Koninklijke Philips NV (PHG) 2017 Q3 法說會逐字稿

Welcome to the Royal Philips Third Quarter 2017 Results Conference Call on Monday, the 23rd of October, 2017. During the introduction, hosted by Mr. Frans van Houten, CEO; and Mr. Abhijit Bhattacharya, CFO, (Operator Instructions). Please note that this call will be recorded and is available by webcast on the website of Royal Philips.

I will now hand the conference over to Mr. Pim Preesman, Head of Investor Relations. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen, and welcome to Philips' Third Quarter 2017 Results Conference Call. I'm here with our CEO, Frans van Houten; and our CFO, Abhijit Bhattacharya. On today's call, Frans will take you through our strategic 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 a.m. this morning. Those documents are now available for download from our Investor Relations website. A full transcript of this conference call will be made available by end of today on our website.

Before I turn over the call to Frans, I would like to remind you that Philips' shareholding in Philips Lighting is currently still at 41.27% of the issued and outstanding share capital by end of the third quarter, and results continue to be consolidated under IFRS. Our loss of control is highly probable within 1 year due to further sell-downs. Philips Lighting is presented as a continued -- discontinued operation in the financial statements of Philips as of the second quarter of 2017. Discontinued operations treatment means that the profit and loss of the Lighting business is reported into discontinued operations. And for the balance sheet, the assets and liabilities of the business are reported on the line Assets Held for Sale and Liabilities Held For Sales, respectively. Cash flows are reported in the line Cash Flow From Discontinued Operations.

Finally, 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 other significant items.

With that, I would like to hand over the call to Frans.

Yes, Thanks, Pim, and thank you all for joining us today in this call. Philips' performance in the third quarter demonstrates that we continue to deliver on our plan, with comparable sales growth of 4% driven by double-digit growth in our growth geographies, most notably in China, and 8% growth in our Connected Care & Health Informatics businesses. We delivered an adjusted EBITA improvement of 140 basis points, driven by higher volumes and the productivity program savings that are well on track. Moreover, we had a solid 5% comparable order intake growth on the back of 8% order intake growth in the third quarter of last year, thus maintaining momentum.

Let me start with some key points regarding our financial performance in the quarter, after which I will share some business highlights as well. Our third quarter results demonstrate our progress in creating value. Philips' comparable sales growth of 4% was led by our Connected Care & Health Informatics businesses, which delivered 8% comparable sales growth. Our Personal Health businesses delivered 5% comparable sales growth. And our Diagnosis & Treatment businesses showed a 2% comparable sales growth.

We were able to further expand our backlog with a solid comparable order intake growth of 5%, mainly driven by a 7% increase in Diagnosis & Treatment...

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Please continue.

Geographically, our...

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Apologies, everybody. We will try to reconnect this one. Okay, you can continue, please. Thank you, Frans.

That's unusual in my 27th quarterly call. Never had that. Geographically, our 4% sales growth was driven by a 15% increase in growth geographies, most notably in China, Latin America and India, and this more than offset a 1% decline in mature geographies. We observed some shifts from September into Q4 both related to orders and revenue, especially in mature markets.

Moving to profitability. Adjusted EBITA was 12.8% of sales compared with an 11.4% last year, which is a strong 140 basis point improvement. All 3 segments contributed to this margin increase. The increase in margins was driven by higher volumes and productivity programs.

The Connected Care & Health Informatics businesses made a strong recovery this quarter as margins improved by 440 basis points. The improvement in Diagnosis & Treatment continued as margins improved by 40 basis points. Personal Health delivered 130 basis points of margin improvement. This is a good moment to refer to the change in leadership in this segment. During the quarter, we activated our strong internal talent pipeline to promote Egbert van Acht to become the Chief Business Leader of our Personal Health business segment. Egbert's experience with the Personal Health businesses enabled a seamless leadership transition in a very short time frame.

Let me expand now on our strategic journey to leadership in Health Technology. Our self-help productivity programs continue to be an important contributor to our margin improvement. In the period 2017-2019, we have committed to achieve a cumulative total net productivity saving of EUR 1.2 billion. We have made a good start as our programs are well on track to deliver the targeted savings of EUR 400 million for 2017, with year-to-date savings already at EUR 350 million.

We continue to strongly drive the digital transformation to serve our customers better and unlock value for them and Philips, and we are pleased with the progress that we are making with our HealthSuite Digital Platform adoption. The benefits are brought to life through the following example: COPD is the most common cause of hospital readmissions, and a recent study showed that with Philips' Trilogy home ventilators, providers can save millions in readmission cost. We have expanded our market-leading home ventilation offering with the launch of the connected Trilogy ventilator in North America, linking it to the Philips Care Orchestrator. Care Orchestrator is a unique patient management service for people living with chronic respiratory and sleep conditions. This service effectively provides care coordination between patients, home care workers, doctors, hospitals and payers, all enabled by our HealthSuite Digital cloud platform. A combination of the connected Trilogy ventilator and the CareSage service provides a clinically validated solution for COPD management, which is expected to help providers lower care cost and reduce hospital admissions while improving the patient experience.

