Koninklijke Philips N.V. (PHG) Q4 2020 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to Philips Fourth Quarter and Full-Year 2020 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 the financial performance, and after that, we will take your questions. Our press release and the related information slide deck were published at 7:00 a.m. CET this morning. Both are available on our Investor Relations website. A full transcript of this conference call will also be made available today on the website.

Yes. Thanks, Leandro. Hi, everybody. Good morning to you. I hope that you and your families are keeping safe and well. It's clear that COVID-19 pandemic is far from over, and my thoughts go out to the caregivers and patients as we battle the virus all together. In this environment, we, at Philips, are proud of our role to support care providers and patients. I'm pleased with how we have performed under these challenging circumstances as our teams remain focused on delivering against what we call the triple duty of care: meeting critical customer needs, safeguarding the health and safety of our employees and ensuring business continuity. The work we are doing to support healthcare providers, medical staff, patients and consumers as our top priority. In close collaboration with our suppliers and partners, we have ramped up the production volumes of products and solutions to help diagnose, treat, monitor and manage COVID-19 patients throughout 2020. We have also rapidly responded to the increased demand for telehealth solutions like tele-ICU, tele-radiology, tele-pathology, tele-dentistry services, which aid virtual working among care professionals as well as move care into the community. Very important, we have continued to deepen our engagement and relationships with customers through consultative partnerships, strategic partnerships, leading to a higher degree of recurring revenues, superior service and stronger customer loyalty. As a result of these efforts, I am pleased that we have recorded comparable sales growth of 7% in Q4. Connected Care grew a very strong 24%, driven by the demand for patient monitors and respiratory care. Our Diagnosis & Treatment businesses delivered encouraging sequential improvement and returned to growth with a 1% comparable sales increase. Sales for Personal Health grew a solid 5%. Comparable equipment order intake grew 7% in Q4, with double-digit growth in Connected Care and 3% growth in Diagnosis & Treatment. This was driven by strong demand for our patient monitors, hospital ventilators, radiology informatics, computed tomography, x-ray and ultrasound systems.

Thank you, Frans, and thank you all for joining us today. Let me start with providing some color on the fourth quarter comparable sales. Comparable sales for Diagnosis & Treatment businesses grew 1% in the quarter. Diagnostic Imaging sales grew high single digit, driven by double-digit growth in computed tomography and diagnostic x-ray. Enterprise Diagnostic Informatics sales also grew double digit in the fourth quarter as we continued to successfully roll out our world-class Enterprise Imaging Platform resulting from our R&D programs and the integration of the Carestream business. Ultrasound and Image-Guided Therapy sales declined mid-single digit in the quarter, mainly due to pushouts of installations in the U.S. The volume of elective procedures was close to pre-COVID-19 levels in October and November, but went down to around 80% of pre-COVID levels in December, mainly driven by the U.S. We expect the elective procedure volumes to gradually recover in the course of the first quarter. Services sales for our Diagnosis & Treatment businesses grew a solid mid-single digit compared to the same period in 2019. Let me remind you that recurring revenues from Solutions & Services represent more than 45% of the total sales of Diagnosis & Treatment. For the full year 2020, sales for Diagnosis & Treatment businesses declined 2% on the back of 5% growth in 2019. The sales for Connected Care businesses grew a strong 24% in Q4, driven by patient monitoring and respiratory care solutions. We were also pleased to see double-digit growth in our Therapeutic Care business and a solid sequential improvement in the Sleep business, driven by growth in patient interface. In the full year, comparable sales for Connected Care grew 22% with double-digit growth in both Monitoring & Analytics and Sleep & Respiratory Care. Order intake for Connected Care grew strong double digits in the full year. For Personal Health, we saw solid demand in the quarter with the comparable sales increase of 5%. Domestic Appliances grew double digit and Personal Care grew mid-single digit. Oral Healthcare comparable sales declined low single digit on the back of mid-teens growth in Q4 2019, mainly in China. In the full year 2020, Personal Health sales declined 4% compared to 2019. Consumer sales through digital channels grew double digit in Q4 and represent 39% of total sales of Personal Health. Our shift to digital and adoption of new business models of direct-to-consumer resonate very well. Important to note that our current online market share is even higher than that in the traditional off-line channels.

