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PHIA.AS - Q2 2016 Koninklijke Philips NV Earnings Call
EVENT DATE/TIME: JULY 25, 2016 / 8:00AM GMT
Co. reported 2Q16 results.
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JULY 25, 2016 / 8:00AM, PHIA.AS - Q2 2016 Koninklijke Philips NV Earnings Call
CORPORATE PARTICIPANTSRobin Jansen Koninklijke Philips NV - Head of IR Frans van Houten Koninklijke Philips NV - CEO Abhijit Bhattacharya Koninklijke Philips NV - CFO
CONFERENCE CALL PARTICIPANTSIan Douglas-Pennant UBS - Analyst Andreas Willi JPMorgan - Analyst Max Yates Credit Suisse - Analyst Ben Uglow Morgan Stanley - Analyst James Moore Redburn - Analyst Andrew Carter RBC Capital Markets - Analyst Gael De Bray Deutsche Bank - Analyst Philip Scholte Kempen & Co. - Analyst Alok Katre Societe Generale - Analyst Jonathan Mounsey Exane BNP Paribas - Analyst
PRESENTATIONOperator Welcome to the Royal Philips' second-quarter 2016 results conference call on Monday, July 25, 2016. 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'll now hand the conference over to Mr. Robin Jansen, Head of Investor Relations. Please go ahead, sir.
Robin Jansen - Koninklijke Philips NV - Head of IR Thank you. And good morning, ladies and gentlemen. Welcome to Philips' second-quarter FY16 results conference call. I'm here with Frans van Houten, CEO; and Abhijit Bhattacharya, CFO. Pim Preesman, who, as we announced this morning, will take over the responsibilities for IR from September 1, onwards, is also joining us today.
In a moment, Frans will take you through our strategic and financial highlights for the period; Abhijit will then provide more details on financial performance. After that, we will be happy to take your questions.
Our press release, and the related information slide pack, were published at 7:00 am CET this morning; both documents are now available for download from our investor relations website. A full transcript of this conference call will be made available by tomorrow on our investor relations website.
Before I turn over the call to Frans, I would like to remind you of three things. First, Philips Lighting was listed and started trading on Euronext in Amsterdam under the symbol LIGHT on May 27. Philips initially retains a 71.2% stake and, therefore, continues to consolidate Philips Lighting's results.
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JULY 25, 2016 / 8:00AM, PHIA.AS - Q2 2016 Koninklijke Philips NV Earnings Call We encourage you, if you haven't already, to review Philips Lighting's second-quarter and semi-annual earnings materials, which were published on Friday, July 22.
During this call, we will, therefore, focus our commentary as much as possible on the performance of our HealthTech businesses.
Second, following the decision in 2014 to combine our Lumileds and Automotive, Lighting businesses in to a standalone company, and to explore strategic options to attract from third-party investors, the profit and loss of these combined businesses is reported under discontinued operations and the net assets for that business in the balance sheet on the line assets held for sale. The cash flow of the combined Lumileds, Automotive business is reported under cash flow from discontinued operations.
Finally, when referred to adjusted EBITA on this call, this represents EBITA excluding restructuring costs, acquisition-related charges, and other charges and gains above EUR20 million.
With that, I would like to hand over the call to Frans.
Frans van Houten - Koninklijke Philips NV - CEO Yes, thanks, Robin. The second quarter of 2016 was a quarter that marked several important events. Of course, the important milestone for Royal Philips was the successful separation of Philips Lighting; but, sadly, also, several political events were happening with potentially significant consequences throughout the world. And I have to say that volatility has gone up with unsure outcomes.
As we said, we completed the separation process at the end of May with the successful listing of Philips Lighting on the Euronext Amsterdam stock exchange. I want to congratulate the entire Philips Lighting team on the successful offering and listing.
And, as Robin already mentioned, Royal Philips currently retains a majority ownership stake in Philips Lighting, and we aim to fully sell down over the next several years.
We can now fully focus on capturing the exciting opportunities in the health technology space, allowing Philips Lighting to do the same in the growing market for energy-efficient lighting.
Britain's decision to leave the European Union has increased volatility in the short term and uncertainty in the long term. And while not a choice that Philips would have favored, it's a new reality. We remain hopeful that a trade and other commercial arrangements that are negotiated with the UK over the next several years will maintain the close partnership that we have with a very important market for Europe broadly, and Philips specifically.
To that end, I want to make entirely clear that we remain 100% committed to our entire ecosystem in the United Kingdom, and, most notably, our customers and employees.
With that, let me now focus on our second-quarter results. On today's call, I will focus my remarks on our opportunities in the HealthTech market, and, therefore, will review the performance of the businesses in our three key segments: Personal Health, Diagnosis & Treatment, and Connected Care & Health Informatics.
This quarter, we again delivered a solid set results with operational improvements across the operating segments and 5% comparable sales growth in our HealthTech portfolio.
This level of sales growth performance underscores the compelling opportunity for Royal Philips as a Company focused on helping consumers to become healthier, and our B2B customers to deliver better clinical and financial outcomes through an integrated approach to healthcare delivery across the health continuum. This includes, among other things, capturing key opportunities in Population Health Management; improved enterprise-wide solutions for health systems and accountable care organizations; and coordinated care delivery across the health continuum.
