Siemens Healthineers AG

XETRA:SHL

Earnings Call Analysis

Healthineers Starts FY '24 Strong with Growth and Stewardship

Siemens Healthineers kicked off fiscal year '24 with robust growth, excluding antigens revenue, posting a 7% increase and a 5% rise in adjusted earnings per share. Varian led the growth contributions, while progress in diagnostics transformation also fueled earnings. They uphold the '24 outlook, expecting double-digit earnings growth by '25. The firm continues innovation and emphasized sustainability commitments, aiming to achieve Net Zero and increasing women in senior roles to 30% by '25. Headwinds from China's anti-corruption campaign and foreign exchange are factored into the unchanged EPS guidance.

Strategic Healthcare Partnerships and Earnings Growth Ambitions

Siemens Healthineers sets out with a tenacious start to the fiscal year, inking pioneering partnerships in healthcare that showcase a commitment to long-term value creation. A standout example is a 10-year, CAD 175 million deal with Nova Scotia Health, enhancing cancer care from diagnosis to survivorship. Another strategic partnership is in Oklahoma, where remote imaging expertise will be extended state-wide, highlighting confidence in technological advancements. These moves are aligned with the company's bold ambitions for double-digit earnings growth by 2025 and beyond and illustrate a proactive strategy to enhance healthcare access and leadership diversity within the firm.

Promising Quarterly Performance and Outlook Confirmation

With a robust beginning to the year, Siemens Healthineers announces solid comparable revenue growth in Imaging, reporting a 5.3% increase. The margin expansion excluding antigen businesses stands at a remarkable 800 basis points, indicating robust operational performance. While confirming the forecast for fiscal year 2024, expectations include an earnings per share (EPS) increase of approximately EUR 0.10, reflecting confidence in sustained progress.

Operational Excellence and Geographic Considerations

Operational resilience features prominently in Siemens Healthineers' strategic narrative. The company expects to operate within the guided growth and margins range for Diagnostics in Q2, signifying an effective transformation underway. Imaging margins are projected to lie between 21% and 22.5% for the fiscal year, underpinned by a robust backlog and visibility in the market. In terms of the Varian integration, a growth trajectory and margin enhancements are anticipated, underscoring confidently assumed financial contributions. Furthermore, a book-to-bill ratio goal for the full fiscal year north of 1.1 and price accretion across geographies reinforce the financial strength and pricing dynamics underlying the firm's optimism.

Margin Perspectives and Growth Drivers

Margin expansion is a critical focus, with Varian seeing a higher margin delta compared to other segments due to its blend of service and equipment revenue. This suggests that as installations grow, so too will the service margins, providing opportunities for upgrade and expansion of the installed base. China, as 10% of global business, presents unique opportunities and challenges with its volume-based procurement affecting around 2% of the global Diagnostics business. Siemens Healthineers anticipates gaining more direct business and firm volume commitments in China due to this regulatory shift.

Short-term Margin Pressures with Positive Long-term Outlook

A transient weaker margin environment is expected in the short term, influenced by various factors such as mix and geography. Despite this, the company maintains confidence in its projected margin range for the year, indicating that they anticipate an offsetting improvement over the following quarters.

Portfolio Development and Supply Chain Resilience

Reinforcing its commitment to technological innovation and accessibility, Siemens Healthineers outlines the significant prospects for its MR modality, particularly in expanding its reach to new settings with the MAGNETOM Free platform. Concurrently, the company has been diligently addressing supply chain issues with a particular supplier to enhance overall stability and contribute to margins expansion goals, underscoring the effectiveness of their proactive and adaptive supply chain strategy.

Earnings Call Transcript 2024-Q1

[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, executive]

Thank you, operator. Good morning, dear analysts and investors. Our CEO, Bernd Montag; and our CFO, Jochen Schmitz, who are here with me in our headquarters in Erlangen, will be taking you through the details of our Q1 2024 this morning. The Q1 results for fiscal '24 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 a chance to raise questions. Please let me remind you of the 2 question rule for the Q&A.

So let us get started. Bernd, please go ahead.

[Bernhard Montag, executive]

Thank you, Marc. Good morning, dear analysts and investors. Let's kick it off with a look at our outlook KPIs in Q1. We are off to a good start into fiscal year '24. We had strong comparable revenue growth ex antigen of 7% with the strongest growth contribution coming from Varian. Adjusted earnings per share came in at EUR 0.49 in Q1 year-over-year, up by 5% ex antigen with strong EBIT contribution from conversion and the diagnostics transformation. With this good start, we reiterate our outlook for '24 with all KPIs, including the segment's KPIs being on track. In the first quarter, we increased our order book lock once again with a very good equipment book-to-bill rate of 1.14.

Looking at the segments. The strongest revenue growth contribution came from Varian. The growth rate of 22% was remarkable even if you consider the easy comps. The Varian margin expanded by 150 basis points to 15.9%, well in line with our expectations. Imaging and Advanced Therapies both grew by 5%. On the margin side, Imaging came in with 19.1% temporarily impacted by an unfavorable mix in Q1. Advanced Therapies improved its margin by 270 basis points year-over-year to 14.3%. In Diagnostics, the transformation is well on track to crystallize the full potential of the business. We also saw the positive impacts from the transformation in the Q1 performance. Diagnostics continued to stabilize its revenue with 2% growth ex antigen, and the transformation was the main contributor to the improved margin of 5.1%. Jochen will provide you with more insights in the financial section.

