors would allow you to have better growth, mid-single digit growth plus during 2017?
Okay, thanks, Ben. Yeah, let's talk about it. Maybe let me start with taking you all the way back to fourth quarter 2015, where diagnosis and treatment had a order intake of 21%. We ended 2015 very strong. The beginning of 2016 was much weaker because maybe related to that very strong order intake in the fourth quarter of 2015. We had a positive order intake growth in the third quarter and close to flat in the fourth quarter. We continue to sit on a healthy order book, for D&T for the year 2017. A bit more color. We saw that the ultrasound market actually shrunk in 2016, that was not an easy market. We saw strong traction in image-guided therapy.
In the diagnosis, let's say diagnostic imaging, we actually expect further traction in 2017 with a couple of new products coming on the market. We also have an important product launch expectedly later this year for image-guided therapy. We expect stronger traction for ultrasound in 2017. There are several positive drivers that give us the confidence that we can, across the Philips portfolio, support, let's say, the growth target. I'm looking at Abhijit, whether I missed anything. I think the last thing is, Ben, as you know, the order book is 30% of revenues, right? 70% is still outside the order book, which comprises of the service business, personal health, et cetera. With those growing also pretty good, we are pretty confident that we will still be within the guidance.
Okay. That's very helpful. The color does help. I'm right that we can comfortably assume for diagnosis and treatment that we should be within the guidance band for the current year?
Well, the guidance band is for Philips in health technology.
Right.
Yeah.
If we take out Personal Health, because the growth rate, to be clear, in the last couple of quarters, we're down to 3% now, so that's why I'm asking the question.
Yeah. Well, there's nothing shameful of 3%, but let's say the overall growth rate of 4-6 is for Philips in health technology. Personal Health, slightly ahead of that, the other two, slightly below that. Overall, we will stick to our guidance range. Maybe there's one more comment to make, and that is that some of these larger scale deals do not show up in the order intake numbers, because we typically only take a 15 months window in recognizing orders. Now, as time progresses, then we will, of course, look back at these large scale deals and bring it to orders. Also, the more managed equipment services deals that come as a recurring revenue stream may skew the picture here a little bit.
That's really helpful. Thank you very much.
You're welcome, Dan. All right. Next question.
We will now take our next question from James Moore from Redburn. Please go ahead.
Yeah. Hi, everyone. My first question surrounds the margin guidance for this year, the 100 basis points on average you've talked about over the years. I know you wanted to get away from individual year-based guidance. At the same time, with the FDA issue today, I sense you're trying to say that guidance remains applicable. Can we be very clear and say that that guidance remains applicable for 2017, given the FDA issue? That's the first question. Secondly, I wondered if I could talk about your lighting stake, and any reductions planned and the timing on that. Finally, could you give us a little color on the Diagnosis & Treatment business? The margin's progressing. I see it's up in the year and the quarter. You've obviously had, in the past, the Big Iron issues.
There are movements in there for service margin, ultrasound, and other pieces, IGT, et cetera. I wonder if you could just give us a bit of a feel for how much Big Iron's improved and how much it has to go.
Okay. Let's give it a try, James. In fact, in the past, we had the habit of giving a far out target three years away, and we typically had to do a sprint towards the end of the three years to get there. At the Capital Markets Day, Abhijit and I said, look, we want to become a more predictive company and provide an annual improvement in results. In fact, we are not stepping away from guidance that relates to a year improvement. We have, however, said that it is on average 100 basis points per year. Which could mean that in one year, you're a little bit over that number, and in another year, you are a little bit below. I don't want to be stuck on exactly 100 basis points within a given year. It could be around that number. Either above or below.
It should average out on 100 basis points on average for a three to four-year period. I hope that that helps, and we remain committed to that statement also for 2017. That means that we will compensate for the impact that the potential agreement with DOJ, FDA will have within our business. We feel that we have enough levers to pull, productivity, new product introductions, margin expansion, growth, that we are able to absorb that. We think even though it's a disappointment, I want to reassure you that this relates to past inspection issues related to quality management systems. There is nothing wrong with our products, and that we will continue to push the envelope. We have momentum. That's how we talk about it in 2016. It's working, and we will just continue with that momentum. The second question, if I may, go to the lighting stake.