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JULY 25, 2016 / 8:00AM, PHIA.AS - Q2 2016 Koninklijke Philips NV Earnings Call Adjusted EBITA improved by 90 basis points to 9.3% of sales, driven by improvements in all operating segments, and within HealthTech, most notably, in the Personal Health business.
Our transformation program, Accelerate!, continues to drive top-line growth and deliver savings that, on an annualized basis, more than compensate for inflation, price erosion, and our ongoing investments in quality and new business areas, like Health Informatics, Variable Patient Monitoring Solutions, Population Health Management, and Digital Pathology, that all offer great long-term growth and margin potential.
Order intake dynamics remain quite uneven, and, as a result, currency-comparable equipment order intake fell by 1% in the quarter. But I want to stress that the somewhat disappointing level of orders in the second quarter, in our view, does not reflect the commercial activity that we see in our opportunity funnel. And based on this, we expect good order intake growth in the second half of this year.
Our Personal Health businesses grew by 9% on a comparable sales basis, with high single-digit growth in our mature and growth geographies, driven by double-digit growth in Central and Eastern Europe; and Middle East and Turkey; and Western Europe.
Adjusted EBITA improved by 18% to EUR234 million. And our margin improved by 170 basis points to 14.1%, including some small non-recurring items that contributed 80 basis points to the margin.
This quarter's performance clearly reflects the strength of the Philips brand, and specifically the Personal Health franchise for consumers around the world; as well as the positive impact of our operational improvement programs.
One of the strong performers in the Personal Health segment is our Sleep & Respiratory Care business. This business grew high single-digit, driven by mid-teens growth in sleep as a result of the rollout of the Dream Station portfolio, which is also driving increased customer satisfaction and market share gains.
We built on this momentum in the second quarter with the successful launch of our cloud-based Patient Adherence Management Service, which is the first of its kind connected health technology for sleep and respiratory conditions, allowing patients to stay connected to their care teams throughout the course of the therapy.
It enables the access to data, clinical management workflow, informatics and intelligence for providers, [payers], and patients within a single cloud-based platform.
We are helping to increase therapy-compliance rates among patients, and to improve the experience of new patients attempting to adapt to the therapy.
In the Personal Care businesses, we introduced a revolutionary new product concept, named OneBlade. OneBlade is a hybrid styler that trims, shaves, and creates clean lines. It was specifically designed for millennials, many of whom prefer to have beards or other types of facial hair.
OneBlade leverages our capabilities as the world's leading electric male grooming brands, and it's stepping in to the growing market trend of male facial hair styling.
OneBlade was already successfully launched in France, the UK, Germany, and North America, and has elicited a positive response from both consumers and retailers. And the first sign-ins -- signs of an in-market performance are exceeding our initial expectations.
As we continue to support these promising product launches in the coming quarters, we expect advertising and promotion to go up compared to historic levels.
In the Oral Healthcare businesses, we introduced the Philips Sonicare Flexcare Platinum connected toothbrush; our latest innovation that uses smart-sensor technology to help consumers optimize their brushing routine.
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JULY 25, 2016 / 8:00AM, PHIA.AS - Q2 2016 Koninklijke Philips NV Earnings Call This advanced connected toothbrush synchronizes finally the Philips Sonicare app via Bluetooth to track brushing habits in real time, and provide a personalized 3D mouth map to help consumers identify the areas of the mouth missed in their current brushing routine.
As the data is stored in the cloud, patients can also choose to share their data and stay connected with their dental professionals, leading to improved brushing compliance between visits.
Switching to the Diagnosis & Treatment businesses, we posted comparable sales growth of 1%, driven by low single-digit growth in Image Guided Therapy and Ultrasound.
Order intake in Diagnosis & Treatment was down mid single-digit, largely driven by phasing in regions like North America, Japan, Germany, and the Nordics.
Adjusted EBITA improved by 20 basis points to 8.2% as operational leverage and ongoing cost savings were able to more than offset the ongoing investments in quality, mainly related to Cleveland.
CT production and shipments from Cleveland have been back on track for some time now. However, as we continued to work hard on further augmenting the overall quality standards across our facilities and among our supplier base, we continued to see elevated levels of quality and regulatory spend in the second half of 2016, and first half of 2017.
These costs remain in line with prior expectations, and, therefore, we continue to expect the Cleveland-related business to contribute improvements of around EUR100 million to adjusted EBITA in 2016; and around EUR75 million in 2017.
Philips Volcano is really performing well, demonstrating again this quarter both the benefits of the acquisition, and the success of the integration.
In the second quarter, we delivered another strong quarter of double-digit comparable sales growth and continued operational improvements, driven by growth across the Smart Catheter product portfolio; synergies with the Image Guided Therapy Systems business; and expansion in to new geographies.
Last month, we further strengthened our Digital Pathology business by acquiring PathXL. With this complementary acquisition, we can build on our digital pathology solutions offering and leverage PathXL's capabilities in the fast-growing image analysis and tissue pathology software field.
We will be an even more attractive partner for global medical institutions as they transition to digitized pathology workflows by solving needs in computational pathology, education, workflow solutions, and image analytics.