Now let me share my thoughts on our sources of growth and most importantly, how we are positioning ourselves as a company to make the biggest impact. To frame this, I'd like to reshare this slide from our Q4 presentation. A growing and aging population, expanding insurance coverage and the rising burden of chronic diseases are well-known secular growth drivers. More than ever, our customers face the challenge of doing more with less, treating more patients at less cost and with fewer qualified staff. Siemens Healthineers is all about innovation, pioneering and a relentless patient focus bolstered by our combination with Varian in the mission of creating a world without fear of cancer.

I had the pleasure to join the Annual Meeting of the World Economic Forum in Davos. It is an indispensable platform to demonstrate and grow our relevance to develop new partnerships and to co-shape global health care. I had inspiring discussions with health care governors, CEOs of providers and of other companies, but also with NGOs, all with a focus of what we can potentially do together to address the challenges shown on this slide. The outcome is quite obvious, opportunities to work and innovate together are numerous. Innovation, be it by us, by others or in cooperation, will be a key driver for future growth.

Thanks to our unique capabilities, patient training, precision therapy and digitalization, data and AI, we are at the center of these challenges, fighting noncommunicable diseases, solving the staff shortage of professionals in health care and overcoming productivity challenges in health care systems worldwide, all by working on increasingly equitable access to care. We are in pole position to directly tackle these challenges, improving productivity, expanding access for billions and continuously innovating for better diagnosis and treatment.

To address these challenges, we follow an almost religious approach of investing a high single-digit percentage of our revenue into R&D to sustain our growth by expanding our innovation leadership into the future. Therefore, our thinking is centered around how to bring productivity to the system, how to improve procedures, how to enable new therapies, but also how to use technology to solve the access to care problem. And we have the right answers. At RSNA at the end of November in Chicago, we once again received great customer feedback regarding our innovations. Our innovations will help us to further gain market share, accelerate replacement, open untapped potentials, increase scale and ultimately will provide attractive innovator margins.

Let me highlight some of our recent innovations, starting with the Naeotom Alpha CT based on photon-counting technology. This is an undisputed breakthrough, which allows for higher resolution at lower dose resulting in more clinical information. Half million patients have been scanned to date on the world's only photon counting CT. And we aim to scan 1 billion patients with photon counting CTs within the next decade by bringing this technology to lower price points. We can give such bold targets as we are clearly ahead of competition and on the way to making this the clinical standard as we did with multi-slice CT more than 2 decades ago.

Secondly, the MAGNETOM Free. MRI is enabling more people to get access to MRI exams and is growing into completely new MRI settings, such as ambulatory care. For this innovation, the team received the German Federal President's Award for Technology and Innovation, the Deutscher Zukunftspreis in November last year. The MAGNETOM Free. family provides high-resolution imaging using comparably low magnetic field strength and a cooling system that manages with a very small amount of liquid helium.

This technology is very cost effective by eliminating infrastructure needs and is significantly easier to use, enabling more people to get access to MRIs and opening this technology to new fields of use cases like interventional MR or dental deployment. We will bring the technology from the entry-level MRI to higher price points in our portfolio, which will again help us to differentiate and increase margins. Usually, we talk about the trickle down of new innovations. Here, we talk about a trickle up soon.

Another technology that made the -- avoided MR Free. family possible is Deep Resolve, an AI-supported image reconstruction technology. With this technology, you cannot only acquire high-resolution imaging at low field strength but also speed up scans, reduce noise in MRI images and produce ultrafast neuro scans. This application is also available for higher field strength MRIs.

Another great example of our innovation leadership is Varian's HyperSight, bringing together our strength in imaging and radiation therapy. HyperSight offers substantially improved image quality at a significantly increased speed. This new cone-beam CT imaging technology can achieve diagnostic imaging quality in 6 seconds, a true breakthrough in speed and resolution, hence it allows for a substantially improved treatment planning capability right in the treatment room or, to be even more precise, in the treatment device.

The FDA has cleared HyperSight for TrueBeam and Edge radiation radiotherapy systems completing the rollout of this groundbreaking technology to the full range of Varian linear accelerators. HyperSight is a proof point of our broad offering of comprehensive cancer care solutions that is leading in the industry and a showcase of imaging and therapy coming together.

In Advanced Therapies, we have developed CIARTIC Move. This is a new class of self-driving 3D C-arms that addresses the challenges of staff shortages and overloaded surgical teams in the OR by automating intraoperative imaging workflows. It effectively reduces the time, effort and workforce capacity needed to move and position the system. We even offer voice control, increasing the efficiency in a sterile environment.

