Siemens Healthineers AG

XETRA:SHL

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to Siemens Healthineers Conference Call. [Operator Instructions] 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, Head of Investor Relations]

Thanks, operator. And welcome dear analysts and investors to today's call also from my side. Our first quarter results were released at 7 a.m. CET this morning, and you can find all the material, presentation, earnings release, and the recording of the call on our IR web page.I'm sitting here with Bernd Montag, CEO of Siemens Healthineers; and Jochen Schmitz, our CFO, who will be taking you through our first quarter results in the usual detail. After the presentation, you will have the chance to ask questions. Please may I ask you to limit yourselves to 2 questions each. Some things never change.With this, I pass the word over to our CEO, Bernd Montag. Bernd, the floor is yours.

[Bernhard Montag, President, CEO & Chairman of Management Board]

Thank you, Marc. Good morning, dear analysts and investors. Thank you for dialing in and expressing your continued interest in Siemens Healthineers.It has been a few months since we last spoke at our 2021 Capital Markets Day. In case you missed it back then and have a few hours to spare, you can still watch it on our web page.Let me start by shedding some light on our financial performance in Q1, which shows that we have been able to take the momentum from 2021 over into the new financial year despite a quite challenging environment. We increased our order backlog with an excellent equipment book-to-bill rate at 1.2, which is for all segments roughly on the same level. Comparable revenue growth was strong with 9.5%, driven by an excellent 20% growth in Diagnostics, including EUR 329 million of rapid antigen sales.Varian had a very solid start to the fiscal year and contributed EUR 750 million to the revenue. Imaging continues to be strong with 6% comparable revenue growth in Advanced Therapies with 3% growth.The adjusted EBIT margin for the group came in at 17.6% in Q1. Foreign exchange headwinds and currently higher procurement and logistics costs were mostly offset by a better-than-expected rapid antigen contribution.Our adjusted earnings per share increased year-on-year and was EUR 0.55 in Q1. Free cash flow was strong with EUR 556 million.We have raised the outlook for the group. In terms of comparable revenue, we now expect 3% to 5% growth from previously 0% to 2%. For adjusted basic earnings per share, we expect EUR 2.18 to EUR 2.3 from previously EUR 2.08 to EUR 2.20. This increase is the result of higher-than-expected antigen revenues. We now assume EUR 700 million of revenues out of rapid antigen testing in fiscal year '22.So while it looks like it's shaping up to be another successful year at Siemens Healthineers, and Jochen will explain in more depth the numbers of this successful start, let me recap a bit on what we told you at our Capital Markets Day, what makes Siemens Healthineers so unique. The basis for our success is the set of unique capabilities which we have systematically built in the past years, a set of capabilities which we keep strengthening every day. Patient twinning, precision therapy, and digital data and AI. Patient twinning 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 a patient in mind on which diagnosis, therapy selection and response control can be based very individually. This is why we drive imaging to new levels of insights, develop new diagnostic tests and work on making imaging and diagnostics more productive and accessible.Precision therapy means using cutting-edge technologies to deliver individualized therapies, often with submillimeter accuracy, whether it's cancer, neuro or cardiac disorders. The importance of precision in treating patients is what makes Varian so unique in cancer therapies. It is also why Advanced Therapies is focusing on making more and more procedures minimally invasive by image guidance and robotic assistance. Precision improves results, reduces side effects, in short, makes therapies better for patients.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 patients before and for connecting patient training with precision therapy. Our unique capabilities allow us to pioneer breakthrough innovations to fuel further growth.Let's look at some of the most recent examples. First, the MAGNETOM Free.Max, our lightest, smallest and most cost-effective MR system. The MAGNETOM Free.Max comes with a basically helium-free technology that significantly reduces total cost of ownership and, therefore, makes MR more accessible and consequently improves access to high-quality diagnosis globally. Since its launch, we have seen more than 50% of systems being sold into new markets, that means into settings where MR could not go before.Buyer decisions are driven by favorable infrastructure requirements and ease of use, especially for those first-time users. It was released in August '21, and we see a steady order ramp up also for the little sister, the MAGNETOM Free.Star.The NAEOTOM Alpha is the first FDA-cleared photon counting CT on the planet. After more than 15 years of development, over 280 patents and over 100 publications, we have successfully launched NAEOTOM