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Good morning, ladies and gentlemen, and 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.
Thank you, operator. Good morning from Erlangen, dear analysts and investors. Our CEO, Bernhard Montag; and our CFO, Jochen Schmitz, will be taking you through the details of our Q3 results for fiscal year ’23 this morning. The Q3 2023 results were published this morning at 7:00 a.m. And you can find all the relevant documents as well as a recording of this call on the Investor Relations section of the Siemens Healthineers website. After the presentations, there will be a chance to ask questions. Let me just remind you of our two question rule for the Q&A.
And now I’ll pass the word to our CEO, Bernhard Montag. Bernhard, the floor is yours.
Thank you, Marc. Good morning, dear analysts and investors. Thanks for listening in and for your continued interest in Siemens Healthineers. As usual, I will kick it off by giving a brief summary of the financial performance in the quarter. We again achieved an excellent double digit revenue growth of 10% ex-antigen, including antigen it was also positive at 3.6%.
Our order intake was at a very good level as well. We are happy with the 1.11 equipment book-to-bill that means we booked notably more orders this quarter than we posted revenue. Even in a quarter with excellent revenue, we achieved this very good level despite the absence of a large deal that we signed only a few days after closing the quarter. Jochen Schmitz will dive a bit deeper in his part.
We see a healthy global market environment and continuous strong demand for our products and solution was broad-based. Strongest driver of our excellent group revenue growth this quarter was the Imaging segment with 15% growth. While this was on a somewhat weaker comp, I am nevertheless very pleased about this impressive growth and of course also about the strong margin of almost 22%.
Diagnostics revenue declined by 20% in Q3, as this move was essentially due to the antigen contribution tailing off, the business ex-antigen grew by 2%. This and also the return of the core margin into positive territory i.e. excluding transformation costs and excluding antigen, prove that we are on a good track.
Varian grew with 7% which is below the annual guidance range but also was on strong comps. I feel comfortable about the double digit growth was dynamic for the full fiscal year which was again underpinned by a strong order intake. On the margin which was only 12.1% in Q3, we are experiencing a phase of temporary weakness. Several factors come together here, most importantly, missing conversion this quarter from temporary logistics challenges and the benefit from the pricing measures kicking in later at Varian.
Advanced Therapies had a further strong quarter in terms of growth as well as profitability. The segment grew by 12% and achieved a 15.3% adjusted EBIT margin, which is almost a doubling of last year’s weaker level. In light of the broad-based good developments in terms of profitability, we were able to deliver a good quarterly EPS number of €0.53. The 24% growth in EPS was supported by a low tax rate. Excluding antigen and the impact of transformation cost, EPS growth was even higher at an impressive 69%.
On back of this good quarter, we confirm our outlook for fiscal year ’23. We are expecting to be in the upper half of our 6% to 8% range for revenue growth ex-antigen and confirming to come in at the lower end of the range for EPS. Jochen will explain the moving parts with regards to this in detail. However, before he takes over, I will give you my take on the segment’s Q3 highlights in the next few minutes, starting with Imaging.
Q3 was a strong quarter for Imaging in terms of growth and profitability. At the same time, we have been able to increase the very strong and healthy backlog for the Imaging segment again. The demand for our products and services is clinically driven and the virtuous wheel of innovation keeps turning fast for our Imaging business. Our strength allows us to invest more than our competitors in R&D and at the same time increase our sector leading margins.
With this, we ensure to be at the forefront when it comes to innovations consistently growing at above market rates and therefore further taking share and expanding markets. This is the secret sauce for our ability to grow so strongly and at the same time expand our sector leading margins. Our successful pricing initiatives as a reaction to the current inflationary environment are the additional element that will keep this nice margin dynamic working in terms of further sequential improvement also in the fourth quarter. Hence we are well on track for our segment guidance on growth and margin.
An example, or one example of many, is ideal for six photon-counting CT’s with SCAPIS, a cardiopulmonary bioimaging study. This country wide study is designed to identify early stage of coronary artery disease and COPD with unprecedented precision and low radiation exposure for patients to initiate and monitor preventive therapies. This deal is not only a proof point for our innovation strength, but also will show that photon-counting CT has the potential to change how diagnosis and treatment decisions done in the future.
And this potential is even enhanced by our leading position in digitalization data in AI, with more than 1.5 billion curated images which are the basis to develop our portfolio of AI enhanced products. Our AI offerings range from scan automation, e.g., how the patient is automatically best positioned in the isocenter of the CT for his respective exam to shortening MR exam. Exams, for example with Deep Resolve, which provides tremendous acquisition time reductions, especially in depiction of dynamic processes or moving organs like cardiac images, and the pre-analyzing of images with reading assistants for the radiologist with our AI-Rad Companion family.
