SEMHF - Siemens Healthineers AG (SEMHF) Q4 2023 Earnings Call Transcript
2023-11-09 09:19:10 ET
Siemens Healthineers AG (SEMHF)
Q4 2023 Earnings Conference Call
November 8, 2023 02:00 ET
Company Participants
Marc Koebernick - Investor Relations
Bernd Montag - Chief Executive Officer
Jochen Schmitz - Chief Financial Officer
Conference Call Participants
Graham Doyle - UBS
Veronika Dubajova - Citi
David Adlington - JPMorgan
Hassan Al-Wakeel - Barclays
Odysseas Manesiotis - Berenberg
Robert Davies - Morgan Stanley
Lisa Clive - Bernstein
Richard Felton - Goldman Sachs
Dylan van Haaften - Stifel
Hugo Solvet - Exane
Sezgi Ozener - HSBC
Oliver Metzger - Oddo
Falko Friedrichs - Deutsche Bank
Presentation
Operator
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.
Marc Koebernick
Thank you, operator. Good morning from Erlangen. Our CEO, Bernd Montag; and our CFO, Jochen Schmitz will be taking you through the details of our Q4 2023 this morning, and we’ll be giving you an update on strategy and group financials at the interim stage of our New Ambition phase. The Q4 results for the fiscal ‘23 as well as our full year results for fiscal ‘23 were published this morning at 7:00 a.m., 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 the chance to raise questions, and let me remind you of the two-question rule for the Q&A. Bernd, I hand the word over to you.
Bernd Montag
Thank you, Marc and good morning, dear analysts and investors. We have quite a lot to speak about today, and we have split the presentation into 3 sections. I will start with a look at a very strong Q4, and we’ll summarize our achievements in the full fiscal year. I will then share our growth outlook for 2025 and beyond our pools of value creation and our New Ambition level in sustainability. Jochen will then present our financial results and targets in more detail and close with the outlook.
We had a strong finish to our fiscal year. We again achieved excellent double-digit revenue growth of 11% ex-antigen. This came on top of an already strong prior year quarter performance. Our order intake was again very strong, and we are very happy with the 1.16 equipment book-to-bill. We again booked notably more equipment orders than we posted equipment revenue even in a quarter with such an excellent revenue size. The 16% growth number, excluding antigen, highlights our operational strength. If we were to exclude the transformation costs that impacted the Diagnostics bottom line, this growth would have even been 20%. And we generated free cash flow of above €500 million in Q4 and was a strong quarter across all four segments.
Imaging continued its strong performance with excellent revenue growth of 11% at industry-leading margins. In addition, and on top of it, we were able to further increase the very strong and healthy backlog for the Imaging segment. The theme of order book strength was also – was true also for Advanced Therapies, which had a robust finish, including strong margins. However, the segment that personally impressed me the most this quarter was Varian. With a revenue growth of 30% and a margin of 19%, our Varian team has put quite an exclamation mark on this quarter.
On top of this great recovery, Varian achieved an equipment book-to-bill of 1.2, showing the impressive momentum of the combination. And Varian has proven that there’s also a lot of potential in terms of margins. Of course, this quarter will keep – will not keep us from making the necessary changes in processes and set up to avoid the volatility that burdened the past 5 quarters in the future. We can do better, and we will do better. We are happy with the continued improvement of Diagnostics performance. The transformation program is fully on track, and we are seeing the savings kicking in as planned.
Summarizing fiscal year ‘23, the second year of the New Ambition phase of Siemens Healthineers, I would highlight. In every segment, we introduced major innovations and further expanded our lead from completing the Atellica family to rolling out hyperside in Varian to a stream of AI innovations across imaging. We took decisive actions wherever we needed to course correct. The Diagnostic transformation is in full swing, and we deliver cost reductions of €300 million by 2025. We focused the endovascular robotics business in Advanced Therapies exclusively on neuro. We successfully countered the challenging inflationary environment with focused pricing measures.
We continue to rapidly grow our business and relevance with the C level fueled by the combination with Varian. We lifted total order intake in value partnership in the Value Partnerships business to over €2 billion in 2023. Remember, we crossed the €1 billion line only 3 years ago. On an annualized basis, we achieved an equipment book-to-bill of 1.15, documenting the strength and momentum of the company and outperformance of the market. Last but not least, we achieved our guidance on EPS despite significant currency headwinds and rising interest rate headwinds, and we were able to beat our guidance in terms of comparable revenue growth. So overall, I’m very proud of what we have achieved in the last 12 months.
Let me now talk about how we want to carry this momentum into the future. In the last 2 years, we have been growing in line with our New Ambition targets, which we set at the Capital Markets Day in 2021, and we will deliver on our New Ambition group targets in the coming 2 years with 6% to 8% revenue growth CAGR as well as a CAGR of 12% to 15% adjusted EPS growth. In addition, we expect to sustain our attractive comparable revenue growth dynamic beyond 2025, achieving mid- to high single-digit growth, and we expect this to feed through to double-digit adjusted EPS growth. With this, we want to provide you with clarity on our midterm financial ambition for a 4- to 5-year horizon from today. This growth is driven by a multitude of factors. The secular growth drivers are well known but always worth repeating, a growing and aging population together with expanding insurance coverage results in more people getting access to health care. The rise in noncommunicable diseases, especially cancer and cardio and neurovascular diseases drives the need for exactly what we offer with our portfolio. In addition, we benefit from innovations in other fields of health care, whether it is in pharma or the medical device space or in the advancements of robotic treatments. One could say the world innovates for us. Increasingly often, when there are new drugs brought to the market, our products are needed to identify the right patients to assess response and to confirm health or to accompany survivorship.
When there are new devices, our products are needed to plan and guide interventions. And when there are new robotic therapies, our products help to guide. And more than ever, our customers are faced with the challenge to do more with less, more in the sense of treating more patients, more in the sense of adopting medical progress, less by doing all this under constant cost pressure and less by doing all this amid a global shortage of qualified medical staff. With our technologies and competencies, we are tackling exactly these growth drivers and challenges by innovating continuously for better diagnosis and treatment, enabling efficient operations to improve productivity in the systems and expanding health care access for billions of people.
The foundation of our success is the combination of patient training, precision therapy and digital data and AI. Patient when it means adding more effective and efficient ways to accurately describe the state of an individual patient, having the ultimate vision of a digital twin of the patient in mind on which individual diagnosis, individual therapy selection and individual response control can be based. Precision therapy means cutting-edge technologies to deliver individualized therapies, often with sub-millimeter accuracy, whether it’s in cancer, neuro or cardiac disorders. Precision improves results, reduces side effects; in short, makes therapies better for patients and less costly for the system.
Our third strength is our unique competence in digital data and AI. It is key for scaling the application of technological advances, for having the next patient benefiting from the knowledge generated by diagnosing and treating millions of other patients, for connecting patient twinning with precision therapy. Our unique capabilities fuel our present and future growth. They follow us. They allow us to play a key role in multiple mission-critical departments of our customers, which, by the way, opens up the value partnerships as growth opportunity on top.