Alpha on November 18, '21. Described by the FDA as the first major imaging device advancement for CT in nearly a decade, NAEOTOM Alpha is seeing an impressive customer interest in both private and academic institutions. Our customers confirm that photon counting technology has the potential to become the new global technical standard in CT in the decades to come.More than 35,000 patients were already scanned using the new system as of today, and we started to book orders in fiscal year '21 for a selected customer group of early adopters already. Atellica CI1900, Atellica Solutions' little sister is targeted towards midsized labs, hub-and-spoke settings in the emerging countries. It brings the Atellica philosophy of combining quality and throughput to even more customers worldwide.Speaking of Atellica, in Q1, we were capable to sign a contract for more than 40 Atellica Solution analyzers with Ascend in California, making it one of the country's largest single-site Atellica solution locations.Turning the page over to precision therapy, Ethos, our AI-driven adaptive radiation therapy system provides data-driven personalized cancer care with maximum impact, while minimizing side effects. Since launch, we have booked more than 110 orders for Ethos already. Around 50 systems are installed with a remarkable number of over 15,000 adaptive sessions since launch. And with CorPath, we are on the way to advance endovascular robotics to better and more accessible state-of-the-art stroke treatment. All of this is enabled by the glue of digital, data and AI. Like our AI-Rad Companion or Varian's Oncology as a Service offering. As an example, we advanced clinical decision-making with a comprehensive AI-powered portfolio with our AI companions providing solutions for anatomies covering 35% of imaging procedures. By 2025, we aim to increase this number to 85%.These breakthrough innovations, our unique capabilities and the focus and scale of our broad products and solutions portfolio allow us to benefit from and to contribute to the 3 company-wide growth vectors that we presented at our Capital Markets Day. These growth opportunities include fighting the most threatening diseases, enabling efficient operations and expanding access to care. Our unique technologies and competencies are tackling exactly these opportunities and we tirelessly strengthen them even further. As a result, we will have even more impact on global health care and accelerated growth.And while we pursue these 3 company-wide growth vectors, each segment keeps a razor-sharp focus on its respective targets and contributes to our midterm targets that we presented at our Capital Markets Day. As a reminder, we aim to grow our comparable revenue growth by 6% to 8% per year and our adjusted EPS by 12% to 15% per year in the years from '23 to '25.Quickly turning to Varian. I highlighted already before the incredible success of Varian with the rollout of Ethos, taking a lead in the adaptive therapy market. However, besides this, Varian also delivered a very remarkable quarter. Varian had a very solid start with a very positive revenue growth across all regions with revenues reaching EUR 750 million. At the same time, Varian has been capable to further expand its strong order backlog with an equipment book-to-bill of 1.23 in the first quarter.Documentation of this strong performance are 2 notable long-term partnerships we signed with the Oulu University Hospital and the U.S. Oncology Network. The partnership with Oulu University Hospital in Finland is a 10-year strategic partnership to build a comprehensive digital diagnostic and therapeutic ecosystem that addresses the entire cancer treatment pathway and advances the quality of care for cancer patients in Northern Finland. Through this partnership, Varian and Siemens Healthineers will provide Oulu University Hospital with a technology and services package that includes both imaging and radiation therapy equipment for cancer treatment, software solutions for improved workflow and decision support, and a range of services from equipment maintenance to staff training and workforce development. This is just one of many proof points of combined deals that we have in our pipeline. So stay tuned for more combined deals to come.At the same time, during the quarter, Varian signed a multiyear agreement with the U.S. Oncology Network, further extending the existing partnership. The U.S. Oncology Network is the largest network of community oncologists in the United States. The agreement includes software, service and equipment solutions across the U.S., including service support for over 150 linear accelerators.Also in terms of profitability, Varian achieved a strong quarter, with an adjusted EBIT of EUR 117 million and a margin of 15.7%, Varian is already right in the middle of its margin target range of 15% to 17%, and therefore, very well on track to deliver on what we have committed.So before I hand it over to Jochen for the financials and our updated outlook, let me just say how proud I am on how we, as a team, have managed these challenging times and that we consistently work and deliver on our target to pioneer breakthroughs in health care for everyone, everywhere.And with this, over to you, Jochen.