Turning the page now to Diagnostics, where we also can report good progress on important steps of our transformation. This was an important quarter for the Diagnostics business. Next to the promising green shoots in terms of P&L developments, which I have already briefly commented. I would like to highlight quite a few promising -- very promising developments. Let me start with the maybe most important positive news.
We have received the FDA clearance for the Atellica CI Analyzer, the instrument we used to refer to as CI 1900. This is an important step for us. Firstly, the Atellica CI Analyzer was the missing puzzle piece in completing the Atellica ecosystem. And secondly, the US market is by far the most important therefore by far most important single market for our Diagnostics business. Hence, being able now to offer the most competitive complete offering for IA/CC settings in the core lab, be it for the mega lab for hub-and-spoke settings and for low and mid throughput labs, it is a very crucial step in the diagnostics transformation. This comes at a point in time, I mean we have already been noticing a nice commercial momentum. We have been signing many deals of different sizes and see more in the pipeline, strong proof points of our portfolio strength.
Also in the sentiment of the AICC the largest tradeshow in the diagnostic space which took place last week, was very positive. Firstly, it proved to us that the market is in healthy growth mode and secondly, that the customer resonance to our product portfolio is extremely positive. In terms of our own P&L, this is proven by the fact that the Atellica franchise has been growing strongly throughout 2023. So the commercial momentum for our new and complete portfolio is clearly strong.
Also, with regards to the cost side, the past months were important. Thanks to the completion of the portfolio on the IA/CC side, we could advance in terms of portfolio simplification. Five end of sales dates for legacy systems have been communicated to our customers as well as to end of life dates. Ramping down legacy systems is a process that takes time. We need to take each step carefully considering the impact for our customers. However, walking this path is extremely important in order to reduce complexity and to increase efficiency in so many dimensions over time.
So our transformation program is in full execution and cost savings are kicking in. In Q3, we already saw some €20 million of effective savings. This is the first proof point that the transformation is effective and that we are on track to reach our targeted savings of €300 million in 2025. On this positive note, I would like to move to another exciting story.
Varian sees a continued order momentum and is supported by the latest addition to the Varian portfolio HyperSight, which is creating lots of traction. You might remember we launched HyperSight last autumn. It offers substantially improved image quality at an increased speed and allows for substantially improved cancer treatment planning capability right in the treatment room. And it is a showcase of imaging and therapy coming together. The integration of Varian is progressing well. And this is what we also can see when it comes to the synergies ramping up.
In the field of AI based planning and adaptive therapy, Varian is at the forefront and underlines this with more than 76,000 online adaptive sessions since market introduction. The excitement this creates with our customers manifests itself in continuous strong order momentum, quarter-by-quarter. Revenue growth in Q3, however, was held back somewhat by outbound logistics challenges, which we clearly perceive as temporary.
Still Varian is with its year-to-date growth rate of more than 9% well on track for the upper end of the 9% to 12% growth guidance in fiscal year ’23, especially having in mind that Q4 last year was rather a weak comp. The pushed out revenue in Q3 of course did lead to some missing conversion. There is still a noticeable margin compression which is of temporary nature. At the same time, we continue to invest into R&D to achieve future revenue synergies. Also, it takes longer than in Imaging and Advanced Therapies till the cost challenges from the current inflationary environment can be compensated by our pricing measures, which brings me to Advanced Therapies.
Similar to Imaging, Advanced Therapies delivered a very strong revenue growth of 12% at expanding margins. Since the launch of the ARTIS icono biplane for neurovascular interventions, we were able to sell more than 1000 ARTIS icono. We are leading in the neurointervention space, and were able to continuously enhance the ARTIS icono portfolio since the launch by adding further versions to the portfolio, for example, the biplane version for cardiovascular interventions as well as a ceiling version for precise tumor embolization.
The pioneering integration of ARTIS icono ceiling and CT in the Nexaris suite for the OR played a big part in closing a multimodality deal with one of the leading cancer centers in the US. The lead to this deal was given by the Varian team having a strong presence from a collaboration and research perspective and this really helped to leverage our value proposition, combining Imaging, Variant and Advanced Therapies equipment.
Further momentum in the Advanced Therapy segment was added by the collaboration with Intuitive Surgical in the field of endobronchial pulmonology, integrating Siemens Healthineers Cios Spin mobile imaging system enhances the Intuitive Surgical Ion lung biopsy workflow. Our unique capabilities make us the attractive partner for our other healthcare companies as much as for our customers.
And let me briefly remind you of these three unique capabilities. The foundation of our success is the combination of patient twinning, precision therapy, and digital data and AI. They fuel our present and future growth and make us the holistic partner of choice for our customers everywhere. They are the source of a constant stream of innovations and pioneering breakthroughs to continuously gain share and expanding accessible markets.
And with this, I hand it over to you, Jochen.
