Earnings Call: Q2 2016

Jul 25, 2016

Welcome to the Royal Philips Second Quarter 2016 Results Conference Call on Monday, July 25, 2016. During the introduction, hosted by Mr. Franz Van Houten, CEO and Mr. Abhijit Bhattacharya, CFO. All participants will be in a listen only mode. After the introduction, there will be an opportunity to ask questions. Please note that this call will be recorded and it is available by webcast on the website of Royal Philips. I'll now hand the conference over to Mr. Robin Jonsson, Head of Investor Relations. Please go ahead, sir. Thank you, and good morning, ladies and gentlemen. Welcome to Philips' Q2 fiscal year 2016 results conference call. I'm here with Frans van Houten, CEO and Abertjeet Bhattacharya, CFO. Pip Breysmann, who, as we announced earlier this morning, will take over the responsibilities for IR from the 1st September onwards, is also joining us today. In a moment, Frans will take you through our strategic and financial highlights for the period. Abhijit will then provide more details on financial performance. After that, we will be happy to take your questions. Our press release and the related information slide deck were published at 7 a. M. CET this morning. Both documents are now available for download from our Investor Relations website. A full transcript of this conference call will be made available by tomorrow on our Investor Relations website. Before I turn over the call to Frans, I would like to remind you of 3 things. First, Philips Lighting was listed and started trading on Euronext in Amsterdam under the symbol Light on May 27. Philips initially retains a 71.2% stake and therefore continues to consolidate Philips Lighting's results. We encourage you, if you haven't already, to review Philips Lighting's 2nd quarter and semiannual earnings materials, which were published on Friday, July 22. During this call, we will therefore focus our commentary as much as possible on the performance of our HealthTech businesses. 2nd, following the decision in 2014 to combine our Luminess and Automotive Lighting businesses into a standalone company and to explore strategic options to attract capital from 3rd party investors, the profit and loss of these combined businesses is reported under discontinued operations. And the net assets for the business in the balance sheet underlying assets held for sale. The cash flow of the combined Luminess Automotive business is reported on the 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 €20,000,000 With that, I would like to hand over the call to Frans. Yes. Thanks, Robin. The Q2 of 2016 was a quarter that marked several important events. Of course, the important milestone for Royal Philips was the successful separation of Philips Lighting. But sadly, also several political events are happening with potentially significant consequences throughout the world. And I have to say that volatility has gone up with unsure outcomes. As we said, we completed the separation process at the end of May with the successful listing of Philips Lighting on the Euronext Amsterdam Stock Exchange. I want to congratulate the entire Philips Lighting team on a successful offering and listing. And as Robin already mentioned, Royal Philips currently retains a majority ownership stake in Philips Lighting, and we aim to fully sell down over the next several years. We can now fully focus on capturing the exciting opportunities in the health technology space, allowing Philips Lighting to do the same in the growing market for energy efficient lighting. Britain's decision to leave the European Union has increased volatility in the short term and uncertainty in the long term. And while not a choice that Philips would have favored, it's a new reality. We remain hopeful that the trade and other commercial arrangements that are negotiated with the U. K. Over the next several years will maintain the close partnership that we have with a very important market for Europe broadly and Philips specifically. To that end, I want to make entirely clear that we remain 100% committed to our entire ecosystem in the United Kingdom and most notably our customers and employees. With that, let me now focus on our Q2 results. On today's call, I will focus my remarks on our opportunities in the health tech market and therefore will review the performance of the businesses in our 3 key segments: Personal Health, Diagnosis and Treatment and Connected Care and Health Informatics. This quarter, we again delivered a solid set of results with operational improvements across the operating segments and 5% comparable sales growth in our HealthTech portfolio. This level of sales growth performance underscores the compelling opportunity for Royal Philips as a company focused on helping consumers to become healthier and our B2B customers deliver better clinical and financial outcomes through an integrated approach to health care delivery across the health continuum. This includes, among other things, capturing key opportunities in population health management, improved enterprise wide solutions for health systems and accountable care organizations and coordinated care delivery across the Health Continuum. Adjusted EBITDA improved by 90 basis points to 9.3% of sales, driven by improvements in all operating segments and within HealthTech, most notably in the Personal Health business. Our transformation program, Accelerate, continues to drive top line growth and deliver savings that, on an annualized basis, more than compensate for inflation, price erosion and our ongoing investments in quality and new business areas like health informatics, wearable patient monitoring solutions, population health management and digital pathology that all offer great long term growth and margin potential. Order intake dynamics remain quite uneven, and as a result, currency comparable equipment order intake fell by 1% in the quarter. But I want to stress that the somewhat disappointing level of orders in the 2nd quarter, in our view, does not reflect the commercial activity that we see in our opportunity funnel. And based on this, we expect good order intake growth in the second half of this year. Our Personal Health businesses grew by 9% on a comparable sales basis with high single digit growth in our mature and growth geographies, driven by double digit growth in Central and Eastern Europe and Middle East and Turkey and Western Europe. Adjusted EBITDA improved by 18% to €234,000,000 and our margin improved by 170 basis points to 14.1%, including some small nonrecurring items that contributed 80 basis points to the margin. This quarter's performance clearly reflects the strength of the Philips brand and specifically the personal health franchise for consumers around the world as well as the positive impact of our operational improvement programs. 