Koninklijke Philips N.V. — Call Transcript 2021

Speaker 8: Good morning. Welcome to Philips' first quarter 2021 results conference call. Joining me today are our CEO, Frans van Houten, and our CFO, Abhijit Bhattacharya. Frans and Abhijit will take you through our strategic and financial highlights for the period. 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 call will also be made available today on the website. Before we start, I would like to remind you of a few things. As mentioned in the press release, adjusted EBITA is defined as income from operations, excluding amortization of acquired intangible assets, impairment of goodwill and other intangible assets, restructuring charges, acquisition related costs, and significant one-off items. Comparable growth for sales and orders are adjusted for currency and portfolio changes. As of this quarter, the Domestic Appliances business is reported as discontinued operations. Sales and results from this business are no longer included in the results of continuing operations, and relevant assets and liabilities are reported under assets and liabilities held for sale. The restated statements of income for 2019 and 2020 reflecting these changes are available on our investor relations website. Finally, all forward-looking projections exclude the Domestic Appliances business. Over to you, Frans.

Speaker 5: Hello, everyone, and thank you for joining us today. I hope that you and your families are keeping safe and well. The COVID-19 pandemic is far from over, and our teams remain focused on delivering against our triple duty of care, meeting customer needs, safeguarding the health and safety of our employees, and ensuring business continuity. Despite the ongoing impact of COVID-19, our performance gained momentum with a strong 9% comparable sales growth and an adjusted EBITDA margin increase of almost 400 basis points in the first quarter. Diagnosis & Treatment sales grew 9%. Our Connected Care businesses delivered 7% comparable sales increase, and sales for Personal Health grew a very strong 17%. We are also encouraged by the strong 11% comparable order intake growth for the Diagnosis & Treatment businesses, with all major markets contributing, driven by the sequential improvement of electives and hospital CapEx, and the very positive customer response to our innovative products and solutions. Comparable order intake for the Connected Care businesses decreased as anticipated following the exceptional growth in Q1 2020, driven by the demand for hospital ventilators and patient monitors. Looking ahead, while we continue to see uncertainty related to the impact of COVID, we see increased demand in the Diagnosis & Treatment and Personal Health businesses. We are raising our growth guidance given this momentum, we now plan to deliver low to mid-single digit comparable sales growth in 2021 compared to our earlier plan of low single-digit growth. Still, with an adjusted EBITDA margin improvement of 60- 80 basis points. I would like to provide some color on some of our initiatives to respond to the needs of today's hospital leaders across the globe as they plan for the future. In the quarter, we expanded our range of remote patient management solutions with the launch of the Medical Tablet, a portable monitoring kit designed to help clinicians remotely monitor large patient populations during emergency situations. This new offering, which is available in North America, Europe, and Japan, provides remote access to patient data to improve workflows and better manage increased patient volumes. Highlighting our strengths in smart diagnostic systems, we expanded the Incisive computed tomography platform with the launch of Precise Suite, an AI-enabled solution that delivers smart radiology workflows from image acquisition to reporting with AI-enabled image reconstruction, automated patient positioning, motion-free cardiac image capture, and real-time interventional guidance to drive precision in dose, speed, and image quality. Precise Suite is the latest enhancement of the Incisive CT platform, which already includes a newly designed patient table that accommodates bariatric patients, the Tube for Life guarantee, Philips PerformanceBridge process improvement services, and our DoseWise Portal radiation exposure tracking solution. All of this makes the Incisive CT unique in the industry. We also further strengthened the Image-Guided Therapy portfolio with our smart CT application for Azurion, which provides interventionists with CT-like 3D images to enhance procedural outcomes, and it fits seamlessly into the existing workflows. Our ClarifEye augmented reality surgical navigation, an industry-first solution to advance minimally invasive spine operations in the hybrid operating room. Very important, we continue to drive market share in our core businesses through deeper, more comprehensive customer partnerships. During the first quarter, we signed several new long-term strategic partnerships with hospitals in the U.S., Europe, and Asia, helping them achieve their clinical and operational goals. For example, we signed a five-year agreement with the Spanish group Vithas to provide diagnostic imaging systems combined with advanced informatics and image-guided therapy solutions to enhance patient care. The agreement also includes collaboration in technological innovation projects and joint scientific research. In Personal Health, we continue to invest in innovation and new product introductions. In the first quarter, we introduced the Lumea IPL 9000 series with SenseIQ technology for personalized hair removal, which is available through a try-and-buy subscription model in several countries. We also produced the 100 millionth OneBlade blade, just five years after OneBlade's original launch. The Philips OneBlade has disrupted shaving markets worldwide, creating a new category for shaving, trimming, and edging. In line with our plans, we signed an agreement to sell the Domestic Appliances business to global investment firm Hillhouse Capital for a total deal value of EUR 4.4 billion. This comprises of an enterprise value of around EUR 3.7 billion and an exclusive brand license agreement with an estimated net present value of around EUR 0.7 billion for the first 15-year period. We expect to receive cash proceeds after tax and transaction-related cost of EUR 3 billion in the third quarter. We are very pleased that we have found a good home for this business. The transaction is expected to be completed in the third quarter, subject to the customary conditions. In Q1, we also took important steps in our strategy to strengthen our leadership in Connected Care solutions with the completion of the acquisitions of BioTelemetry and Capsule Technologies. The combination of our leading patient monitoring position in the hospital with BioTelemetry's leading cardiac diagnostics and monitoring services outside of the hospital make us a global leader in patient care management solutions with potential for further expansion. With Capsule, we have a unique medical device information platform that connects almost all medical devices and EMRs in hospitals through a vendor-neutral system that transforms streaming clinical data into actionable information. These acquisitions will further broaden, enrich, and scale Philips patient care management solution as well as monitoring and software-as-a-service offering. BioTelemetry and Capsule will be accretive to sales growth and adjusted EBITDA margin in 2021 and will be reported within our Connected Care Informatics business in the Connected Care segment. On the regulatory matters, regretfully, we have identified possible risks related to the sound abatement foam used in certain sleep and respiratory care devices. C urrently in use, and this is primarily related to the first-generation DreamStation product family. We are in the process of engaging with the relevant regulatory agencies regarding this matter and initiating appropriate actions to mitigate these possible risks. Given the estimated scope of the intended precautionary actions on the installed base, we have taken a provision of €250 million. I would like to flag that our latest CPAP platform, the DreamStation 2, is not affected as it is of a different design. Let me now update you on some changes in our management team. Earlier this quarter, we announced that Rob Cascella, currently strategic business development leader and formerly in charge of our Diagnosis & Treatment segment, stepped down from the Executive Committee effective from April 1st. This in relation to his planned retirement from the company by the end of this year. Rob will continue to play a role in certain strategic business development projects on a part-time basis until the end of 2021. We also announced that Shez Partovi joined Philips Executive Committee effective from March 22nd to succeed Jeroen Tas as Chief Innovation & Strategy Officer effective from July 1st. Shez brings deep healthcare and informatics experience to Philips and most recently served as the global head of business development for healthcare, life sciences, and medical devices at Amazon Web Services. In that role, he was responsible for the business go-to-market strategy, charting the path for customer cloud transformation, and the adoption of artificial intelligence and machine learning. Jeroen Tas, who joined Philips in 2011 and became Chief Innovation & Strategy Officer in 2017, has made a personal decision to assume a part-time position within Philips and will focus on the continuation of several strategic business development projects until the end of 2022. I want to thank Jeroen and Rob very much for their very valuable contributions to the transformation of Philips. Jeroen played a very important role in inspiring and executing our innovation strategy for digital health and healthcare informatics, while Rob has successfully shaped our Diagnosis & Treatment segment over the last several years, including the addition of IGT devices to our portfolio. To round off, let me reiterate that I am pleased with the progress that we are making on our strategic and performance roadmap. Our journey to health technology leadership continues, and we have a clear strategy to help transform care along the health continuum, combining smart systems, devices, informatics, data and services. I am convinced that the growth and margin profile of Philips remains very well underpinned. With that, I'll turn the call to Abhijit.