[Jochen Schmitz, CFO & Member of Management Board]

Thank you, Bernd, and also good morning, everyone, also from my side. Glad that you are joining us again. Let me take you through our financials of our first quarter in fiscal year '22.As Bernd highlighted before, we see the momentum from fiscal year '21 to continue in the first quarter of our fiscal year '22. Let me start with giving some color on the dynamics in the equipment orders first. We continue to post very good equipment order intake growth in the high single digits, a very healthy dynamic, both year-over-year as well as sequentially, underpinned by the, again, very good equipment book-to-bill of 1.2 in Q1.In revenue, we also continue to see good underlying revenue growth, i.e., excluding rapid antigen revenue of 4.5% growth with growth across the board. This is particularly good when you take into account that we grew by around 10% ex antigen last year, and this, again, was on the last quarter in fiscal year '20, which was not impacted by the pandemic. This is for me a clear testimony not only to the accelerated growth momentum, and at the same time, as important to our unique resilience in extremely challenging environments. In particular, the appearance of the Omicron variant accelerated the momentum of the antigen business in Q1 with EUR 329 million of revenue, primarily in EMEA, which brings us to the overall 9.5% comparable revenue growth. Bear in mind that we received the EUA approval for the U.S. market only at the end of December. Therefore, we did not see U.S. revenue from the antigen business in Q1.I will talk later in my presentation in detail on what we have assumed for the antigen business in the remaining fiscal year. In the geographies, we also see the very good underlying momentum continuing, also in China, which saw very tough comps in the prior year quarter. Last year, in Q1, we saw significant equipment growth in China due to government-backed preparations for a potential second COVID-19 wave. In Q1, we also saw a tailwind from foreign exchange translation of around 3 percentage points. So revenue in Q1 grew by around 12% if you take out portfolio effects only. This growth we saw also drop through to the bottom line with 12% growth on our adjusted earnings per share this quarter. Obviously, there were some moving parts in between.Adjusted EBIT margin came in at 17.6% below the stellar prior year quarter. Bear in mind that last year's Q1 was exceptionally good since we posted the highest margin of the fiscal year in Q1, which is quite unusual. So we see some degree of normalization in the Q1 margin this year.On top of this, we saw 2 major headwinds this quarter. Headwinds from foreign exchange on the bottom line and currently higher costs from procurement and logistics related to the current situation of global supply chains in the COVID-19 pandemic. On the other side, we saw a tailwind from the higher rapid antigen contribution. I will talk in more detail later in this presentation on the different profit impacts this quarter and what to expect in the course of the remaining fiscal year.Below the EBIT line, we posted minus EUR 30 million of financial income, which was above our normal run rate for interest expenses due to a negative impact from the variation of smaller equity investments. We continue to expect the targeted EUR 50 million to EUR 70 million expenses. Financial income net for the full fiscal year, unchanged to our guidance from early November. Tax rate came in at 29%, slightly above prior year quarter.Regarding cash, we had also a very strong start to fiscal year 2022 in generating free cash flow with a strong free cash generation of EUR 556 million, despite significantly higher bonus payouts and the ongoing challenges in the supply chain with its impact on inventory levels. This was largely driven by excellent cash collection.Now let us have a look at the dynamics in the different segments. Bear in mind that Varian has no comparable prior year quarter yet, and therefore, is not included in the comparable growth numbers yet. We will include Varian in our comparable growth from Q3 onwards.Let us now have a look at our segment performance. As Bernd has already covered Varian, I will be commenting the remaining 3. Imaging continues to be strong with 6% revenue growth, driven by very strong growth in molecular imaging, CT and MRI on the back of very strong prior year growth fueled both by healthy underlying growth in the core business as well as some pandemic-related demand.On the adjusted EBIT line, imaging showed a good performance of 20% margin. However, it was 340 basis points below prior year's record margin, partially due to headwinds from foreign exchange and procurement and logistic costs.Our marketing and sales activities for the new product launches in the first quarter also impacted the margin slightly negatively.Diagnostics showed excellent growth driven by rapid antigen sales as well as a very solid core business growth. Given the normalization of the test volume for routine examinations, excluding the rapid antigen contribution, core business continues with solid growth at more than 3%. On the margin side, profitability was up by 530 basis points year-over-year from the highly accretive rapid antigen business. Excluding antigen, the core business sustained solid underlying profitability. I will give more detail what this means for the diagnostic performance going forward on the next slide.At the same time, we also saw an impact of around 300 basis point headwinds from foreign exchange and procurement and logistics costs, which were overcompensated, obviously, by the antigen contribution.Advanced Therapies saw 3% growth this quarter, a decent performance on a strong comparable of 6% in prior year and almost 10% in Q1 of fiscal year '20. Despite a softer growth quarter, we see Advanced Therapies well on track for growth this year with a healthy order backlog. Q1 margin in Advanced Therapies was down to 14.3% in Q1 versus a very strong prior year quarter and in the guided range for this fiscal year. In this quarter, the margin was negatively impacted by the headwinds from foreign exchange and procurement and logistic cost of around 150 bps and also by ongoing investments for Corindus.In our diagnostic business, we now assume a higher rapid antigen revenue contribution of EUR 700 million in fiscal year 2022, up from previously communicated EUR 200 million. Since our fiscal year 2022 outlook announced in November, the situation has changed significantly with the Omicron variant wave. Adding to this, we have received the FDA emergency use authorization approval in the United States, both was not factored into our original guidance. The team worked very hard to get the U.S. approval and meet the additional demand which arose from this opportunity. However, the full year visibility on the testing demand is still relatively low and the situation is still very dynamic.Based on the trends we experienced over the last years, we