Siemens Healthineers AG (OTCPK:SEMHF) Q3 2024 Earnings Conference Call July 31, 2024 2:30 AM ET
Company Participants
Marc Koebernick – Head-Investor Relations
Bernd Montag – Chief Executive Officer
Jochen Schmitz – Chief Financial Officer
Conference Call Participants
Hassan Al-Wakeel – Barclays
Veronika Dubajova – Citi
David Adlington – JPMorgan
Hugo Solvet – Exane
Julien Dormois – Jefferies
Julien Ouaddour – Bank of America
Robert Davies – Morgan Stanley
Sezgi Ozener – HSBC
Operator
Good morning, ladies and gentlemen, welcome to Siemens Healthineers Conference Call. As a reminder, this conference is being recorded.
Before we begin, I would like to draw your attention to the Safe Harbor statement on page 2 of the Siemens Healthineers presentation. This conference call may include forward-looking statements. These statements are based on the company’s current expectations and certain assumptions and are, therefore, subject to certain risks and uncertainties.
At this time, I would like to turn the call over to your host today, Mr. Marc Koebernick, Head of Investor relations. Please go ahead, sir.
Marc Koebernick
Thank you, operator. Good morning, dear analysts and investors. Our CEO, Bernd Montag; and our CFO, Jochen Schmitz, who here with me in our headquarters in Erlangen, will be taking you through the details of our Q3 2024 for this morning.
The Q3 results for fiscal 2024 were published this morning at 7:00 AM., and you can find all relevant documents as well as the recording of this call on the Investor Relations section of the Siemens Healthineers website.
After the presentation, there will be a chance to raise questions. Please note the following. Siemens Healthineers will record and transcribe this meeting. It will be published on websites such as www.siemenshealthineers.com. If you don’t want to be recorded or transcribed, please inform us before asking questions or making comments. The details are found in the privacy policy of Siemens Healthineers.
And finally, let me remind you of the two question rule for the Q&A. So let us get started. Bernd, the floor is yours.
Bernd Montag
Thank you, Marc. Good morning, dear analysts and investors. Today, we present to you our quarterly figures. We confirm our outlook for comparable revenue growth and adjusted EPS for fiscal 2024 despite China still impacting growth.
Varian delivered a very solid set of numbers again and Diagnostics significantly further expanded its margin based on a consistent executed transformation program. This is evidence of our decisive measures following up on our challenges from last year and bearing fruit. We successfully stabilized Varian’s performance. We are swiftly implementing the Diagnostics transformation program.
The Imaging business is still impacted by the anticorruption campaign in China, which impacts the entire industry. We expect this to turn into pent-up demand in 2025 as the clinical need for our offerings is not impacted by exogenous factors like this.
In terms of growth, we came up against very tough comps in Q3. Please remember, last year’s Q3, we grew by 10% ex-antigen. And in particular, Imaging was a very strong 15% and Advanced Therapies at 12% growth.
Let me now briefly run you through the third quarter results. In the third quarter, we again expanded our strong order backlog with an equipment book-to-bill rate of 1.07.
Revenue growth in Q3 came in at 4%, mainly held back by China. Adjusted earnings per share were €0.52 in Q3, broadly in line with last year’s strong third quarter, which benefited from an extraordinary low tax rate.
Imaging grew by 4% on very tough comps. The margin was 20% year-over-year impacted by headwinds from foreign exchange. Varian grew by 10% at the upper end of the guided range and the margin came in at healthy 16.6%.
Advanced Therapies revenue was flat on very tough comps. The margin was 14% year-over-year impacted by headwinds from foreign exchange. Diagnostics grew by 2% at a strong 7.4% margin and is fully on track to deliver the savings from the transformation program. Jochen will provide you with more insights in the financial sector.
We are very optimistic about our future growth prospects. On the one hand, thanks to our healthy and constantly growing order book. On the other hand, since we have identified multiple sources of growth for our products and services.
You are aware of the secular growth drivers such as growing and aging population and the rise in non-communicable diseases. Cancer and cardio and neurovascular diseases, especially drive the need for exactly what we offer with our portfolio.
Increasing cost pressure in healthcare systems, combined with staff shortages further increase the need for substantial innovations. What are we doing about it? We offer breakthrough innovations for better patient outcomes and gain further market share, accelerate replacement and ultimately, reach attractive innovator margins with increasing scale.
But we also benefit from innovations in other fields of healthcare, whether it is in pharma or in the medical device space or in the advancements of robotic treatments. One could say the world innovates for us.
This chart you are familiar with from previous communications. To accelerate growth and profitability, we leverage two distinct sources of value creation. On the one hand, we have our synergetic and winning combination of Imaging, Varian and Advanced Therapies. Our focus there is on leveraging combined scale in multiple dimensions. For Diagnostics, on the other hand, the formula is rigorous focus.