I spoke with a lot of med tech investors, and I'm really encouraged by what they have to tell us. They believe that our strategy is very interesting, that we are operating in various market niches that are highly relevant. The way we embrace digital, which is very relevant for hospitals and consumers in the future. Actually, many med tech investors say they can't wait to see us as a pure health tech company. Which means a deconsolidation of lighting is important to them. That is imprinted on my mind. It's what we keep in mind. Today, however, I cannot give you a precise timeline as to when we will sell down. We are committed to sell down. When we have news to tell you, we will tell you.
It is certainly going to be helpful that Lighting yesterday told the market that if we sell down, that they will participate through their share buyback, which could mean therefore that the rate in which we go down can actually accelerate a bit. I'd like to leave that point at that statement. The third point about D&T margins, as I'm running out of steam here, I'm going to ask Abhijit to take that one.
I think you've seen from last year to this year a significant improvement in the D&T margins. In the overall plan that we have made, we are also looking at 100 basis points improvement next year across the group, That would mean that it comes pretty much evenly across the businesses. It's not that there is one outperformer and there is a lagging business. If you look at the productivity savings that D&T has lined up, the procurement savings that are lined up, the cost initiatives that they have lined up, I think we expect the momentum that we have gained on margin improvement to continue into next year, although not as steep as it has been this year. You've seen in the fourth quarter, I think is well above the 200 basis points. It's about 280 basis points. That trend should continue next year.
I could add to that, Abhijit and James, that the product portfolio is strong. Diagnosis has, for example, strong MR range, radiology solutions, PerformanceBridge, productivity for radiologists. Ultrasound, we are moving beyond cardiology and ultrasound into OBGYN and general imaging. I think we are really on a roll with image-guided therapy. Volcano is working out fine. It's really very good with double-digit growth. I think there are several growth levers that also will improve the margin through mix and growth. Okay, James, does that answer the question?
Yeah, that's helpful. Could I just circle back to your comment about the compensating in 2017 for the FDA? Is that really to say that if there is an impact, it would be contained within a single fiscal year as opposed to, say, two or three, as we saw with Cleveland?
I would like to postpone, let's say, the discussion of impact till the moment when the discussions with the DOJ are finalized and leave it for now at a meaningful impact. Now I'm going against my own word again. I want to reiterate that this is not a product issue. This is related to the past findings on the quality management system. We need to demonstrate that that is all in order. That causes potential disruption. I would like to leave it at that. We'll get back to you if and when we conclude with the DOJ.
Thanks, Frans.
We will now take our next question from Andreas Willi from J.P. Morgan Cazenove. Please go ahead.
Yeah, good morning, gentlemen. Thanks for your time. First question I have is on Connected Care Health Informatics. You had some negative sales growth in the informatics business in Q4. Maybe you can comment a bit around that. It's certainly an area where I would have expected to see some more growth given the product launches and what you talked about in the past. What should we expect from this business here in the past? Also mentioned that you see the growth accelerating there. Is that Q4 just a one-off, or is there something in the business in terms of that's holding back the growth at this time? My second question on capital allocation and dividend, you kept the dividend flat, QB, but you offer it again as a stock dividend with the potential of the dilution in terms of the number of shares.
If Philips is an attractively valued health tech play with a good balance sheet, should it really issue shares over time? Why are you not buying back shares that are issued through this dividend scheme, which I appreciate has tax advantages for the shareholders that can participate, but a dilution risk for the others?
Yeah, thanks. Hi, Andreas. Connected Care Health Informatics, we saw strong sales growth in patient monitoring and a bit more lumpiness in health informatics. Health informatics is much more a project business. Moreover, as we move more to SaaS and PaaS business models, you build up a revenue stream that is coming in over time. We did see very good order intake growth in the fourth quarter for Connected Care Health Informatics. Therefore, we are confident about our ability to grow this business in the future. My team here is scribbling next to me. Abhijit, why don't you?