anticipate strong demand in Q1 and Q2 and then softening demand during the summer months. Additionally, pricing has come down substantially for tenders in Germany. And considering we are not the only player to receive the U.S. approval for its COVID-19 antigen test, we should see how pricing and volumes evolve over time in the United States. So the overall market becomes more and more competitive with more capacity overall. Therefore, we expect revenues to decline sharply in the second half.Profitability in this segment is largely a result of the development in volume and prices. We expect profit accretion from rapid antigen peaking in the first half to then decline sharply in the second half due to the expected lower demand and price erosion.Finally, a few comments on the Q1 performance of Diagnostics core business. Excluding rapid antigen margin accretion, we continue to see that the core business is developing according to our plans with a solid underlying profitability. And this needs to be evaluated taking into account the current global supply chain challenges. Taking everything into consideration, we can be very happy with the steady improvements in our Diagnostics segment. We continue to be on track with our plans to turn around the business.Now let us have a closer look at the different profit impact that we expect to be more material in this fiscal year. You see on this slide the 4 topic that we currently consider material and the year-over-year impact on adjusted EBIT in the first half and the second half of this fiscal year. And you also see that they all have somewhat different profiles in terms of year-over-year comparison over the course of the year.Let me start with what we just talked about, our rapid antigen testing. We expect a very positive accretion in the first half year, turning into a very negative year-over-year impact in the second half due to the slowing demand and at the same time comparing against a very strong second half of last fiscal year.Regarding foreign exchange, as said before, we see a translational tailwind of around 3 percentage points this quarter, particularly from the strengthening of the U.S. dollar, and we expect this to continue throughout the year. However, since we do hedging on a rolling basis for 3 to 6 months forward, the impact to the EBIT line is usually trading the top line impacts by the said 3 to 6 months.Consequently, we expect a negative impact from foreign exchange on the first half bottom line turning in second half. The topic of impacts from incentives followed us during the course of last year. So let me start that the updated assumption for rapid antigen for this fiscal year is already fully reflected in our books. Also, group incentives related to antigen are kept this year. So any incentive impact from antigen will be limited to the Diagnostics segment from now on as the new assumption is already beyond the set cap.For fiscal year '22, we expect an overall tailwind from incentives skewed towards the second half. We expect the tailwind in the second half of the fiscal year to be larger, since we booked, in last year's Q4, the employee bonus provision of EUR 56 million. The tailwind from incentives in Q1 was largely compensated by higher travel and marketing costs.And now to the impacts from procurement and logistic costs related to the current situation of global supply chains. We are aware that this is a big topic currently, also in the capital market. So let me give you 3 main messages that sum up our current situation and what we expect for the remainder of the year.First, very important, we did not see material impact on our revenues from supply chain issues so far. And we assume that we will not see material impacts going forward. Obviously, there is uncertainty from the future development of the pandemic and, for example, from new variants, which we cannot foresee.Second, we see the headwinds, mainly in procurement and logistic cost of around 100 basis points in margins year-over-year, skewed towards the first half of the fiscal year. These headwinds have 2 main drivers. One driver is price increases due to shortages, most notable in the electronic components and in certain raw materials like metals. The other driver is logistic cost, including structural changes, EG switching from sea to air freight and mitigation measures in our manufacturing to secure production.And this brings me to the third message. Thanks to our team, we have been managing these challenges extremely well so far. And we expect to continue to manage the situation well going forward. Our procurement, manufacturing and R&D teams work closely together on mitigation and new solutions, working together with our suppliers who are closely integrated into our value chain. Albeit we manage the situation, relatively speaking, very well. The 100 basis point year-over-year headwind now reflects the intensified global supply chain challenges. And of course, this is also reflected in our updated outlook, which brings me directly to the next chart.We raised the outlook for fiscal year 2022 due to the new assumption of EUR 700 million for rapid antigen revenues in fiscal year 2022. Consequently, we raised the revenue target for Diagnostics to low single-digit negative growth. This raises the outlook for the group to 3% to 5% comparable revenue growth. We also raised the outlook for adjusted basic earnings per share. The range for the adjusted EPS is now between EUR 2.18 and EUR 2.30. This new range obviously includes the different profit impact that we have discussed before; EG, the headwinds from procurement and logistic costs, as well as the higher rapid antigen contributions in Diagnostics. This results in a net impact of around EUR 0.10 higher outlook, by which we increased the outlook for adjusted earnings per share.The Diagnostic margin in fiscal year 2022 is now expected in the low teens, driven by the higher contribution from the rapid antigen business. And all other targets for the segments and the other items of the previous outlook remain unchanged.One comment on the margin target for Imaging in the range of 22% to 23%. We currently expect the Imaging margin to be around the lower end of the range, mainly due to the aforementioned headwinds from procurement and logistic cost. This reflects an element of caution and there is uncertainty, especially how headwinds and mitigation measures will play out in the second half of the year.Let me also add a comment on what we expect in Q2, where we have obviously better visibility. For comparable revenue growth, we expect momentum from Q1 to continue into Q2 for all segments. On the margin side, we expect imaging margins in Q2 to continue to be somewhat below the 22% to 23% margin range, whereas we expect in the other segments some more pressure from procurement and logistic costs. So margin in the other 3 segments might end up around or slightly lower compared to Q1.And with this, I close my presentation and hand over to you, Marc, for Q&A.