Now let me give you some examples how we are crystallizing value in our two cores. Let me start with the synergistic segments. You know about our substantial innovation leadership in CT imaging with photon counting or in an MRI with our award-winning low helium technology. Both are obvious examples of our innovation leadership and how we are paving the way for future growth. However, growth for us does not only come from our own innovations. It is also the result of the healthcare world innovating for us.
We are constantly witnessing extraordinary breakthroughs in medical science like in pharma or the medical device space, which need better diagnosis and better treatments with substantially better patient outcomes. Outstanding examples are new therapy approaches in cancer care and neurology based on innovations in pharma industries triggering fast adoption of novel procedures. This has a direct impact on growth in our Molecular Imaging business and further sustains our growth ambitions.
Our products are needed to identify the right patients, to assess response and to confirm health or to accompany survivorship. One example is theranostics as a new approach to identify and treat an increasing number of cancer types.
Theranostics is a highly targeted and individualized treatment using one radioactive agent, the radio legend to identify and mark cancer cells and a second agent to destroy those cells. Theranostics has been proven effective in extending lives and improving quality of life of patients, especially also for those who have not responded to traditional cancer treatments such as radiation, chemotherapy and immunotherapy.
As an example, the treatment of prostate cancer has recently significantly advanced by theranostics. It has also a pharma pipeline covering more than 25 other cancer types. PET CT scans and spec CT scans as well MRI play a key role for the clinician to select the right treatment for the right patient and to monitor therapy progress. The clinical benefits of providing individualized cancer care is why theranostics is gaining momentum among providers.
Another outstanding example are diseases modifying therapies for Alzheimer’s disease. As you are probably aware, several groundbreaking immunotherapy treatments have recently emerged that work to reduce beta amyloid plaques that form in the brain and slow down cognitive decline in the early stages of Alzheimer’s disease. To qualify for those — these treatments, the presence of beta amyloid plaque must be confirmed through diagnostic testing.
Beta amyloid plaque — PET imaging plays a critical role in the Alzheimer’s disease care pathway as it is one of the only modalities available to evaluate the better amyloid plaque burden. We offer the broadest PET CT portfolio in the market from ultra high-end systems primarily installed at larger or academic institutions to systems targeted at bringing digital PET CT to a broader market. They come with a wide range of innovative technologies like our latest innovation, the AI-powered Biograph Trinion. But our offering goes beyond molecular imaging scanners. We own and operate the leading PET radio diagnostic pharmacy network in the US, which reliably delivers PET radiopharmaceuticals across the country.
What makes this so relevant? These radiopharmaceuticals have a very short half-life and need to be used quickly after production. We invest in our radiopharmaceutical network with new production facilities to increase patient access to PET biomarkers and to support future biomarker development. The availability of new biomarkers will increase access to the latest individualized care and make us an even stronger partner for customers and patients along the entire cancer care continuum and for many of the most threatening diseases.
To sum it up, we laid the foundation for another future growth engine, helping health care providers and patients to deal with noncommunicable diseases.
When it comes to Diagnostics, our full focus for value creation in the last 2 years has been on successfully implementing the transformation program that was designed to drive a step change in profitability at Diagnostics. We started the program in 2022 as a reaction to the changed cost environment, but the key trigger was the completion of the Atellica portfolio with the launch of the Atellica CI analyzer.
This enabled us to embark on a substantial portfolio simplification, the positive effects of which we will see coming in as we wind down the legacy platforms. However, next to the portfolio simplification, we pulled many different levers to bring the cost level in the segment to a sustainably lower level in a large onetime effort.
We have tightened our belt with a leaner organization in a significant reduction of complexity. We have challenged the way. We do things across the organization and successfully focused the entire setup more suited to the needs of the Diagnostics business and with the right focus and people to efficient single life growth, the same holds true in terms of our service approach, which we right-sized and designed to better fit the needs of Diagnostics.
I will not run you through the detailed initiatives, there are many. I believe the number on the right-side of the chart speaks for itself — the numbers on the right-side of chart speak for themselves. The cost cutting is having a substantial impact.
The steep ramp in terms of margin improvement is also the result of the super swift implementation of the cost-out measures that we are clearly ahead of plan in terms timing. We are now already on a sounder cost level in the business.
Further margin improvement will not happen at a similar speed, it be more a function of the of the winding down legacy platforms over years to come, and of course, of conversion from higher revenue growth in the mid-term, which brings me to the next chart, where I will run you through the key points on why we have the right product in place to really compete in the core lab.
In Vitro Diagnostics testing is at the core of clinical decision-making, and we have the perfect offering. With the completion the Atellica family with the CI analyzer, we can cater for all settings and all customers, large, medium, small, up and spoke.
We offer a highly competitive menu of more than 200 tests assessing patient health, and we are adding novel assays on an ongoing basis, like the recent first of its kind Neurofilament Light Chain or NFL blood test for accurate diagnosis and personalized management of multiple sclerosis.