Thank you, sir. And we can now take our first question from Veronika Dubajova from Goldman Sachs. Please go ahead.

Good morning, and thank you for taking my question. And I hope you're both keeping well and healthy. Just wanted to kind of dive in a little bit into the dynamics that you're seeing across the healthcare businesses, both for D&T and Connected Care. Just curious, Frans, Abhijit, can you discuss a little bit where the backlog stands when you look at it at the end of the fourth quarter? And I guess in the context of the current trading dynamics, it would seem to me that there should be fairly healthy backlog for both of these businesses that might imply a bit more growth than what's assumed in the guidance. So just if you can kind of walk us through your thinking on that, and what are some of the risks, but also the opportunities that you see for both of these as you think about 2021?

Yes. Hi, Veronika, great to hear you. Let me start and Abhijit can complement if I forget something. Look, I feel quite encouraged about how hospitals are looking at the future. We have seen no cancellation of orders, only some postponements. We are getting new orders, right, the 7% order intake in the fourth quarter is also a sign of confidence in the future. Those orders were partially related to Connected Care. But for example, Precision Diagnosis recorded an 8% order growth in the quarter, right, which is all looking at the future. We know from hospital C-suites that they are interested to expand ambulatory surgery centers, OBLs, but also invest in telehealth and remote patient monitoring. And I'm sure we'll come to talk about BioTelemetry later on, and that bodes well. Also, you could say that to get 25 new strategic long-term partnerships is a validation of the Philips strategy. Hospitals want help, need help in transforming healthcare as they need to do more with less. They need to support more patients with stable budgets, and they realize that they need to invest in technology to do so, right? And I don't recall a quarter where we had 25 agreements in a single quarter. So it is a bit of a signal for confidence. So -- and then on the backlog, Veronika, indeed, the order book that we have is very high partly because of the delays in installments -- installations in 2020, partly because of the new orders. And so if I would sum it all up, then we expect a strong start of the year, a strong first quarter, strong second quarter. In the first quarter, of course, the pandemic is still raging, but we will continue to deliver acute care equipment. We also expect that D&T, despite the pandemic, will still have a good start of the year, especially driven by Precision Diagnosis. Elective procedures are a risk. I think this was also picked up by the JPMorgan conference in January, where I was asked to comment on it. I think we should not take this out of context. It's pretty normal that elective procedures are rescheduled when hospitals are full of COVID patients. I would turn it around and actually say, we should take some encouragement that at this time, it is only 20% to 30% down, while back in April, it was 70% down, right? So hospitals are much better able to cope with the pandemic than before. And I would also expect a quick rebound of elective procedures the moment, let's say, regions go from red to orange kind of risk status. Therefore, the IGT business is maybe a bit more later in the quarter showing strength, the Diagnostics and Connected Care immediately now. We also expect a good start of the year for Personal Health. Of course, there are risks. Of course, there are opportunities. Maybe I look now to my right. Abhijit, anything to add?

No. I think it was very comprehensive. Just for the order book, it's -- the order book itself is double-digit higher than the end of 2019. So that's also what gives us the confidence that we will start 2021 well and that growth is across, right? So Connected Care is up double-digit; Precision Diagnosis close to double-digit; and Image-Guided Therapy is a bit lower. It's still higher than the end of 2019, but it's a low single-digit growth and that's primarily because the -- of the U.S. where orders have been slow in coming. But Frans, you will remember to the end of Q3 when we were thinking that the pandemic is going to abate, the discussions around IGT rapidly picked up and then again got pushed out with the second wave. So we have good confidence that when the pandemic does abate, IGT will come back strongly.

Yes. And as some analysts noted in the commentary, of course, you then temporarily have a mix change towards diagnosis versus treatment. And that, of course, has a little bit of impact on the profitability as such, but that's all temporary. That should be a fairly comprehensive answer, Veronika.

