Koninklijke Philips N.V.
Q1 2019 Earnings Call Transcript

Published: 30 Apr 2019

[Pim Preesman:]

Thank you. And good morning, ladies and gentlemen. Welcome to Philips' First Quarter 2019 Results Conference Call. I’m here with our CEO, Frans van Houten; and our CFO, Abhijit Bhattacharya. On today’s call, Frans will take you through our strategic and financial highlights for the period. Abhijit will then provide more detail on financial performance and market dynamics. After that, we will take your questions. Our press release and the related information slide deck were published at 7 A.M. CET this morning. Both documents are available on our Investor Relations website. A full transcript of this conference call will be made available by end of today on our website. Finally, as mentioned in the press release, adjusted EBITA is defined as income from operations excluding amortization of acquired intangible assets, impairment of goodwill, other intangible assets, restructuring charges, acquisition-related costs and other significant items. Comparable growth for sales and orders are adjusted for currency and portfolio changes. With that, I would like to hand over to Frans.

[Frans van Houten:]

Yes, thanks, Pim. And thank you all for joining us on the phone today. We had a reasonable start to the year, as we delivered 2% comparable sales and order intake growth, further building on the strong growth in 2018. I’m pleased that we regained momentum in our Personal Health businesses, as comparable sales grew by 5% in the first quarter. It is a good improvement compared to 2018 performance. The Oral Healthcare business delivered high-teens comparable sales growth driven by our innovative solutions like the Sonicare ProtectiveClean power toothbrush and improved brush head supplies. Notably, we saw double-digit growth in both mature and growth geographies. I’m also pleased with the double-digit comparable sales and order intake growth for the group in the growth geographies. As you are aware, we achieved double-digit order intake growth during the first quarter of 2018, which resulted in a tough comparable. Our Diagnosis & Treatment businesses delivered 2% comparable sales growth and our Connected Care businesses a 1% comparable sales decline mainly as a result of the Monitoring & Analytics business where the large orders for 2018 came only in the fourth quarter. Based on these orders, we do expect growth to improve in the coming quarters. Let me expand on our strategic journey to leadership in health technology. Our value creation story is built of three key levers of driving growth in our core business, innovating to solutions and driving operational excellence. As a way to create value in our core businesses, we continue to drive market share through deeper, more comprehensive customer partnerships; and pursuing growth by increasing geographic coverage and market penetration. During the first quarter, we entered into multiple new agreements in the United States, Europe and Asia. We signed our first long-term strategic partnership agreement in Vietnam to provide a turnkey hospital solution to the newly built Hong Duc General Hospital II comprising the latest medical imaging and healthcare IT solutions, as well as design, consulting and financing services. As Healthcare continues to transform from a volume-to a value-based approach and the amount of data available for each clinical decision is growing, our customers are seeking seamless integrated solutions to enable more precise diagnosis and treatment as well as optimized patient care pathways inside and outside the hospitals. We continued to bring new solutions to the market in the areas of diagnosis treatment, connected care and personal health. Diagnosis & Treatment unites the businesses focused on precision diagnosis and treatment selection and planning; and the businesses related to image-guided, minimally invasive treatments. We continued to roll out adaptive intelligence-enabled applications combined with successful innovations in our systems platforms. On the platform side, we expanded our Diagnostic Imaging portfolio with the new Incisive CT platform, integrating innovations in imaging, workflow and life cycle management. We also received 510(k) clearance from the FDA to market our newest premium digital radiography system, the DigitalDiagnost C90, in the United States. The C90 offers health care organizations a flexible and customizable imaging solution that helps to improve workflow and clinical outcomes. We launched our new premium ultrasound system EPIQ Elite, which combines the latest advances in transducer innovation, enhanced performance; and is tailored to specific clinical segments such as general imaging and obstetrics and gynecology. On the informatics side, we launched the IntelliSpace Portal 11, the latest release of our comprehensive advanced visualization and quantification software. The new version further extends the clinical innovation of the portal, with enhancements to improve workflow efficiencies, bridging superior data sharing between systems within the hospital network to address the security and privacy needs of customers globally. To complement this, we signed an agreement to acquire the Carestream Health’s healthcare information systems business, adding a cloud-based enterprise imaging informatics platform and complementary geographic footprint to our portfolio. In addition, Philips expanded its radiology solutions portfolio with new teleradiology services, building on the acquisition of Direct Radiology’s teleradiology platform. We also reinforced our leadership in image-guided therapy with the successful launch of the Azurion with FlexArm in January as a new extension of the proven Azurion Image-Guided Therapy platform. The FlexArm includes innovations for optimal visualization across the whole patient in 2D and 3D dimensions to simplify and enhance a broad range of procedures. We expanded our offering in mobile image-guided therapy systems for conventional operating rooms with the launch of the Zenition, our new mobile C-arm imaging platform. Zenition is easy to move between operating rooms; and allows hospitals to maximize the OR performance, enhance