Small hospital labs as well as reference lab faced the same provider challenges from staff shortage to cost pressure, consolidation and procedure growth. And this is exactly what we address with systems, automating and digitizing routine work.
At ADLM 2024, the Clinical Lab Expo, we cut it short with the claim, do less. Atellica’s human-centered engineering and automation delivers highly efficient testing at scale, which enables customers to streamline processes and speed turnaround time. Atellica is reliable with high throughput and therefore, drives a high consumable utilization and ultimately, our revenue.
Healthy development of the revenue per box in our installed base shows that we are on the right path. The Atellica franchise already crossed the €1 billion revenue line and continues to grow double-digit. To sum it up, we have done our homework and are receiving great feedback from our customers at ADLM.
And with this, I hand it over to Jochen for a deeper look into the financials of the past quarter as well as the outlook for the rest of the year.
Jochen Schmitz
Thank you, Bernd, and a very good morning to everyone also from me. Let me begin with some color on our continued positive equipment book-to-bill of 1.07 in Q3. Again, this equipment book-to-bill was positive in all segments, especially strong in Varian, further strengthening our already very strong order book.
Let us now look at the comparable revenue growth in Q3. Q3 revenue grew by a very solid 4.3% considering the circumstances against a very tough comparable of 10% growth in the prior year quarter. Despite China still declining by 13% this quarter, we achieved this solid growth at group level on back of strong growth in Americas accelerating to 9% in Q3 and EMEA continuing strongly with 6% growth on very tough comps.
On earnings, we see a healthy development. Adjusted EPS came in at €0.52. The year-over-year decline of 4% is due to a very low tax rate in the prior year quarter. If you take out the year-on-year tax impacts, earnings were driven by an increase in adjusted EBIT margin of 60 basis points year-over-year for the group.
Considering the negative impacts from foreign exchange on Q3 margin of close to 100 basis points, this is a very strong margin expansion year-over-year. Also, let me add some color on the cash performance in Q3. The cash conversion was good this quarter with a cash conversion rate pre-tax slightly above 1. All three equipment segments achieved a cash conversion rate at one or above.
In operating working capital, we reduced receivables this quarter, whereas inventories increased in light of a very strong revenue quarter in the upcoming Q4. As said in previous reporting, we are in the process of reducing safety buffers in inventories, which were built up during the pandemic. At the same time, we are working on improving cycle times of operating working capital, additionally, freeing up cash.
Let us now look at the Q3 performance of the segments, starting with Imaging. Imaging posted growth of 4% against very tough comparables, 15% in the prior year quarter. Although we saw good growth, for example, in Molecular Imaging, the growth in Q3 was primarily held back by a still declining China.
China revenue is still declining due to muted demand triggered by the anticorruption campaign. This temporarily muted demand will come back as pent-up demand the structural demand drivers for growth are fully intact.
The adjusted EBIT margin in Imaging came in at 20% year-over-year, held back by a headwind from foreign exchange of around 100 basis points. Additionally, the below average growth in Q3 led to a lower absolute profit contribution.
Now let’s look at Varian and Advanced Therapies on the next slide. Varian achieved a strong absolute revenue of €927 million, which was in line with Q1 and Q2 levels in absolute terms, underpinning the continued steady performance. In relative terms, Varian achieved excellent growth with about 10% despite China revenue still declining year-over-year.
We also saw a continued stable performance in profitability with no volatility in margins and sequential improvements quarter-by-quarter. On top of this, continued stable performance varying nicely expanded margins. This is especially notable as also Variant saw foreign exchange headwinds of roughly 100 basis points.
Advanced Therapies posted flat growth against very tough comparables, 12% growth in the prior year quarter. As in Imaging, the growth in Q3 was primarily held back by a still declining China where we expect the temporarily muted demand to come back as pent-up demand.
The adjusted EBIT margin in Advanced Therapies came in at 13.9%. It was impacted by year-over-year headwinds from foreign exchange of more than 100 basis points and obviously by the below average growth leading to a lower profit contribution in Q3.
Now, let’s move to Diagnostics, our fourth segment. As Bernd pointed out at the beginning of the call today, Diagnostic is well on track with the transformation program to crystallize business full potential. With no meaningful revenues from antigen in last year’s Q3, the Diagnostics business continued to grow solidly with 2%. The strong adjusted EBIT margin of 7.4% was mainly driven by operational improvements from the transformation program contributing to a margin expansion of roughly 600 basis points year-over-year. Furthermore, like in the first half of the year, the margin also benefited from a longer useful life of our leased laboratory analyzers. This effect was partially offset by foreign exchange headwinds.
And now to the outlook for the current fiscal year. First, we confirm our outlook for fiscal year 2024 for both comparable revenue growth and adjusted basic earnings per share. We updated two of our main assumptions. Firstly, we now assume imaging revenue growth to be between 4.5% and 5.5%. We lowered the growth range for fiscal year ’24 due to revenue in China still declining until Q3.