Speaker 1: Thank you, Frans, and thank you all for joining us today. I hope you and your families are well and safe. Let me start by providing some color on the first quarter comparable sales of 9%. I'd like to remind you that this comparable sales growth does not include the double-digit growth of our recently acquired companies, BioTelemetry and Capsule Technologies. Our Diagnosis & Treatment businesses comparable sales growth grew 9% in the quarter. Diagnostic imaging sales grew double digit, driven by strong installations of computed tomography and magnetic resonance. Ultrasound and enterprise diagnostic informatics sales grew high single digit. Image-Guided Therapy sales saw solid sequential improvement and grew mid-single digit in the quarter, mainly driven by strong traction of our devices business, as we saw good return to growth at the end of the quarter, especially in the U.S. The volume of elective procedures gradually improved during the first quarter, with March tracking above pre-COVID levels. We expect that elective procedures volumes to continue to gradually increase in the course of the year as hospitals normalize their operation and also work through the backlog of patients. The sales of the Connected Care business grew 7% in the first quarter, driven by double-digit growth in patient monitoring as we continue to successfully convert the strong order book into sales. This was partly offset by a mid-single-digit decline in sleep and respiratory care on the back of a strong Q1 last year, driven by COVID-19 demand. We were also pleased to see the recovery in our emergency care business with another quarter of double-digit growth. This business was formerly called Therapeutic Care. For Personal Health, we saw strong demand in the quarter with a comparable sales increase of 17%. Personal Health grew strong double digit and oral healthcare comparable sales increased by mid-single digit. We saw solid sequential improvement in Personal Health in China, with double-digit comparable sales growth in the quarter, driven by new product introductions across the portfolio and continued momentum in North America and Europe. Consumer sales through digital channels grew double digit in Q1 and represented 43% of total sales for Personal Health. Our shift to digital and the adoption of new business models of direct to consumer resonate very well. Important to note that our online market share is higher than in the traditional offline channels. Moving on to orders. I'm pleased to share that the Diagnosis & Treatment business comparable order intake grew double digits in Q1, driven by strong double-digit growth in Image-Guided Therapy and solid performance in diagnostic imaging and ultrasound. This is due to improving market conditions as well as the strong competitive momentum of our innovative portfolio. As a result, we saw a further increase of the order book in these businesses in the quarter. Comparable order intake in Connected Care declined 27%, as anticipated, on the back of 80% growth in Q1 2020, driven by the spike in COVID-19-generated demand last year. While we continue to expect demand for ventilators and patient monitors to normalize during the course of 2021, activity levels are expected to remain higher than in 2019 in these businesses. Also important, we continue to experience positive competitive momentum, notably of our innovative monitoring solutions. Let me now turn to the profitability development in the first quarter. Adjusted EBITDA for the group increased by 390 basis points to EUR 362 million, which is 9.5% of sales. In Diagnosis & Treatment, the adjusted EBITDA increased 230 basis points to 8.7% of sales. Connected Care delivered an adjusted EBITDA margin of 12.8% of sales, compared to 9.8% in the first quarter of 2020. In Personal Health, adjusted EBITDA was 14.3%, up from 7.3% last year. The improvement across our business segments was mainly driven by sales growth and results of our productivity programs. At the same time, we continue to execute on the planned higher investments in advertising in Personal Health. Adjusted EBITDA for the group was also impacted by positive currency impacts of 40 basis points in the first quarter. We continue to focus on driving productivity and are executing initiatives that will deliver cumulative net savings of EUR 2 billion by 2025. These initiatives delivered EUR 97 million savings in the first quarter. More specifically, EUR 44 million through procurement programs, EUR 33 million supply chain productivity and EUR 20 million overhead cost reduction. Restructuring acquisition related and other charges include a EUR 41 million gain due to the release of a contingent consideration liability related to EPD. Revisions to the financial forecast due to the maturity of the technology resulted in a decrease in the fair value of the respective contingent consideration liability. At the same time, we recognized an impairment loss of EUR 55 million in amortization of acquired intangibles. The net impact, therefore, of the impairment is EUR 14 million. Other charges also include the EUR 250 million provision related to the intended precautionary quality actions that Frans mentioned before. This amount is our best estimate at this point in time. Financial income and expenses were an expense of EUR 6 million compared to EUR 19 million in Q1 2020. This decrease is mainly due to the increase in value of our minority participations. Net income was in line with Q1 2020, with higher earnings and an increase in net income from discontinued operations, offset by the provision related to quality. The adjusted diluted EPS from continuing operations doubled from EUR 0.14 in Q1 2020 to EUR 0.28 in Q1 2021. Free cash flow was an inflow of EUR 169 million compared to a EUR 15 million outflow in Q1 2020 due to strong working capital performance and lower capital expenditures. Let me provide some guidance for certain areas of our business. In the segment Other, we continue to expect an adjusted EBITA loss of around EUR 120 million and an EBITA loss of around EUR 240 million for the full year 2021. This includes EUR 80 million-EUR 100 million of costs related to the separation of Domestic Appliances in 2021. For Q2, we expect a net cost of around EUR 35 million at the Adjusted EBITA level and around EUR 70 million at the EBITA level. In line with our previous guidance, restructuring charges are expected to be 70- 80 basis points. Acquisition related costs are expected to be around 70 basis points in 2021. This is lower than our prior guidance of 100 basis points due to the positive one-off impact from the release of the contingent consideration liability for our EPD business that I had explained earlier. We continue to expect one-time EU MDR and consent decree costs, a related cost of around EUR 40 million in the year. Financial income and expenses are expected to be a net cost of around EUR 140 million in 2021. This is lower than our prior guidance of EUR 180 million, largely due to the increase in the value of our minority participations in the first quarter and assumes no one-off gains or losses in the rest of the year. Our midterm guidance of 24%-26% effective tax rate, excluding incidentals, remains valid, while for 2021, we currently expect that to be around 22% due to one-off effects. On the topic of share buybacks, I would like to remind you that our EUR 1.5 billion program for capital reduction purposes that was announced in January 2019 will be completed during the course of 2021. To conclude, let me reiterate what we stated at the start of the year. Given the comparison base of 2020, we expect overall relative performance to be stronger in the first half of 2021, as has been confirmed by the Q1 performance. Further, as mentioned by Frans, we see an increased demand in the Diagnosis & Treatment and Personal Health businesses. Now plan to deliver low to mid-single-digit comparable sales growth for the group in 2021 compared to the earlier plan of low single-digit growth. We continue to expect a decline of Connected Care sales in the high single-digit to low double-digit range as previously guided. We also expect an adjusted EBITA margin improvement of 60- 80 basis points for the group. With that, I'm happy to take your questions along with Frans. Thank you.