We launched a global brand campaign to help us leverage the Philips brand as a key competitive differentiator and to strengthen our reputation as a leader in Health Technology. This new campaign builds on our belief that there's always a way to make life better, which supports our ambitions to improve the lives of 3 billion people a year by 2025. We are also using the campaign to deepen our engagement with consumers and customers in the C-suite, accelerating a shift from a transactional business model to a more sticky relationship-based model. This has already yielded encouraging results in the first wave of markets, including in the United States where we are partnering with the Washington Post for the launch.

We create further value through deeper customer partnerships and increasing geographic spread. During the third quarter, we signed several multi-year agreements, including a 5-year agreement with the Siloam Hospitals of Indonesia, covering maintenance and operational services. As Indonesia's largest private hospital group, the Siloam Hospitals provide general and highly specialist care to more than 2 million patients a year. Siloam Hospitals use a broad range of Philips health care technologies, such as suites for image-guided therapy, diagnostic imaging solutions, including MRI and ultrasound. The new agreement aims to ensure the high quality of health care services that Siloam is providing to its patients, while at the same time improving operational and cost efficiencies.

We also signed a 6-year agreement with the San Giovanni Calibita Fatebenefratelli Hospital in Rome, which is specialized in providing Mother & Child Care. The hospital supports the birth of 4,000 newborns and provides critical care for 400 premature babies from across Italy each year. Philips will provide a full suite of medical technologies, clinical informatics and services. Philips will implement a centralized command system that works with advanced patient monitoring for the neonatal intensive care units to enable continuous monitoring of the neonates and applying predictive analytics of their condition.

In the United States, Philips expanded its relationship with Advocate Health Care, the largest health system in Illinois, to assist Advocate Health Care in standardizing its clinical IT and patient monitoring solutions across the enterprise for improved patient outcomes and predictable costs.

We continued our strong growth momentum in China, driven by our innovative consumer health and professional health care portfolio, focused initiatives to step up market share and customer partnerships. This is illustrated by the double-digit growth in Diagnostic Imaging order intake, which was in part driven by the strong traction in the private hospital segment, such as the new strategic partnership with Health 100, the largest health examination organization in China.

Moreover, an important milestone in the long-term partnership agreement with Phoenix Children's Hospital was achieved with the opening of a new emergency department and level 1 pediatric trauma center, which both feature connected solutions from Philips.

Philips also continues to reinforce its leadership in cardiac ultrasound with the strong performance in the United States and the continued drive to expand in adjacencies such as in the Obstetrics and Gynecology and the point-of-care segments, resulting in strong double-digit order intake growth in each of these clinical segments in the third quarter. For example, Philips introduced Obstetrics and Gynecology ultrasound innovations that are designed to support earlier, easier and more confident diagnoses. Philips introduced the Lumify mobile ultrasound in Europe and Asia, with the first multi-million order secured in Germany. Lumify is Philips' first app-based mobile ultrasound solution that offers diagnostic capabilities for compatible smartphones and handheld devices, focused on the urgent care environment.

Highlighting Philips' leadership in digital pathology, the Pathology Institute in Hall and Pathology Institute in Tirol Kliniken Innsbruck, both in Austria, fully digitized their diagnostic process with Philips' comprehensive IntelliSite Pathology Solution. Last quarter, we already announced that we received regulatory clearance from the FDA for the Philips IntelliSite Pathology Solution, which is the first and currently only digital pathology solution for primary diagnostic use, enabling us to market the solution in the United States.

Moving on to Oral Healthcare. After a successful launch of the Sonicare DiamondClean Smart in Q3 to dental professionals and consumers in China and the United States, we are rolling out this innovative and superior Philips range to over 20 other markets in Q4. Most of the activation has started in October, and first signs are promising. The DiamondClean Smart is the most technologically advanced toothbrush in the world, building on the success of DiamondClean iconic design range, but adding sensors, delivering a complete care experience. This innovation also comes with a coaching app to help guide consumers towards a more complete oral cleaning. Feedback from dental professionals and consumers has been encouraging, with strong ratings and reviews in China, for example, Tmall rated the proposition with 4.8 out of 5 and JD.com at 95%.

During the quarter, we also launched the next-generation Airfryer, which features an innovative technology to prepare tasty, healthier food with little to no oil. As a leader in this category, Philips has sold now more than 8 million Airfryers globally to date.

On a different note, we are looking forward to the RSNA or, in full, the Radiology (sic) [Radiological] Society of North America, annual meeting at the end of next month in Chicago. This is one of the largest radiology trade shows globally, and Philips will be unveiling some exciting innovations in diagnostic imaging systems, advanced clinical informatics and services, all designed to facilitate an efficient workflow and first-time right diagnosis. This will lead to a significant further renewal of the portfolio of offerings in the Diagnosis & Treatment businesses.

