Koninklijke Philips N.V. (PHG) Q1 2017 Earnings Report, Transcript and Summary

Welcome to the Royal Philips First Quarter 2017 Results Conference Call on Monday, April 24, 2017. During the introduction hosted by Mr. Frans van Houten, CEO; and Mr. Abhijit Bhattacharya, CFO, all participants will be in a listen-only mode. After the introduction, there will be an opportunity to ask questions. Please note that this call will be recorded and is available by webcast on the website of Royal Philips. I will now hand the conference over to Mr. Pim Preesman, Head of Investor Relations. Please go ahead, sir.

Good morning, ladies and gentlemen. Welcome to Philips' first quarter 2017 results conference call. I'm here with our CEO, Frans van Houten; and our CFO, Abhijit Bhattacharya. On today's call, Frans will take you through our strategic and financial highlights for the period. Abhijit will then provide more detail on financial performance and market dynamics. After that, we will take your questions. Our press release and related information slide deck were published at 7:00 AM 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, I would like to remind you of a few things. First, Philips retains a 55.125% stake in Philips Lighting, and therefore, continues to consolidate Philips Lighting's results. However, since Philips Lighting reported its Q1 2017 results on April 21, we will focus our commentary on today's call as much as possible on the performance of our HealthTech portfolio. We encourage you to review Philips Lighting's first quarter results materials, which are available on the Philips Lighting IR website. Second, as a reminder, following the decision in 2014 to combine our Lumileds and Automotive Lighting businesses into a standalone company, the profit and loss of this combined business is reported under discontinued operation. And the net assets for the business in the balance sheet on the line, assets held for sale. The cash flow of the combined Lumileds-Automotive business is reported under cash flow from discontinued operations. Finally, as mentioned in the press release, adjusted EBITA is defined as income from operation excluding amortization of acquired intangible assets, impairment of goodwill and other intangible assets, restructuring charges, acquisition-related cost, and other significant items. With that, I would like to hand over the call to Frans. François A. van Houten - Royal Philips NV: Yeah. Thanks, Pim. Thank you, all, for joining us today. In 2016, we made significant steps in our transformation into an innovative health tech leader by focusing our portfolio along the health continuum. After covering some of the key results in Q1, I will talk you through some recent highlights of our journey to leadership in the exciting health tech market, and how we see the future. But let me first start with the first quarter results. Our first quarter results demonstrate our progress in creating value as the Philips Group consolidated comparable sales grew 2%. This comparable sales growth was 3% in the HealthTech portfolio. This despite continued volatility in some key markets. The Personal Health segment showed a solid 5% growth in the quarter, while Diagnosis & Treatment and Connected Care & Health Informatics grew by 2% and 1%, respectively. This was mainly a result of the more back-end loaded order book as we indicated during our quarter four analyst call. Comparable sales growth in mature geographies was driven by mid-single digit growth in Western Europe and a small increase in North America. Growth geographies posted a high-single digit growth, while other mature geographies showed a low-single digit comparable sales decline. The increase in margins was driven by improvements in volume, procurement savings and overhead cost reductions contributing to an adjusted EBITA margin increase of 80 basis points in HealthTech from 6.6% of sales in quarter one 2016 to 7.4% in quarter one 2017. Our Diagnosis & Treatment businesses and our Personal Health businesses delivered strong margin improvements with adjusted EBITA improving by 190 basis points and 150 basis points, respectively, versus the first quarter of 2016. The Connected Care & Health Informatics businesses had a slow start of the year with 30 basis points lower adjusted EBITA, however, we continue to expect to fully deliver on the planned improvements for the year. Let me expand on our strategic journey to leadership in HealthTech. As outlined at last year's Capital Markets Day, our HealthTech value creation story is built on three key levers. Firstly, we create value by improving margins through better serving customers and raising operational productivity. Secondly, we create value in our core businesses by gaining market share through deeper, more comprehensive customer partnerships and by pursuing growth by increasing geographic coverage. Thirdly, we create value by expanding our innovative solutions along the health continuum through R&D investments, co-creation with customers and partners and selective M&A. On the first level, our productivity programs all delivered ahead of plan in 2016. We will continue the self-help story journey during the coming years. In the first quarter, procurement savings amounted to €41 million. The other productivity programs resulted in savings of €54 million. To remind you, our plan is to achieve a cumulative total net savings amount of €1.2 billion by 2019. These ongoing productivity savings are expected to be approximately €400 million per annum. I'm pleased with the continued strong cash flow generation resulting from tighter management of inventories and working capital, as well as from improved earnings. Moving to the second lever of creating value through deeper customer partnerships and increasing geographical spread. We saw good growth in Diagnostic Imaging, and we continued to recover to reign (06:58). We launched Access CT, a new system that allows healthcare organizations to enhance or establish CT imaging capabilities at accessible cost. It provides consistent image quality across diverse patient populations and a wide range of exam types. This means that healthcare organizations can improve their capacity and capability to treat more patients at a relatively lower total cost of ownership. In Personal Health, we aim to further expand our market penetration and convert consumers to electrical brushing. At the International Dental Show in Germany, the world's leading trade fair for the dental sector with more than 155,000 attendees, Philips revealed Sonicare DiamondClean Smart toothbrush and Philips Sonicare Breath care system with breath analyzer and all-in-one connected oral care platform. Philips also presented the results of a new clinical study demonstrating the effectiveness of Philips Sonicare power toothbrushes, including the Philips Sonicare DiamondClean Smart, which removes up to 10 times more plaque than a manual toothbrush, with up to 100% better stain removal in just three days, and up to seven times better gum health in just two weeks. We also forged a partnership with Air Matters, an app that provides users with live data on air quality, allergy pollen and weather from across the world. This will augment the continuing strong growth of our air solutions business. An example of increasing geographical spread in our Sleep & Respiratory Care business is the acquisition of a pioneer in pharmacy sleep testing. Australian Pharmacy Sleep Services will complement our Sleep & Respiratory Care portfolio and will help accelerate its home sleep testing offer through the pharmacy channel in Australia. In Connected Care & Health Informatics, we are pleased with the continued share gains in patient monitoring. This is further underpinned by the FDA clearance to market our IntelliVue Guardian Solution in the United States. This solution to monitor patients in the hospitals' general wards was already introduced in Europe and comprises smart devices including wearable biosensors, clinical decision support software and services. It's designed to aid clinicians in the early recognition of patient deterioration, allowing timely intervention and avoiding adverse events, unplanned transfers back to the ICU, and longer length of hospitalization. We worked closely with one of France leading university hospitals in Poitiers to equip its new regional cardiovascular center. We provided advanced technologies and clinical IT solutions for diagnosis and image-guided minimally-invasive treatments and critical care. Thanks to deeper customer relationships, we saw order intake for services grow by 4% in the first quarter. Overall, our large-scale customer projects funnel and strong traction with solutions continues to expand. Finally, a few examples of how we are creating value by building new innovative solutions. Our innovative solutions and partnerships are focused on the health continuum with an integrated approach from healthy living and prevention to diagnosis, treatment, and home care. Among others, we have compelling solutions for cardiovascular, cancer, respiratory, connected patient care, and health informatics. Our solutions enable healthcare organizations to lower their total cost of ownership by making healthcare systems more efficient, and thereby making care more accessible and affordable. We teamed up with LabPON in the Netherlands to create the world's largest digital pathology database. This will allow pathologist to develop image analytics, algorithms for computation of pathology and pathology education. Another pathology partnership was with PathAI, a startup company that develops artificial intelligence technology for pathology. They focus on building algorithms to automatically detect and diagnose medical conditions with the goal of helping hundreds of millions of people receive fast, accurate diagnosis. In a major breakthrough in image-guided therapy solutions, we launched the Philips Azurion, which is our next-generation image-guided therapy platform. Over the last few years, we have learned from the clinical experts that there is a pressing need for a new platform that enables clinicians to perform a wide range of high-volume routine procedures, as well as complex procedures, helping to optimize interventional lab performance and provide superior care. It's the result of a multi-year development program conducted in close collaboration with leading hospitals. Azurion has regulatory clearance to be commercialized in Europe, Japan, the United States, and we've already shipped and installed an initial series of more than 20 systems across the world. The feedback from these customers has been extremely positive and see this as the operating room of the future. Azurion will strengthen our leadership position in the image-guided therapy market. Within image-guided therapy devices, two large clinical trials demonstrated the benefits of our innovative and proprietary Instant Wave-Free Ratio or iFR technology compared to the conventional Fractional Flow Reserve or FFR standard. The FFR standard is used alongside real-time interventional x-ray images to assess suspected blockages in coronary arteries. The trial results have removed the critical barrier to the adoption of our iFR technology to decide, guide and confirm appropriate therapies, demonstrating our commitment to evidenced-based healthcare interventions and systems. Our partnership with B. Braun combines our expertise in ultrasound and image-guided therapy solutions and B. Braun's expertise in regional anesthesia and has resulted in the launch of Xperius, a new mobile ultrasound system that will provide a platform for integrated solutions in regional anesthesia and vascular access. We will also work with B. Braun to offer education, training, services and support that will enable anesthesiologist and healthcare providers to extract maximum benefits from our joint offering. Furthermore, we launched IntelliSpace Enterprise Edition, a managed service solution for hospital-wide clinical informatics and data management. This industry-first high-performance informatics platform is secure, scalable, and enables health systems to manage the growth and cost of their clinical enterprise with a manageable upfront cost based on pay-per-use. This model with a fixed total cost of ownership, reduces the financial risk for healthcare enterprises as they invest in their IT infrastructure. During the very active first quarter, we continue to strengthen our position as a focused leader in health technology as we launched several breakthrough innovations, forged strategic partnerships and won various integrated solution deals. And we also decreased our shareholding in Philips Lighting to 55%. Following the reclassification by the FTSE Group's ICB of Philips shares to Health Care in 2016, we are pleased to see that on March 20, the STOXX Europe 600 Index reclassified Philips shares from Industrial Goods & Services to Health Care. And with that, I will turn the call to Abhijit, who will provide more details on financial performance and market dynamics.