One of the key things one needs to get right in med tech is finding the right balance of focus versus scale. Focus is the recipe when a global vertical has its own strong characteristics and/or is in a special phase. Scale is the recipe when businesses have strong similarities and synergies and can it benefit from one another to get to the next level of performance. Imaging, Varian and Advanced Therapies on the one hand, are truly synergetic. And for these 3, our recipe is winning together or in other words, using scale.
For Diagnostics, on the other hand, the recipe is focus, and there’s only one priority transforming the business to win. Everything else would be a distraction. Diagnostics represents a razor-razorblade model, the growth and profitability results from the continuous and growing reagent stream per analyzer. Imaging, Advanced Therapies and Varian are based on equipment and service business models in which both revenue streams are profitable. In Diagnostics, today, we are in a runner-up position in attractive market while Imaging, Varian and Advanced Therapies are clear leaders in their respective markets in terms of innovation, growth and margins. In Diagnostics, the lifetime of a platform like Atellica is easily above 20 years, while the innovation cycles in the equipment businesses are significantly shorter. Last but not least, in Diagnostics, we are at a mission-critical moment leveraging the completion of the Atellica portfolio, which is closely linked with the Diagnostics 2025 Transformation program.
Let me run you through the characteristics of the unique synergistic portfolio of businesses on the left. Here, we occupy leading positions across the board and other trends that are in the industry. In these businesses, strength leads to strength. We consciously invest more than any competitor into R&D, which makes us gain even more share and achieve industry-leading margins. This lets us reinvest into further innovation. We partner with the leading institutes who conduct research and publish scientific papers with our technology. We lead in scale in production. We lead in scale in service. We lead in scale and coverage in sales. We use our innovations at the high end to make our whole offering more competitive via the trickle down of innovations.
We use design to cost to reduce cost of goods sold continuously and to make our innovations available at all price levels. Much of our innovation by now is in the field of digital and AI, another area in which we can clearly benefit from our scale. There are many examples of Varian making use of the innovative strength of imaging and vice versa. The joint portfolio makes us stronger and more valuable for our customers. We gain more and more access to the C suite, enabling a totally different level of discussion. The latter is documented by the strong dynamic we are noticing in our value partnerships. The impressive success of Varian in terms of commercial momentum under its new umbrella is a great proof point of this strength. We are opening doors together with Varian that were closed before the combination. Simply put, the recipe for success in this part of the business is winning together.
When it comes to our Diagnostics segment, the case is quite a different one. Here, the competitive environment is much more fragmented with more market players. We are clearly one of the well-established players, but the performance of the business is clearly below its true potential in both growth and profitability. With a decisive portfolio simplification and a focused transformation program, we are on the path to unleash this potential. The market is very attractive. And so the investment into the transformation is clearly set to create value, especially as we now have the right offering in the IA/CC field. We are optimizing the setup and rightsizing the business resulting in a more efficient and agile organization, acting on a significantly reduced cost base. As you may know, the Diagnostics segment is the result of three acquisitions in the latter Northeast. With these acquisitions, we gained good positions in several diagnostic segments like IA/CC, but with a lot of different and partially overlapping technology stacks for instruments and reagents which we now can finally consolidate all into Atellica as the one and only platform as the Atellica CI analyzer is now available globally.
Next to the IA/CC business, we have two other attractive business segments, which already operate on good margins, plus have clear plans for margin expansion with excellent growth prospects. One segment consists of our specialty lab business with strong positions, EG in hemostasis, plasma proteins or allergies. And the other segment is our point-of-care business. We are convinced that Diagnostics segment has a lot of potential to create value with its new and very dedicated setup, and I like the commitment and energy of its newly formed management team. I covered our financial ambition.
Let’s now turn our heads towards an equally important level of ambition, sustainability. Our next level of ambition will focus on three pillars: improving health care access for all, preserving our planet’s resources and developing highly diverse and engaged Healthineers. More than 3 billion people around the world still lack access to adequate medical care in low and middle-income countries. That number is much higher when considering lack of adequate care in underserved communities within high-income countries. To better address this health care access disparity, we are shifting our approach from measuring our installed base in underserved countries to measuring patient impact in underserved communities regardless of which country they are in. We commit to 260 million patient touch points in underserved country – communities by 2030 while in parallel defining a solid baseline that measures patient impact globally.
Our ultimate aspiration is to democratize health care access. Shortage of qualified health care workers is well known as one of the biggest pain points in our industry. We are committed to helping our customers and communities close – to close this gap by offering education and professional training. Initially, we are setting the bar at 6 million hours of training delivered by 2030 with an increase of 33% over our current education offerings. Our resource preservation pillar will focus on minimizing our impact on the environment, which is critical to ensuring a sustainable business and proactively address regulatory requirements. We are moving from carbon neutrality targets to a net zero commitment. Our commitment is to reduce by 90% Scope 1 and Scope 2 emissions from our own operations by 2030, and to reduce Scope 3 emissions across our value chain by 28% by 2030 and by 90% by 2050, and to increase our share of circular revenue by 2030.
Healthcare is responsible for almost 5% of global greenhouse gas emissions. Our efforts matter. Good for the planet also means good for the business. The targets we are committing to will create value for our customers. They will translate into cost-effective solutions in terms of energy efficiency and waste reduction as well as support them in achieving their own sustainability targets. Finally, when it comes to our 70,000 Healthineers, we will continue to drive diversity in all its forms, employee engagement and our attractiveness as an employer of choice. The concrete commitments are to have 30% women representation in senior management roles by 2025, maintaining our top quartile position in employee engagement and being recognized as a Great Place to Work in countries representing more than 80% of our employees by 2025. To emphasize our commitment and to show how closely we tie sustainability to our strategy, sustainability is now also embedded in our purpose, the pioneer breakthroughs in health care for everyone, everywhere sustainably.
And with this, I hand it over to Jochen to give you some more insights on our Q4 performance and the financial midterm ambition.
Jochen Schmitz
Thank you, Bernd, and good morning to everyone also from me. I would like to start by shedding more light on our Q4 results. We finished another successful year with a strong close in Q4. Equipment orders were again notably above very strong equipment revenues in Q4. Consequently, equipment book-to-bill was a – was at an excellent 1.16. Overall, we are very pleased with the order development in the second half of fiscal year 2023. Remember, after Q2, we pointed to an equipment book-to-bill being above 1.1 in the second half, and we now ended up at around 1.14, further strengthening our order backlog despite the market in China being temporarily held back.
Our order book strength is also shown in our strong Q4 finish. Excluding antigen sales, we achieved very strong comparable revenue growth of 10.8% after a 10% growth in Q3. This was based on excellent equipment revenues as well as continued strong service revenue growth. The adjusted EBIT margin for the group came in at 16.7% in Q4 on the same level of the prior year quarter. However, excluding the year-over-year effect of antigen contribution, we saw 160 basis points margin expansion, mainly driven by conversion from the strong revenue. Below the EBIT line, financial income net came in at negative €83 million. Higher interest rates continue to come through in financial income, mainly from refinancing of loans in Q4 and a higher use of the working capital facility for short-term funding. Additionally, we saw financial income from equity investments turning negative this quarter, further burdening financial income net.