Yeah, Andreas, if you look at Q4, we had 4% growth in Connected Care and Health Informatics. PCMS grew nicely well above the 5%. I think overall growth this year was around the 5%. Compared to a 2% growth last year. 2% in Q4, but for the full year last year, it was actually flat, and this year we are up close to 5%. I think we are actually pretty happy with the return to growth in CC and HI. We had good mid-single digit growth in PCMS as well for the year, which was flat last year.
Maybe that gives a different perspective than what you had in mind, Andreas. It's an exciting business for us. Your second question, and I'm sure that Abhijit would also like to contribute to that. We have, of course, over the last years done sizable share buybacks. In that sense, we are ahead of the game in shrinking the share count, and over a longer period of time, there is no dilution, especially if you then include this year's upcoming dividend payment as a combination of cash and scrip. Just to reinforce that we are cognizant about the importance of not diluting, but we have looked carefully at it, and we are not diluting.
No, I think that's a fair reply. If you look at the buybacks we've done over the past two years, we have been actually accretive. A couple of years if we do this. It's actually a choice dividend, unfortunately, or fortunately. The shareholders make a choice on what they want to do. We made a small change to the default setting that we had earlier. We used to actually put to scrip, and we have put that to cash now, so that's in line with market practice. Then, there are shareholders who gain tax advantages by taking on the scrip dividend, and we give them that opportunity. As Frans mentioned, the long-term plan is, of course, not to be dilutive.
Thank you.
All right.
We will now take our next question from Gaël de Bray from Deutsche Bank. Please go ahead.
Yes. Good morning, everyone. My first question is on the defibrillator business, or at least on the investigation process. Clearly, I am not familiar with the process here, but could you explain why the DOJ is involved and not just the FDA this time? That's question number one. Question number two is on the contribution from Cleveland, which was probably EUR 10 million or EUR 15 million below expectations in Q4. That would be great if you could comment about that. In particular, why the Cleveland contribution was the same in Q4 as in Q3, despite the higher revenue number. If you could comment about what we should expect for 2017, that would be obviously very good. Thank you.
Hi, Gaël. The FDA is not an enforcement agency in their own right. They do inspections, but when they want to enforce something, they go to their colleagues of the DOJ. That's like if you would hire a law firm. I hope that that answers the involvement of the DOJ. That's normal. It's not exceptional. When the FDA wants to enforce, they go to the DOJ. The contributions of Cleveland, the way we report on them, of course, is related to the improvement actions, not necessarily to the sales progress. It has to do, for example, with cost containment, lesser expense on remediation actions, and so on. It is not an exact science, I'm afraid. We had originally indeed targeted a slightly higher amount. I think we came in around EUR 80 million.
We were about EUR 10 million short.
It was about EUR 10 million short.
Yeah.
The direction is that we are absolutely on track, and we also expect to continue to improve in 2017.
Would you expect to fully catch up on the last EUR 175 million or so you had over the past couple of years from Cleveland? What should be the timing for that?
We've said that will be over the next couple of years, I think we are on track for that. The way we look at Cleveland is, production is back to where it should be. We are now making sales. It's part of the overall improvement that we will drive next year. It's not something that I think we need to call out anymore because the operations are back on, let's say, where they should be, and now we need to build back market share. The more volumes we drive, the higher will be the contributions for the CT/AMI business because it's now not restricted to just the Cleveland site because we are also manufacturing from other sites. I think at the end of the fourth quarter, we bring the Cleveland issue to a close on this.
We will now take our next question from Max Yates from Credit Suisse. Please go ahead.
Hi. Thank you. Just my first question would be on the overhead cost savings and gross margin
savings for next year. You gave in that bridge where you showed the 100 basis points of margin expansion per year, 1.9% from gross margins and 0.5 per year from overhead. I just wanted to understand the sort of phasing of that through the three or four years, and whether we should expect that to be evenly split over the next four years or whether any of that was front-loaded because you'd already started closing some of the smaller manufacturing footprints. Just a little bit of color around that.
