Siemens Healthineers AG

XETRA:SHL

Earnings Call Analysis

Siemens Healthineers' Q3 Performance Amidst China's Challenges

Siemens Healthineers reported a solid Q3 performance with a 4% revenue growth, despite challenges in China due to an anticorruption campaign. Adjusted earnings per share were EUR 0.52, slightly down due to a low previous year's tax rate. Varian showed excellent growth at 10%, while Imaging grew by 4%. Advanced Therapies experienced flat growth. Diagnostics improved its margin by 600 basis points to 7.4% through a successful transformation program. The company remains optimistic about future growth, supported by a healthy order book and innovations. For fiscal 2024, revenue growth is now expected between 4.5% and 5.5%, with margins stabilizing【4:0†source】【4:4†source】【4:10†source】.

Quarterly Overview

In the third quarter, Siemens Healthineers reported a revenue growth of 4%, which, although impacted by challenges in China, signifies a steady performance overall. A key highlight is their adjusted earnings per share coming in at EUR 0.52, reflecting strong operational resilience despite the year-ago quarter's extraordinarily low tax rate that skewed comparisons. The company's book-to-bill rate remains healthy at 1.07, revealing a robust backlog of orders.

Imaging Segment

The Imaging segment, while showing a modest 4% growth against tough comparisons, faced significant headwinds from foreign exchange rates and muted demand in China due to an ongoing anticorruption campaign. The impact was a reduced year-over-year margin of 20%. Nonetheless, the segment anticipates a rebound driven by molecular imaging advancements and potential recovery in China as pent-up demand surfaces by 2025.

Varian and Advanced Therapies

Varian continues to be a cornerstone of Siemens Healthineers' portfolio with consistent revenue at EUR 927 million, marking around 10% growth relative to previous quarters despite similar foreign exchange challenges. Advanced Therapies, on the other hand, remained flat due to similar issues in China, but both segments are expected to see a resurgence as China stabilizes. Varian's margin improved to 16.6%, benefiting from sequential advancements in profitability and operational scale integration.

Diagnostics Transformation

Diagnostics showed solid resilience with a 2% revenue increase and a notable margin leap to 7.4%, thanks to the rigorous execution of a transformation program. The strategic focus on operational efficiency and portfolio simplification contributed significantly to this margin expansion. This segment's transformation underpins the company's outlook, setting the stage for continued advancements and higher profitability.

Outlook and Growth Strategies

Siemens Healthineers reiterated its fiscal year 2024 outlook, projecting comparable revenue growth between 4.5% and 5.5% in Imaging. The company also adjusted its tax rate assumption to a more favorable 22% to 24%. Going forward, significant revenue contributions are expected from all geographies, particularly with an anticipated stabilization in the Chinese market. The equipment business segments, especially, are projected to witness uplift from high profit conversion ratios and flattened operational expenditures in Q4.

Secular Growth Drivers

Long-term growth for Siemens Healthineers is anchored in global trends like aging populations and the rise in noncommunicable diseases. With an innovative portfolio addressing key healthcare needs, including cutting-edge imaging technology and robotic treatments, the company is well-positioned to capitalize on these trends. The focus on breakthrough innovations aims at not only improving patient outcomes but also gaining substantial market share through enhanced operational scale and efficiency.

Challenges and Mitigations

The company faces ongoing challenges, particularly in China, where anticorruption campaigns have temporarily dampened demand. Despite these setbacks, Siemens Healthineers remains optimistic about a rebound driven by underlying demand and potential benefits from China's stimulus programs. The mitigation strategies focus on maintaining a robust order pipeline and leveraging multi-dimensional scale across its synergistic segments to sustain growth momentum.

Earnings Call Transcript 2024-Q3

[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 Q3 2024 for this morning. The Q3 results for fiscal '24 were published this morning at 7 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 note the following. Siemens Healthineers will record and transcribe this meeting. It will be published on websites such as www.siemens-healthineers.com. If you don't want to be recorded or transcribed, please inform us before asking questions or making comments. Further details are found in the privacy policy of Siemens Healthineers. And finally, let me remind you of the 2 question rule for the Q&A. So let us get started. Bernd, the floor is yours.

[Bernhard Montag, executive]

Thank you, Marc. Good morning, dear analysts and investors. Today, we present to you our quarterly figures. We confirm our outlook for comparable revenue growth and adjusted EPS for fiscal '24 despite China still impacting growth. Varian delivered a very solid set of numbers again and Diagnostics significantly further expanded its margin based on a consistent executed transformation program. This is evidence of our decisive measures following up on our challenges from last year and bearing fruit. We successfully stabilized Varian's performance. We are swiftly implementing the Diagnostics transformation program.

