Pim Preesman - Head of IR Frans van Houten - CEO Abhijit Bhattacharya - CFO

Veronika Dubajova - Goldman Sachs Andreas Willi - JP Morgan Mark Troman - Bank of America Merrill Lynch Patrick Wood - Citi Ian Douglas-Pennant - UBS Max Yates - Credit Suisse David Vos - Barclays Yi-Dan Wang - Deutsche Bank Scott Bardo - Berenberg James Moore - Redburn

Good morning, ladies and gentlemen, and welcome to Philips Second 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 though 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 we have published at 7 a.m. 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 end of today on our Investor Relations website. Before I turn over the call to Frans, I would like to remind you of accounting of dates regarding Philips Lighting. Following a sell down on April 25, 2017, Philips shareholder and Philips Lighting was 41.6% of the issued and outstanding share capital by end of the second quarter. And results continue to be consolidated in the IFRS. Our loss of control is highly probable within one year due to further sell-downs. Philips Lighting is presented as a discontinued operation in the financial statements of Philips as of the second quarter of 2017. This continued operations treatment meaning 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 lines asset held for sale and liabilities held for sales respectively. Cash flows are reported in the line, cash flow from discontinued operations. We have also published a reporting of date to reflect the treatment of Lighting at discontinued operations. This document is also available for download from our Investor Relations website. The combined Lumileds and Automotive Lighting businesses continue to be reported in the discontinued operations, including the due results following the completion of the sale of an 80.1% stake on June 30, 2017. In the third quarter, the remaining 19.9% stake will be reported as an available for sale financial assets. 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 cost and other significant items. With that, I would like to hand over the call to Frans.