I think, Max, you should look at that as something that would be evenly spread, because even on manufacturing footprint, by the time you finish with the whole consolidation and get the savings into your P&L, it takes a while, whereas the overhead savings and gross margin improvements comes a bit earlier. If you look at the entire package, I think an even phasing throughout the three years is a fair way to look at it.
Maybe just a quick follow-up. I just wanted to understand the historic timeline around this defibrillators issue. Is it that there was an inspection in 2015? Since then, you've been working with the FDA, going back and forward, and this word compliance was used because the FDA ultimately didn't get what they wanted and then brought in the DOJ? Or is it more a case of it was inspected in 2015, you've heard very little, and now the DOJ has been brought in? I just wanted to understand a bit about that sort of historic timeline.
It's even a bit earlier than that, where most of the past inspections were well before 2015. The way you describe it's the latter. Where, in fact, it's only recently that we were contacted and engaged in dialogue with the DOJ.
Is there any way you can give us any confidence that sort of inspections even before, through 2015, are there any more of these sort of ongoing where you've had contact from the FDA regarding something that happened maybe back in 2014 or 2015?
If I take a wider perspective, I told you that we have made investments and we have made a lot of progress on quality across the board. We have ongoing inspections from regulatory bodies, including the FDA, all the time. In fact, we are quite pleased that in the last two years, we have had no warning letters anywhere, which demonstrate the statement of progress. We can actually demonstrate to ourselves that the findings of, let's say, habitual inspections as they may occur from time to time, they are showing the progress that we have made. As I said, or as you referred, we didn't hear for a while, there's an enforcement action on past inspections, the consequence is now, even though we have made a lot of progress.
Okay, understand. Thank you very much.
You're welcome.
We will now take our next question from Daniel Connolly from Liberum. Please go ahead.
Hi, thanks for taking my question. Two questions. Firstly, just on PH, the seven points of very strong top-line growth. Could you just give us a sense of how much of that is due to the sort of earlier sell-in from the change in the Chinese New Year timing? That's the first question. Second question, again, coming back to the defibrillator unit. Now, I recall that Cleveland was around about EUR 700 million to EUR 800 million, and that saw 340 basis points margin decline. The defibrillator unit's probably about 20% the size of Cleveland. Is it fair to sort of assume 20% the size of the impact, i.e., 60 basis points margin pressure? Now, I appreciate you can't sort of help on this. You said you wouldn't. I mean, that's clearly our job.
I'm more looking for sort of the color of how this sort of compares to Cleveland in terms of, if you could give us a sense of the nature of the remediation actions that would be required. Are they sort of in line with what you saw with Cleveland and not as harsh? Just sort of some kind of a bit more detail on that so we can make our assumptions on the likely impact. Thanks very much.
Daniel, I'm smiling because it clearly I'm not very successful in stopping the flow of questions here. Let's first talk about Personal Health. The team is doing a fantastic job, and I really want to compliment the Personal Health folks, because the growth is driven across the board. We saw strong growth in the U.S., strong growth in Europe, strong growth in China. You cannot infer that there was big impact of the Chinese New Year timing, right? If anything, it was relatively small. The takeaway is that Personal Health has great innovations, very strong execution, and we expect just a continuation of growth. Of course, not every quarter can be the same, and that is why we wanted to flag the Chinese New Year timing. It is not If Chinese New Year is later in the quarter, then you have, relatively speaking, a stronger first quarter.
Exactly.
Right now, Chinese New Year is early. It may mean that the first quarter is a little bit weaker. That is why we wanted to talk about it. All right. Does that answer your first question, Daniel?
Absolutely. Thank you very much.
Okay. The Computed Tomography and Advanced Molecular Imaging business actually was over EUR 1 billion in size, so a little bit bigger than what you had in mind. It would be wrong to associate, let's say, a percentage impact to the business in proportion to the sales. Unfortunately, it may not work like that. We have not yet been able to estimate the impact for the defibrillator business. That we can only do when it is clear what the final outcome of the discussions with the DOJ are. What we did want to say is that the defib business is, of course, a much smaller business, and only about half or less than half of that business is in the U.S. For the rest, I'm afraid we'll have to be patient till the conclusion of the discussions.
Okay, thanks.
