Koninklijke Philips N.V. (AMS:PHIA)

CMD 2015

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Sep 15, 2015

Good morning, ladies and gentlemen. Welcome here at the Phillips Capital Markets Day 2015 in the Landmark Hotel in London. I would also like to extend a warm welcome for those of you who are listening and looking at this Capital Markets Day through the live webcast that we have available through the Internet. I think we have a very exciting day ahead of us, where we'll explain a lot about where we are in our transformation process, our separation process, and we will zoom into the HealthTech opportunities and strategy. But before I do that and talk you through the agenda of today, I would like to draw your attention to the following safe harbor statement, which you can see on the slide and which is also in your slide pack. In addition to that, I would like to appraise you of the following. As most, if not all of you know, we are in the midst of separating Philips into 2 leading fit for purpose companies. And as we are considering all strategic options for Philips Lighting, we have to be careful about the forward looking statements we make because we are considering all strategic options, and one of them is a potential IPO. And as such, we are restricted from giving certain forward looking statements. So therefore, we also have to be careful about indirect forward looking statements. So all the guidance that we will give today will be related to group performance. So there will be no specific guidance at HealthTech or Lighting Solutions level. Now let me talk you through the agenda of today and what we have in store for you. After my welcome, Frans van Huert, the CEO, will provide a company update about the transformation process, the separation process. We will remind you of the attractive opportunities we see in lighting and then zoom into all the opportunities we see in the HealthTech market. After that, Ron Birani Raksa, the CFO, will provide a financial update related to all the strategic elements that Frans will talk about. And after that, we will zoom into our path to operational excellence done by Pasquale Aboucetre, our Chief of Operations. That will be followed by a Q and A, where we can have a Q and A for France's role in Pasquale. And after that, we will end the live part of the webcast. The rest of the day will be recorded and will be put on the Internet as soon as possible after the event. After the Q and A panel, we have a break to have a well deserved coffee, and then we will split into 6 groups. So we create smaller groups, and we'll go in what we call business Zooms, breakout sessions, where we aim to bring our health Tech strategy to life and show you a lot about all the opportunities that we see in the Health Tech space. And as you can see, there will be a number of business leaders providing you with all kinds of inspiring insights on the HealthTech strategy. We will do 3 before lunch, and then we will continue with the other 3 after lunch. And after those business zooms, we will come back here and have a plenary Q and A. At the end of each breakout session, there's also the opportunity to ask questions in the smaller groups, and then we will have a kind of a wrap up Q and A here in the plenary room, and then there will be kind of final words from Frans van Houten. And before I forget, it's also good to keep in mind that we intend to provide you with a USB key at the end of the day, so that you will have a soft copy of all the presentations so that you don't have to go to the website to get the soft copies. Now with that, I would like to hand over the mic and the floor to Frans van Houten, CEO of Philips. Thank you. Good morning to you all. Also welcome to the folks that follow us on the webcast. It's a pleasure to see all familiar faces, and it's an honor for us that we can update you today on the journey that Philips is on. It's an exciting journey, and we are making progress, and we would like to appraise you today of that progress. And all my team members here look forward to the interaction today. Let me quickly summarize my key messages. Of course, you're interested in how we are doing with the separation Phillips into 2 companies. I can tell you that we are on track with that separation. Lighting is a great business. And the way to look at lighting is a very cash generative conventional business and a fast growing LED Systems and Services business, an attractive proposition with increasing financial returns. Philips will focus in the future on HealthStack. HealthStack is a very large market, a growing market, has a lot of excitement around it. You can read it every day in the newspapers, and we have a great starting position in that. We become more and more a solutions provider so that we better serve our customers. We are boosting growth and scale. We will gradually get to an improved profile of performance for Phillips and for HealthTech. And we see many, many opportunities, and we're going to inform you about those opportunities today. You will, of course, have a great interest to understand the near term performance, including 2016. And here, we can tell you that we continue to see operational improvements at the adjusted EBITDA level that supports the earlier guidance that we gave in January July, where we see an improvement versus 2014 of approximately 200 basis points, arriving landing at around 11% adjusted EBITDA in 2016, albeit with a more modest growth, of course, taking into account a macro environment that is not that easy, and we will come back on that. Now let me dive deeper into the journey that we are on. You are very familiar with the journey that we started in 2011, where we said we will address fundamental underperformance in our businesses. That's the bottom bar, and we are continuing to effectuate that. We have done a lot, but there is more to come. I've always said this is a multiyear journey, and we need to stay the course. Only through consistent and persistent effort can you adopt a business system like, for example, a Danaher that I admire very much. But while we address underperformance and try to become a truly excellent company in everything we do, we are also investing in new growth, in scaling up existing businesses and initiating new growth engines. And there are numerous examples, and I'm sure you have followed the press releases out around, for example, digital pathology and health care informatics and the fast growth in, for example, oral care, and these are examples of the upper two bars. We will continue with this general framework, as we move forward. It helps us continue to improve. As part of this journey, we announced that we will separate Philips into 2 leading companies. Yes, that reflects an insight that a diversified holding model is no longer serving us and that we believe that it is better to have focused management on each of these opportunities, thereby becoming a more homogeneous focused company that can drive synergies in the business that we are in and get to better returns with the right accountability, but also with access to capital markets and a set of investors that are each interested in either Philips or Philips Lighting or, of course, perhaps both. A clear proposition, but both are good businesses, and both businesses are targeting growth markets. And we will talk more about that today. I've said already that we are well underway with the separation process. For a company that is 124 years old, obviously, we have some disentanglement to do in systems, in legal entities, assigning people that are part of shared service organizations, and we have made great progress. We are on schedule to finish the legal separation. By January, we are on track to create capital market access for lighting in the first half of twenty sixteen. And as Robin Janssen already said, we will consider all options, including an IPO and possible other scenarios. So that's basically the update on that. We will diligently continue to work through all the details, but it is reassuring that we are on schedule. And we have not found any major roadblock as such, so it's going well. And although the day today is focusing on HealthTech, I would be amiss to not briefly remind you of how attractive our lighting business really is. First of all, the lighting market is a growing market. You need to look beyond the trees to see the whole picture of the forest. We see a growing lighting market because more people will get on the electricity grid, either through solar or through the grid. In a growing population worldwide, more people will need light. The world definitely need more energy efficient light, and LED and smart systems can provide that. And as we speak about digital light, the amount of new applications that come to us are just phenomenal. Smart lighting that reacts to the amount of people in the street or in the building, colorful light that can enhance environments. All of this drives a growing market, 2% to 4%, where also the profit pool remains intact in that market. And some people are worried about commoditization. But actually, as the market becomes more sophisticated with systems and services and smart luminaires, there are new opportunities for growth. So we remain positive about the market outlook on lighting. And it's just that we go through this turmoil of the transition from conventional to LED. Within that turmoil, actually, Phillips is very, very well positioned. We have already made the decision to move downstream in the more value added area of lighting. We are the company that already has more than 40% in so called luminaire systems and services, where the profit pool is migrating towards. We have a great profile of leading positions in both conventional and in the key growth areas of LED Systems and Services. Our reach has an unrivaled channel strength, but also brand value. And we see as prices come down of LED lamps that actually our brand value premium kicks in. And this has happened before also when we introduced the CFOI