We are also making good progress with the integration of Spectranetics. The Spectranetics business reached an important milestone with the FDA approval of Stellarex, the next-generation drug-coated balloon, or DCB, to treat patients with peripheral arterial disease. Stellarex' latest results from the ongoing ILLUMENATE European randomized clinical trial demonstrated that Stellarex is the first low-dose DCB to demonstrate a lasting treatment effect 2 years after the treatment compared to standard endovascular care in the United States. The Stellarex launch in the U.S. is going very well, is fully on plan, whereby we also cross-trained our existing sales force to further expand the U.S. market launch. Other examples of the progress on the integration is that we already identified cross-selling opportunities for over 500 accounts and achieved some significant procurement savings by leveraging our existing Philips contracts.

Our Image-Guided Therapy devices business continues its strong performance with double-digit growth, driven by the success of our smart catheters for peripheral imaging and therapy, as well as the sales growth of our iFR portfolio on the back of the strong clinical study results earlier this year. iFR is the next-generation physiologic measurement to access the blood flow across a suspected blockage. We are convinced that this proprietary technology is a clear differentiator in this market segment.

Last month, I also attended the United Nations General Assembly meeting in New York, and we made a commitment to improve the lives of 300 million people in underserved markets, thereby recognizing the often critical needs of women and children in many communities already struggling without adequate access to health care.

Last year, we announced our new 5-year sustainability program, Healthy people, sustainable planet, which includes the ambition to improve the lives of 3 billion people by 2025 by focusing on sustainable development goals, primarily 3 and 12, and we also aim to become carbon-neutral in our operations by 2020.

So ladies and gentlemen, sustainability is an integral part of the way we do business at Philips, and we are pleased that this was also recognized as we were named Industry Leader by the Dow Jones Sustainability Index 2017 for the third year in a row. As stated in the press release, this month, we reached agreement with the U.S. government on a consent decree focusing on our defibrillator manufacturing in the U.S. The decree is related to compliance with current good manufacturing practice requirements arising from past inspections in and before 2015. While the settlement, of course, is a disappointment for all of us, we are fully prepared to fulfill the terms of the decree, and we hope to resume the suspended defibrillator production in the course of 2018. As a consequence of the decree, we anticipate an EBITA impact of approximately EUR 20 million in the fourth quarter of 2017 and approximately EUR 60 million in 2018. The combined sales of the external defibrillator product lines affected by the terms of the decree were approximately EUR 35 million per quarter in 2016. Let me stress that there is no concern on product quality. Our products are market-leading also in the area of quality and reliability and are highly appreciated by our customers.

Further, as expected, the FDA conducted an inspection of our Cleveland facility in the quarter. In accordance with normal practice, we submitted our response to inspectional findings for review by the FDA. We are committed to delivering high-quality innovative products and solutions. And over the last years, we have made significant progress in our Quality Management System Regulation compliance.

Last Friday, on the 20th of October, Philips held an Extraordinary General Meeting of Shareholders, during which Marnix van Ginneken, Philips' Chief Legal Officer and member of Philips Executive Committee, was appointed as a member of the Board of Management, replacing Pieter Nota. Marnix has been playing an important role in the Executive Committee since 2014, providing valuable contributions on a wide area of subjects. His broad knowledge of Philips and his vast international corporate governance expertise makes him an excellent member to complement the Board of Management.

I'm pleased to note that in September, the MSCI acknowledged our transformation into a focused health technology leader by reclassifying Philips' stock to the health care sector from the industrials group. This follows the reclassification of our shares to health care by the FTSE Group's ISB -- ICB, and the change in sector classification for the STOXX Europe 600 Index to health care.

Despite ongoing global uncertainties, our outlook for 2017 remains unchanged. Supported by our 5% year-to-date comparable order intake growth, we are on a good track to deliver the 4% to 6% comparable sales growth and an improvement in the adjusted EBITA margin of around 100 basis points this year.

And with that, ladies and gentlemen, let me turn the call to Abhijit, who will provide more detail on financial performance and market dynamics.

Thank you, Frans, and good morning to all of you on the call as well as on the webcast. Let me start by providing some color on the third quarter growth of 4%. This was largely led by 15% comparable sales increase in the growth geographies, which was driven by strong double-digit growth in China, India, Turkey and Argentina.

In the growth geographies, each of the 3 segments recorded double-digit growth in the third quarter, and Diagnosis & Treatment grew in the 20s on the back of a high-teens growth in Q3 2016. North America sales were flat year-on-year, while other mature markets posted a 4% comparable sales growth, driven mainly by Japan. Sales in Western Europe declined by 6% in the quarter, following a strong second quarter when comparable sales grew by 8%. Year-to-date sales in Western Europe have grown low single digit, which is in line with our expectations. In HealthTech Other, net sales decreased by EUR 9 million, reflecting lower royalty income.

Turning to order intake. As Frans mentioned, comparable order intake overall grew by 5%. The Diagnosis & Treatment businesses grew for a second quarter in a row by 7%, driven by double-digit growth in Ultrasound. The Connected Care & Health Informatics businesses grew by 1% on the back of strong mid-teens comparable growth last year.

