Earnings Call Transcript - PHG Q4 2020

Operator, Operator

Good morning, ladies and gentlemen. Welcome to Philips Fourth Quarter and Full-Year 2020 Results Conference Call. I'm here with our CEO, Frans van Houten; and our CFO, Abhijit Bhattacharya. On today's call, Frans will take you through our strategic and financial highlights for the period. Abhijit will then provide more detail on the financial performance, and after that, we will take your questions. Our press release and the related information slide deck were published at 7:00 a.m. CET this morning. Both are available on our Investor Relations website. A full transcript of this conference call will also be made available today on the website.

Frans van Houten, CEO

Yes. Thanks, Leandro. Hi, everybody. Good morning to you. I hope that you and your families are keeping safe and well. It's clear that the COVID-19 pandemic is far from over, and my thoughts go out to the caregivers and patients as we battle the virus all together. In this environment, we, at Philips, are proud of our role to support care providers and patients. I'm pleased with how we have performed under these challenging circumstances as our teams remain focused on delivering against what we call the triple duty of care: meeting critical customer needs, safeguarding the health and safety of our employees, and ensuring business continuity. The work we are doing to support healthcare providers, medical staff, patients, and consumers is our top priority. In close collaboration with our suppliers and partners, we have ramped up the production volumes of products and solutions to help diagnose, treat, monitor, and manage COVID-19 patients throughout 2020. We have also rapidly responded to the increased demand for telehealth solutions like tele-ICU, tele-radiology, tele-pathology, and tele-dentistry services, which aid virtual working among care professionals as well as move care into the community. Very importantly, we have continued to deepen our engagement and relationships with customers through consultative partnerships and strategic partnerships, leading to a higher degree of recurring revenues, superior service, and stronger customer loyalty. As a result of these efforts, I am pleased that we have recorded comparable sales growth of 7% in Q4. Connected Care grew a very strong 24%, driven by the demand for patient monitors and respiratory care. Our Diagnosis & Treatment businesses delivered encouraging sequential improvement and returned to growth with a 1% comparable sales increase. Sales for Personal Health grew a solid 5%. Comparable equipment order intake grew 7% in Q4, with double-digit growth in Connected Care and 3% growth in Diagnosis & Treatment. This was driven by strong demand for our patient monitors, hospital ventilators, radiology informatics, computed tomography, X-ray, and ultrasound systems.

Abhijit Bhattacharya, CFO

Thank you, Frans, and thank you all for joining us today. Let me start with providing some color on the fourth quarter comparable sales. Comparable sales for Diagnosis & Treatment businesses grew 1% in the quarter. Diagnostic Imaging sales grew high single digit, driven by double-digit growth in computed tomography and diagnostic X-ray. Enterprise Diagnostic Informatics sales also grew double digit in the fourth quarter as we continued to successfully roll out our world-class Enterprise Imaging Platform resulting from our R&D programs and the integration of the Carestream business. Ultrasound and Image-Guided Therapy sales declined mid-single digit in the quarter, mainly due to pushouts of installations in the U.S. The volume of elective procedures was close to pre-COVID-19 levels in October and November but went down to around 80% of pre-COVID levels in December, mainly driven by the U.S. We expect the elective procedure volumes to gradually recover in the course of the first quarter. Services sales for our Diagnosis & Treatment businesses grew a solid mid-single digit compared to the same period in 2019. Let me remind you that recurring revenues from Solutions & Services represent more than 45% of the total sales of Diagnosis & Treatment. For the full year 2020, sales for Diagnosis & Treatment businesses declined 2% on the back of 5% growth in 2019. The sales for Connected Care businesses grew a strong 24% in Q4, driven by patient monitoring and respiratory care solutions. We were also pleased to see double-digit growth in our Therapeutic Care business and a solid sequential improvement in the Sleep business, driven by growth in patient interface. In the full year, comparable sales for Connected Care grew 22% with double-digit growth in both Monitoring & Analytics and Sleep & Respiratory Care. Order intake for Connected Care grew strong double digits in the full year. For Personal Health, we saw solid demand in the quarter with the comparable sales increase of 5%. Domestic Appliances grew double digit and Personal Care grew mid-single digit. Oral Healthcare comparable sales declined low single digit on the back of mid-teens growth in Q4 2019, mainly in China. In the full year 2020, Personal Health sales declined 4% compared to 2019. Consumer sales through digital channels grew double digits in Q4 and represent 39% of total sales of Personal Health. Our shift to digital and the adoption of new business models of direct-to-consumer resonate very well. Important to note that our current online market share is even higher than that in the traditional offline channels.