clinical capabilities and improve staff experience. Image-Guided Therapy Devices delivered double-digit growth driven by all major diagnostic and therapeutic catheter product families. The continued strong performance is supported by the tight integration with our Azurion platform; and by a growing body of clinical evidence such as the recent positive results of the DEFINE PCI study to assess the potential of iFR, which is our next-generation physiologic guidance technology, for the treatment of coronary artery disease. I also would like to provide an update on our Stellarex drug-coated balloon solution, which along with our other therapy catheters such as the Turbo-Power and Turbo-Elite laser atherectomy catheters and the AngioSculpt scoring balloon is part of the peripheral therapy segment within our Image-Guided Therapy Devices business. On March the 15th, the FDA released an update on the treatment of peripheral arterial disease with the paclitaxel-coated balloons and drug-eluting stents. The FDA conducted a preliminary analysis of long-term follow-up data up to five years in a number of studies, which identified signals of increased long-term mortality. There is no five-year follow-up data yet from the pivotal premarket randomized clinical trial for our Stellarex DCB. The Stellarex trial was not one of the three trials specifically referenced by the FDA in its update, but very important for you to know, at the three years follow-up, data from the Stellarex trials do not show any such signal of increased long-term mortality. Stellarex is unlike any other drug-coated balloon in the industry for the treatment of peripheral artery disease. The Stellarex drug-coated balloon features the EnduraCoat Technology, which is a unique coating consisting of the polyethylene glycol as the base material, which is the so-called excipient, and a combination of amorphous and crystalline paclitaxel particles dispersed in it. The EnduraCoat Technology provides efficient drug transfer, effective drug residency with high coating durability and minimal particulate loss; and therefore enables a low therapeutic drug dose. It’s perhaps all a bit technical, but I value explaining this. Our dedicated clinical studies with three-year follow-up data demonstrate the efficacy and safety of Stellarex in restoring and maintaining blood flow to the arteries in the legs of patients with peripheral artery disease. Stellarex delivers top-tier outcomes with the lowest therapeutic drug dose in common to complex patients and has a strong safety profile. Our Connected Care businesses focus on patient care solutions, advanced analytics and patient and workflow optimization inside and outside the hospital. And we aim to unlock synergies from integrating and optimizing patient care pathways; and leveraging provider, payer, patient business models. To advance patient care in the hospital, we launched the IntelliSpace Epidemiology Solution that optimizes the detection of health care associated infections in the hospital. Philips IntelliSpace epidemiology is the only decision support solution in the United States that combines clinical informatics and genomic sequencing information from pathogenic bacteria aiming to assist infection prevention and control teams in identifying infection transmission. A recent study shows an 87% reduction in time when identifying infection transmissions using the Philips IntelliSpace Epidemiology Solution. As a leader in home sleep care, we expanded our range of successful patient-centric CPAP mask designs with the launch of the DreamWisp, a "first of its kind" over-the-nose nasal mask that allows patients with sleep apnea to sleep in any position they want. With its robust nasal cushion and "top of the head" tube design, the DreamWisp delivered a new level of comfort and freedom of movement, providing patients with the therapy option that best suits their needs. We are also expanding our offering for prehospital settings. The Philips Tempus ALS, a unique modular monitor/defibrillator is pending FDA 510(k) approval. Its flexible deployment enables emergency medical providers to improve their workflow and positively impacts safe patient outcomes with wider clinical operational and financial advantages to meet the evolving needs of modern emergency medical services. Our Personal Health businesses focus on healthy living and preventative care. Pioneering new business models, we teamed up with the largest U.S. dental health insurance provider Delta Dental aiming at developing clinically validated solutions designed to drive positive behavior change and support people’s long-term oral health. We also introduced our new S7000 shaver series globally. The shaver is designed to address skin irritation and discomfort from shaving. This is our first connected shaver, and it comes with a personalized solution for sensitive skin. This far, the S7000 has received highly positive user reviews. Moving now to the third key driver of strategic – of our strategic agenda, namely to improve margins through customer and operational excellence. Our self-help initiatives to drive over €1.8 billion in savings for the period 2017 to 2020 are well on track, as we delivered €113 million savings during the first quarter. The main three programs, i.e., procurement savings, manufacturing productivity and overhead cost reduction, all delivered on their milestones. As progress update on regulatory matters. We continued to make progress towards fulfilling our obligations under the consent decree. The FDA recently reverted back to us with follow-up requests that we are acting on over the coming months. We continue to expect our performance momentum to improve over the course of the year based on the demand of our innovative products and solutions to improve people’s health and enhance care provider productivity, supported by our order book. We reaffirm, therefore, our overall targets of 4% to 6% comparable sales growth and an adjusted EBITA margin improvement of 100 basis points on average per year for the 2017 to 2020 period. And with that, I would like to turn over the call to Abhijit, who will provide more detail on financial performance and market dynamics.