Secondly, we now assume the tax rate to be between 22% and 24%. We lowered the range for the tax rate for fiscal year 2024 on the back of the favorable development so far driven by positive one-offs. We confirm all other main assumptions for growth in margins for the segments as well as for central items and financial income net. With the lowering of the imaging growth, we also assume lower absolute profit conversion in fiscal year 2024 for Imaging. Therefore, we now assume the Imaging margin will end the fiscal year around the lower end of its margin band.
In Diagnostics, we now assume the Diagnostic margin will end the fiscal year towards the upper end of its margin band due to the very swift implementation of the cost savings kicking in from the transformation program in fiscal year 2024.
Now let me share the general dynamic that we expect in our last quarter of the fiscal year. In equipment businesses, i.e., Imaging, Varian and Advanced Therapies, we expect significantly higher absolute revenue in Q4 with positive contributions from Americas, EMEA, APJ and China, means from all geographies. We expect China revenue growth to stabilize in Q4 and stop its year-over-year significant decline.
On the bottom line, in the Equipment business, we will see the additional Q4 uplift from a higher absolute profit conversion from significantly higher revenue in Q4. With the higher revenue comes also higher gross profit, which gives you leverage over the sequential more flattish OpEx line. Also lifting margins significantly up in Q4 from significant OpEx conversion. And in contrast to the situation in Q3, we do not expect significant foreign exchange effects to negatively impact margins in Q4 year-over-year.
In Diagnostics, we expect the strong margin performance to continue in Q4, driven by the savings from the transformation program. Bear in mind that in Q4, antigen will play a role in the year-over-year comparison for Diagnostics and Siemens Healthineers in total since we booked €52 million of antigen revenue in Q4 of the last fiscal year.
Let me finish with reiterating Bernd’s comments on our performance this fiscal year so far. This year, we have successfully fixed our challenges in Varian and Diagnostics from last year. At the same time, we see the exogenous but temporary impact from the anticorruption campaign on Chinese market for over nine months now impacting primarily Imaging and Advanced Therapies.
And to give you a bit more color on this, we expect to lose around 150 basis points of growth from China relative to our assumptions moving into the year, which is the single reason to change one of our assumptions on the Imaging growth. And despite this, we post positive equipment book-to-bill year-to-date. We increased year-to-date margins and confirm the outlook for revenue growth and adjusted EPS.
And on that note, I’d like to end and hand over to Marc for the Q&A.
Marc Koebernick
Thanks, Jochen. Before we go into the Q&A, let operator just briefly remind you on how to get into the queue.
Question-and-Answer Session
Operator
Thank you, gentlemen. [Operator Instructions]
A – Marc Koebernick
Great. So the first one in the queue would go live be Hassan from Barclays. So Hassan, please go ahead with your questions.
Q – Hassan Al-Wakeel
Good morning. And thank you for taking my questions. I have two, please. Firstly, just on Imaging growth in the quarter. What came as a surprise to you this quarter driving the miss and guidance cut, given China delays to orders in the first half meant that it wasn’t necessarily going to have a meaningful impact this quarter in the second half for Imaging?
And then secondly, could you talk about what you’re seeing on the ground in China and the extent of the recovery you expect this calendar year? Do you think that stimulus will kick in this year? Do you think hospitals are waiting for this? And if it doesn’t kick in this calendar year, does it drive risk to your 20% earnings growth expectations for 2025? Thank you.
A – Jochen Schmitz
Hassan, thanks for your question. On Imaging growth, I think it’s — as I tried to point out, I think we have a single topic in Imaging growth as well as in the overall company growth, and that is China, and that is also holding true for Q3, right? Please be reminded, China is different than other regions. More book-and-bill region, out of several reasons. We do not have significant value partnerships in China business, which have, in general, longer lead times.
And secondly, as you know, we manufacture everything in China for China. And our expectations were clearly that we see a better China contribution for Imaging, but also for the group. That’s it at the end of day.
When we look into the future, and look into our expectation for next year, and the first, we do not expect to see an impact from the stimulus program in revenue for this fiscal year. And then when you look at the stimulus program, it is divided into several pieces. And where we see good progress is on the, so say, Tier 1 national top 44 hospitals. They are the — topic is well defined, meanwhile. And there, we also see good momentum coming in the near future, either early in the fiscal year or earlier in the fiscal year. On the others, it’s still a bit open, how quickly that will come in.
I think when we look at — I think that was the second part of your question. When we look at our expectation for margin expansion on Imaging, we had that discussion last quarter a lot. We feel still good to see a margin expansion above and beyond the upper end of the normal range of 20 to 80 basis points. Last quarter, we talked about 100 basis points, and we feel still good about this. Also, now looking into the future, looking into what we see in the market and what we see also coming out of China.
Marc Koebernick
So I move over to the next one on the queue. That will be Veronika Dubajova from Citi. So Veronika, go ahead.