Operator, Operator

Thank you, sir. And we can now take our first question from Veronika Dubajova from Goldman Sachs. Please go ahead.

Veronika Dubajova, Analyst

Good morning, and thank you for taking my question. And I hope you're both keeping well and healthy. Just wanted to dive in a little bit into the dynamics that you're seeing across the healthcare businesses, both for D&T and Connected Care. Just curious, Frans, Abhijit, can you discuss a little bit where the backlog stands when you look at it at the end of the fourth quarter? And I guess in the context of the current trading dynamics, it would seem to me that there should be a fairly healthy backlog for both of these businesses that might imply a bit more growth than what's assumed in the guidance. So just if you can walk us through your thinking on that, and what are some of the risks, but also the opportunities that you see for both of these as you think about 2021?

Frans van Houten, CEO

Yes, hi Veronika, it's great to talk to you. I'll begin, and Abhijit can add anything I might miss. I'm feeling quite optimistic about the outlook for hospitals. We haven't seen any order cancellations, just a few delays. We're receiving new orders, and the 7% order intake in the fourth quarter reflects confidence in the future. Some of these orders are linked to Connected Care, but for instance, Precision Diagnosis experienced an 8% growth in orders this quarter, which is positive for the future. We hear from hospital executives that they're interested in expanding ambulatory surgery centers and investing in telehealth and remote patient monitoring. We'll discuss BioTelemetry later, which is promising as well. Additionally, securing 25 new strategic long-term partnerships validates our strategy at Philips. Hospitals are seeking assistance in transforming healthcare as they need to manage more with limited budgets, and they recognize the necessity to invest in technology for this. I can't recall a quarter where we established 25 agreements in just one period, which is a positive sign. Regarding the backlog, it's true that our order book is very robust, partly due to delays in installations in 2020 and also due to new orders. To sum up, we anticipate a strong start to the year, particularly a solid first and second quarter. The pandemic continues to be a challenge, but we will keep delivering acute care equipment. We also expect good results from Diagnostics & Technology, driven especially by Precision Diagnosis. While elective procedures are a concern, we shouldn't overlook the fact that the decline is currently 20% to 30%, as opposed to 70% in April, indicating that hospitals are managing the pandemic better now. I expect a rapid recovery in elective procedures as regions adjust their risk levels. The IGT business may show strength a bit later in the quarter compared to Diagnostics and Connected Care. We also foresee a good start for Personal Health. There are risks and opportunities to consider. Abhijit, would you like to add anything?

Abhijit Bhattacharya, CFO

No, I think it was very comprehensive. Just for the order book, it's the order book itself is double-digit higher than the end of 2019. So that's also what gives us the confidence that we will start 2021 well and that growth is across. So Connected Care is up double-digit; Precision Diagnosis close to double-digit; and Image-Guided Therapy is a bit lower. It's still higher than the end of 2019, but it's a low single-digit growth and that's primarily because of the U.S. where orders have been slow in coming. But Frans, you will remember to the end of Q3 when we were thinking that the pandemic is going to abate, the discussions around IGT rapidly picked up and then again got pushed out with the second wave. So we have good confidence that when the pandemic does abate, IGT will come back strongly.

