Koninklijke Philips N.V.
Q1 2018 Earnings Call Transcript

Published: 23 Apr 2018

[Pim Preesman:]

Good morning, ladies and gentlemen. Welcome to Philips' First Quarter 2018 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 market dynamics. After that, we will take your questions. Our press release and the related information slide deck were published at 7

[Frans van Houten:]

Yes. Thanks, Pim, and thank you all for joining us today. After covering some of the key results in Q1, I will talk you through some recent highlights of our journey to leadership in the exciting health technology market and how we see our future. Let me first start with the first quarter results. We started the year well with 10% comparable order intake growth, 5% comparable sales growth and 130 basis points improvement in operational profitability. Good traction of the new products and solutions that we introduced last year, and they contributed to 9% comparable sales growth in the Diagnosis & Treatment segment. This growth was driven by strong growth in Diagnostic Imaging, Image-Guided Therapy and, in particular, by mid-teens growth in Ultrasound. We see that in Ultrasound, our innovations in, for example, cardiovascular, but also in women’s health care, are now getting very good traction. The Personal Health businesses grew 4%, a lower growth compared to previous quarters, due to lower demand in the air purification market in China. This was due to an improvement in the weather conditions in China and government policies to improve air quality. Nevertheless, our portfolio continued to do well as we gained market share in this category. This impacted the comparable sales growth of Personal Health business by approximately 150 basis points. The Connected Care & Health Informatics businesses were in line with last year. We continue to expect further improvement to be in the second half of the year. The increase in margins were mainly driven by growth, our productivity program and operational improvements, contributing to an adjusted EBITA margin increase of 130 basis points. Our Connected Care & Health Informatics businesses and our Diagnosis & Treatment businesses delivered strong margin improvements, with adjusted EBITA improving by 180 and 140 basis points, respectively, versus quarter 1 2017. The Personal Health businesses further improved adjusted EBITA margin by 30 basis points. In the quarter, we continue to make good progress with our productivity programs and took actions to further reduce our interest expense. Let me expand on our strategic journey to leadership in health technology. As outlined at our Capital Markets Day last year, our value-creation story is built on 3 key levers on which we made further progress in the first quarter. First lever, by creating value in our core businesses by gaining market share through deeper, more comprehensive customer partnerships, innovative solutions and pursuing growth by – through geographical adjacencies and coverage. On this first lever, innovation, partnerships and increased geographic coverage were important drivers of the strong sales growth of 9% and the continued momentum in order intake growth of 15% in Diagnosis & Treatment businesses. Across our markets, we continue to see strong customer interest in our innovations. As part of our new product introductions to drive growth, in Diagnostic Imaging, we launched the Ingenia Elition, a new 3.0 T – 3 Tesla MRI solution that offers superb image quality while performing exams up to 50% faster. This means that hospitals can scan significantly more patients, thus helping productivity of hospital systems. Following the introduction of the mid-range MR Prodiva 1.5 Tesla system in the previous quarter, our offerings in magnetic resonance imaging have been significantly strengthened, and this is receiving increased recognition from our customers. We also see strong traction from the new cardiac ultrasound products, such as the new and enhanced Live 3D TEE imaging capabilities to help diagnose cardiac conditions and guide minimally invasive therapies. Also, the new women’s health care ultrasound innovations like a new cutting-edge transducer 3D and 4D lifelike image capabilities and anatomical intelligence for easier and faster exams that we introduced late 2017 for our EPIQ and Affiniti ultrasound systems, drove strong double-digit comparable order intake for this business. Moreover, we continue to revolutionize point-of-care ultrasound with our Lumify app-based ultrasound solution. There are several thousands of medical professionals in a variety of medical specialties using this solution across the world, and this number is growing rapidly. This quarter, we have further enhanced Lumify with face-to-face conversation, along with simultaneous viewing of live ultrasound images and guided probe propositioning to enable remote collaboration and virtual training. At the 2018 HIMSS conference and exhibition in Las Vegas, one of – which is one of the largest health information and technology events globally, Philips launched the next-generation IntelliSpace cardiovascular informatics platform. We also launched the FocusPoint, a web-based operational performance management application for our Philips' Patient Monitoring Solutions. This application aggregates processes and stores statistical and alert information, which are presented on a dashboard for optimal management of the technology. IntelliSpace Portal, Philips' advanced data integration, visualization and analytics platform, has been named the 2018 Category Leader in the Advanced Visualization category in the 2018 Best in KLAS