Thank you, Pim, and thank you all for joining us here today. Philips' performance in the second quarter of 2017 was solid, with a 4% comparable sales growth driven by Western Europe, North America and China and a strong 8% increase in our order intake. We achieved further operational improvements resulting in a 90 basis point increase in the adjusted EBITA margin. After covering some of the key results in the second quarter, I'll share with you some recent highlights of our exciting HealthTech journey, but let me first start with our results. Our second quarter results demonstrate our progress in creating value. Philips comparable sale growth of 4% which was led by the Personal Health segment, which showed a continued strong 6% growth in the quarter, while Diagnosis & Treatment and Connected Care & Health Informatics grew by 3% and 1% respectively. We were able to further expand our backlog with a comparable intake growth of 7% in Diagnosis & Treatment with all businesses contributing. And in the Connected Care & Health Informatics businesses, the comparable order intake increased by 8%. Geographically, our 4% comparable sales growth in mature geographies was driven by 8% growth in Western Europe. North America recorded 4% growth, partly offset by a 7% decline in other mature geographies. In growth geographies, sales increased by 3% on a nominal and comparable basis driven by high single digit growth in China and Latin America. Moving to profitability, adjusted EBITA was 10.2% of sales this quarter compare to 9.3% previous year, that's a 90 basis point improvement. The increase in margins was driven by higher volumes, operational improvements and cost productivity. Personal Health delivered a 120 basis points of margin improvement, and maybe that's a good moment to come back to the announcement that Pieter Nota, the Chief Business Leader of our Personal Health businesses and Chief Marketing Officer will be leading Philips. Pieter and I have worked very well together for six years, and this is with regret that I see him leave after a successful tenure with Philips. Based on our strong internal talent pipeline, however, we expect to announce Pieter's successor in the coming weeks, who'll be our sure will be able to build on the growth and margin expansion momentum achieved over the last couple of years in Personal Health. Coming back to the performance in a soft healthcare market, our Diagnosis & Treatment businesses improve margins by 80 basis points, and the Connected Care & Health Informatics businesses improved by 90 basis points. I'm confident that the performance of the Professional Health businesses will continue to improve in the second half of the year based on the strength of their order book. Let me expand a bit on our strategic journey to leadership in health technology. As outlined at last Capital Markets Day, our HealthTech value creation story is built on three key levers. Firstly, we create value by improving margins through better serving customers and raising operational productivity. Secondly, we create value in our core business by gaining market share through deeper, more comprehensive customer partnerships and pursuing growth by increasing the geographic coverage. Certainly, we create value by expanding our innovative solutions along with the health continuum through R&D investments, co-creation with customers and partners and selective M&A. Let me detail that a bit further. On the first lever, our self health productivity program continues to be an important margin contributor, and for the next three years we have committed a cumulative total net saving of €1.2 billion by 2019, averaging productivity savings of approximately €400 million per year. In the second quarter, procurement savings amounted to €61 million. The other productivity programs resulted in savings of 48 million. So, overall we are well on track to deliver the yearly savings amount. We continue to drive the digital transformation to serve our customers better and on work value for them and Philips. For example, the Philips Sonicare DiamondClean Smart connected toothbrush reached a 94% customer satisfaction rating, out of the full score of well 100%. It was top online retailer JD.com in China with consumers highlighting the benefits of the coaching app and the premium design. With this, connected toothbrush, we can directly engage with consumers and by leveraging the data related to the users of the toothbrush, we plan to enhance the brush head replacement rates. By staying on top -- on the topic of digital and online marketing and sales, I can tell you that already 27% of revenue of our consumer categories are sold online, a number that doubled over the last three years. Part of our digital agenda is to increase the online relationship and intimacy with our customer and uses of our products through which we expect to stimulate recurring revenues of our products and services. With the acquisition of UK-based Health & Parenting, we have strengthened our global digital mother and child care platform uGrow. The Health & Parenting team creates easy-to-use and helpful apps to guide expecting parents through pregnancy and into parenthood. Its leading product is the Pregnancy + app, which is one of the world's most downloaded pregnancy apps with approximately 12 million downloads from the Apple App Store and Google Play Store, over 1 million active users and in the UK approximately one out of two expectant mothers used apps. Building on the second level of creating value is through -- building on the second level of creating value to deeper customer partnerships and increasing geographical spread, I can tell you that in the second quarter, we signed multiple long-term strategic partnerships or as we abbreviated LSP's. For example in France, we signed a 10-year Managed Equipment Services contract for patient monitoring systems with Le Confluent, private hospital. The agreement with the top three ranked France hospital for cardiovascular solutions includes maintenance replacement and upgrade of patient monitoring systems as well as biomedical and clinical training. In Singapore, we entered into a multiyear partnership with the Singapore Institute of Advanced Medicine Holdings to provide solutions for its new oncology center with a range of Philips' Advanced Diagnostic imaging systems including in the IQon Spectral CT and Vereos Digital PET CT systems combined with clinical informatics and services. Our funnel for LSP's for the remainder of the year and next year is strong. We're pleased with the success of OneBlade, the innovative new products that taps into the growing market trend of male facial hairstyling. OneBlade effectively broadens the reach of our male grooming portfolio, levering our capabilities as the world's leading electric male grooming brand, OneBlade is on track for its rapid rollout and is currently available in 14 countries worldwide. Certainly, on the third level, we create value by expanding our innovative solutions along the health continuum through R&D investments, co-creation with customers and partners and selective M&A. Our breakthrough R&D investments are delivering tangible results as we see 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. This further confirms our position as a leader in digital pathology, an important solution that is used in the diagnosis of complex diseases such as cancer. We also received FDA clearance for our IntelliSpace Portal 9.0 and a range of innovative applications for radiology. The platform gives clinicians a comprehensive overview of each patient, helping them to diagnose conditions using advanced analytics and quantification of medical images. During the previous quarter, I spoke about the launch of Azurion within the image-guided therapy business. Azurion is a major breakthrough and is our next gen image-guided therapy platform. The solution has been very well received by our customers and we're able to grow market share in the first quarter to strengthen our number one position in that market. In the second quarter, we further strengthened the leadership position of our image-guided therapy business by expanding our portfolio of therapy devices with the agreement to acquire the Spectranetics Corporation. Spectranetics has an impressive product portfolio of catheters for the treatment of coronary artery disease and peripheral vascular diseases. This involves the opening of obstructive blood vessels around the heart and in the legs with devices such as the laser atherectomy catheters and drug-coated balloons. In addition, they are the market leader in the minimally invasive removal of implanted pacemaker and internal defibrillator leads. Spectranetics' highly complementary portfolio including this laser atherectomy catheters and the AngioSculptX drug-coated scoring balloon with Stellarex drug-coated balloon will all support Phillips' expansion in image-guided therapy devices. To combine Spectranetics and Phillips' image-guided therapy device business, Phillips Volcano is expected to grow by strong double digits to approximately €1 billion by 2020. This transaction is expected to be accretive to Phillips adjusted EBITA and adjusted EPS by 2018, mainly driven by sales growth, channel synergies at overhead reductions, while we expect limited integration complexity. With the acquisition of Spectranetics, we are building on our successful track record of integrating acquisitions and rapidly improving growth and profitability. To remind you, Volcano had a stagnant top line at the time of the acquisition in 2015. It reached double digit growth rate in 2016 and we are continuing the trajectory. In addition, we have reduced over $40 million in cost to drive the business to profitability. The acquisition of CardioProlific will further strengthen our longer term innovation pipeline of catheter-based therapy devices. The development of CardioProlific differentiated thrombectomy technologies, combined with our suite of image-guided therapy solutions, will help our customers drive the procedure innovation for the treatment of peripheral vascular disease. Furthermore to reinforce our leading position in ultrasound, Phillips acquired TomTec Imaging Systems, a leading provider of clinical applications and intelligent image-analysis software. This acquisition will strengthen our number one position in cardiac ultrasound and will support the further expansion in other clinical areas, such as obstetrics and gynecology or Ob/Gyn. TomTec will be accretive to growth and margins as of the first year. Within the Personal Health segment in Sleep & Respiratory Care, we cite an agreement to acquire RespirTech, a U.S.