In the growth geographies, order intake on a comparable basis grew high single digit compared to Q3 2016, mainly driven by China and India. We continued our strong growth momentum in China, driven by our innovative consumer health and professional health care portfolio, and focused initiatives to step up market share and customer partnerships. This is also illustrated by the mid-teens growth in Diagnostic Imaging order intake, which was in part driven by the strong traction in the private hospital segment, such as a new agreement with one of the largest health examination organizations in China. Year-to-date, the Diagnostic Imaging order intake in China amounts to over 20%. Comparable order intake in North America posted a 2% growth, while Western Europe declined 3%.

Let me now turn to the EBITA development for the group in the third quarter. Adjusted EBITA margin of 12.8% in the quarter was 140 basis points higher than the year before. This margin increase was driven by a very strong margin improvement of 440 basis points in Connected Care & Health Informatics. In Personal Health, the margin improved by 130 basis points. In both segments, this was mainly attributable to operational leverage from growth, procurement savings and cost productivity. In Diagnosis & Treatment, the margin improvement was 40 basis points, mainly due to procurement savings and cost productivity.

Our performance in the third quarter is driven by higher volumes, improved operational performance and delivering on our cost productivity targets. More specifically, the net overhead reduction amounted to EUR 26 million in non-manufacturing cost. The productivity program contributed EUR 43 million to the gross margin. And procurement savings, in part driven by our Design for Excellence program, delivered EUR 77 million bill-of-material savings year-on-year. Year-on-year, our productivity savings amount to EUR 350 million. And as Frans also mentioned, we are on track to achieve our target of EUR 400 million for this year.

In HealthTech Other, the adjusted EBITA amounted to minus EUR 19 million. The decline of EUR 5 million compared to Q3 2016 was caused by the lower royalty income. One-off significant items in the third quarter were approximately EUR 70 million above our previous guidance. Of this, around EUR 40 million is related to acquisitions that were closed in the third quarter, mainly related to the acquisition charges of Spectranetics, and an additional EUR 30 million due to acceleration of certain restructuring costs.

In the third quarter, the income tax expense was EUR 5 million, which was an increase of EUR 21 million compared to last year, mainly due to higher income. Both Q3 2016 and Q3 2017 included a release of tax provisions. Overall, net financial expenses declined by EUR 154 year-on-year, mainly reflecting a EUR 98 million charge in Q3 2016 related to the redeem notes in October 2016, higher dividend income related to the retail interest in the combined businesses of Lumileds and Automotive, and lower interest expenses on net debt.

Return on invested capital, which is calculated on a 5-quarter MAT basis, was 13.2%, which is 5 percentage points above our weighted average cost of capital, and improved by 0.7% compared to Q3 2016. ROIC decreased by 2.2% compared to the previous quarter, mainly due to the impact of acquisitions. Our drive to increase working capital continued to yield results as inventories as a percentage of sales decreased to 14.9% year-on-year, an improvement of 120 basis points. Overall, working capital improved by 80 basis points to reach 9.6% of sales.

Free cash flow was EUR 72 million in Q3 2017, including a EUR 219 million of pension liability derisking in the U.S. In Q3 2016, the free cash flow was EUR 65 million, including EUR 63 million of pension derisking. Therefore, free cash flow excluding pension liability derisking amounted to EUR 291 million in Q3 this quarter -- this year compared to EUR 128 million in the same quarter last year.

The change in debt in Q3 mainly reflects the notes issued for a total amount of EUR 1 billion. We successfully placed EUR 500 million floating-rate notes due in 2019 and EUR 500 million fixed-rate notes due in 2023 at very competitive pricing levels. The net proceeds of the offerings were used for the repayment of the EUR 1 billion loan which was entered into for the purpose of financing the acquisition of Spectranetics and for general purposes.

Let me now provide you with an update on the U.S. market and our outlook for Western European and China markets. Health care in the U.S. is undergoing profound changes. With our scope and scale in the U.S. and wide range of digital innovations, we are well-positioned to support public and private health care organizations to reduce health care costs, improve the quality and outcomes of care and move from a volume-based to a value-based system of reimbursement and service delivery. We continue to pursue and develop customer partnerships focused on these aims.

Market uncertainty continued in Q3. While legislative processes to repeal the ACA was deferred, uncertainty around other policy topics, for example, the ACA health insurance marketplace stabilization, remains. The main uncertainty -- the market uncertainty continues to impact larger and longer-term customer commitments. Additionally, it is possible that the current 2-year delay in the medical device tax will expire and not be extended after January 1, 2018. We continue to monitor these events closely and stay focused on the needs of our customers. We saw a moderate improvement in government spending during the quarter. Given these uncertainties, we continue to expect U.S. market growth to be in the low single digit while we closely monitor further developments.

In Western Europe, we continue to expect modest low single-digit market growth. And in China, we continue to expect mid- to high-single-digit market growth for 2017. Overall, we estimate the global health care market growth to be in the low single-digit range for 2017.