Thanks, Frans, and good morning to all of you on the call. Let me start by providing some color on the first quarter growth of 3% for the HealthTech portfolio. On a geographic basis, mature geographies delivered low-single digit comparable sales growth, Western Europe showed mid-single digit growth, North America was in line with the same quarter last year, while other mature markets posted a low-single digit decline. All three segments delivered low-single digit comparable sales growth in mature geographies. In the growth geographies, high-single digit comparable sales growth was largely driven by double-digit growth in countries like Argentina, Turkey, Indonesia, Malaysia and Saudi Arabia. We're pleased with the high-single digit growth in China for the quarter. In the growth geographies, Personal Health recorded high-single digit growth, Diagnosis & Treatment recorded mid-single digit growth, and Connected Care & Health Informatics sales were in line with Q1 2016. Growth of 5% in Personal Health was driven by a high-single digit growth in Health & Wellness and Sleep & Respiratory Care, where we saw another quarter of strong double-digit growth in the patient interface business, with continued market share gains. As Frans mentioned, in Health & Wellness, we have a solid pipeline of new product introductions, as well as the launch of our very successful OneBlade shaving system into newer markets. We will also launch the Philips DreamStation Go portable CPAP solutions. We will back these launches with the requisite support in advertising and promotion, which will have a dampening effect on the results of Personal Health in the second quarter. However, I'd hasten to add that we do expect to have continued improvements in operating results for Personal Health. In HealthTech Other, net sales decreased by €11 million, as royalty income decreased by €14 million due to the foreseen expiry of licenses. Turning to order intake, currency comparable order intake grew by 2%, driven by mid-single digit growth in the Diagnosis & Treatment businesses, and partly offset by low-single digit decline in Connected Care & Health Informatics businesses. In the growth geographies, order intake on a currency-comparable basis was in line with Q1 of 2016, as double-digit growth in India and China was compensated by declines in Latin America and Africa. North America and other mature geographies posted a 1% growth, with an encouraging 5% growth in Diagnosis & Treatment for North America, while Western Europe posted a strong 10% growth, rebounding from a weaker Q1 in 2016. Let me now turn to the EBITA development for the Group in the first quarter. The HealthTech adjusted EBITA margin of 7.4% in the quarter was 80 basis points higher than the year before. This margin increase was driven by an improvement of 150 basis points in Personal Health, attributable to operational leverage from growth. In Diagnosis & Treatment, the margin increased by 190 basis points, mainly due to operational improvements and some currency impact. The decrease of 30 basis points in Connected Care & Health Informatics was mainly due to unevenness of sales from large hospital informatics deal, and higher channel investments. Our performance improvement in the first quarter was mainly driven by better operational performance and our productivity program. More specifically, the net overhead cost reduction programs amounted to €18 million, the productivity program contributed to €36 million to the gross margin, and procurement savings, driven by our Design for Excellence approach, delivered €41 million of bill of material savings year on year. In HealthTech Other, the adjusted EBITA of minus €38 million was in line with our guidance from earlier in the year. The decline of €29 million compared to 2016 Q1 was driven by lower royalty income, phasing of costs in Innovation and Central cost, as well as investments in the rationalization of the IT landscape. In the first quarter, income tax expenses was €91 million, which was an increase of €16 million compared to the first quarter of 2016. This increase was mainly due to higher income. In Q1 2016, we had some specific tax charges resulting from activities related to the separation of the Lighting business. On January 20, 2017 Philips completed the redemption of the outstanding 5.75% notes due in 2018 with an aggregate principal amount of $1.25 billion. The transaction resulted in a cash outflow in the first quarter of €1.2 billion, excluding accrued interest. This transaction contributed significantly to our plan to reduced annual interest expenses by approximately €100 million in 2017. Overall net financial expenses decreased by €53 million year on year, mainly due to lower net interest expenses, as we redeemed bonds of $1.5 billion during the last two quarters, and additionally, by a fair market value adjustment in quarter one of 2016. Net income from discontinued operations increased by €40 million year on year, as the actions to improve results in the combined Lumiled and Automotive business continued to deliver as planned. The HealthTech return on invested capital, which is calculated on a five quarter moving annual turnover basis, was 15.9%, which is 7.5 percentage points above our WACC. Our drive to increase working capital efficiency in our HealthTech portfolio continued to yield result, as inventories as a percentage of sales decreased to 15%, an improvement of 30 basis points year on year. On a currency-comparable basis, the improvement was 90 basis points. Overall, working capital improved by 100 basis points, to 9% of sales. Net cash flows from operating activities increased by €333 million, mainly due to improvements in income from operation and improved working capital management, partly offset by a €64 million payment related to the January 2017 bond redemption. Q1 of 2016 has an outflow of €172 million related to the pension liability de-risking. Let me now provide you with an update on the U.S. market and our outlook for the Western European and Chinese markets. Healthcare in the U.S. is undergoing fundamental change. With our scope and scale in the U.S., we are well positioned to support public and private healthcare organizations to reduce healthcare cost, improve the quality of care and move from a volume-based to a value-based system of reimbursement and service delivery. The events surrounding the ACA legislation created market uncertainty in the first quarter. We continue to monitor events closely and stay focused on the needs of our customers. We also saw a slowdown in government spending. Given these uncertainties, we continue to expect the U.S. market growth to be in the low-single digits, while we closely monitor further developments. In Western Europe, we expect modest growth, low-single-digit market growth. And in China, we continue to expect mid-single digit market growth for 2017. Overall, we estimate the global healthcare market growth to be in the low-single digit range for 2017. Let me now turn to our guidance for the HealthTech portfolio of businesses. In the HealthTech Other segment, we expect a net cost of approximately €45 million in the second quarter, including approximately €5 million of restructuring and other incidental items. We originally guided €100 million net cost at EBITA level, however, as a result of the €59 million gain on the sale of real estate assets, we now expect approximately €49 million of net cost at EBITA level for the year. Excluding restructuring costs and other incidental items of approximately €20 million, we continue to expect approximately €60 million net cost at adjusted EBITA level for the full year. In legacy items, we expect remaining Lighting separation costs for the second quarter to be €15 million and remain with our guidance of approximately €30 million for the full year. Other legacy items are expected to be €10 million for the second quarter and we continue to expect approximately €35 million of cost for the full year of 2017. In summary, we are pleased with a solid start to the operating performance for the year in terms of earnings improvement, working capital management and our cash flow performance. With the scheduled product launches and the development in our order book, we continue to expect further improvements in our operating margins for 2017 to be at the back-end of the year. We continue to target our performance trajectory to deliver 4% to 6% comparable sales growth and around 100 basis points margin improvement in adjusted EBITA every year. With that, we will now open the line for your questions. Thank you.