Frans van Houten, CEO

Yes. And as some analysts noted in the commentary, of course, you then temporarily have a mix change towards diagnosis versus treatment. And that, of course, has a little bit of impact on the profitability as such, but that's all temporary. That should be a fairly comprehensive answer, Veronika.

Veronika Dubajova, Analyst

I was going to say, I think we've covered pretty much everything. I guess just a quick follow-up, if I can. Just looking at your guidance because obviously you guys gave that out in early November, and the world has changed a bit since then. Just curious kind of at this point in time and given where the fourth quarter came in, your degree of confidence in that guidance, has it increased or stayed the same or worsened? If you can just briefly speak to that and then I'll jump back into the queue. Thank you both.

Frans van Houten, CEO

I believe it remained unchanged, and we discussed during the CMD about the associated risks. I previously indicated that if a second wave of the pandemic were to occur, we might see an increase in Connected Care sales early on, potentially impacting elective procedures. This is exactly what we've just talked about. However, we anticipate a robust recovery later in the year for interventional procedures. Overall, we reaffirm our guidance as I don't believe the risks have materially altered. We're starting the year off positively. Leandro also reminded me to note that we should see an increase in Sleep sales as the pandemic becomes more controlled, as there are significant unmet needs in the sleep market. Additionally, Abhijit mentioned in his remarks that we've experienced good momentum with the patient interface, which is always a key focus for your business.

Operator, Operator

And our next question comes from Patrick Wood from Bank of America.

Patrick Wood, Analyst

I have two questions to ask. First, I'd like to discuss Personal Health and the Q4 exit rate, which appeared to exceed our expectations. Considering the guidance for 2021, it suggests that organic revenues are still below 2019 levels, even when accounting for foreign exchange. I'm curious about the concerns or issues that might be leading you to this perspective. You have a solid product pipeline and everything seems to be on track, so I'm interested in your thoughts regarding the consumer outlook for 2021. My second question relates to the recent M&A activity. Despite the divestiture of DA, the balance sheet should still look strong by year-end. How are you approaching capital allocation? Are you planning to maintain a similar balance between buybacks and M&A, or is your focus shifting more toward one area than the other?

Frans van Houten, CEO

All right. Patrick, maybe, Abhijit, why don't you start straight away with the Q4 exit rate and the PH discussion?

Abhijit Bhattacharya, CFO

We've projected a growth of 5% to 6% for PH next year, which is a solid growth rate. In the last two quarters, specifically Q3, we experienced significant growth following a decline in Q2. Therefore, going beyond that growth target at this point wouldn't be prudent. Additionally, as the pandemic continues, there will be economic effects on people's spending power. If we finish next year with a 5% to 6% growth, that would be quite healthy for PH, although we anticipate a stronger performance in the first half of the year.

Frans van Houten, CEO

And then perhaps also we can link there the China performance.

Abhijit Bhattacharya, CFO

Yes. So we were not very happy with the China performance in 2020.

Frans van Houten, CEO

Right. And we are off to a good start in 2021, yes.

Abhijit Bhattacharya, CFO

In 2021. So we had mentioned that in Q3 we had some work to do. I think most of it is now dealt with. So we will return to growth and then that gives us the confidence for a full-year growth. Yes, we don't catch up to 2019, but maybe a bit longer. And if things are all very good, then maybe there is a chance. But for now, 5% to 6% is a good guidance.