Yeah, thanks Bernhard, and good morning to everyone, also from me. Let me take you through the financials of our third quarter of fiscal ’23. I would like to start by giving some color on equipment orders. We refer to equipment orders which relate to Imaging, Varian and Advanced Therapies without service orders and obviously without Diagnostics. Q3 equipment order intake was at a very good level despite the absence of one large deal that we signed only a few days after closing the quarter.
Equipment orders were again, notably above equipment revenues in Q3, the positive equipment book-to-bill of 1.11 further increase our very healthy order book across the board, again. The prior year quarter had very strong equipment book-to-bill of 1.31. Equipment order this quarter were on the same level as the very strong prior quarter on a comparable basis, which had mid-teens growth back then. I will give more insight on the order book dynamics later in this presentation. By the way we did we do see our strong order book reflected in our Q3 revenue growth.
Excluding antigen sales, we again posted very strong comparable revenue growth of 10%, another strong quarter after Q2 with 11%. This was based on excellent equipment revenues as well as an accelerated service revenue growth. The strong revenue was converted into strong earnings expansion as you see on the right side of the chart. Adjusted basic earnings per share increased year-over-year but 24%.
Well looking at the year-over-year comparison is important to take into account the antigen accretion from last year’s quarter. In the prior quarter we booked around €300 million in antigen revenues which lifted earnings per share by around €0.11. As mentioned already in the Q2 earnings call, antigen sales are tailing off in 2023 as anticipated. In Q3, there was no material impact from antigen.
Let me give you some more color on the development of the adjusted EBIT margin in Q3. The adjusted EBIT margin came in at 14.2%, slightly below the prior year quarter. However, excluding the effects of antigen and the transformation costs in diagnostics, we saw more than 250 basis points underlying margin expansion primarily driven by better operational performance.
Foreign exchange tailwind of around 100 basis points was partially offset by cost increases for increased procurement costs year-over-year. In addition, we saw year-over-year headwinds from a normalized level of incentive provisions in this quarter compared to the unusual low level in prior year.
Below EBIT line, financial income net came in at negative €52 million. This is a slight sequential increase of around €5 million versus Q2, which is partially a function of higher interest rates coming through. In Q3 We saw an exceptionally low tax rate positively impacted by several discrete items. I mean, discrete items obviously have a kind of a one-time character.
One last comment on cash before we look at the segments. Free cash was at €285 million, below the level of prior year quarter. Last year we ordered very positive effects from the antigen business. In this quarter we increased our inventory levels to ensure our ability to deliver to customers in the upcoming fourth quarter. Bear in mind that we had a strong revenue quarter in Q2 and in Q3 and expect Q4 to be very strong again in absolute terms as always. In the appendix, you will find the free cash conversion bridge.
Now let us have a look at the segment performance in detail, starting with Imaging and Diagnostics. Imaging reported very strong 15.2% comparable revenue growth, growing well across all modalities. On the margin side, Imaging showed strong margin expansion year-over-year driven by healthy conversion from the very strong revenue growth and as expected, we saw the pricing measures contributing to the healthy conversion. Not much to add in a very strong quarter for Imaging.
Over to Diagnostics. Due to the tailing off on antigen sales from around €3 million in Q3 last year, Diagnostics saw a notable revenue decline this quarter. Excluding antigen, we saw the core business returning to growth, as expected. Looking at the margin in the core business, as you know, the core excludes antigen and transformation costs, Diagnostics achieved a break even margin driven by the stabilization in the top line and low logistic cost. Outside of the core margin, we saw transformation costs amounting to €12 million. Please bear in mind that these transformation costs are not falling under our adjustment definition which means they are reflected in the adjusted EBIT figure. As Bernhard has stated before, we also saw the first cost savings from the transformation program coming in.
Now let’s look at Varian and Advanced Therapies on the next slide. On a comparable basis, Varian posted strong revenue growth of 7% this quarter. Although this is below the target range, we feel very confident with the overall growth dynamic for the following reasons. We saw a growth in all regions, particularly strong in EMEA and the Americas. Also, Q3 had a relatively tough comp, which will become easier in Q4.
And most important, we see the strong order momentum at Varian continuing. We had expected to book even more revenues in Q3, but were held back by temporary challenges in outbound logistics which we expect to resolve in Q4. These held back revenues lead to missing conversion in Q3 while at the same time we continue to invest into R&D for future growth. Together this temporarily compressed the margins to 12.1% in Q3.
When looking at the Q3 margin year-over-year, please bear in mind that the prior year quarter had the highest margin fiscal year ’22, 18.1% whereas was 15.9% for the full fiscal. Compared to this high margin quarter, we saw year-over-year headwinds from increased procurement cost and foreign exchange. In addition, pricing measures are taking longer compared with Imaging and Advanced Therapies to take effect for Varian due to the longer lead times between order and revenue in this business.