[Abhijit Bhattacharya:]

Thank you, Frans. And good morning to all of you on the call and the webcast. Let me start by providing some color on the first quarter comparable sales growth of 2%. The Diagnosis & Treatment businesses delivered 2% comparable sales growth as well. Sales in the quarter were impacted by supply constraints resulting from a fire at a factory of one of our suppliers which we had mentioned during our Q4 2018 call. Sales in Diagnosis & Treatment was mainly driven by Image-Guided Therapy, which grew double digits despite this impact. Ultrasound grew mid-single digit and Diagnostic Imaging declined mid-single digit. To remind you

[Operator:]

[Operator Instructions] We will now take our first question from David Adlington from JPMorgan. Please go ahead sir.

[David Adlington:]

Just obviously with one maybe just to focus on the cash flow which I think was relatively poor this quarter. You cited working capital there. I just wondered if you could give us a bit more further color and your expectations going forward from here. Thanks.

[Abhijit Bhattacharya:]

Yes, hi David good morning. No, I think, cash flow-wise, as I mentioned, our inventories are high. That was part of the plan because we are executing on our footprint transformation as we speak, where as a result of which we need to build inventories in both locations and to protect against any loss of sales or upsetting customers. So this will come down more in Q3, Q4. So our expectations for the cash flow for the year between the 1% to 1.5% still remains. €1 billion to €1.5 billion. Sorry.

[David Adlington:]

Thank you.

[Operator:]

Our next question comes from Veronika Dubajova from Goldman Sachs. Please go ahead.

[Veronika Dubajova:]

I would like to start off with Personal Health. And given that we’re one quarter in, one, I’d like to sort of understand what your confidence is in that 4% to 6% guidance range for the year. And I think, if I go back, a quarter ago, you had guided to acceleration as we move through the year. Obviously, Q1 has come in quite strongly. Do you still think you can accelerate growth from the first quarter? Or is it more about maintaining the current momentum as we move through the rest of the year?

[Frans van Houten:]

Hi Veronika, this is Frans. Great to hear you. And we took several measures in the second half of 2018 to turn the growth rate back up in PH. And this ranges from leadership interventions, and you have met Roy Jakobs, a strong leader; to accelerating new product introductions; and reviewing our advertising and promotion effectiveness. On all these levers we see positive traction. And it’s great to see that in oral care we now have strong growth again. The new product that were introduced in Q1 start to have really good traction. The brush head supply is fully back on track. And also in some of the other PH areas we have done good product introductions. I referenced one of the shavers in my speech. So we can say that Personal Health is back on track where we all like it to see. And with regards to the question can we accelerate it further, at this time, I’m happy with the 5% growth. We have given – after the reorganization of the segments, we have given a guidance of the mid-single-digit growth. We are well in that bandwidth. And so let’s first sustain and consolidate, make sure that we consistently deliver this kind of a growth before we raise further expectations.

[Veronika Dubajova:]

That’s great. And can I ask a follow-up on Connected Care? I look at the performance, and it’s a third quarter of quite meaningful margin declines in the business. Is there anything you can do from a cost perspective to try to stem this margin momentum and start delivering some improvement? And Abhijit, any guidance from you on how to think about this for the year? Thank you.

[Abhijit Bhattacharya:]

Yes. I think, in Q1, we have had particularly a big dip, so yes, you are absolutely right. There are quite some productivity measures which are in place, so they will start impacting, let’s say, from Q3, Q4. So as you see the year progress, you will clearly see us making up the shortfall in Q1. So we also had – apart from the growth, this is a high-margin business, right? So the growth, when it – as we start delivering on those orders, we had some currency and tariff headwinds also and the phasing of productivity which will come more in the second half, as I just mentioned.

[Frans van Houten:]

Maybe I can add a strategic angle to this answer as well. Let’s say Monitoring & Analytics originates out of what is called the intensive care environment, all right? And Philips is absolute market leader there. The intensive care market has matured, and there is less growth currently in ICUs. And we are shaping the market towards monitoring and analytics and telehealth and command center technology to optimize care pathways across all care settings, enabling hospitals to move patients from the expensive ICU beds to the general ward, to skilled nursing facilities and into the home environment. That strategy has already been validated by – with health care providers. And you know that we’re on the right path. This also means that we continue to invest in innovation despite the near-term kind of slower growth. And the 14% order growth in Q4 is just testimony to the beliefs that we have in this business. And several large orders are being – working its way towards sales recognition later in the year, and we expect a step up later this year in revenue. And with the high margin that Abhijit already referred to in terms of gross margin business, then we will see a big step up. So it’s a bit of several headwinds coming together in Q1, but structurally it’s a great business that we continue to have strong belief in.