I was going to say, I think, we've covered pretty much everything. I guess just a quick follow-up, if I can. Just looking at your guidance because obviously you guys gave that out in early November, and the world has changed a bit since then. Just curious kind of at this point in time and given where the fourth quarter came in, your degree of confidence in that guidance, has it increased or stayed the same or worsened? If you can just briefly speak to that and then I'll jump back into the queue. Thank you both.

I think it stayed the same, and I think we talked about CMD also around risks. And then I think I flagged that if pandemic second wave would happen, that you would probably see a bit more Connected Care sales early on at the expense of elective procedures. Now that's exactly, of course, what we just discussed. But then we all expect a strong recovery later in the year of the interventional procedures. So all in all, we confirm our guidance. I don't think that materially the risk has changed. And so we are off to a good start of the year. I'm reminded here by Leandro to also mention that we would see the upside -- the uptake of Sleep as the pandemic, let's say, gets more under control because there's certainly a lot of unmet needs in the sleep market. And Abhijit mentioned in his speech part that we saw good traction on the patient interface, which, of course, is a theme that is always high on your attention business as well.

And our next question comes from Patrick Wood from Bank of America.

I'll just ask my two upfront, if I can, please. I guess the first one would be specifically around Personal Health and the Q4 exit rate, which seemed a bit better than certainly what we were expecting. And when you think about the 2021 guide, I mean, that guide essentially implies that organically revenues are still below 2019 even adjusting for FX. I guess why -- what is it that you're seeing that's causing you to think about worries or issues? You've got a good, full product pipeline. Everything seems to be going well. And the Q4 exit rate seems to imply a better result than that. I'm just kind of curious some of the puts and takes you're thinking of when you think about the consumer for '21. So that's the first question. And the second question, obviously, even though you guys have done some interesting M&A very recently, the divestiture of DA, after that, the balance sheet should still be in very good shape by the end of this year. Just curious how you guys are thinking about capital allocation. Are you thinking about a similar sort of balance between buybacks and M&A? Or is it more weighted one way or the other? I'm just curious.

All right. Patrick, maybe, Abhijit, why don't you start straight away with the Q4 exit rate and the PH discussion?

Yes. We've guided for 5% to 6% growth in PH for next year, which I think is a pretty good growth rate actually. And the last 2 quarters -- let's say, Q3, we had very strong growth because of Q2 decline. So we are not -- let's say, going above that at this stage would not be wise. And also the longer the pandemic continues, there will be economic impacts on people and their spending ability. So I think If we end next year with a 5% to 6% growth, that's a very healthy growth for PH, although we expect to start the first half a bit stronger.

And then perhaps also we can link there the China performance.

Yes.

So we were not very happy with the China performance in 2020.

Yes.

Right. And we are off to a good start in 2021, yes.

In 2021. So we had mentioned that in Q3 we had some work to do. I think most of it is now dealt with. So we will return to growth and then that gives us the confidence for a full year growth. Yes, we don't catch up to 2019, but maybe a bit longer. And if things are all very good, then maybe there is a chance. But for now, 5% to 6% is a good guidance.

And then Patrick, on the M&A question, well, we are indeed proud of a good cash generation. I think it was also about time that we were generating more cash, and yes, we have a healthy balance sheet. But that's also our policy, right? I mean we think that, that is the way to go. So we now, with BioTelemetry and Capsule, will have a significant cash outflow in the first quarter. And then as we are on schedule with DA, then Domestic Appliances then that gets replenished later in the year, expectedly in the third quarter. So then we are indeed a healthy company with a healthy balance sheet, and I like it like that. The capital allocation strategy remains unchanged. In a way we have discussed it also at Capital Markets Day, so it will be a combination of organic growth, M&A, continuing our dividend strategy as well as capital buybacks -- or share buybacks. So we have, I think, a healthy balance at the moment. We continue to be active on the M&A front, but the plan of the 5% to 6% growth is all on the basis of organic growth. Therefore, we will be selective on M&A only when it strengthens our core business and it has a good return path, will we consider it. On the 2 examples that we discussed earlier, BioTelemetry and Capsule will both be accretive in -- to growth and EBITA in 2021. Of course, they are not part of the comparable reporting because Abhijit always takes everything out for a 12 months horizon.

Next question comes from Michael Jungling from Morgan Stanley.