And last but not least, we introduced a long-awaited mammography system with strong AI-enabled capabilities. Mammomat B.brilliant is a new mammography system with wide angle tomosynthesis. With a scan time of around 5 seconds, it provides the fastest wide-angle tomosynthesis in the market, creating a 3D image with high depth resolution in the shortest time possible. In this way, abnormalities and microcalcifications in the tissue of the breast can be identified with a high level of accuracy. The acquisition speed is about 35% faster compared to other devices, making the examination more comfortable for patients.

Our innovation strength allows 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. Value partnerships leverage our true uniqueness of having this breadth, being a strong partner and offering the full bandwidth for key departments in a hospital from radiology to oncology. Being the leader and the leading innovator and the leading player in our industry gives us unique access to the C level. We are the partner of choice when it comes to long-term partnerships. In fiscal '23, we signed value partnership agreements in the magnitude of more than EUR 2 billion. We have taken this momentum into the new fiscal year and have been able to announce 2 additional important new partnerships with substantial value tax in the course of the first quarter.

Firstly, we formed an unprecedented 10-year multidisciplinary cancer care partnership with Nova Scotia Health to deliver value across the health system by accelerating the patient journey from screening to survivorship. The deal was worth about up to CAD 175 million, including the purchase of hardware, software, digital solutions and services as well as contributions to the development of a digital imaging concept. This partnership alone shows how relevant we are when it comes to dealing with cancer and how appealing the combination with Varian is using the strength of imaging and therapy.

And secondly, we entered into a strategic 10-year value partnership to bring the latest diagnostic and therapeutic equipment to patients across Oklahoma. OU Health will use Siemens Healthineers technology, such as the syngo Virtual Cockpit, to connect with community hospitals across the state to provide remote imaging expertise for complex patient examinations, especially for cardiology and neurological procedures. This technology provides patients with access to more advanced imaging regardless of their location, empowering physicians in community hospitals to make quicker, more precise diagnosis and treatment decisions.

To set it up, our innovation leadership across our segments is paving the way for continuous growth sustaining our double-digit earnings growth ambition by '25 and beyond.

I will be closing my part with emphasizing the importance of sustainability for Healthineers. To start, let me remind you of our third sustainability report, which we published at the end of November '23. I want to highlight the most important changes in our commitment towards even better sustainability. We will further support our commitment toward health care access by providing 6 million hours of workforce education and training by 2030.

On the environmental side, we will focus on minimizing our impact on the climate by moving from carbon neutrality targets to a Net Zero commitment. Adding to this, we introduced a new KPI targeting to increase our share of circular revenue by 2030. To drive greater diversity, we raised the bar to have 30% women representation in senior management roles by '25. 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.

And with this, I hand it over to Jochen for a deeper look into the financials.

[Jochen Schmitz, executive]

Thank you, Bernd, and good morning to everyone. Let me start by adding some color to our Q1. We had a strong start into the fiscal year. Equipment book-to-bill was 1.14, Again, a very good quarter with an expending equipment order backlog. All 3 equipment businesses contributed to the backlog growth with book-to-bill ratios larger than 1.1 each. Hence, a good momentum across the board.

In revenue, we also saw good momentum across the board, all segments and all regions grew ex antigen in Q1, a strong broad-based performance resulting in a strong revenue growth of 7% ex antigen for the group. In the regions, EMEA stood out this quarter with 12% growth. The Americas and Asia Pacific grew by 5% and 4%, respectively. China grew by 6% versus a very weak comp of minus 6% in the prior year quarter. While this is clearly below China's potential, it is fully in line with what we expected this quarter due to the temporary impact from the anti-bribery campaign.

In earnings, we started strong as well, especially keeping in mind the expected impact from China. Adjusted earnings per share were up 5% year-over-year ex antigen, driven by the notable increase in adjusted EBIT margin by 150 basis points. The margin increase was driven by conversion and by the progress in the Diagnostics transformation. Below the line, tax rate and financial income net caused a year-over-year headwind on EPS in Q1. Prior year quarter, there was a significant positive impact from the release of a tax provision. Year-over-year, this resulted in a headwind of around EUR 0.06 on EPS only from tax rate and financial income. Therefore, the year-over-year EBIT increase did not fully drop through to adjusted EPS growth this quarter. Assuming a tax rate and financial income this quarter on the same low prior year levels, adjusted EPS growth would have been around 17%, more than twice the growth in revenue.

Free cash flow in Q1 was at EUR 238 million, significantly above the prior year quarter. After a strong year-end finish in Q4, we saw a moderate buildup in operating working capital in Q1, significantly less than in prior year Q1. The operating cash slightly helped to reduce net debt. This was offset by an increased pension provisions driven by increased obligations due to lower long-term interest rates. Hence, net debt, including pensions over EBITDA remained in Q1 at the Q4 level of 3.7x. It is our clear priority to use cash to deleverage towards 3x in fiscal 2024. As always, please find the EBIT to cash bridge as well as the net debt overview in the appendix of the analyst presentation.