[Marc Koebernick, Head of Investor Relations]

Thanks, Jochen. So I will be obviously managing the Q&A, but let me just hand it also briefly to the operator to start the Q&A session.

[Operator]

[Operator Instructions]

[Marc Koebernick, Head of Investor Relations]

First caller on the line would be Veronika Dubajova from Goldman Sachs.

[Veronika Dubajova, Equity Analyst]

I have 2, please. One is on the COVID-19 guidance. I mean, obviously, you've already delivered EUR 329 million of sales in the first quarter. I'm just looking at the EUR 700 million. It seems to me like there might be some room for upside even just thinking about the second quarter. So maybe, Jochen, you can give us a little bit of your thinking on why Q2 shouldn't be at least as good as Q1 and in that context, why the EUR 700 million may be a bit more cautious. I know you mentioned pricing, but I'm just curious in terms of demand, and if you can give us a little bit of insight into what you're seeing at the moment? That would be my first question.And then my second question is on the Imaging margin. Obviously, coming in at around 20% in Q1 and assuming Q2 is similar. That does leave you quite a lot of work in the second half to do. How much visibility do you have on component pricing and transportation costs as you move into the second half of the year? Have you been able to lock in some prices there that help you? And therefore, how derisked is that 22% on a full year basis?

[Jochen Schmitz, CFO & Member of Management Board]

Veronika, thank you very much for the good questions. Let me start with antigen first. As you know, we were always relatively conservative with assuming in our outlook an antigen revenue portion. And we have good visibility on the EUR 700 million. And I would also expect to see a relatively similar level of revenue in Q2 as we saw in Q1 at least, and this leaves then some trailing out antigen revenue for the remaining quarters. That is our current thinking. And there are a lot of, I would say, variables still open, pricing, availability, channel development in the United States, and other things, which led us to give you, I would say, a very balanced guidance for assumption for EUR 700 million in our outlook.On the Imaging margin, when you asked, you had several questions around this. And last year, you saw quite some, I would say, spread in the margins from 18% in Q3 up to, I think, 20%, 23%, 24% in the highest quarters. And it ended up, on average, with 21%. When we started out, it was 20% with significant headwind from foreign exchange as well as procurement and logistic cost, and we expect those procurement logistic costs to be skewed towards the first half of the fiscal year. This is our assumption. Visibility is not super great in this regard, but this is what we currently assume. And we have a clear plan to get to the lower end of the range, as I highlighted. But visibility is, beside backlog, where we have good visibility, I would say, strong security on the top line, and I think we still have some limited visibility on certain cost items. But I'm still confident that we can reach the lower end of the band.

[Marc Koebernick, Head of Investor Relations]

So then I would hand over to the next person on the line, this would be Patrick Wood from Bank of America.

[Patrick Andrew Robert Wood]

I guess the first one is particularly on the margin side. I'm just curious as to -- you clearly have quite a lot of offset work going on within the business to manage some of those increased costs. Just curious what are some of the things that you're actually doing within the business to offset those costs, some detail of that would be great.The other side, maybe actually on the demand side of things, the NAEOTOM, good to know it's in the early launch phases with early adopters. But when should we expect it to become more in a full commercial launch? Is that really back half of this year? Or when do you feel you're going to be able to put more of the pedal down and push the product in a more aggressive way?

[Bernhard Montag, President, CEO & Chairman of Management Board]

Thank you, Patrick. So maybe I'll rephrase the question here, how do we offset the cost. I mean the other thing is also how do we preserve margins here, because margin is the difference of price and costs here. And I mean, one big topic is, of course, to very carefully manage pricing, and also to make sure that we use our pricing power. And there, we have good signals that we also made good progress on that front. I mean, we see it also in the order book, that pricing quality is good. So don't only look at the cost side here.And when it comes to the component supply aspect, I believe that we are getting into more stable waters, which may also help to ease the effect from there. But in the end, I mean, I think please bear in mind 2 things. On the one hand, I think we did a great job, also compared to some of our competitors, in safeguarding the top line, which is, I think, the first and big topic to achieve. And secondly, we will manage very carefully the cost implications. But on the other hand, there is a big topic when it comes to pricing power and also passing some of these effects on, so to say.When it comes to the photon counting, I mean this year is the year of a rollout to selected customers, I mean, an early commercial rollout, I would say. The full commercial effect you will see in the next fiscal year. But what we see so far in terms of interest, in terms of also real demand, but also in terms of price realization is very, very encouraging.

[Jochen Schmitz, CFO & Member of Management Board]

And maybe, Patrick, one other aspect on that margin topic. We have made a deliberate decision to have a clear prioritization to be able to deliver our products to our customers. Currently, this doesn't come for free. You need to be clear about this. This is a deliberate decision. And that's also why we currently do not see any material impact on the top line, because of the strength of our team, but also based on the decision we made. And I think we feel so far, in relative terms speaking, comfortable with that decision. And we will obviously observe it very, very carefully. If things would get out of control in this regard, yes, we might need to do things differently, but we don't expect this to happen.