1 of the strong performers in the Personal Health segment is our Sleep and Respiratory Care business. This business grew high single digit, driven by mid teens growth in sleep as a result of the rollout of the DreamStation portfolio, which is also driving increased customer satisfaction and market share gains. We built on this momentum in the Q2 with the successful launch of our cloud based patient adherence management service, which is the first of its kind connected health technology for sleep and respiratory conditions, allowing patients to stay connected to their care teams throughout the course of the therapy. It enables the access to data, clinical management workflow, informatics and intelligence for providers, payers and patients within a single cloud based platform. We are helping to increase therapy compliance rates among patients and to improve the experience of new patients attempting to adapt to therapy. In the Personal Care businesses, we introduced a revolutionary new product concept named OneBlade. OneBlade is a hybrid styler that trims, shaves and creates clean lines. It was specifically designed for millennials, many of whom prefer to have beards or other types of facial hair. OneBlade leverages our capabilities as the world's leading electric male grooming brand and it's stepping into the growing market trend of male facial hairstyling. OneBlade was already successfully launched in France, the U. K, Germany and North America and has elicited a positive response from both consumers and retailers, and the first sign ins signs of an in market performance are exceeding our initial expectations. As we continue to support these promising product launches in the coming quarters, we expect advertising and promotion to go up compared to historic levels. In the oral health care businesses, we introduced the Philips Sonicare FlexCare Platinum Connected Toothbrush, our latest innovation that uses smart sensor technology to help consumers optimize their brushing routine. This advanced connected toothbrush synchronizes via the Philips Sonicare app via Bluetooth to track brushing habits in real time and provide a personalized 3 d mouth map to help consumers identify the areas of the mouth missed in their current brushing routine. As the data is stored in the cloud, patients can also choose to share their data and stay connected with their dental professionals, leading to improved brushing compliance between visits. Switching to the Diagnosis and Treatment businesses, we posted comparable sales growth of 1% driven by low single digit growth in Image Guided Therapy and Ultrasound. Order intake in Diagnosis and treatment was down mid single digit, largely driven by phasing in regions like North America, Japan, Germany and the Nordics. Adjusted EBITDA improved by 20 basis points to 8.2% as operational leverage and ongoing cost savings were able to more than offset the ongoing investments in quality, mainly related to Cleveland. CT production and shipments from Cleveland have been back on track for some time now. However, as we continue to work hard on further augmenting the overall quality standards across our facilities and among our supplier base, we continue to see elevated levels of quality regulatory spend in the second half of twenty sixteen and first half of twenty seventeen. These costs remain in line with prior expectations, and therefore, we continue to expect the Cleveland related business to contribute improvements of around €100,000,000 to adjusted EBITDA in 2016 and around €75,000,000 in 2017. Philips Volcano is really performing well, demonstrating again this quarter both the benefits of the acquisition and the success of the integration. In the second quarter, we delivered another strong quarter of double digit comparable sales growth and continued operational improvements, driven by growth across the smart catheter product portfolio, synergies with the Image Guided Therapy Systems business and expansion into new geographies. Last month, we further strengthened our digital pathology business by acquiring PathXL. With this complementary acquisition, we can build on our digital pathology solutions offering and leverage PathXL's capabilities in the fast growing image analysis and tissue pathology software field. We will be an even more attractive partner for global medical institutions as they transition to digitize pathology workflows by solving needs in computational pathology, education, workflow solutions and image analytics. In the Connected Care and Health Informatics businesses, comparable sales grew by 6%, driven by high single digit growth in patient care and monitoring solutions and mid single digit growth in Healthcare Informatics. This strong growth as well as cost savings enabled the adjusted EBITDA to improve by 110 basis points to 7.6%. In line with our long term strategy of building multiyear partnerships that allow health systems to expand access to quality care and manage costs better, we signed a $36,000,000 agreement with the Medical University of South Carolina Health with a focus on integrated patient monitoring solutions. Our ability to provide more cost effective ways to monitor, diagnose and treat patients, offering the most advanced technology, while improving the patient experience, was actually key to our selection out of a competitive field of bidders. In Europe, we signed a €19,000,000 agreement with the heart hospital in Tempera, Finland to collaborate on a center of excellence for cardiac care. Under the strategic partnership, we will install, integrate and manage cardiac angiography imaging, cardiac ultrasound imaging, clinical informatics and patient monitoring solutions as well as providing maintenance, training, consulting services, all under a unified payment structure. Our outlook for 2016 remains unchanged. We expect modest comparable sales growth and continued progress on our operational performance improvements that will drive further earnings improvements in the second half of the year. At the same time, we are concerned about the increased risk due to volatility in a number of markets and the potential impact that this may have on Phillips businesses and performance. And with that, I will hand over the call to Abhijit to discuss our financial performance and market dynamics in more detail. Thank you, Frans, and good morning to all of you. Before delving into the Q2 financial performance and market dynamics, I would like to take this opportunity to thank Robin, who has decided to leave Philips after 3 years as our primary point of contact with the investor community. I know that many of you would agree that he has been instrumental in optimizing our industrial our Investor Relations program. He's been a key member of the Philips Finance leadership team, especially as we executed on the separation of Philips Lighting. We will miss his valuable contribution and wish him all the best for the future. Pim Prasman, who joined Philips 13 years ago and who many of you will know from his time in IR from 2,009 to 2012, will become Head of Investor Relations effective September 