I have 2 questions. I'll ask them upfront, if you don't mind. Firstly, on Domestic Appliances, are you able to provide some more insights into the cost synergies coming from the sale of Domestic Appliances? You threw a lot of numbers at us at the call and I think I missed some, apologies for that, but just a reminder of the magnitude of these cost synergies and how you will treat them in terms of are they recurring costs in the way that you will disclose them? Or are they going to be recorded as ongoing restructuring costs for a number of years until you're able to somehow get rid of them? And then, secondly, on the marketing and sales budget, in light of the COVID-19 restriction sort of continuing at a high level, are you intending to sort of rework your budgets giving sort of a 2021 opportunity to over deliver on your margin expansion targets of 60 to 80 basis points on less travel, et cetera, that's perhaps a different situation than when you first guided for 2021 back in November?

So Michael, let me take the first part on the dis-synergies coming from DA. In the past, for Lighting and other businesses, we don't adjust it out so that remains part of the P&L. We expect that to be, let's say, over a 2-year period, normally between 2 to 2.5 years, we reduce that cost because that's the time it takes also to wind down that activity. So again, it remains part of the adjusted EBITA and will be, let's say, dealt with or removed over a 2-, 2.5-year period. Moving to the sales and marketing, maybe?

Yes. So let's say, we have a marketing transformation ongoing. That marketing transformation is aimed at raising our advertising budget and proportional spend, which we think is a structural matter because of the higher proportion of online sales and our desire to have a deeper consumer engagement. So we think that investing more in advertising is a good thing. Now we are, at the same time, transforming our fixed selling expenses. We will reduce that as we are more targeted -- targeting the online market where there is a higher customer concentration, and we can leverage more also online B2B portals for what you can call the long tail of traditional retailers. So all together, marketing and sales will become more efficient, also more effective. It should help us generate a higher growth rate and eventually then the operating leverage. So then eventually, you will, I think, see that margin expansion, but it is not just by cutting the budget. It is more by changing the budget mix. The travel expense is an interesting question. We are striving to keep travel lower than the 2019 levels. Of course, at this time, nobody is traveling, but anyway structurally. If we succeed in that longer term, then it will disproportionately benefit our health systems businesses, more than only the Personal Health business because the travel rate in health systems was certainly more intense than on the Personal Health side. The -- at this time, we are not changing our guidance of the 60 to 80 basis points, right? I mean you can definitely identify opportunities to save such as in travel, but there is also areas where we may need to adapt. And then maybe interesting comment related to the area and that is how we engage with customers, we do that increasingly through virtual means, not only for marketing and sales, but also for service. We find that remote service works very well and that we can also then do data analytics on all of that. So it's also something to stay. So also on that area, on the service area, we expect eventually productivity gains. Michael -- yes, go ahead.

Just going to ask Abhijit just on the 60 to 80 basis points of margin improvement this year, is it more likely that we'll see upside than downside from lower spend on sales and marketing? Is that the right way of looking about it? Or will you just reinvest whatever is on top because of the restrictions that we're facing today, meaning less travel, et cetera? Just some clarity on that.

Look, Michael, the guidance is 60 to 80, right? We are -- today, on the 25th of January, we have 11 months and more to go through a fairly turbulent time. So I think we are not going to now start speculating whether it's upper or lower. In terms of our overall plan, it is to drive growth from 2022 onwards. So whatever we need to invest to drive that growth we have planned for that. If things turn very positive, it doesn't mean that we will -- whatever extra margin we make, we are going to simply reinvest. So we have plans to make our growth for next year, and that's all well funded within the 60 to 80 basis points profit improvement.

Our next question comes from Hassan Al-Wakeel from Barclays.

I have a couple, please. You talked about gaining share in the health care business. Could you expand on the dynamics within D&T and which modalities and products you feel are the most significant drivers of this? And then secondly, on the Sleep business, could you talk about the performance here and the degree to which you have seen an improvement in new patients?