Let me now turn our guidance for HealthTech Other, Legacy Items and restructuring costs. In the HealthTech Other segment, we now expect approximately EUR 80 million net cost at adjusted EBITA level for the full year. On an EBITA level, we now expect EUR 90 million of net cost for the year. Both the EBITA and the adjusted EBITA losses increased by EUR 20 million compared to the previous guidance, reflecting lower expected royalty income.

In Legacy Items, we expect Lighting separation cost to remain EUR 30 million for the full year. We now expect EUR 105 million of net cost at reported EBITA level, an increase of EUR 10 million, driven by the movement of environmental provisions and legal charges. At adjusted EBITA level, we now expect EUR 50 million net cost for the full year.

Restructuring and acquisition-related costs in the fourth quarter are expected to amount to approximately EUR 150 million. We are taking additional restructuring and portfolio optimization measures, mainly focused at acceleration of productivity programs in Diagnostic Imaging. Restructuring charges were on an average 80 basis points during the last 3 years, and we now expect a similar level for 2017 to 2019, with a decrease thereafter. Finally, the fourth quarter results will include the financials of the businesses acquired in Q3 and will have a dilutive effect of 20 to 30 basis points on the adjusted EBITA for the quarter.

During the third quarter, we also started the EUR 1.5 billion share buyback program, which was announced on June 28, and intend to complete it in 2 years. The program will more than offset the share dilution in connection with Philips' long-term incentive programs and dividend in shares. We execute part of the program through a series of individual forward transactions unevenly distributed over the 2-year period. Details of the transactions can be found on the Philips Investor Relations website.

In summary, we are pleased with another solid quarter with mid-single-digit order intake and comparable sales growth, earnings improvement, free cash flow improvement and further progress on working capital management. On a year-to-date basis, we have delivered an improvement of 100 basis points in adjusted EBITA. We continue to target a performance trajectory to deliver 4% to 6% comparable sales growth and around 100 basis points improvement in adjusted EBITA per year.

Before we open the line for questions, I'd like to remind you that we will host our Capital Markets Day in New York next week on the 2nd of November, where we will provide an update of our strategy and deeper insights on the path to value towards 2020. We look forward to meeting many of you in New York, while a live webcast will be available for the plenary presentations as well.

With that, we'll now open the lines for your questions. Thank you.

The first question comes from Ms. Veronika Dubajova from Goldman Sachs.

I'll keep it to 2 to start off. First, can you talk about what drove the slowdown in the Personal Health growth in the third quarter? It seems to me that both the momentum in Health & Wellness and grooming decelerated pretty meaningfully in the third quarter. So maybe you can talk about what happened there and how we should be thinking about the growth trajectory for the rest of the year. So that's my first question. And then my second question is more a financial one. Abhijit, looking at your execution versus the EUR 1.2 billion saving program, it seems to me that you're running slightly ahead of where you had expect it to be. Is this a function of timing only? Or are you also realizing that the savings target that you had communicated is maybe there are pockets above and beyond what was included in the EUR 1.2 billion, which is allowing you to be progressing so well so far?

Yes. Veronika, thanks for your questions. Let me start with the first one. My advice is let's not look for any trends in the Personal Health. I rate the Health & Wellness and Personal Care entirely to the phasing and timing of campaigns and product introductions. And we expect a strong year-end, so we don't read anything significant into it. I'm pleased with the handover to Egbert van Acht, and I'm absolutely confident in the momentum that we are having in these businesses.

Veronika, on the savings, yes, you are right, we are slightly ahead. I think, in general, the EUR 1.2 billion will still remain the EUR 1.2 billion. But we will try to, of course, see how quickly we can get the savings in. But for the time being, the EUR 1.2 billion remains, and I would take the -- maybe a slight over-delivery for this year as a starting point.

Understood. And I noticed that you mentioned in the charges for the quarter that you were looking at some portfolio optimization measures in D&T. Is that anything we need to be aware of? And that will be my last question.

No, not in particular. We are taking some significant measures to improve profitability in Diagnosis & Treatment. We are behind our peer group there and, therefore, let's say, some of the less profit-making businesses where we don't see a path forward to value, we are taking some actions to stop those, but it's nothing major.

(Operator Instructions) We can now take our next question from Ian Douglas-Pennant from UBS.

It's Ian Douglas-Pennant from UBS. So my one question, I guess, would be on the health care orders. So we've had very strong order growth first 9 months of the year, but that hasn't translated into meaningful revenue growth. Should we -- how should we think about it? Should we think about a very strong Q4? Is there a sustainable increase in the kind of order fulfillment time? Or how should we think about that?

Yes. Ian, yes, some of what you say is right. Orders become a little bit bigger, takes some more time to make it over the finish line. I think we talked about it in July as well on the back of the second quarter. At that time, it was some patient monitoring deals that moved into, from a revenue recognition, into the third quarter. By the way, that did happen, and you saw subsequently a very strong CCHI quarter with patient monitoring performing very well. Again, also in Q3, we saw some deals that didn't make it into the end of September revenue recognition, otherwise, the quarter could have been even stronger. So now we are looking at, yes, significantly back-end loaded Q4 where we intend to finish the year well. The order intake also bodes well for the underpinning of next year because some of these orders actually will only make it into revenue during 2018.