1. Apart from his time in IR, Pim has performed many key roles within Philips' global finance function and is currently Head of Finance for Brazil. Please join me in welcoming him back to Investor Relations. I know that he looks forward to engaging with all of you going forward. Let me now provide you with more granular information on our Q2 results. In Q2 2016, we delivered 5% comparable growth in our Healthtech portfolio. Including the 1% drop in Philips Lighting's comparable sales, overall sales increased by 3% on a comparable basis. Geographically, comparable sales growth in the second quarter was driven by 4% growth in Western Europe and 6% in the growth geographies, which was partly offset by stable comparable sales in North America and the other mature geographies. Sales of our Healthtech portfolio in the growth geographies grew by 9%, and the mature geographies delivered 2% growth. Comparable sales growth for our Healthtech portfolio in the mature markets was driven by mid single digit growth in Western Europe, low single digit growth in North America and stable comparable sales in the other mature geographies. Personal Health and Connected Care and Health Informatics businesses recorded high single digit comparable sales growth in mature geographies, while our Diagnosis and Treatment business saw low single digit double digit growth in country was driven by double digit growth in countries like Poland, Indonesia, Argentina and others. China delivered mid single digit comparable sales growth in Healthtech. Let's have a look at our order intake now. On a currency comparable basis, equipment order intake declined 1% in the quarter, resulting in 4% currency comparable order intake growth on a 12 month rolling basis. I say this as we have signaled often earlier about the unevenness of the order intake trajectory. A low single digit growth in our Connected Care and Health Informatics businesses was offset by a mid single digit decline in the Diagnosis and Treatment businesses in the 2nd quarter. Geographically, we reported a high single digit growth in comparable orders in our growth geographies, driven by double digit growth in regions like China, Russia and Africa. In Western Europe, order intake grew low single digit, while North America posted high single digit decline, mainly reflecting the lumpy nature of the order intake. Looking at the strong commercial activity we have seen in the first half of the year and the related order funnel, we remain confident that we will see good order intake in the second half offsetting the slow start of the year. Let me remind you that in our Healthtech portfolio, approximately 30% of sales are related to the order book in the next quarter. Let me now switch to the EBITDA development in the quarter. Slide 24 of the presentation material that we posted on our website this morning provides an overview of the main drivers of adjusted EBITDA when compared to the same period last year. As you see on the slide, the adjusted EBITDA margin of 9.3% in the quarter was 90 basis points higher than in Q2 of last year. This margin increase was driven by a margin improvement of 1 170 basis points in the Personal Health businesses, 110 basis points in Connected Care and Health Informatics businesses and 20 basis points in the Diagnosis and Treatment businesses and finally, 100 and 80 basis points delivered by Philips Lighting, who delivered an overall strong performance and remains on track to return to positive comparable sales growth in the course of 2016, which is the first time since the Q4 of 2013. Our underlying operational performance, excluding FX effects and the €12,000,000 positive contribution from Cleveland, contributed 80 basis points to the EBITDA margin in the 2nd quarter as our Accelerate program continues to improve operational performance and drive efficiencies. More specifically, in the 5th bar, you see a net contribution of 34,000,000 euros from our overhead and end to end productivity programs as year on year incremental cost savings of 97,000,000 were partly offset by higher nonmanufacturing cost as a result of investments in emerging business areas and investments in selling expenses in the quarter. Our Design for Excellence or DFX program, which is aimed at improving value, delivered €86,000,000 of additional bill of materials savings year on year and are on top of the normal run rate of procurement savings of €98,000,000 Based on the cumulative savings achieved in the first half and the outlook for the second half of the year, we remain on track to achieve the cost savings target for the year that we have set for all three programs. In addition to the operational improvement of 80 basis points, the improvement in the adjusted margin was supported by 20 basis points coming from the positive financial contribution of Cleveland, which was partially offset by negative impact from currency translation effects of 10 basis points. In the Q2, the income tax expense was €48,000,000 which was similar to the Q2 of last year but €27,000,000 lower than in the Q1 of 2016. Due to the sequence of activities related to the separation of lighting, The tax line in Q1 included tax expenses related to the separation, whereas in Q2, it included tax benefits related to the separation that largely offset each other. For 2016, we expect the effective tax rate to be around 30%. Net financial expenses were €25,000,000 higher in the quarter, which was mainly due to an interest reversal related to a release of long term provisions in 2015. Net income from discontinued operations was €151,000,000 higher than in 20 in Q2 2015, which is mainly due to the 100 and 44,000,000 we were awarded in the FUNAI arbitration case in the quarter. The return on invested capital, which is calculated on a 5 quarter MAT basis, was 7.1 percent, Excluding the total one off charge of €345,000,000 related to the pension liability derisking in the U. S. And the U. K. In Q4 2015, the ROIC was 10.1%, which is about 1 percentage point above our WACC. Inventory as a percentage of sales decreased by 180 basis points to 15.2% year on year. Excluding currency translation effects, inventories as a percentage of sales were down 90 basis points year on year, driven by all operational segments. Free cash flow for the quarter amounted to an inflow of €127,000,000 compared to an outflow of €30,000,000 in the same period last year. By the end of the Q4, we completed 91% of our 3 year €1,500,000,000 share buyback program, which we started in October 2013. Let me now provide you with some health care market perspectives from the U. S, Western Europe and China. In the U. S, we expect to see flat to low single digit growth in the health care market in 2016 following a strong 2015. We expect acute care providers to continue to make operational process changes to avoid penalties for hospital readmission, a first step in the gradual movement from reimbursement for episodes of care to payment for management