Speaker 11: Thank you, sir. The first question comes from Veronika Dubajova from Goldman Sachs. Please state your question.

Speaker 15: Hi, good morning, Frans , Abhijit Bhattacharya, and thanks for taking my questions. Two, please, and both related to the guidance for the full year. First one is just on revenues and trying to parse out where that incremental confidence is coming from in terms of the low to mid-single digit organic sales growth versus what you had guided for previously. Can you maybe talk through what are some of the moving parts where you've become incrementally more confident? Is it PH? Is it D&T? Is it a specific region? Is it a specific business line? If you can just shed some light into that would be really helpful. My second question, I appreciate you don't guide for EPS. Obviously, this year there's quite a lot of moving parts. We have the dilution from Domestic Appliances, from the disposal. You have some contribution coming in from acquisitions. Just curious if you can level set for us, Abhijit, how we should think about EPS development in 2021. I guess looking beyond 2021, if you can comment on some of your midterm expectations on EPS growth and how we should level set those off the new base, that would be very helpful. Thanks, guys.

Speaker 5: Yeah. Hi, Veronika. Great to hear you. I sympathize with your question on EPS. Abhijit will try to answer it as best as we can, given the circumstances. Indeed. Let me start on the revenue traction. If I take you back to the Capital Markets Day guidance where we said, D&T and Personal Health should grow in the 5%-6% bracket while Connected Care, given the difficult compare, will first have a year of a negative and then in 2022 also be in that frame. Okay? That's the framing of it. Obviously, as we said in the call, Connected Care stays with the same guidance of approximately high single digit, low double digit decline year-on-year. Which then implies that all the upside comes from Diagnosis & Treatment and Personal Health. Both of which will grow ahead of the 5%-6% range this year. We see strong order momentum in Diagnosis & Treatment with the order growth of 11%. The 11% order growth in Q1 is driven across the world, basically. China, high single-digit. In North America, double-digit growth in orders. I think very pleasing and perhaps also a precursor of what can happen when COVID-19 becomes more under control. Europe, a very solid, around 6% order growth. Much driven by IGT, which of course was weak last year. Customers holding back on orders, also postponing shipments. Now that comes back with a vengeance, as there is a backlog in patients, elective procedures are stacked up. That's then also maybe a nice bridge to talk about the consumables. We have seen a very nice uptick, in the course of Q1. You can really track how COVID gets under control. In the U.S., March was very strong on elective procedures. We of course compare not only to 2020, but also to 2019. On the consumption of our catheters, we are well ahead of 2019 on a run rate basis. That bodes for a very nice growth step up over 2019 in IGT devices. Make a long story short, good start in Diagnosis & Treatment. Strong order book, strong order intake. We are looking at momentum there in Q2. Of course, the second half of the year, the comparison already becomes a little bit more difficult, but still overall growth ahead of the 5%-6% on revenue. Let me do a similar, albeit a slightly shorter story around Personal Health. If we are honest, of course, 2020 was not a great year for Personal Health, even though the second half year was much stronger than the first half year. We are having a very positive comparison year-on-year. 17% growth in Q1. We are also looking at a very strong growth in Q2 while the second half of the year, will be much more moderated given the year-on-year comparison. The driver of growth, from a geographical perspective, we see China double-digit. We see Europe performing very strong, amazingly strong. North America in the high single-digits. Strength across the globe as consumers rally to buy our new innovations in oral care, in personal care, in beauty. Good traction there. As you know that we have also stepped up A&P, advertising and promotion, because in a digital world, that becomes more important. At the same time, we have taken cost out of what is called other fixed selling expenses. You could say we have changed the mix of sell- ex to drive more consumer preference, and we think that that is working. It bodes well for the future. I think that gives you color on revenue and, maybe in the meantime, I can look to Abhijit.