Frans van Houten, CEO

Patrick, in response to the M&A question, we are pleased with our strong cash generation. It was essential for us to increase our cash flow, and we maintain a solid balance sheet, which is part of our strategy. With the acquisitions of BioTelemetry and Capsule, we will see a significant cash outflow in the first quarter. However, as we progress with Domestic Appliances, we expect to replenish our cash reserves later in the year, likely in the third quarter. We consider ourselves a healthy company with a robust balance sheet, and I prefer it that way. Our capital allocation strategy remains consistent, as we discussed during Capital Markets Day. It will involve a mix of organic growth, M&A, continuation of our dividend strategy, and share buybacks. At present, we have a good balance. While we remain active in M&A, our goal of 5% to 6% growth is based on organic growth. Therefore, we will be selective about M&A opportunities, only pursuing those that reinforce our core business and offer a positive return. The two examples we mentioned, BioTelemetry and Capsule, will both contribute positively to growth and EBITA in 2021. They will not be included in the comparable reporting as any adjustments are made for a 12-month timeframe.

Operator, Operator

Next question comes from Michael Jungling from Morgan Stanley.

Michael Jungling, Analyst

I have 2 questions. I'll ask them upfront, if you don't mind. Firstly, on Domestic Appliances, are you able to provide some more insights into the cost synergies coming from the sale of Domestic Appliances? You threw a lot of numbers at us at the call and I think I missed some, apologies for that, but just a reminder of the magnitude of these cost synergies and how you will treat them in terms of are they recurring costs in the way that you will disclose them? Or are they going to be recorded as ongoing restructuring costs for a number of years until you're able to somehow get rid of them? And then, secondly, on the marketing and sales budget, in light of the COVID-19 restrictions sort of continuing at a high level, are you intending to sort of rework your budgets giving sort of a 2021 opportunity to over deliver on your margin expansion targets of 60 to 80 basis points on less travel, etc., that's perhaps a different situation than when you first guided for 2021 back in November?

Abhijit Bhattacharya, CFO

So Michael, let me take the first part on the dis-synergies coming from DA. In the past, for Lighting and other businesses, we don't adjust it out so that remains part of the P&L. We expect that to be, let's say, over a 2-year period, normally between 2 to 2.5 years, we reduce that cost because that's the time it takes also to wind down that activity. So again, it remains part of the adjusted EBITA and will be, let's say, dealt with or removed over a 2-, 2.5-year period. Moving to the sales and marketing, maybe?

Frans van Houten, CEO

We are currently undergoing a marketing transformation that focuses on increasing our advertising budget and proportional spending. This shift is necessary due to the growing share of online sales and our goal of enhancing consumer engagement. We believe that allocating more funds to advertising will be beneficial. Simultaneously, we are adjusting our fixed selling expenses by reducing costs as we target the online market, where customer concentration is higher. We also aim to take advantage of online B2B portals to reach a broader array of traditional retailers. Together, these changes in marketing and sales will lead to greater efficiency and effectiveness, resulting in a higher growth rate and, ultimately, operating leverage. We anticipate that this will lead to margin expansion, not just through budget cuts, but by optimizing our budget mix. Regarding travel expenses, we aim to keep them below 2019 levels. Currently, travel is minimal, but if we can maintain this approach in the long term, it will significantly benefit our health systems business more than just our Personal Health business, as health systems typically incur higher travel costs. At this moment, we are not altering our guidance of 60 to 80 basis points. While there are clear opportunities for savings, such as in travel, there may also be aspects where adjustments are necessary.

Michael Jungling, Analyst

Just going to ask Abhijit just on the 60 to 80 basis points of margin improvement this year, is it more likely that we'll see upside than downside from lower spend on sales and marketing? Is that the right way of looking about it? Or will you just reinvest whatever is on top because of the restrictions that we're facing today, meaning less travel, etc.? Just some clarity on that.

Abhijit Bhattacharya, CFO

The guidance is set at 60 to 80. As of January 25th, we have 11 months ahead of us during what is expected to be a turbulent period. Therefore, we will not speculate on whether we will lean towards the upper or lower end of that guidance. Our overall strategy is focused on driving growth starting in 2022, and we have budgeted the necessary investments to achieve that growth. If circumstances turn favorable, we will continue to reinvest any additional margin we generate. Our plans for next year’s growth are already accounted for within the 60 to 80 basis points profit improvement.