Veronika Dubajova
Hi guys, good morning and thank you for taking my question. Hope you can hear me well. I’m going to stick with the predictable themes. So first, I just want to understand a little bit kind of I think last quarter, you said, look, we’ve derisked the numbers in China. There is no more downside risk. And here we are a quarter again, having seen a disappointing top line performance and you taking the growth guide down again. What can you tell us to give us confidence that this is it? And from here on China, in your expectations, both for fiscal ’24 and for fiscal ’25 is realistic, and we’re not going to have to worry for another quarter or 2 quarters or 3 quarters about what China does. So if you can give us some color on that and kind of your degree of confidence, that would be super helpful.
And then my second question is just to follow up again on China. But you’ve been very helpful in quantifying the top line headwind to the original fiscal ’24 expectations. Can you also talk through the margin headwind that you’ve experienced as a result of China being soft? And I guess how that flows through to your fiscal ’25 expectations when you look at that at least 100 basis points margin improvement in Imaging. What does that assume for China margin in there? Thank you, guys so much.
Bernd Montag
Yes. Thank you, Veronika. Let me take the first part of the question and — about our confidence for the quarters to come in China. A little bit of a double-click on this. In Q3 revenue in China was on Q2 level, yes, even a touch above. And despite this being on a low level, this is a first sign of stabilization.
Another sign of stabilization is that the book-to-bill in China was above one, yes, for the second quarter in a row coming from figures significantly below one in the quarter before. And with Q4, we expect further stabilization in China and are very confident to almost sure that China will stop its year-over-year decline in Q4.
Meaning, we expect China Q4 year-over-year to be at least flat or growing. So – and this is backed up with all the bottom-up planning, and we have a lot of — not only planning here, but also with the scheduled backlog you have in China. So I hope that double click gives you a little bit of a feeling why we see stabilization and now return to growth.
And with this, I hand it over to Jochen.
Jochen Schmitz
Yes, Veronika, I mean, when we look at the — and I said that for the group overall, that we have about 150 basis points higher loss than anticipated when we started into the year from China. And 150 basis points for the group is about €300 million plus revenue, yes, and that comes with a decent conversion. And I would say if you use, for example, the gross margin, that is not a bad assumption for using the profit impact of it. So it’s a significant aspect because you cannot really do a lot on the cost side in the short-term for the thing.
And as you know, we see this as a temporary effect. So that’s roughly what it is. And as said, Imaging and Advanced Therapies are affected higher than the other two businesses. And when you do then the math, you see that also the assumption on Imaging, for example, the 4.5 to 5.5 now is if you use a number, which is a bit above 150 basis points that you would be well in the range we guided for initially, the 6 to 8.
With regard to 2025, I think, we expect to see China in, for example, in Imaging, to decline this year in the high single-digits. And we expect this to be reversed well next year. Yes. I can’t give you a precise number, but just being back to more — to a normal situation would already cater for a significant growth line coming out of China, yes, just to say that. And that is what we currently have baked into our assumption, and which is also, I would say the basis for our confidence with regard to margin expansion in Imaging of the 100 basis points we were referring to last quarter and this quarter again.
Veronika Dubajova
Excellent. Thank you, guys so much.
Marc Koebernick
Thanks, Veronika. So we move over to Graham from UBS. Graham, you should be live. Go ahead.
Unidentified Analyst
Good morning. This is Kavvya filling in for Graham. Just two questions, please. So firstly, on Imaging. Given you have a strong order book and therefore, have good visibility, just wanted to check if there’s a supply chain issue or any kind of customer installation issue that might be contributing to some uncertainty? And then — sorry, again, on China, it’s obviously been a tough market for the past year. But whereas the vast majority of your revenue is generated outside of here for your local competitors in China, the reverse is true. So just curious as to whether you’ve seen any changes in behavior from these competitors? And do you expect the market to bounce back to be on similar competitive terms and dynamics than before? Thank you.
A – Bernd Montag
Yeah. Maybe I’ll take this question. I mean, first and foremost, we don’t have a supply — we don’t have any supply chain issues. So the — if there are topics about — it is missing, as Jochen explained, a bit of missing book and bill business in China. And what is a minor topic is that sometimes customers are hesitating to do the final installation because it also requires sometimes to “order civil engineering and type of topics”, which is in the current environment. Sometimes also a topic where people are cautious. So this is — these are the topics, which have continued to held back China revenue in the past quarter to some extent.
But as I said in the answer to Veronika, I mean, we see a stabilization of the revenue line, with a very small quarter-over-quarter improvement from Q2 to Q3 with the improved and our book-to-bill above one year and with the visibility of returning to growth in Q4. Local competition, we don’t see a general change from — in the past quarters. And currently, what we see in the market is a overall topic across the entire industry, which is affecting the multinationals as much as locals.
Unidentified Analyst
Thank you.
A – Bernd Montag
Thank you.