Advanced Therapies continued its healthy momentum with very strong comparable revenue growth of 11.9%. On the adjusted EBIT, we saw a very high year-over-year margin expansion, however, compared to a very low margin quarter in 2022, even if Q3 ’22 would have had a normalized margin, we would still have seen a decent margin expansion this quarter, driven by a very healthy conversion from the very strong revenue growth. And as expected, we saw also here the price measures contributing to the healthy conversion.
The Endovascular Robotics business continued to dilute margins in Q3 by around 300 basis points as we are still in the process of ramping down the activities of the cardiology solution. But compared to somewhat elevated levels in the prior quarter, the quarterly dilution was less than prior year. As said before, Q1 of fiscal year ’24 onwards we expect to see significantly less margin dilution on an ongoing basis from the Endovascular Robotics investments in neuro solutions only. Related to this, we booked minor charges of €17 million in Q3 for the additional buybacks from customer sides. As in Q2, these charges are adjusted and we do not expect further charges related to this topic.
Now let us have a closer look at the orders and book-to-bill development. Let me start with a grade when we signed and booked a 10 year contract with SSM Health in early July. SSM Health is a large provider with 23 hospitals over 300 physician offices and other facilities in the Midwest of the United States, making it one of the largest integrated providers in the United States. The contract includes equipment from Imaging, Advanced Therapies, and Varian, which is another proof point that the combination with Varian is working and is beneficial for our customers. The deal adds revenues for the next 10 years, adding to our resilience for the long term like the many other value partnerships that we have signed.
A quick word on the timing, we signed the deal on July 5, right after Independence Day with the first and second of July being a weekend. So because a one work day in the United States, the booking of the deal moved from Q3 to Q4. If we would have booked it in Q3, equipment orders would have not been on the same level, but it would have even grown by around mid-single-digits. Just another anecdotal evidence that equipment order growth in a single quarter can be lumpy, which does not create any problem as future revenue growth does not depend on order intake in a single quarter.
And single quarterly order growth numbers are not an indicator about the health state of our business. However, future revenue growth is of course substantiated by the order backlog. Which brings me to the right side of the chart, we continuously had positive equipment book-to- bill in the last years. And to-date, although this year was 1.15, even excluding the SSM Health deal, I was referring to beforehand. This means our equipment order bookings are consistently above our revenue booking further building up our large and healthy backlog. This constantly growing backlog and the accelerated service revenue substantiates very well our revenue growth for the future.
Speaking of the future, let us now move to the outlook. We confirm our outlook for fiscal year 2023. We continue to expect the fiscal year clearly in the upper half of the range of 6% to 8% growing, excluding antigen or of the minus 1% to plus 1% growth, including antigen. In terms of adjusted EPS, we continue to expect to finish the fiscal year at the low end of our €2 to €2.20 per share outlook. Essentially we are at the lower end because of foreign exchange effects which have turned against our initial assumption in the course of the year. As communicated in early May, the foreign exchange impacts are accumulating to more than €0.10 headwinds on EPS compared to when we initially gave this guidance in November 2022.
Let us now have a look how this outlooks comes together from the bottom up, we have the segment performances starting with comparable revenues growth. For the segments Imaging, Varian and Advanced Therapies, we continue to expect to end the fiscal year at the upper end of the respective ranges for comparable revenue growth. Based on strong revenue growth in the first nine months, very strong backlog and higher recurring revenue share from the service business. In Diagnostic, we are well on track to end the year within the gross range given in May.
Over to margins. Both Imaging and Advanced Therapies have shown good margin momentum in the first nine months. Diagnostic has also shown the expected recovery in Q3, so for those three segments we are on track to end the year well within the respective margin ranges. For Varian, we lowered the margin range to 14% to 15% for this year, due to the temporarily challenged margin performance.
And now to the line items below the adjusted EBIT. For financial income net, we are lowering our guidance to minus €175 million to minus €185 million this year, so around €20 million more than the old midpoint of minus €160 million to the new midpoint of minus €180 million. Despite the majority of our debt being fixed and rising interest rates still find their way into the interest expense we are the loans which have floating rates and through partial refinancing our working capital facility for short-term financing is obviously also exposed to current rates.
The minus €52 million financial income we saw this quarter is probably a very normal quarter for financial income. And assuming a similar level for Q4 brings you to the new guidance range for 2023. Beyond this, we need to prepare for some more refinancing to do which at the current interest rates, should all other things equal, lead to some additional upward pressure in terms of the interest results.
On tax on the other hand, we have not seen a normal quarter. We have seen an extraordinary low tax rate of 13% this quarter, driven by several discrete items that positively impacted the tax rate in Q3. Together with the odds of very low tax rate in Q1, we now lower the tax rate guidance to 20% to 22% for fiscal year 2023. Please bear in mind that the tax rates in Q3 and Q1, were both positively impacted by discrete items that we cannot expect to repeat themselves in the future.