[Abhijit Bhattacharya:]

Thank you, Frans, and good morning to all of you on the call and webcast. Let me start by providing some color on the first quarter comparable sales growth of 5%. The Diagnosis & Treatment businesses delivered a 9% comparable sales growth, with solid growth in all businesses of Diagnostic Imaging, Ultrasound and Image-Guided Therapy. We are very pleased to see the strong traction of these businesses, specifically in Ultrasound, where strong customer demand enabled us to register higher book and bill than expected in the quarter. The Personal Health businesses delivered 4% comparable sales growth, driven by high single-digit growth in Sleep & Respiratory Care. As Frans mentioned, this includes a negative impact of 150 basis points due to lower sales in our air purification business in China. Low single-digit growth in Health & Wellness was mostly driven by phasing and timing of campaigns and product introductions. We expect a stronger second half, driven forward by – driven by the launch of the ProtectiveClean mid-range toothbrush this year. Also in our Mother & Child Care business, we expect strong demand for our new anti-colic bottle with air-free vent designed to reduce feeding issues like colic, gas and reflux. Comparable sales growth in Connected Care & Health Informatics businesses were flat year-on-year. Given the phasing of our order book, we expect improved sales growth during the second half of the year. Additionally, as per this year, we decided to split the Patient Monitoring & Solutions business into 2 focus business group

[Operator:]

Thank you sir. [Operator Instructions] We will now take our first question from Mark Troman from Bank of America. Please go ahead you line is open.

[Mark Troman:]

Yes, thank you very much. Good morning Frans, good morning Abhijit. Just a question, please, on order patterns. I mean, D&T clearly very strong with 15% or so order growth, but noticeably different from CCHI. So I guess, the first question on the D&T is what visibility do you have that you can keep at a very healthy rate in terms of Ultrasound, Imaging and Image-Guided? And then on CCHI, I guess I’m trying to understand, it obviously seems a little bit disappointing on the growth, is that an operational issue? I know you mentioned some changes about splitting some of the Monitoring and the Therapeutic Care, et cetera, but what do you need to do better in CCHI?

[Frans van Houten:]

Hi Mark good morning, this is Frans. Well, let’s dive in. The Diagnosis & Treatment order growth come on the back of many innovations that we brought to market in the second half of 2017 and we continue to do new product introductions also in Q1, for example, these new MR systems that can scan patients at half the time. We think we are taking market share. I’m not promising you the 10% will continue exactly, but we certainly are confident that our innovations have good traction. And CCHI, let’s peel the onion there. First of all, I need to ask you to take into consideration the impact of the defibrillator business. If we exclude the defib business, actually the order growth in the quarter was about mid-single digit, right, not as strong as D&T but certainly demonstrating an ongoing interest in our innovation. What further needs to be said is that many of the innovations around connected care, telehealth, population health have a strong interest. And we see a funnel of hospitals and IDNs that are very keen on it, but decisions are slow in coming. So we have not lost deals, but we do see that customers are taking their time to make these important decisions. And finally, also in effect, is that we continue to see a shift from so-called capital deals to subscription-based deals where you get the revenue in as a trickle, all right, an annual subscription base. But we also have the habit of only booking orders within – let’s say, allowing for a time window of order recognition of about 12 to 18 months, all right, so we are not booking then the full horizon of these orders. So maybe altogether, a somewhat complex answer to underline that I remain confident. And CCHI is actually one of those businesses where, in January, we said the year will be back-end loaded. And in fact, that is also what will happen.