I will be starting the closer look at the performance on segment level with the 3 segments that follow the same logic of value creation by winning together, our 3 synergistic equipment and service businesses. First, Imaging. Imaging showed solid comparable revenue growth of 5.3%, with considerable growth in molecular imaging, magnetic resonance and also x-ray products. The adjusted EBIT margin in Imaging of 19.1% was held back by an unfavorable business mix in Q1 of around 200 basis points, which is only temporary. The mix was especially unfavorable this quarter. For example, due to a significantly high share of business in the EMEA region.

Now let's look at Varian and Advanced Therapies on the next slide. Varian achieved remarkable revenue growth of 22.3%. Even considering easy comps in the prior year quarter, the Varian growth showed the excellent momentum of the business fueled by the very strong backlog. This already very strong backlog became even stronger with a 10-year multidisciplinary oncology partnership with Nova Scotia Health that Bernd mentioned earlier.

In terms of profitability, Varian achieved a 15.9% margin with a good margin expansion. As we are successfully progressing in terms of making our supply chain more resilient and efficient, the EBIT line further stabilizes, and we see the conversion coming through as planned.

Advanced Therapies continued its successful top line performance with solid comparable revenue growth of 5%, also driven by a healthy backlog. In terms of the adjusted EBIT margin, we saw an increase of 270 basis points year-over-year, driven by a strong conversion, additionally supported by the decreased dilution from the Endovascular Robotics business.

Over to Diagnostics, where we are well on track with the transformation to crystallize the business full potential. Excluding antigen, the business continued to stabilize the top line with 2% growth. Diagnostics all-in revenue saw a decline due to the antigen contribution of EUR 63 million in the prior year quarter. The adjusted EBIT margin of 5.1% was mainly driven by the savings from the ongoing transformation, resulting in a year-over-year margin expansion of 800 basis points ex antigen.

Furthermore, the useful life of leased out laboratory analyzers has changed over time. The useful life of our analyzers, the IVD instruments leased to our customers, as part of an operating lease, is assessed on a regular basis. The latest assessment showed a longer useful life of our laboratory analyzers resulting consequently in a lower depreciation for our operating leases also benefiting the margin expansion.

Let me now on the basis of our strong Q1 run you through our outlook for 2024 again. We confirm our outlook for fiscal year 2024 for both comparable revenue growth and for adjusted basic earnings per share. We also confirm all our main assumptions for growth and margins of the segments as well as for central items, financial income, net and tax rate. Our assumptions on China is unchanged and included in the outlook.

We continue to assume that revenue will be temporarily held back by the current anticorruption campaign impacting revenue growth by around 1 percentage point and adjusted basic earnings per share by around EUR 0.06. Within our unchanged guidance for EPS, our assumption on the year-over-year headwind from foreign exchange has slightly changed. We now assume a headwind of around EUR 0.10 for the adjusted EPS in 2024. As of Q4, we had factored in a headwind of only EUR 0.08.

To wrap things up, let us have a quick look at the general dynamics we expect for the current quarter, Q2. First of all, no material antigen revenues in Q2 last year. This will make the year-over-year comparison for this quarter much more straightforward. On revenue growth, we saw very tough comps in the prior year Q2 in all 3 equipment businesses, Imaging with 13%, Varian with 27% and Advanced Therapies with 10% growth. Therefore, we would see growth in Q2 approaching the respective guidance ranges from below, meaning Imaging and Advanced Therapies towards 6% and 5%, respectively, and Varian with the by far toughest comps to be clearly below the range of 8% to 10%.

Margins are not affected by comps as such. Therefore, we would expect margins in Q2 to end up towards the lower end of the guidance ranges for the equipment businesses, as we have expected and already baked into the outlook for the temporary impact from the anti-bribery campaign in China. For Diagnostics, we expect with the progressing transformation that we will end up within the guidance range in Q2 for growth as well as margins.

And on that note, I'd like to end and hand it over to Marc for Q&A.

[Marc Koebernick, executive]

Thanks, Jochen. And I would briefly pass the word to the operator so that you can get your instructions for the Q&A session.

[Operator]

[Operator Instructions]

[Marc Koebernick, executive]

Great. Thanks, operator. So we start the session with Graham Doyle from UBS.

[Graham Doyle, analyst]

Just 2 questions on Imaging for me. Just firstly, could you talk a little bit more about that mix in Q1 and how that changes through the rest of the year? Is that just visibility you have in the order book and what you're shipping is? Or was that sort of an unexpected mix in Q1?

And then on photon counting, you discussed it a little bit there earlier, Bernd. Could you just give us another refresh on when you expect to be sort of at industrial scale? So is it the sort of early '26 when that new plant in Forchheim opens, please?

[Jochen Schmitz, executive]

Graham, yes, thanks for your question. Not unexpected. When we look at the mix, I highlighted the regional aspect of it. It was a very strong EMEA quarter. And as we have discussed this in this round very, very often, we see regional mix impacts coming from different price levels in regions. And EMEA is not a region with particularly high prices. And this is -- but as you know, mix comes in different forms and fashion. It's not only regional. It's a business line. It's in the business line depending, I would say, on how many applications we sell with it and other things.