-based provider of innovative airway clearance solution for patients with chronic respiratory conditions, highly complementary products to our existing portfolio to help those patients to receive the care they need at home. Also RespirTech will be accretive to growth and margins as of the first year. As you have seen we signed agreements for a significant number of bolt-on and strategic acquisitions during the last quarter. We have been following these companies for a long-time and we are pleased to reach final agreement which coincidently all came together in the second quarter. Spectranetics is obviously the only acquisition of real significant size, and with these acquisitions, we are executing on our strategy. In line with our earlier guidance on June the 30th, we announced completion of the sale of an 80.1% stake in the combined Lumileds & Automotive businesses. With the completion of this transaction and the recent sale down of our stake in Philips Lighting, we are nearing the completion of Philips transformation into a focused health technology company. Additionally, we announced a new €1.5 billion share buyback program, to be initiated in the third quarter of 2017 and to be completed in two years. This comes in addition to the €3.5 billion in share buybacks that were already completed between 2011 and 2016. The program is intended to more than offset the share dilution in connection with Philips long-term incentive programs and dividend in shares. Philips intends to execute part of the program through a series of individual forward transaction on evenly distributed over the two year period. The buyback is in line with our capital allocation policy which aims at a balanced mix of investments in organic and inorganic growth opportunities, actions to drive balance sheet efficiency and returns to shareholders. As stated in the press and as previously reported, we continue to be in discussions on the several matter with the U.S. Department of Justice representing the FDA. The discussions are focusing primarily on the external defibrillator business in United States and are arising from past inspection by the FDA in and prior year to 2015. Despite continued volatility in the markets in which we operate our outlook for 2017 remains unchanged, as we expect further operational improvements and comparable sales growth in the year to be backend loaded. This supported by a strong order book. We are on track to deliver the 4% to 6% comparable sales growth and an improvement in adjusted EBITA margin of around a 100 basis points per year. And with that, I would like to 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 and webcast. Let me start by providing some color on the second quarter growth of 4%. On a geographic basis, matured geographies delivered 4% comparable sales growth. Western Europe showed a strong 8% comparable sales growth mainly driven by the Netherlands, Iberia, Denmark and Norway, with double-digit growth. North America grew 4%, while other matured markets posted a 7% decline driven mainly by Japan. In matured geographies Diagnosis & Treatment grew high single-digit and Connected Care & Health Informatics and Personal Health posted low single-digit growth. In the growth geographies, 3% comparable sales growth was largely driven by strong double-digit growth in countries like Russia, Turkey, Indonesia, Thailand and Argentina. We are pleased with the continued high single-digit growth in China in the quarter. In the growth, geographies Personal Health recorded double-digit growth, Connected Care & Health Informatics low single-digit sales growth and Diagnosis & Treatment mid single-digit decline compared to Q2 of 2016. In HealthTech Other, net sales decreased by €9 million, as royalty income decreased by €14 million due to the foreseen expiry of licenses. This gave us a headwind of 30 basis points for the overall growth of the group in the second quarter. Turning to order intake as Frans mentioned, comparable order intake overall grew by 8%. The Diagnosis & Treatment businesses grew by 7% with image-guided therapy business growing mid single digit and both diagnostic imaging and ultrasound growing at high single digit rates. The Connected Care & Health Informatics businesses grew by 8%, recovering from a slower start in the first quarter. In growth geographies, order intake on a comparable basis grew mid teens compared to Q2 2016, mainly driven by Latin America, India, Russia and Middle East and Turkey. Comparable order intake in Western Europe declined with 8% on the backlog double digit growth in the previous quarter while North America posted a strong 9% growth. On the last 12 months basis comparable order intake grew with over 4%. Let me now turn to the EBITA development for the Group in the second quarter. Adjusted EBITA margin of 10.2% in the quarter was 90 basis points higher than the year before. This margin increase was driven by an improvement of 120 basis points in Personal Health, mainly attributable to the operational leverage from growth. In Diagnosis & Treatment, the margin increased by 80 basis points, mainly due to higher volumes and product mix. In Connected Care & Health Informatics the margin improved by 90 basis points mainly due to cost productivity. In order to further improve our financial disclosure and to align with the new peer group, we have included an adjusted EBITDA metric as from Q2 2017 in our press release, which also includes the bridge from income from operations and provides historical numbers for 2016. Our performance improvement in the second quarter is driven by higher volume, improved operational performance and meeting our cost productivity targets. More specifically, net overhead cost reduction amounted to €15 million in non-manufacturing cost, the productivity program contributed €33 million to the gross margin, and procurement savings in part driven by our Design for Excellence program, delivered €61 million of bill of material savings year-over-year. In HealthTech Other, the adjusted EBITA of minus €32 million was 8 million better than our guidance. The decline of €18 million compared to Q2 2016 was driven by lower royalty income. In the first quarter, the income tax expense was €44 million, which was a decrease of €19 million compared to the second quarter of 2016. The increase was mainly due to the release of tax provision, partly offset by higher tax charges resulting from the higher income. Q2 2016 also included tax cost related to the lighting separation. Overall net financial expenses decreased by €43 million year-over-year mainly due to lower net interest expenses as we redeemed bonds of in a total of $1.5 billion during Q4 2016 and Q1 2017. Net income from discontinued operations which now includes the results of Philips Lighting along with Lumileds and Automotive business, decreased by €185 million year-over-year, mainly due to the Funai arbitration award in Q2 2016. Net income of the Lumileds and Automotive business decreased by €42 million, this was mainly due to €66 million net loss from the field of the 80.1% state in the combined Lumiled and Automotive business. Taking into account, the gain related to the sale of real-estate of this business which was recognized as income from continuing operations in Q1 2017. And in addition, trademark license revenues which will be recognized in income from continuing operations in the future, the sale of the combined business will result in an overall net gain. Return on invested capital which is calculated on a five quarter MAT basis was 15.4%, which is a 7.1 percentage points above our WACC and improved by 8.4% compared to Q2 2016. Our drive to increase working capital efficiencies continue two year in results, as inventory as a percentage of sales decreased to 14.4% year-on-year and improvement of a 120 basis points. Overall working capital improved by 130 basis points to 9.8% of sales. Net cash flows from operating activities decreased by €104 million, mainly due to higher working capital compared to Q1 due to seasonality and higher tax paid. Let me now provide you with an update on the U.S. market and our outlook for Western European and China markets. Healthcare in the U.S. is undergoing fundamental change. With our scope and scale in the U.S., we are well positioned to support public and private healthcare organizations to reduce healthcare cost improve the quality and outcomes of care and move from a volume based to a value-based system of reimbursement and service delivery. For example with the help of our Intensive Ambulatory Care Program, Banner Health in the U.S. reduced hospitalizations for chronically-ill patients with multiple conditions by nearly 50%, reducing overall cost of care by more than one-third. The market uncertainty is coming from the ACA legislative process continued in Q2, particularly around larger and longer term customer commitments. We continue to monitor events closely and stay focused on the needs of our customers. We saw a continued slowdown of government spending. Given these uncertainties we continue to expect the U.S. market growth to be in the low single-digits while we closely monitor further developments. At the same time, we are currently able to increase market share as we expect in the second quarter and hence remain confident in our ability to grow revenues. In Western Europe, we expect modest low single-digit market growth and in China, we expect mid-to high-single digit market growth for 2017. Overall, we estimate the global market growth to be in the low single-digit range for 2017. Let me now give you some guidance on HealthTech Other and legacy items. In the HealthTech Other segments, we continue to expect approximately €60 million net cost as adjusted EBITA level for the full year. On an EBITA level, we now expect approximately €70 million of net cost for the year. The increase compared to the previous guidance of €40 million reflects higher restructuring charges and incidental items. For the third quarter, we expect a net cost of approximately $15 million at an adjusted EBITA level. In legacy items, we expect remaining lighting separation cost for the second half to be around €10 million and remain with our guidance for separation cost of €30 million for the full year. Other legacy items are expected to be €5 million for the second half. We now expect approximately €95 million of net cost at the reported EBITA level and increase of €30 million almost fully driven by the CRT legal settlement in Q3. And adjusted EBITA level we expect €40 million net cost for the year. Mid July remainder contribution of $250 million to the U.S. pension fund to further improve the funding ratio, this will further decrease Philips interest cost going forward. In summary, we're pleased with the solid first half of the year with mid single digit order intake growth, earnings improvement, working capital improvement and our cash flow performance. With the schedule product launches and the development in our order book, we continue to expect further improvements in our operating margins for 2017 to be at the back end of the year. We continue to target a performance trajectory to deliver 4% to 6% comparable sales growth and around a 100 basis points improvement in adjusted EBITA per year. With that, we will now open the lines for your questions. Thank you.