Thank you, sir. We will now take our first question from Patrick Wood from Citi. Please go ahead.

Hi. Thank you very much for taking my question. I'm aware that it's difficult for you guys to comment, but maybe on the defibrillator business from DOJ, and I appreciate we've been around this topic a fair bit. But do you have a better sense for how likely this is to be confined to that area of the business or whether there is any risk that it could be part of a larger patient care and monitoring business, and when do you think we might find out a little bit more news flow on this topic? And I guess my second question would be, if I can, on the hospital informatics business, you guys mentioned a little bit of lumpiness there. Is that something we should expect to come back into the subsequent quarters? Thank you. François A. van Houten - Royal Philips NV: Yeah. Hi, Patrick. This is Frans. Thanks for your question. We continue to believe that the scope of the DOJ is primarily limited to the defibrillators. Since the update that we gave in January of this year, not much progress and new updates can be given. We continue to be in dialogue, and I think it just needs some time before this will come to a closing. On the health informatics, we see that order sizes have become larger, and as a consequence, also lumpier. We are optimistic about our funnel and ability to generate customer interest. The launch of the IntelliSpace Enterprise solution is also well received. We had a great presence at HIMSS this year, at the healthcare informatics show in North America, where our informatics solutions for both diagnostics and for patient care were very, very well received. And I have no hesitation to believe that the guidance and revenue growth does not only apply to Philips, but also to, let's say, this division as well.