The Q4 tax rate came in at 30% after very low tax rates in Q1 and Q3. Despite increased interest and tax expenses in Q4, our adjusted earnings per share saw a year-over-year increase of 3%, excluding antigen based on the strong operational performance, highlighted by Bernd. Free cash increased 23% year-over-year to €557 million despite the strong Q4 revenue, leading to increased level of operating working capital at the year-end. In the appendix, you will find the free cash conversion bridge as usual.
Now let us have a look at the segment performance in detail, starting with Imaging and Diagnostics. Imaging had a very strong comparable revenue growth at 10.6% on top of very strong growth in the prior year quarter. Significant growth in magnetic resonance and molecular imaging, especially, contributed to this great performance. The adjusted EBIT margin in Imaging was slightly below the particularly strong prior year level. The prior year Q4 was exceptionally strong, partly due to catch-up effect from a much softer prior year’s Q3. Nevertheless, we saw consecutive margin improvements in each quarter throughout fiscal year 2023 in Imaging, resulting in the strongest performance in Q4. Q4 adjusted EBIT was the highest of the fiscal year in both absolute and relative terms. In addition, we saw year-over-year headwinds from a normalized level of incentive provisions in this quarter, which were offset by year-over-year foreign exchange tailwind of around 100 basis points.
Over to Diagnostics. Diagnostics saw a decline in revenue in Q4 due to the antigen contribution tailing off from around €230 million in the prior year quarter to around €50 million in Q4. Excluding antigen, the business continued to grow by 2%. Now moving over to margin. Excluding antigen and transformation costs, Diagnostics achieved a 2 percentage margin from a stabilizing top line despite the year-over-year foreign exchange headwind of around 100 basis points. We saw transformation costs amounting to €29 million, which were compensated by the final antigen contribution on the same magnitude. Please bear in mind that these transformation costs do not fall under the adjustment definition applicable in fiscal year ‘23, which means they are reflected in the adjusted EBIT figure of the Diagnostics segment.
Now let’s look at Varian and Advanced Therapies on the next slide. Varian achieved a very strong finish in Q4 and saw excellent revenue growth of 30%. This impressive growth was partly due to catch-up revenues from Q3 but was mostly driven by the successful conversion of the strong order backlog into revenue. Looking at margin performance, Varian achieved an 18.7% margin driven by conversion more than compensating for year-over-year foreign exchange headwinds of around 100 basis points. In Q4, the margin increased by 660 basis points year-over-year. You should bear in mind that the prior year quarter was soft due to headwinds from the delays in the supply chain back then. Advanced Therapies continued its successful top line performance with solid comparable revenue growth of 5%, driven by also a very healthy backlog.
In terms of the adjusted EBIT margin, we saw an increase of 240 basis points year-over-year on the back of successful conversion from revenue. Additionally, we saw a year-over-year foreign exchange tailwind of around 150 basis points. The now refocused endovascular robotics business continue to dilute margins in Q4. However, the dilution already started to decrease to around 250 basis points in Q4 from the 300 to 400 basis points before.
Let me now refocus your attention from our Q4 earnings on to our priorities and guardrails for value creation in the future. As you know, we have clear priorities in guardrails to create value, and we apply the right prioritization for each source of value creation. Starting with Imaging, Varian and Advanced Therapies. First, with an equipment book-to-bill continuously above 1, we continue to gain market share, which is the main driver for continuously growing equipment revenues, thereby creating value. Second, by gaining share, we continuously expand our installed base, creating the basis for continuous strong service revenue growth, again, thereby creating value. Third, our innovation leadership, let us participate in the innovator premium in the market, while our continuous growth gives us operating leverage, both expanding our innovator margins thereby creating value.
Let me now turn to Diagnostics on the right-hand side of the slide. Having completed our Atellica offerings in IA/CC with a CI analyzer for low to mid-volume labs, we now have the leading IA/CC solutions in the industry. We are all set to transform Diagnostics to deliver sustainable growth and profitability, thus creating value. The Diagnostic business model is a razor-razorblade model and generates very, very sticky revenues accordingly. Around 90% of the revenues are recurring, meaning that any value created will stick with the business for the longer term. This, by the way, is also the reason that it takes quite a while to turn such a ship around. As highlighted by Bernd, one of the key priorities of the transformation is the rightsizing of the cost position to industry standards. This is progressing as planned. It will put us in a position to realize the margin potential in Diagnostics and thereby creating value.
Let’s now look at the priorities for Healthineers overall. We continue to invest in our growth agenda with industry-leading R&D budgets. We spend around 8% to 9% of revenue for R&D, which corresponds to more than €2 billion per annum invest into R&D. We also invest in CapEx for our growth agenda in a range of 3.5% to 4.5% of revenues. We assume in the near term to be more in the upper half of that range since we are expanding production capacities, for example, in the build-out of a factory to grow crystals needed to produce photon counting CTs. To fund our growth agenda, we have a clear priority on cash generation. For the segment, Imaging, Varian and Advanced Therapies, we are targeting free cash to EBIT ratios of about 90%. It is our clear priority to use the cash to further deleverage. In fiscal year ‘24, we target a leverage of net debt over EBITDA towards 3.0 and further deleveraging in 2025 and beyond too.
And now let us have a look at the structure of our recurring revenues. We have a high share of recurring revenues. In the equipment businesses, Imaging, Varian and Advanced Therapies, this amounts to about 45%. In these businesses, the stable stream of recurring revenues are service and software revenues. Additionally, our value partnerships add another stream of recurring revenues for equipment and service. The value partnerships are large deals that are signed for the longer term. These deals include equipment, service and solutions to be provided over the period of the respective contract. This means each day makes the equipment, the service and the solutions revenues a recurring item for that longer-term period.
In Diagnostics, as I said, we have a typical razor-razorblade business model, which around 90% of revenues being the very sticky reagent revenues. The reagents can only be used with the instruments of the respective manufacturer, which make these revenues so sticky to your installed base. This high share of recurring revenue both in the equipment businesses as well as in the Diagnostic business are a significant source of resilience in our business. It smooths the more pronounced volatility between quarters that you see in the equipment business, but it also protects the revenue line from external factors like the pandemic. At the peak of the pandemic, there were only two quarters where we did not grow. This is so important because it means, even in a crisis, we do not need to go into defense where we can only react, but we can stay in offense and act on our strategic priorities.
Now let us have a look at another dimension of our resilience, our large and expanding order book. As you may know, we have had discussions on what is the most meaningful forward-looking indicator to gauge future revenues. As a basis for future revenue growth, we can refer as discussed to our recurring revenue streams, which obviously grow steadily.