Operator, Operator

Our next question comes from Hassan Al-Wakeel from Barclays.

Hassan Al-Wakeel, Analyst

I have a couple, please. You talked about gaining share in the healthcare business. Could you expand on the dynamics within D&T and which modalities and products you feel are the most significant drivers of this? And then secondly, on the Sleep business, could you talk about the performance here and the degree to which you have seen an improvement in new patients?

Frans van Houten, CEO

Yes. Our calculations indicate that we have gained market share in Diagnosis & Treatment and in Connected Care, which is positive news. In Connected Care, this was partly due to our ability to scale up acute care equipment, but also because hospitals are increasingly standardizing on one architecture, leading to enterprise-wide agreements where our strong portfolio often positions us as the chosen provider. We are also enhancing our out-of-hospital monitoring, which will integrate smoothly with in-hospital systems, and we aim to drive further share gains. Turning to Diagnosis, we have a robust portfolio due to its recent renewal. Despite a decline in the MR market last year, we gained market share across all regions thanks to innovations like the sealed magnet and helium-free operation, as well as Compressed SENSE and the in-bore camera function for AI-enhanced image acquisition. The efficiency of our MR system, which reduces scan times by 40% to 50% through Compressed SENSE, has been well-received. On the CT side, I am pleased to report that we have gained acceptance from a competitive standpoint. We are seeing market share increases in regions such as the United States and China, where our CT portfolio is performing strongly. In ultrasound, we are continuing to grow, particularly in cardiovascular, where we are the market leader. Although there were dynamics in 2020 affecting the mix between point-of-care and general ultrasound, we anticipate that our strong portfolio will gain traction in 2021. The integration of AI is also positively impacting the confidence of sonographers, allowing even less-trained individuals to make confident diagnoses. Regarding Enterprise Informatics, the Carestream acquisition is performing excellently, with strong order growth in the fourth quarter. The integration of our traditional eyesight packs with Carestream packs is showing a promising evolution for our existing customers, while also attracting new clients. In Image-Guided Therapy, we are continuing our strategy to innovate procedures, which resonates well with interventionists who seek to handle more patients efficiently and confidently. Upgrades to Azurion are helping us gain market share, and we are performing well with our differentiating devices. I can share that the results of a safety study, which has just completed its fifth year, will be published today and are very positive for us. This positions Stellarex to continue gaining traction, and interventionists appear to be becoming more comfortable using Stellarex regardless of FDA updates. The longer balloon design also adds economic appeal. Looking ahead, these factors support continued market share gains. Specifically regarding China, our strong double-digit order growth in the Diagnosis & Treatment area reflects our effective navigation of local presence challenges amidst geopolitical dynamics. In the Sleep business, new patient diagnostics are challenging due to closed sleep centers. However, we have introduced remote diagnostic and home sleep tests, along with a remote fitting process for masks utilizing mobile photography analyzed by AI for precision. We believe we can compete effectively in Sleep, and we feel we are now on par with our competitor regarding the Carestream orchestrator and its informatics ecosystem for sleep. We are well-equipped for the Sleep market in 2021.

Abhijit Bhattacharya, CFO

Yes, we might be seeing the turnaround. In Q2 and Q3, we experienced a double-digit decline. However, Q4 was flat compared to last year. Currently, procedure volumes and new patient volumes are about 70% to 80% of where they were before COVID. As Frans noted, the masks, or patient interfaces, have exhibited solid growth, contributing to our flat performance for the quarter, which is quite positive. Additionally, we believe we have made significant progress in increasing our market share in both North America and international markets.

Operator, Operator

We can now take our next question from David Adlington from JPMorgan.

David Adlington, Analyst

So I just wanted to get your thoughts on the pricing environment, both across your hospital exposed franchises and your personal healthcare franchises. Just wondering if you're seeing or expecting any change to the pricing environment.