And this quarter, Q1, we had almost in all categories a relatively weaker quarter. But be rest assured, first of all, we confirmed our assumptions for the overall outlook, including the imaging margins from 21% to 22.5% for this fiscal year. And we have decent visibility based on our strong backlog, which confirms this. And therefore, we feel good about our initial assumption we have given for the year for the imaging margins.

[Bernhard Montag, executive]

Graham, on photon counting CT, we will, in the next -- or in the not far future, have the next products available for more for lower price points, as also mentioned in the speech. And if this is what you call industrial scale, yes, we are very well prepared with the further factory expansion to then also supply this need. We are currently, on the other hand, very well positioned to also fulfill the deliveries from a photon counting material point of view with the capacity we have built up so far. So therefore, what you have seen in Forchheim is for the next phase of going into new price points, and this is working hand in hand with the new products available in the near future, plus then even larger scale production, including also the scale benefits on the cost side.

[Marc Koebernick, executive]

Thanks, Graham. So we move over to the next one on the queue. That would be Veronika. Veronika, please go ahead.

[Veronika Dubajova, analyst]

One, I just want to follow up on China, obviously. We've heard different updates from some of your peers and competitors about how difficult the environment remains and how likely -- how long it will likely remain difficult. So just I was curious to see your statement this morning saying you are still expecting an improvement in the third quarter of your fiscal year, so from April onwards. Can you maybe just give us a bit of flavor for of, one, what you're seeing on the ground today? And two, what gives you the confidence that China improves on the time line that you've outlined? That would be really helpful.

And then my second question is on Diagnostics and the margin progress that you have made there. Maybe just some thoughts on how you're thinking about the pathway from here. And anything you'd flag in terms of the cost actions, in particular, that are yielding the upside in margin that you have reported this year so far?

[Bernhard Montag, executive]

Thank you, Veronika. I mean, on China, I think the main headline is we feel so far very comfortable with what we have said in the beginning of our fiscal year when we guided for the impact, when we quantified also that the timing of the kind of hesitation of customers to place orders resulting in 1% lower revenue growth for Siemens Healthineers in this year than what we would have had without this year.

So just as to remind everyone what the assumption was, and we stick to these assumptions. I mean what we see is that the anticorruption campaign is becoming more targeted versus its beginning in July, August '23. With this, we also see that the activities of our customers are more and more normalizing and as expected. And that means now sequentially, meaning quarter-over-quarter, we see also an improvement of equipment orders in China, which means especially versus the fourth quarter. And so all in all, this is fully in line with our expected trajectory towards a normalization by the end of Q2.

[Jochen Schmitz, executive]

Veronika, on the ex margins, I mean, first of all, I mean you heard us saying that we are very pleased with what we see on the transformation progress. And we see this also very clearly in the margin trajectory, which is good. We highlighted also this, I would say, additional effect on the longer useful life of the ceded instruments, which is another help in this regard. To quantify this, this is about mid-teens profit impact -- positive profit impact in the quarter.

And as you know, we strive for 8% to 12% profitability in 2025. This is our new ambition target and then going in the midterm to mid-teens. And I think the progress we have seen gives us, I would say, even more confidence that this is a meaningful set of targets. That's how we see this. And therefore, we are very pleased with the success of the team in Diagnostics in this regard.

[Marc Koebernick, executive]

Thanks, Veronika. So we move on. The next one in the queue up, that was -- sorry, Hassan, you have to come back in line. Sorry, I just exed you out. That was not my intention. So then before Hassan joins, we have Julien Ouaddour from BofA. Please, Julien, go ahead.

[Julien Ouaddour, analyst]

So two questions as well for me. The first one, good start to the year at Varian. Could you maybe comment on the pricing impact magnitude this quarter? So you are already at the midpoint of the margin guide, even if I think you said previously that the full pricing benefits will be more back-end loaded. So the question clearly here, should we understand that the higher end of the margin guide is the sort of base case scenario for Varian now?

And second question, could you help us understand what could be the potential negative impact from the Red Sea situation for the company? Is it only a question of longer shipping time for you? Or do you also have some sort of cost impact? And if the situation remains tough for a long time, what could be the impact for the group margin?

[Jochen Schmitz, executive]

Julien, thanks for your question. First of all, I think we are, as I finished with my last statement, also very pleased with the performance on Varian, a very strong quarter, second strong quarter in a row on a very healthy growth levels. And it's important to note, we expect this year a much more straightforward, unvolatile top line development for Varian relative to prior year in absolute terms, which will have a significant impact on the growth trajectory every quarter because it is then disturbed, so to say, by prior year's volatility. This is a good thing. And therefore, we are very, very pleased with what we have seen. Q1 was exactly the start we were looking for, for Varian.

And with regard to the margin, I think we had, as I said, a good start good conversion, solid conversion. We made it almost to the midpoint of the margins. And as I said, we expect much more balanced quarters with one exception, which is Q4, which is always the strongest. And therefore, we feel good about the assumption for our outlook on Varian, also from a growth trajectory as well as from a margin trajectory. And yes, we are very happy with the start.

Should I also do Red Sea? On the Red Sea topic, I mean, you never know how things will play out. But if it stays like it is today, we would not expect significant impact on our ability to deliver on one hand as well as on our financial results. Therefore, the effects we currently see are baked in.