Now let us have a look at the nonrecurring equipment revenue growth, which is converted from our equipment order book. With a growing order book, we also substantiate further equipment revenue growth. Hence, we are convinced the most meaningful indicator for future equipment revenue growth is the KPI that shows the development of the order book, the equipment book-to-bill ratio. As you can see on the graph, we continuously had book-to-bill above 1, the reason for our very strong order book and our very strong consistent equipment revenue growth performance. In the graph below, you see the equipment order growth of our 4 regions for the last 16 quarters compared with the comparable revenue growth line.
Two observe observations on this graph, firstly, the revenue growth is not very volatile. One could go so far to say it’s pretty stable from the high share of recurring revenues from the converting equipment revenues from the backlog. This is not at all linked to the quarterly equipment order growth number. Secondly, the quarterly equipment order growth number is very volatile in the regions. It is even more volatile when you look at the single markets or countries. So there are 2 takeaways for us: number one, the quarterly equipment order growth of isolated quarters is not a meaningful indicator for future revenue growth at all; number two, the visible regional differences in equipment order growth document and other dimension of our global resilience. We are rooted in over 160 health care markets in the world. Each market can be temporarily volatile, but on a global scale and over time, this balance out well.
Before we look in detail at the outlook for 2024, let me quickly draw your attention to our new adjustment definition. From now on, we adjust for restructuring measures in a more comprehensive fashion according to the definition of IAS 37. This means that the Diagnostic transformation costs, for example, are now fully part of the adjustments for EBIT and EPS. We believe that this will give more clarity to the operational performance of Diagnostics and the group, especially when comparing periods. We do this, although we make the year-over-year earnings progression tougher with this approach. The new definition now excludes the positive impact from lower transformation costs planned in 2024 compared to 2023. In the appendix, we provide details on the new definition, restated adjusted figures for fiscal year 2023 and an overview of the adjustments as of the new definition for 2023.
Now to the outlook which is – as per the new adjustment definition. Our outlook for comparable revenue growth in fiscal year is between 4.5% and 6.5%. In 2023, we had €121 million of antigen revenue. We do not assume any antigen revenue in 2024. Excluding antigen revenue, the outlook for comparable revenue growth is between 5% and 7%. The outlook for fiscal year 2024 adjusted basic earnings per share is between €2.10 and €2.30. Included in our outlook is the assumption that revenues will be temporarily held back by the current anticorruption campaign in China impacting revenue growth by around 1 percentage point and adjusted basic earnings per share by around €0.06.
We expect this to be only temporary in fiscal year 2024 and that it will come back as pent-up demand later. Our view of the strong fundamental and structural demand in the Chinese market is unchanged. For the adjusted EPS in 2024, we assume a year-over-year headwind from foreign exchange of around €0.08 based on our outlook assumptions. While looking at year-over-year impact, it is important to consider that in fiscal year 2023, we still saw a tailwind of around €0.05 in adjusted earnings per share from antigen whereas we assume no antigen contribution in fiscal year 2024. Below the group outlook for fiscal year 2024, you’ll find the main assumptions, starting with revenue growth for the segments.
We expect Imaging, Varian and Advanced Therapies to grow in 2024, more or less in line with our communicated ambition. This is even though these segments face a tough 2023 comparison, and are those who are predominantly impacted by the anticorruption campaign in China by around 1 percentage point on their respective comparable growth numbers. We expect Diagnostics to continue with at least the growth momentum in 2024 that we saw in the second half of 2023, excluding antigen.
And now some color on the margin development in the segments. In the Imaging margin, we assume 80 to 100 basis points headwind year-over-year from foreign exchange and from lower conversion due to China. In Diagnostics, we do not assume material year-over-year margin impact from foreign exchange. In the Varian margin, we assume no material year-over-year impact from foreign exchange and only a minor headwind from lower conversion due to China. In the Advanced Therapy margin, we assume that headwinds from foreign exchange and lower conversion due to China are offset by decreasing dilution from endovascular robotics. All in all, we do see operational margin expansion in all segments, excluding the headwinds from foreign exchange and the temporary China impacts.
On central items, we assumed temporarily higher expenses in fiscal year 2024 due to the rollout of global IT programs to support our go-to-market activities in sales and service and HR systems. We expect this to normalize again in fiscal year 2025 back to the levels of 2023. Financial income net is assumed to be between minus €300 million to minus €280 million in fiscal year ‘24. This is primarily due to refinancing of low interest loans at higher rates as well as higher rates coming through on loans with floating rates and on our working capital facility. Most of our debt remains fixed and hedged, but we are not fully immune to rising interest rates due to the reasons mentioned above.
On tax, we see a more normalized tax rate level in fiscal year 2024 than in 2023, which was unusually low. We are continuously improving our setup. So to put this into perspective, the assumed tax rate between 24% and 26% is a continuous improvement on tax rate levels we saw in the years before 2023. Due to the unusually low tax rate in fiscal year ‘23 and the higher interest rates coming through in fiscal year 2024, we do see a substantial headwind in earnings per share progression in fiscal year 2024 from those two items of about €0.18 year-over-year. Despite those headwinds, and based on the strong operational improvement, we would see an increase in adjusted EPS in our New Ambition range of 12% to 15%, excluding the effects from antigen, foreign exchange and the temporary effects from China.
We are on track for comparable revenue growth and adjusted EPS growth until 2025 as envisioned at our Capital Market Day in November 2021. Adjusted EPS growth will be much stronger in year 2025 due to the expected backswing from China, margin expansion in Diagnostics from the transformation savings, margin expansion in Varian from the full impact of the higher supply chain maturity and pricing measures finding its way into the Varian P&L as well as less spending in central items relative to 2024.
In addition, we expect no material year-over-year headwinds nor nor tailwinds in 2025 from interest expenses and tax rate levels. I would also like to add at this point that we feel very comfortable with the picture we see in 2025 consensus estimates for revenue growth and profitability down to the segment level.
Furthermore, the strong growth trajectory is to continue in the medium term from today for the coming 4 to 5 years. This means comparable revenue growth in the mid to high single digits and double-digit earnings growth beyond 2025. This is backed by the fundamental growth and corresponding margin expansions in the segments where the trajectories continue beyond 2025. Imaging and Advanced Therapies to grow at least mid-single digits, Varian at least high single digits and Diagnostics at least at market rates. Consequently, on margins, Imaging is to continue its margin expansion from scale, Varian to advance, to Imaging like margins, Advanced Therapies to return to industry-leading margins and Diagnostics margins are to advance to mid-teens. This compounding of revenues and earnings in each segment in combination with our high share of recurring revenues, the very strong order backlog and our global scale sustained double-digit earnings growth also beyond 2025 for the medium term.
Before we go to Q&A, some quick remarks on what we expect for the upcoming Q1. Bear in mind that Q1 ‘23, we still had €63 million of antigen revenues, which will impact the year-over-year comparison for Diagnostics and the group. Also bear in mind that our quarters a way towards the usually stronger Q4 as we just saw it. Therefore, expect for the segments in Q1 performance rather to be in the lower half of the respective guidance ranges.