A – Marc Koebernick
So next one would be David Adlington from JPMorgan. David, please go ahead. David, you are live.
Q – David Adlington
Thanks for the questions. Maybe just as you look into Q4, I just wondered what — so maybe just on Q4. As you look into Q4, I just wondered what risk there is for further slippage in revenue recognition [Technical Difficulty] or do China, at what risk you attached to maybe not hitting your targets? And then just a more technical one. Just on the tax rate, obviously, much lower and you’ve loaded for the full year. I just wondered, any thoughts on the impact on midterm tax rates? Thanks.
A – Jochen Schmitz
Dave, if I start with the second part of the question. When we see over the years, where we have seen over the years, a constant decline on the tax rate from more the higher 20s now to the mid-20s arena. I think we guided also for this is, I would say, the different value-add structure, the different profit distribution across the globe also triggered by the acquisition of Varian will help or has helped the tax rate to become lower.
This year, I would say, it is particularly low due to certain onetime one-offs, and I mentioned that that before. And so I would say tax guide on a general level over the next two to three years between 24% and 26% is still a prudent assumption.
On Q4 revenue recognition, I mean, when we have a guide out there, we have adjusted the assumption on Imaging. As we guide normally, we see this as an ambitious but realistic picture for the company as a whole as well as for Imaging.
Marc Koebernick
Good. Thanks, David. Then I’m moving over to Hugo from Exane. So Hugo, you should be live now.
Hugo Solvet
Hi. Hello. Thanks. Just on Diagnostics, can maybe discuss the moderate decline in the US here. And on €1 billion Atellica business, can you maybe help us give the split between high and throughput CI analyzer on the installed base and a revenue split basis? And are you seeing any cross-selling synergies? Thank you.
Bernhard Montag
Yes. So on this moderate decline. I mean, the — well, let me start differently. I mean what we see in Diagnostics in this quarter for the first time is that the legacy business is smaller than the Atellica business in the Central App, so which is actually — and I spoke also about €1 billion, crossing the €1 billion line with Atellica. Atellica growing nicely in the double digits again.
And this function of legacy business going down and Atellica business going up also is the explanation for the US contributing more on the decline side because historically, simply we have a very strong installed base of legacy systems in the US. So this is not a topic of weakness in the US. It is just a topic of the product mix normalizing here to how the world has developed in the last, let’s say, 10 years are simply the installed base of legacy systems in the US is higher and in the rest of the world.
And then, sorry, the second question was about — sorry, I forgot the second question, Hugo, was about?
Hugo Solvet
No. If you can be the split between high and mid throughput?
Bernhard Montag
This is a bit of a not so straightforward to answer simply because the CI analyzer is currently in the ramp-up of placing instruments, and this is developing very nicely in terms of placed instruments. Not only the number of placements but also the customer satisfaction is very, very high. But on the other hand, it’s very clear that these instruments don’t pull through yet the same revenue per box as the longer installed larger Atellica systems.
But I can say that overall, the completion of the Atellica portfolio with CI analyzer is a huge success. There is a lot of excitement about the CI analyzer, but then also about the combined setting of having one system or one family of systems in hub-and-spoke settings. And this type of “cross-selling or combined selling of the two” is a big topic also for addressing the hospital-based systems and the IDNs in the United States moving forward.
Hugo Solvet
Thank you very much.
Marc Koebernick
Thanks for these questions, Hugo. So moving on to Julien Dormois from Jefferies. Julien, please go ahead.
Julien Dormois
Hi. Good morning, everyone. I hope you can hear me okay and thanks for taking my question. Still giving you a break on imaging and following up on Hugo’s questions on diagnostics, I think Bernd, you mentioned in your prepared remarks that we should probably not expect the same pace of improvement on margin in Diagnostics going forward for obvious reasons. But I think you previously had a guidance for — I think it was 8% to 12% margin in fiscal year 2025. So from where you stand, is that something that would still be valid? And what would — and whether the mid-teens margin is something realistic than beyond 2025. So just a comment on the general shape of the margin would help.
And the second question still on margin but this time with Varian. Just curious where you see Varian going from here? I mean, you have previously indicated that you would like the margin to go towards Imaging kind of margin in this business. You’re now out of a very strong year of margin expansion for Varian. How should we think about the next two, three years on this side?
Bernhard Montag
Yes. Julien, first, on the Diagnostics margin. I mean — so first, the technicality, so to say. I mean this year, we see a very, very happy about the margin uptick coming from the transformation program as Jochen and I said. And this is, to some extent, a one-time step change in terms of lowering the cost base, which was possible by streamlining the organization and by switching off costs, which are directly related to the legacy portfolio, which we don’t need anymore.
And with this, for example, I mean, production of the instruments or certain R&D work for new assays or whatever. So there is a certain portion of cost reduction, which were one-off efforts and then create a step change.