[Operator]

So next one on the line would be Lisa Clive from Bernstein.

[Elisabeth Decou Bedell Clive, Senior Analyst]

I have 2 questions on the IVD business. First, on your U.S. antigen revenues, are you selling to specific government programs? Or are you going to pharmacies, more of a sort of direct-to-consumer approach? Just curious as to the channels and whether you may expand that over time.And then second question, just on the IVD business ex antigen. Nice to hear that there's some decent revenue growth and margin improvement there. If we think about the underlying demand for sort of routine tests, how close are we to getting back to normal volumes? Are we at sort of 85%? Or is it more or less than that?

[Bernhard Montag, President, CEO & Chairman of Management Board]

Yes, let me go first here. I mean the primary customer group when it comes to antigen testing or rapid tests in the United States is, let's say, large customers. And we don't have the channels and not the ambition yet to go too much into a scattered retail space. So number one is, of course, the big government programs. This is also what our strength is and has been in Europe, where the claim to fame for Siemens Healthineers as a super Agile company was to make sure to deliver big quantities of super reliable tests with high confidence and certainty. So in terms of millions of tests which need to be delivered at once, and this is also one aspect we are now living up to in the U.S. when it comes to the government program.We are also looking at larger retail chains and we'll see how that market develops. But it is currently baked into the forecast of the EUR 700 million.When it comes to the core business, I mean, yes, in Diagnostics, I'm very happy with the start we had here. It shows a nice continuation of the trend of a step-by-step improvement towards the targets we have set for this business. When it comes to how close this business is to the, let's say, pre-pandemic levels, I think it's pretty -- I can't give you a clear number, I mean, but it is more in the 90% to 100% normal. But what you still see, and which is -- when you double-click on it is that when it comes to the testing menu, there might be some shifts compared to what normally has been done compared to 2 years ago, there were maybe 2 years ago more wellness tests and now there are still more secondary COVID-related tests, which are baked in because of some COVID-related comorbidities or so. But overall, we are largely back to a normal situation in that business.

[Marc Koebernick, Head of Investor Relations]

Okay. Next one on the line should be James from Jefferies.

[James Alexander Stewart Vane-Tempest]

It's James Vane-Tempest from Jefferies. Two questions, please. So just on procurement and logistics, you mentioned you don't have a lot of visibility. So I'm just curious, what's changed in the past 3 months when you first gave guidance. Where were the additional pressures which weren't initially anticipated? And without that visibility, how do you have confidence we won't see additional pressures in the second part of the year?And then my second question is just on Varian actually. I think, you said it's going to be included in comparable sales growth from Q3 this year. I think if we just look back a bit, I think, in Q3 before, I think you said it was around 17%, can't remember the Q4 number off the top of my head, but from April, I think it was just low teens to expect. So I just wonder if you can give us a flavor what that was in Q1, so we can see the trajectory for that?

[Jochen Schmitz, CFO & Member of Management Board]

Yes. Thanks for the question, James. I think what has changed since the initial assumption was that I think we saw, I would say, the shortages and the necessity to buy at spot rates, certain components has increased relative to where we stand at early November. Secondly, as I said before, and we deliberately made the decision to prioritize the ability to be able to deliver to our customers. And by this, we had to do because of the difficulties, because it's not only price of components, right? When you have shortages, you also need to be super agile and flexible in your internal processes, which sometimes also leads to, I would say, to certain disruptions in the internal processes, which might also lead to later ability to manufacture things. And therefore, you also have certain logistic challenges following up. And that's also why I said structural changes from sea to air freight and things like this. And I would say the tension just increased across the board. But as Bernd said, what we currently see is that we see a stabilization of some, in particular on the supply side of components and certain things, which gives us, I would say, some confidence in being able even to manage that even better than we have already managed it today. And there's also the learning curve we currently walk through, we have been under this pressure in the organization is helping to optimize our internal processes according to the challenging environments.On the Varian side, on a pro forma basis, the growth rate on revenue in Q1 was in the low teens, again, so a super strong start, fully in line with what we have guided for Varian for the full fiscal year.

[Marc Koebernick, Head of Investor Relations]

So next one on line should be Julien Dormois from Exane.

[Julien Dormois, Research Analyst]

I have 2. The first one, and sorry if you mentioned that in your prepared remarks, the line was a bit patchy, but it relates to the Diagnostics margin excluding the COVID contribution. I think you have a guidance for fiscal year 2022, which is to reach a mid-single-digit to high single-digit margin for the underlying Diagnostics business. So just curious whether the Q1 margin was in line with that guidance or maybe marginally above, and any help in understanding profitability of the COVID tests in Q1 would also be helpful? I think you had previously indicated that the pricing had been maybe have in some instances. So just willing to understand what the profitability of the underlying business COVID tests, if possible.And the second question relates, sorry for that again, to the logistics and procurement costs. It's more looking at the midterm guidance that you had indicated at your Capital Markets Day back in November. You had said that you expect improvement on that side in H2. So you would say that there is nothing structural there that could prevent you from reaching your midterm guidance, both in Imaging and Diagnostics for the next few years?