Frans van Houten, CEO

We expect it to be the same. And so in the investor deck, you have the standard page, the bridge that kind of talks about the normalized, Abhijit?

Abhijit Bhattacharya, CFO

Yes. We normally talk about a 1% price erosion in a year. And as Frans said, we don't expect anything different from that.

Frans van Houten, CEO

And then, of course, there are the occasional kind of bulk tenders, whether it's Russia or China, where people buy higher volumes. But then that is offset by add-on sales afterwards and/or, let's say, the efficiency of serving those customers, and therefore, it would not lead to a stronger or, let's say, an impact on profitability. So overall, I feel confident that we should not expect anything extraordinary on the pricing front. Now on the Personal Health side, we basically have not experienced price erosion there because it's always offset by new product introductions that keep us whole on the margin. We are now adding both in Male Grooming and in Oral care, also products in the lower-priced segments, like the Shaver 1000 that I referred to in the introductory speech or the Philips One by Sonicare, which is entry level. But those are all add-ons to the existing portfolio and lead us to bring new users into the franchise. And also there, it's not a pricing effect on the existing portfolio. It's just a product line extension and it leads to new customers coming in. So it will also not have a negative effect on margins.

Operator, Operator

Next question comes from Scott Bardo from Berenberg.

Scott Bardo, Analyst

Two upfront then, please. Obviously, pleasing to see some strong dynamics for your long-term enterprise partnerships this quarter. Our own survey work suggests that appetite for these sorts of contracts has been growing throughout the COVID crisis. I wonder if you could share your views on whether you think that's the case or whether this is simply a one-off or company-specific phenomenon that we see in the fourth quarter. So I'd be interested to hear what your thoughts are, please, Frans. And second question for Abhijit, please. Free cash flow of close to €1.9 billion, very good this year, particularly in light of your 2025 guidance of over €2 billion. So I wonder, Abhijit, can you help us understand throughout 2021, is it likely that we see some correction or some lower free cash flow dynamics for the group as compared to what seems a relatively high watermark in 2020?

Frans van Houten, CEO

I agree that there is a growing recognition among hospitals, particularly larger chains managed by executives, that they need to change their procurement strategies. Traditionally, many suppliers have offered isolated solutions that do not integrate, which hampers the advancements in results that hospitals require. While this approach may create pricing pressures, it fails to provide the essential support for transformation. The recent crisis highlighted that larger suppliers were more capable of assisting hospitals through challenging times. For instance, I've been receiving positive feedback from hospital CEOs about how we handled the crisis with innovative solutions, such as remote COVID patient monitoring, which allowed for quicker patient discharges while still providing necessary oversight. This level of flexibility and resourcefulness is difficult to achieve with a traditional procurement approach, which often overlooks essential solutions. I believe there is a growing appetite for this change, and that's encouraging. Philips is well-positioned compared to our competitors, as we've been focused on this for several years and have a clear strategy to integrate technology across hospital departments. We excel in healthcare informatics, workflow optimization, and care process analytics, and we now offer fleet management solutions. This gives us a comprehensive set of tools, unlike some competitors who still focus mainly on equipment rather than comprehensive solutions. Ultimately, I believe the results will speak for themselves, and I'm optimistic about our ongoing strategy. In fact, we are about to announce our first win of the year regarding a new project we've just signed.

Abhijit Bhattacharya, CFO

So Scott, regarding cash flow, we have €1.85 billion. If we exclude about €250 million for DA, that brings us to approximately €1.6 billion. We’ve also reduced our overdue payments this year by around €150 million, although that won't be a recurring figure annually. Additionally, there’s a timing advantage and increased sales in Connected Care, which has shorter payment cycles than Diagnosis & Treatment, contributing another couple of hundred million. As I stated earlier in 2020, there will be fluctuations between 2020 and 2021. We performed well with significant collections this year, and excluding DA, we stand at around €1.6 billion. We continue to target roughly €3 billion in cash flow over the two years of 2020 and 2021, with this year being slightly higher and next year a bit lower. However, we aim for an average of €1.5 billion, excluding DA, which represents a very strong performance.