Yes. In our calculations and data sources, we have gained market share in Diagnosis & Treatment and in Connected Care. So that's good news. And in Connected Care, it was partly our ability to, let's say, ramp up in acute care equipment. But also structurally, in especially monitoring, you see hospitals standardize on one architecture, on one standard, and increasingly, we see enterprise-wide agreements coming through and where, given our strength of the portfolio, we are often the winner. And now that we are further strengthening the out-of-hospital monitoring, which will seamlessly integrate with the in-hospital monitoring architecture, I think you can expect or at least we target to further drive that -- those kind of share gains. If I then pivot to Diagnosis for a moment, I feel that thanks to the renewal of the portfolio that we have a very strong portfolio. We have -- of course, the MR market was down last year But in that down market, we gained share basically in all geographies. And it comes on the back of innovations such as the sealed magnet, the helium-free operation, but also innovations like Compressed SENSE and the in-bore camera function to apply AI to the image acquisition. The speed of our MR, thanks to Compressed SENSE whereby you can reduce the scan time by 40% to 50% is a very well-received innovation. On the CT side, I'm really pleased to see that from a reputation point of view and a competitive point of view, we are fully accepted now. So the Cleveland era is behind us. We see market share gains ranging from the United States to China, where we are performing very well with our CT portfolio. Ultrasound, we go from strength to strength. In cardiovascular, of course, where we are the market leader, it's s going very well. We did see a bit of dynamics in 2020 from the mix shift between point-of-care ultrasound and general ultrasound versus cardiovascular that was obviously less prioritized by hospitals. But we expect also in 2021 that our strong portfolio will be having a lot of traction. Also there, applying AI is very well received, which aids the confidence of the sonographer and even allows for less trained sonographers to still do a very confident diagnosis. If I then switch to Enterprise Informatics, the Carestream acquisition is really doing fantastic. We saw strong order growth in the fourth quarter. The integration between our traditional eyesight packs and the Carestream packs, we have a very good evolution path for our existing customers, whereas we are also winning net new names into the franchise. So that looks good. And then finalizing with Image-Guided Therapy. We continue on our strategy to innovate the procedure. This resonates very well with the interventionist doing more patients in the day, doing it more confidently, doing it more efficiently is exactly what they need. Azurion's upgrades are helping us to continue to gain market share. And then on the devices side, we are running very well with differentiating devices. I made a passing statement with regards to the safety study that is now -- has now completed its fifth year. We are under NDA and the results will only be published at 1:00 today, but I am authorized to tell you that they are very positive for us. And that also lends us to make a statement that we expect, relative to competitors, that Stellarex will continue to gain in traction. I also see intervention is becoming more comfortable regardless of what the FDA kind of publishes to use Stellarex. And the longer balloon makes it also an economically attractive or more attractive solution. So if that's basically a view of the horizon, Hassan, I think these are all drivers for continued market share gain. And maybe finishing off on China because there it's not just innovation that plays a role, but also geopolitics, right? Last year, we talked a couple of times about what about the locals, but the fact that we had strong double-digit order growth in China in the D&T area just also shows that we are navigating that kind of local presence thing quite well. Then on the Sleep business, not -- you asked, are new patients coming in? Well, the sleep centers are still mostly closed. And therefore, patient diagnostics in the sleep centers is difficult. However, we have launched remote diagnostic and home sleep tests. We have also launched the remote fitting of the mask using mobile phone photography, which is then interpreted through AI to kind of recommend a perfectly fitting mask. Then it gives us confidence that we can compete well in Sleep. We also feel that we are now at least on par with our competitor on the Carestream orchestrator, the informatics ecosystem for sleep. And so we feel that we are well set up for sleep in 2021. Abhijit, do you want to...

Yes. Maybe we see the pickup coming. So Q2, Q3, we had double-digit decline. So we have now -- Q4 was flat year-on-year. So procedure volumes or new patient volumes are around 70% to 80% of what they were pre-COVID. But as Frans mentioned, the masks or patient interface, as we call it, has shown good growth, which brings us to flat for the quarter, which is pretty good. And in terms of share, we believe also in North America and international markets, we have made good progress in gaining share there.

We can now take our next question from David Adlington from JPMorgan.

So I just wanted to get your thoughts on the pricing environment, both across your hospital exposed franchises and your personal health care franchises. Just wondering if you're seeing or expecting any change to the pricing environment.