[Operator Instructions] The first question comes from Ms. Veronika Dubajova from Goldman Sachs. Please state your question madam.

I have one and one follow-up please. My main question is around the outlook for the remainder of the year, if I look at the organic revenue growth is at 3.2% but in spite of that you already delivered 90 basis points of margin improvement year-on-year. So I'm just trying to understand, if we do see growth acceleration into the second half of the year. How much of that incremental cost would you expect to drive operating leverage above and beyond the 90 basis points that you've already delivered in the first half of this year? And then my quick follow-up is just on the M&A transactions. So far year to date, obviously, it's been a very busy second quarter for you and Frans maybe can you just talk about to what extent you see elevate your team both on the business development side of things and integration, has capacity and capability to do more than the seven transactions that you've announced year-to-date?

Hi, Veronika, good morning. Let me take the M&A question and then turn to Abhijit for the outlook question. So, as a condition for me that I always apply is that the business group needs to be ready to absorb an acquisition. Our image-guided therapy business group on the leadership of Bert van Meurs has proven with the Volcano acquisition that they are capable to handle that. The Volcano integration is mostly completed and they are ready to take on Spectranetics. The CardioProlific is a very small team and doesn't require real integration. And TomTec goes into the ultrasounds business group, that's a high performing business group with very capable management Vitor Rocha and they can handle this. Moreover TomTec besides they will also continue with serving the external customers, so I consider the integration not to be very complicated. And then for example RespirTech and APSS, both go into Sleep & Respiratory Care, again a high performing business group that is delivering steady mid-single digit growth and high profitability, they are very capable to absorb these acquisitions. And then lastly Health & Parenting, it's a very small team goes in our high performing Health & Well Being business group on the leadership of Bert van Meurs, what you can derive from that is that we have looked for a spread. We have not put everything in the same unit and I can hold individual business group leaders accountable for delivering results, exactly what we did before. So I think we are well positioned to take this along. Obviously, our focus will be on execution, we have said that this will all be growth and adjusted EBITA and adjusted EPS accretive next year in the aggregate and for the most important ones like Spectranetics and TomTec. So, that is now the name of the game, everybody focused on execution. So, for now I think our plate has been filled. Abhijit, what about you?

So, I think on the outlook where we get for the first half, the growth was at 3% or 3.2 we were slightly handicapped because of the loss of license revenue that impacted us by 30 bps on the overall growth of the Group. So if you see where we talked about the 100 basis points year on year improvement, we had said we expect about 100 bps from volume, 190 bps from gross margin and about 50 bps from overhead reduction which would be compensated then by price erosion of 130 bps and inflation of 110 bps. In the first half because our growth has been slightly shy of the 4%, our volume impact is around 80 bps so as the growth picks up in the second half we expect then the volume impact to go up by about 20 bps compared to the first half. And then for the first half near about 85 to 86 bps improvement, so we have to drive slightly over a 100 bps in the second half to make the average 100 for the year, which we are pretty confident in doing partly because we expect the volume growth in the second half, as I just mentioned and then of course our productivity programs will gather further steam as the year goes on.

That’s very helpful. And if can just quickly ask, Siemens announced overview of MRI imaging in the U.S. Any thoughts you have on that Frans? Or expectations for what that might mean for your business? And I will jump back into the queue on that. Thank you.

No, I need to study it further Veronika. So no comment now.