Terrific. Thanks very much. François A. van Houten - Royal Philips NV: Okay.

We will now take our next question from Andreas Willi from JPMorgan. Please go ahead.

Yeah. Good morning, everybody. Thanks for the time. My first question is on the cash flow where you haven't provided the usual – that kind of detail on the cash flow statement, you gave some helpful comments on working capital. If the real estate gain included in what you call the operational cash flow that you show that was very strong for Q1, and do you think you can maintain that very strong working capital performance as the year progresses and maybe the organic sales growth picks up? So basically, is there a further potential as a percent of sales to reduce working capital as we go forward?

Hey, Andreas. Good morning. This is Abhijit. On your question on the real estate gain, that's not part of the operational cash flow, that's part of the free cash flow. So we have actually had a good year-on-year improvement. It's been close to €333 million. Last year, we had the pension de-risking of €170-odd million. This year, we had the bond repayment of €64 million-odd. So if you take that as a, let's say, net negative of €110 million, it's still about €220 million or so positive. So I think we've done well on that. And regarding your question on working capital improvements, yeah, we will keep trying to work that through the year. We have now done it for close to two years and been able to shave off good amounts of inventory, et cetera. It'll be a bit lumpy through the year, because we will also be rolling out our new ERP systems in some markets, so in some quarters we may actually build some inventory. But overall, for the year, we should be well positioned to hit our targets of between €1 billion and €1.5 billion for the year.

And my follow-up question on the earnings bridge, inflation is, it's relatively high. Is that all just wage inflation, or do you also see some raw material pressure? And what can you do on price to maybe counteract in a more inflationary environment? Do you get from price on traction in some of your businesses?

Yeah, you're right, there. But if you look at the original, let's say, bridge that we have provided in the Capital Markets Day, we are estimated over a three-year period for inflation to be around the 1.1%; we are at 1.3%. And it's largely wage inflation, but we have countered that with the lower price erosion. So we had also factored in around the 1.3% price erosion, and we've ended up at 0.9%. So let's say, the net of those two, we have managed well. And then therefore, with the volume increases and the gross margin and productivity improvements that we have made, we were able to get the 80 basis points improvement.

Thank you very much.

Thanks, Andreas.

We will now take our next question from Veronika Dubajova from Goldman Sachs. Please go ahead.

Good morning, gentlemen, and thank you for taking my questions. I have two, please. The first one is on Personal Health and the strength of the margin in the first quarter. Abhijit, can you help us understand to what extent that was driven by the business mix in the quarter versus just an underinvestment into selling and marketing? And I guess, how we should be thinking about Personal Health margins for the full year? And then, my second question is a follow-up to Patrick's question on the defibrillators. I noticed that there was a €17 million charge for quality and regulatory in the quarter in CC&HI. Can you help us understand what this was for and what kind of works or progress you've made on actually addressing what the FDA has brought to your attention? Thank you. François A. van Houten - Royal Philips NV: Yeah. Let me start. Hi, Veronika. The PH margin is very much driven by strong innovations. Now, in the quarter, we saw high-single digit growth in Health & Wellness, high-single digit growth in Sleep & Respiratory Care. Both categories are above average in profitability for Personal Health. And therefore, overall, with that growth rate, we also saw a further mix improvement. And that then drove a nice profit expansion that can change a little bit if the mix changes through the year, all right? So let's say from a seasonality point of view, the mix is not equal in every quarter, all right? That you need to take into account. But otherwise we are very confident that Personal Health is on a good path and that we continue the improvement. Maybe also nice to call out is an improvement in domestic appliances and coffee where we saw a healthy improvement in the quarter. If I then may expand on the defibrillators, so apart from the discussion with the DOJ, we also saw in the first quarter, a charge for a field issue. We have 95,000 MRx defibrillators in the field, and our quality management system is now, let's say, so good and granular that we detected that two units could potentially have an issue. And, on the basis of that, we took proactive and voluntary action to issue a notice, which the FDA then calls a recall to clarify the instructions for use, and to offer a software upgrade which can be done in the field and does not require a physical, let's say, recall of the product. And the exceptional charge was related to rolling out that upgrade.

Okay. Understood. Thank you. No, that's very clear. That's very clear. And can I just quickly follow up? Any changes to your thoughts on capital allocation? We were seeing sort of continued M&A activity in healthcare including in medtech. Have your thoughts at all changed in terms of priority, size or kind of where current valuation stand? And I'll leave it at that. Thank you, Frans. François A. van Houten - Royal Philips NV: Yeah, we were. Yeah, I guess everybody was reading this morning apart from the Philips' press release what happened to Bard. Let's say, let me first of all underline that the Philips story is foremost an organic growth and improvement story, all right? We continue to have a lot of opportunity to drive organic growth and profit improvement, and we remain focused on the self-help, all right? That drives the 4% to 6% growth and the 100 bps per year average improvement. And Abhijit already underlined what benefits we are also doing to working capital and cash. So the management, we will remain very focused on that. Nevertheless, I have said last year at the Capital Markets Day that we will have an open eye for acquisitions. And I've said that, let's say, Volcano as being such a success both – with sales synergies and cost synergies, would be a nice proxy in terms of size and characteristics. In the meantime, we have not done a lot. It all needs to work out in terms of returns and portfolio fit. And we will certainly not rush into any deals. We continue to look at the market, but if it doesn't happen, that's okay too because, after all, as I said, it's primarily a organic growth and improvement story. So we don't have any heightened anxiety if we cannot do a deal. So in other words, all right? So we'll just take it as it comes. So for now, the capital allocation strategy remains exactly as it was, as announced in the last Capital Markets Day. Obviously, cash generative as we now are and having less incidentals, the balance sheet becomes richer. I think for now, that's perfectly fine. We have used the cash in the first quarter to retire expensive debt. As we flagged last year, there may still be a small portion of pension risk that we want to deal with. And other than that, it's okay if it looks a bit conservative for now. I hope that answers your question, Veronika.