[Mark Troman:]

Okay. That’s super clear. And just one follow-up, just on the cash flow maybe for Abhijit. Working capital looked pretty heavily, and I know there’s obviously some areas of strong growth. How much of that can you get back during the year? Or will it just depend on the growth rate?

[Abhijit Bhattacharya:]

Yes, we will get back most of it, Mark, because the cash flow is basically the difference is the working capital position between end of the year and end of Q1. So end of the year typically, we end very low. Year-on-year end of Q1, actually, working capital is down 20 basis points, inventory down more than 100 basis points. So it basically reflects the buildup of working capital from the end of Q4 to the end of Q1. But again, as we go through the year, we will make that up.

[Mark Troman:]

Very helpful thank you both.

[Abhijit Bhattacharya:]

Thanks Mark.

[Operator:]

The next question comes from Ian Douglas from UBS. Please go ahead your line is open.

[Ian Douglas:]

Thanks very much. Yes, it is Ian Douglas, UBS. So first on toothbrushes. This weakness looks like a trend. I mean, looking back in my data, you’ve grown double-digit pretty much every year since 2010 until last year. Is this something – a new – or what gives you confidence this is something a new product can fix rather than just a structural change in the market? And on your guidance – second question on your guidance for this year. You said last quarter that you think revenue growth will be H2 weighted. Given the strong growth we’ve seen so far this year and given the strong order book that you have at the moment, would you like to re-evaluate that commentary or restate that commentary?

[Frans van Houten:]

Yes. Ian, this is Frans. Well, we don’t see a structural change in toothbrushes. And we are currently launching new products, and therefore, we are expecting a stronger second quarter and second half. Now what does play into the overall global equation is that as the base in China becomes bigger, the relative growth contribution changes. We continue to see very strong growth in China. But we saw – originally coming from a very low base, we saw 50%, 60% growth. And of course, that growth rate is now, as the business becomes so big, that growth rate is becoming more – coming down a bit. Now having said that, we are opening up new markets. We are investing in Brazil, which is also a country with a large population with strong interest in dental hygiene. We think that for years to come, oral care will be a very strong category. There’s only – there’s not that many players, of course, who our competitors are, but we think we will continue to grow strong. On the – on your second question on guidance, I think I already referred to it a bit when Mark asked his question. In CCHI, you actually see this play out, expectation for a back-end loaded year in fact comes through. On D&T, a strong quarter. What particularly played into the quarter was the interest in Ultrasound, the strong double-digit orders and revenue. Now Ultrasound is a category where the cycle time to go from order to revenue can be relatively short, in fact even weeks. And when we gave that guidance in January, that was not, let’s say, fully clear yet. And we got quite some orders late in the first quarter that also made it into revenue. And therefore, D&T got an extra boost in the quarter, all right? Now that doesn’t mean that it will exactly play out in the same way in the second quarter, although as to my earlier statement, the innovations are strong and we see good interest.

[Ian Douglas:]

Thanks Frans. Just a quick one, if I can sneak it in, for Abhijit. You didn’t – or excuse me if I missed it, but you didn’t comment on the impact on currency on margins for this quarter. Could you give us any data? Or is that because it was negligible?

[Abhijit Bhattacharya:]

Yes, it was negligible, Ian. So we’ve mentioned earlier how we have balanced our footprint and also changed our hedging actions. So unless there is really a short-term big swing in emerging market currencies, we should be able to manage that within a negligible bandwidth.

[Ian Douglas:]

Thanks very much.

[Operator:]

The next question comes from Veronika Dubajova from Goldman Sachs. Please go ahead your line is open.