We expect it to be the same. And so in the investor deck, you have the standard page, the bridge that kind of talks about the normalized, Abhijit?

Yes. We normally talk to about a 1% price erosion in a year. And as Frans said, we don't expect anything different from that.

And then, of course, there are the occasional kind of bulk tenders, whether it's Russia or China, where people buy higher volumes. But then that is offset by add-on sales afterwards and/or, let's say, the efficiency of serving those customers, and therefore, it would not lead to a stronger or, let's say, an impact on profitability. So overall, I feel confident that we should not expect anything extraordinary on the pricing front. Now on the Personal Health side, we basically have not experienced price erosion there because it's always offset by new product introductions that keep us whole on the margin. We are now adding both in Male Grooming and in Oral care, also products in the lower-priced segments, like the Shaver 1000 that I referred to in the introductory speech or the Philips One by Sonicare, which is entry level. But those are all add-ons to the existing portfolio and lead us to bring new users into the franchise. And also there, it's not a pricing effect on the existing portfolio. It's just a product line extension and it leads to new customers coming in. So it will also not have a negative effect on margins.

Next question comes from Scott Bardo from Berenberg.

Two upfront then, please. Obviously, pleasing to see some strong dynamics for your long-term enterprise partnerships this quarter. Our own survey work suggests that appetite for these sorts of contracts has been growing throughout the COVID crisis. I wonder if you could share your views on whether you think that's the case or whether this is simply a one-off or company-specific phenomenon that we see in the fourth quarter. So I'd be interested to hear your thoughts are, please, Frans. And second question for Abhijit, please. Free cash flow of close to €1.9 billion, very good this year, particularly in light of your 2025 guidance of over €2 billion. So I wonder, Abhijit, can you help us understand throughout 2021, is it likely that we see some correction or some lower free cash flow dynamics for the group as compared to what seems a relatively high watermark in 2020?

Scott, the -- I would agree with you that there is growing appetite or, let's call it, a growing realization by hospitals, especially the larger chains that are run by a C-suite that they need to make a change to their procurement strategies. Historically, many suppliers, all with point solutions or -- that are not integrating, that doesn't lead to the breakthroughs in results that these hospitals need. I mean, yes, they can put pricing pressure by that approach, but they cannot get the necessary support in their transformation. And I think they realized that in the -- during the crisis that their largest suppliers were much better able to take them through the crisis. For example, I've been receiving complements from hospital CEOs on how we have stood up during the crisis. We're creative with solutions. For example, we realized remote COVID patient monitoring so that patients could be discharged faster while the hospital kept them into site. So that agility and that resourcefulness doesn't come through if you have a classical procurement strategy because you don't even get to the activity necessarily of the solution. So I would agree with you, there is, across the board, a general growing appetite and I think that's a good thing. Within that, I think Philips is better positioned than our competitors because we have been going at this for 5, 6, 7 years and we have a clear strategy of integrating technology across the different functional silos of a hospital. We are strong in health care informatics. We are strong in workflow optimization. We are strong in analytics of care processes. We have now fleet management solutions. So we can bring a whole arsenal of weapons to the game whereas some of our competitors are still much more traditional in their equipment focus as opposed to solutions focus. So let the results be the judge of this, but I feel good about the ongoing strategy. In fact, today, we are going to send out the first win of the year already with regards to the next LSP that we have just signed. So it's going to be good. On your cash flow question, Abhijit, over to you.

Ye. So Scott, on the cash flow, so we have €1.85 billion. Let's say about more than €250 million of that is for DA. So if you take that out because that's not going to be there going forward, we will be around the €1.6 billion then I mentioned a few things, right? We have reduced our overdues this year with many, many actions by about €150 million so that, of course, will not repeat every year. And then we had a phasing benefit as well as a benefit because we had much larger Connected Care sales where the receivables came in earlier or it has a shorter payment cycle than the Diagnosis & Treatment part. That's another couple of hundred million. So as I had mentioned right at the start of 2020, between 2020 and 2021, there will be flux. We were -- I think we did well that we did a big collection this year, so excluding DA around €1.6 billion, and we are still aiming to be, let's say, around the €3 billion cash flow over the 2 years of 2020 and 2021. So this year, a bit higher; next year, a bit lower. But overall, still on an average €1.5 billion excluding DA, which is a very, very strong performance.