That's very clear. Thank you very much.

We will now take our next question from Ian Douglas-Pennant from UBS. Please go ahead.

Hi. Thanks for taking my questions. So just on CC&HI. So you've called out some volatility in the HI business which is fine, but we've also actually seen a slowdown in the Patient Care & Monitoring business from the level of disclosure that you've given us on that business. And is there a trend underlying here that we should be aware of that means you had strong growth in H1 last year and before, and weaker in H2 and into Q1? It's getting harder to pass this off as volatility and to convince ourselves that 4% to 6% growth for this business is realistic. And just as the flipside to that question on Personal Health, there is a decent chance that you'll be able to hit the target that you gave us at the Capital Markets Day in terms of margins for this division even this year, that the high-teens margin, given the current rate of progress. And I understand it's silly to extrapolate from Q1, but why is not 20% margins for that division realistic on a three-year to five-year view? François A. van Houten - Royal Philips NV: All right. Let's first talk about CCHI and patient monitoring. A couple of things. That segment grew 5% last year; very solid. Q1 had a very difficult compare, where PCMS still grew with 3%. But let's say, last year, I think in the first quarter, we had a 9% increase, which makes the comparison pretty tough. That, coupled with the more lumpiness of orders, which, by the way, also applied to patient monitoring, because we see more and more enterprise-wide deals coming also for patient monitoring. That is the explanation. We've also looked at market shares. And it is our firm belief that, in market shares with patient monitoring, we are gaining over our competitors. So absolutely nothing to worry about, and we believe that CCHI has good momentum. So let's not get on the wrong foot with the first quarter. Then, your confidence in our ability to further improve Personal Health, thank you for that. We've always said that this is a business with a lot of potential. Now if you recall Capital Markets Day, where we said mid-teens to high-teens profitability is entirely feasible. I believe I recall, we've also talked about the fact that there are categories in Personal Health that are high-teens already. And then, basically the Domestic Appliances business, where last year we were in high-single digit, where we want to actually to get to low-teens, and that's probably what the industry will support, all right? So it will always be a blend between, let's say, potentially high-teens businesses and the Domestic Appliances business, which we believe will do very well if it gets to low-teens. And other than that, let's first reach our targets before we give an update or a restate of those targets, all right? We are committed to the targets as they are.

All right, I think conservative targets are no bad thing. And just one follow-up on the defib thing, which I think should be a yes/no answer. The upgrade that you put out, was that related to the DOJ investigation in any way? Was it an outcome of the conversations that you're having there? And can I just confirm that it had no impact on revenues whatsoever? François A. van Houten - Royal Philips NV: So it was unrelated, the defib, let's say, fields action was something we detected ourselves, it's just our quality management system at work. Whereas the DOJ case relates back to 2015 and before, and the findings at that time. In the meantime, we have a proved quality across the board, a lot – we feel quite confident about where we are with quality right now.

And on revenues, just to confirm there? François A. van Houten - Royal Philips NV: No. As it is a instructions for use update and software upgrade, it's unrelated to revenues and shipments.

Perfect. Thank you very much. François A. van Houten - Royal Philips NV: You're welcome.

We will now take our next question from Max Yates from Credit Suisse. Please go ahead.

Thank you. Just my first question was on the Diagnosis & Treatment margin. And obviously, you're not reporting the benefit from Cleveland anymore, and you also mentioned there was a little bit of support from FX in the margin. So could you maybe help us sort of break out the impact of both of those on the Diagnosis & Treatment margin for Q1?

Yeah. We said last year, Cleveland was now as far as we are concerned, up and running now for more than a year. We are manufacturing to the full demand that we have, the cycle times are what they are. So we have actually stopped calling out specifically a Cleveland impact because now, whatever we do is just operationally improving the business across the board. I think most of the improvements have come from operational improvements. You've seen that also at Group level, which we have announced in terms of cost savings, procurement savings, and let's say, lower price erosion than planned, and then we have had a small part of that also from currency, although overall, currency was not material for the Group, but we had a little more in Diagnosis & Treatment, with minuses on the other businesses, so we called that out, just so that it's clear that not all of the 190 bps came out of operational improvements.

Okay. And just a follow-up was on Connected Care, and I just wanted to understand a bit more about these sort of lumpiness comments. So, when you talk about sort of the back-end loaded year, are you talking primarily about the revenue – sorry, the order book-to-revenue flow-through, because if I look at Connected Care, orders in the second half of last year, they were very strong. So when you talk about the improvements in the second half, is it these orders flowing through to revenues? Or, when you talk about the improvement in the second half, are we talking about new orders that need to be won in order for those revenues to pick up in the second half? I'm just trying to understand, is this something you have in backlog, or is this something you need to win in the market? François A. van Houten - Royal Philips NV: Yeah. We have much of it in the backlog. And what we saw also at the back-end of the quarter is some installation work that was close to being finished, some customers pushing it out into the next quarter, in terms of acceptance. And therefore, the order book will, let's say, turn into revenue later this year. So, does that answer your question?

Yeah. So essentially, this is something you have very good visibility on. François A. van Houten - Royal Philips NV: Yeah. Largely, yes.

Yeah. Okay. Thank you.

We will now take our next question from Scott Bardo from Berenberg. Please go ahead.

Yeah. Thank you very much for taking my question. So the first question, please, just is a point of clarification on the ongoing regulatory discussions with the DOJ. I think you said also on this call that the discussions are primarily centered on the defibrillator plant. Can you please be even clearer, actually, as to – does the discussion involve at all, or implicate any other manufacturing facilities from product areas or administrative centers within the organization, or is it, in your mind, completely isolated to this small business that you quantified at the last quarterly update? So if you could talk to that please, that would be helpful. François A. van Houten - Royal Philips NV: Sure. We chose our words carefully in January. And we said, it primarily affects the defibs, because that is where the focus of the dialogue with the DOJ is. As long as that dialogue is not finished, it would be foolish to kind of be definitive about it, all right? That would be taking an advance of the outcome of the discussions. We have basically given as fair a representation of the situation as we believe it is, which is around the defibs. Now, there are two factory locations doing defibs, not one, just be transparent there as well. It affects both the (48:37) and the Andover factory for defibs.