Speaker 1: Yeah, sure.

Speaker 5: For your EPS question.

Speaker 1: Yeah. Hi, Veronika. If you look at last year, we estimate that DA had probably about EUR 0.24 contribution to our EPS. If you look for this year, with our now increased sales guidance, we will compensate most of that. Maybe about EUR 0.17, EUR 0.18 of that will get compensated with the growth of the company itself and the adjusted EBITA growth. Important to understand that we will have a lower share count, we will complete the buyback this year, so that will also add to the EPS. Finally, I guided for a lower tax rate this year, that also contributes positively. With this, we will actually be able to offset the dilution of EPS with last year. Of course, we have Biotel and Capsule, which are doing well, and they will probably even result in slight incremental EPS this year for the group compared to last year. Last year, if I include DA, and this year if I exclude DA, our EPS will still go up. If you, let's say, look forward, of course, that will go up in the range that we have guided for improved earnings, as well as slightly lower restructuring costs. I think on a good trajectory there.

Speaker 5: All right. Did this answer your question, Veronika?

Speaker 15: Yeah. That was very helpful. Thanks, guys.

Speaker 5: All right.

Speaker 11: The next question comes from Hassan Al-Wakeel from Barclays. Please state your question.

Speaker 6: Thank you. I have a couple, please. firstly, on the DreamStation 1, could you talk about some of the issues that have been reported by users, and whether any of these have been significant? What does the current provision account for as it relates to the 3 million-4 million installed base, and whether you expect any short-term impact on sales because of these issues. If I can ask a second question, on the broader performance of the sleep business. Where are diagnosis rates relative to pre-COVID-19 levels, and do you think you're gaining share here? Thank you.

Speaker 5: Yeah. Hi, good morning, Hassan. The issue with the DreamStation 1 family and related products come out of our post-market surveillance, where we have picked up reports from users, that lead us to do this warning. The occurrence rate is very, very low. In the last year, got accelerated because of what we have discovered, the use of unauthorized detergents in cleaning the machine. In the U.S., there's quite a lot of locations that have started to use ozone to disinfect the machine. In fact, that has an impact on the foam used in the machine, which makes it degrade. Globally, we have seen some occurrence of that phenomena in high humidity, high temperature environments. As I said, the occurrence rate is very, very low, 0.03% off the top of my head. Being responsible and proactive, we don't want to have this happen, and we are going to repair the machines in the field, for which we have taken the provision. The installed base is very high, given that Philips is the market leader in sleep apnea, CPAP devices. There's several millions out there, a couple of millions out there. Yeah, that relates to the magnitude of the provision. I hope that that scopes that a bit. It is early stage because we wanted to go out immediately, and we are also in parallel engaging the regulatory agencies with whom we have to detail out the field safety notice, as is customary practice. I want to emphasize this is coming out of our own post-market surveillance actions. You ask, does it have impact on sales? The good thing is that we have launched DreamStation 2. That product is already authorized in the U.S. and is of a different design, and is not affected by this component. Other countries, that product is not yet authorized, therefore, we were still manufacturing and shipping the DreamStation 1. We have, out of precautionary measures, put a temporary stop to the production of those units. Therefore, in relation to your question, can it impact sales on the short term? Yes, it can, on a limited basis, because in the U.S., which is our biggest market and the majority of the demand, we have the DreamStation 2 to ship. We are planning to outsource most of the field action so that we can do it fast and that we can leverage third-party capacity, thereby avoiding hindrance to our own manufacturing line. On your related question, how is the sleep market developing? We still see relatively low levels of sleep lab visits. Consumers are not yet back to sleep labs, and therefore, the new diagnosis is still at a lower level than what it used to be. It's about 80% of pre-COVID times. We expect this to go up later in the year as normality in life resumes, especially in those countries where vaccination degrees are high. Finally, I want to assure everybody on the call, is that we will compensate for the slowness in the sleep and respiratory care business. We still see good demand for hospital respiration and oxygen concentrators. Across Connected Care, we also see strong traction on patient monitoring. This is also why we kept the guidance on Connected Care the same as we flagged to you before, i.e., high single digit to low double digit decline year-over-year, given the peak of last year. Let me pause there, Hassan, and see whether I've captured all your questions.

Speaker 6: You have. That is very helpful. Thank you.

Speaker 5: You're welcome.

Speaker 11: The next question comes from Patrick Wood, from Bank of America. Please state your question.