[Marc Koebernick, executive]

So as promised, Hassan, you're next. Go ahead.

[Hassan Al-Wakeel, analyst]

My couple of questions. Firstly, can you talk about order trends in the quarter? I appreciate you had a strong comp on order growth of 16% last year. But any commentary here by geography and modality would be helpful, and how you're thinking about all the growth dynamics or book-to-bill for the rest of the year?

And then secondly, on pricing, can you provide an update on the benefits accruing in the first quarter from pricing? And how you expect this to pan out over the course of the year by modality, particularly the extent to which this may support the expansion -- margin expansion needed in Imaging?

[Jochen Schmitz, executive]

Thanks, Hassan. First of all, let me start out with orders. I think this Q1 is exactly what we have expected, and it is fully in line also with our kind of guide that we said we want to -- or we expect to be in a book-to-bill ratio for the full fiscal year north of 1.1 and Q1 is a very, very solid start in this regard. And this is with the exception of China, as indicated across the board, obviously, driven to get to a 1.14 with a shrinking China topic, which was indicated shows that all the other markets need to be very well intact for us. And therefore, we are very, very happy. And we expect to see similar development for the full fiscal year, just to say this.

On the pricing side, I just want to highlight that the pricing topic is in Imaging not the factor which led to, I would say, more slightly muted margins in the quarter. This is really the mix topic. And the price accretion we have seen over the last years goes also across the geographies. But as I said, EMEA, for example, has, in general, lower price levels than other markets like the U.S., for example. And we see -- we expect here to be, and it is also reflected in the margin guide -- or the margin assumption for imaging for the full fiscal year, I would say, a decent margin expansion, operational margin expansion, which is held back by 2 things, which we indicated foreign exchange to a certain extent as well as the China impact.

But we expect to see or to be for the full fiscal year in a solid mix. That means everything we have seen negatively in Q1 will be, so to say, offset over the coming quarters. And secondly, we expect to be in a very, very healthy, what we call, economic equation out of pricing, cost increase and productivity bringing us into the band we have guided or assumed for the full fiscal year of 21% to 22.5% for Imaging.

[Marc Koebernick, executive]

Thanks, Hassan. Moving on to David Adlington from JPMorgan. David, please go ahead.

[David Adlington, analyst]

Most of them have been asked, but maybe just on Varian again. I was quite surprised that the big sales mix didn't drop through to an even larger impact to margins. Is there anything else we should be putting out there in terms of mix or anything on the cost side?

[Jochen Schmitz, executive]

David, thanks for the question. You can always find something, but I think let me reiterate, very pleased with the performance of the Varian business. And then when you think about mix, yes, there is a mix impact here. It's just the mix between equipment and service. You can imagine, when you grow 22%, that this is driven by equipment significantly at a healthy growth rate on service, but obviously lower than the average of 22%, significantly lower than the average of 22%. And that has a significant mix impact on margins, just to say this.

[Bernhard Montag, executive]

David, this is an effect which is in Varian more pronounced since the margin delta in Varian between service and equipment is higher than in the other and -- higher than, for example, in Imaging and Advanced Therapies. So you wouldn't see the same in -- when -- if we had a totally disproportionate growth of imaging equipment.

[David Adlington, analyst]

That's clear. And so as we roll forward 12 months from here and you start to earn service on the installations from now, we should see a further improvement in margin?

[Bernhard Montag, executive]

Yes. So I mean, this is a very attractive service business. And I think another aspect one should bear in mind is that, I mean, typically, the Varian equipment is also longer installed and it has quite a lot of opportunity for upgrades in terms of software, but also hardware extensions, and a lot of the HyperSight business is also targeting the installed base, and there will be future opportunities also for the installed base, which we are generating now. So there is -- to some extent, when we have high growth on the equipment side, it is a clear precursor for future revenue growth in service, but also when it comes to extensions.

[Marc Koebernick, executive]

Thanks, David. So moving on to Lisa Clive from Bernstein. Lisa, please go ahead.

[Lisa Clive, analyst]

Turning to your IVD business, could you just make any comments on volume-based procurement in China? There's been some rumblings just giving us an update on, A, what's happening in fees? If you could remind us what exposure you have? I mean I know, as a group, your overall exposure to China is 13% of sales. Would really love some color on how that varies by division.

And then also thinking about the potential for VBP to move further on Imaging, I think we've had conversations in the past about whether this could be an issue in the future. And it sounds like there's a lot of service revenue, so you're a bit insulated from that. But can you just sort of confirm that the pricing on machines is already pretty competitive in Imaging? So if there was that sort of -- if that was incorporated into VBP kind of, should we -- is that something that we should be worried about as a potential future headwind?

[Bernhard Montag, executive]

Thank you. So I go maybe division by division or mainly Diagnostics and then the equipment businesses. I mean, to give some color on what VBP means for the Diagnostics business and not here. First of all, in Diagnostics, I believe China is around 10% of the global business. So it's a bit lower than in the rest of Siemens Healthineers where it's more in the 15% range. And currently, VBP effects about, I would say, 20% of the business in China. So that means we are here talking about a 2% revenue slice of the global Diagnostics business, which is if affected by it, which also means that it's not too material.