of health of populations. These changes are expected to result in fewer patient admissions in the hospital, and those remaining will be the ones that have more acute conditions to be dealt with. The uncertainty of the impact of these changes will likely continue to cause some delay in the capital spending of hospitals. And therefore, capital spending for hospitals is expected to be flat in 2016. The European Health Care market coming off a slight growth in 2015 is expected to see flat to low single digit growth in 2016. We continue to see an uptick across Europe in multi year solution oriented deals, although cuts to public spending budgets have offset this growth driver. In China, headwinds related to government's anticorruption measures, centralized tendering and price erosion continued the overall slowdown across health care markets in 2015. We expect this to stabilize in 2016 and grow modestly, bolstered by the need for more capacity and replacement of aging equipment. Overall, we estimate the global health care market to be growth to be in the lowtomidsingledigit range for 2016. Let me briefly summarize our financial performance in the second quarter before opening the line for questions. Our Healthtech portfolio delivered strong 5% comparable sales growth, and our improvement programs continue to drive operational performance across the segments. Following the successful IPO of Philips Lighting in May, we expect separation costs in the second half of the year to be in the range of €65,000,000 to €85,000,000 and represent the majority of what we expect to report in legacy items in the second half. In the HealthTech Other segments, we continue to expect to incur approximately €50,000,000 of restructuring cost and other incidental items, which will be slightly offset by cost savings in 2016. As a result, we continue to expect a net cost of €80,000,000 to €100,000,000 at EBITDA level in 2016. On Lumilets, as you know, Lumilets performance has been under pressure for a couple of quarters, which is inherent to the cyclical nature of the industry. We continue to expect the performance to improve in the second half of this year based on the good order book for Lumilets and measures we have taken in the beginning of the year to improve cost productivity. These measures typically take about 6 months to take an effect. At the same time, we continue to engage with parties that have expressed interest in the combined Lumilets and Automotive business and will provide more detail on this process when appropriate. For the full year 2016, as Frans mentioned, our outlook remains unchanged as we continue to expect earnings improvements in the second half of the year, but we are concerned about the increased risk due to volatility in a number of markets. With that, let me now open the lines for your questions, which Frans and I will be happy to answer. Thank you. Thank you, The first question comes from Ian Douglas Pennant from UBS. Please state your name and withdraw your question. Thank you. Your outlook statement, please, and the qualifying commentary there. Why did you not lower the guidance based off what you're politically? Or is it fair to say that if it wasn't for the macroeconomic uncertainty that you would have upgraded guidance today? And can you put any quantification on how far ahead of your expectations you are in that case? Hi, Ian. This is Frans. I'm afraid the first half of your question dropped away a bit. Would you mind repeating it quickly, please? Yes, sure. So in summary, just on your guidance, why did you not lower the guidance? Is it fair to say that if not for the macroeconomic uncertainty, you would have raised your guidance today given what you've been seeing in the margins? Interesting. Let's say we gave guidance in the beginning of the year or rather we called it the outlook, and we said we would end the year around 11% adjusted EBITA and have modest growth. We maintained that outlook. I think it's fair to say that many analysts were doubtful about that outlook. I can tell you that we believe that in the first half of the year, we feel that we are on track to deliver on that outlook. It is true that we still have a lot to do in the second half of the year. We've always said we are back end loaded when it comes to improvement. We are confident that we can deliver that. But when we look outside to the world, a lot of stuff is happening and that concerns us. We need to manage those risks as best as we can. Today, those risks are not having a direct negative effect at this time. So we continue to be a case of self help mostly. We are happy with the 5% growth in our HealthTech portfolio in the second quarter. We see sizable profit expansion in the second quarter. That leads us to stay committed to reaching this around 11% outlook. Okay. So it's fair to say that the risk of that guidance is now to the downside? Yes. Look, we still have a lot to do. We are confident in our own abilities and let's first work to achieve our guidance before we even dream about a different guidance. Okay, fine. But given the uncertainty that you're seeing today, the risk is to the downside with your guidance. Would you agree with that statement? Given the fact that that is external risk, yes, you're right. External risk has increased. Okay. That's my one question. I'll jump back in the queue. Thank you. Okay. Thanks. Our next question comes from Andreas Willey from JPMorgan. Please go ahead. Your line is open. Yeah. Good morning, everybody. My question is also related to the guidance and the implied second half margin improvement year on year. So if you use the 11%, you will need about 2 50 bps improvement in H2. You did 80 bps in H1. The Cleveland guidance gives you another 70 bps in the second half. So the 100 bps gap, is this a specific division you see that weighted to in terms of your plan if you get to 11%? Or is this a more broad based improvement that you see coming to support 11%? Andreas, this is Abhijit. You're right. Cleveland is one factor. But also, if you look at the phasing of our cost savings, including our DFX savings, that is also second half loaded. Like Frans mentioned, we expect stronger growth and with that operational leverage in the second half to also drive improvement. And last but not the least, in terms of our royalty income, we have a higher weightage in the second half compared to the first half and also an improvement year on year in the second half. So these are a few things that hopefully will get us across the line and closer to around 11% that we've talked about. And the follow-up question on Lumilet Auto, are you still committed to agreeing a transaction in the second half of this year? You didn't specifically mention that in your speech earlier. And on the automotive side, given how good the peer results are, I'm still a bit surprised that doesn't offset some of the LED weakness there. Are you losing market share on the auto side? Yes. Andreas, We remain