Speaker 12: Morning. Thank you very much. I'll just ask my two upfront if I can. The first, I think you gave a little bit of color, but a little bit more would be great, was in Connected Care in the patient monitoring business. Just giving us a sense of how much traction we're starting to see in the general ward, and so outside of the ICU. Obviously, that's a long-term driver there, but I'm just curious as to what you're seeing and how the outlook is looking. As the second question, thank you, Frans, you touched on this earlier. IGT devices, obviously good data out of the ILLUMENATE trial, but more short-term, I'm just curious, if the devices were up double-digit in Q1, the hardware must have been pretty weak still. Can you help us understand why we've seen such a dramatic acceleration in the core diagnostic imaging business? On the more procedure-focused side of things, it seems the recovery curve has been quite a bit slower, albeit it sounds like the order book's going better. Just help us understand why one has just leapfrogged so fast versus the other one. That'd be really helpful. Thank you.

Speaker 5: Yeah, absolutely. Let me start with Connected Care and patient monitoring. Yes, we see patient monitoring coming more and more outside of the ICU. Let me just also explain that most COVID wards in hospitals are not ICU wards. Many patients that have moderate COVID, never make it into, let's say, the proper ICU, and are in COVID wards. COVID wards that we have equipped with monitoring as well as with ventilators. We also see a general trend towards remote supervision using command center technology where you can overlook, or your central stations if you like, where you can overlook cohorts of patients, with a higher patient to staff ratio. Finally, we are seeing hospitals standardize on an enterprise level to one vendor, as it integrates with their informatics network. There's a general feeling that hospital informatics are too fragmented, too much patchwork, and standardization is the name of the game. Finally, hospitals and providers are gearing up for the out-of-hospital monitoring and want to leverage a uniform, strong architecture across their enterprise. This plays very much into our hands because we are market leader, and we are then often the party on which hospitals are standardizing. That's strengthened by our innovations in command centers and eICU. Now with the extension with Capsule being able to integrate data from other sources and BioTelemetry expanding monitoring outside of the hospital, the portfolio becomes pretty comprehensive for such an enterprise play. I think it bodes well for the future and I would express my expectation that monitoring at large, is going to grow at a higher pace versus 2019 structurally. Your IGT question, Hassan. Sorry, Patrick. I mentioned that the electives are up, but that is a phenomena late in the quarter. Right? January, we were still behind 2019. February, we started to become break-even on 2019. Then in March, we soared ahead. Right? That also means that IGT devices as such, is not yet showing this massive impact on the revenue cycle of Q1, but it's a rather good news for Q2 and beyond. That then also suggests that the revenue in Q1 was in fact, supported by IGT systems installations. The order intake in the quarter was also very much driven by IGT systems.

Speaker 12: Very clear. Thanks, guys.

Speaker 11: The next question comes from Michael Jüngling from Morgan Stanley. Please state your question.

Speaker 10: Thank you, good morning. I have two questions. Firstly, when it comes to the 2020 guidance upgrade, if you had a further chance to raise organic sales growth because of, let's call it, pent-up demand? Would you consider in the next round some upside to the EBIT margin, which currently seems to be set in stone at around 60- 80 basis points? Question number two is on the DreamStation 1 provision. Can you comment on what will physically happen on the ground? Do all sleep apnea machines have to be returned to Philips for repair and/or inspection? What happens if patients need a sleep apnea machine? Will you provide a replacement? Thirdly, if you look at the provision, it's around EUR 71 for the 3.5 million machines, or if the incidence rate is 0.03%, it's 1,050 machines at a provision of EUR 238,000. It's a wide range. Which one is it? How are you providing for this? Can you give more color on what the math is behind this? Thank you.

Speaker 5: Right. Well, Michael, your first question is, of course, very hypothetical, that if we were to further increase guidance, what would we do? With your permission, I'm not going to speculate on that. The reason why we keep the guidance to 60- 80 basis point at this time is that we do see some higher freight costs. We see a tight semiconductor market. The intake cost, we want to be a bit careful there. We don't want to get ahead of our skis here on margin. For now, we see this as very good underpinning, and also potentially, with a few mix effects. You recall, of course, that last year, patient monitoring had a very strong impact on the mix. It's a very profitable product. If you now, let's say, have a slightly different mix, then that has an influence. We just want to be cautious on not getting ahead of ourselves on margin. On your further inquiry on the DreamStation. Indeed, occurrence rate, very low. However, the intended precautionary measures will expand to the entire base of the DreamStation 1 related family, whether or not symptoms are there. Right? That's the cautionary approach that we take. If the discussion with regulators lead us to a different conclusion, then that can change, but at this time, we think that this is the best course of action. We have calculated this on the basis of an expected time of intervention in the field per unit, times the amount of units, and leveraging, as I said before, also our DMEs and others. I want to assure everybody on the call that the device is safe to be continued to use, to the best of our knowledge at this time. Of course, this will also be discussed with the regulator. Our own expectation is that users can continue to use it. As we repair the units, they either get a replacement unit or they get their own unit back. That still needs to be determined. I don't want to be completely precise about that. Michael, does that answer your question?

Speaker 10: It does. Maybe a brief follow-up. You mentioned that people are using ozone, which is against the FDA regulations or against your user manual. Why is it your problem if someone wants to use a cleaning agent that is not even permitted? Why are you taking responsibility for that in those provisions?

Speaker 5: Well, patient safety is always our concern. We have been very clear to say, first comes the patient. We don't want to debate culpability at this time or who's done it, because that doesn't help the patient. Right? If there is something to be said about, what is the root cause and why did people choose a certain way of cleaning the device, yeah, that can be an endless debate. At this time, that should not be the debate. We should just deal with the issue, later on, we can sort out how this cleaning came about. If we look around the world, this use of ozone is typically a U.S. issue. Within the U.S., it is related to certain regions where certain companies have been very active in marketing that method. That's all, let's say, 2020 hindsight. The FDA observed this and also put out safety notice to say, "Don't use ozone for CPAP machines. Right? Nevertheless, we cannot control that. Right? We don't want to focus on, let's say, culpability questions. Our prime concern is, let's take this small risk out of the market and deal with it proactively.