The next question comes from Andreas Willi from JP Morgan. Please state your question, sir.

My main question is on Connected Care & Health Informatics. It had appeared now pretty lackluster organic sales growth, we have better orders now. You talked a lot about the product rollout, the breakthrough R&D you spent. Should we now go into a period of a more sustained kind of mid single-digit organic sales growth trend? Or will this remain a bit more lumpy in terms of getting the confident that these investments are driving superior revenue growth, going forward?

Yes, thanks. Hi, Andreas. You are right. We will now go into a more sustainable growth period. In fact, we talked about it before that some of these orders deal with more complex larger scale installations that at enterprise level in the IDNs need to be signed wasn't integrated. In fact, some of the revenue again was pushed out into the third quarter So you are right, we should expect a much stronger revenue level in the second half here versus the first half so that we can make up for the slowness and overall land in a good growth rate in the same target area as we have guided.

And my follow-up is for Abhijit on Healthcare Other. Obviously, the run rate in the Q3 guidance implies quite an improvement than over needed for Q4. How much visibility do you have on the licensing income which I guess is part of the positive imply for Q4 the generally by the results further for the second half?

So, we got a bit over knock there in Q2, but for license income we are close to flat for the second half. So that decline in the year was largely in the first half and therefore you will see a second half year-on-year comparison being better than the first there. So we lost I think 20 million in the first half year and the second half will be about flat.

And the next question comes from Mark Troman from Bank of America Merrill Lynch. Please state your question, sir.

Yes, thank you very much, good morning everybody. Question, please on pricing front, 90 bps in the quarter I think from your profit bridge and the long-term, so the guesstimate seems to be a 130 a bit more than that. I wonder if you can comment on the pricing environments and maybe how that is developing by cash degree? You wish obviously some innovation, but you are trying to do more systems selling, there is more IGT. So is there a better pricing mix that we can expect, in other words, can we expect a little bit more robust performance in that pricing variable in the bridge? Thanks very much.

Yes, it was a little bit lower than our longer term guidance, but I would not say that that’s a trend break. As you know, we worked very hard to move towards more of a solutions orientation looking to have a combination of system software and services that improves the mix, but it also takes the direct attention away from a naked bulk sale. So maybe that’s a part of the explanation. But I'm not able to promise you that 90 basis points is the new normal, we will stick for now as our longer term guidance.

And just one quick follow-up on -- where you think the most share gain, you comments about market share gains, is that Cleveland or is that across other businesses other than that?

The slow order intake in North America clearly outpaced the low single digit market growth and that is why we also believe we are gaining share. The order intake growth was across the Board, so also for DI, Diagnostic Imaging, and notably strong was the order intake for the enterprise informatics, healthcare informatics area.

In patient monitoring also?

Yes, so across the Board basically. Now, the official reporting in North America will undoubtedly confirm this, but let's say our overall track record of gross bodes well.

The next question comes from Mr. Patrick Wood from Citi. Please state your question, sir.

The first I guess would be on the Oral Care and Personal Care category. You guys have been taking share fairly considerably and consistently for quite some time versus sort of the FMCG peers. I wonder how long you feel you can keep doing that and whether that is -- is that peer innovation? Is that NPD? What's really driving the share gains? And how confident are you those can keep going? And just as a quick follow-up as well as, if I may, maybe following up to the North American, imaging side of things, a bit of stronger and I think some of it expected. Has the conversations with hospitals changed a lot? There is a lot of uncertainties surrounding Healthcare Reform in the U.S. and it's surprising that I guess you and payers have had pretty, robust growth and you have been taking share back. Have you had any change of discussion of this pent up demand or what's really driving that, that North American market growth that you are seeing? Thanks.

Thanks, Patrick. Well, oral, so your question was specifically, first, is the FMCG guys, right. So, in oral care, you see an ongoing shift for manual brushing to electrical brushing. That is a micro trend that will continue. So that creates a fundamental for our oral care business that is very, very healthy. Moreover, we have completely overhauled the product range in all our healthcare and we have been stepping up our investments in advertising and promotion. So -- and lastly, we are still adding countries to our franchise, all right. I mean to address the geographical expansion. So this is a potent recipe that has been working extremely well for us and can continue to drive, let's say the growth rate that we have been enjoying. Then on personal care, a few years ago, we kind of anticipated that male shaving with the traditional electrical razor was not necessarily appealing to young man, and we started to invent the OneBlade. Now, OneBlade is a kind of hybrid between a traditional handle for wet shaving and an electrical shaver. And it's particularly targeted towards this grooming area and we are selling the OneBlade in the traditional shaving aisle basically where the wet shaving classical competitors are, right. So, it's for us an extension of our market reach into a new segment and it is in our opinion and taking share away from the classical categories in shaving. And then moreover we entered into let's say beauty segment. So again because of this strategy, we can sustain growth in personal care and, we said in the introductory speech that OneBlade and has just increase its geographical coverage to 14 countries up from last year six. That means we are still in the ramp-up phase and we expect more growth to come. So that is I think where this growth is coming from and for at least the forcible future we expect this to continue. Then your second question on hospitals, and I'd say in North America, there is a lot of uncertainty around the ACA. And the conversations with hospital C-suite it that people are concerned, especially if you have a high exposure to Medicare and Medicaid, then your funding is at risk, and this is in the market slowing down overall investments. Moreover, it has -- there is a slowdown at the Veterans Administration due to their procurement rules that favor small veteran-owned companies. All of that has not stopped us from driving hard, let's say our innovations in gaining some share, and I do see more reluctance in the near-term for long-term large scale project commitments. And so that is something that I think, we need to be a little bit more conservative in our estimations on because nobody is going to commit themselves structurally in this uncertain situation. So I hope that answers your question Patrick.