[Veronika Dubajova:]

Good morning Frans, good morning Abhijit. Thank you for taking my questions. My first one is on the revenue growth outlook for the remainder of the year. Given that you’ve come in at 5% or the order book is 8%. I Wonder if you could comment on your confidence in your ability to achieve the upper half of the 4% to 6% range? And at what point in time might we see you narrow that 4% to 6% as we move through the year? And then my second question is on buybacks, Abhijit. Clearly, with the further sell-down in lighting, do you see scope or desire for increasing the buyback amount this year beyond the €1.5 billion under the three-year program? Thank you.

[Frans van Houten:]

Yes, I can maybe take both, Veronika. Regarding the growth, we have given a 4% to 6% growth outlook over a longer period of time, right? And within that, last year we were at 4%. We have started this year well at 5%. We are not going to narrow the guidance for a specific year or a quarter. This is a range we’ve given for a longer period, and we will stick to that. The growth in the order book, which on a last 12-month basis, gives us a 7%. Order intake growth gives us confidence to be within the 4% to 6% range. Regarding the buybacks, we have said we would do the €1.5 billion over a two-year period, so we are not planning to increase that at this point of time, Veronika.

[Veronika Dubajova:]

Thank you. And I guess – I mean, your degree of confidence in your ability to grow in the upper half, do you think – given where the first quarter is and given the order pattern that you saw in the first quarter, are you more confident in your ability to accelerate growth this year?

[Frans van Houten:]

Well, last year, we had an average of 4% growth. That was at the bottom of the bandwidth. Now we had a good start of the year and a healthy order growth. So it’s definitely our ambition to get well into the 4% to 6% bandwidth.

[Veronika Dubajova:]

Okay, thank you very much. Appreciated.

[Frans van Houten:]

You welcome.

[Operator:]

The next question is from Michael Jungling from Morgan Stanley. Please go ahead your line is open.

[Michael Jungling:]

Good morning friends and thank you for taking my questions. And I have two questions in relation to the Diagnostic & Treatment business. First question is, if I look at the organic order book growth, can you provide a bit more color what it means specifically for Diagnostic Imaging? Are we talking here about double-digit growth, meaning in the teens? Or did the Diagnostic Imaging business actually deliver something more in the 20% range? And question number two is also on Diagnostic Imaging. Can you comment on specifically the order demand and sales demand for your CT business?

[Frans van Houten:]

Yes, Michael. DI actually delivered a low teens order growth in the quarter, and we saw strength across the various modalities for MR, CT and x-ray. We launched – we renewed almost 70% of the product range, and it’s our belief that we are currently regaining market share across the world on these products.

[Michael Jungling:]

Okay. And then specifically in relation to CT, how would you describe the demand for the products following some refreshments in the portfolio? Specifically, the order book growth in CT, is that a very high number right now, sort of 20%, 30%, 40 %, given low comps?

[Frans van Houten:]

Well, we don’t specifically split out CT. I just said that the low teens order growth in DI. And actually, over the last 12 months, a very similar pattern is that we are sustainably growing Diagnostic Imaging. And then I mentioned that is across the three modality clusters of CT, x-ray and MR.

[Michael Jungling:]

Okay. And finally, just the driving demand for CT. Are you having to use more pricing to get back into the market? Or would you say that pricing for your products is as expected?

[Frans van Houten:]

Pricing is as expected. And let’s not forget, we introduced some very high-end products like that digital PET/CT and the dual energy IQon Spectral CT. Both have higher price points than, let’s say, normal systems and actually raised the average of revenue per system for us. Also, in MR, we have launched two new products. The 3.0T Tesla can scan a patient in half the time. It comes also with a camera system in-bore with artificial intelligence that can guide a first-time right image acquisition. So what – the reason I expand a bit on this is that we feel that we have come out of the, let’s say, the issues around Diagnostic Imaging strongly with a slate of attractively featured products. And customers are gaining confidence to do business with us, leading to market share gains. If you look at the last 12 months order growth, off the top of my head, at high single-digit even around 10%. So that is just testimony to that strategy working.