We expect the Q4 tax rate to be a notch above the previous fiscal year guidance of 26% to 28%, which was indicating normal levels. This then brings you to the new range of 20% to 22% for fiscal year ’23. So summarizing, quite a few moving pieces but at the end the confirmation of our group guidance for comparable revenue growth as well as group EPS in turbulent times.
And now I would like to hand it over to Marc some words on our plans on the IR fund in the second half of the calendar year, and then, obviously Q&A.
Thank you, Jochen. We have quite a program of IR activities planned for the second half of the calendar year. We will obviously be on the road after this reporting virtually in the UK and the US. And we’ll be taking part in several conferences in-person in September. And then we are going to report Q4 results on the 8th of November and will enrich this reporting with strategic and financial update in a format that you might remember we already had also in 2019. This will be followed by in-person road shows to all major locations.
And we will then finalize the IR year with a great in-person event at our premises in Forchheim, where we invite you for the Meet the Management on December 7. On that day, you will get to look behind the scenes, also in a very interesting tour of our Experience Center and the city factory during the morning, and in the afternoon, you can meet the management of our four segments, including presentations, and Q&A sessions. And if you have not signed up for this event, I do encourage you to do so, a reminder of the invitation should be in your inboxes in the course of the day-to-day.
And with that, I get to close today’s presentation part and hand over to the operator to remind you of our Q&A instructions.
Thank you gentleman. We will start today’s question-and-answer session where we would like to ask you to limit yourself to two questions. [Operator Instructions].
Okay, thank you, operator. We start the session today with Hassan from Barclays. So Hassan, you should be live.
Thank you for taking my questions. I have two, please. Firstly, Jochen, when we spoke last in mid-June, you talked about low-single-digit to mid-single-digit growth in orders for the second half as a fair assumption. I appreciate the commentary around timing on SSM. But has anything changed on an underlying basis and do you expect Q4 to compensate for this weakness in Q3 and for Q4 to be, say, in the mid-single-digit to high-single-digit range in growth terms?
And then secondly, on Varian, could you talk about some of these temporary logistics issues and whether they’ve been solved so far this quarter? And do you still consider the 2025 margin target of greater than 20% here as realistic and if so, should we expect linear phasing from here? Thank you.
Yeah, Hassan, on the -- thanks for the order question. I think we, hopefully we made it very clear that how satisfied we are with the development in the market. You know, the markets are in general extremely healthy. And the explanation on SSM deal showed you how lumpy this order growth can be. But importantly for us is that we see with 1.11, a very, very healthy addition to our order book at a rate, which is very, very promising for what we can expect from revenue growth in the future. And I’m also not worried about our market developments in the coming quarter.
Then Hassan on the Varian side, this is outbound logistics, where the team is, has quite a turbulent year. I mean, as you know, we have made up a great deal in the last -- in Q2 with 47% equipment growth, yeah, with the original inbound hiccup we had. Still the getting all the LINACs out here which is, in a way, a nice problem because of the high growth there, is, at some point, a challenge to achieve at exactly a given date.
And this is what happened here that that a couple of 20-ish LINACs didn’t make it to a complete delivery at the customer side at the cut-off date, at the end of Q3 which was basically the -- to give some color on what the reason here was. But in the end, yeah, it is recovering from the kind of turbulences we had on the inbound side and now making up for it in this with this huge order backlog we have. And I’m very happy about this one and also, this on the back of a pretty strong Q3 in the last year. So the absolute revenue target has been has been very high.
You ask about Q4, I’m very optimistic that, we know on the one hand, what has -- what didn’t make the cut-off here in Q3 will definitely show up in Q4. And I’m very, very optimistic that the team gets into more or into less turbulent, more laminar territory. I think also here, Otto will be of great help with his experience from the MR side. And also bear in mind here that Q4 last year was not a very strong comp, which is why I’m very optimistic that we -- that Varian will end up at the upper end of the growth guidance we have given of 9% to 12%.
I mean, you asked about the Varian margin for the years or for the midterm. I mean, on a positive side the growth momentum, and this is really super exciting, is intact. You see, or more than intact. Yeah, it’s a vibrant business within Healthineers the strongest order momentum and also strongest revenue growth momentum. So the growth is very much intact, and underpinned by the strong order book. Achieving the 20% in ’25 is still possible, but probably an optimistic case. But I’m optimistic that we that we are getting close to it.
That’s very helpful. Jochen, if I could just follow up on orders. And maybe to ask it another way, can we get your confidence around 2024 and 2025 revenues that that you expect around high-single-digit given what we’ve seen and what you expect on the order front so far?
Hassan thanks for the follow-up question which is really heading towards where we always wanted to head to from our communication standpoint. Our strong order book was, I would say, nine months 1.15, means 15% more orders on equipment than revenue combined with accelerated service growth gives us a lot of confidence for our midterm outlook on the revenue line. And therefore, we feel very good about this. And therefore, we are not concerned in getting to what we have guided for in November ’21 for Imaging, for Varian and for Advanced Therapies, and with the update we did on Diagnostics.