The Imaging business is still impacted by the anticorruption campaign in China, which impacts the entire industry. We expect this to turn into pent-up demand in '25 as the clinical need for our offerings is not impacted by exogenous factors like this. In terms of growth, we came up against very tough comps in Q3. Please remember, last year's Q3, we grew by 10% ex-antigen. And in particular, Imaging was a very strong 15% and Advanced Therapies at 12% growth.

Let me now briefly run you through the third quarter results. In the third quarter, we again expanded our strong order backlog with an equipment book-to-bill rate of 1.07. Revenue growth in Q3 came in at 4%, mainly held back by China. Adjusted earnings per share were EUR 0.52 in Q3, broadly in line with last year's strong third quarter, which benefited from an extraordinary low tax rate. Imaging grew by 4% on very tough comps. The margin was 20% year-over-year impacted by headwinds from foreign exchange. Varian grew by 10% at the upper end of the guided range and the margin came in at healthy 16.6%.

Advanced Therapies' revenue was flat on very tough comps. The margin was 14% year-over-year impacted by headwinds from foreign exchange. Diagnostics grew by 2% at a strong 7.4% margin and is fully on track to deliver the savings from the transformation program. Jochen will provide you with more insights in the financial section. We are very optimistic about our future growth prospects. On the one hand, thanks to our healthy and constantly growing order book. On the other hand, since we have identified multiple sources of growth for our products and services.

You are aware of the secular growth drivers such as growing and aging population and the rise in noncommunicable diseases. Cancer and cardio and neurovascular diseases, especially drive the need for exactly what we offer with our portfolio. Increasing cost pressure in health care systems, combined with staff shortages further increase the need for substantial innovations. What are we doing about it? We offer breakthrough innovations for better patient outcomes and gain further market share, accelerate replacement and ultimately, reach attractive innovator margins with increasing scale.

But we also benefit from innovations in other fields of health care, whether it is in pharma or in the medical device space or in the advancements of robotic treatments. One could say the world innovates for us. This chart you are familiar with from previous communications. To accelerate growth and profitability, we leverage 2 distinct sources of value creation. On the one hand, we have our synergetic and winning combination of Imaging, Varian and Advanced Therapies. Our focus there is on leveraging combined scale in multiple dimensions.

For Diagnostics, on the other hand, the formula is rigorous focus. Now let me give you some examples how we are crystallizing value in our 2 cores. Let me start with the synergistic segments. You know about our substantial innovation leadership in CT imaging with photon counting or in MRI with our award-winning low helium technology. Both are obvious examples of our innovation leadership and how we are paving the way for future growth. However, growth for us does not only come from our own innovations. It is also the result of the health care world innovating for us.

We are constantly witnessing extraordinary breakthroughs in medical science like in pharma or the medical device space, which need better diagnosis and better treatments with substantially better patient outcomes. Outstanding examples are new therapy approaches in cancer care and neurology based on innovations in pharma industries triggering fast adoption of novel procedures. This has a direct impact on growth in our Molecular Imaging business and further sustains our growth ambitions. Our products are needed to identify the right patients, to assess response and to confirm health or to accompany survivorship. One example is theranostics as a new approach to identify and treat an increasing number of cancer types.

Theranostics is a highly targeted and individualized treatment using one radioactive agent, the radioligand to identify and mark cancer cells and a second agent to destroy those cells. Theranostics has been proven effective in extending lives and improving quality of life of patients, especially also for those who have not responded to traditional cancer treatments such as radiation, chemotherapy and immunotherapy. As an example, the treatment of prostate cancer has recently significantly advanced by theranostics. It has also a pharma pipeline covering more than 25 other cancer types. PET CT scans and SPECT CT scans as well as MRI play a key role for the clinician to select the right treatment for the right patient and to monitor therapy progress. The clinical benefits of providing individualized cancer care is why theranostics is gaining momentum among providers.

Another outstanding example our disease modifying therapies for Alzheimer's disease. As you are probably aware, several groundbreaking immunotherapy treatments have recently emerged that work to reduce beta amyloid plaques that form in the brain and slow down cognitive decline in the early stages of Alzheimer's disease. To qualify for those -- these treatments, the presence of beta amyloid plaque must be confirmed through diagnostic testing. Better amyloid PET imaging plays a critical role in the Alzheimer's disease care pathway as it is one of the only modalities available to evaluate the beta amyloid plaque burden. We offer the broadest PET CT portfolio in the market from ultra high-end systems primarily installed at larger or academic institutions to systems targeted at bringing digital PET CT to a broader market.