You also -- what is special about VBP, which is basically coming out of the, let's say, pharma and device industry, and it's not very straightforward to apply to our razor/razor blade business and then even less to an equipment and service business. We see attempts to do this in certain provinces. I think we are very well positioned here. And I think the important target for us is to really balance the positive -- the negatives and the positives and the opportunities here because what VBP on the positive says, it gives you a more direct access to customers.

So a big target of the exercise is to cut out the middlemen and all the margin stacking, which is currently still happening within the Chinese health care system. And on the other hand, it gives you the opportunity to get to firm volume commitments. So for us, it's currently something which we look at on a balanced -- in a balanced way and to some extent since -- I mean, while we are a market leader in the U.S. in Diagnostics, we are not in such a strong position in China, so that it is -- we have potentially more to gain than to lose. So that's the optimistic view.

On the equipment and service side, we don't really see VBP having an impact because really this is about equipment -- or this is hard to apply to equipment business. It's always customer-specific configurations, training and so on and so on, sometimes upgrades. But also here, the aspect of which also, to some extent, is a byproduct, if not the target of the anticorruption campaign, to provide even more transparency and a more direct business in the Chinese market is something which helps us, so that the distribution and the direct customer access is the opportunity.

And please also when looking at prices, look at what the price from whom to whom, because the opportunity to go direct also means that margins, which are currently with the distributors, go away to the benefit of the health care system, but to some extent also that this is something which is an opportunity for us when we go direct. So -- and price levels in China are not exaggerated. They are attractive, but not on an extremely high level. And all these effects are baked into our outlook, but also into what we said about the years to come.

[Lisa Clive, analyst]

Okay, great. Just one clarification. You said the effect of 2% of your total IV business versus that 10% in China. Can you just comment specifically on what that means? Is it just those specific regions? And is this something that's actually been proposed or where you're already working under VBP? It's just we get such limited information there. It's just sort of helpful to know if there's anything to expect in terms of headwinds.

[Bernhard Montag, executive]

The message here is that this -- that about 20% of our new business in China is affected by VBP like purchasing in certain provinces. This 20% corresponds to 2% of the global diagnostics volume. And as I said, we are targeting to balance here opportunities and challenges when it comes to the affected 2% volume in terms of margin.

[Marc Koebernick, executive]

Thanks, Lisa. So just a short prewarning. We only have 9 minutes to go, and there's, I don't know, 10 people in the queue. So we won't make it to the end. So just you know, we will follow up with the people that we don't get to talk to. So next one on the line would be Julien Dormois from Jefferies. Julien, please go ahead.

[Julien Dormois, analyst]

The first one relates to Imaging. In the press release, you are calling out a considerable growth in MR and Molecular Imaging. Can you elaborate a little bit on this? Is this just a quarter lumpiness? Or do you believe this has something to do with the rise of the Alzheimer's drugs, which you have previously flagged as a potential driver for structurally higher growth in Imaging?

And the second question is still an Imaging, now on the margin side of things. I know it's only 1 quarter, would you say it's now maybe more cautious or you would rather indicate that we should target maybe the lower end of your fiscal year '24 margin guidance compared to what we have seen maybe in previous years when you started the year with a relatively weakish margin on that side?

[Jochen Schmitz, executive]

Julien, let me start with margin. As I said, we expect this quarter to be extraordinary affected by weaker margin environment. And I think I highlighted it relatively clearly that we feel good about the margin range we have given. And based also on what we see in the outlook -- in the backlog, sorry, not in the outlook, we're good about the outlook because what we see in the backlog, that's way around. And therefore, I think it's much too early to quantify now where we might end up in the margin ranges. But as I said, feel good about the 21% to 22.5%.

[Bernhard Montag, executive]

Julien, as you probably forecast, so let's say, we shouldn't overinterpret, let's say, the modality mix in. Some more detail in it. I mean, MR is, of course, a super attractive modality with a lot of growth potential in terms of what we -- what I also said in the speech about bringing it to new places with the MAGNETOM Free. platform, bringing MR also into ambulatory settings is a growth driver there, plus, let's say, the always increasing applications and the range of clinical questions you can answer with MR.

I would not yet attribute this to any opportunity in Alzheimer's. And I -- maybe you know that I'm always saying Alzheimer's, please look at Alzheimer's as one of the exciting examples of the world innovating for us. There are many, many drugs, targeted therapies, interventions and so on, which drive Imaging. Alzheimer's has a lot of gear time. Of course, because it's really a public health burden, but not the only topic, which will drive Imaging.

A little bit of a different -- additional topic here when it comes to molecular imaging. Here, we see this big theme of theranostics, where the novel biomarkers and theranostic treatments come into play. So this is much more already an economic reality or a real world topic than the Alzheimer's opportunity is yet. And here, we see very nice growth in PET, but also in the PETNET business here, where we distribute these new diagnostic agents on behalf of the license holders.