Speaker 10: Great. Thank you. Very clear. Thank you.

Speaker 11: The next question comes from Lisa Clive from Bernstein. Please state your question.

Speaker 9: Hi. Thanks very much. Just two questions on patient monitoring. First of all, you discussed a little bit the potential to move into the general ward. Number 1, what is the sort of technology limitation here. Is it the reliability of wireless sensors and, I guess sort of, are wireless sensors good enough to be accurate enough, have connectivity that's very consistent, etc. ? Are we still a little bit early in that stage? Number two, as those wireless sensors get better, then that opens up the home market. A question more on the sort of pricing model in the home, because obviously, the actual hardware would come into competition potentially with all sorts of gadgets from the likes of Apple, Fitbit, etc . If we think about how the sort of value across your patient monitoring business, what proportion today is sort of the hardware itself versus the software and the sort of broader connectivity, and as this market develops, so there's actually more in the home, how will that look? Thanks.

Speaker 5: Yeah. Hi, Lisa. Great questions. Your first one, with regards to adoption, I would actually say that technology is not a limitation at all, right? This is all about hospitals having to change their ways of working. If you put monitoring in a general ward, you also need to organize for somebody to oversee the central station where you can look at a whole cohort of patients. Patients that are using a wireless device, they can wander around, that also means do you want to track where the patient is or not, right? Technically, all of that is possible. We have solutions for that, actually, hospitals can only adopt this once they change their ways of working. I mentioned earlier that COVID has been an accelerator for the use of monitoring in general wards or COVID wards. As hospitals were struggling with a shortage of staff, then having monitors aided by a central station could actually help take care of more patients with less staff, right? I think providers have gotten a good insight and boost of how changing ways of working is actually a good thing for patients and for productivity. No technological limitations. We have everything available. Similarly, with the home, technology is there. I would not jump straight to consumer devices, as you mentioned. The data coming out of those devices is causing doctors to despair because they get a lot of people coming in, look at my data kind of thing, which then bridges already to what is your operating model behind the technology so that you can actually handle large cohorts of patients with data coming in, whereby AI in the cloud stratifies the patients as to who needs what and why, and direct it to the responsible in the care team that is appropriate to the severity of an incident, right. This is a whole new world of how do you organize care. That maybe is then the final bridge to hardware, software, and services ratio because the services will play an increasing role in handling remote patient monitoring, whereby the device becomes a smaller proportion of the value and the software and the services become the bigger proportion of the value. I'm over-asked to give you a number in this call, unless my friends here at the table can help me out quickly, but I don't want to guesstimate the number.

Speaker 1: Can take that separately.

Speaker 5: don't have now. We take that separately, Lisa, and then in future call, we will share that with the whole community.

Speaker 9: Okay, thanks. Then one just very quick follow-up question. I think I read somewhere recently that the FDA is thinking about trying to regulate these sort of consumer health-related devices. Are you aware of what they're thinking here? I guess, obviously the likes of Apple and Google, etc. , have enough money that if they want to get involved in medical devices, they certainly can hire the regulatory people to do so. What do you think are the sort of barriers to entry for big players like that coming into the monitoring market?

Speaker 5: Well, these devices are already regulated, right? If you put a heart rate rhythm monitor in a watch, that's already a Class II device. That is regulated. From my story, you also heard that people are worried about what happens with the data, how does it disrupt the healthcare market, who can have access to the data, how safe is it? It's a new world out there that indeed deserves to be further scrutinized from a regulatory perspective. Interoperability is a big factor. What are patients taking away from the data? Because it worries them unnecessarily sometimes. That is something the FDA is concerned about, right? I would say this is not just a technological barrier, it's much more the overall ecosystem that needs to be looked at.

Speaker 9: Great. Thanks very much for that.

Speaker 11: The next question comes from David Adlington from JPMorgan. Please state your question.

Speaker 3: Hey, guys. Thanks for the questions. Two, please. Just to follow up on the field repair, the EUR 250 million provision. Is that provision purely for the field repairs or is there some litigation cooked into that? Just to make sure, has there been any litigation started or any patients injured? Secondly, quite a good start on the free cash flow front, Abhijit. Just wonder if you can give any thoughts in terms of free cash flow for the year, please.

Speaker 5: Sure. David, let me say that the amount is related to the field action. I've already flagged that any slowness in the business near term is absorbed within the business and compensated elsewhere, and therefore not expected to further impact. This is very early stage, we are acting on the fact that we got a few reports out of the field, out of our post-market surveillance and our own test. We are taking proactive action here. Even though the earlier question around ozone, and that's not us, that's somebody else, doesn't matter. We are taking proactive action. There are no litigations here at this time. Moreover, I can say that we have not seen reports of severe user harm. Right. We have seen some reports of irritation, but not severe patient harm. Moreover, it's still, to our knowledge, safe to use the machines while we are going about preparing and executing on this field action. Maybe, Abhijit, second one?

Speaker 1: Yeah, on the cash flow, I think it's a good start to the year. Like I mentioned, our working capital management has been better. In general, our overdue receivables have come down quite substantially, so that's a good operating result. Our net income or our profit increase for the year was also good. We were helped a little bit also by the calendars, so that will be a bit lower in Q2. I think overall for the year, we are in line with what we had guided for. We'll be a tad lower, depending on how much is the cash out for the repair actions that we have to take on the DreamStation issue. For the rest, I think we are glad with the way we have started the year.

Speaker 3: Great. Thanks, guys.

Speaker 1: Thanks, David.

Speaker 11: The next question comes from Scott Bardo from Berenberg. Please state your question.