Very helpful, thank you.
Thanks, Hassan. So, we turn over now to Veronika Dubajova from Citi. Veronika, you should be live now.
Excellent. Hi, good morning. And thank you for taking my questions. I have also two, and they will be along very similar lines to Hassan’s. My first one is on Varian and I guess the margin progression as we think about fiscal ’24 and fiscal ’25 given that we have a lower starting point in fiscal ’23, I think Jochen, if I look at consensus, the expectation for next year is for an 18% margin, do you still think that’s possible? And maybe just related to that what you do to help the organization avoid issues such as what we have seen today? In the future, are there any changes that are happening? So sort of two parter to that Varian question.
And then my second question is on the portfolio and the structure of the company. Just wanted to get your temperature on, you know, obviously post some of the current exchanges, whether there were any other parts of the business across all the divisions that you think is noncore, and therefore at this stage, might end up being divested, disposed off or closed off? Thank you, guys.
Thanks, Veronika. I do start with a Varian one. And I will support the statement of band, which is always good, if you do this in a public. But let me start differently, I would say on the top line, on the top line we feel extremely well positioned. We gained market share in this business, we have a very, very healthy, -- very, very healthy book-to-bill ratios. We have a very healthy order backlog and we see with regard to margin, as Bernhard pointed out, the achieving the 20% in 2025 is still possible. But as Bernhard said, it’s probably the more optimistic case. And the starting point we are currently at didn’t make it easier.
On the other hand, we are in a very strong position and what is fundamentally weighing on margins that we have not -- that we are not yet back to the economic equation we were used to in this business, out of price and cost because of the long cycle nature of the business. And I believe that we still have good, good opportunities to work on this and this will give us tailwind for margin expansion in the next two years. And I think with this, we feel good about the messages we gave that the 20% is still in reach. But as we said, it is more the optimistic case.
Yeah, Veronika on the portfolio side. I mean, first of all, I’m very happy and convinced that we have a very, very rational portfolio. And we also worked on it to be rational and when I keep speaking about this triangle of patient twinning, precision therapy and digital data and AI, it shows really where we see medicine going when it comes to addressing the non-communicable diseases, when it comes to overcoming staff shortage and creating access to care.
And this is what makes this and this story is extremely strong for the combination of Imaging, Advanced Therapies and Varian. This is why a Varian got this extra boost in growth. And this is also what makes us win the value partnerships because in addition to the medical progress we are driving, we are covering many critical departments in one, in a hospital or a health system, which allows us to then be also a attractive partner for the C level. Yeah, so this part of the portfolio is extremely rational and something which also a logic which we want to build on further.
Now, I’m coming back to the word, core, so to be clear, what is my definition of core means? Core means that a business is, benefits super strong from being part, being under one roof with the other businesses or when you take a business away, the other businesses suffer. So this is clearly the case on the one hand, when it comes to Advanced Therapies, Imaging, and Varian, we are -- this one core. You can say that Diagnostics is in a way, a separate entity in this logic, it doesn’t have the same strong interdependency to the other businesses. So you can see that after the -- since the IPO with the Varian acquisition, and with all the efforts we are doing on digitalization, value partnerships, and so on. So its, we are more a company of a two core, so to say, with a Diagnostics business with its own logic, and the three other businesses. We don’t see current, any topics, like where we need to streamline the portfolio within these two stories, so to say.
That’s very helpful and thank you for that. If I can just maybe a quick follow up on the Varian. I guess, you guys had outlined some really compelling margin expansion path when you did the deal. And it seems like we’re diverging further and further away from that. Is there anything else that’s going wrong in the business? Are the synergies harder to realize? I mean, it doesn’t sound like it from the conversation or is your impression very much that the challenges are sort of self imposed and easily fixable such as logistics? Wanted to get your thoughts on that.
Veronika, I think what we need to see is when -- I mean when we about the --when we laid out the margin trajectory, and it was in November 2021, when we had our Capital Market Day, the road when it comes to inflationary environment, it hasn’t become easier. So and that is what we see currently. With an additional aspect of how do we manage the growth and how much kind of special efforts we currently need to invest before the supply chain is completely streamlined. But I think this current deviation from the path is driven by the change in the cost environment but we see it as a temporary drop, as Jochen talked about and we will see what we currently see on the Imaging side nicely, the pricing measures making starting to visibly making up for the cost pressures, which we saw in the quarters before. We will see similar easing on the Varian side, plus more and more benefits from an overall improvement of the supply chain where Varian will benefit from the knowhow which is there in the rest of Siemens Healthineers.
Thanks, Veronika.
That’s great. Thanks.
We head over to Graham from UBS. Graham, you should be live just about now.