absolutely committed to trying to do a deal on Luminess Automotive in the second half of the year. We are in dialogue with various parties. We are also optimistic about the results development of Lumilets having visibility on the design ins of the various components with customers. And so we believe also that the dip in performance is largely behind us. Thank you very much. You're welcome. Our next question comes from Max Yates from Credit Suisse. Please go ahead. Your line is open. Hi, thank you. Just my first question would be on Healthcare orders and specifically in North America. What is it that you're seeing that gives you a lot of confidence in the second half? Is it that consigning a couple of orders slipped into the next quarter? Or is it just broader conversations with customers? If you could give us a little bit more of a feeling as to why you are confident in the second half picking up and particularly in North America where you said it was a timing issue? Yes. We did indeed see a couple of orders slipped from Q2 to Q3. That altogether had a significant impact on orders, which frankly speaking, we had strong order intake in 2015. Then first half twenty sixteen was a bit soft and therefore a bit disappointing. But we know, of course, all the orders that we are working on, some slipping to Q3. And we talk about good order intake expectations for the second half year, and that includes North America. Okay. Just my second question would be on the legacy items. And when I look at the first half impact from those, it's around minus €50,000,000 on the EBITA. And I'd just like to try and understand how you think about those legacy item costs running into the second half of this year. Is this sort of minus $25,000,000 per quarter run rate what we should expect? Or will those likely come down in the second half of the year? Yes. Max, on a run rate basis, you will see that coming down. So it would probably come down to roughly half of that in the coming two quarters. Okay. Half of that per quarter or half of that combined? Yes, and so on an adjusted basis, it will be between $12,000,000 €13,000,000 per quarter in the next two quarters. Okay. That's very helpful. Thank you very much. We will now take our next question from Ben Uglow from Morgan Stanley. Please go ahead. Your line is open. Yes. Good morning, everyone. A couple of questions, I guess relating again to the issue of the North American orders. Frans, can you tell us the double digit decline in North American orders, is that is the diagnosis and treatment division in line with that? And in terms of these deferrals or push outs, what I'm trying to understand is, are these large specific contracts, I. E, if we had signed those contracts in 2Q, would we be close to a 0 growth in North American orders? So I guess what I'm asking for is how big are these one off impacts in that North American minus 10% number? And the second question is on understanding the margins in Connected Care. The division as I understand is basically majority patient monitoring and then minority healthcare informatics. It's an 8% margin right now, which I would have thought relative to peers even in 2Q is an extremely low number. Can you give us a sense over the remainder of the year if you are expecting Connected Care to show a significant upward trajectory, the similar seasonality to what we've normally seen in diagnosis and treatment. Is that part of the big recovery as well that you expect in the second half? Hi, Ben. Franz here. Yes, so let's take North America a bit in perspective. If I would take you to visualize a rolling 12 months order intake curve, then actually North America shows a healthy 10% level. So in that sense, we are not concerned about our ability to compete in North America. Structurally, we believe our market share is okay. We actually saw the Q1 report on market shares, which arguably looked back at that time and that was healthy. As said, Q2 was impacted by push outs that were quite sizable, multiple deals, not one big deal actually, but multiple deals. We believe that we will get back into positive territory in the second half, in the third quarter. And that also this 12 month rolling OIT is something that we can maintain on a healthy level. Then your question on margins in Connected Care and Health Informatics. You're right that the largest business group in there is Patient Care and Monitoring Solutions, which has a very healthy EBITDA margin. The second piece is Health Informatics, which is rapidly transforming itself from a hardware orientated business towards a software business. I must say that the leadership that Jeroen Tasse is doing there really helps it because frankly speaking 2 years ago that Healthcare Informatics business was in negative territory. It has been turned around successfully. It is now showing high single digit results. But as a software business, it will further improve to healthy high teens margin over the next quarters. So and then the 3rd piece that you need to know is that we are making sizable investments within this cluster or this segment. For example, in HealthSuite Digital Platform, in the medical wearable sensors. And to keep in mind, I'm talking about tens and tens of 1,000,000 of euros. So 3 pieces: Patient Care Monitoring Solutions, a well performing business with strong profitability with an increasing growth profile, a Health Care Informatics business that is rapidly recovering and moving towards double digit profitability territory and then these big investments that pull it down. And you saw a good improvement from Q1 to Q2. We expect a further improvement into the second half year and then, of course, a further improvement next year. Okay. Just one follow-up, Fran. So on the issue of the lumpiness of orders, And I completely take on board the fact that on a rolling 12 month basis, it's been 10%. But what I'm perplexed by is why the orders each quarter are significantly more lumpy than what we see at the 2 main peers. Is there any natural reason why Philips, your imaging business should be showing a more stop start growth trajectory than the 2 main peers? Well, we specifically talk about equipment order intake. I believe some of our competitors talk about some of equipment and service order intake, which of course has a dampening effect on the peaks and troughs of orders. Nevertheless, yes, I think this lumpiness is something that we need to live with. You guys are now zooming in on North America and rightly so, but I may point out that our China performance was lumpy last year and is now strongly in positive territory, even ahead of what some of our competitors were reporting. So we also see strengths there. Across the world, I see good health. So I already talked about China. I see Europe with a strong resilience in orders. So altogether, I think we are on a good path of both growth and profit improvement. And we believe that the order book and the order intake supports the growth ambition