They come with a wide range of innovative technologies like our latest innovation, the AI-powered Biograph Trinion. But our offering goes beyond molecular imaging scanners. We own and operate the leading PET radio diagnostic pharmacy network in the U.S., which reliably delivers PET radiopharmaceuticals across the country. What makes this so relevant? These radiopharmaceuticals have a very short half-life and need to be used quickly after production. We invest in our radiopharmaceutical network with new production facilities to increase patient access to PET biomarkers and to support future biomarker development.

The availability of new biomarkers will increase access to the latest individualized care and make us an even stronger partner for customers and patients along the entire cancer care continuum and for many of the most threatening diseases. To sum it up, we laid the foundation for another future growth engine, helping health care providers and patients to deal with noncommunicable diseases. When it comes to Diagnostics, our full focus for value creation in the last 2 years has been on successfully implementing the transformation program that was designed to drive a step change in profitability at Diagnostics. We started the program in 2022 as a reaction to the changed cost environment but the key trigger was the completion of the Atellica portfolio with the launch of the Atellica CI analyzer.

This enabled us to embark on a substantial portfolio simplification, the positive effects of which we will see coming in as we wind down the legacy platforms. However, next to the portfolio simplification, we pulled many different levers to bring the cost level in the segment to a sustainably lower level in a large onetime effort. We have tightened our belt with a leaner organization in a significant reduction of complexity. We have challenged the way we do things across the organization and successfully focused the entire setup more suited to the needs of the Diagnostics business and with the right focus and people to efficiently drive growth.

The same holds true in terms of our service approach, which we rightsized and designed to better fit the needs of Diagnostics. I will not run you through the detailed initiatives, there are many. I believe the number on the right side of the chart speaks for itself or the numbers on the right side of the chart speak for themselves. The cost cutting is having a substantial impact. The steep ramp in terms of margin improvement is also the result of the super swift implementation of the cost-out measures where we are clearly ahead of plan in terms of timing. We are now already on a sounder cost level in the business.

Further margin improvement will not happen at a similar speed, it will be more a function of the winding down of legacy platforms over the years to come, and of course, of conversion from higher revenue growth in the midterm, which brings me to the next chart, where I will run you through the key points on why we have the right product in place to really compete in the core-lab. In vitro diagnostics testing is at the core of clinical decision-making, and we have the perfect offering. With the completion of the Atellica family with the CI analyzer, we can cater for all settings and all customers, large, medium, small, hub and spoke.

We offer a highly competitive menu of more than 200 tests assessing patient health, and we are adding novel assays on an ongoing basis, like the recent first of its kind Neurofilament Light Chain or NfL blood test for accurate diagnosis and personalized management of multiple sclerosis. Small hospital labs as well as reference lab face the same provider challenges from staff shortage to cost pressure, consolidation and procedure growth. And this is exactly what we address with systems, automating and digitizing routine work. At ADLM 2024, the Clinical Lab Expo, we cut it short with the claim, do less. Atellica's human-centered engineering and automation delivers highly efficient testing at scale, which enables customers to streamline processes and speed turnaround time. Atellica is reliable with high throughput and therefore, drives a high consumable utilization and ultimately, our revenue.

Healthy development of the revenue per box in our installed base shows that we are on the right path. The Atellica franchise have already crossed the EUR 1 billion revenue line and continues to grow double digit. To sum it up, we have done our homework and are receiving great feedback from our customers at ADLM. And with this, I hand it over to Jochen for a deeper look into the financials of the past quarter as well as the outlook for the rest of the year.

[Jochen Schmitz, executive]

Thank you, Bernd, and a very good morning to everyone also from me. Let me begin with some color on our continued positive equipment book-to-bill of 1.07 in Q3. Again, this equipment book-to-bill was positive in all segments, especially strong in Varian, further strengthening our already very strong order book.

Let us now look at the comparable revenue growth in Q3. Q3 revenue grew by a very solid 4.3% considering the circumstances against a very tough comparable of 10% growth in the prior year quarter. Despite China still declining by 13% this quarter, we achieved this solid growth at group level on back of strong growth in Americas accelerating to 9% in Q3, and EMEA continuing strongly with 6% growth on very tough comps. On earnings, we see a very healthy development. Adjusted EPS came in at EUR 0.52. The year-over-year decline of 4% is due to a very low tax rate in the prior year quarter. If you take out the year-on-year tax impacts, earnings were driven by an increase in adjusted EBIT margin of 60 basis points year-over-year for the group.