Operator, Operator

Next question comes from Lisa Clive from Bernstein.

Lisa Clive, Analyst

Two questions. Just first, Abhijit, thanks for the detailed guidance on the Other category. Just given your comments that the cost synergies for the sale of DA remain in your adjusted EBITA figures, can we assume that the specific items you mentioned that will add to the cost in the Other category for DA for the separation are fully one-off in 2021 and that the cost thus in the future years will be lower, obviously barring any future one-off costs? And then also just a small follow-up on that. The weaker performance in the Other category in Q4, is this just a timing issue where Q1 will be higher? And then the second topic, just on China, can you remind us of the impact of the current tariffs excluding DA? And if the tariffs were reversed, would all of this come back? Or are some of the mitigation strategies that you put in place more permanent? I suppose just giving us a net impact would be helpful.

Abhijit Bhattacharya, CFO

Okay. The first one was the cost in Other for the DA separation, that is a one-time. So once the separation is done, that cost will stop. The second was in HealthTech Other, the license income that moved from Q4, yes, that is a timing issue. So there were a couple of deals that we were hoping to settle in Q4, which didn't happen so that should come this year.

Frans van Houten, CEO

But not necessarily in Q1, right? It's not a miss of a week. So it will come later in the year.

Abhijit Bhattacharya, CFO

Exactly. And your third question, could you repeat that?

Frans van Houten, CEO

China tariffs.

Abhijit Bhattacharya, CFO

Yes, the impact of the tariffs in China was significant. We have reduced that to approximately €25 million. If the tariffs are lifted, it would benefit us, but I don't anticipate that happening in the near future. It's something we will keep monitoring. We have adjusted our supply chain to address some of the effects, and we do not expect to reverse those changes anytime soon.

Operator, Operator

Next question comes from Julien Dormois from Exane.

Julien Dormois, Analyst

I have two questions. First, you've mentioned that hospitals need to do more with stable budgets. Based on discussions with C-suite executives, do you have any anecdotal evidence or early signs that hospitals are becoming more optimistic about securing higher budgets in the future, especially considering the significant funding that could be available in the coming years in Europe and the U.S.? Second, regarding the Oral Healthcare business, it seems that you've experienced flat sales in absolute terms in that sector in 2015, along with notable yearly fluctuations. How do you view the future of this division? Is it still considered a core part of Philips' business, and do you think it could potentially hinder your goals for accelerating sales growth of 2% to 5% or even 6%?

Frans van Houten, CEO

The sentiment in hospitals has become a bit more optimistic because many countries have measures in place to compensate for the losses they faced during the COVID focus. These compensations vary by country, sometimes involving insurance companies or government support. Generally, hospitals are expected to receive compensation for the expenses they incurred, suggesting they are not hindered in making future investments. This correlates with a higher order intake observed in Q4, particularly in diagnostics. There may be a shift in priorities, with productivity becoming a top focus for hospitals. Investments will need to demonstrate a clear business case and generate returns, leading to reduced capital expenditure on non-essential technology. Our focus remains on providing health economic evidence to justify results. Hospitals are also emphasizing care management and care orchestration, both within and outside the hospital, to improve productivity and engage patients remotely. Telehealth is gaining importance as reimbursement becomes more structured in various countries. This explains the increased optimism. Regarding Oral Care, we have seen substantial growth but were not fully satisfied with last quarter's performance, particularly the negative growth in China, following strong growth in Q4 2019. With new product launches and expansion into different price segments, we anticipate strong performance in 2021. Oral Healthcare is central to our portfolio, and we have no plans to remove it. There is growing interest from insurance companies and integrated delivery networks in consumer behavior at home, highlighting the correlation between personal health and behavioral health. Philips' dual focus on professional and consumer health is increasingly recognized as vital, and while further integration is needed, it is an area we are actively developing.