Next question comes from Lisa Clive from Bernstein.

Two questions. Just first, Abhijit, thanks for the detailed guidance on the Other category. Just given your comments that the cost synergies for the sale of DA remain in your adjusted EBITA figures, can we assume that the specific items you mentioned that will add to the cost in the Other category for DA for the separation are fully one-off in 2021 and that the cost thus in the future years will be lower, obviously barring any future one-off costs? And then also just a small follow-up on that. The weaker performance in the Other category in Q4, is this just a timing issue where Q1 will be higher? And then second topic, just on China, can you remind us of the impact of the current tariffs excluding DA? And if the tariffs were reversed, would all of this come back? Or are some of the mitigation strategies that you put in place more permanent? I suppose just giving us a net impact would be helpful.

Okay. The first one was the cost in Other for the DA separation, that is a onetime. So once the separation is done, that cost will stop. The second was in HealthTech Other, the license income that moved from Q4, yes, that is a timing issue. So there were a couple of deals that we were going to -- we were hoping to settle in Q4, which didn't happen so that should come this year.

But not necessarily in Q1, right? It's not a miss of a week. So it will come later in the year.

Exactly. And your third question, could you repeat that?

China tariffs.

Yes, China tariff impact.

So let's say, we have -- the gross impact of the tariffs were substantial. We have mitigated that down to a level of around €25 million. If for some -- if tariffs are rolled back, then that should be a net positive for us. However, I don't see that happening anytime soon, right? So it's an area to continue to watch. And we have now made the changes to the supply chain to mitigate some of this. There's no expectation that we would roll back those measures anytime soon.

It remains current.

Next question comes from Julien Dormois from Exane.

I also have two. So the first one is a broad question. You've mentioned that hospitals need to do more with stable budget. But based on the discussion with the C-suites, do you get any anecdotal evidence or early signals that the hospitals are actually becoming more optimistic about getting higher budget in the future, and that is obviously in the context of the serious money that could be spread in the coming years in Europe and in the U.S. And the second question is on the Oral Healthcare business. If I'm right, you've seen broadly flat sales in absolute terms in that business in 2015 and we've seen pretty significant yearly variations in that line of business. So how do you see this division going forward? Is this still part of your -- of the core business of Philips? And do you see that as a potential drag on your ambitions to accelerate sales growth 2% to 5%, 6%?

Yes. The sentiment in hospitals, I would say, yes, it has become a bit more optimistic because in many countries in the world, there is a backstop for the losses that they have incurred as they focused on COVID. Of course, the scheme in which that is done differs by country. Sometimes it's the insurance companies, sometimes it is the governments themselves. But I think, largely, you will see that hospitals are going to be compensated for the cost that they have incurred. That would then also suggest that in many countries, the hospitals are not impaired for future investments. And I think that statement would then correlate with the higher order intake already in Q4, for example, diagnosis. I do think that there will be some shift in priority. What I hear is that the word productivity is very high on the priority list of hospitals. So unlocking that and having a business -- every investment needs to have a business case that generates that return. I think you will see less capital expenditure just for, oh, I need to have this state-of-the-art piece of technology and it doesn't matter what it costs. I think that is going to be under pressure. But that is not our business. Our business is very much where we can provide the health economic evidence that results can be obtained. The hospitals are also talking about doing more on care management, care orchestration both in and outside of the hospital because that's what they need for productivity gains for remote patient engagement. Telehealth will become structurally much more on the forefront also because reimbursement is now in place in more countries on a structural basis. So I think you will be able to see that evolve. So that is, I think, what explains the somewhat better -- or somewhat higher optimism. On Oral care, look, we have had a tremendous ride with Oral Healthcare. We are not completely satisfied with our performance in the last quarter where we saw a negative growth in China. But that was on the back of strong double-digit growth in Q4 2019. And with the new product launches, with the expansion into other price segments, we expect to see strong performance in 2021. We see Oral Healthcare is core of our portfolio. We have absolutely no intentions whatsoever to even think about not having that in our portfolio. And we see also an increasing interest from insurance companies, from integrated delivery networks in what consumers do at home, right, because behavioral health -- I mean personal health and the behavior, it all correlates. And in fact, Philips strategy to be both in professional health care and in consumer or personal health is something that is increasingly recognized as very important. It's a skill base that I value, that I would admit we can still build further integration as we go forward, but it's certainly something that we are working very hard on.