lamps. And once the dust settles, also LED lamps will benefit from this channel and brand premium that we can derive. Of course, we have a strong track record on innovation. We have the strongest patent portfolio in the world. Hundreds of companies take IP licenses from Philips in order to deal with, let's say, our strengths there. And we are leading the way to this added value systems and services with the U lighting, with the smart city touch and so on and so on. So I think we are creating here a very attractive profile, well positioned to capture the opportunities. And I would like to, again, underline how you can look at Lighting. On the one hand, a strong conventional business that has a very high cash generating profile, where we have strong cost advantage because of our proactive restructuring and economies of scale. Our cost profile is better than the competition, and we know through all the modeling that we have done that over the next many years to come, even when we need to restructure and close factories, that our conventional lighting will remain cash flow positive. So that is one part of the lighting business. And the other part of the lighting business is a highly attractive fast growing LED luminaire systems and services business, where we have brand leadership, where we have distribution leadership, where we are the leading innovator with smart solutions such as CityTouch and You and Smart Buildings that generate a lot of interest in the market. We are consciously moving Philips Lighting into these systems and services areas where we get more stickier relationships with our customers and where we get recurring revenue streams through innovative business models such as selling light as a service and through maintenance contracts around smart cities and smart buildings. And in this Luminaire Systems and Services market, we can already see that the LED piece has above market growth and profitability. We have a strong management team that will be able to manage lighting as a standalone company, And I have full confidence that they are able to do that. And we have stepped up and beefed up this team, for example, with a new CFO and for example, with a new operations leader in order to ready Lighting for their new standalone future. Summarizing the lighting strategy, we will generate cash from the conventional business. We will fuel growth in LED Systems and Services, driven by innovation, driven by the move to Systems and Services, and we are innovative in capturing added value through new business models. We continue to boost performance through our Accelerate program, driving operational performance, lowering overhead cost structures, but also improving service levels to our customers. The net result of all this hard work will be that we see a future with profitable growth, margin expansion, and as we become more asset light, as the manufacturing model starts to shift to leveraging more our supplier base, we can also see a rising return on capital. And all along, we see an increasing free cash flow generation. That is what I wanted to tell you about Lighting. Just so that you keep it fresh in your minds that this is a great business. Most of today, we are going to talk about HealthTech. Now if you observe, we have changed the number at the top of the slide. Last year, we spoke about a market opportunity of around 100,000,000,000 dollars And as we were getting deeper and deeper in this vast opportunity, we have allowed ourselves to look at the adjacencies next to our strong market positions and believe that we can serve an addressable market of approximately $140,000,000,000 Within that, we today have around $15,000,000,000 sales. That means we have a lot of room to grow. We have many positions where we are already very strong. I will come back on that later in my presentation. We detail out here through this iconic health continuum the phases of the market that we address. Healthy living, prevention, diagnosis, treatment, home care, supported by population health, monitoring, informatics and connected care. This is a way to look at the market that we have piloted and pivoted last year already. And whereas a year ago, much of the market was still talking about medtech, you see more and more companies, governments talking about this health continuum, recognizing that acute and episodic care in the middle is not going to be the way to look at delivering health to all the billions of people in the world. So we take this integral view that fits very nicely with our core strength in professional health care and in consumer health and well-being. We believe that this these two worlds will be strongly interconnected, and we will detail that out today why that is. Overall, we see a market that will have mid- to high single digit growth, and that's attractive to us as we reposition for strong performance in these segments. When we look a bit deeper into the Health Continuum and the market segments that we see there, we see a couple of profound trends, trends that play into our cards, that play into our opportunity to support the market transformation with technology. We see in the acute and episodic care, basically in the middle with the hospitals, a shift to value based health care, aiming to reduce waste, aiming to increase access to more people and improve outcomes. This is often referred to also through accountable care. And of course, it relates to the fact that governments grapple with the fact that health care has escalating soaring costs and needs to be contained. And the way to contain that cost is, first of all, what we call the industrialization of health care, making sure that it is first time right and less wasteful. But secondly, the personalization of care, whereby consumers are increasingly engaged in their own health journey, and perhaps you will recognize this from your own lifestyle changes. But secondly, where care will shift from the expensive setting of the hospital into more, the community and into the home setting. We will see a world where ambulatory care is much more prevalent rather than hospitalization as such. And this reinforces this ecosystem of the health continuum whereby there needs to be strong collaboration between health care providers in the middle and how people live their lives, both when they are healthy, how they prevent escalations of problems and how they live with chronic disease. This will be driven by governments. This will be driven by insurance companies. This will be driven by large IDNs who adopt accountable care models. And this is a great opportunity for Philips since we have such a strong franchise in consumer health and well-being and a strong franchise in the hospital setting. We will be the company that targets solutions based on innovation to help people live a healthy life, to enable people to manage their own health, such as, for example, through oral hygiene, to ensure that diagnosis is first time right. Frankly speaking, this is still a bit of a Holy Grail for many hospitals. And if you see all the tests that are being done, there's a huge opportunity to ensure that through algorithms, through informatics, we make we help doctors diagnose people first time right and put them on the path of the right treatment. And this is often referred to as personalized medicine. And wouldn't we all want to have personalized medicine instead of a shotgun approach? So this is a very attractive opportunity where Philips is already working on so called adaptive care pathways, linking diagnosis to treatment. And when we speak about treatment, minimally invasive, allowing you to go home the next day, effective therapies, faster recovery. Of course, that is where we will talk later today about image guided therapy and volcano. And as people go home, technology to support the recovery through medicine compliance, through telehealth, through coaching, and all of that, I think targeting a large and growing population that may have to live 30 years with a chronic disease. Cardiovascular disease, cancer will become chronic, respiratory care is chronic. So all in all, many opportunities. We will support these businesses through a population health play. Increasingly, Philips is an informatics company. You will see that today in the various detailed presentations from my colleagues leading the businesses that informatics, where we go beyond the product, where we interpret the data and apply decision support, where we apply coaching has is the future. And you can appreciate that, that will help us create more value for Philips, where we do no longer compete just on the box, but we provide the software and services to differentiate ourselves and become more effective solutions partners to our customers. This is where the value will also partially migrate. And so monitoring, informatics and connected care basically straddles across this whole health continuum, integrating it all, and we will look for more and more integrated solutions around cardiology, oncology, respiratory care and pregnancy and parenting. We are convinced that we have a good deck of cards, a unique position to play out this opportunity. Built around the deep consumer and customer insights, deep clinical know how, strong analytics and clinical decision support expertise, advanced technology, broad channel access, Philips is a global player and everywhere our brand is well recognized. We are a trusted solutions partner. And as we move from products to software and services, we are harmonizing the interface by building everything on top of the announced HealthSuite digital platform, and you will hear more about that this afternoon as well. The starting position is strong with leading positions in every phase of the health continuum and also in at the bottom in monitoring informatics and connected care. And I would invite you to take a moment later today to let these all these strong positions sink in because I think it's the foundation on which we can build this future Phillips HealthTech company. We do have a clear execution plan now in place to deliver on this compelling strategy. And it will not surprise you that it is anchored on a continuation of our Accelerate program in order to really master operational excellence in everything that we do. So foundational at the bottom, continue to focus on better serving customers and improving performance with better execution, basically leveraging the Phillips Business System. We are investing to boost growth and gain scale in our core businesses that have a lot of potential. And for us, innovation is not only technological. Innovation is also in how we engage with our customers through more consultative relationships. These consultative relationships at the C Suite with our customers or B2B2C in order to reach consumers, for example, through insurance companies and employers help us to grow faster. And at the top, number 3, build winning solutions along this health continuum, leveraging our leadership in diagnostics, consumer health and patient monitoring, stitching together cardiology care pathways, oncology care pathways, respiratory care, pregnancy and parenting. Let's go a little bit deeper in this execution plan to give you the color on how we will drive value. 