We will now take our next question from Jonathan Mounsey from Exane BNP Paribas. Please go ahead.
Hello. Hi. Thanks for taking my call. A couple of questions. First of all, on capital allocation. Obviously, you've been asked about the timing of selling down the stake in Philips Lighting. Commented that you're quite keen to get that moving. Once you do get the money in, could you say something about maybe acquisitions, thoughts about how to deploy the money? Secondly, on HealthTech Other, just looking through that business or that division. It looks like it was central cost that kind of drove the high level of the cost in that division this quarter relative to consensus expectations. Is that something we should model going forward? Will central costs be higher than maybe the street currently thinks in HealthTech Other?
All right. Two questions. I will start, Abhijit will finish. If I first may take you to 2016, we have in fact used quite a bit of the cash generation to strengthen balance sheet with taking the expensive bonds out. In 2017, with the redemption of the 2018 bond, actually, we continue on that policy. We are, of course, cognizant that we will be becoming a very cash-generative business. Actually, my compliments to Abhijit for how he's driving working capital improvement. We probably can expect further improvement in that area. In terms of capital allocation, M&A will potentially play a role going forward. I've often referred to Volcano as a good indication of a deal. We have executed very well on that deal, and it could be kind of a direction to look at these kind of sizes of deals.
At the same time, it needs to be actionable. It needs to have a good payback. We have high hurdles to apply. I don't want to get ahead of ourselves. For the rest, I'd ask Abhijit to complement my introduction.
I think if you look at HT Others, the central costs look high because we actually have centralized a lot of costs this year, let's say for finance and other functions, so that we manage those at group level. That is actually part of our program to get our enabling functions cost to benchmark levels. I think, I've guided for next year overall at a number of EUR 100 million with around EUR 40 million of restructuring. You have clear guidance there, and that would give you a net in the adjusted EBIT of around EUR 60 million, which is a combination of lower license revenue of EUR 25 million-EUR 30 million or EUR 25 million-EUR 35 million, which we will offset with further cost reductions that we will drive. That's how you should look at HealthTech Other for next year or for this year rather.
Just one small follow-up. On the capital allocation, should we be thinking that pretty much all of the money that's returned from lighting is potentially there to reinvest in acquisitions? That there's actually maybe potential for capital return in excess of that?
I think we have said that a number of times. There are a few things that we are doing. One is cleaning up the debt portfolio. We have paid back also the loan we had taken for Lumileds, that is done. Yes, part of that money will be reinvested in M&A if opportunities arise, and if the opportunities don't arise, we will look, in the next years, what we should do with it. I think at this stage, currently, we are going to hold a stronger balance sheet for a while.
Understood. Thank you.
We will now take our next question from Peter Reilly from Jefferies. Please go ahead.
Well, good morning. I've just got one question, please. You've had another very good quarter from Personal Health. It continues to grow faster with higher margins than the rest of the group. Can you give any tangible examples of any synergies between Personal Health and the rest of the group? I know it's obviously part of your whole HealthTech strategy, but are there any tangible things you can highlight which show why that business benefits by being part of the group?
Peter, as you already indicate yourself, it's part of our strategy. If you look at the overall healthcare expenditure in the U.S., it's shifting towards more ambulatory spending. Where originally 40% was spent in hospitals and 60% was spent outside of hospitals, actually now that moves to 30/70. There is a quite significant shift of healthcare spending in ambulatory settings. We expect that with digital and cloud, consumer health activities at home will actually become larger and larger. We see that we are quite unique in positioning ourselves along the health continuum, with regards to the ability to preventative care and also support for chronic disease, for consumers at home. We have a lot of interest from hospital systems to understand how you actually influence consumer behavior, and we believe that our trusted brand for the consumers will give us opportunities in the future.
At the same time, Personal Health benefits from the connection to deep clinical insights and professional endorsement. The fact that we are growing oral care so well is because of our efforts on clinical evidence, that our products actually have a better impact for health than consumers. Our air business is now starting to tackle allergens. We see down the road, more and more propositions coming that are going to be kind of a hybrid, right? We are definitely going to stick with this business. We think it's great. We also, by the way, are applying skills from consumer to professional. We have built up quite a sizable knowledge base on digital marketing that we are now going to apply towards health professionals, reaching more decision makers for our professional business.