Thank you. But the discussions thus far haven't changed your view, if you like. There could be other centers in the organization that are encapsulated within this discussion. It hasn't changed since the last (48:57)? François A. van Houten - Royal Philips NV: No. It hasn't changed since the last discussion. But while we're on the topic of the wider regulatory situation, I'd like to underline that we get audits and inspections all the time in many locations in the world. And on that basis, I feel quite confident that our quality system has improved a lot over the last three years with no new warning letters emerging in the recent times. All right? So we will continue to strengthen our setup, but the DOJ discussion again reflects the history of the defib business of 2015 and before.

Understood. Thank you. And just a quick follow-up on the Diagnostics & Treatment business. I've seen here that ultrasound has been putting in some relatively sluggish growth over the last few quarters, which is perhaps a bit of a surprise given that you've called it out, there's been a growth driver and you have the Lumify launch. So is there anything particular there which is weighing on growth for that driver of that particular division at the moment? François A. van Houten - Royal Philips NV: Yeah. The ultrasound business had a low-single digit growth in the quarter. We are the market leader in high-end cardiovascular ultrasound. That happens to be a segment that is seeing slow growth and the market in ultrasound that is showing higher growth are the OB/GYN and general imaging segments. At the Capital Markets Day, I think we explained that we are starting to branch out in those adjacencies and we have developed products for those segments. That should result into sales growth in the coming quarters, and I already have a first proof point for that, because the order intake for ultrasound in Q1, was actually 6%. All right? So kind of early indication that our strategy to go into the adjacency of OB/GYN and GI is starting to work. It has taken some time. We also had to step-up investments into channel, but I have high confidence in this strategy, and that also will result then in higher growth in the second half of the year.

Right. Thanks very much for answering the questions.

We will now take our next question from Alok Katre from Société Générale. Please go ahead.

Hi. Thanks for taking my questions. I just have one follow up, just in terms of the ultrasound question as well. If you look at overall sort of imaging orders on a trailing 12-month basis, it seems there is a bit of sluggishness at Philips versus some of the peers. Is it just the mix of geographies, or products, or is there a bit something more that's going on? So I just want to get a little bit under the hood in that sense. And then just – the second question is, thinking about a bit of capital allocation and stepping back and looking at your longer-term strategy and at the HealthTech sort of vision, just wanted to get a sense of how you're thinking about Personal Health, sizeable portions of that division particularly, I mean, is it a good to have, or is it a must-have either in parts or fully? So any comments there would be helpful. Thanks. François A. van Houten - Royal Philips NV: First, your general impression on imaging. I would not agree with that. We saw in imaging a 5% order intake growth in the first quarter underlining the strengths of that portfolio. I think we will see a stronger second half of the year in terms of sales growth. Then your second question on Personal Health, I'm quite happy with that portfolio. I bring to recollection our insight on the health continuum, and let's say, with digitalization of healthcare, more and more chronic disease management will be done at home. Philips has an excellent position both in the channel as well as in the consumers' home, and it's very important that we maintain that strength, and we see, gradually, an expansion of the more healthcare-related product sets that we have to offer there. If I take to the example of oral hygiene and oral care at the latest dental show that we talked about, we introduced a breath analyzer. Now, you may say, what's the relevance of that? Well, first of all, it's great for people that are worried about their breath, but more importantly, we foresee the introduction of more and more sensor technologies in consumers' homes also for chronic disease management. Philips is the company that has all the entitlement in the world to actually be the leader of that. We have been talking about Banner Health and the strengths of our ambulatory care programs that will reduce – that has reduced in the Banner clinical study, a 50% reduction of hospitalizations. Now, first of all, that's fantastic news for consumers, but it's also fantastic news for the healthcare system, all right? And it is because we understand consumers, all right? It's a combination of technology and behavioral science. And Personal Health gives us that basis of strength to actually deal with consumers and consumer behavior. So I would like to ask you to, let's say, have an open mind when it comes to, let's say, the synergies between healthcare at home and healthcare in the hospital. In fact, another data point is, is that, if you look at the U.S. healthcare spend, the traditional portion of in-hospital spend versus out-of-hospital spend used to be 40%/60%. And it has now shifted to 30%/70%, just underlying the trend towards at more ambulatory care and home care. So long answer to say that I am happy with the portfolio.

Sure. Just a quick follow-up, if I may, on the healthcare. So you would say that this is just literally a bit of a phasing issue for yourself in 2017 on the order side, (56:19) on the imaging seems okay. But I just wondered, when you say underlying, you sort of still expect stronger trend towards 2017 in terms of orders than – should we just think there's a phasing issue, is it new products or something else? François A. van Houten - Royal Philips NV: Yeah. Yeah. Yeah. It's a phasing issue and we retain our sales growth guidance, and also, obviously, means that we need to get orders in the same order of magnitude, otherwise, we would eat into our order book and we have no intention to do so.

Okay. Fantastic. Thanks.

We will now take our next question from David Vos from Barclays. Please go ahead.