1st of all, much value continues to be created by continuing on our Accelerate journey and implementing the Philips Business System. I've referred already to other companies how they have done that consistently for many years. We still have work to do to further drive quality and compliance. We still see opportunities to become more efficient and to take out overhead costs. And there are numerous examples also listed here at the bottom where we continue to drive that. I can tell you that on Cleveland, we are making progress. And later today, our Chief of Operations, Pasquale Abrucesi, will talk more about it. We have started a whole program around lean manufacturing, and we see a lot of opportunity to derive more value from that. Our procurement program was designed for excellence involving our suppliers more strongly, continues to drive above average, above historical levels of procurement savings, helping us to capture this well known $1,000,000,000 that we announced a few years ago. We have other programs around operational excellence, and Ron will talk about overhead cost reduction. But all in all, when you look at these opportunities, I can tell you, I can reinforce the notion that we continue to be a self help story, where we see over the next several years an improvement potential of around 300 to 400 basis points for, let's say, improvement of the profitability. The second step in the execution plan is innovation, innovation that boosts growth and deepens customer relationships. So both technological and commercial and business model innovation help us to deeper penetrate markets. We see that our strong consultative approach where we often co create with customers using design thinking, design methodology, that it helps us to win the hearts and minds of the C suite. The Westchester Medical Center Health Network win 500,000,000 dollars earlier this year is a nice example. And Brent Schafer, our CEO of North America, will talk to you on how this is helping us to gain our market position. But also on the product side, through geographical expansion, through product range expansion, in, for example, oral health care as well as ultrasound, we see that we can attain high growth rates and with very nice returns. And the 3rd step of the implementation plan is around creating solutions that follow these diseases around cardiology, oncology, respiratory care and so on, where as we capture these deep clinical insights and connect to the consumer, we can leverage adjacencies in our leadership positions. This is where focused M and A will also help us and where the HealthSuite digital platform will create a foundation so that data can be extracted, population health can be enabled and connected and coordinated care can be delivered. Examples here are numerous, and I remind you that we are investing in our business as we speak, and some of that investment still need to generate a return over the next 3 or 4 years, the cost already being in our run rate. One example is the acquisition of Volcano, where we are making great progress, where we're basically ahead of plan on the value creation ceases. But other examples are where we are leveraging our strong position in patient monitoring and building it out across the health continuum, also by investing in wearable technologies, in sensors that patients and consumers are taking with them at all times. The investments in the HealthSuite program, and we are building out along these various diseases integrated solutions. So there's a lot cooking in the kitchen, and you will see a lot of that coming through in the demonstrations and presentations this afternoon. What will this all mean to our business portfolio? And here, I take an advance also towards the new segment reporting that Ron will talk about and that we will introduce next year, where we talk about 4 segments in HealthTech. Diagnosis and treatment, healthy living, prevention and home care, monitoring, informatics and connected care. You will recognize in this our health continuum, where we have grouped together some of these segments into a new segment reporting. The execution plan that I just shared with you will help these businesses to improve margins and to strengthen the growth profile. The recipe is adjusted to each of these businesses. Healthy Living, and you will recognize the strength of consumer lifestyle there, is already on a very good path. Preventative and home care also is already a high performer. But for both, we see opportunities to strengthen both growth and profitability. The biggest moves will be made by diagnosis and treatment where, of course, we saw the impact of Cleveland, where the operational excellence improvements will benefit the business a lot, but where we also carry the integration cost today of the Volcano acquisition. And as we overcome these quality issues and as we work through the integration of Volcano, you can see how diagnosis and treatment will start to edge up into again into the territory where it belongs, namely in double digit margins, and through innovations, a higher growth profile. Similarly, for Monitoring Informatics and Connected Care, I would like to remind you of the strong investments that we have been doing in that area. In monitoring informatics and connected care, you will find back the investments that we are doing in health care informatics, in the HealthSuite digital platform, in wearable technologies. So in that cluster of businesses, in fact, we have relatively speaking a high R and D investment today versus sales. That is why at the bottom, we mentioned that we expect a higher ROI on R and D leading to a margin increase. In other words, getting a higher scale will generate a healthier profile, both on margins and growth. There's obviously a lot more to speak about this. We felt that you would appreciate to have directionally a summary of how the portfolio in HealthTech will evolve, and this is the way that we aim to talk about it in the future, also giving you insights around the performance of each of these segments. The business will be driven by this management team, a management team that has seen some changes over the last 6 months. For example, Rob Cassella came on board coming from Hologic. You will hear him speak later today. Another change that is has already been announced is Andy Ho in China, who comes from IBM and who will help us transfer and transform there from basically a product business into a systems and services business. Again, acquiring the skills needed in order to play into this solution space. In summary, we have detailed out our plan to grow Philips in HealthTech. Anchored on operational excellence, boosting growth and scale in our existing businesses in an organic fashion through innovation, technologically, but also through customer business models and thirdly, by building out winning solutions along the health continuum. This leads to an improved financial profile that you may say rightly so. A financial profile with mid to high single digit growth and mid to high teens EBITDA margin, where we will see a higher ROIC and where we will consider disciplined, but a slightly more active approach to M and A as we build out our portfolio along this health continuum, and Volcano last year being an example of that. I'd like to talk about performance also in the near term, and Ron will expand on this. In the near term, we see operational improvements coming through as discussed in January and as discussed already in July. So as such, this should not be anything new. It's just perhaps that through the bridge, it gives you a clear representation of what we mean. So on the operational level, between 2014 2016, we see approximately an improvement of 200 basis points on the adjusted EBITDA level. This driven by modest sales growth and especially by the self help that we spoke about. And it does include sizable investments in transformation, and it does include sizable investments in new innovation. This adjusted EBITDA level is taken down by continued restructuring and separation cost, as we talked about in the July quarterly meeting. We also would like to remind you that even though we are very convinced about our ability to drive operational performance improvement, that we do see a number of incidentals still at the horizon. For example, the pension plan derisking that we have talked about. Secondly, we still working on the transformation of our professional lighting solutions in North America. And I think overall, you would agree with me that the world around us has not necessarily become an easier place with high currency volatility and a China, Brazil, Russia markets place that is not exactly flourishing. So we see certainly in China that we need to tighten the belt as we in the near term, maybe in the next 1 or 2 years, see a reality of