Could you also talk about -- is there any change in the criteria that would make you book something as an order, which maybe you're booking them slightly earlier than you might have done previously, either intentionally or unintentionally?

No, no, no, we have no change. In fact, we are quite strict in order recognition. But I'd look to Abhijit to...

No, no, absolutely. Ian, to your question, we have intentionally not changed anything. So in order intake, nothing happens unintentionally. It's just good to remember that for the large-scale projects, we don't recognize the entire project as order intake. So we -- for imaging equipment, for example, we go out the next 15 months, depending on the lead time. So actually, for the larger-scale projects, we recognize only that portion of the order which is in the delivery horizon, which is probably different from what our competitors do.

Great. And sorry, what I hope is a one-word answer question. I can't find the size of the tax provision reversal. I'm sorry if it's obvious.

Yes, we -- I think it was -- we don't give that amount out because of -- for obvious sensitivity, but it was slightly lower than last year is what I can tell you.

We can now take our next question from Andreas Willi from JPMorgan.

My first question, on Connected Care, you had a great margin performance this quarter, a big step-up; been a bit erratic last few years. So are you confident you've reached the kind of a higher level of performance there? Or is this still going to be quite volatile in terms of the quarterly margin performance beyond the seasonality? And my follow-up or second question will be on restructuring. You made some comments earlier. Maybe you could elaborate a bit more in terms of where the increased spending is going, and why is it needed? Is it -- are you more ambitious now? Or is something else in the market going against you that you need more spending within the same kind of operating plan to get to your targets?

Andreas, well, the CCHI market -- or margin improvement certainly was helped by a very strong patient monitoring business in the quarter. The way I would look at it, it is a combination of structural improvement across the entire CCHI segment as well as a over-delivery, thanks to great factory loading and a quarterly high in the patient monitoring revenue. So the seasonal peak may not be the same every quarter, but the structural improvement will, of course, continue as we see CCHI as a -- in the near term, trending towards a mid-teen EBITA performance.

Yes. Andreas, regarding the restructuring, there is not something specific going against us in the market. We have a pretty ambitious program, which we classified as self-help over the next 3 years. And whatever we can pull in, because from the time you actually start the process, you restructure, you have the cost out and you improve the profitability's reasonable length of time. So the earlier we can get these done, the better we are in terms of delivering our year-on-year improvement. So nothing out of the ordinary. But yes, as we take deeper actions with our global business services and as we move along on our footprint rationalization, these costs are coming in now and a bit accelerated, to your point.

We can now take our next question from Mark Troman from Bank of America.

I've got a question on Diagnosis & Treatment, the margin up 40 basis points. Looks like Ultrasound doing very well, but could you provide a bit more color on the margin performance of how IGT and Diagnostic Imaging is performing?

Yes. Mark, I think overall, all our businesses are doing well. You're right, the DI has, of course, improved, but so has IGT, and IGT is continually improving. In Diagnostic Imaging, we didn't have so much growth this quarter, so the operational leverage was a bit limited. And that's also partly with, as Frans mentioned, some of the revenue recognition issues in the quarter. But I think overall, for the year, we will make a good improvement there as well. So with the revenues moving into Q4, the operating leverage impact will come in Q4 as well.

Okay. And then one follow-up, on pricing. I mean, so far this year, you've looked to have been 100 basis points on your group profit bridge negative, negative 100 basis points, or a bit less, in fact, earlier in the year. And I think your longer-term average is about 130. How are you feeling you're doing on pricing? Do you think you can keep slightly ahead of that 130 basis points per year benchmark?

Yes. Mark, I would think we should be able to maintain this for the time being. We also see that as we are emphasizing the solutions aspect more and we go to more partnership deals that -- and we sign up for, let's say, helping hospitals drive productivity, that the business becomes less of a price game and much more of a performance game. So I -- we are hoping that we can continue down that path and thereby mitigate and even reduce price pressures.

We can now take our next question from Patrick Wood from Citi.

I have 2, please, if I may. The first is, obviously, a very strong performance in PCMS. I'm trying to get a sense there how much of that is, let's say, the deferred orders that are coming through and a sort of 1-quarter bump versus going forward? Should we expect, for example, Q4 to look a bit more like Q1 or 2 from an organic growth perspective? That will be the first one. And then the second one is, so the deferred revenues that you expect to fall into something like DI in Q4 of this year, do you have a rough sense of roughly how much we should expect from that? Should we expect within the overall D&T business a step-up in organic sales growth in Q4 or similar to Q3?