The next question comes from Ian Douglas-Pennant from UBS. Please state your question, sir. Ian Douglas-Pennant: So the first on the process improvement cost in CC&HI, can we -- should we take this as a sign that you're acting in response to the concerns the FDA raised and the DoJ may or may not in force already? And I don’t know whether you can give any comments about how new are those cost have been -- have quickly those costs been rolled out, how recently? And then the follow-up question is to…

Sorry, Ian, if you say process improvement cost, I'm not sure I heard the word that you used. Ian Douglas-Pennant: That’s what I said, yes.

Okay. Ian Douglas-Pennant: That's not exactly the same language is in your release, I apologize there. And then the other one is a follow-up question related to also Veronika's question earlier. And I wasn’t quite sure what you're regarding for -- were you saying that you're going to hit the 100 basis points of margin improvement this year or by the second half of this year you're going to be analyzing at 100 basis points, if that make sense, this quite to be different for the run rate for idea?

Well, we carefully phrased the 100 bps per year as an average, so it could be one year at 90 another year at 110, averaging across the year at around a 100. For this year we have said that the second half year will be stronger in terms of revenue growth than the first half. We have not specifically guided on what that does for profitability, other than saying that for the full year, we intense to be around the 100 bps without further precision. On your first question in CC&HI, couple of things going on, yes we're stepping up a bit to cost for to be ready for regulatory inspections. We're always ready but you can shortly do more when you are in a situation as we're in and that specifically relates to the Basel and oversights. Moreover in CC&HI, we also have restricting. And I'll turn to Abhijit to maybe say be few words about them.

The restructuring is part of the, let's say overall footprint program that we're running, but we're also stopping one particular product which leads to a slightly higher than restructuring in this quarter, okay. Ian Douglas-Pennant: The reason for that product discontinuation is this just a standard SKU reduction or is this…

Yes, that has nothing to do. Ian Douglas-Pennant: It's nothing to do with the defibrillator or anything like that.

No, it has nothing to do with the whole FDA thing, it could have happen anyway.

The next question comes from Max Yates from Credit Suisse. Please state your question, sir.

Just my first question is one Personal Health. You've obviously shown in other quarter very strong growth against a tough comp. You also talked about I think having advertising revenues that were burning this quarter's margin. So, should we be thinking that as we move into the second half, if we can sustain similar growth rates that we should get a greater amount to margin expansion? Or do you expect to have some further appetizing cost and product launch cost in the second half as well?

There's no reason to expect a stronger second half than a first half. If we can continue to perform at this rate, that'd be outstanding in my book.

And just the follow-up was just on China and what's happening there. I think you sort of talking about the market growing at mid to high single digits, and I think your business has been growing double digit for the last couple of quarters. So I think you talked about in the past the government -- or the government favoring local players there, yet, you seem to sort of continuously to be actually outperforming the underlying market that you talked about. So could you give us a little bit of feel for how healthcare in China's developing? And maybe sort of explaining, so if your ongoing strong performance there and how sustainable that is?

Couple of years ago there were several issues, one of which was the local players and the preference that they were being given by in some provinces and in some hospitals. The other one was the kind of clampdown on procurements methods in hospitals. The latter factor has gone away and the China five-year plan clearly identifies healthcare as a growth area, in particular, in the more rural areas and also favoring private hospitals expansion, right. The share of private hospitals is expected to increase from around 10% to 25% in the next four or five years. That is good for us because private hospitals are not bound to this kind of political game in certain provinces favoring local vendors. Nevertheless, the local preference thing has not gone away, we occasionally bump into that and then we cannot really participate especially when it is on larger bundled deals. So, it's a reality that we try to work around. The strategy that we have to become more of a solutions provider also is at work in China and that increasingly is well received. In particular also with the private hospitals who look for solutions and are not necessarily keen to be assistance with the greater in their run rate. So we somewhat outperformed the China market, not by a lot I would say, we talk about the market being two high single digit and we are kind of hovering around the 10% growth so it's nice performance it also means we have recovered from 2015 when we were much lower. Must say that Andy Harlan and his management team are doing a great job that's our leader for China and I for the foreseeable future I see this as sustainable growth. So I'm confident about our ability to perform at least for the foreseeable horizon. Longer term, look, I read the Economist and other magazines and then you can see you know longer term is there a macroeconomic issue, but at least nothing that the near term need to worry about.

And just, just while I'm on this one, one number that would be really helpful, you talked about in personal health and trying to do more to increase your recurring revenue and customer, so relationships. Would you be able to give us an update of how much of personal health is now recurring revenue or at least on the sort of the toothbrush and toothbrush and that what the [indiscernible]?

Yes, off the top of my head, the recurring revenue in personal health is currently around 10% and that has being steadily increasing.

The next question comes from Mr. David Vos from Barclays. Please state your question, sir.

The first one is on the healthcare other line actually where you expect quite a bit of a break in return between H1 and H2. Could you just comment on that? And particularly relates to the innovation line, is that also stepping down quite a lot? And if that’s the case is that down because you now feel that you need to invest less and therefore we can expect a similar amount going forward, i.e., lower amount? And then I will ask the question after that. Thank you.

Maybe you asked your second question also that we can look up the first question.