lower growth. I also noted on here that we are working diligently around the Luminess transaction close that we expect later in this year. Let me sum up. We are well on our way to create 2 leading companies, 2 companies that have both attractive opportunities to grow and to expand margins. Lighting with a strong conventional business and a high growth LED Systems and Services business. And Philips focusing on an attractive health tech market where there's a lot happening and a lot of opportunities, where the governments and health providers are all looking for better solutions, and where we believe that through our solutions approach, through our innovation, we can boost growth and we can boost scale and drive a better performance. And I've spoken to you about our near term performance outlook. And with that, I would like to round off and invite Ron Virahadi Raksa on stage to give you a more detailed financial performance update. Thank you. Thank you, Raj. Good morning, everyone. The coming 20 minutes, I will give you a financial update for the group. We'll speak a bit about the global environment out there, our operational performance, currency targets and about the separation. The macro environment continues to be very challenging. It's not getting any easier. Real GDP versus last year forecast trending down. Healthcare spent in the world also down, but in the least by the strong U. S. Dollar, which is taxing on budgets of some other countries. And we see also in the non residential construction that versus earlier forecast, outlooks are a little bit dimmer. Particularly in the growth geographies, Brazil, Russia and notably China, we see slowdowns and softness. And if I hone in a bit on China, the current challenges are of course the macroeconomic situation, the headwinds, what is the real growth rate in China, a weaker construction markets, slower health care spend due to structural reform and uncertainty and a drive for domestic innovation. Now how are you going to combat that because in China, we have to learn to work with a much lower growth rate and focus also on cost and operational efficiency. That is exactly what we will do. And we will also provide along the lines that Frans just said, our new solutions business into China. There are also a few bright spots because there are new opportunities in China. The private market, the private healthcare market in China is slated to grow to above 20%. For those who can afford it, Chinese government has an agenda to drive health care in that segment too. And of course, we have a very exciting health and wellness business And that in China, I'm talking here about the consumer part of the business, is a growing segment, particularly in oral healthcare, Consumers in China increasingly flock to take care of dental health because, as also depicted on the health continuum, that helps with prevention. The market outlook, the health care market and the lighting market on the back of what I just said, and in lighting, weaker construction will remain softer. Consumer Lifestyle business is also experiencing slower growth. That is the key takeaway from this slide. How are we faring? You have seen for the first half after the Q2 reporting that the Accelerate story, the operational improvement storyline of Philips that is much more than cost saving, there is a fair bit of cost saving and I will talk about it, but also on growth and innovation is intact with 100 basis points margin expansion. That margin expansion is then partly taken away by ForEx impact. And of course, we still have some of the Cleveland cost to take, which we see improving in the second half of this year. So that leads to about a 10 basis points market expansion underlying, and that is the key message here, the operational improvement is intact, 100 basis points of improvement. So for the second half of the year, what are some of the positives? You can see them here, cost savings in driving operational excellence is very much on the agenda, and it pays. Despite somewhat of a more muted order intake than we anticipated in Q2, we do have a strong order backlog to make the sales for this year. Cleveland, I already mentioned, the production is ramping gradually up, and we do expect to improve there. There will be a lower restructuring cost. And of course, gradual improvements, as we said, and as Frans also highlighted, in our Professional Lighting Systems business in North America. We're aiming to drive for low single digit growth there for the second half in this year. Some of the offsetting factors in the second half will be the slowdown in the growth geographies as I just outlined for you, notably in China, but we can't forget that also in Brazil and Russia, things are not exactly as we anticipated and that that also has significant currency impacts in both geographies. Our separation costs, we highlighted €200,000,000 to €300,000,000 We spent in the first half €40,000,000 so there's 160,000,000 to 260,000,000 to go. And that is because we're getting into a phase of separating the company, for the hard work done, where executing on split will drive more cost to come in as anticipated. So this is the normal pattern for us. And then we will also do pension de risking. We'll do it such that we get good value versus the risk mitigation that we are seeking. It's too early to call an amount because right now, we are discussing with all stakeholders, pension funds and others in the market. So there's not much to be said there at this moment. As you know, we've been very active in pension derisking over the past years, partly in the U. S. We have derisked the Dutch pension fund last year, and we intend to prolong that further, particularly around the U. S. And the U. K. Fund. So as you can see, we continue to focus on the modest sales growth for 2015, and we're also focused on driving continuous operational improvement. A bit more on currency. I've broken the currency down here on the left top side of the page. You can see the 41% in U. S. Dollars. Despite that, on the right hand side, you can see we're effectively net in U. S. Dollars. So the currency footprint of the company has altered somewhat. And it has altered, for example, because of the divestment of the Luminess Automotive business, which is a business, particularly in automotive side, was long in dollars. And with the Volcano acquisition, the U. S. Dollar cost footprint has also increased a bit. So how do we manage that? Of course, we're looking ongoing at rationalizing our footprints and Pascuala, but Cesi is going to talk about that. Price increases where we can and when we can. Driving costs in general, besides manufacturing, to a good level. And of course, we're driving better solutions business with anticipated higher margins. For the second half, however, despite what we anticipated after Q2 earnings, where I said on the call to be 100 plus, we now expect this to be slightly negative for the full year. Yes, so the big plus that we anticipate in the second half, under the influence of recent currency movements, and you now have all good knowledge on where they come from, they have driven down the impact to a slightly negative number. A word on the 2016 targets. Frans spoke about the 11% adjusted EBITA margin. So let me start on the left hand side with a reported EBITA margin and build it up to the right hand side of the page, the reported EBITDA margin 2016. So from 4%, there were significant incidentals last year. So added back to the reported EBITA is 5.20 basis points of incidentals. That brings the adjusted EBITDA margin for last year to 9%, and we intend to expand that with 200 basis points to 11% in 2016. And you can see the buildup of it. A lot will come from operational improvement. This is in line with earlier anticipating anticipated developments in the operational improvements. And of course, we have some risk there because of the growth geographies and ForEx, but we're working very hard to drive costs further down. Also, Cleveland will add to this, and then we have a slight contingency. That brings it to 11%. And then you can see here on the slide, the restructuring is about 1%, and there's a percent for separation costs. So I find it good to articulate that this is not a change from what we communicated after Q2. We have simply written down and quantified the number here. So the reported EBITDA, 2016, 9% with an adjusted of 11%. Productivity programs continue to improve the operational performance. You can see it here. 2014 incremental growth overhead saving, DFX and the productivity and the restructuring and investments. The Restructuring and Investments line is completely in line with what we publish every quarter, so you can find that back. In 2015, for example, of the 2 60, there's €175,000,000 of investments. Those are the one off accelerate transformation cost that we bring to the P and L. And for 2016, you see incremental growth overhead €200,000,000 That brings you down to the targeted 1.8 cumulative. DFX, 1,000,000,000. So that is also executing on what we said we would do over 'fourteen, 'fifteen, 'sixteen. So we're on track to deliver that. And then you have the end to end productivity gains that has that's related to the Philips integrated landscape. And the good news is, we have started with implementation in North Latin America, and the first news is, it's gone very well, and we intend to roll it out further. This will take some time of course. Now the operational improvement will drive ROIC growth. We measure ROIC as we report to all of you on a 5 quarters MAT basis. Yes, so hence the first half, 4.4 percent. We'll add back the past incidentals that will fall out, of course, progressively, as we move further in Q3 and Q4. Operation improvement added to that, the separation costs will be deducted, and that brings us to a over 12% return on invested capital slated to take place in 2016. Our business has a good very good cash conversion capability, and we will drive further improvements. So we'll drive further on working