Speaker 13: Yeah. Thanks very much for taking the questions. Two, please. The first one, just on the field action and provision again. I just wonder, Frans, if you kindly confirm that the issues detected were not informed by any FDA inspection warning letter or Form 483. Furthermore, is it your working assumption that those sorts of warnings or observations at manufacturing plants will not unfold as a result of this? The second question, please, just relates to oral care. I note that you had around a mid-single-digit growth this quarter. The comp was, I think, high single digit negative last year, and you're in quite a meaningful product launch cycle. I wonder if you can confirm, is there any softness in the end market demand or anything we should be aware of for that particular business? Thanks.

Speaker 5: Yeah. Hi, Scott. I can confirm that the field action originate out of the user reports and tests that we did ourselves, that there is no regulatory origin in that. The Pittsburgh or the Murrysville, but Murrysville is close to Pittsburgh, is where the business unit is and the factory is, has a good record with regards to prior inspections. Other than that, I cannot anticipate what will be future discussions. I feel that we are taking appropriate and proactive action, fully in line with our quality management system. Abhijit will answer the second question.

Speaker 1: Yeah, I think, overall, oral healthcare demand was good. China recovery, as we had said last time for oral healthcare, will start from Q2. Actually, we're gearing up for a much stronger Q2 in oral healthcare. For the rest of the world, it was strong. It was more the China recovery and the launches in China have taken place at the end of Q1. From Q2 onwards, you will see a better momentum, Scott.

Speaker 13: That's very helpful. Thanks. If I can, just one quick, non-related follow-up, also for Abhijit, please. Again, congratulations on the disposal of Domestic Appliances. I think previously, Abhijit, you'd highlighted an expectation of some ongoing royalties as a result of this separation. Now that you've concluded the deal, can you just highlight how those royalties will flow through? What sort of magnitude one should expect? Thank you.

Speaker 1: Yeah. Typically, we cannot disclose separate royalty agreements with each of our partners. I think the way you should look at it is for this year, we will compensate for the standard cost, and then from next year it will be a bit of an add-on, but it's part, let's say, of the overall guidance. I think that's how you should look at it for now.

Speaker 13: Okay. Thanks very much indeed.

Speaker 5: Yeah. Thank you.

Speaker 11: The next question comes from Julien Dormois from Exane BNP Paribas. Please state your question.

Speaker 7: Hi, good morning, Frans van Houten. Good morning, Abhijit Bhattacharya. Thanks for squeezing me in. I'm left with two questions. The first one relates to the order book, which was up 11% in D&T overall. You mentioned strong double-digit growth in IGT, so I was just wondering whether you could shed more light on the actual growth in the order intake for imaging specifically, and that's obviously in the context of maybe some slowdown that we saw in CapEx spending from listed hospital groups in the U.S. and also all the discussions around stimulus money for Europe. Just curious to get more color on that side, please. The second question relates to M&A. Once you get the cash for DA, the leverage will be back to a relatively low level. How should we think about your appetite for more deals, in the short term, or are you happy first in the next few months to digest the recent acquisitions and the divestment from DA?

Speaker 5: Hi, Julien. Let me unpack a bit, the Diagnosis & Treatment order book. Of course, last year, we already saw strong traction on computed tomography in diagnostic imaging. Right? The compare for Precision Diagnosis is a bit tougher than the compare for IGT. Okay? The 11% is strong double digit for IGT, driven by, first of all, North America, then Europe and China, more or less ex aequo , also with mid-single-digit growth. Precision Diagnosis, given that last year we saw a lot of computed tomography orders this year, the kind of mid-to-high single-digit order growth in PD is driven first of all by China. By basically Europe and other markets. Notably, North America is still quite modest on Precision Diagnosis, also because last year we saw there's quite some good performance. Yeah, Abhijit just gives me two data points that order growth last year on CT and general X-ray was over 30%. Right. That just gives a little bit of color on that difficult compare with only MRI being soft last year. Now if you look at the mix, MRI is actually the star together with cardiovascular ultrasound, again, which is very logical because with the resumption of elective procedures. The interest to spend money on cardiovascular equipment is back, which is also a positive. I think that explains the nature of the order book. I'm happy to see that China is really performing well, with all the discussions, of course, always about local competition. Philips is holding its ground very well. The DA cash. Oh, yeah, let me not go over that. You could, of course, argue that much of the cash we have just spent on BioTelemetry and Capsule Technologies. You kindly reminded us about the balance sheet, and the state of it, which will be great. Let's just say that it puts us in a comfortable position with the ability to do a further bolt-on. We don't have to because Abhijit went to great lengths to discuss our organic growth opportunity. Right? Our normal guidance for next year, 5%-6% across the board in all segments. On top of that, you get the contribution of BioTelemetry and Capsule Technologies, which are both growing above the average of Philips. Right? That's also good news. We are not in a hurry to spend our cash. We are quite comfortable to keep the balance sheet, then, for a while, with a leverage in the guided range.

Speaker 7: Right. Thank you very much.

Speaker 5: You're welcome.

Speaker 11: The next question comes from Falko Friedrichs from Deutsche Bank. Please state your question.

Speaker 4: Thank you very much. Two quick questions, please. Firstly, on this ongoing semiconductor supply shortage, could you share some color on how this could impact your business throughout the year and to what extent that is baked into the guidance you gave us today? Secondly, out of interest, with regard to Connected Care, what are you still seeing in terms of demand for hospital ventilators, especially in light of these rising hospital admissions again in several countries across the world?