Okay, that’s also fine. The second question was more of a housekeeping one around Lumileds, if you could confirm already what the expected net cash amount in will be once the, once you recognized in Q3? And then also, if you expect the standard cost to run in the 5 million range for the foreseeable future, and so, and if not steps down? Thank you.

So, maybe let me just address your first question on HeathTech Other, there is no real significant change in the run rate on innovation between the first half and the second, maybe a little bit its more than in the first half we had certain one-off charges which we will not have in the second. And the other thing is in the first half, we had compared to last year that deterioration in the license income and therefore the EBITA related to that for about 28 million which is not there in the second half.

Yes, I see that Abhijit, but I struggle a little bit to make a bridge them between first half in which you have done kind of a 70 million negative in the second half which should be 10 million positive to reach the 60 million adjusted EBITA guidance unless I took that number down in the wrong way. I am not really sure how we get there.

Let me -- I am more than happy to give you that off line on and here as well. Like I said the first half was more severely impacted by the license income, so if we give you let’s say on a call separately the view on license income for the second half and in the first half we also like I said had some one-offs in the quarter which you see in the health tech other line of 10 million that also will not repeat in the second half. So I think those are the two big, and we have a quite big quarter in Q4 on license revenue, so although year-on-year it remains flat, but through the year the license revenue in the second half of the year is significantly more than the first half and that also what creates its additional income in the second half.

Okay, let’s take it offline then.

So, if you keep the innovation cost the same, but we have much larger license revenue, you will have a much better income for the second half.

And the cash amount for Lumileds?

And the cash amount for Lumileds as already coming -- was I think the 1.35 billion so it was what we had announced earlier and that money is coming in Q2.

Coming into Q2, okay.

Sorry, what was your question on the Lumileds standard cost?

On the standard cost, yes, you mentioned 5 million in the other items and legacy.

Yes, that used to be where that standard cost, but now that Lumileds is gone. We will get rid of that cost so that will disappear in the coming months.

Next question comes from Mr. Yi-Dan Wang from Deutsche Bank. Please state your question, sir. Yi-Dan Wang: Hi this is Yi-Dan from Deutsche Bank. Just one quick question; can you provide a bit more color on the performance in the other mature markets? It seems to be a lot weaker than mature markets in general, and what are you doing there? When can we expect that to – that performance to improve? That would be great, thank you.

I can be quick about it. That’s mainly driven by a sales decline in Japan. And what is now good deceit in the second quarter we had a very strong positive order growth, and therefore, we are going to be able to turnaround our performance in Japan and get back to positive sales growth in the coming quarters. Yi-Dan Wang: So that's just a quarterly fluctuations rather than something in the….

Well I would call it a little bit more than a quarterly fluctuation because in fact our Japan performance has been a little bit on the soft side for the last several quarters. And we appointed new management about three quarters of a year ago and we are now seeing the positive impact of that new management; very pleased with the strong -- very strong order growth in the second quarter, and therefore I’m optimistic that going forward, we will see a much more steady performance. Yi-Dan Wang: What was wrong with it and what did they do to turn it around?

It’s just a matter of new energy and leadership into the team. I mean there was no specific single root cause other than that a newly appointed leader brings new energy and takes the team forward. Yi-Dan Wang: Okay so products are fine but there was a management issue?

The next question comes from Mr. Scott Bardo from Berenberg. Please state your question, sir.

First question just relates to the order book bounce back of 8% this quarter which is encouraging and good to see. But I just wanted to understand in historical context because it appears that North America was major driver of the rebound but it was against a comp which I think was one of the worst growth comps for all of the company has had for some time. I think you were down something like 10% in the prior year so is this effect to a large extent normalization rather than market share gains? Perhaps you could comment that a little bit about how we put that in the context of history?

Well if you take last 12-month order growth for Phillips as a whole then we are a little over 4%, I think 4.1% off the top of my head. That I would say is a little bit above global market growth. With the strong order growth in the second quarter we probably will see this LTM average go up a little bit. North America specifically is also at a 4% LTM and I like to point out that this year we have not yet had orders from the VA given that the VA is withholding all orders due to this legislative issue around giving preference to veteran-operated enterprises. There are hearings going on with regards to this and the hope this will be resolved later this year, we are not certain yet. Phillips has a very strong market share in the VA so this is material for us. Notwithstanding the VA not ordering, we had 8% order intake growth hence my conviction about market share performance.

9% even.

Thanks very much, you’ve been very clear.

9%, okay thanks Scott.

And maybe just one follow-up if possible please. So free cash flow generation I think in the first half I think was about 165 million which is perhaps a little bit softer than the trajectory for 1 and 1.5 billion that you outlined for HealthTech. Can you talk a little bit about the drivers for free cash flow in the second half and following on from this, if Abhijit could take a stab at what the net debt position for the business will be at the end of the year considering the Lumileds inflow and in the absence of further sell down for lighting? That would be very helpful for us to get a feeling for balance sheet position. Thanks very much.

So I think from a cash flow perspective we are pretty good well placed, if you look at the first half of this year versus the first half of last year, as a business ours cash flow largely comes in Q3 and Q4. So we are actually pretty okay with the 1 to 1.5 billion guidance that we've given. Regarding the net-debt, we probably will be on the lower side of the 1 to 1.5 tons of net-debt-to-EBITA that we target so closer to the 1 than the 1.5.

That’s excluding Spectranetics, Abhijit or…?

No that’s including, I mean, we will pay for Spectranetics now right so we will find that as well.

Next question comes from Mr. James Moore from Redburn. Please state your question.