[Michael Jungling:]

Great and thank you.

[Operator:]

Our next question comes from Yi-Dan Wang from Deutsche Bank. Please go ahead madam.

[Yi-Dan Wang:]

Thank you. can you hear me? Okay.

[Frans van Houten:]

Carry on. Go ahead.

[Yi-Dan Wang:]

Okay, thank you. Couple of questions. So for Ultrasound, would you be able to give us some color on how much of the mid-teens growth in revenues, comparable growth in revenues, and also the order intake is coming from the new segments versus the businesses that you were already strong in? And if you could, what is the share that you have in the new segment versus existing segments? And then the second question is for air purification, can you give us some sense of what the size of that business is? So based on your comments, it seems that, that is a structural trend in China. So with that, should we take a haircut to the Personal Health business growth over the medium to long term? And then finally, Abhijit, on the financials, you’ve done some refinancing at – and so there are still some – quite a bit of outstanding debt with very high interest rates of 6% to 7%. Do you have scope to refinance these? And if so, what sort of timeline are we looking at? Thank you.

[Frans van Houten:]

Let’s start with the air purification and refinancing questions by Abhijit, and then I will take the Ultrasound question when we find the data.

[Abhijit Bhattacharya:]

Yes. So I think for air purification, the business is about a couple of hundred million euros a year. It’s a fast growing business. Normally, this year, the trend has been reversed a little bit in the first quarter. So I don’t think you should look at it as a long-term trend because this is a business which grows well. It is largely dependent on Q4 and Q1 and swings with the weather conditions in the bigger markets. But I would not say it is a structural. If you look the year before last year, also, we had a similar situation and then it gets – it changes year-on-year. So I would not look at it as such a major issue in the medium term, okay? So that is one. Second is on the debt. We have the more expensive ones. We’ve cleaned up as much as is possible. You will see what is left is only small tranches, and those are with certain, let’s say, lenders who don’t want to buy back because, of course, they are happy with our credit performance as well as with the interest that they get. So the value creation, having to buy those out, doesn’t work out. So we are doing the 3.75% paper now, and with that, we get more than, yes, 20 million plus in terms of value creation every year. So that’s why we do that.

[Frans van Houten:]

All right. So let’s come back to Ultrasound. I don’t have all the numbers in front of me, so let me just give you a general color. Globally, Philips is the number 2 in ultrasound, we are the number 1 in cardiovascular and we are a relatively smaller player in OB/GYN, right? And we sustain our leadership in cardio. Order growth there is also good in the low teens in the first quarter. But in OB/GYN, in women’s health, their order growth was around 30%, right, and double what it was before thanks to the new product introductions that are gaining traction. So I think that just underlines the point that we are gaining market share in this important adjacency.

[Yi-Dan Wang:]

Thank you, very much.

[Operator:]

The next question comes from Scott Bardo from Berenberg. Please go ahead. Your line is open.

[Scott Bardo:]

Yes. Thank you very much for taking my questions. The first question, please, just related to the Personal Health division. And I note you had pretty strong sleep apnea performance this quarter. Can you give us an update as to the launch of the Full Face mask in that segment, whether that contributed to growth at all or if that’s due to fall out in the remaining quarters of the year? Also, whilst on this division, if you could just possibly share some dynamics of the Electric Razor business, which I understand has had some relatively pedestrian growth. Just wonder if that market changed in any extent? So that’s the first question, please. And second one just on Diagnosis & Treatment. Obviously, encouraging to see some good life in that division. Given the significant margin strides already so far, is it fair assume that we see a margin expansion well north of 100 basis points this year for the division? If you could comment a little bit on that point. Thank you.