Considering the negative impacts from foreign exchange on Q3 margin of close to 100 basis points, this is a very strong margin expansion year-over-year. Also, let me add some color on the cash performance in Q3. The cash conversion was good this quarter with a cash conversion rate pretax slightly above 1. All 3 equipment segments achieved a cash conversion rate at 1 or above. In operating working capital, we reduced receivables this quarter, whereas inventories increased in light of a very strong revenue quarter in the upcoming Q4. As said in previous reporting, we are in the process of reducing safety buffers in inventories, which were built up during the pandemic. At the same time, we are working on improving cycle times of operating working capital, additionally, freeing up cash.

Let us now look at the Q3 performance of the segments, starting with Imaging. Imaging posted growth of 4% against very tough comparables, 15% in the prior year quarter. Although we saw good growth, for example, in Molecular Imaging, the growth in Q3 was primarily held back by a still declining China. China revenue is still declining due to muted demand triggered by the anticorruption campaign. This temporarily muted demand will come back as pent-up demand as the structural demand drivers for growth are fully intact. The adjusted EBIT margin in Imaging came in at 20% year-over-year, held back by a headwind from foreign exchange of around 100 basis points. Additionally, the below-average growth in Q3 led to a lower absolute profit contribution.

Now let's look at Varian and Advanced Therapies on the next slide. Varian achieved a strong absolute revenue of EUR 927 million, which was in line with Q1 and Q2 levels in absolute terms, underpinning the continued steady performance. In relative terms, Varian achieved excellent growth with about 10% despite China revenue still declining year-over-year. We also saw a continued stable performance in profitability with no volatility in margins and sequential improvements quarter-by-quarter. On top of this, continued stable performance Varian nicely expanded margins. This is especially notable as also Varian saw foreign exchange headwinds of roughly 100 basis points.

Advanced Therapies posted flat growth against very tough comparables, 12% growth in the prior year quarter. As in Imaging, the growth in Q3 was primarily held back by a still declining China where we expect the temporarily muted demand to come back as pent-up demand. The adjusted EBIT margin in Advanced Therapies came in at 13.9%. It was impacted by year-over-year headwinds from foreign exchange of more than 100 basis points and obviously by the below-average growth leading to a lower profit contribution in Q3.

Now let's move to Diagnostics, our fourth segment. As Bernd pointed out at the beginning of the call today, Diagnostics is well on track with the transformation program to crystallize the business' full potential. With no meaningful revenues from antigen in last year's Q3, the Diagnostics business continued to grow solidly with 2%. The strong adjusted EBIT margin of 7.4% was mainly driven by operational improvements from the transformation program contributing to a margin expansion of roughly 600 basis points year-over-year. Furthermore, like in the first half of the year, the margin also benefited from a longer useful life of our leased laboratory analyzers. This effect was partially offset by foreign exchange headwinds.

And now to the outlook for the current fiscal year. First, we confirm our outlook for fiscal year 2024 for both comparable revenue growth and adjusted basic earnings per share. We updated 2 of our main assumptions. Firstly, we now assume imaging revenue growth to be between 4.5% and 5.5%. We lowered the growth range for fiscal year '24 due to revenue in China still declining until Q3. Secondly, we now assume the tax rate to be between 22% and 24%. We lowered the range for the tax rate for fiscal year 2024 on the back of the favorable development so far driven by positive one-offs.

We confirm all other main assumptions for growth in margins for the segments as well as for central items and financial income net. With the lowering of the imaging growth, we also assume lower absolute profit conversion in fiscal year 2024 for Imaging. Therefore, we now assume the Imaging margin will end the fiscal year around the lower end of its margin band. In Diagnostics, we now assume the Diagnostics margin will end the fiscal year towards the upper end of its margin band due to the very swift implementation of the cost savings kicking in from the transformation program in fiscal year 2024.

Now let me share the general dynamic that we expect in our last quarter of the fiscal year. In the equipment businesses, i.e., Imaging, Varian and Advanced Therapies, we expect significantly higher absolute revenue in Q4 with positive contributions from Americas, EMEA, APJ and China. Means from all geographies. We expect China revenue growth to stabilize in Q4 and to stop its year-over-year significant decline. On the bottom line, in the Equipment business, we will see the additional Q4 uplift from a higher absolute profit conversion from significantly higher revenue in Q4. With the higher revenue comes also higher gross profit, which gives you leverage over the sequential more flattish OpEx line. Also lifting margins significantly up in Q4 from significant OpEx conversion. And in contrast to the situation in Q3, we do not expect significant foreign exchange effects to negatively impact margins in Q4 year-over-year.