The further margin expansion comes out two – out of two sources. One is the “gradual decline” or move of the of the legacy, the costs related to legacy portfolio, because we still, of course, need to continue to do service, to have spare parts, to have the reagent supply. So this will step by step move out of the P&L but not as a onetime effort here, which is why this effect of margin improvement will come, but not at the same speed.
And the second improvement comes from growth of the Atellica business and growth of — and also conversion from accelerated growth. So we are very positive about the future trajectory, but we will see not the same acceleration of margin improvement as we have seen it in the current year.
You asked about the 8% to 12%, we are confident and to get into the range. But I would shy away as we at this point to say that next year will be — margin will be in the double digits to qualify this a little bit. And when it comes to the mid-teens in the mid-term, they are definitely reachable.
On the Varian side, I think you see a very good and stable performance. And we said always that there are three main ingredients bringing us to what we call Imaging-like margins, and they are absolutely intact. So this is number one, volume, in conversion. I mean, you see and we continue to see in Varian high growth, in the range of 10%.
We guide for 9% to 12% in our mid-term targets. And that will results in conversion and the current book-to-bill in the business and so on is — and the order backlog is absolutely substantiating this. This is number one.
Number two, we still have a bit of an effect from pricing, because of the longer book-to-bill times in this business.
And number three is a productivity, or meaning you’re really getting Varian online and fully integrated into the Siemens Healthineers overall global supply chain using all the internal suppliers and competence centers we have using the economy of scale, but also using the art of design to cost will help us in addition to improve the gross margin in the business on the equipment side and all these levers are intact. So I feel confident that we will step by step over the next years, reach the Imaging-like margins.
Julien Dormois
Okay. Thanks very much.
Marc Koebernick
Thanks, Julien. So we move to the next Julien from Bank of America. Julien, please go ahead.
Julien Ouaddour
Hi. Thank you very much. Good morning, everyone. The first one, sorry, to coming back on China. But I mean we start to hear on the stimulus that, I mean, it might be a bit lower than expected for healthcare specifically. It seems that like all the sectors are being prioritized here. Has your view on the stimulus change recently with maybe what you’re hearing from your team on ground? So that’s the first question.
And the second one on sales guidance, I mean, like for the group, so I mean after the miss to the revision of Imaging growth guide, how should we see the sort of group sales growth guidance? Is it more realistic to be in the lower half of the range? Just looking at the, let’s say, like upper end, implies a plus 12% growth in Q4. You mentioned in your comments sort of ambitious, but realistic guide, but I mean, does it include like the upper end of the sales growth guidance as well? Thank you.
Jochen Schmitz
Julien, let me start with the second part of the question. When we lowered — and I said that clearly, we — relative to our initial assumptions when we entered into the year, we have less growth from China amounting to about 150 basis points for Siemens Healthineers overall. And our guidance range is 200% — 200 basis points. And if you do the math, you automatically come into the lower half. And here, I would say, we see us more at the lower end of the range for the group for this fiscal year. And by the way, it’s very similar for Imaging, but a bit more pronounced. That’s it on China.
Bernd Montag
So comment on number one, okay, on the stimulus. I mean, first of all, let me qualify a little bit how we talked about it because, I mean, we have never, let’s say, been overly emphasizing the stimulus, and let me explain why because as you maybe know, if follow our discussions on a regular basis, yes. I always emphasize, hey, let’s please look at the underlying growth drivers? And yes, even there might be an anticorruption campaign, this lasts for a couple of quarters, but it comes back and there will be pent-up demand, yes.
And at the same time, I also don’t want to over advertise as an opportunity topics like the stimulus program, because the real topic is how do we address the underlying demand. And then when you look at that underlying demand curve, there is some kind of a wave positives and negatives in a given country coming from short-term exogenous topics holding back investment decisions or accelerating investment decisions until things come back to the overall underlying growth curve.
So just as a general remark here, when looking at the outlook for China. First of all, as Jochen also said, we will see growth in the next year simply, because going back to normal is already growth. The second source and to be — or the reason to be optimistic is that there will be pent-up demand over the next quarters, and we will see how long it takes.
And the number three is the stimulus program. And the stimulus program is — will help in addition, but it is not the primary reason why China is an interesting market. It is a one-time opportunity, and we are happy about it. But the real topic is, as I said, how do we address the underlying growth and the underlying demand? And the swinging back to the underlying demand is already a very, very good topic, including the pent-up demand here. Stimulus comes on top, and we believe to be well positioned for it.
Julien Ouaddour
Perfect. Thanks. I mean, if I can like follow-up quickly on that. So I mean in the 2025, let’s say, like Imaging 100 basis points like margin improvement kind of guidance that you gave. I mean, do we have the impact from stimulus? Or it just come on top? And so it could be — it’s like above the — I mean, like what are the expectations really from the stimulus in your, let’s say, like in your margin guide or like growth guide for Imaging next year? Just to help you roughly.