[Frans van Houten:]

Yes. Hi, Scott. Let me start with the Diagnosis & Treatment, and then pass it to Abhijit for the Personal Health questions. D&T actually has to deliver above 100 basis points. We have promised in Diagnostic Imaging 150 to 200 basis points, which is necessary to get there in DI to the low teens and for D&T, as a whole, to the mid-teens, right? So yes, that rate of expansion is going to be above the average of Philips. And we are arguably, for Personal Health, it can be a little bit below that average. Now let’s come back to your first question and give a bit of color on the PH business.

[Abhijit Bhattacharya:]

Yes, on the first one on the new DreamWear Full Face mask, we just launched it in Q1, so customer reception has been actually very, very good. It – the volumes have been low in Q1, so the double-digit growth of the mask range is not really impacted big time by the Full Face mask of DreamWear, but that hopefully will drive good growth in the coming quarters because that is the biggest segment of mask, the Full Face. And we now use the same technology that we use in the DreamWear series, so we are pretty confident that, that is going to work out for the remaining part of the year. Regarding the shaving business, yes, there has been, let’s say, a software shaving business overall. But grooming has been very, very strong. So the growth in OneBlade continues to be very strong, both because of the geographic expansion but also because of more applications that we do, as Frans mentioned in his speech, with the full body groomer, et cetera. That is really driving top line as well as change in our distribution since we now go into the shaving aisle in the supermarkets, and that has to drive further growth. So within, let’s say, shaving and grooming, shaving, a bit soft because you see more and more men with facial hair styling. But that of course, gives the positive impact on the grooming business, which is doing extremely well.

[Scott Bardo:]

Thank you. Just one follow-up, please. I think after your Q1 update, you announced the closure of Cleveland and the transfer of production from that facility. Can you give us a little bit of an update as to how that’s going, when you expect the full manufacturing to be in terms of your facilities and when you see a positive margin impact, if you like, from the closure of that facility? Thank you.

[Frans van Houten:]

Yes. Well, let me first underline that Cleveland will continue as a location for research and development as well as for service and training, and it will also remained a headquarter for the CT AMI business unit. The production had already reduced in Cleveland. As over the last two years, we had been making progress in ramping up the factories in Haifa and in Suzhou. That process will be completed in the second half of this year. In parallel, but not specifically related to this location, we will continue to expand margins in Diagnostic Imaging. And in relation to the earlier question this conference call, DI has a plan to improve margins between 150 and 200 basis points annually in order to get to a decent return profile.

[Scott Bardo:]

Understood, thanks very much, Frans.

[Frans van Houten:]

You’re welcome.

[Operator:]

The next question comes from David Adlington from JPMorgan. Please go ahead. Your line is open.

[David Adlington:]

Hi guys,. Thanks taken the question. You were fairly vocal at the start of this year, and when we saw you just voiced in terms of growth and margins being second half weighted this year. But obviously, Q1 has really come in a bit better than anticipated. I just wondered how we should be thinking about progression through Q2 and the rest of the year. And it sounds like these statements still stand, but really just wanted to get your feeling for why Q1 have come in better than maybe than originally expected.

[Frans van Houten:]

Yes, I remember that I said that, thanks for rubbing it in. David, definitely something that came through stronger was the Ultrasound business, a business that has relatively short cycle between orders and revenue recognition. So that was very pleasing to see. I think Ultrasound has the opportunity to continue to perform well without promising the same order growth as we have seen in Q1. But it’s great to see that Diagnosis & Treatment overall is having traction with its innovations. Now CCHI actually – I mean, there it followed the guidance, right? I mean, we started the year a bit slow and we need to catch up in the second half year. I would say that is really a second half of the year game and not just a second quarter game. So altogether, yes, maybe we are a little bit ahead of the guidance that we gave in January. And then PH, where we had the headwind from the air purification market in China where we actually gained market share but the market was down, there, of course, also we have to catch up and overdeliver on – to compensate for the 4% growth in Q1.

[David Adlington:]

Perfect, that’s great. Thanks very much.

[Operator:]

The next question comes from Max Yates from Credit Suisse. Please go ahead. Your line is open.