[Jochen Schmitz, CFO & Member of Management Board]

Thanks for the questions. As you rightfully said, our guidance for the Diagnostic business, our core business for this fiscal year is on the profitability side, mid-single digit to higher single digit. And we were at the lower end of this range, in the range, but at the lower end, also due to the fact that we had significant, as we highlighted, significant headwind from foreign exchange as well as the procurement and logistics costs. In Diagnostics, it's primarily the logistic cost currently. But we feel well on track to stay in that line and see progress as we proceed through the year.On the procurement and logistics front, I do not see this as a critical item for our midterm targets. We consider this a temporary problem, which should be dealt with over time. And as Bernd already said before and when we have also mitigation measures, when you extend this topic not only to COVID-19 but also to the inflation topic, that we can also, I would say, in a very meaningful way address it by significant price discipline. And we have initiated the measures and we expect to see also benefits from this kicking in according to when the orders come in and turn that into revenue more in the later end of this fiscal year and then in the next years.

[Marc Koebernick, Head of Investor Relations]

Then I would pass it over now to Hassan from Barclays. Hassan, your line should be open. We can't hear you. We'll wait just a second, I don't know if we have any technical issues here, maybe just a second, Hassan. I hope we get you into the line in a second or 2. Okay, so we tried again. Are you live now, Hassan, give us...

[Hassan Al-Wakeel]

Yes. I can hear you now, Marc. Thank you. Brilliant. I have 2 questions, please. So firstly, just to follow up comments on the top line. Your competitors have clearly seen headwinds and have talked about deferred installations. Is this something that you're seeing at all? Or is this getting worse in fiscal Q2?And then second, could you elaborate on your comments on pricing, Bernd, and whether you have any meaningful ability to offset cost increases and pass them on to customers? Or are you seeing overall level of pricing deflation?

[Bernhard Montag, President, CEO & Chairman of Management Board]

Thank you, Hassan. I mean, first of all, and here I -- okay, coming back to Jochen's point, let me say, we've made a decision to deliver, but on the other hand, we have the ability to deliver, which is, I think, something that sets us apart because here really this organization does a wonderful job here in extremely quickly reacting to new situations. I mean it's similar to also what we do in the antigen tests and so on. So it is very, very encouraging, and I'm very proud how the organization is dealing with the topics when it comes to -- I mean, your question is more about, I understand, outbound logistics.The question is, are customers ready to take the orders and so on. So here we are very flexibly reacting and prioritize then one customer over the other. We see we are confident when it comes to the visibility we have in turning the order book into revenue. Also in the short term that this challenge is not increasing. And you can trust us that the way we were able to handle it in Q1 will continue. And here we really stand out in the market, and to some extent our ability to deliver helps us to even gain share, because some of the delivery times of competitors are just not what the market accepts.And that brings me also to the other topic. When it comes to pricing, it is, of course -- some of the pricing which we have is set at the point of the order intake. And as you know, in our business, typically on the imaging side orders, the time between order and revenue or between book and bill is in the range of 6 to 9 months. So that means that pricing measures, which we have initiated and which we see in the order book here, will also materialize towards the second half of the year. And we see actually a good acceptance of this, both internally, so to say, in the sales force, but also when it comes to customers.And as a last point, please also bear in mind here, about 50% or more -- 55% of our revenue is recurring revenue. And especially when it comes to the service aspects here, we have also price adjustment clauses and so on and are also protected when it comes to inflationary tendencies.

[Marc Koebernick, Head of Investor Relations]

So now we hand over to Daniel Wendorff. You're the second but last one on the queue.

[Daniel Wendorff, Analyst]

I hope you can hear me well. I have the first question on the Varian top line development. Maybe you can tell us a bit how the combination now with Varian part of Siemens Healthineers helped to that, if at all? And yes, maybe give a few examples what really drove the revenue line, if it was at all, by being part of Siemens Healthineers? And then I have a question on the Atellica low-to-mid throughput solution, CI1900. What is the key marketing message you would give customers here on this front, given that the end market is slightly different, competition is slightly different. So what is really the key thing standing out for the Atellica solution in the low to mid segment?