And on that note, I would like to end and hand it over to Marc for some words on the next IR events and then Q&A.
Marc Koebernick
Thanks, Jochen. So that said, just to get your eyes to our web page, we have all of the roadshows and our conference participation flagged there. But very especially, of course, we would like to see you come in person to our Meet-the-Management event on the 7th of December here in Forchheim. It’s going to be a very interesting day packed with a lot of information and of course, a lot of chance to meet our segment management and ask the question that you’d like to ask to understand also our new midterm ambition levels that we’ve articulated today.
And with that, I would pass the word to the operator to just briefly remind you of the rules of engagement for the Q&A.
Question-and-Answer Session
Operator
[Operator Instructions]
Marc Koebernick
Great. Thank you. So our first questions today come from Graham Doyle. Graham, your line should be live now.
Graham Doyle
Great. Good morning, guys. Thanks a lot for taking my question. Just two. In terms of the guide that you’ve reiterated around the 2025 CAGR, could you just give us a sense of what’s driving the confidence next year for that acceleration in the EPS? Is it – is it part of the deleveraging and obviously, the unwind of the pressures in China in the Diagnostics business? And then a quick one on Diagnostics. It’s obviously slightly more separate in this presentation where you dedicated a bit more time to it. And there was some speculation last week around a potential divestment scenario. Would you just be able to give a sense of – and obviously, feel free not to give us a sense as to – is this a business that you’ve had interest from potential buyers in the past? And do you feel like you’ve kind of tackled and fully replaced the installed base, meaning this is now primed for reagent growth rather than equipment growth? Thank you.
Jochen Schmitz
Hi, Graham, on your guidance question and why do we see accelerated adjusted EPS growth from 2024 to 2025. I try to give some color on this in my speech. We’re happy to spend even more light on this. Let me start off, and you mentioned the right points, yes. The first point is as we clearly indicated, we see the impact from China weighing on the outlook of 2024, but becoming pent-up demand and, therefore, tailwind for 2025. This is the first aspect. Second aspect is we see acceleration in margin expansion in Diagnostics and in Varian due to the respective regions in diagnostics, it’s a transformation savings. In Varian, it’s getting the full impact of maturity increases in the supply chain on the one hand as well as seeing the full impact of the pricing measures kicking into the P&L.
Then what is also an important topic is what we also highlight is that we have a relatively high level of spending in 2024 on the central items due to the heavy rollout of the majority portion of our ERP templates for sales and service into the regions in 2024, and the implementation of a consolidated HR system globally. Our clear expectation is that we will go down from the high charges in 2024 back to the levels of 2023 and 2025 on central items. Lastly, I think that is the biggest topic is that we expect to see no headwind from higher interest expenses and tax rate effects from 2024 to 2025. And please be reminded, this alone is almost 10% of headwind – 10% in growth on EPS almost. This year with €0.18, just to figure out, yes. With this, Bernd, you do the diagnostic question?
Bernd Montag
Yes. Thank you, Jochen, and thank you, Graham, for the question. I mean we highlighted in the presentation how serious we are about the transformation program. How much we use the scale in the three businesses, Imaging, Varian and Advanced Therapies to win together. While in the Diagnostics business really focusing on unleashing the potential in this very business. When looking at where we are, the – I highlighted in my speech here, the two segments or two aspects in this business of the specialty lab solutions, which is a nicely growing good margin business. We saw – we see good momentum in point of care. And when it comes to the central lab business or called IA/CC in the presentation.
I’m very pleased with the momentum in the Atellica franchise, which has now crossed €1 billion in terms of revenue and is growing nicely in double digits. And now it’s really about converting step-by-step, the existing legacy products and melting down this legacy part of the business, which is a bit of a drag of the P&L. We are very positive about where we are going with the transformation program. I think the last three quarters, the track record is a good proof point. And we are confident to see the margin expansion, which Jochen talked about here for this year and then also going to the 8% to 12% in ‘25.
Marc Koebernick
Great. Thanks for the questions, Graham. Heading on to the next one on the line, that would be Veronika Dubajova from Citi. So, Veronika, your line should be live now.
Veronika Dubajova
Excellent. Hi, guys. Good morning, and thank you for taking my questions. I will also stick to two, please. My first one is just on order growth. If you can maybe give us a little bit of insight into what the order growth was in the quarter and the type of competitive dynamics and kind of broader industry dynamics that you’re seeing, obviously. If I do my math right, I think your orders did grow at least mid-single digits year-on-year in Q4, which would be substantially better than peers. Just curious if you can confirm that to what you’re seeing from a competitive perspective. So apologies, that’s the first question. My second question is just to circle back on Graham’s question around the Diagnostics business as the value of it. I mean if I look at the way that you presented in the slide, it does seem very clearly distinct from the rest of the portfolio. And I think, Bernd, you’ve spoken extensively about the lack of synergies. I guess just maybe longer term, thinking, is this the business that you think should remain part of Siemens Healthineers? Or is there really no reason for this to remain part of your portfolio if you extrapolate into the mid to long-term? Thank you so much.
Jochen Schmitz
Veronika, good morning. Let me take the order growth question. When you hear – you heard me talking about book-to-bill and how we feel that this is the best indicator for future revenue growth or indicating future revenue growth on the equipment side, because as you know, we – when we talk about equipment orders – when we talk about orders, we always talk about equipment orders only because the recurring revenue streams are anyway, very, very stable and growing. When we look at the most recent quarter, I think the 1.16 is, I would say, an extraordinary strong number. Why do I say this? Not because 1.16 is extraordinary high but the denominator of 1.16 was also extraordinary high. So look at the growth rates in Imaging, look at growth rates in Varian. And therefore, we are super happy with that development.
And if you want to do the math, it is – your number is too conservative, just to say this. But again, I think when you look at it on the slide we presented here with the volatility in markets and on order growth in a quarter. I still believe that the gross number of orders in a quarter, in particular, in different markets is not helpful at all in gauging future revenue growth, just to say this again. On the Diagnostic question, I think Bernd made it from my standpoint, very clear, yes. We are solely focused on the transformation project for Diagnostics. And I think what Bernd said was everything else would be distraction. And this is the clear marching order for us in Diagnostics to create value. And I think there is not more to say now because everything else would be distraction.
Marc Koebernick
Good, and thanks for those questions, Veronika. That brings me to the next one on the queue. That’s David Adlington from JPMorgan. David, please go ahead.
David Adlington
Hi, guys. Good morning. A couple of questions, please. I just wondered if you could pull out how much of a headwind China was to orders in the quarter, but also how much of an impact you may have seen from one of your competitors having supply chain issues, particularly on the MR side. One, is just in terms of the outlook for next year. I just wondered what your assumptions were in terms of salary, wage inflation, please?