Hi. Good morning, Pim, Abhijit, and Frans. One question on China please, if I can. Clearly, last year was pretty good there. Your large U.S. competitor posted a pretty good Q1. You did something in the region of double-digits growth there if I'm correct. My question is more around the tiering of the markets and how you see the future developing there. The reason for that is that we recently had a chance to catch up with somebody in the market there who told us that all the western manufacturers had actually been excluded out of kind of a catalogue for county-level hospitals, in which these hospitals are allowed to buy only domestically-produced medical devices. And I just wondered, therefore, what's your take on that is and if you could remind us what the split for Philips is between those county-level hospitals and perhaps the more western-inclined university hospitals and Tier-1 city hospitals. That will be great. Thank you so much. François A. van Houten - Royal Philips NV: Okay. Hi, David. Yes. Good double-digit growth in China for us. I continue to have good confidence in the market, but let's face it, there is not enough capacity in China for healthcare. Also, from a macro point of view, it's very logical that that market is buoyant. Now, your question around the procurement of hospitals in China, actually that's not new. It has been in place since 2015, where there were instruction letters floating around at various hospitals, suggesting that local manufacturers should get preference over western manufacturers. That is a situation that we are navigating. In fact, that is the policy in those local hospitals doesn't mean that it is also happening. So in the end, decision-making is still allowing deviations from that direction. So I would say, I don't know whether what you picked up was very recent, but in my book, this is something we live with already for a while, and nevertheless, we are able to grow. We are not splitting out growth by hospital segment. It is fair to say that private hospitals are growing rapidly and that's also a government policy. The share of private hospitals off the top of my head was close to 10%, and is slated to rise well into the 20s. So it's logical then that we see more growth in that segment. And for the same – let's say, the same government policy tries to curtail the growth of large Tier-1 city hospitals. Those basically governments want to avoid that all the healthcare traffic goes there. Maybe a third comment that I'd like to make is that the solution strategy that we have pioneered in the western world also starts to get traction in China. For a very long time, the China market was very transactional, very tender-driven, buying equipment piece by piece, that is not necessarily advantageous to us, because then, it becomes a price game or it is a price game in that context. And we are pushing very hard to clinical informatics as a value-add around equipment so that we can differentiate from the competition. And I must say that that strategy is working and we get a rising interest for a more outcome-based kind of healthcare offer for just equipment standalone.

Okay. That's very clear, Frans. Thanks for the extensiveness of the answer there. It did seem to us that those comments I made were more incremental and perhaps a bit more recent, but it's good to hear that at least what you're seeing on the ground is that all things are going as they were before. Thanks so much. François A. van Houten - Royal Philips NV: Okay.

We will now take our next question from Gaël De Bray from Deutsche Bank. Please go ahead. Gaël De Bray - Deutsche Bank AG: Thanks. Good morning, everybody. Just a quick one on the population health management business. I mean, we've seen some of your competitors investing a bit more aggressively in this area recently. So could you elaborate perhaps in the progress you've been making in building up your specific offering in population health management? And if there is actually any evidence of your backlog expanding in this field? Thank you. François A. van Houten - Royal Philips NV: Thanks, Gaël. Well, we are also investing quite significantly I would say. Apart from the acquisition of Wellcentive last year, we have our investments in HealthSuite Digital Platform, which is gaining traction where we are also now opening up to third-parties to build their applications on top of it. We also have seen the success of telehealth with Banner Health. We have seen the announcement of Emory in how eICU technology is helping them save cost and move patients out of the ICU faster. I dare say, we have a lot of ingredients that are successful. The market overall is a bit slow on population health especially in relation to the uncertainty around the Affordable Care Act. I think that may be more temporary because overall, I think, population health is where society will eventually go. I was in New York talking to a CEO of a large hospital system last week; they have large exposure to Medicare and Medicaid patients. And he said, whatever happens to the ACA, I need to proceed in rolling out population health because these patients will come to my institution any way, and I better be proactive about it rather than reactive. And I thought it was a nice kind of indication where hospital enterprises are with their thinking. So it may take a few years before this is the kind of very large market that we all expect. But I have absolute conviction that it's an important market for the future. Gaël De Bray - Deutsche Bank AG: Okay. Thank you.

We will now take our next question from James Moore from Redburn Capital. Please go ahead.

Yes. Good morning, everyone, Frans, Abhijit. Thanks for taking the questions. My question is on D&T. On the mid-single digit order growth, are you now regaining or still losing market share in U.S. pig iron (1:05:00)? And on the 190 basis point margin uplift in D&T, can you say if it was similar across the three units, or whether the negative ultrasound margin direction of last year has continued? François A. van Houten - Royal Philips NV: Yeah. Hi. Frans here. I think it's a bit too early to call out market share gains in the first quarter. I don't think so, in the U.S. We have seen good traction in Europe, in China. On the U.S., I don't know yet. The margin question will be answered by Abhijit.

Yeah. Hi, James. Regarding the improvement in margin, actually, we saw it across the whole of the Diagnosis & Treatment portfolio. So including ultrasound, so it was all across the portfolio.

That's great. And can I follow up on price, please? I was just looking at your last three years of presentations, and you called out 2016 price of minus 2.4% to the Group, 2.1% in 2015 and 2.4% in 2014. So quite similar, low-2%s. And now you talk about 0.9% on page 28. Can I clarify that the calculation behind that is exactly the same, or has it changed? And if the pricing environment is improving to that degree, thirding (1:06:29) nearly, how much of that is linked to raw materials and more temporary, and how much is innovation? And how is that going to phase as the year progresses?

James, I have a relatively simple answer for that. The big difference is the exclusion of Lighting. You see, Lighting had a much steeper price erosion. So if you take that out, then you see what it is for healthcare and...

Of course. Okay. And if we look at the HealthTech picture on a sort of rolling basis, is it broadly unchanged?

Yes. Yes.

Okay. Stupid questions. Thank you.

Thank you.

We will now take our next question from Ben Uglow from Morgan Stanley. Please go ahead.

Good morning, Frans, Abhijit and Pim. Thanks for taking the question. So two things. First of all, I wanted to make sure I properly got the numbers down, or understood the Patient Care & Monitoring performance. It was a 9% growth. I am right to think you're talking about order growth in the first quarter of 2016 and – versus that 9% order growth in Patient Care & Monitoring, have you had any sort of positive orders in this quarter, i.e. was this growth in Patient Care completely offset by healthcare informatics, is question number one? Question number two, I don't know how to put it appropriately, but to slightly challenge this phasing issue around the growth, if I look over the last 12 quarters, i.e. three years, your average order intake on equipment is plus 1%. If I look at Siemens – and that obviously includes service – it's closer to 6%. And if I look at GE, just on equipment, it's around plus 4%. So my question is, why would we be seeing that trend on a two-year to three-year basis, not just one or two quarters? So that's one issue. And then, specific to this quarter, we've had another quarter where Philips is growing at 2%, the largest tier (1:08:43) in GE is growing at 10%. So I'm trying to understand why this is simply a phasing issue, and why you feel confident that this isn't something more structural?