In Diagnostics, we expect the strong margin performance to continue in Q4, driven by the savings from the transformation program. Bear in mind that in Q4, antigen will play a role in the year-over-year comparison for Diagnostics and Siemens Healthineers in total since we booked EUR 52 million of antigen revenue in Q4 of the last fiscal year. Let me finish with reiterating Bernd's comments on our performance this fiscal year so far. This year, we have successfully fixed our challenges in Varian and Diagnostics from last year. At the same time, we see the exogenous but temporary impact from the anticorruption campaign on the Chinese market for over 9 months now impacting primarily Imaging and Advanced Therapies.

And to give you a bit more color on this, we expect to lose around 150 basis points of growth from China relative to our assumptions moving into the year, which is the single reason to change one of our assumptions on the Imaging growth. And despite this, we post positive equipment book-to-bill year-to-date. We increased year-to-date margins and confirm the outlook for revenue growth and adjusted EPS. And on that note, I'd like to end and hand over to Marc for the Q&A.

[Marc Koebernick, executive]

Thanks, Jochen. Before we go into the Q&A, let the operator just briefly remind you on how to get into the queue.

[Operator]

[Operator Instructions]

[Marc Koebernick, executive]

Great. So the first one in the queue that would go live would be Hassan from Barclays. So Hassan, please go ahead with your questions.

[Hassan Al-Wakeel, analyst]

I have 2, please. Firstly, just on Imaging growth in the quarter. What came as a surprise to you this quarter driving the miss and guidance cut, given China delays to orders in the first half meant that it wasn't necessarily going to have a meaningful impact this quarter in the second half for Imaging. And then secondly, could you talk about what you're seeing on the ground in China and the extent of the recovery you expect this calendar year? Do you think that stimulus will kick in this year? Do you think hospitals are waiting for this? And if it doesn't kick in this calendar year, does it drive risk to your 20% earnings growth expectations for 2025?

[Jochen Schmitz, executive]

Thanks for your question. On Imaging growth, I think it's -- as I tried to point out, I think we have a single topic in Imaging growth as well as in the overall company growth, and that is China, and that is also holding true for Q3, right? Please be reminded, China is different than other regions. More a book-and-bill region, out of several reasons. We do not have significant value partnerships in China business, which have, in general, longer lead times. And secondly, as you know, we manufacture everything in China for China. And our expectations were clearly that we see a better China contribution for Imaging, but also for the group. That's it at the end of the day. When we look into the future, and look into our expectation for next year, at the first, we do not expect to see an impact from the stimulus program in revenue for this fiscal year. And then when you look at the stimulus program, it is divided into several pieces.

And where we see good progress is on the, so say, Tier 1 national top 44 hospitals. There the topic is well defined, meanwhile. And there, we also see good momentum coming in the near future, either early in the fiscal year or earlier in the fiscal year. On the others, it's still a bit open, how quickly that will come in. I think when we look at -- I think that was the second part of your question. When we look at our expectation for margin expansion on Imaging, we had that discussion last quarter a lot. We feel still good to see a margin expansion above and beyond the upper end of the normal range of 20 to 80 basis points. Last quarter, we talked about 100 basis points, and we feel still good about this. Also now looking into the future, looking into what we see in the market and what we see also coming out of China.

[Marc Koebernick, executive]

So I move over to the next one on the queue. That will be Veronika Dubajova from Citi. So Veronika, go ahead.

[Veronika Dubajova, analyst]

Hope you can hear me well. I'm going to stick with the predictable themes. First, I just like want to understand a little bit kind of I think last quarter, you said, look, we've derisked the numbers in China. There is no more downside risk. And here we are a quarter again, having seen a disappointing top line performance and you taking the growth guide down again. What can you tell us to give us confidence that this is it? And from here on China, in your expectations, both for fiscal '24 and for fiscal '25 is realistic, and we're not going to have to worry for another quarter or 2 quarters or 3 quarters about what China does?

So if you can give us some color on that and kind of your degree of confidence, that would be super helpful. And then my second question is just to follow up again on China. But you've been very helpful in quantifying the top line headwinds to the original fiscal '24 expectations. Can you also talk through the margin headwind that you've experienced as a result of China being soft? And I guess how that flows through to your fiscal '25 expectations when you look at that at least 100 basis points margin improvement in Imaging. What does that assume for the China margin in there?

[Bernhard Montag, executive]

Yes. Thank you, Veronika. Let me take the first part of the question and -- about our confidence for the quarters to come in China. A little bit of a double-click on this. In Q3 revenue in China was on Q2 level, even a touch above. And despite this being on a low level, this is a first sign of stabilization. Another sign of stabilization is that the book-to-bill in China was above 1 for the second quarter in a row coming from figures significantly below 1 in the quarter before. And with Q4, we expect further stabilization in China and are very confident to almost sure that China will stop its year-over-year decline in Q4. Meaning, we expect China Q4 year-over-year to be at least flat or growing. So - and this is backed up with all the bottom-up planning, and we have a lot of -- not only planning here, but also with the scheduled backlog we have in China. So I hope that double click gives you a little bit of a feeling why we see stabilization and now a return to growth. And with this, I hand it over to Jochen.