Jochen Schmitz
Yeah, Julien, let me take that, yeah. I said in Q2, and I reiterated in this quarter that we feel good about 100 basis points. What and how this will exactly be, so to say, to be described? We will talk about in Q4 when we guide for the next fiscal year. I think it’s a bit too early because we are still working our way through our own budget assumptions. We will have the discussions with the teams, but I still feel good about the 100 basis points.
Julien Ouaddour
Perfect. Thank you very much.
Marc Koebernick
Thanks, Julien. So starting to run out of time but I’m still for, let’s say, a few questions. Robert Davies, please go ahead.
Robert Davies
Thanks for taking my question. My first one was just if you can give us a little more color. I know you mentioned in the release that the backlog was higher. Perhaps you could give us some quantification of where the backlog sits now versus beginning of the year? That was my first question. And then the second one was just in terms of order development across the regions, I know you provided some color on sales growth, but perhaps you could give us some color on order development, just the sort of magnitude of kind of declines, I guess, in China, just to give us a sense and then the relative growth in the Americas would be very helpful. Thank you.
Jochen Schmitz
Robert, on the backlog side, I think when you look at our equipment book-to-bill ratio, you see we are currently slightly ahead of this. I think we are at 1.08. Year-to-date, we expect as pointed out at the beginning of year, to be at the end of the fiscal year north of 1.1, because we expect a solid a solid Q4, very Q4. When we look at equipment book-to-bill, I think we see about — when we do the math, I think about 5% 5% — 4% to growth on equipment backlog in this fiscal year.
Robert Davies
Okay. And the second one is on the difference in orders by regions.
Jochen Schmitz
And I think, as you know, we don’t talk about all our growth. But when we look at markets, I think we are very — in general, are very satisfied with what we see regard to activity in all markets. And we see a healthy US market. We see a healthy European, Middle East and Africa market. We see also a very solid APJ market. And I would say, the only market, which is currently as discussed now at length, which is currently muted is the Chinese market. And that drives also the book-to-bill ratios above one despite the fact that we see the muted China situation. And going forward, we also expect to see this continuing.
Robert Davies
Okay, great. Thank you.
Marc Koebernick
Okay. So maybe one question for Sezgi, the time if you keep it short. Thank you.
Sezgi Ozener
Hi. Hope you can hear me. I had two, but I’ll try to narrow it down to one. Imaging, you mentioned some new therapies and turn offtakes and growing demand in Alzheimer’s. Do see that reflects to your order book? Do you see increased demand for PET scans and other products? And also where do you see — or do you also see the same way radiotherapeutics demand reflect your order book similarly? Thanks.
Bernd Montag
I mean, thank you for the question. I mean, we see good growth in Molecular Imaging. I think it’s also highlighted in the earnings report as one, I think fastest growing business in this quarter. And we see this, and that’s also why we — I mean, one of the reasons why we highlighted it that, I mean, there’s a lot of excitement about CT and photon-counting CT, which is super great. There is a lot of strength in MR and that sometimes over, or let’s say, draw so much attention that we — that there is not so much talk about Molecular Imaging where there is really a lot of momentum. We see all this growing need for PET inspect CT scans.
But on the other hand, we are also benefiting from these new radio nucleide, and it is very good to see that our PET net business is now in the mid triple digit millions as a business and an additional growth contributor.
Sezgi Ozener
If I may, then as a follow-up there. You mentioned also that you have the largest broadest portfolio. That should presumably lead to better margins in this product because competitive picture looks different on this product, would that support a higher incremental margin accretion in the midterm for Imaging?
Bernd Montag
I mean this is certainly one contribution. I mean, when you look at a little bit of details on the Molecular Imaging business, this is about, I would say, about 15% of the Imaging top line at — Imaging at the midpoint, more or less of the Imaging margins. So CTM are a bit accretive.
So it is one of many reasons, why we are very positive about Imaging growth. I mean, Jochen made the calculation also about this fiscal year that we are losing about 2.5% or so of growth because of China and Imaging. So when you add this back to the numbers, it shows how fast the growth in Imaging is and what the true potential is. And that also why we are very positive about the margin expansion and accelerating growth in the next year. I mean a molecular imaging will definitely also contribute to this.
Marc Koebernick
Okay. Thanks, Sezgi.
Sezgi Ozener
Thanks very much.
Marc Koebernick
Okay. So we are really out of time now, so I need to wrap it up. Sorry, Falko, we’ll give you pull position in the sell-side breakfast on Friday for your questions. And that brings us to the end of the call today. Looking forward to the road show next two days in UK and the US. And then obviously, lots of conference participations in September. And if we don’t meet and speak there, we hear ourselves at latest with the Q4 reporting in November. Until then, stay safe and sound. Bye-bye.
Operator
That will conclude today’s conference call. Thank you for your participation, ladies and gentlemen. A recording of this conference call will be available on the Investor Relations section of Siemens Healthineers website.
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