[Bernhard Montag, President, CEO & Chairman of Management Board]

So thank you, Daniel. I mean looking at Varian, there is, on the one hand, when it comes to the revenue development, a very, very strong, a, recovery of the business, coming from the pandemic, which on the one hand is triggered by a very, very strong competitive situation of Varian as a "standalone business". But in addition, and that's what we see on the order book, we see many deals. Some of them have already been booked, like the one example I gave on Oulu in Finland, and many are in what we call the funnel, which is the, say, project the sales force is working on, where there is a super encouraging and momentum across the entire globe in the sales teams to team up and to work jointly on opportunities. And that goes in both directions. This can be specialty oncology customers, who are strongly tied to Varian via strong connections and who now want to also expand the relationship to imaging and it can be using the strength we have in C-level relationships as Siemens Healthineers Classic, if you wish, to pull in the Varian team and to use this additional effect. It is using our strength as Siemens Healthineers Classic, again, yes, in parts of the world where Varian hasn't been as strong. In terms of sales presence, sometimes not even having a direct sales force. So here we are extremely positive about the internal momentum and it also shows in the numbers.Looking at the order book, we see, I mean it's not only a very strong start on the revenue side in Varian with the EUR 750 million, but you need to look at the book-to-bill of 1.23. So that the orders have been even 23% more than that. So here, a clearly very, very strong start, and I'm very, very bullish when it comes to this.Second question was the CI1900, what is the positioning of the product. Basically, it expands the philosophy of Atellica solution, which is highest quality test in high throughput. So the unique mix we bring at Siemens Healthineers as an engineering company in the lab to new customer groups. And these are, on the one hand, the midsized labs in the developed countries, very importantly, hub and spoke deployments. That means hospital networks who use the "big Atellica solution" in the hub and the small Atellica in the associated spoke places, which brings them, on the one hand, so-called result concordance, the same test results, but also allows them to purchase the same reagents and so on. So this is a big requirement in the market. And the third topic is, it is an ideal system for labs in the emerging countries.

[Marc Koebernick, Head of Investor Relations]

So now we hand over to the last one for today, last but not least, Falko Friedrichs from Deutsche Bank.

[Falko Friedrichs, Research Analyst]

I have 2 questions as well, please. Firstly, on your new Imaging launches. And how would you describe the replacement behavior of your customers in light of these launches. So is it that the replacement cycles might actually be shortened a bit now because your customers really want to get their hands on this new technology? Or is that not really the case?And then secondly, on Advanced Therapies, can you just provide a bit more color on the underlying trends you see there at the moment with regard to the recovery from the pandemic and potential customer wins? And also, was there anything specific that stood out in the quarter that caused this very strong performance in the Americas?

[Bernhard Montag, President, CEO & Chairman of Management Board]

Okay. Thank you, Falko. On the Imaging launches. I think they come in 2 different buckets. On the one hand, when it comes to what we do with the MAGNETOM Free.Max and also Free.Star, which is the smaller version of it. This is about creating new markets for MRI and it's bringing MR to places where it couldn't go before. So from that point of view, it is independent of replacement cycles, to answer your question, because it, so to say, comes on top of the normal course of business. And we are very happy with what we are seeing that the products exactly do that, bringing MR to the outpatient clinic, which so far only had CT, or bringing MR to places in emerging countries, which didn't do it, or bringing MR to clinical specialties outside radiology. So irrespective of replacement cycle, this is typically installations where there is no MRI before.On the photon counting CT, this is -- I mean, I commented before that this is in an early phase of launch where we have a lot of excited and exciting customers who are coming either from the academic medical centers or very prestigious private institutions. Here, the topic of shortening of a replacement cycle can definitely happen because one of the reasons to buy the product is to stay at the forefront of medical research. This is more the academic medical center type of thinking, or to be a quality leader in terms of what type of diagnosis you can offer as a private imaging center.And when your business model is to be competitive and an early adopter, because you are an innovator as a health care provider, it shortens the replacement cycle. And the good thing is that this effect of shortening the replacement cycle will over time migrate into broader segments of the market because -- I sometimes use this a little bit maybe trivial analogy of comparing photon counting CT to flat panel TV or to HD TV. When a technology like this is available, people make the decision to go to the next level product earlier than when the next generation offers just little improvements.

[Jochen Schmitz, CFO & Member of Management Board]

Maybe answering your question on the Americas, we just highlighted that the AT had a strong quarter in the Americas. And as you know, this is not a book and bill business, so it was nothing which happened at the end of the day in the quarter from a market success, this is the success we had over the last years with a strong order intake also on the AT side, which then materialized in the quarter as revenue. And by the way, it was across the board of Americas, it was not U.S. only, but also on a much lower scale, a very good revenue growth in Latin America on the AT side. So I think nothing what you can really point out to particular in the quarter, but it was a particular driver of the revenue line in the quarter.

[Marc Koebernick, Head of Investor Relations]

Okay. So this ends our call for today. Thanks for your participation, for your continued interest in Siemens Healthineers and your questions in today's call. We look forward to seeing some of you on our road show in the next days or at the London conferences early March or at the Barclays Conference in Florida in person, maybe. Till then, stay healthy, your Healthineers team.

[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. The website address is corporate.siemens-healthineers.com/investor-relations.