[Jochen Schmitz, executive]

Yes, Veronika, on -- I mean, when we look at the -- and I said that for the group overall, that we have about 150 basis points higher loss than anticipated when we started into the year from China. And 150 basis points for the group is about EUR 300 million plus revenue, and that comes with a decent conversion. And I would say if you use, for example, the gross margin, that is not a bad assumption for using the profit impact of it. So it's a significant aspect because you cannot really do a lot on the cost side in the short term for the thing. And as you know, we see this as a temporary effect. So that's roughly what it is. And as said, Imaging and Advanced Therapies are affected higher by -- than the other 2 businesses.

And when you do then the math, you see that also the assumption on Imaging, for example, the 4.5% to 5.5% now is -- if you use a number, which is a bit above 150 basis points that you would be well in the range we guided for initially, the 6% to 8%. With regard to 2025, I think we expect to see China in -- for example, in Imaging, to decline this year in the high single digits. And we expect this to be reversed well next year. I can't give you a precise number, but just being back to more to a normal situation would already cater for a significant growth line coming out of China, just to say that. And that is what we currently have baked into our assumption and which is also, I would say, the basis for our confidence with regard to margin expansion in Imaging of the 100 basis points we were referring to last quarter and this quarter again.

[Marc Koebernick, executive]

Thanks, Veronika. So we move over to Graham from UBS. Graham, you should be live. Go ahead.

[Kavya Deshpande, analyst]

This is Kavya filling in for Graham. Just 2 questions, please. So firstly, on Imaging. Given you have a strong order book and therefore, have good visibility, just wanted to check if there's a supply chain issue or any kind of customer installation issue that might be contributing to some uncertainty? And then, sorry, again, on China, it's obviously been a tough market for the past year. But whereas the vast majority of your revenue is generated outside of here for your local competitors in China, the reverse is true. So just curious as to whether you've seen any changes in behavior from these competitors? And do you expect the market to bounce back to be on similar competitive terms and dynamics than before?

[Bernhard Montag, executive]

Yes. Maybe I'll take this question. And I mean, first and foremost, we don't have a supply -- we don't have any supply chain issues. So the -- if there are topics about -- it is missing, as Jochen explained, a bit of missing book and bill business in China. And what is a minor topic is that sometimes customers are hesitating to do the final installation because it also requires sometimes to "order civil engineering and type of topics", which is in the current environment. Sometimes also a topic where people are cautious. So this is -- these are the topics, which have continued to held back China revenue in the past quarter to some extent. But as I said in the answer to Veronika, I mean, we see a stabilization of the revenue line, with a very small quarter-over-quarter improvement from Q2 to Q3 with the improved and our book-to-bill above 1 year and with the visibility of returning to growth in Q4. Local competition, we don't see a general change from in the past quarters. And currently, what we see in the market is a overall topic across the entire industry, which is affecting the multinationals as much as the locals.

[Marc Koebernick, executive]

So next one would be David Adlington from JPMorgan. David, please go ahead.

[David Adlington, analyst]

Maybe just as you look into Q4, I just wondered what -- so maybe just on Q4. As you look into Q4, I just wondered what risk there is for further slippage in revenue recognition [ water or do China ], I mean at what risk do you attach to maybe not hitting your targets? And then just a more technical one. Just on the tax rate, obviously, much lower and you've lowered it for the full year. I just wondered, any thoughts on the impact on midterm tax rates.

[Jochen Schmitz, executive]

If I start with the second part of the question. When we see over the years -- where we have seen over the years, a constant decline on the tax rate from more the higher 20s now to the mid-20s arena. I think we guided also for this is, I would say, the different value-add structure. The different profit distribution across the globe also triggered by the acquisition of Varian will help or has helped the tax rate to become lower. This year, I would say, it is particularly low due to certain onetime one-offs, and I mentioned that before. And so I would say that tax guide on a general level over the next 2 to 3 years between 24% and 26% is still a prudent assumption. On Q4 revenue recognition, I mean, when we have a guide out there, we have adjusted the assumption on Imaging. I mean as we guide normally, we see this as an ambitious but realistic picture for the company as a whole as well as for Imaging.

[Marc Koebernick, executive]

Good. Thanks, David. Then I'm moving over to Hugo from Exane. So Hugo, you should be live now.