So let me clarify on the first one. The growth we were talking about last year Q1 was for CCHI was at 9%. So Connected Care & Hospital Informatics was the 9% in Q1. And therefore the... (1:09:11)

No. That is the comparable sales growth.

Right. So then, can we have... the order figure? (1:09:18)

The question was related to PCMS. So on PCMS, in Q1 last year, we had a growth of close to 11% and now 3%. So let's say, on the tough comparables, we are still pretty okay with that growth.

Sorry. That's sales growth, right, Abhijit?

Yeah. We are talking about sales.

Okay. I understand the sales point. Could you give us a sense, even if not the exact numbers, on orders please?

Yeah. Orders, we had a low-single digit decline in Q1 last year, and we have a low-single digit increase this year. If you look at...

It says low-single digit decline, it doesn't... (1:10:08)

Yeah, yeah. Sorry. So it is kind of flat to last year. A little bit better, but still a low-single digit decline, right, for CCHI.

Okay. But to be clear, so we got a low-single digit decline on an order number for last year that was a low-single digit decline, correct?

Yeah.

Okay. So my question is, within that mix, what's happening? Is it that Connected Care is down and Healthcare Informatics is significantly down – just on orders, not on sales?

Yeah. So it's basically on hospital informatics, which is lumpy like we said. So Q1 to Q1 hospital informatics, order intake is low, and we expect that to correct maybe in the coming quarters. So the PCMS business is fine and gaining share, and that you can see also from external data that is published. So there is no issue around the patient monitoring business. And informatics business is the one which has this uneven pattern.

Okay. All right. Thank you for that. François A. van Houten - Royal Philips NV: Okay. Ben, on your second question, let's say, for a picture more around the last two to three years, I've just looked up that our full-year order intake in 2015 was 5%, and then the full-year order intake for 2016 was 1%, and then the first quarter now started with a 2% increase. And I think, from all the discussions this morning, you can hear our confidence that order intake growth for the following quarters will rise. So where there was some truth in what you said, let's say, this kind of gives you the full picture, and we are confident that we are on a path up. Now, one more comment...

So orders do accelerate from here, Frans, you're confident around that, yeah? François A. van Houten - Royal Philips NV: Yes. Moreover, in the commentary, in the opening of the call, we also said that service order intake that – by the way, we didn't talk so much about in the past, and we have internally said we need to talk more about it – service order intake growth was 4% in the quarter. And we will try to give transparency on that, let's say, going forward. And moreover, we do not take into our order intake anything beyond a 12 to 18 months window. And in the United States, I think, between us and competitors, that's kind of harmonized, but it may actually be quite different in other geographies. Now, we have a global policy on it, and we cut off our orders, let's say, on this 12 to 18 months' time window that may not be comparable to how other competitors do it.

Okay. That's helpful. And just, I believe, the final point is just any early indications or any more confidence around – and I know I asked this question in September last year – but around the market share recovery in North America, any early indicators that that could be happening? François A. van Houten - Royal Philips NV: Still work to do. I see certainly positive signs, but as we said on an earlier question, let's await for the market share numbers. There is still certainly more opportunity down the road.

Thank you very much. Very helpful. François A. van Houten - Royal Philips NV: Welcome, Ben.

We will now take our next question from Jonathan Mounsey from BNP Paribas. Please go ahead.

Hi. Yes, thanks for letting me ask these questions. So the first one, just on the Personal Health growth, so I guess it slowed a little versus the rate last year. I guess obviously the comps are quite tough going forward. So what should we expect in the coming quarters? Are we going to see a further slowing or can this business continue to grow at a current rate or can it even reaccelerate? And if so, what's driving that? What does the product launch pipeline look like? For instance, is OneBlade still to roll out in a number of large territories or is that basically lapping tough comps now?

No. Jonathan. Hi. This is Abhijit.

Hello.

Hi. For Q1, we had actually mentioned in the Q4 call that we expected slightly slower growth primarily triggered by the calendar of the Chinese New Year, right? So it was earlier this year. So a lot of the supplies happened in December. So I think we are not – we are pretty happy with the way it has panned out in Q1 and good growth prospects for the rest of the year. We have said it's a business which will grow mid- to high-single digit. And we will be in that range for the year. Regarding the OneBlade, yeah, we continue to roll out in further geographies as we up our production volumes and have our launch plans there. So I think we are expecting the successes, so far, in the initial markets to roll out as well in the new markets that we launch OneBlade. So I think we have a good product lineup, which is why I also mentioned in the earlier part of my speech, we are going to back that up with quite a solid A&P spend, advertising and promotion spend, so that we can get good sales traction. We also have the Sonicare launch, the SimplyGo Mini, which is the portable CPAP. So we are pretty solid in terms of our new product introduction pipeline for the rest of the year.

Could I ask a follow-up just on capital allocation? You touched on acquisitions, I think, earlier. What about the dividend going forward? Are there any thoughts on what to do in regards to the dividend and the payout ratio?

So I think from a payout ratio point of view, we have been so far above our payout ratio. We've said we will be at a 40% to 50% of net recurring income. As we increased our income progressively, I expect that sometime next year, we will fall well within the bandwidth that we have spoken about. So that's basically how we see the dividend development. And then, as we keep increasing earnings going forward, we will maintain that payout ratio so then the dividend would go up.

Okay. Thank you.

We will now take our next question from Ian Douglas-Pennant. Please go ahead. Your line is open.

Hi, Ian.

Hi. It appears Ian has stepped away.

Okay. Then that was the last question, right? That was the last caller that we had.

That's correct. That was the last question. Please continue. François A. van Houten - Royal Philips NV: Okay. Well, then, I thank everybody for joining in this call and for your keen questions. And I reiterate our confidence in delivering on our plan for the whole year. Thanks very much. Bye-bye.

This concludes the Royal Philips' first quarter 2017 results conference call on Monday, April 24, 2017. Thank you for participating. You may now disconnect.