Jochen Schmitz
When we had a lot of discussions in the last quarter on orders and the impact of the China compliance initiative on order development. And we have really seen this in the quarter. So when you look at the book-to-bill of 1.16. I forgot to say this and to the question of Veronika. I mean we made this 1.16 happen despite the fact that we had a significant decline in order, which you can also see from my chart, because one of the lines in the chart is going down, which is China in the quarter, and it was significantly negative. Therefore, I think we are very proud of what we achieved here. Secondly, and this is very important to note. We see this as clearly as a temporary topic, and we expect to see everything coming back as pent-up demand. And that is, I think, a very, very important thing here. On assumptions for next year with regard to what was it merit and what was the second question you had on assumptions? Merit and – David, could you please?
David Adlington
Salaries and wages inflation.
Jochen Schmitz
Salary, we are in – from our assumption base, it’s relatively similar to 2023. It’s in the 5 percentage point increase on a global level.
Marc Koebernick
Good. Good. Thanks, David. Then we are heading on to the next one in the queue that will be Hassan from Barclays. Hassan, go ahead.
Hassan Al-Wakeel
Hi, thank you for taking my questions. I have a couple, please. So on Imaging, following up on orders, could you say what equipment order growth was excluding SSM Health and its mid-single-digit is also too conservative ex-SSM and how you’re thinking about 2024. And on margins for Imaging next year, what are your key assumptions that you’re making around pricing, China headwinds and FX? And secondly, following up on China, could you talk about what you’re seeing in China from an anticorruption perspective and whether there are any signs of this easing? To what extent could the assumption around fiscal Q2 improvements proved to be too ambitious? Thank you.
Jochen Schmitz
Hassan, on the Imaging side, we also saw on the imaging side, healthy book-to-bill ratios above 1.1, which I think is also very, very good. Obviously, some of it was helped by SSM, which was pushed over, but when you look at the revenue line in Imaging, it was particularly strong. The equipment line well in the double digits on a 10.6% growth overall. So we are very, very confident on future revenue growth in Imaging based on the super strong order book for equipment as well as the constantly and continuously growing service revenues, which are currently growing more in the higher single digit than in the mid-single digits.
On the margin side, I mean when you look at the margin guide for 2024, you could argue at the midpoint, it’s more stable on Imaging. And as I tried to point out, we see headwind in those stable margins year-over-year from foreign exchange and China of 80 to 100 basis points roughly split half and half. So about 40 to 50 basis points headwind from foreign exchange and 40 to 50 headwind, so to say, from the China impact. When obviously, the China and the foreign exchange are heavily assumption-based. And if there’s assumptions prove to be different, then we will update you. And maybe this is a good hand over to Bernd to talk a bit about China.
Bernd Montag
Yes. Thank you, Hassan. And I spent the last week in China, by the way. So – and also had a lot of first-hand insights into the topic. So a little bit of detail when it comes to the anticorruption campaign. This is a topic where step by step, I think we can see the first easing because when looking at it, this is also causing a lot of uncertainty in the Chinese healthcare provider community, which is not what the government wants. I mean, remember that in the beginning of last fiscal year, there was a kind of stimulus program, which means there is a willingness to build up healthcare. And it’s also clear that there is a bit of a feeling of – I mean, anger is a little bit too much of healthcare providers and physicians who have been praised to be the heroes of the nation during the pandemic. And then the feeling of we are all under suspicion is a little bit a difficult situation also for the society there.
So my expectation – just to give a little bit of more background. I expect that this will ease slowly in the next one to two quarters. I think a potential milestone could be Chinese New Year, which is end of January, beginning of February, which often is a bit of the point of their new year, new beginning, and we start with new paradigms, yes. So from that point of view, I would say, that my current assumption would be that the second half of the year will be – will give us a very different situation in China. Maybe on the long run, it shows, I mean, there’s clear willingness to further improve healthcare in China by the government. There’s also a very vibrant private segment, by the way. I think there’s also a good thing about this initiative because it is a further investment into transparency and an efficient go-to-market in China, and it is definitely not a topic, which is a means to weaken global companies like us. So it is affecting all companies in the same way. And I believe that we have been even very, very well prepared because our focus on our own compliance in the team and with our business partners has been razor-sharp in the last decade.
Hassan Al-Wakeel
Perfect. Thank you.
Marc Koebernick
Thanks, Hassan. So moving on to the next one in the queue, Odysseas from Berenberg. Odysseas, please go ahead, ask to your question.
Odysseas Manesiotis
Hi, thanks for taking my questions. First one, could you please clarify how you account for value partnerships in your order book using the SSM Health contract, as an example. I mean it’s 10 years long. What part of this is included in your Q4 order book? And secondly, does your Diagnostics guide include headwinds from the VBP program in China? And could you please quantify what percentage of your China sales for the division you expect to be exposed to VBP and what kind of price decrease do you expect? Thank you.
Jochen Schmitz
Odysseas on your question on the value partnerships. Value partnerships do have, in general, three components: Equipment, service and solutions business. And when we talk about the equipment order book and the equipment book-to-bill ratio, then we include everything, which is a firm commitment of our customers with regard to a contract independent of the length of the contract, just to say that. So therefore, depending – and I don’t know exactly how the firm commitment in the respective contract was, was defined or is defined, yes, but I would say it’s definitely a portion of longer-term revenue – future revenue part of the order book now for equipment for Healthineers.
Bernd Montag
Odysseas, to your Diagnostics question in China. So this also requires a little bit of a deeper dive here and was also a bit of a topic in my last week’s visit. I mean, first of all, to put – to give you the big perspective. I mean China is about – I would estimate, I don’t have that number completely correctly in my mind here, it’s about 10% of our Diagnostics business. It’s a bit below, I would estimate of our the 15% we have for the global – for the entire business, simply because of the strength of – and the importance of especially in the U.S. when it comes to Diagnostics. So the VBP for Diagnostics is a bit of a tricky thing to implement because for those who do it, yes, because it’s a razor-razorblade business and VBP works well when you have only consumables. I mean it’s a standard drug or whatever and then it’s not so much about here is an analyzer, which then needs to come also in addition with so and so many tests.
So it is a bit of a tricky thing, which is why the implementation of this way of purchasing is taking longer than in a clear, let’s say, consumable medical business like in pharma or medical devices. We see it a little bit in open channel business. That means in the rare or the small part of the business, where reagents can be used across analyzers. This is a small segment only in clinical chemistry, and we see some provinces starting, let’s say, pilots in how to implement VBP. My answer would be that currently, it is maybe affecting 20% or so of the business. And if you play it smartly, it is also an opportunity to gain share, and it’s not necessarily. And we also need to be clear here, not necessarily a super negative on price because in the end, what that whole topic is targeting at is to also cut out the middle men. I mean this is where it started in pharma and in medical devices. So, that with the manufacturer having the ability to go direct to the end consumer, a lot of margin stacking in the middle men is cut out of the system. So, there is also a long-term positive in that effect because you are closer to the business and you have a much more transparent way to achieve your strategic goals.
Marc Koebernick
Thanks Odysseas. We will go over to the next one on the line will be Robert Davies from Morgan Stanley. Robert, please go ahead.