that we have been talking about and also been demonstrating in Q1 and in Q2. That's great. Thank you very much. Our next question comes from James Moore from Redburn. Please go ahead. Your line is open. Yes. Good morning, everyone. Franz, Abhijit, Robin. I wonder if I could start with the Diagnosis and Treatment business. And a little bit the medium term outlook, if I might. You have talked about some of the positive potential in CT given your work at Cleveland, China, Israel and in IGT from Volcano. But I wondered if you could help us understand the MRI piece, which I believe is lower margin, certainly below those of your peers. Could you talk to us a little bit about how you think that business could develop in the next couple of years? And secondly, I wondered if we could touch on Personal Health. The growth there, 9%, very good. You've talked about products now for a while. You've kept the growth rate very high, Dream Space, OneBlade, Platinum. But could you help us understand the growth outlook into the second half and into next year? Do you see a point where we compare unfavorably against some of this growth? Or do you think it can continue? And you mentioned advertising and promotion impacts inside that and could you perhaps expand as to whether you're talking about a meaningful margin impact there? Okay. Let me give it a try, okay. So our MR business is performing very well in Europe, in Asia with market shares well in the 20s. In North America, we are a bit lower. We are working very hard to fix that. That comes also with some investments. We also have new product introductions in the MR space. We are one of the 2 leaders in MR in the world, and we believe that we can structurally improve profitability of MR in the coming era. We have also tightened a bit how we manage pricing for MR. We believe that in some geographies, we were a bit too low for the value that we have to offer to our customers. So we also expect that, therefore, equipment margins can gradually improve. If I move to Personal Health, we believe that Q2 had an exceptional high growth. Nevertheless, we are committed to mid to high single digit growth in Personal Health. We believe that, that is sustainable. We see that in multiple of the business groups. For example, Sleep and Respiratory Care performed very well. Lots of innovation going on there with our cloud based connected sleep solutions. Are outpacing competition there. In oral care, the market is expanding. We are performing very well against competition. People are switching from manual to electrical brushing. We have a great franchise in brush heads. So we believe that the high growth can continue there. Then in Personal Care, we just launched the OneBlade. OneBlade is kind of a hybrid shaving concept between electric and wet shaving. That launch goes hand in hand with significant advertising and promotion commitment. We think that, that's a great investment. I can quantify that a bit for you. We think that the impact on Personal Health in Q3 could be around 50 basis points for Personal Health that is. So it is an overseeable amount. And with the growth, we can quickly find compensation for that in the next quarters as we see the traction of this product. Does that answer your question, James? Yes, it does. Thank you very much, Fence. Our next question comes from Andrew Carter from RBC. Please go ahead. Your line is open. Good morning all. Thank you very much for taking the question. The first one I just wanted to go back to again for which I apologize. It's D and T North America. And I just wanted to pick up on, I think that you said that the sales growth in the quarter, I think you said it was down high single digits. And I wondered if you could just help us understand that a little bit. I think you've explained what's going on in orders quite well. But it does also sound as though the sales performance in North America in the quarter was quite weak. And I guess if I take into account the sort of the idea that the service side of the business should have been, I would have thought, reasonably stable, if not growing, it does seem to suggest that the equipment was down quite a long way. And then the other one I just wanted to ask perhaps going on from what James asked was just on domestic appliances. And it does seem as though we've had a nice acceleration in the quarter there. I was wondering if there's anything in there that might relate to a prior year comparison or be one off in any way. I wonder if you could just talk a little bit about what's driving it and what the sustainability is. Sure, Andrew. Let's first talk about D and T North America. In fact, your comment on comparability is applicable for D and T, more so actually than for Personal Health. The year on year decline is close to 8%. And you may recall that Q2 2015 was a very good quarter, thanks to the recovery of the resumption of production and sales of Cleveland, where we started to deliver against the backlog and that resulted in a sales spike in that quarter. Now that doesn't justify, of course, not growing it this year, so don't get me wrong, but the comparison was certainly not easy. We've also seen that in Image Guided Therapy, some customer acceptance slipped also into Q3, which made revenue recognition a bit more difficult. So altogether, we believe that Q3, we will see a resumption of the business growth. Then on DA, you talk about DA, but do you mean Personal Health or specifically domestic appliances? I meant domestic appliances specifically because I guess if I look back over the last 4 quarters or so, the growth rate in domestic devices, I think, has been a little bit lower. And so I was just quite interested in the acceleration that we've seen. Okay. That's very perceptive. As you know, Personal Health has several business groups. Many of them have these very strong high profitability franchises. Domestic Appliances is a bit different in the sense that it is a bit more generic. We saw a nice recovery through a new leadership in domestic appliances that has enhanced the new product introductions and managing that business. Also we saw finally the turnaround of coffee coming through. And altogether that has resulted off the top of my head in a mid single digit kind of growth rate for DA a little bit better, even being signaled that therefore DA starts to perform more in gross terms as the other businesses. Of course, that also has a nice fall through to the bottom line, thanks to operational leverage. Thank you. You're welcome. Our next question comes from Gaele de Bray from Deutsche Bank. Please go ahead. Your line is open. Yes. Thank you. Good morning, everyone. Looking at the bridge, the price component was higher than in prior quarters. It was about 0.3% higher at 2.4%. And I find it a bit surprising given the slower growth seen in the LED lamps business this quarter. So do you see some higher price pressure in some parts of healthcare now? So that's question number 