capital improvements. We're working with our suppliers to partner with them to make sure that we can utilize optimal supplier credit. We have a consumer financing arm, it's not a bank, it's called Phillips Capital, that helps with financing and not taking it on the balance sheet, but through a fine network of financing partners to drive business growth through financing solutions, which works very well. And then as I said already, the Phillips Excellence Program. The bottom part of the page talks about the CapEx intensity. This will decrease over time. As you know, we are reducing the conventional footprint gradually. And the LED business is not that CapEx intense. And as we're moving more to systems and services, the CapEx needs from the past where lighting was, where it was also largely driven by the Luminess Automotive business, the components part upstream will slow down. Also in Healthtech, the CapEx needs are not that high because what you finally end up with in differentiating on the asset base is final assembly and testing, and that is not the most CapEx intense part of the business. Let's talk about the separation. The separation is on track. Frans already mentioned this. This is a complex separation of highly integrated operations. So even though this is not a classical disentanglement, there's of course a lot that we find that is entangled in unwinding the 2 companies and setting them up fit for purpose, each with their own legal structure, their IT infrastructure, their tax, financing infrastructure, real estate. It is a very, very large and intense project. But we're on track. So the creation of the optimal infrastructure for both companies is what it is that we're after. So it's not just disentangling, also making sure that we're then fit for purpose, both companies, yes, fairly set up. You can see here, most of the legal entities have been incorporated, almost all of them. We have completed the organizational separation. And in the process, we have also implemented a lean operating model that relates to the fit for purpose, setting both organizations up with the right cost structure going forward. And of course, we are in the midst of separating the assets and liabilities of IG and S, right. That's a real separation, like the IG and S cost will be a real split. So what are the next steps here? We will further optimize the IT systems. Yes, that is a very big step. And without the IT infrastructure, basically, it will be very difficult to create a stand alone entity. So that's a real gating item. We aim to have the companies legally separate or lighting separate legal entity by February of 2016. So we're on track for that too. And we will report in the new structure as of Q1. So as of Q1, over the results, we will report in the new external segment reporting structure. I will elaborate on that in the next slide. So of course, we will report for the full year in the current structure. After we have reported in the current structure in January of next year, we will publish a pro form a on the web in the new structure so that ahead of the Q1 results, you already get an inkling of what the reporting would have looked like if we had the new structure already in place in 2015. And that is what we always do. So this is not something out of the extraordinary when we divest businesses, including restates. And as already said, we are reviewing all capital market access possibilities for lighting. And Robin has already qualified in the beginning what that means for disclosure, particularly also in this meeting. Now on the new reporting structure, here depicted is the new segment reporting where in the dotted line box are the reporting segments. Of course, you have the group, then we will also report on HealthTech, Lighting is a segment. And then we have 4 Healthcare Business segments, Healthy Living, in which Personal Care and Domestic Appliances Prevention and Home Care with, of course, a Sleep and Respiratory business. The Personal Health Solutions business, the new wearables business, I don't know how many of you were in the IFA a week ago, 10 days ago. Very, very exciting. You've been able to see what we're doing there. And of course, the Health and Wellness business, a great franchise, particularly around oral care. And then Diagnosis and Treatment, which has the diagnostic imaging part of the business as well as the Image Guided Therapy business, Yes, and that part is then Diagnosis and Treatment. Then we're moving to the right, Monitoring, Informatics and Connected Care. Under there will be the business of Patient Care Monitoring solutions and healthcare informatics services and solutions. So that's the basically undercurrent to manifest the health continuum. You can see what we have done here is more or less reflected the health continuum, which starts with healthy living, prevention, diagnostics, treatment, recovery and home care, yes, with the clinical backbone and all the informatics underlying that and monitoring to help manifest and get the whole health continuum connected. And this is how we will report. We will report lighting in one segment. Yes. This is now, and that is ahead of basically keeping all options open, including an IPO. And then there will be some corporate items. The corporate items will be legacy litigation, as you can see, old cases, stranded costs, as you can see, and the separation costs. So what you can also then see is that IG and S, as we know it, particularly the overhead part, is basically separated out, split up into Health Tech and Lighting Solutions. Yes, so the segments will include that part of the business. To give you an idea on the idea of split, and it's real split, it's not an allocation. So we've gone through meticulous and granular meetings, reviews, granularity to get it done. So you know the IG and S reporting segment as we currently have it. So I've depicted here for you where were the revenue fall. So the revenue in IGS currently is particularly IP related. That will stay with HealthTech. Then you have cost innovation over it in service units. That will have a split of 85% for Healthtech and 15% for lighting. Other legacy, as I said, will be in corporate items. And if you do that on an adjusted EBITDA basis, if that is 100%, 45% will be HealthTech, 35% Lighting and 20% corporate items. In the reported EBITDA, 25%, 25% 50%, respectively. Also of note is that the idea split then is reported EBITDA margin impact of minus 1.3 percent for HealthTech and 2.4% for Lighting. This is indicatively and pro form a. So directionally, I think it's right. But of course, as we're not 100% separated yet, the number is not 100% crystaled out yet, but I wanted to give you an inkling of what it's going to look like. Creating 2 fit for purpose companies, yes, after reporting on separation and the split of IAG and S, how are we driving these 2 fit for companies towards value creation? Of course, the Philips business system that we have elaborately reported on since inception as part of the Accelerate program and transformation is at work. So the separation is because of Accelerate and the Phillips Business System will drive value creation repeatably as a model in both companies. There are a lot of market opportunities that we are capitalizing on with a strong IT backbone, a good customer financing support and growth opportunity and a great solutions organization. The way to manage, and you're going to hear more of that this afternoon, the large scale projects and to make it an integrated part of your organization. More of that to come. We'll complete the Volcano integration and realize the synergies, the very complementary synergies as we're now in Systems and Devices, in Image Guided Therapy. That's a great asset to have. And then of course, we're going to share on an equal basis, on a fair basis, the liabilities. You can see here, the balance sheet will be provided from Q1 2016 onwards. The other liabilities in that will be split based on originating entity, that is fair. Existing debt will stay with Royal Philips and the majority of the deferred tax assets will stay with Royal Philips. We're on capital allocation. We will continue to invest in organic growth to strengthen each business. And there's many opportunities along the lines Frans has outlined for you. We will look more into M and A, particularly geared to HealthTech, and we'll do that very disciplined. We're committed to a strong investment grade credit rating. For the group now, current policy, we're not altering it because we're not separated yet. Is the current policy, 40% to 50%, payout of continuing net income, and we're slated to complete the share buyback that we started in October 13 by 2016. We're more than halfway in now. Key takeaways, therefore, challenging environment, deteriorating in certain growth geographies, ForEx impact is there. We continue to drive operational performance. Accelerate is at work. So separation is one thing, transforming is another and improving is yet another, and we're doing it all. Reported adjusted EBITA margin, 11% in 2016, coming from 9% end of 2014, on track with the separation, and we will report in a new structure as of Q1 2016 onwards. This is what I wanted to share with you in the financial update. Thank you for your attention. Pasquale, may I ask you? Thank you, Rachit. Thank you. Morning, everybody. Great pleasure to be here to just give a little bit more detail on what our path to operational excellence is and where we are. I want to just remind us here of Phillips Business System. So we've mentioned it a few times, but the essence of the business system is how we operate differently, how we build a performance and growth culture. That's why it's a multiyear journey where it takes time to do that. You don't just do it by saying it, we have to practice it, we have to lead it, we have to build it, we have to continuously learn and it's a multiyear journey. But I think we've made great strides and today I'm going to show you some of the initiatives we've got around making ourselves better every day. So on the operational excellence side, I split into 3 buckets. So we want to look at 3 buckets. 