I wonder if I can ask a little bit about the profitability in D&T; progressing nicely but maybe a little better than consensus was expecting, perhaps we were all a bit too high, but I was wondering if you could perhaps provide a little colour on the year-on-year development for margin between the units; DI, IGT, Ultrasound? Specifically I’m trying to understand how much big irons is coming up with or without Cleveland, and whether ultrasound, the step back that we saw last year, whether that’s stopped or is still continuing?

So if you look at DI and the improvement in the first half, we see that actually pretty much across the board. So you see, you know, we have improvements in DI for sure because also the improvements in the CT, CT/AMI results. We have good improvements in the results of IGT, and what is also very good is that we have good improvements in the results of ultrasound because ultrasound growth is back, and therefore you know, these are high margin businesses which have very strong operating leverage. So I think that is helping us, and also the added growth so far from IGT and ultrasound gives us a positive mix impact in the overall numbers. So CT, AMI, fast reductions on track, good volumes so far and then a bit of mix that comes from the ultrasound and IGT businesses growing fast.

Very helpful, thank you. And the other question was on trademark license revenues; I might have misheard you earlier, but will there be a change in the sales or profit and could you size the impact going forward from either Lighting or Lumileds/Auto?

Sorry I didn’t mention.

The brands’ licensing comp.

No, I didn’t mention anything about that. So we had -- we have said there are certain licenses which expire and we had guided to that earlier that we would lose this year around 28 to 30 million. The loss of that revenue is basically in the first of half of the year, so the second half year-on-year would be close to flat.

So Lumileds will start contributing to the brand license income going forward now that they are from Q3 being deconsolidated.

And that’s what I was trying to understand; we’ve got this dropping out and then Lumileds coming out and basically big picture if we look at next year versus next year, license income, is it broadly similar or how should we think about that?

Brand license income is seeing it steady increase overtime.

And in terms of the profit impact of that, does it move with it? They’re things we need to think about.

So you see within the licensing portfolio that we are losing license income from intellectual property patents and we are gaining license income from the brand. In terms of profitability it’s probably similar, and Abhijit already said that the decline of IP&S was primarily in the first half whereas the second half year-on-year is more comparable.

[Operator Instructions] We have a follow-up question from Veronika Dubajova from Goldman Sachs. Please take your question, madam.

Thank you gentlemen for squeezing me in at the end, I just wanted to ask a question about the order book growth and the four plus percent that you’re running at over the last 12-month period; how sustainable do you think that is? And other than U.S. CapEx, which you have flagged as maybe an area of concern, are there are any other risks that you see to that 4% growth rate? Thank you.

Hi Veronica. That is sustainable, in fact, I would like to have the order growth to be in the same bracket as our guidance for revenue growth. We see that we have done that over the last 12 months. I flagged that Q2 will help that average, and also looking forward, looking at our opportunity funnel, we use Salesforce.com so we can actually analyze our opportunity funnel pretty well. I feel confident about our ability to do that.

That’s great, thank you.

You’re welcome. Okay, are there any other questions?

And we have a follow-up question from Andreas Willi from JP Morgan. Please state your question.

Yes, thank you very much. I just wanted to ask about foreign exchange and the sensitivity to it. Obviously, we have a translation impact from the strong euro but historically Phillips have at times quite material impact on the transaction side. I mean, a weak dollar should generally should be good for some of your sourcing costs but maybe you could just talk about that bit more in terms of what the implications are of the big currency moves we are currently seeing; how far out you’re hedged and whether we should expect much in the earnings bridge in terms of margin impact in the second half and into next year.

I think for the second half not really anything significant. If you see we are largely hedged in terms of our position than just a strengthening of dollar, you know you will get an impact both on the sales as well as the absolute amount of EBITA. But from a margin perspective, not too much so we have changed quite a bit on our hedging strategies in the past so therefore you’ve seen in the last couple of years we don’t call that out as large as it used to be. Of course, if emerging market currencies fluctuate big time that could have an impact but if it’s just the euro, dollar, we should be okay for this year and then for next year it would be too long term to see but then we'd hedge accordingly as well. Or take pricing actions, so one of the two.

But do you have a big net exposure, I guess you export some products from Europe, you export others from the US, is there is a big net exposure prior.

Not big no, not really.

The last question comes from Mr. Scott Bardo from Berenberg. Please state your questions.

Thanks very much for taking my follow-up, it just relates to the ongoing regulatory discussion with the U.S. Department of Justice. Obviously, this is an overhang that’s been kicking on for some time now. I just wonder if you could -- obviously, there’s limited things you can share here but can you share some sort of feeling as to the likelihood that these discussions culminate in a consent decree with the regulator? Perhaps you could share some thoughts there, thank you.

Hi Scott. Well, discussions are still going on with the DoJ and obviously discussions with the DoJ are serious, otherwise you wouldn’t have them so we take it very seriously. Now, it affects primarily the defibrillator business and therefore the impact of any measures would be targeted to let’s say part of the PCMS business group. Other than that, I really don’t want to run ahead of ourselves and first come to a conclusion with that discussion which is taking a little bit of time so -- but let’s take it when it comes and then we will inform you in detail on the next steps.

Thank you. Mr Frans Van Houten and Mr Bhattacharya that was the last question, please continue.

Okay well, then I’d like to say to everybody thank you for attending. We had a strong let’s say quarter, we look with confidence at the future and that is what we wanted to radiate and we will stay very focused on execution and that’s what you can expect from us. Thank you very much for attending.