1. And the second question is on perhaps is a bit M and A related. At the latest CMD, you indicated that there was €37,000,000,000 addressable market for adjacent businesses for the Connected Care division. So could you elaborate perhaps on what you consider are the most attractive sub segments within these adjacent businesses? Thank you. Hi, Gail. This is Abhijit. On the price erosion, it's basically LED. And the LED growth was not particularly weak. It was a 25% growth year on year on a much bigger volume. So it's not that we are seeing higher price erosion in HealthTech. So that should not be a concern at this point. We've always guided for 2% to 3% price erosion. We are at the lower end of that range. Okay. Then I'll take your M and A question. Let's first talk a bit about Connected Care and Health Informatics, right? What we do there is basically patient monitoring and patient care, both in the hospital as well as in an ambulatory fashion after discharge and into the hall. So we envisage that we support patient care along the journey from hospitalization back into the home with full recovery. Now we have a market leading position in patient monitoring in the hospital, which we are extending with wearable sensors so that we can also keep tracking the patient wherever they are. So that is one area where we are investing. We have chosen to do that mostly through organic investments, hence the investment discussion that we had earlier in the call that we are investing money in developing those centers. Then secondly, we see strong opportunities in what we call population health management. This is about analytics on the one hand and care coordination, supporting doctors, nurses, both in hospital enterprise, but also with primary care and ambulances to collaborate together in the cloud. The acquisition last week of WellCentive is a nice example to boost our analytics capabilities of data mining to enable population health management. Well, Centiv is a software as a service platform company, and their software is being used extensively by health systems in North America to identify patient populations that are in need for care. Now then the interesting thing is that we can immediately cross sell that to our own solutions. So we expect a synergistic play between Valsentiv and our device businesses and services business. That's the second area of investment. And then 3rd is in health informatics. We are strong in imaging informatics. We see opportunities to extend that. We are expanding into pathology, as you know. The acquisition of PathXL is a nice example of a company that is very strong in image interpretation, thereby assisting the diagnosis of, for example, cancer patient. Both Wellcentive and PassExcel at this time are examples of relatively modest acquisitions. The acquisition that we did last year, Volcano, is performing very well. That would be an example of a somewhat higher value acquisition. So that's, let's say, gives you a bit of color around our interest to expand and strengthen our position in Connected Care and Health Informatics. You're welcome. Our next question comes from Philipp Scholte from Kempen. Please go ahead. Your line is open. Yes. Good morning, everybody. I had a question about the growth you mentioned about actually 2 areas where I was expecting a bit higher growth as both in the Image Guided Therapy segment and within Connected Care in the Population Health Management, which you said was actually in line with. So can you comment a little bit about why those numbers are a bit low at least compared to my estimates? Yes. In IGT, which is a combination of our systems business and the acquisition of Volcano, we saw a mixed picture. Volcano showed very strong growth for the Q2 in a row and is delivering on its acquisition business case. I'm quite pleased with the performance there. On the systems side, sales indeed was quite a bit lower and we saw that being caused by some slippages into Q3. I would like to bring to your recollection that in the first quarter, we actually saw a 10% growth. Now these larger installations of hospital operating rooms are a bit lumpy. So we had strong sales recognition in Q1, weak sales recognition in Q2, and we expect stronger sales recognition in Q3, right? That has to do when the customers actually accept and sign off on the installation. Then on population health, today, this is really still a very small activity compared to the rest of our businesses. And I would not read too much in the commentary on population health management. We are still building that asset and we expect over the coming 24 months to gradually come to a very solid and healthy profile. Right, right. Can I have a quick follow-up on Lumilets? You used to report separately on the Lumilets automotive business combined. Why did you stop that? And are you willing to share the EBITA of that business as previously reported as the way you used to report that? Yes. We still show it separately. I mean we don't provide all the lines because earlier, it was deconsolidated from Lighting as a result of which it helped to understand the Lighting results better. Now with lighting being a separate company, which is reporting all its lines, we've just simplified that layout. You've seen that overall from a we show that as a separate line in the discontinued operations. So you see there is an improvement compared to last year, but that's largely because of lower tax. And as we mentioned earlier, we expect from Q3 onwards the overall results to actually start beating last year again. Sure. But you're not willing to share the adjusted EBITA number? No. We have I mean, it doesn't right now, we're part of discontinued operations. We don't need to give that level of detail anymore. Okay. Thank you. You're welcome. Next, please. Our next question comes from Alok Katri from Societe Generale. Please go ahead. Your line is open. Hi, Alok Katri from SocGen and thanks for taking my questions. I have a follow-up, firstly, on the question around Connected Care and the margin improvement that's seen in the second half of the year. Improvement in the growth that you were expecting in patient care and monitoring and then the informatics business? Or is it got to do just in the second half of this year with some phasing of cost and revenues? Is it just the phasing or is it part of the leverage from the growth as well? So that was the follow-up. And then the question that I have from my side is just on diagnosis and treatment. And I can appreciate the margins were up 20 basis points year on year. But if you strip out the $12,000,000 improvement that you show in Cleveland within the bridge, then the underlying profits were slightly lower year on year. So I was just trying to gauge whether there's something else that's going on in that business. Is it the FX? Is it some other investments, etcetera? And then just within the same breath, working capital at that division was up 60 basis points year on