Our next question comes from Falko Friedrichs from Deutsche Bank.

I have 2 questions, please. Firstly, have you been able to secure all the service contracts for all the new ventilator sales you realized last year? And then secondly, on BioTelemetry and this overall trend of moving monitoring outside of the hospital, now that appears to be a pretty interesting space for the bigger technology companies of this world as well, the Apples and the like. What is your view on the developments here? And could those big technology companies become a threat over the next 3 years? Or is there even a possibility for some early partnerships? Any thoughts here would be appreciated.

Yes. We are working very hard to secure service contracts for this vast installed base that is now in place. We also are working with governments who have stockpile programs to remind them that just having it in the stockpile is not a recipe for success, you need to maintain it. I think this was a lesson also observed in the United States. I would say still some potential there to do more, but definitely possible. Now in any case, it usually takes a year between delivery and a service contract to have an impact on Philips because the first year is like warranty and everything else. But we are working on it. And then on the BioTelemetry side, so first of all, let's indeed confirm that It's going to be a very important space. To manage vast cohorts of patients that have chronic disease, remote patient monitoring and remote patient care is the way to go. And I emphasize that this is very often about chronic patients and not only, let's say, behavioral health or health coaching in the preventive space. And I would position the tech companies foremost in that lifestyle segment of preventative care. Very important, by the way, and I would encourage them to be in it, but it gives assurance and feedback to people who are generally healthy, whereas the health care systems require more information, deeper analytics and also more services around this. And I see BioTelemetry not just as a company with exciting devices. I see BioTelemetry as a services platform company that engages with referring doctors, that rolls out these diagnostic services to individual patients that then digests and analyzes the data and comes with a confident diagnosis, right? So it's a much wider game than just a smart device. I could eventually also see that data from other devices will be complementary to what we do. Our data architecture is designed to be open and to take the data from anybody's device into the equation. So in that extent, we can also expect collaboration. Already today, the data from Health Watch, if you put the privacy settings to allow that, then the data can be uploaded into the Philips Health suite architecture and made available to your doctor, right? And I think increasingly in the future, that will be rather the norm than the exception. And therefore, having a platform play where we are the data integrator and that where we are able to provide services, not just a clever gadget, is the way where the business is going. So you should then also expect that we use BioTelemetry as a platform play where we will expand it beyond the long-term holter. I'm very pleased that BioTelemetry is also in the outpatient monitoring business. And with their recent ePatch loans, we also expect to gain share against some of the competitors in the space. And I can also anticipate that over time, we will expand BioTelemetry to other disease profiles beyond cardiovascular. So lots to do, lots of excitement. We expect strong double-digit growth and we also expect further profit enhancement, and we are very happy that we were able to buy the market leader.

Due to time, the last question will come from Scott Bardo from Berenberg.

I just wonder if you could help us, Abhijit, in understanding the potential royalty flow that should be expected from the exit from Domestic Appliances. I suspect that's mismodeled. And I wonder if you could help confirm then that given your guidance excludes Domestic Appliances, does any way your margin improvement of 60 to 80 basis points this year include any benefit from additional royalties from the exit of DA?

Yes, I think, Scott, the way you should look at it is the royalty income initially will be used to offset the standard cost that we will have and then, let's say, in the future years would be a potential benefit. So the 60 to 80 basis points profit improvement includes potential license revenue from DA.

All right, I'd like to thank everybody for your contribution and questions. And I'd like to summarize that we look with confidence at 2021. And that the year for us is already in full swing being 4 weeks in. And we look to already delivering a very good first quarter. Thanks very much, everybody. Bye-bye.