[Hugo Solvet, analyst]

Just on Diagnostics, can you maybe discuss the moderate decline in the U.S. here. And on the EUR 1 billion Atellica business, can you maybe help us or give us the split between high and mid throughput CI analyzer on the installed base on a revenue split basis? And are you seeing any cross-selling synergies?

[Bernhard Montag, executive]

Yes. So on this moderate decline. I mean, the -- well, let me start differently. I mean what we see in Diagnostics in this quarter for the first time is that the legacy business is smaller than the Atellica business in the Central lab, so which is actually -- and I spoke also about the EUR 1 billion, crossing the EUR 1 billion line with Atellica. Atellica growing nicely in the double digits. And this function of legacy business going down and Atellica business going up also is the explanation for the U.S. contributing more on the decline side because historically, simply we have a very strong installed base of legacy systems in the U.S. So this is not a topic of a weakness in the U.S. It is just a topic of the product mix normalizing here to how the world has developed in the last, let's say, 10 years were simply the installed base of legacy systems in the U.S. is higher than in the rest of the world. And then, sorry, the second question was about -- sorry, I forgot the second question, Hugo, was about?

[Hugo Solvet, analyst]

No. CI analyzer. If you can gather the split between high and mid throughput?

[Bernhard Montag, executive]

This is a bit of a not so straightforward to answer simply because the CI analyzer is currently in the ramp-up of placing instruments, and this is developing very nicely in terms of placed instruments. Not only the number of placements but also the customer satisfaction is very, very high. But on the other hand, it's very clear that these instruments don't pull through yet the same revenue per box as the longer installed larger Atellica systems. But I can say that overall, the completion of the Atellica portfolio with the CI analyzer is a huge success. There is a lot of excitement about the CI analyzer, but then also about the combined setting of having one system or one family of systems in hub-and-spoke settings. And this type of "cross-selling or combined selling of the two" is a big topic also for addressing the hospital-based systems and the IDNs in the United States moving forward.

[Marc Koebernick, executive]

Thanks for these questions, Hugo. So moving on to Julien Dormois from Jefferies. Julien, go ahead.

[Julien Dormois, analyst]

I hope you can hear me okay. Still giving you a break on imaging and following up on Hugo's questions on diagnostics. I think Bernd, you mentioned in your prepared remarks that we should probably not expect the same pace of improvements on margin in Diagnostics going forward for obvious reasons. But I think you previously had a guidance for -- I think it was 8% to 12% margin in fiscal year '25. So from where you stand, is that something that would still be valid? And what would -- and whether the mid-teens margin is something realistic than beyond 2025? So just a comment on the general shape of the Diagnostics margin would help. And the second question still on margin but this time with Varian. Just curious where you see Varian going from here? I mean, you have previously indicated that you would like the margin to go towards Imaging kind of margin in this business. You're now out of a very strong year of margin expansion for Varian. How should we think about the next 2, 3 years on this side?

[Bernhard Montag, executive]

Yes. Julien, first, on the Diagnostics margin. I mean -- so first, the technicality, so to say. I mean this year, we see and are very, very happy about the margin uptick coming from the transformation program as Jochen and I said. And this is, to some extent, a onetime step change in terms of lowering the cost base, which was possible by streamlining the organization and by switching off costs, which are directly related to the legacy portfolio, which we don't need anymore. And with this, for example, I mean, production of the instruments or certain R&D work for new assays or whatever. So there is a certain portion of cost reduction, which were one-off efforts and then create a step change.

The further margin expansion comes out 2 -- out of 2 sources. One is the "gradual decline" or moving of the legacy -- of the costs related to the legacy portfolio, because we still, of course, need to continue to do service, to have spare parts, to have the reagent supply. So this will step by step move out of the P&L but not as a onetime effort, which is why this effect of margin improvement will come, but not at the same speed. And the second improvement comes from growth of the Atellica business and growth of -- and also the conversion from accelerated growth, yes? So we are very positive about the future trajectory, but we will see not the same acceleration of margin improvement as we have seen it in the last -- in the current year.

You asked about the 8% to 12%. We are confident and to get into the range. But I would shy away as we -- at this point to say that next year will be -- margin will be in the double digits. So to qualify this a little bit. And when it comes to the mid-teens, in the midterm, they are definitely reachable. On the Varian side, I think you see a very good and stable performance. And we said always that there are 3 main ingredients bringing us to what we called Imaging-like margins, and they are absolutely intact. So this is number one, volume and conversion. I mean you see and we continue to see in Varian high growth in the range of 10%. We guide for 9% to 12% in our midterm targets.