year whereas it declined everywhere else. So just wondered what's driving that and how we should read into this? Sure. Sure. I think all are quite easily to be explained. Many of these health care businesses are having a reasonably high fixed cost component and are dependent on its seasonality in revenue. And the second half of the year is always much stronger than the first half. So we expect margin expansion in the second half year. And that applies to Connected Care Health and Phoneetics, where the patient monitoring business always is strong in the second half year. That should give us more growth and margin expansion. But also in D and T, we talked about earlier in the call that sales were a bit slow in D and T and that you immediately see back by then a negative operational leverage in that business as we and we had some push outs which explain the higher working capital, right, because if an installation is being delivered but not yet revenue recognized, it ends up in working capital. So that whole story hangs together. And as we then get to sales recognition in the 3rd quarter of some of these work in progress orders, we will see the trend reverse with an above average margin expansion and, of course, a commensurate reduction of working capital. Does that answer your questions? Yes, fair enough. I mean just on as I said in Connected Care, usually that sorry, in Diagnosis and Treatment, usually that is to be the division with sizable FX headwinds. So was there none at all or nothing sizable in Q2? No, nothing sizable in Q2, no. Okay. And we don't do we expect at the current rates that there will be anything in the second half, which we should keep in mind? No, negligible. In the second half, we expect it to be negligible. And on the working capital, also part of it is due to the intercompany payments. If you take that out, we also have quite a good improvement in working capital also for diagnosis question comes from Jonathan Mounsey from Egwene. Please go ahead. Your line is open. Hi, yes. Good morning. Thanks for taking the call. So just going back to D and T and particularly North America and the weak progress on orders in Q2. Obviously, you're saying you're very confident in the second half pickup. Can we assume from that that as recently as July, we've booked the orders that slipped from the Q2 into the Q3? I'm not going to dissect the quarter for you. That goes a bit far. Let us just stay with the confidence that we've spoken about before. And just one follow-up then. On the M and A pipeline, obviously, you've done a deal quite recently. As we go into the second half, can we expect much of the proceeds from lighting to be spent imminently or how does the pipeline look? Well, thanks for raising that. It gives me an opportunity to maybe a bit broader talk about our capital allocation policy, right? We've always said that we will use some of the proceeds for debt reduction. We have just paid down the Volcano bridge loan. We are planning to retire some of the more expensive debt. We will still do a little bit on pension liability reduction. We are finishing off the share buyback program in the second half year. We aim at dividend stability. And then finally, yes, we are we'll consider disciplined but more active approach to M and A. So with the two examples in Q2, I can't promise you that we do that every quarter. We will have our eyes and ears wide open about our selective possibilities, but I would not jump to the conclusion that we are now on a spending spree. Thank you. Maybe just one final follow-up. If I look at the bridge that was given in the Capital Markets Day presentation from last year, the aim to get to 11% adjusted EBIT margins by end of 2016. I think the biggest positive component, the 2% operational improvement. If we look at where you're tracking year to date, I think it's probably a little less than 1%. Can we really expect in the final half of the year to make all of that gap up? It feels as if I think as already mentioned, the risk is to the downside now. Yes. I think we'll just be repeating ourselves. I think Andreas asked that question in the beginning. And as I clarified, the Cleveland opportunity is an improvement over last year. As I mentioned, most of our cost saving because we have for our enabling functions a plan to get to benchmark levels by the end of this year. So we will get some cost savings there. We, of course, are banking on stronger growth in the second half, as we've mentioned right through the call, which gets us better operating leverage. And the fact that royalty income gives us a bit of a tailwind in the second half, Plus the way we have managed ForEx, I think, gives us some gives us good visibility to come around the 11% as we spoke about. Okay. Thank you. We will now take our last question from Ian Douglas Pennant from UBS. Please go ahead. Yes. Thanks very much for taking my follow-up question. As you can imagine, most of them have been asked. I've just got a couple of boring ones left. Firstly, on the tax rate, just a semantics, you now said it's going to be about 30%. I have in my notes from the past that it's going to be low 30s. So can I just confirm that is an improvement? Yes, that is. That is an improvement? Okay, good news. Thank you. And then the other one is on restructuring. Obviously, this quarter was much lower than what you're guiding for the full year divided by 4, if you see what I'm saying. Are we going to expect a lot of the charges to accumulate in Q4 as they have done in prior years? And if so, why is that trend happening like that? Yes, sorry. Are you done? Yes. That was the end of my question. Yes. Thank you. Yes. Q3 and Q4, so Q2 was a bit lower because a couple of lighting restructurings, which were planned in Q2, slipped to Q3. So you will see the let's say, the lower restructuring in Q2 getting compensated by a higher amount in Q3. And then you will see some in Q4 as we, let's say, put into effect some of the new productivity programs that we will kick start in the second half of the year to drive our margins up in the coming years. So that's something we are working on. And once we start implementation of that, you will see some more restructuring charges coming in. Okay, great. And in terms of the tax rate going forward, are there further optimization programs that you've got going on or however you sorry, however the correct way to phrase it, should we expect the tax rate to come down further in the future? No. I think around the 30% is a fair number to go by. It could go up a tad, but it will be in and around 30%. Okay. Thank you. All right. I think that concludes our call, and I appreciate everybody's questions, and we will continue to work hard on achieving our aims for business results. Thank you very, very much and have a great summer period. This concludes the Royal Philips Second Quarter 2016 Results Conference Call on Monday, 25th July, 2016. Thank you for participating. You may now disconnect.