Robert Davies
Yes. Good morning. Thanks for taking my questions. I had two. One was just on the Varian margin. There was obviously some discussions over the last six months of your medium-term ambitions there. Given the exit rates in the fourth quarter, just be curious on your thought process in terms of the medium-term margins trajectory for that business, maybe just a sort of shape of how we get there. And then following up on a point you just made around sort of cutting out the middle man, I guess. In the imaging business, is it still your expectation that potentially there will be some benefits to that business from the China anticorruption lockdown sort of actions over the medium to long-term if you are able to go direct to hospital customers? And are you actually seeing that at all in any of the hospitals or people that you sell to yet? Thank you.
Jochen Schmitz
Robert, on the Varian margins side and men, obviously, we were extremely satisfied with what we have seen in Q4, not only on the top line, but also – so they would fall through to the bottom line. But we also need to be clear that this wasn’t extraordinary quarter with regard to the top line, 30% growth. Therefore, we cannot expect to see the same level of conversion in all the quarters coming. We will not see the same level of conversion in all the quarters coming. Therefore, we guide not on average, not for the number we have seen in Q4 for next fiscal year. On the other hand, I think when we look at the mid-term, I mean we have a clear view communicated now. And that is – and that’s also not really new. I think we have talked about it, that we see the margin expansion potential in Varian in the mid-term means over the next 4 years to 5 years, to become imaging like margins. And I mean whatever that exactly in 4 years to 5 years exactly means, but what it definitely means is that it will be well above 20% in this timeframe. And therefore, we have a very strong and solid plan to get there. And I think that is – in the Q4, I would say, was a good testament that this is doable. With this, I will hand it over to Bernhard.
Bernd Montag
On the China future go-to-market in – let’s say, for imaging or for the equipment business, some comment on this. I mean the target certainly is, and we are working on this since a couple of years to go as direct as possible there where applicable. And that means, on the one hand, when it comes to the private segment, we are – we aim for a direct relationship to the customer as we have in the rest of the world in this. And to have also for the big accounts, that’s the big level one hospitals or Class 3 hospitals in Chinese language, which are like the – I mean imaging in the rest of the world, an academic medical center to have a key account type of person established on our end. And these are also very professionally organized customers. What one needs to bear in mind that the desire to have a business partner is in the mid-market largely driven by the customer because these business partners or middle man, as I call them, or these business partners take care of topics like dealing with difficult payment terms. Often, it takes a long time until hospitals can pay or they arrange the room preparation for them, and the budget was only there for the scanner and then they also take care of the room preparation and they know that the budget for that is only in the next year in topics like this, which help to overcome and sometimes imperfect purchasing system. And these are topics, which are not our core competence and where one needs to be like the local caretaker of a hospital. And this is here to stay. What I appreciate though is that it is with all the focus of the government here of looking at what is the margin level here. And is this also everything compliant and so on that it is very clear what these business partners are there for and that the margin levels and so on, on a transparent level.
Robert Davies
Thank you. Maybe just one follow-up on Varian at this time, just in terms of the lumpiness of the business, are you more comfortable now you can smooth that out going forward into ‘24, ‘25 because that was obviously a big topic over the last 12 months.
Bernd Montag
Yes. And certainly not something we are proud of. I think when I look back at the last year, I am on the one hand, extremely proud at Varian as has been the fastest-growing business of Siemens Healthineers, which is a great proof point of the acquisition or a combination, as I call it, with 15% growth that’s remarkable. But the way to get there was really a roller coaster, which was not good and definitely not at the standard we expect. And I have high, very high confidence in the Varian team and especially also in Arthur, kind who came from MRI, where we have a super well-oiled [ph] machine when it comes to R&D and then especially supply chain and he is making the changes. So, that I am very, very, very optimistic that we get to a much more smooth quarterly performance. I mean bear in mind though, that because of the kind of roller coaster of growth rates in the last year, we also have a very difficult compare, let’s say, prior year comps in the quarters to come. So, please don’t look too much at the growth rate, look at the absolute numbers when we report out in the quarters to come.
Marc Koebernick
Okay. Thanks Robert.
Robert Davies
Thank you. Thanks very much.
Marc Koebernick
So, heading on to next one on the line, that will be Lisa Clive. Lisa, please go ahead.
Lisa Clive
Hey. Thanks. You disclosed that your recurring revenue is now 45%. I just wanted to break that down a little bit more. Is it safe to assume that 40% of that is effectively the sort of traditional maintenance contract model and it’s not 5% from incremental revenues from partnerships through support services and software? And how should we think about where that 5% goes in 5 years to 10 years’ time? And specifically, in terms of how you book it, you have previously indicated that you think the best way to monetize incremental software sales is upfront rather than Software-as-a-Service. So, I just wanted to get your updated thoughts on that. Thanks.
Jochen Schmitz
Lisa, when we do – when we made the calculation of the 45%, it is not necessarily how you did it. It’s also a bit about the mix of the businesses. Varian has a higher share of recurring revenue than imaging and AT have, which is more in the 50s. And I would say the – in the 45% and looking at your logic, I would say, the value partnership portion is currently a bit below the 5 percentage points. We obviously have a big front runner with regard to orders here, but not – I mean, revenue is following. And I would see the value partnership portion growing faster than the overall business. But as it still is a relatively small portion of the business, I would not expect spectacular changes in the composition of non-recurring, recurring revenues over time. And coming back to your question on how do we envision to sell software or software options in the future. I think we will be prepared to sell software options as the market demands for it. Let me frame it this way. And that means in general, we will see – we expect to see not a big shift to Software-as-a-Service, but we might see certain applications, which are sold like this. So, I would also coming back to what I said before. And I would also not expect to see a significant or material shift in revenue streams with regard to the business models we apply, just to say that, so not a lot to update to be honest on this, Lisa.
Lisa Clive
Okay. Thanks. And just a follow-up on the IDV split between consumables and equipment. I understand 90% of the run rate, could you just comment on where you actually are today on that, just given the new Atellica CI Analyzer rollout, I assume you are not at that 90% run rate yet?
Jochen Schmitz
Well, I mean this is relatively stable, and that is also not shifting much. When we see a shift, you see maybe a shift of 1 or 2 percentage points, but it’s not huge of the shift, even in times where you might place a bit more instrument than normal. But I would say this is – you can model it with 90% and you are on safe ground from my standpoint.
Marc Koebernick
Thanks Lisa. So, let me move on. We have 10 minutes left, quite a few people on the line still. So, maybe we will reduce the number of questions to one now. And I am sorry, Richard, you will be next, Richard Felton from Goldman.
Richard Felton
Hi. Good morning. I will just do one question then, please. So, my question is on the phasing of Varian pricing, please. To what extent are you seeing pricing flowing from the order book to the P&L already in Q4, or is that something which we can expect to build through the course of fiscal ‘24?