[Max Yates:]

Hi, thank you. Just one question from me. I just wanted to understand a little bit about Spectranetics and the integration there. I think when you sort of bought the business, you gave some quite sort of bullish messages around where the margin could get to. I think you were saying it’s a double-digit in 2018, and also around the growth there. So I just wanted to check how the business was evolving under your ownership and how the integration had gone so far. Thank you.

[Frans van Houten:]

Yes. Hi Mark. The integration of Spectranetics is going well. We continue to see double-digit growth. And I can also confirm that we expect double-digit margins in the second half of this year.

[Max Yates:]

And so, in which case, I think, then you talked about 30% margins inside in this business. So I mean, everything is sort of on track with those original midterm targets that you gave as well, I take it?

[Frans van Houten:]

Yes, that number is specifically related to the Spectranetics business. Overall, we gave guidance on our device business. We said we – if IGT will grow to 3 billion by 2020, then 1 billion of that is going to be devices. And overall, the profitability of IGT needs to be close to 20%. And also, the device business will then, at that time, be in the high teens. And beyond 2020, we expect them to continue to improve margins to the high 20s.

[Max Yates:]

Okay, great. Thank you.

[Frans van Houten:]

You welcome.

[Operator:]

The next question comes from Julien Dormois from Exane. Please go ahead. Your line is open.

[Julien Dormois:]

Hi, good morning, Frans. Good morning, Abhijit. I have just one question on the CC&HI business. Again, sorry to push you on that. But as you just said, so you expect an improvement in organic growth in that business in H2. I’m just curious because you’re going to face much tougher comps on that business. And I was just wondering where the improvement would come from. Is that purely from the defibrillator manufacturing issue coming to an end? Or is it coming from your – on order book?

[Abhijit Bhattacharya:]

Yes, I think it’s across the board, Julian. So if you look in the monitoring business, which is the big part also, there, we continue to expect growth in the second half. We’ve – growth has been a bit soft of the first half in – or in the first quarter in monitoring, but we have a large market share there, well above the 40%. So we – if we grow small, the market is also kind of growing small. The Healthcare Informatics order intake was good. So therefore, we expect that business to pick up. So it’s not just related to defibs. Overall, I think with the order book that we have, we expect to get stronger growth in the second half. And given the high-margin content of these businesses, then, of course, you start getting higher earnings out of it as well.

[Julien Dormois:]

Okay, very clear. And if I may just follow up on that. Regarding the defibrillator issue, have you provided any timeline in order to get rid of the consent decree? Is there any indication of time?

[Frans van Houten:]

Yes, Julian, we – a consent decree is a multiyear affair. So that will not go away quickly. What we did speak about earlier was that the injunction on sales within North America for the defibs, that we aim to get that lifted in the second half of the year. And there, we believe, we continue to be on track.

[Julien Dormois:]

Okay, very clear. Thank you very much.

[Operator:]

Our next question comes from Ed Ridley-Day from Redburn. Please go ahead. Your line is open.

[Ed Ridley-Day:]

Good morning, thank you. If I could follow up on the strong growth in IGT. It’s just – breaking that back, it would appear that your angiography business, Azurion, and your last legacy angio business has grown substantially stronger. Is that right? With high single-digit or even low double-digit for the angio business, could you give us some more color on that? And also, on Spectranetics, could you comment a little on the impact of the U.S. reimbursement cut for drug-coated balloons, which has been implemented in January, and how that affects the business or not? And indeed, relative to say it’s the growth of Stellarex or the uptick of Stellarex in Europe? Thank you.