Morning guys, thanks for taking the questions. Just two from me, and just firstly on China, has it been a source of strength? I wonder if you could give us an update on the dynamics in how you think the environment is developing from an order perspective into the second half of calendar year, just because we obviously had the rolling over of the fiscal stimulus from the government? So if we could to get a sense of how impactful that was and sort of what the underlying demand is like there? And then maybe if you give an update on how you’re thinking about labor costs particular over the next sort of 12 months, and just to get a sense of what we should be taking in for inflation there? Thanks a lot.
So, Graham, on the China side, I mean, first of all, underlying demand is super strong. And I think this is how we always, always need to look at this. And China is definitely a business or part or a region in which we can achieve growth in the high-single-digits or low-double-digits in the -- as from an underlying perspective. Then there is an overlay. I mean, in the beginning of the year, there was or let’s say, overlay of some government actions which have impacts in maybe which take then one or two quarters.
So there was a little bit of a held back topic when it comes to -- when it came to the COVID restrictions, then there was a stimulus, then the stimulus ran out. Currently, there’s a little bit of a hesitation in China, of hospitals to take orders because there are some -- because there is a special government focus on procurement practices. But all these things typically, have always returned to normal. We will see what we saw in China, a little bit of a held back orders but we will see that coming back in the quarters to come. And typically these topics always compensate.
Graham, on the labor cost side, for next year we expect to see, I would say a similar merit increase level as we have seen from 2022 to 2023. So I would say in the ballpark, on average globally of 5%, which is still a bit decelerated to what we normally would expect, which is more a 3% -- 3% to 4%. Well, we have baked this into our assumptions for the midterm, when we adjusted them with regard to our pricing environment. So I think that is not surprising us, going forward.
Great, thanks a lot guys.
Thanks, Graham. Brings us to the next one on the line, that would be David Adlington from JP Morgan. David, go ahead.
Morning, guys. So just firstly, on market conditions, you sort of mentioned sort of high level in terms of a healthy environment for capital equipment across hospitals. Maybe just a little bit of further color by region, because we have had some different commentary from some of your peers. And then secondly, just in terms of Diagnostics, just on the margins, maybe you could give us some kind of path from here, particularly in the next year and how you’re thinking about the margin improvements or trajectory for Diagnostics will be great. Thank you.
David, on the markets, we see in general, I would say a very, very healthy situation in general. I mean, Bernhard referred to China before and nothing to add here. China is in an ongoing bid out of its health care system, which will lead with certain lumpiness just based on government incentives or government -- other government programs by quarter, but we see an ongoing trend of investment into the healthcare system which should give us a good, good momentum in China.
We see the United States also in general, very, very healthy. Which translates in the classical equipment market to growth rates which are in the low to mid-single-digit and as we have pointed out, since quite a while is that we have seen a very, very strong market environment in EMEA throughout the pandemic, which is now stabilizing on a very high level relative to the past and also now turning back to normal growth environments, which are in the lower single-digits on the classical equipment.
On the other hand, when you look at our growth profile, and when we have built up significant installed base over the years. We have still, as I highlighted a very, very healthy backlog which will drive our revenue growth on the equipment side, further fueling our service growth, which is currently in levels which we have not seen in the past, north of 7%, very, very healthy. Therefore, we feel very, very confident about the about the prospects with regard to revenue for our business, based on healthy markets globally.
Sorry, there was also second --
Diagnostics margin.
The Diagnostic margins progression, and we are in general on track -- where we see as on track to achieve the guided margin band for 2025. The transformation is starting to paying off. That’s what we have seen. We believe that we have seen trough in Q2, we saw the first signs of light in the Q3. We expect to stay on the growth path also in Q4 and in the positive territory in the core business in Q4 and then uplifting the margins as the savings, the transformation savings kicking in. And then what will be so say the icing on the cake and the question is how much icing, is depending on the growth trajectory we are able to achieve. And I mentioned that before. And that was also the reason why we had a relatively broad band communicated 8% to 12%. Because depending on the success in the marketplace, means the growth trajectory will either -- and depending on I would say less successful, more at the lower end, more successful and more to the upper end. And this has not changed.
Thanks, guys.
Thanks. Thanks, David. We head over to Odysseas Manesiotis from Berenberg. Odysseas, please go ahead.
Hi, thanks for taking my questions. So one and a half on Varian, please. So just to better quantify the impact of the outbound logistics issue on the 20-ish LINACs you mentioned didn’t make it to complete delivery by the end of Q3, is it fair to assume around the €2 million price on average? And on the timing of the price increases, here, outbound logistic issues aside, would it be sensible to assume some margin expansion in this quarter already from price increases? Or is the lead time more of a doubling just the quarter compared to Imaging?
And secondly, also uncertain about the Alzheimer’s opportunity following the CMS proposal on covering PET scans for beta amyloid plaque a couple of weeks back. How are you positioned against competition for this one? And would you think it could help sustaining above your market growth for the next couple years? Thank you.