Jochen Schmitz
Richard, this is in general, how do you say that, a curve, which of revenue – a stream of revenue, which is constantly increasing of better pricing. But we also need to be mindful that other factors do also play a role in margin development, yes, which is for example, if you look at a quarterly number, regional mix is a big topic, but also business mix within Varian. Therefore, we need to be also careful to not focus too much on one factor only when we assess quarterly margin development. Now, those mix topics normally tend to level each other out over a year or so. But on a quarterly level, they can have an impact. But I would expect to see – Q4 had already a good portion of good prices in there, and we expect to see this even in an increased fashion over the coming quarters because we also think of doing maybe even a bit more on pricing going forward.
Richard Felton
Thank you.
Marc Koebernick
So, we will move over to Dylan from Stifel. Dylan, please ask your one question. Thank you.
Dylan van Haaften
Excellent. Thanks guys. So, maybe one question on PET, CMS just removed one Alzheimer’s disease scan for lifetime limit this last October. It’s early days, it can be only €7 million to €6 million. But could you maybe tell me sort of what you are seeing in the market so far? Maybe also some of the conversations you are having around PET, and maybe how that folds into your expectations over the next sort of 2 years to 3 years? Thanks.
Bernd Montag
Thank you, Dylan. I mean this is for me one reason for the slide I had in the long-term drivers when I say the world innovates for us. And the Alzheimer’s opportunity is just one of the topics, which contributes to imaging growth, whether it is new therapies for Crohn’s disease or a new medical device for repairing the mitral valve. So, this is an exciting opportunity, but look at it also in this Alzheimer’s topic as just the beginning of imaging stepping into the field of managing neuro-degenerative diseases, whether it’s Alzheimer’s, Parkinson’s, I mean even topics like depression are in research. And it shows – look at it as the long-term as another proof point for the long-term growth trajectory of 6% to 8% we target in imaging. And these new procedures will drive demand, not in a step change but underpin the ambition we have.
Marc Koebernick
Thanks Dylan. So, we will move over to our next one online, with Hugo from Exane. Hugo, please ask your question.
Hugo Solvet
Hi guys. Thanks for taking my question. I will stick to one. So, Jochen, you mentioned you are comfortable with the consensus 2025 estimates, which as a matter of fact for diagnostics, are in the high-single digits. Just wondering in this context, what’s the timeframe beyond 2025 to get to the mid-teens that you presented in the slide? Thank you.
Jochen Schmitz
Hugo, thanks for your question. I think we – when we talked about what we expect on diagnostics over the mid-term, we talked about the 4 years to 5 years timeframe to reach mid-teens margins over time. And obviously, with the intermediate step we communicated for 2025. But 4 years to 5 years is the timeframe we expect to advance to mid-teens margins in the diagnostic business.
Hugo Solvet
Just the 8 to 12, of course still – as an intermediate step still holds.
Jochen Schmitz
Yes.
Marc Koebernick
Good. So, next one would be Sezgi from HSBC. Please go ahead.
Sezgi Ozener
Hi. Sezgi Ozener from HSBC. Just wanted to understand the different impact of China anticorruption case on different segments, you hopefully quantify the impact for – expect the full year ‘24 growth as 1% of revenues and I think 6% of EPS. But how does this differ among the different segments? Is it more in some of them than the others? And also, if you can give a highlight of the profitability of any higher profitability of China in any of your segments compared to rest that sticks out? That would be helpful.
Jochen Schmitz
Yes. And Sezgi, as far to get the numbers straight, we said it is about, as you rightfully said, about 1 percentage point in growth, which we have built into or baked into the guidance and €0.06, not 6%, €0.06 on adjusted EPS. And when we look at the effects on the different segments, I think you should – we said that about a percentage point effects on the growth, effects on the equipment businesses, I would say, a bit skewed towards imaging, slightly skewed towards imaging. And on the diagnostics side, it might also affect in particular, instrument placements, which is not necessarily an immediate significant revenue topic, yes, but it might delay certain uptick on revenue because, as you know, the reagent revenue stream comes after the placement of the instrument, and this is the topic. And as I have said, as the impact on the top line is a bit skewed towards imaging, I would also expect this to be a bit skewed with regard to margin impact on imaging, okay?
Marc Koebernick
Thanks Sezgi. So, I am moving over to the third, but last one on the queue that would be Oliver from Oddo. Please go ahead, Oliver.
Oliver Metzger
Yes. Good morning from my side. My question is, I assume you made already some comments on pricing on Varian for next year. But could you give a quick comment on the relative contribution of pricing to your segmental targets in ‘24 compared to ‘23. So, how does pricing play a role relatively? Thank you.
Jochen Schmitz
Oliver, on the pricing side, I mean I would say what we have managed in particular, in imaging and advanced therapies, we have managed ourselves into a territory where we feel very good about what we call our economic equation out of pricing, cost increases and productivity, back into a very, very healthy situation, which we are going to manage also in the coming years. And what was really helpful in hindsight was that we went through this phase where we had to change the way how we get to a healthy economic equation in a very hefty way because of the fast impact of inflation, and we have proven that we can do this. Yes, therefore, I look much more confident into the future in cases volatility would kick in, which I do not expect, but volatility would kick in into the economic equation going forward.
Oliver Metzger
One quick…
Marc Koebernick
Thanks Oliver, I am sorry. I am moving over to Falko. Please Falko, go ahead and ask your question.
Falko Friedrichs
Thank you and good morning. And my question also relates to your confidence into the 2025 consensus, which implies quite a step-up in the Varian margin from ‘24 to ‘25. So, at a very high level, can you just sort of remind us what’s giving you the confidence that, that is achievable?
Jochen Schmitz
Falko, very, very short. Two things – well, three things, first of all, continuous fast-growing business gives conversion. We are very confident about this. When you look at the growth profile in the business, we had the very, very healthy equipment book-to-bill ratio on top of it. And then the second piece is that we expect a very, very solid improvement from the very, very lumpy supply chain we had lived through in 2023. When you think about this, we – to give you also another number, about 60% more equipment revenue in Q4 than in Q1. When you think to manage such a supply chain is not only a challenge, it’s also costly and things like – and you create non-conformance with this. And this is something we will tackle in the current year and then hopefully see the full benefit coming out in 2025. And lastly, we intensify our productivity efforts in that business, and we will see the full impact of better pricing in 2025.
Falko Friedrichs
Okay. Thanks.
Marc Koebernick
Thanks Falko. So, we wrap it up with the last one on the line, that will be Delphine. Delphine, we have to be very quick. So, quick question, a quick answer from us, hopefully.
Unidentified Analyst
Just to be back on the core business, imaging North America band, any evolution regarding financing issue, regarding demand in the U.S. over the course of the year? Thank you.
Bernd Montag
No, we are seeing a very healthy market, and we are very, very confident. So, no concerns about the U.S. market.
Unidentified Analyst
Perfect. Thanks.
Marc Koebernick
That’s a nice ending word. So, that was the last question for today. Thanks for all of the questions. Thanks for listening to us. And as said, looking forward to seeing you on the road in the next few weeks and latest then at the Meet the Management, stay safe and healthy. 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 the Siemens Healthineers website.
For further details see:
Siemens Healthineers AG (SEMHF) Q4 2023 Earnings Call Transcript