Speaker 5: Yeah. Hi, Falko. The semiconductor market is certainly a concern to us. We have near-term demand well organized, yet we are seeing, of course, an increase of revenue. We are increasing our own plans and put more requirements on the semi industry, in terms of supplies. So far, we have been able to handle that well, with the exception of defibrillators, where we saw already some tightness in Q1 and in Q2. Other than that, for now, we are navigating this scarcity situation, and we hope that we can continue to do that. We are not baking in big constraints going forward. On vent demand. Of course, last year, we had the peak. We're still seeing pockets of demand across the world, and we are doing whatever we can to help with those critical care requirements. For example, in India, where we have been able to alleviate some of the most pressing needs, both for ventilators as well as for oxygen concentrators, where even with Abhijit's personal intervention, several flights out of the U.S., with cargo, take over 10,000 concentrators into India to help remediate the most pressing shortages over there. If you add it all up, then hospital ventilation this year is much lower than last year. That's just math cannot be avoided. For monitors, you heard us with a much more positive story because we expect demand for monitoring to go wider and even outside of the home, and therefore, it's much more a trend, whereas ventilation was more of a one-time peak.

Speaker 4: Okay. Thank you.

Speaker 5: You're welcome.

Speaker 11: The next question comes from Sezgi Ozener from HSBC. Please state your question.

Speaker 14: Hi. Thanks very much for taking my questions, and thanks for all the information. Just one question. Given that most of the production savings programs have delivered a lot of results since 2017, and given the tightness in the market, not only the semiconductor market, but also a lot of the supplier tightnesses that we've seen recently, how much further scope do you see for further productivity gains within 2021 and beyond?

Speaker 5: Yeah. Sezgi, let me first welcome you to this call. Great to have you as analyst for HSBC and following Philips. I really appreciate that. Abhijit, is this first question something for you?

Speaker 1: Yeah, I think, we guided for EUR 2 billion, up to 2024-2025, sorry. At this stage, we continue to track to that program. Typically, we have done a little bit more, but, I think that is par for the course over the next five years. At this point in time, we report on net productivity, right? We, therefore, whatever price increases come, we have to offset that. We will not increase that guidance, but we constantly work to look at bigger opportunities to compensate for newer headwinds that come up like the ones you mentioned. Right now, we want to deliver on the EUR 2 billion program that we had set out last year.

Speaker 14: All right. Just as a small follow-up, can you comment or guide about the increased R&D expenses that we've seen this quarter? Should we assume a correction in the rest of the year, and what kind of a trajectory?

Speaker 1: I think the R&D increase in the quarter may have to do with the impairment that we have taken. Let us come back to you. There is no significant increase in the overall R&D spend for the year. Maybe I will give you the adjusted number for the restructuring, and then we should be okay. We are on a good trajectory there.

Speaker 14: All right. Thanks very much.

Speaker 11: The next question comes from Daniel Wendorff from Commerzbank. Please state your question.

Speaker 2: Yes, good morning, and thanks for taking my questions. The first one is a follow-up, really, on diagnostic imaging. How would you see the underlying market develop there at the moment, excluding the corona-related effects, the positives you highlighted from last year and also from this year? The really underlying market development would be of interest to me, and then a more bigger picture question. If you look at your product offering now in patient monitoring, outpatient, inpatient, including all the software-related products you have on offer there, how do you see the competitive environment develop? I would assume that this is rather limited in the most important regions of the world. Any more color you could provide would be helpful. Thank you.

Speaker 5: Hi, Daniel. Diagnostic imaging market globally, we would classify as low to mid-single digit, with more strength in China and low single digit in mature markets like U.S. and Europe. Installed base is pretty old, so there is a need for renewal. Regardless actually of the CapEx situations. Hospitals have been postponing this for a while, and there's real need to make step-ups. China's strength relates also to government interventions towards diagnostic centers. With the influx of monetary support in the Biden administration and in Europe towards hospitals, we can actually expect some acceleration in the DI market space, with more room for CapEx than maybe was previously assumed. I see a slight positive trend emerging, even though on the question of, I think it was Julien, had to give more color on the order book. I think I said that on diagnostic imaging, the U.S. was still the lowest of all the regions. I see a general trend that is moving in a positive direction. We'll see. We'll certainly update you again in Q2 and July, if that trend is continuing. For now, as you know, we have updated our growth guidance for Philips, and much of that is also driven by Diagnosis & Treatment and therefore by DI also. Yeah. On the patient monitoring offering, we pride ourselves in being the market leader and having also the widest approach. A platform approach whereby we think it's all about the data and processing the data, and turning that into actionable insights as opposed to just offering a box. I think we have taken some distance from competition, in that context. I don't claim that we are the only one. The more complex these systems become, in fact, the better it is for us. We take a solutions approach to monitoring. We've also started to offer monitoring as a service, thereby, moving away from a kind of a discrete CapEx and call for tender situation towards a more continuous upgrading approach to hospitals. Time will tell how fast that goes, but the initial reception is very positive.

Speaker 2: Thank you.

Speaker 5: Yeah.

Speaker 11: Due to time, the last question is a follow-up from Michael Jüngling from Morgan Stanley. Please state your question.

Speaker 10: Thank you for this. I have a question on ultrasound. If there was a sizable ultrasound business up for sale, would you be interested to further expand your market-leading business? Does your current market share actually allow this? Thank you.

Speaker 5: Yeah, I love hypothetical questions, Michael. As you know, our strength foremost is in cardiovascular ultrasound. There we are number one. In other areas such as general or point-of-care ultrasound, we are much lower. If opportunities would arise, potentially we would look at it. We do have to worry around kind of antitrust approval. It would not be a slam dunk.

Speaker 10: Okay, great. Thank you.

Speaker 5: You're welcome. All right. Back to you, Leandro.

Speaker 8: Oh, thank you. I think that concludes the call. That was the last question.

Speaker 5: Okay. Well, I appreciate very much everybody dialing in. We are slated for a good future, with increasing momentum. Makes us very happy. We'll keep you posted as we go. Thanks.