As you say, you're unique in your positioning and if it does give you a lot of tangible benefits, do you think other people are going to follow your example, or do you expect to remain uniquely positioned in that space? It is an unusual combination.
It may be unusual from a medtech traditional point of view, right? Where medtech companies are focused on devices. I can tell you that in my discussion with medtech companies, they all struggle with what outcome-based care is going to do to them, right? In a volume market, you sell lots of devices, but once you have to prove outcomes, you need to understand what an individual patient has as benefits of your devices. Same with pharma companies. Pharma companies need to demonstrate impact, need to demonstrate compliance and results. They are actually talking to us with regards to our HealthSuite digital platform, whether we can help them deliver the evidence of patient outcomes. If anything, I would say more healthcare companies are going to seek for ways to become consumer-centric in their efforts.
I predict that over the next years, we will see this rationale is stronger. Maybe finally, I don't want to belabor it, you start seeing Apple and Google and other Silicon Valley companies getting into the space. I don't see that as a threat to Philips, we are so-called in the last yard of patient engagement and patient care and supporting doctors. I do see it as an evidence that the consumer angle is going to play a bigger role in cloud-based healthcare delivery.
That's very helpful. Thank you.
Okay, thanks. I'm sure we can continue this dialogue at some point in time. That's fine.
We will now take our next question from Alok Katre from Société Générale. Please go ahead.
Hi, Alok Katre from SocGen. Thanks for taking my questions. I just have one really. On Diagnosis & Treatment, you sort of mentioned that, in 2017, you don't expect a similar level of margin improvement as in 2016. I would just like to understand what's driving that comment, given you still get a bit of a bump up from Cleveland, and that actually should make life a bit easier for the margin expansion. What are the factors that should then hold back the margins, if you know that Cleveland's still going to contribute in 2017 at D&T?
Alok, for 2016, we had a pretty significant increase- I think it was well over 100 basis points, close to 150 or 160. Basically that's what we said we will not be able to repeat for 2017 because we will go into, let's say more the I think for DI for 2016 to 2017, we had over a 240 basis points improvement, and that's not what is going to happen for 2017. That's all. There is still a big improvement to come, but the amount of improvement is just huge between 2016 and 2017.
Yeah. If I may just sort of phrase it differently. 2016, you had roughly about EUR 80 million or EUR 75 million from Cleveland. You still got about EUR 100 million to be recouped over the next sort of couple of years. Even if you assume it's EUR 50 million, EUR 60 million or a bit more on Cleveland coming in, that's still close to about 80-100 basis points for the D&T margins. Are you sort of intending to say that the underlying improvement ex Cleveland in D&T cannot be more than 50 basis points? Is that how we should be thinking about it?
No, I think you make it a little bit too complex. The year-on-year improvement for D&T was 150 basis points, right? 2015 to 2016. With the current plans, we don't see that higher level of improvement. It would be closer to the 100 basis points than 150, is what I'm saying.
Okay. Fair enough.
Yeah.
We will now take our next question from Veronika Dubajova from Goldman Sachs. Please go ahead.
Good morning, gentlemen, and thank you for taking my questions. I want to return to the D&T growth in the U.S., because I appreciate that orders are not necessarily a big part of the book, but even if I look at what you disclosed in your press release this morning, it seems like the U.S. D&T business was effectively flat year-over-year in 2016. I'm just surprised by that comment, given some of the statements you've made about Volcano doing really well and also Cleveland coming back on track. Is this a sign that the ultrasound business is really struggling in the U.S., and if so, what can you do to address that? That's my first question, then I have a quick follow-up.
We finished the year stronger than we started it, right? That resulted in the overall flat situation. We do believe, we have the opportunity to grow the business in 2017. We expect an uptick from ultrasound. We expect IGT to do well. The big iron business market in the United States is flat overall. That kind of gives you the picture. China actually performs well. Europe, we expect, again, a lower gross.