1, the quality and compliance side to better serve our customers. The operational excellence side by bringing PBS to life and getting speed and agility in everything we do. And also, we've got fairly detailed cost reduction programs. It's key to understand, I believe, that it's not 1 before 2, then 3, but we have to push all 3 at the same time. So quite an expansive approach to becoming operationally excellent. We're just doing 1 or 2 things here. I'm going to go into detail now in these three areas. So on the quality and compliance side, you can see down the left, we're building a foundation and we're getting towards sustainable quality, we've got actions along all that axis, okay? There's a tight governance now with 1 central quality model. So one function, one leader and a leadership team direct line. There's a quality management system that we've designed and implementing that gives us real time data and corrective actions. The key to the quality management system is finding the issues quickly and correcting them. And we're engineering that as we go. Again, not one step to get there, multiple steps, but we've made strides along that path. We've injected talent. We were lacking in certain capabilities. If you look at the top 200 team within the quality and regulatory field, 40% are new and at a leadership level, so the top 12 people or so of quality and regulatory, 70% new. We've injected in capabilities, a lot of them from the medical device area, aerospace and also automotive fields. We've we're doing leadership led quality training where leaders including myself and some of the folks you've seen on stage so far, get up and talk about the business system about Philips and what quality means to Phillips before getting into the technical details of what we need to do to become a quality organization. We've also boosted an internal quality audit function with the idea of preventing or finding issues and putting in corrective actions before we have outside parties come in and do some of that for us or with us. So we've boosted that in the last 12 months or so too. And most importantly, I think is that quality is led from the top, from Frans Down and his old direct team. We rigorously look at quality. We don't think that quality is a function that we tag on at the end like a policeman type function, but we build in quality to all our processes every day. It's an attitude, it's a leadership behavior, which we're heavy on bringing through the organization. Let me just deep dive Cleveland now. So we've gone from remediation to operationalizing the Cleveland plant. Four areas that we focused on were the new production and process control architecture, the product development and launch process, the cultural change driven by transparency visibility and rewarding almost the finding of problems, I would say. And in the factory itself, single piece flow and lean factory processes accelerated in that we redesigned the whole factory in 1 year right from a white sheet of paper. So we brought in these concepts right from the start. Actions over that period, 250 quality system procedures rewritten with work instructions onto the floor and into the value streams. A revised design validation and improved supplier controls process, launched a cultural training program where everybody on-site, 750 people, went through a 2 week program of just understanding customer quality and how to build it in. A new structure and cross functional organization and we redesigned the factory with predictable production processes. Some of the impact of those actions. A quality management system that was certified in January 2015 by 3rd party. We improved warranty by 35%, the cost of warranty. 100% of the suppliers recertified. And we've put in much tighter processes to proactively identify issues. And here, as I said earlier, we encourage everybody to stop the production or stop the process if there's a suspicion of a quality concern. It's a little bit of an overkill, I would say, today, but we're very cautious that anything we find, we act upon. So we encourage the whole 750 people on-site in Cleveland to do that every day. And we do have instances where we've stopped things and had to go and work out what's happened. We've trained all 7 50 employees in the quarterly plan. And as I said earlier, well, there's 40% of leadership new on this on-site here, 55 of the 65 roles in total, 55 of them replaced in quality. We're about 80% or so of the ICT backlog shipped to date. We increased line capacity to get to be able to get rid of some of this backlog by 60% as we redesigned the factory flows. Okay. So quite an activity going on in Cleveland to give us robustness in output from our facility. Going on to the 2nd bucket from my earlier slide in operational excellence. This focus is on getting the right skills at the right level. So part of PBS, Phillips Business System is Phillips excellence. Phillips excellence is how we operate, how we ask people to behave and operate differently. There are certain practices that we've defined, you can read some of them there, process management, performance management, project management, change management, all of it underpinned by what we define as continuous improvement, which is really lean and 6 Sigma. We've on the continuous improvement side, we've defined 12 very precise tools that we've got spreading across the company from top down, really understanding those tools and how to apply them. So quite a defined curriculum of learning. And the pyramid, the learning pyramid that we have there really shows that are an awareness level. So these curriculum are in an e module fashion where 3 to 5 hours worth of work takes you through the curriculum with a test, with a certification at the end. We see we've gone from 12,000 to 30,000 with an ambition to get to 40,000. So the majority of the health tech folks with email access, with computer access to go through that. And we've built the practitioner level and the expert level on top of that. You see the pyramid. Practitioner, probably 2, 3 weeks' worth of training, 6 months' worth of certification to be able to practice with these practices very well. An expert level deal with combined internal, let's say, Philips folks from inside and brought them through as well as injected in some talent because we wanted to bring in the expert level to to go faster we've injected in that level with this external benchmark as a view of where we want to get to, okay? So all the companies like Danaher, Honeywell, Toyota have taken 15 to 30 years to become very good and very excellent and bring to life their business system. We don't want to take that long. We're injecting in and building capabilities at a faster pace than you would naturally do so. So with a very structured program and measures each level of how we build that. A little bit of a deep dive on the factory. So we've got a lean deployment program for a number of years. It's continuously evolved over the last 4 or 5 and got better and better. What this really shows top left, there's a maturity, let's say, Phase 0 embryonic, Phase 5 mature. So we want everybody to get to Phase 5. At Phase 5, there's lean thinking happening in the site. There's natural learning and improvement ideas coming out every day with improvement in productivity. And you can see that at the moment, we're at 16% of our sites at Phase 5. In 2016, we plan to get to 50%, 52%. And the graphs at the bottom depict that in the 15% that we've done so far in the last 2 or 3 years, we've gained these types of improvements. 10% in delivery reliability, defects out of the door down 75%, Productivity within the 4 walls up 65%, a huge work in progress reduction of 60%. And most importantly on here for me is the Kaizen ideas. We've gone up 200%. So these are where we're encouraging everybody to give ideas and improve the site to drive the other KPIs or other metrics that you see on here. And it gives you the healthiness of where the site is. And we're really measuring how many ideas are coming through, how many do we implement on-site. A lot of these ideas are not big capital intensive ideas. It's just the site self help in itself, generating continuous improvement every day and getting the spirit of being able to resolve issues and improve on a daily basis. The next area I'd like to go into is procurement. There's been a significant procurement transformation over the last 4 years or so. We're on track to achieve the 1,000,000,000 dollars as Ron mentioned earlier. And here, I just want to give a little bit more detail of where we are in doing that. So design for excellence, cross functional teams looking over the value chain. We started by looking retroactively at the product we had and going in and saying how could this be better designed and cheaper at the same time. Clean, we got great results from that. That now becomes how do we design in cost and quality and reliability right upfront. And that methodology is going into the new product development and launch procedure that we have to ensure that, that converts into getting it right first time, I would say. Supplier development, a structured approach to getting into some key suppliers and effectively helping them become lean and understand how their business runs and how their people operate. And from that, they become stronger, we take some reward too. So quite an intense program on that. Negotiation Factory is just a centralized process of looking at how to negotiate real work leading edge tools and bringing together the whole procurement function up to speed and certified in negotiation. Esourcing platform, really a platform to facilitate e auction, so as we can tender much quicker and eliminate waste in that process too. So quite developed in going much faster with outsourcing and giving us flexibility on moving or making sourcing decisions in a faster way. Additional activities apart from