Yes. Well, Patrick, we are not going into specific guidance for Q4, so it's a bit tricky how shall I answer you. I mean, Andreas, of course, asked a similar question. What was -- what is attributable to a seasonable peak and what is the structural improvement? And I answered that CCHI is trending towards the mid-teens EBITA performance on a structural basis. We had a very strong sales performance for PCMS in the quarter. Therefore, you need to even it out a little bit and get to a kind of a more normalized incline of the performance improvement where one quarter, you can be a little bit ahead and the next quarter, you even it out again. Order growth for CCHI in the second quarter was strong. So we also are sitting on a good order book for CCHI. I have strong confidence in the future sales traction there. D&T, if you recall, we had good order growth in the second quarter, a little bit less in the third quarter. But on a 12-months moving average, we are actually in the range, completely supporting the growth plan that we have. I think Abhijit just now already said that we had some business slip into Q4 that also applies to Diagnostic Imaging and D&T at large. So we are heading towards a good strong finish of the year. And again, also for 2018, we already are having an order book that is well-filled.

We can now take our next question from James Moore from Redburn.

My first question is on the strong PCMS growth in the quarter. Can I assume that that's just sensible inventory channel management into the defib ruling? And so will it all reverse in the fourth quarter? Really trying to understand how much is sustainable and how much we should think about a switch into the fourth quarter. And my second question is on Western Europe. I see you've had a couple of quarters of negative orders, and I saw organic sales growth went from sort of plus 8% to minus 6%. And Abhijit, you mentioned the comp and you mentioned year-to-date, you're low single and that's in line. But just on the minus 6%, can you talk a bit about whether any one business or any one country is driving that?

Yes. Well, James, let me, first of all, strongly deny the implication of inventory management in the third quarter. We did not, so this is not defib-related at all. It's a strong performance on the side of patient monitoring and specifically -- I mean, if I pivot to some of these customer examples, Advocate Health, Lakeland, of course, those are new orders. They are not yet in revenue. But it just underlines the strong traction that we are having on patient monitoring. Then the second question will be taken by Abhijit.

Yes, I think on Western Europe, it's largely from the Benelux. And in the Benelux, for the last -- in the last quarter, we had fantastic growth close to 30%, so therefore, it was very lumpy. And then, of course, we had a big decline in this quarter, so I would not read too much into that, James. If you look for the first half of this year, we've had a 7% growth. So I think we are pretty okay because we had said all along, Western Europe would be a low single-digit market, and we are trending in that direction.

We can now take our next question from Ben Uglow from Morgan Stanley.

I had a couple. On the orders, you very kindly gave quite a lot of detail around Ultrasound and the overall trend. Without, how would I put it, without wanting to sort of sound pernickety, is it correct or is it fair for me to assume that when we look at the North America market in terms of Diagnostic Imaging, i.e., advanced imaging, CT, MR, et cetera, that the orders there are still trending down? Is this sort of triangulating it, backing it out? Is that a fair assumption? If so, is there any connection at all between that, that current trend on what we're seeing on the North American revenues which are down mid-single-digits? So that's question number one. Question number two, and it's for Abhijit, very briefly or very quickly, on Slide 31 of the presentation, can you just give us some color on the incidentals? There's a EUR 22 million incidental in Diagnosis & Treatment and an EUR 18 million in Connected Care. I just want to really understand what those are about.

Yes. Ben, so I'm going to disagree with your assumption because if I look at the whole year, then DI, Diagnostic Imaging, in North America is on a very good trend. We saw mid- to high single-digit order intake growth in the first half year. And it's our belief that we are increasing some market share, in particular in, for example, MR. So no worries for me in North America. Also, when I look at the funnel, let's say, the customers that we are engaged with where we hope to win orders, there is a lot of activity in the funnel with relation to DI. The -- Q3 just happens to be a little bit lumpy towards DI. And I just got a very helpful message from Abhijit that year-to-date for DI in North America, we are...

Mid-teens order intake.

Mid-teens in order intake growth. So it's even a bit stronger than I was just representing to you, that's probably why I get the signpost. So anyway, it's going well. The third quarter happens to be a little bit softer, but nothing to worry about.

Ben, on the incidentals, there are a couple of things. So we had actually guided to most of it. But in Diagnosis & Treatment, like I said, we took a couple of portfolio decisions, which led to the additional charge of EUR 22 million. And in CCHI as well, we did some portfolio rationalizations, which led to slightly higher than what we guided for, and that it was more a phasing between the quarters and we were able to pull it in earlier.

Just roughly, what are the charges?

These are related to restructuring, inventory write-offs and any other balance sheet write-offs that we need to take when you stop a product line or a product.

We can now take our next question from Max Yates from Crédit Suisse.

Just my first question is around the comments on Cleveland. So you said kind of, as expected, the FDA's done their investigation and you've submitted your response. Is there any color you could give on whether the issues that the FDA raised were kind of in line or less or more than perhaps you would have expected? That's my first question.

Yes. So the physical investigation was, or on-site, was completed in the course of August. And then as is customary, you get their draft 483 findings that you can then react to and then you go into dialogue on the outcome. It's current expectations that we will have that dialogue only in the next coming months. So there is no immediate urgency behind the situation. So that is, I think, where I would need to leave it at. I mean, obviously, there are some findings, otherwise, I would have said it's a completely clean investigation. But I feel that the situation is very well in hand and that we will continue to improve. Also, the whole Diagnostic Imaging setup is very much a global setup with factories in 3 locations and all products being manufactured from those locations, so we feel comfortable about where we are.