[Veronika Dubajova:]

Understand, thank you very much.

[Operator:]

We will now take our next question from Patrick Wood from Bank of America Merrill Lynch. Please go ahead.

[Patrick Wood:]

I have two, if I can, please. The first will be in sleep and respiratory. Obviously, it’s a slightly different category definition to how it used to be, but my understanding was, perhaps if you make it more like-for-like to how it was in profile, that probably grew something like mid-single digits in the first quarter. And within that, given the masks already growing quite nicely, what is it that’s really going to drive the growth in the coming quarters? Is it really Wisp? Is that what’s getting us there? And how confident are you in that base market longer term? It would be great to know. And then the second one, thank you for the details, Frans, on the DCB on the Stellarex side, it’s a fairly chunky market. And I’m wondering how you guys are thinking about it internally from a competitive standpoint because obviously some of your competitors are in a somewhat tricky situation given the tone that the FDA is taking towards paclitaxel. Is there an opportunity here for you to take a little bit more of that market? And given you’re one of the smaller players, that could be reasonably meaningful for you. Is that a fair way to think about this, or is it just too early to say?

[Frans van Houten:]

Okay. Now let me dissect all those questions because it’s quite a chunk. Let’s first talk about S&RC. And indeed, for everybody on the call, let’s remind ourselves that we included now in S&RC also the hospital respiratory care business that originally was separate. And the hospital respiratory business declined slightly, and that masks the fact that S&RC for the out of hospital continues to grow nicely in the mid single-digit area. And overall the growth expectations for S&RC remain strong. The drivers for that are as follows

[Patrick Wood:]

Great detail. Thank you very much.

[Operator:]

We will now take our next question from Michael Jungling from Morgan Stanley. Please go ahead.

[Michael Jungling:]

Thank you and good morning. I have two questions. Firstly, on geographic sales growth. And when I look at your comp-adjusted growth for the first quarter, Western Europe and also North America have been slowing in the first quarter. Why is that? And why would the developed markets improve for you for the remainder of the year? Question number two is on D&T

[Frans van Houten:]

Okay. The – with regards to the geographical split, I mean, of course, we are very pleased with the growth markets, the emerging markets that have done very well for us. And notwithstanding that, we love to see the mature markets grow as well. We are sitting on a strong order book for both Europe and North America. That order book will come to revenue recognition in the course of the year. When we spoke about Connected Care having a slight decline in Q1 and very much related to the same situation where several large orders are making its way towards customer acceptance in Q2, Q3 time frames, and similarly on Diagnosis & Treatment the order pipeline will help us get to strong growth, obviously with the confidence that we have expressed to reach our 4% to 6% growth, we need mature markets to contribute. That can never be done only on the back of the emerging markets. And so we see the growth stepping up there. Maybe I’ll hand it over to Abhijit to give a bit more color on the IGT business and the Prodrive situation.

[Abhijit Bhattacharya:]

Yes. On the Prodrive situation. We lost a little bit less than the €50 million, so around €40 million or so. And then as we have said, it will return in Q3 and – Q2 and Q3. I think the bulk in Q3 and some of it in Q2. So that’s how it will come back. And all of the sales will come back. As I mentioned at the beginning of the year, we don’t lose a single dollar of revenue on this – euro of revenue.

[Michael Jungling:]

Okay, and thank you.

[Operator:]

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

[Scott Bardo:]

Yes, thanks for taking my question. So first question, please, just relates to the Connected Care business. I understand you’re making material investments into R&D in this division. I think it’s the highest ratio invested of all of your divisions, so the question really relates to when do you expect some of these material investments in telehealth and digi health and broadening the addressable monitoring and analytic opportunity to start to inflect the growth profile and profitability profile of this business. I think you mentioned in your previous plan towards the end of your previous financial plan, which is sort of coming into effect now, so I just wonder if you could talk through a little bit more about how some of those investments are materializing. Second question, please, just relates to the update from the FDA related to the consent decree. Could you perhaps give a little bit more details as to what some of the responses from the FDA were and how quick they are to be addressed? And perhaps give us a status update on the closure of the Cleveland plant and any other regulatory updates you’re having across your plants.