Frans, you would think the U.S. business as a whole and D&T accelerates in 2017. That would be your expectation, irrespective of some of the concerns around ACA repeal?
Well, as I said in the earlier discussion, we don't see the effect of that yet. I've said we need to be cautious with a potential repeal and replace. I don't want to take an advance in hedging the traction that we are having, right? If the market is flattish in the United States and we are gaining share, then we should be growing at a low single-digit rate in the United States for this part of the business. We expect to also outgrow the other markets. Across the board, I think we are confident about the ability of D&T to grow. D&T versus the rest of Philips, I've said, I think in an earlier question, that PH is a little bit above the overall guidance of the group.
CCHI is probably on the guidance of the group, D&T is slightly below the overall guidance of the group. I hope I've given you a bit more color.
Yeah, that's very helpful. My second question is very quickly on the M&A priorities. I know you've said size-wise, Volcano was of interest, but if you look at the portfolio that you have, which particular areas or categories would you be most interested in making acquisitions? That will be it for me in terms of questions. Thank you.
Well, you can have two rationales for M&A. One is you can scale up and therefore you get cost synergies, or you can have adjacency in your portfolio, and you get growth opportunities. Volcano was an example of growth. If I look across the portfolio, I can certainly identify businesses where we are not yet number one, and therefore, a scale play could be interesting. I can also identify opportunities for further adjacencies, for example, in the area of image-guided therapy, and health informatics. All of that is under the umbrella of, well, what is actionable? Does it give you a return on investment? Therefore, it is very difficult to have a narrow guidance on where M&A will go. We have done two acquisitions in 2016 that were both related to informatics. Wellcentive and PathXL.
Clearly, there is going to be a lot of activity around digital artificial intelligence, machine learning that is very applicable to our business. Much of these areas we can also do through organic growth. We have a keen eye on the market, but we will not, let's say, do anything stupid when it comes to engaging on M&A if it doesn't return a good financial success.
Very clear. Thank you.
I realize I'm not completely answering your question, Veronica, but I cannot be more precise than that. I hope you understand.
Unfortunately, we only have time left for one more question. We will now take our next question from Marc Schartz from Henderson. Please go ahead.
Yes, hello. Just a brief question with regard to your U.S. business. Well, the medical equipment which you sell in the U.S., to what extent is this all produced in the U.S., or put it differently, to what proportion are you importing from Europe or from elsewhere?
Yeah, good question. Also came up this morning with some of the wires. Philips has always had a balanced approach to employment. If you look at our geographical footprint, and let's make rough statements, and we say that about one third of revenue is in the U.S., one third in Europe, one third in growth markets. Our employment base mirrors that. Actually we have more employees in the United States than we have in Europe. Sometimes I joke that we are as much an American company as we are a European company. Of course I say the same in China, where we have a sizable workforce. Back to the U.S., approximately one third of our employees are there. That applies both to manufacturing and to R&D. Nevertheless, supply chains are complicated, right? Take ultrasound.
We make the majority of our ultrasound equipment in the United States, but we also export to other countries. Some other products we may not make in the United States, but import. Of course you're referring to the risks of border tax. I hope it will not come to that because I don't think it's good for the world. If something like that would happen, then we would point to the fact that we produce a fair share of everything we make in the world in the United States. It's about one third. That is in balance with the one third of revenues that we have in the U.S. We'll take it from there.
Okay. Thank you.
You're welcome.
Thank you. Mr. Frans van Houten and Mr. Abhijit Bhattacharya, that was the last question. Please continue.
Yeah. I'd like to thank everybody for a good one and a half hours of questioning, and like to point to the fact that 2016 was a pivotal year for us, a defining year. We end the year with strong momentum. We have every intention to continue that momentum throughout 2017 on the basis of strong innovation, lots more productivity opportunities, and an enormous enthusiasm and commitment in our employee base. That's also what I hear from our customers, that they believe we are on the right path. Thank you for your attention and talk to you soon.
This concludes the Royal Philips fourth quarter and full year 2016 results conference call on Tuesday, the 24th of January, 2017. Thank you for participating. You may now disconnect.