in the factory and in the supply, Few that I'd like to mention here. We've simplified the organization structure over the last year 2 years now, year and a half. We've gone from 13 layers to 10 and we intend to get to 8, like that being flatter top down, faster, leaner, cheaper at the same time. So a whole exercise in getting there. The enabling functions, which are predominantly IT, HR, finance and real estate, We've got benchmark accurate benchmarks by function and a whole plan by function of how we get to that benchmark level over the next 2 or 3 years. And that's not just a top level number. If I look at IT that I directly look after, we've gone in by sub function of IT and within processes within IT like IT delivery and saying how much does it cost us and how much is it costing in numerous benchmark companies. And like that, it gives us a hint of where to go and improve our processes and make them much more effective and efficient. We're standardizing on end to end processes for speed in that we're redesigning processes end to end, supported by a new IT. We call it the Phillips Integrated Landscape that will roll out over the years. And that gives us a lot of things, but one of the main things is a transactional back office that is standardized. And therefore, we're able to move it to where we want to and lean it out. That's the last bullet, which is the centralized global business service. I like to think of that as industrializing the back office, getting to a much more defined, larger set of hubs where you run it just like a factory, input, output, effectiveness and quality of the transactional back office. At the same time, global footprint. So we're looking at how much footprint we've got both in the factory side, the distribution side and other offices that we have and really got our arms around how to get much leaner to larger scaled hubs over the next few years, we'll be moving there. So in summary, we have a clear program. We've got a real structured approach to quality. We're building capabilities across the organization, not just in one function or another. Lean factory deployment is positive. We spent years engineering a system that is scalable and we're moving that way over time, over the next year or so. At the same time, we start looking at the sales process, R and D process and applying lean methodology in those areas too. The procurement transformation is on track. We're striving towards and made first steps towards a simpler organization built around end to end processes. There's a lot more to come. And as we bring this together, I can see all this dropping to the bottom line over the next few years. So thank you, and I'd like to invite Ron and Frans up for a Q and A. Good. Thanks, Pasquale. Well, let's start right in the middle here. Martin? Thank you. It's Martin Miochi now at Citi. A couple of questions. The on the targeted M and A you talked about, perhaps you could just give a little bit of detail as to how big those acquisitions might be. But also, as part of your Phillips business system, is the integration process, the acquisition process, is that now complete? It sounds like the Volcano deal is going well, but obviously, you've had challenges in the past with Genlight, Respironics, things like that. If you could talk a little bit about the protest for M and A? And then the second question was, you've talked about investing for growth. Are the parts of the portfolio, the HealthTech portfolio that just aren't as appealing anymore? Are there areas, perhaps some of the commoditized imaging pieces, where you're thinking about disposals? And could there be some targeted disposals as part of that M and A process? Yes. Well, thanks, Martin. So first of all, the Philips Business System, as Pasquale has explained, is rolled out everywhere, but it needs to mature. So we would not call ourselves masters yet in the Philips Business System, right? This is a learning curve for many years. As we have learned from lessons in the past on acquisitions, notably much too slow in integration, not immediately rigorously implementing the PMI program. We have taken a different approach with Volcano. Bert van Mers, the leader of image guided therapy under which Volcano is being integrated, is on top of that. We have a very detailed Hoshin approach towards the integration. And this is also why we cannot report out that we are ahead of plan, right? So cost savings and so on. Cross sales opportunities, the sales forces are collaborating very nicely together. So both on cost and revenue level, we see the benefits of this different approach to post merger integration. Looking ahead, I cannot predict with great details, of course, what potential acquisitions may look like. We will be cautious. We will be disciplined. It will need to fit the portfolio profile around the Health Continuum. We want to strengthen our existing businesses, therefore, not necessarily only going into new stuff, right? It needs to reinforce each other. So careful selection of opportunities. And then it needs to be actionable, right? And we will not overeat ourselves. So over the next years, we will consider doing bolt ons. Now then, the question I can already see it in your eyes, how big is a bolt on? Volcano is a good proxy, right? And that doesn't mean that I will never come back to you with something else. But at this moment, with the knowledge that we have today, I would say that's a good proxy. Disposals. Well, we are working on a very large spot. So let's not get ahead of ourselves. This is very impactful. We want to do it right. I think we have demonstrated over the years that we will not shy away from taking a portfolio decision if we feel that we are not the right owner and we cannot add value. But I would like to say that today, we do not see any business in our HealthTech portfolio that would meet that criteria. So we are not planning any disposal. So no speculation, please. Pasquale, please have a seat. Yes. Good morning. It's Peter Reilly from Jefferies. Two questions, please. Ron, you said several times there was no change to what you said at the Q2. But back at Q2, you had a 2016 reported EBITA margin target of 10% to 11%. It's now 9%. So can you help me understand why that isn't a change from the 2nd quarter? And then secondly, on you mentioned stranded costs on one of your slides. So clearly, I guess, you're going into 2016 still with some excess overheads. Can you help us understand the scale of the stranded cost and whether you'll be able to eliminate that during the course of 2016? Yes. So at the end of Q2, we said that we would update the targets at the Capital Markets Day. We clearly depicted that also in our communication materials. So in January, we gave a new outlook on the targets. And we reiterated that after Q1. And in Q2, we had said, okay, this is the outlook that we gave in January, but this will be updated. On top of that, we gave you the separation cost outlook for 2015, euros 200,000,000 to €300,000,000 and also for 2016, plus the restructuring charges that we normally have. So in our book, we have not made any change. We just added up what we had already said before, yes? So that's how you get from the 11 adjusted to the 9 and in your book from the 10 to 11 to the 9. What is the other story? Stranded costs, yes. There will be some stranded costs, so we don't think it will be very high. We are very good in working that away. You know this, usually, it takes 1 to 2 years before we have managed that down. And it is related to a bit of the dis synergies and stranded part that we see with lighting. But as we said, we're we've taken an approach of basically split and then fix. So with lean operating model, as I also articulated, we're addressing costs and setting it up in the best possible way. There will be some stranded costs. Good. Thank you. Andreas? Thank you very much. Andreas Willi, JPMorgan. First question on your longer term HealthTech ambition, the 400 to 500 basis points margin improvement. Is that for HealthTech or HealthCare in terms of the old definition? And what's the starting point, 14 or 15 or adjust or report just that we can put that in the right context? And second, on capital deployment, in the case you would get a larger upfront payment for your for the lighting separation. Is there something in there for shareholders upfront as well? Or does it just mean we have to wait 3, 4 years for capital deployment through add on acquisitions potentially at initially valuations that are much higher than your own? And therefore, basically, shareholders need to wait 4, 5 years to get the benefit from this separation. And last question on Cleveland. Obviously, you've made good progress on the slide. You said you had 60% increase in kind of what you can do there in terms of production, plus you had invested and expanded in other areas last year to compensate for the loss of Cleveland. Do you get the CT orders at the moment so that can actually still run at a good utilization rate next year? Yes. Let's first clarify the midterm outlook for HealthTech. I described to you the 3 main execution steps of the strategy, operational excellence improvement, growth organic growth and the solutions build. The 400 basis points relate to that bottom layer in that picture and relate to therefore to HealthStack. That's not the only improvement that we see in HealthTech because the other two steps of, let's say, boosting growth through innovation and creating these solutions will also contribute to improvement of both growth and profitability. The 400 basis, 300 basis points, 400 basis points basically are there to show what still is possible just by continuing with our operational excellence improvement. And we have not quantified the other two steps. Instead, on the final slide of the HealthTech section, I gave to you an overall outlook in the midterm, 4 to 5 years, of profitability that we aim to achieve. And there we spoke about an overall profitability of mid to high teens. So that is the target ambition level and