[Marc Koebernick, executive]

Thanks, Julien. So move over to Falko from Deutsche Bank. Falko, go ahead.

[Falko Friedrichs, analyst]

My first question is on Imaging. How would you describe the environment in the U.S. in the first quarter? And secondly, on Diagnostics, was this new accounting for the leases considered when you gave margin guidance for the segment a few months ago? Or could this now provide a little bit of upside?

[Jochen Schmitz, executive]

Should I start with the Diagnostics question?

[Bernhard Montag, executive]

You'll start with the second one.

[Jochen Schmitz, executive]

Okay. Falko, first of all, as I said, we look at those useful lives on a regular basis. You don't do this every quarter. You do this over a certain period of years. And we did this in Q1 after and we do this on average around every 5 years because it relates to significant number of installed units and so on. And to get the movement in there, it needs some time, to a visible movement. Therefore, it's not a something which is done on a regular basis, very, very often, only if there are triggering events, which we didn't have at this point in time.

And therefore, it was not baked into the guidance, for the assumption for the full fiscal year. And it's obviously a nice tailwind to what we see. But we are early in the year. Let me phrase it this way. We have given certain assumptions for the year. We feel good about them. This topic makes it -- in particular, let's say, the respite was easier to get well into this margin range. But I think it's much too early in the year to change something here now.

[Bernhard Montag, executive]

Falko, on the U.S. question, Q1 was -- I mean, I reiterate what Jochen said. I mean, when looking at our global growth rate and book-to-bill of 1.14, which came in without China or with a very weak China, I mean the U.S. contributed. Take the Oklahoma topic as just an example of how confident customers are when it comes to further modernizing and expanding their imaging equipment. Also, the atmosphere at RSNA has been very positive.

And I think one topic, which is a little bit underappreciated is, I believe, the opportunity which comes out of this ambulatory trend to build up more hub and spoke models by the larger institutions to bring imaging to places where it hasn't been before, on the one hand, expand the system, but on the other hand, to also be -- offer patients care and avoiding -- while avoiding that they need to travel to the acute setting. It's also more cost efficient. And that's a trend supporting the growth in the U.S.

[Marc Koebernick, executive]

Thanks, Falko. So this takes me to the last one we can deal with in our time. That will be Robert Davies. Please go ahead with your 2 questions, Robert.

[Robert Davies, analyst]

My first one was just on the Imaging margins and how much getting into the range for the full year depends on a China rebound. So I guess the question is, if China doesn't rebound as quickly as expected, can you still make the full year sort of target?

And then second one was just really around sort of revisiting Varian. I'd just be interested in terms of what's changed on the ground versus 12 months ago that gives you conviction that you won't have issues with supply chain disruptions or delivery in maybe the way that you had last year, given all the disruption in the Middle East?

[Jochen Schmitz, executive]

Robert, on Imaging, I think we were extremely clear right from the start of the year what we expect for China and how that affects Imaging. If this will materially change, for which we don't have any indication, that's why we confirm, it might have at least to respite was an impact on it also on the margin and the growth trajectory. But this is not what we expect today, and this is not what we see on the ground happening. Therefore, the only opportunity for us is now to stick to what we have given you because this is what we see, just to make this clear again.

[Bernhard Montag, executive]

Robert, on the Varian side, I mean, first of all, to frame it. We have been as Siemens Healthineers, in total, much more resilient than anybody else when it comes to weathering the supply chain challenges. Varian has been the only business, which was affected, especially by this one problem with one of the -- with a supplier of a core component. Why was that? The positive in Siemens Healthineers is simply because we have the large scale, can leverage that scale, have many, many of the components in-house and really a super professional in managing these topics. Varian needed to rely more on suppliers simply because of the smaller size of the business, which is also what happened to the other companies, who are much smaller in imaging, for example.

We have been working very hard to resolve the situation with this one supplier, and it feels much, much, much better. This is one topic. The other thing is that one of the big priorities of Arthur Kaindl, who is now heading the Varian business, coming from this very, very successful MR business, is to bring the Varian supply chain to the levels we have in MR, which has about twice the scale in terms of units, and to fully make Varian part of the supply network and internal value-adding network of Siemens Healthineers. This is in full swing.

And when I was there 2 weeks ago, I really like what I saw. We will benefit from this, not only in terms of much better supply chain stability but also a big part of the margin expansion, which we target for Varian will come from this opportunity and the decisiveness with which we work on it.

[Marc Koebernick, executive]

Great. Thank you. That takes us to the end of our call today. Briefly, may I remind you, we'll likely be seeing you on the road or at a conference in the next 2 to 3 weeks and maybe also in March, where we're traveling to the U.S. to a conference. But also getting your eyes to this new little product of ours that will be published by the end of the month. This is IR quarterly wrap up. So another touch point where you get an update on what the roadshow talks had brought and what the key questions were and our answers by Jochen and by Bernd and myself. So maybe you want to use that, I would be delighted to see you clicking on this little podcast product. And other than that, I hope you stay safe. And we, at latest, see ourselves again with our Q2 reporting in May. 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.