[Frans van Houten:]

All right, Scott, I’ll give it a try. Well, you heard my response to Veronika’s question on Connected Care, right? So strategically important, we are developing a much more end-to-end care orchestration environment that hospital and care providers are excited about. As is often the case with breaking new ground in these areas, it takes a little bit longer than originally estimated. So I would admit that as well. And we – as you recall, we have down adjusted the Connected Care growth, near term-growth, in our Capital Markets Day and also in our January call. That doesn’t mean that we are not optimistic about it. I am personally very optimistic about it. This year, we will see Connected Care solidly contributing to our mid-single-digit growth outlook and therefore recover significantly through the year. The FDA and the consent decree

[Abhijit Bhattacharya:]

I think maybe just to add one thing on the FDA question. That came – also, the audit was completed before the actual end of the year. So there we asked also some third-party auditors to validate the work done from the time their audit end to what we said we have completed to the end of the year. So that’s also one of the clarifications which will take time.

[Frans van Houten:]

Yes. Thanks.

[Scott Bardo:]

That’s very helpful. I don’t know if I have enough time to squeeze in a very quick follow-up, but just with respect to Stellarex I also share your optimism about the clinical profiles of your product. I think, at the time of the acquisition, you highlighted an aspiration for about €1 billion or so in revenues, combined with Volcano from Spectranetics deal, by 2020. Given some of your comments about the dust needing to settle in the market, would you say that those targets are now more aspirational or somewhat at risk? Thanks.

[Frans van Houten:]

Well, I mean Stellarex is only a small part of our overall device business. And all of last year, we had double-digit growth in devices, and Q1, we again have double-digit growth in devices. So we will get awfully close to the €1 billion aspiration that we formulated. And I mean thanks for reminding everybody in the call. So we said, our IGT business, we aim for 3 billion, 2 billion systems and services and 1 billion devices, so we will get within a hair of that target, I hope. And the double-digit growth in Q1 is certainly a good start to the year.

[Scott Bardo:]

Thanks very much, Houten.

[Operator:]

We will now take our next question from Yi-Dan Wang from Deutsche Bank. Please go ahead.

[Yi-Dan Wang:]

Thank you very much. On the effective tax rate, I think you heard that it’s coming down to 23% to 24%, so can you just talk about what the key drivers for that and how sustainable that is? And then the second question is on the Health & Wellness business. Can you comment on what the growth is for that business as a whole, including oral care? And then for oral care it seems that a lot of the growth came late in the quarter, so how much of that is driven by distributor inventory buildup? And how will that impact your growth in the second quarter? Thank you.

[Abhijit Bhattacharya:]

So on the tax rate, yes, we are guiding to that in the medium term because we believe it’s sustainable, right? So the main benefit comes from the change in the tax rate in the U.S. I think, given the clarifications that came out post the change in the corporate tax rate in the U.S., we were able to find certain benefits also for our exports, which helps, let’s say, to structurally bring it down to the 24% to 26%. So that is structural mainly driven by the U.S. The Health & Wellness growth rate was double digit as well. So I think there the momentum is good. I don’t know, Yi-Dan, where you got the, well, perception that it came late in the quarter, but it has been building over the quarter. And it’s there is not really any inventory buildup associated with this at all. So there is – yes, I don’t have any concern on that front.

[Yi-Dan Wang:]

Okay. Okay. On the tax rate, did you say 24% to 26%? I thought I heard 23%, 24%, but...

[Abhijit Bhattacharya:]

No, 24% to 26%.

[Yi-Dan Wang:]

To 26%, okay, all right. Thank you.

[Abhijit Bhattacharya:]

Yes.

[Operator:]

We will now take our next question from Sebastian Walker from UBS. Please go ahead.

[Sebastian Walker:]

Hi, there. Thanks for taking the question. Just one on Personal Health. So just the margin. So there was limited improvement in the quarter despite the strong top line development, so could you maybe comment on how you expect R&D investments and other investments here to continue throughout the year? Thanks.

[Abhijit Bhattacharya:]

So if you look at Q1, first of all, as we said, the growth was good. There’s a couple of things. So our phasing of IT investments this year not only for the – let’s say, the ERP side but also on the digital side has a different phasing. We started those investments last year. So the first couple of quarters had low investments. This year, it’s higher. And also, we had higher A&P to back our new product investments. So let’s say, I think, if you look, if you take a step back and look at Personal Health, right, last 12 months, we are around a 15.5% adjusted EBITDA, just shy of our targeted range for next year of 16% to 18%. So we are actually very – we are very confident of getting into the range. And I think, the bigger improvements in the margin, you will see towards the second half of the year. That’s how I would look at it.

[Sebastian Walker:]

All right, thank you.