a mid to high single digit growth. If you then take that slide with the quadrants and the vectors on the various segments, you see that we aim to get all these businesses in the right upper hand quartile of that picture. And that is where we would need to see the mid to high teens EBITDA and the mid to high single digit growth. Your second point, which included some projection and judgment, if I may say, on what it means to shareholders when we get the proceeds of lighting. I think we should not get ahead of ourselves. We first need to see how this will all pan out, what the market access for lighting will mean. And then we will apply our capital allocation policy. In other words, we will judge according to our capital allocation policy, the right way to deploy and redeploy the proceeds of the lighting standalone transaction. And I think it would not be wise to start speculating on what that means. And neither, I think, would be could we say that any acquisition would be very expensive. I mean, we should, I think, take every case one step at a time. Your final point on Cleveland, Pasquale, can we book for you? Sure. Cleveland, we have boosted capacity by 60%. It's not fixed cost. We can flex down if we need to. We have to do that to get over the backlog. So we're very accurately planning out as orders come in how to flex that capacity going forward. Yes. And then the second part of your Cleveland question was more commercial, right? How are we doing with new orders? Well, we don't detail out, of course, orders by individual business. We spoke earlier about the fact that Cleveland is introducing new products, most notably the Icon Spectral CT. And I'm happy to report to you that we have just gotten the 510 approval of the by the FDA for this breakthrough product. And we expect that this will help us to reestablish our iconic leadership in this space. The Varios Digital Pet CT is coming, let's say, shippable early in the next year, next to, of course, the whole lineup of ICTs and advanced molecular imaging that we will do. I can tell you that customers are responding positively to the remediation that we have done and the sentiment also in North America has improved a lot. Sitting behind you is our both Brent Schafer, CEO of Phillips North America as well as Rob Cassella, who is in charge of all these businesses. And I'm sure that later today, we will be able to go further into these areas. Please. 1st row here, the lady. Thank you. It's Danielle Kosso from Goldman Sachs. Three questions. Just first one regarding, I think before you had mentioned underlying group margin 2014 versus 2015 that there was an ambition of 100 basis points, which you then said it was quite challenging in Q2. So where do you stand in that now? And then the second thing regarding diagnostic emissions going back to double digit, is it fair to say that or would you agree that could you go back to where you were before Cleveland even under a more tough competitive environment in China? And the third one, just a clarification question to make sure I understood on Cleveland. Before you had a commentary, I think, of 70% to 80% being somewhere between 70% to 80% in terms of capacity, ramping up capacity. How does that tie with the data you've just shown? Okay. Claude, you take the first one. The so you asked about the 100 basis points improvement for this year and where we are on that. Well, as I said, we aim to have modest sales growth. We are also aiming to drive operational improvement. As I also said, it's not the easiest thing to do with the new ForEx headwind, the growth geographies, particularly China, that have come down significantly versus earlier expectations. We're working that also by driving operational excellence, cost savings where we can improve efficiency. So this will drive for improvement. What I'm saying is I can't guarantee if that's what you're looking for, that will be the case. It looks as if we will be able to show a slight improvement, but there are risks out there. Yes? The expectation is that Diagnostic Imaging will certainly attain back historic margins. The cluster of imaging and diagnostics and treatment, by the way, is more than diagnostic imaging. It also includes ultrasound and image guided therapy and volcano. Some of these businesses are actually today operating already in that desired quadrant of performance. The Diagnostic Imaging business is still carrying a lot of remediation cost, which depresses, let's say, the current performance even though we have seen volumes improve. And it is our conviction that, yes, indeed, we were able to get there. What also is helping a lot is the fact that besides hardware, we add a lot of added value through, for example, anatomical intelligence, software applications and new services. So we believe that the whole area of diagnostics and treatment is a good market to be in and that our strategy will help us differentiate from, let's say, a more commoditized environment. I certainly recognize that, that threat is existing, and it is up to us to prove to our customers that they should not buy naked scanners, but rather buy diagnostics solutions. And for us, that is what we are after. That's the whole point around being a solutions provider. Maybe the last point again to Dostoala. Yes. We've installed at 70% to 80% plus. We're running it a little bit cautiously as I alluded to. So we don't go for efficiency or go for output. And we've gleaned so far 60% is a good number, but we can boost to 80% quite easily as we need to. Good. It's very unfair. There are so many hands. Why don't we start on the left side and stay there for a moment and then we move back here. Thank you, Frans. David Voss, Barclays. Two questions from my side, please. First, not to belabor the point, but going back to the bridge. I'd just like to understand a little bit. If we look at what you've achieved in H1 in terms of operational improvement, that was 100 basis points. You're looking to aim for 200 basis points between now and the end of 2016. Yet volumes, by all accounts, are perhaps going to be a little bit weaker, so might price be. Where is the real delta rate on that? And then the second question on the Health Care IT offering. That is clearly a big market and some strong growth coming out of it as well. But we've recently seen quite some movements into that market as well. And I'm not just thinking about Google and Apple. It's also IBM and their Watson Suite buying Merge Health Care. How are you thinking about that competitive landscape there? Okay. Yes. So as shown, the 100 basis points is the operational improvement. Some of that is taken away by ForEx and a little bit of Cleveland. So the question earlier was, will you be able to improve perhaps slightly, although there are risks, as I said. Many of the operational improvements is driven by, as we've shown, the FX program, which has kind of a ramp also in it, you can see that. Additional overhead cost savings and the intensity of restructuring for that will be somewhat lower, so we get more net benefit. And of course, the productivity savings are going to kick in. And that is on the back of the Phillips integrated landscape. So those are 3 key buckets. Those are also the 3 key drivers of our productivity program that we always report on. That will drive this, yes? The health care IT or was a bigger word, population health is a vast area. And indeed, it is attracting bees to the honey, with a lot of people making big announcements. We believe that our sweet spot is being close to the patient and close to the care provider. You could say we are in the last few yards to the care delivery pathway, right? So you see population health companies that data mine insurance records. Well, that's great, but that's not us, right? You see people doing analytics on vast data sets that may can maybe help governments redirect policy. Maybe that's also not us. But what we are doing is using data to help the care delivery, to help doctors work together, to help doctors take the best decision for treatment, to monitor large amounts of patients in real time, measuring hundreds of data sets and then supporting, let's say, the care delivery. We are expanding into what is called coordinated care. You can think there about workflow management. You can think about collaborative cloud based computing, where we integrate device data with what professionals are doing. So very much in the care in the work stream of what care providers need to do and enabling patients to take care of their own health. We will do this in an open environment. You can use the Philips products and data sets, but you can also extract data from Apple Health Book or others. We believe the world wants to have an interoperable open environment, and we think we have a strong strategy in that. Will we do this on our own in isolation? Definitely not. We have a collaboration going on with salesforce.com as a strong player in cloud computing. We work with other partners. This afternoon, Jeroen Tas will take you who is the CEO of Healthcare Informatics, will take you through a strong and compelling case on what we can do to help this world. Carla Krivette, Head of our Patient Monitoring Solutions, again, will show how we leverage data and informatics around the patient. So we need to carve out and we have, let's say, our own sweet spot in this vast market. Others that you mentioned, yes, there will be competitors. And I think this is going to be an interesting space. It would be a mistake to believe that we are just starting. We are already a population health company. We are already an informatics company. We have a large business in this with everyday life. I'm going to disappoint you because Robin, as the master of ceremony, has been waving his hand, and there is probably 50 questions in the room. So I feel bad about that. But then again, we are together the whole day. So Robin, back to you for your master of ceremony announcements. We'll be back here.

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