Okay. And just the follow-up was just around the acquisition pipeline. Obviously, you've done quite a few deals, sort of Spectranetics and some smaller ones. Just wondering how you think about the next 6 months and the pipeline that you see in front of you. I mean, are we more in integration mode over the last -- over the next 6 months, given the deals that have been done? Or are you still very much sort of on the hunt for deals and you see a very healthy sort of [unfilled] pipeline in front of you?

I think we already flagged in the second quarter that it was accidental that they all seem to have come in the same period, so there's certainly not going to be that kind of intensity in a single period in the coming year. M&A does play an active role in our strategy, but only when a deal really passes our internal scrutiny will we do it. Most of our strategy is organic. Most of the improvement for our strategic goals is based on the self-help and the organic growth of the core business, therefore, M&A is the icing on the cake rather than a necessity, right? So we will carefully look at those deals that can really strengthen the portfolio, but we will not go into deals that get us distracted.

Okay. Perhaps just one very quick follow-up on Healthcare Other. Is there any reason or any kind of clarity you can give us on 2018 in Healthcare Other and anything you can point us to that would suggest it will be better, it will be less negative than the EUR 80 million this year in 2018?

Yes. I think, Max, you have to hold your horses until next week. We normally do that in the CMD, so we will do that in our Capital Markets Day.

(Operator Instructions) We can now take our next question from Scott Bardo from Berenberg.

Just first question, just following on from Max's question on Cleveland. Can you give us a feeling for where we are in the recovery from Cleveland as compared to historic output. Are we back at normal historic levels at Cleveland, or is there still some way to go in that recovery? And perhaps you can just comment actually on -- well, following on from your comments in the last update, you mentioned quite a lot of product redesign, recertification. Have all of those activities now occurred at Cleveland? Or is there still some more activities to be done there? So that's the first question, and I have a follow-up.

Scott, Frans here. In speech language, Cleveland has become synonymous with Diagnostic Imaging, and that's a little bit of an oversimplification. I mean, we have several other sites in Diagnostic Imaging, like Haifa, Suzhou and Best here in the Netherlands, that all play an important role in the future of Diagnostic Imaging. On the question of Max, I already said that we feel that we have much more derisked the industrial footprint versus the past with virtually all products being produced in other locations as well. So that's my first statement. The second point is that with regard to production volumes, if I add up the sum of all the factory locations across the world, yes, we are very much at normal levels now, and we have completely recovered from a volume basis. Okay? Then on the third comment is on the famous cost side where we have seen, of course, heavy investments and improvements in the quality management system and quality management system compliance, including the redesign of supplier base because some of the products' problems were not our own doing but actually part of the supplier base. There's still some work ongoing to rationalize the supplier base. Moreover, if I pivot to the profitability of DI from a kind of a mid-single-digit EBITA, we have pledged to go, in the near term, in the next 3 years, to low teens. Now obviously, that can only be done if we tackle the cost of organization also in that -- in the Diagnostic Imaging global footprint. So we have more work to do. Abhijit already said that we have taken some restructuring in order to, let's say, put the business on continued improvement path. And this is typically also a topic that I think would come back at the Capital Markets Day where we have both Rob Cascella as well as Kees Wesdorp, who is the Diagnostic Imaging business group leader, present. And of course, they are completely prepared to be grilled by all of you. So I think we can give more color during that conference on good track record and the good path that we are on in order to get to decent profitability in that business.

That's a very helpful answer. And maybe just a quick follow-up, please, for Abhijit on to some specific financials. So for the full year, Abhijit, I'd like to understand that the current range of growth is 4% to 6% growth range, that both of those growth boundaries are still possible, or do you feel more comfortable with one or the other end of that growth guidance? Perhaps also, if you could just give us a bit of a flavor on where you expect free cash flow for the full year. I understand that, that had some onetime impacts, but it would be useful if you could quantify that and just give us a feeling, obviously, for tax rate as well, how you see that this year and going forward.

Yes. I think I'm not going to get more specific on the growth rate. Frans mentioned earlier as well that we are going to be in the range of 4% to 6%. Year-to-date, we are close to the 4%. We are rounded at 4%, but just shy of it. If you look at the decimal place, if we -- based on Q4, we are probably -- we are comfortable that we'll be in the 4% to 6% range free cash flow. Again, guidance doesn't change, we said EUR 1 billion to EUR 1.5 billion. We maintained that guidance. And the tax rate will probably be in the mid-20s. We had earlier guided to the high 20s. We'll probably be in the mid-20s for the year based on where we are now.

Thank you, Mr. van Houten and Mr. Bhattacharya, there are no further questions. Please continue.

Okay. Well, I think we had our share of questions this morning, and it was good. I appreciate very much your attendance. I hope to see everybody during the Capital Markets Conference that we'll be having in New York very soon. And for now, thanks very much for attending, and have a great day.

This concludes the Royal Philips Third Quarter 2017 Results Conference Call on Monday, the 23rd of October, 2017. Thank you for your participation. You may now disconnect.