[Operator:]

We will take our next question from Ed Ridley-Day from Redburn. Please go ahead.

[Ed Ridley-Day:]

Good morning, thank you. A couple of follow-up questions. Firstly, just on the North American market, would you say in imaging you have grown broadly in line with the market or slightly below market? Because we have seen some softness in North America from other capital equipment companies this quarter. That will be my first question. And secondly, return to Prodrive. I’m still quite surprised that it’s had such a large effect. What have you done perhaps to look at alternative supply going forward in that area of your business?

[Frans van Houten:]

Okay. Ed, let me give it a try. North American market, let’s first talk about the general market in imaging. Last year was fairly strong, around 4% growth. Philips had order growth in that market of high single digit, so it’s our belief that we have grown market share. Abhijit already mentioned that Q1 last year was boosted by accelerated revenue growth of the advanced molecular imaging business, and that gave us a difficult compare for this year. And if I would look at the North American market this year, I would maybe guesstimate that it would grow a little bit less than 2018, but at this time I would not use that as an excuse. It’s also a bit lumpy. And so a slower start of the year is not necessarily giving us a final, let’s say, conviction. And what gives me a lot of confidence is that we are sitting on a large order book and that will definitely underpin good growth this year. Then the Prodrive

[Ed Ridley-Day:]

That’s very clear. And just one very quick follow-up on Stellarex. One of your competitors has highlighted they’re expecting about a 50% reduction going forward for the rest of the year, that’s Boston for their drug-eluting stent. I know that’s a slightly different product, but like Stellarex that had a significantly lower dose than Medtronic and the other companies named by the FDA. Can you just remind us, what sort of growth are you assuming? Clearly, you’ve had a good first quarter. That is encouraging, but as you’ve also rightly highlighted, it’s a bit of a class effect at the moment, so what are you assuming for the rest of the year for Stellarex? And that would be helpful.

[Frans van Houten:]

Yes. We are not breaking out the Stellarex category from the rest of the medical device business. And I want to be cautious. The class effect will, may be kicking a bit stronger in Q2 than in Q1, all right? After all, everybody had to digest the news. And before it affects people’s habits, it takes time both negatively and positively. As I said, we do think we have gained share in Q1, but the two effects combined of our share going up while the category may be a bit under pressure makes it very hard to give a precise forecast for the year, so I don’t want to do that now. But I have said that I remain very confident about our device business overall, in line with the question that we got earlier where I responded that we are well on our way towards €1 billion in device business by 2020.

[Ed Ridley-Day:]

Very good. Thank you.

[Operator:]

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

[Max Yates:]

Thank you. Just my first question is on Oral Healthcare. So you grew double digit in the quarter, and I just wanted to come back to sort of how you think about any restock of brush heads and sorting out the supply chain issues and how that may have affect it. Because it seems quite a lot faster than the underlying category is growing. So maybe if you could talk about what the core Oral Healthcare business was growing and maybe the growth rate that we should expect going forwards and actually whether there was any benefit from supply chain issues being removed and therefore customers restocking brush heads. That’s my first question.

[Frans van Houten:]

Yes, I don’t think the restocking as such is the reason for a boost in revenue, but the fact that we had brush heads again on the shelf also meant that retailers were more inclined to support us with our handle business. So the whole category for Philips was under a cloud last year because of lack of confidence, and the brush heads contributed very much to that. So once that’s restored, we now see this whole positive inclination, added with the new products that we launched, added with a better A&P execution, we get to this much higher growth. Let’s also not forget that the category as such is still growing, all right? So we are lifting on a growing category in which we are restoring our rightful market share.

[Max Yates:]

Okay. Thank you. And maybe just, Abhijit, on FX, if you could talk a little bit around just, firstly, how much of that 30 bps at group level went through Connected Care so just so we understand sort of how much the margin decline was specifically FX. And maybe if you could give any guidance on the transaction and for margin impact as we go into the second quarter, how that 30 basis points evolves into Q2.

[Abhijit Bhattacharya:]

Yes, Max, if I could give you FX projections, I would be a rich man, but let me attempt a little bit. I think you know what happened in Q3 last year, where the emerging market currencies dropped. That has, of course, an impact to – for 12 months. So yes, I think it will be safe if you had similar impact for Q2. Connected Care had a bigger-than-expected income mainly because of how the flows work. So they had slightly more than 50 basis points of currency impact also in the quarter.

[Max Yates:]

Okay. And if I could just have a sort of quick housekeeping question just on Connected Care. When you think about the sort of order intake that you’ve had over the last sort of four quarters averaging at mid-single digit, how much of the actual Connected Care revenues are underpinned by that order backlog? And then is there any way we can think about the average lag time for when we see an order translate into revenue growth across the business just to try and understand how much of that growth flows through to how much revenues in Connected Care and how long that should take?