Odysseas, I had issues to understand your second or to hear your second question. But maybe the others could. But I start with Varian. I start with Varian first and then you might repeat the second question. On the Varian side margins, I mean, the 12% margin we saw in Q3 is below what we expect for the full fiscal year of 14% to 15%. And when we lose the contribution of 20 plus systems, I think that you can – that is a sizable amount. But I would say we would be maybe in a normalized case more at the lower end of the full year guidance range for the fiscal year for Q3.
In Q4, we expect obviously based on the fiscal year guidance, higher margin levels significantly higher margin level than in Q3. And this is driven by, clearly by the expected volume in Q4, as you know Q4 is like in Imaging, like in Advanced Therapies, also in Varian normally, the quarter with highest volume in absolute terms, and with the best margin level. So the majority of margin uptick, quarter-over-quarter will come from volume. But we will also see on a continuous basis, but not to a large extent yet better pricing kicking in, the speed of this is slower than in Imaging and Advanced Therapies. But obviously, Q4 is benefiting more than Q3 for better pricing, but still on a lower extent. And as I said, the vast majority of the margin, expansion Q3 to Q4 comes from volume. With this, I hand over to Bernhard.
Odysseas, can you repeat the second question, it was acoustically a little bit hard to understand.
Yes, of course. So I wanted you to provide some color on the Alzheimer’s opportunity and your competitive positioning for PET Scans here given the CMS proposal of coverage a couple of weeks back.
So, I mean, this definitely plays to our strength here because we are not only the market leader in MR but also the market leader in PET and VR which is mainly not known everywhere, also the market leader in the US when it comes to distribution of PET markers, so that these are -- this is a special topics here, the so called radiopharmacies, maybe you heard that. So we are with the daughter company, PETNET, the leading provider here.
So there’s basically no way around us and when there is progress in dealing with neurodegenerative diseases, particular Alzheimer’s, we definitely benefit. Well I would not be too, let’s say, this is not so easy to derive what is an additional unit also coming from this. I would more use this as one very visible example of what I often say the word, innovates, for us.
So whenever there is a new therapy, Siemens Healthineers benefits, whether it’s a new stent or a new watchman device or whatever in the interventional piece side we benefit by having the imaging in the right place delivered by AT when it comes to new insights or new drugs, whether it is an antifibrosis agent, for Crohn’s disease, or whether it is dealing with Alzheimer’s, Siemens Healthineers and as the leader, the clear leader in Diagnostic Imaging benefits.
And this is what’s driving the growth. Yeah, I have a lot of respect for the order discussion. But this is the real growth driver. And that is why I really liked the question and take this Alzheimer focus, which currently is there as just one example of, well I may be exaggerating, of hundreds of how medical progress in other fields is driving our growth.
Okay.
So, we have still quite a few on the line, I think we will not make it through the whole list. But I would say we now take Robert Davies, from Morgan Stanley, and then we see if we have time for one more afterwards. Thanks.
Yes, good morning, thanks for taking my questions. My first one was just on your coming back to the Varian business, your comments over the mid-term outlook. I guess, if these are sort of, I guess bottleneck challenges or relatively temporary issues, what’s kind of changed your view on the medium term margin potential for that business. That was my first question, thank you.
I mean, as we said, we are optimistic when it comes to the -- very optimistic when it comes to the growth. The topic is rebalancing, I mean what we internally call the economic equation of the cost in supply chain, the labor cost and so on, which is why we are with that growth. Which is why the -- we see the 20% still in reach here, but as an optimistic case.
Thank you. And then my follow up question which is, I guess, looking into 2024 and the current expectations, just in consensus, I know you had a lower tax guide this year. But can you just walk us through the sort of relative moving bars because obviously, you’re up to your financial expenses guidance for this year and moved the tax rate around? I’d just kind of curious what your thought process is on some of those line items heading into 2024? Because there seems to be quite a big step up now, particularly given you are guiding to the low end of the EPS range for this year. Thank you.
We have a clear guidance in place for the midterm, which is a quite -- it is a per annum guidance, 6% to 8%, 12 to 15% growth on EPS. And we are currently in the midst of our own budgeting process and I do not see any reason to deviate from this at this point in time. And as I said before, and we feel very good about the growth momentum we see in the businesses. Because based on average we see on the order book side, on the accelerated service growth, therefore, we feel very good about the top line development. And again, coming back to our midterm guidance, which we still have in place, which is 6% to 8% growth on the top line revenue and 12% to 15% adjusted EPS, it was.
Okay, all right. Thanks very much.
Okay. Thank you. I think this brings us to the end of today’s call. We have a few names left. We will contact us separately on there from our side to finalize your questions. And I would say thank you for all that has come today and see you on the road or at latest then when we report Q4. Bye-bye. And back to the operator.
That will conclude today’s conference call. Thank you for your participation, ladies and gentleman. A recording of this conference call will be available on the Investor Relations section of the Siemens Healthineers website.