[Frans van Houten:]

Yes. Hi, Ed, you’re right, the Azurion and the angio business are growing strongly. So I can confirm that. Then the uptick of Spectranetics is on track. The reimbursement cut – or actually it was in the lack of prolongation of an uplift on the reimbursement that was a disappointment. Across the industry, so not just Philips alone, but across the industry, we will – we are working on creating the insight that a drug-coated balloon should have a higher reimbursement than a nondrug-coated balloon. And we believe that, that is certainly a realistic effort to make. That would happen at the earliest in the next budget year, so this year, we need to live with it. Nevertheless, we don’t see it slow down the adoption of Stellarex as such. It does have a slight impact on the profitability of it, but in the bigger scheme of things, like we had in the earlier question, I can confirm that the Spectranetics integration and business case, i.e. value creation case, are on track.

[Ed Ridley-Day:]

Thank you. That’s helpful. And in terms of the – I mean, can you give us any color on the rate of growth of Stellarex in Europe?

[Frans van Houten:]

I don’t have the geographical split out of growth of Stellarex. Overall, Spectranetics is growing a strong double-digit, and therefore, in line with our expectation

[Ed Ridley-Day:]

Very good. Thank you.

[Operator:]

Our next question comes from Wim Gille from ABN AMRO Bank. Please go ahead. Your line is open.

[Wim Gille:]

Yes, good morning. During the comment, you mentioned that the growth in CCHI was also impacted by a shift from CapEx-related revenues to OpEx-related revenues, or in other words, shifting boxes to more subscription-based revenues. Can you give us an indication on where you are in the transition for the overall business? Are we just at the start or at the end? Is subscription the majority of the revenues, yes or no? So please some guidance on that one. Thanks.

[Frans van Houten:]

It’s still early stages to see these shifts in business models. Remember that at the Capital Markets Day, we reported that we were at 28% of total revenue in recurring revenues, and then that turns into 70% currently. So the proportion of recurring revenues is gradually rising. But as our overall business is also growing, it’s a steep – it’s a chase, right, to make sure that, that proportionally goes up. If you – maybe I’ll give it from a different angle, many of these larger-scale strategic partnerships that we announced, the 8 LSPs that we won in Q1, also have a strong degree of recurring revenues to it. Also there’s definitely market interest to it. And within CCHI, we will feel this more profoundly because it – the business lends itself to these subscription models better than some other businesses. And other that are – we have not specifically detailed it out in the sense of impact.

[Wim Gille:]

Thanks.

[Operator:]

Our final question comes from Yi-Dan Wang from Deutsche Bank. Please go ahead madam.

[Yi-Dan Wang:]

Thanks very much. I just have a couple of quick questions on your working capital, that has continued to improve. And just wondering whether you will be able to close the gap between yourself and your closest competitor. And if so, what kind of time frame we should be looking at? And then also, CapEx. Do you have a CapEx number for the year? And how we should think about that going forward, too, will be helpful. Thank you.

[Abhijit Bhattacharya:]

Yi-Dan, could you – the second part of your question when you said closed the gap with your close peers, because from a working capital perspective, at least if I look at the numbers, we seem to be pretty much ahead of the pack. So yes, we will still continue to drive it down. If you look for the last 13 quarters, every quarter we have brought it down. So of course, as you go longer into the journey, the reductions become more difficult. But we still have a plan to bring it down during the course of the year. Regarding the CapEx number, not really too much different from the pattern of the earlier year. We will be between the – close to the €800 million, and that is not just CapEx, but that includes then capitalization of R&D as well. So if you look at the CapEx in terms of plant and machinery, that’s roughly about half that of the amount.

[Yi-Dan Wang:]

Okay. Great. Maybe we’ll take the working capital question off-line, because I seem to have different numbers with yours. But, anyway.

[Abhijit Bhattacharya:]

Okay. No problem.

[Operator:]

Thank you. Mr. Van Houten and Mr. Bhattacharya, there are no further questions, please continue.

[Frans van Houten:]

Okay, then we will round off this session. Thank you very much for attending. Good start to the year, a lot of good news on innovations and customer tractions, and we will continue to chip away and making progress every quarter. Thanks very much. Have a great day.