Operator, Operator

Our next question comes from Falko Friedrichs from Deutsche Bank.

Falko Friedrichs, Analyst

I have 2 questions, please. Firstly, have you been able to secure all the service contracts for all the new ventilator sales you realized last year? And then secondly, on BioTelemetry and this overall trend of moving monitoring outside of the hospital, now that appears to be a pretty interesting space for the bigger technology companies of this world as well, the Apples and the like. What is your view on the developments here? And could those big technology companies become a threat over the next 3 years? Or is there even a possibility for some early partnerships? Any thoughts here would be appreciated.

Frans van Houten, CEO

Yes. We are working very hard to secure service contracts for this vast installed base that is now in place. We also are working with governments who have stockpile programs to remind them that just having it in the stockpile is not a recipe for success; you need to maintain it. I think this was a lesson also observed in the United States. I would say still some potential there to do more, but definitely possible. Now in any case, it usually takes a year between delivery and a service contract to have an impact on Philips because the first year is like warranty and everything else. But we are working on it. And then on the BioTelemetry side, so first of all, let's indeed confirm that it's going to be a very important space. To manage vast cohorts of patients that have chronic disease, remote patient monitoring and remote patient care is the way to go. And I emphasize that this is very often about chronic patients and not only, let's say, behavioral health or health coaching in the preventive space. And I would position the tech companies foremost in that lifestyle segment of preventative care. Very important, by the way, and I would encourage them to be in it, but it gives assurance and feedback to people who are generally healthy, whereas the health care systems require more information, deeper analytics and also more services around this. And I see BioTelemetry not just as a company with exciting devices. I see BioTelemetry as a services platform company that engages with referring doctors, that rolls out these diagnostic services to individual patients that then digests and analyzes the data and comes with a confident diagnosis. So it's a much wider game than just a smart device. I could eventually also see that data from other devices will be complementary to what we do. Our data architecture is designed to be open and to take the data from anybody's device into the equation. So in that extent, we can also expect collaboration. Already today, the data from Health Watch, if you put the privacy settings to allow that, then the data can be uploaded into the Philips Health suite architecture and made available to your doctor. And I think increasingly in the future, that will be rather the norm than the exception. And therefore, having a platform play where we are the data integrator and that where we are able to provide services, not just a clever gadget, is the way where the business is going. So you should then also expect that we use BioTelemetry as a platform play where we will expand it beyond the long-term Holter. I'm very pleased that BioTelemetry is also in the outpatient monitoring business. And with their recent ePatch loans, we also expect to gain share against some of the competitors in the space. And I can also anticipate that over time, we will expand BioTelemetry to other disease profiles beyond cardiovascular. So lots to do, lots of excitement. We expect strong double-digit growth and we also expect further profit enhancement, and we are very happy that we were able to buy the market leader.

Operator, Operator

Due to time, the last question will come from Scott Bardo from Berenberg.

Scott Bardo, Analyst

I just wonder if you could help us, Abhijit, in understanding the potential royalty flow that should be expected from the exit from Domestic Appliances. I suspect that's mismodeled. And I wonder if you could help confirm then that given your guidance excludes Domestic Appliances, does in any way your margin improvement of 60 to 80 basis points this year include any benefit from additional royalties from the exit of DA?

Abhijit Bhattacharya, CFO

Yes, I think, Scott, the way you should look at it is the royalty income initially will be used to offset the standard cost that we will have and then, let's say, in the future years, it would be a potential benefit. So the 60 to 80 basis points profit improvement includes potential license revenue from DA.

Frans van Houten, CEO

All right, I'd like to thank everybody for your contribution and questions. And I'd like to summarize that we look with confidence at 2021. And that the year for us is already in full swing being 4 weeks in. And we look to already delivering a very good first quarter. Thanks very much, everybody. Bye-bye.