[Abhijit Bhattacharya:]

Yes. So if you look at last year. I think overall Connected Care order intake grew by 5%, but that happened largely in the fourth quarter, right, when we had a 14% growth. Now given that we recognize revenue not when we ship the equipment but when it’s installed and ready for the first patient use, I think you should start seeing impact already from Q2 onwards. But let’s say, Q2, Q3 Q4, you will see a strengthening as the order book starts maturing to revenue.

[Max Yates:]

And my understanding is that in, say, D&T half of the order book – half of the revenues are driven by the order book, and the rest is sort of service and booked and billed in the quarter. Is a similar level true of Connected Care?

[Abhijit Bhattacharya:]

Yes. I think, more or less – it’s a little bit higher but not significantly.

[Max Yates:]

Okay, thank you very much.

[Operator:]

We will now take our next question from Daniel Wendorff from Commerzbank. Please go ahead.

[Daniel Wendorff:]

Thanks for taking my question. It’s actually related to the D&T division and the Diagnostic Imaging business. When I look at the growth contributions in Q1, Image-Guided Therapy versus Diagnostic Imaging, and with the commentary you gave us on the drug-coated balloons, when you look into Q2 to Q4, how should we think of the growth projections for the different – for these two different types of businesses sort of in the D&T division? Is it that Image-Guided Therapy will likely go down a little? And how fast will Diagnostic Imaging turn? So a bit more color there would be helpful. And on the margin in the D&T division, the quite strong uplift, in my view, year-on-year, is that largely due to mix? Any more color there would also be helpful. Thank you.

[Abhijit Bhattacharya:]

Yes, maybe a couple of things. So IGT will remain strong throughout the year, right? So our devices business is growing strongly. That will continue to remain strong, and our system business will also remain strong. DI had a bit of an impact. Or mainly the decline happened because of the comparables with the AMI business, as Frans mentioned and I mentioned also as part of the opening remarks. So once we see through that, DI will also have a low to mid-single-digit growth through the year. So I don’t think you should look at, let’s say, declining sales with DI for the rest of the year. The margin uplift was quite a few things. So the productivity plans that we are executing, that contributed a big amount to the increase. And I think the operational improvements. The factory, I mean, is part of the productivity, but the manufacturing footprint rationalization, et cetera, these are all pieces of the puzzle that are contributing to the improvement in profitability. So going forward, that trend has to – or we plan to keep that trend going as well for the remainder of the year.

[Daniel Wendorff:]

Okay, thank you very much.

[Abhijit Bhattacharya:]

Yes.

[Operator:]

We will now take our next question from Julien Dormois from Exane BNP Paribas. Please go ahead.

[Julien Dormois:]

Hi, good morning gentlemen, thanks for squeezing me in. I have two, I’ll say, housekeeping questions left. Just curious on your comparable order intake. You have reported a pretty significant decline in North America. So I think high single-digit decline in the quarter. So just maybe a recap of where that’s coming from and how we should think about the rest of the year. And the second question is again on Stellarex, maybe just to ring-fence the potential risk here. Can you just remind us or give us a ballpark estimate of how much sales you deliver on that side? Is that like a mid-double-digits million euro or something like this? That would be helpful. Thank you.

[Abhijit Bhattacharya:]

Okay. On the North America order intake, as Frans mentioned, last year, we had overall for North America a very strong order intake, last year. So we grew 8% order intake last year. And we ended actually Q4 with a 10% order intake. So the weakness in Q1 was both in Connected Care and in Diagnosis & Treatment, so it’s not really linked to one side or the other. I think part of a catch-up impact. And I think more because we – some of the businesses – some of the orders, we expect to come in Q2. Regarding Stellarex, yes, do you want to...

[Frans van Houten:]

Yes. I mean I just checked. Stellarex is several tens of millions, but in the totality of our medical device business it’s still relatively modest. And yes, I hope that answers your question.

[Julien Dormois:]

Yes, it does. Thank you very much.

[Operator:]

We will now take our next question from Wim Gille from ABN AMRO. Your line is open. Please go ahead.

[Wim Gille:]

Yes, good morning. I would have a follow-up question on the Personal Health business, which had a good start of the year and partly obviously driven by the products introductions that you did with the value line in oral and the OneBlade in China. Can you give us a bit more color on what you expect to see in terms of your products pipeline for the remainder of this year? Is this kind of sufficiently strong to sustain the momentum that we see today? And then a bit of a follow-up – or not a follow-up, a bit of a housekeeping one. You mentioned the IFRS split over – of €150 million for the EBITDA. Can you also give me the guidance on the impacts on adjusted EBITA and the phasing throughout the years?

[Frans van Houten:]

Let me start with the first question and then hand it over to Abhijit. And innovations are a big driver for success. And in fact, Personal Health derives about 50% of its revenue from innovations that were brought to market in the last 36 months. And between the new Sonicare range; the shaver introductions last year, the P 9000, now the S7000; the OneBlade; and several products coming out in Mother & Child Care and in Domestic Appliances, we feel good about the product pipeline and the underpinning for the revenue growth for the whole year. Couple that with a strong management focus and improved A&P effectiveness, we believe that we can sustain this higher growth rate through the year.

[Abhijit Bhattacharya:]

On the IFRS 16, the main impact comes – or the – not main. Most of the impact comes because of the capitalization of the lease assets, which therefore creates an additional depreciation, which therefore – when you take it out of the EBITDA, therefore, that goes up. So the impact on adjusted EBITA is almost nothing. Regarding the phasing of the year, let us get back to you with Pim and team. I think it should be more or less even throughout the year, but you never know. I will make a double check, but I expect it to be evenly spread through the year.

[Wim Gille:]

That’s perfect, thanks.

[Operator:]

[Operator Instructions] We will now take our next question from Maarten Verbeek from The Idea. Please go ahead. Your line is open. Maarten, your line open. Please go ahead.

[Maarten Verbeek:]

Good morning. It’s Maarten Verbeek, The Idea. I have a question, if you look at your targets regarding the last 12 months, growth rates and just interest great margin. In the past two quarters, you’ve been helped very much by development of Other, but you have never disclosed any targets for the Other division. Let me address it like that. Could you give some color on that, please?

[Abhijit Bhattacharya:]

Yes, I think what we do every year is we give guidance for the full year. I gave that as well earlier in the – in my opening remarks. I think it’s €100 million for the year. So we guide to that. It becomes a bit difficult to be very precise during the quarters, especially because of the IP&S part. And after IFRS 15, actually you need to book. So earlier, if you signed a licensing deal with a certain counterparty, you will book that income over the period of the deal, which is why if you signed a few big deals, you never got a big impact. Now when you sign a deal, you need to book all of that in your income, and that causes a bit of lumpiness. However, overall for the year we are still pretty much on track to what we have guided for. So we guide for it, that the number is €100 million for the year for other. And I mean, if you have some further clarifying questions, we are more than happy to take it on later on through IR.

[Maarten Verbeek:]

Okay. Thank you.

[Operator:]

The last question comes from Michael Jungling from Morgan Stanley. Please go ahead.

[Michael Jungling:]

I have one question about the EBITA margin and the impact from foreign exchange transactional headwinds. And for the first quarter, I think you’ve guided towards a headwind of 30 basis points. If I look at current exchange rates and – I would assume that, that headwind goes away or becomes less for the remainder of the year. Am I correct? And perhaps you can be more precise in guiding what the transactional headwind may be for the full year.

[Abhijit Bhattacharya:]

Yes. I mean, Michael, as you know, if I knew more how foreign currency will behave for the rest of the year, I would give you a very accurate estimate. So based on the rates as of now and based on what happened in Q3 last year, the FX headwind should be there till the middle of the year. If no currencies go kind of big time down after that, then let’s say, from Q3 onwards, we should see that impact going away.

[Michael Jungling:]

Okay. Great. And maybe one follow-up on the D&T

[Frans van Houten:]

Well – but we also said that we compensated that loss of sales through other means, and therefore impact is low.

[Abhijit Bhattacharya:]

We’re – still the – profitability-wise, there will be some impact, but it will be then too precise to start giving for everything those details. But this is a high-margin business. So while, as Frans mentioned, we compensated some of it through other businesses, the loss on D&T, yes, will be the – most of the margin that we make on this €40 million of sales. But we are not going to get into that level of granularity.

[Michael Jungling:]

But the compensation that you’ve made in the first quarter, will that not remain for the remainder of the year?

[Abhijit Bhattacharya:]

No. It’s some stuff that we could pull in from Q2 to Q1 to mitigate some of the – so this is not a on-top-of business. Because as you know, this is a order book-driven business, so it’s not something that comes on top of in such a short period of time. So it’s more a timing thing that we try to smoothen out.

[Michael Jungling:]

Great, thank you.

[Frans van Houten:]

Okay. All right, everybody. Then I, we thank you very much for your attendance. And we remain at your disposal through IR for further questions. Thank you very much.

[Operator:]

That concludes the Royal Philips First Quarter 2019 Results Conference Call on Monday, the 29th of April 2019. Thank you for your participation. You may now disconnect.