And that will -- that results in conversion and the current book-to-bill in the business and so on is -- and the order backlog is absolutely substantiating this. This is number one. Number two, we still have a bit of an effect from pricing, because of the longer book-to-bill times in this business. And number three is productivity or meaning you're really getting Varian online and fully integrated into the Siemens Healthineers' overall global supply chain using all the internal suppliers and competence centers we have using the economy of scale, but also using the art of the design to cost will help us in addition to improve the gross margin in the business on the equipment side and all these levers are intact. So I feel confident that we will step by step over the next years, reach the Imaging-like margins.

[Marc Koebernick, executive]

Thanks, Julien. So we move to the next Julien from Bank of America. Julien, please go ahead.

[Julien Ouaddour, analyst]

The first one, sorry to coming back on China. But I mean we start to hear on the stimulus that, I mean it might be a bit lower than expected for health care specifically. It seems that it's like all the sectors are being like prioritized here. Has your view on the stimulus changed recently with maybe what you're hearing from your team on the ground? So that's the first question. And the second one on sales guidance, I mean, like for the group, so I mean after the miss today, the revision of the Imaging growth guide, how should we see the sort of group sales growth guidance? Is it more realistic to be in the lower half of the range? Just looking at the, let's say, like upper end, implies a plus 12% growth in Q4. You mentioned in your comments sort of ambitious but realistic guide, but I mean, does it include like the upper end of the sales growth guidance as well?

[Jochen Schmitz, executive]

Julien, let me start with the second part of the question. When we lowered -- and I said that clearly, we -- relative to our initial assumptions when we entered into the year, we have less growth from China amounting to about 150 basis points for Siemens Healthineers overall and while our guidance range is 200% -- 200 basis points. And if you do the math, you automatically come into the lower half. And here, I would say we see us more at the lower end of the range for the group for this fiscal year. And by the way, it's very similar for Imaging but a bit more pronounced. That's it on China.

[Bernhard Montag, executive]

So a comment on number one, okay, on the stimulus. I mean, first of all, let me qualify a little bit here how we talked about it because, I mean, we have never, let's say, been overly emphasizing the stimulus, and let me explain why because as you maybe know, if you follow our discussions on a regular basis. I always emphasize, "Hey, let's please look at the underlying growth drivers?" And yes, even there might be an anticorruption campaign, this lasts for a couple of quarters but it comes back and there will be pent-up demand. And at the same time, I also don't want to over advertise as an opportunity topics like the stimulus program because the real topic is how do we address the underlying demand? And then when you look at that underlying demand curve, there is some kind of a wave of positives and negatives in a given country coming from short-term exogenous topics holding back investment decisions or accelerating investment decisions until things come back to the overall underlying growth curve.

So just as a general remark here, when looking at the outlook for China. First of all, as Jochen also said, we will see growth in the next year simply because going back to normal is already growth. The second source and to be -- or the reason to be optimistic is that there will be pent-up demand over the next quarters, and we will see how long it takes. And the number three is the stimulus program. And the stimulus program is -- will help in addition but it is not the primary reason why China is an interesting market. It is a onetime opportunity, and we are happy about it. But the real topic is, as I said, how do we address the underlying growth and the underlying demand? And the swinging back to the underlying demand is already a very, very good topic, including the pent-up demand here. Stimulus comes on top, and we believe to be well positioned for it.

[Julien Ouaddour, analyst]

Perfect. I mean, if I can like follow up quickly on that. So I mean in the 2025, let's say, like Imaging 100 basis points like margin improvement kind of guidance that you gave. I mean, do we have the impact from the stimulus? Or it just come on top? And so it could be it's like above the -- I mean, like what are the expectations really from the stimulus in your, let's say, like in your margin guide or like growth guide for Imaging next year? Just to have a rough idea.

[Jochen Schmitz, executive]

Yes, Julien, let me take that, yes. I said in Q2, and I reiterated in this quarter that we feel good about 100 basis points. What and how this will exactly be, so to say, to be described. We will talk about in Q4 when we guide for the next fiscal year. I think it's a bit too early because we are still working our way through our own budget assumptions. We will have the discussions with the teams, but I still feel good about the 100 basis points.

[Marc Koebernick, executive]

Thanks, Julien. So starting to run out of time but I'm still for, let's say, a few questions. Robert Davies, please go ahead.

[Robert Davies, analyst]

My first one was just if you can give us a little more color. I know you mentioned in the release that the backlog was higher. Perhaps you could give us some quantification of where the backlog sits now versus beginning of the year? That was my first question. And then the second one was just in terms of order development across the regions, I know you provided some color on sales growth, but perhaps you could give us some color on order development, just the sort of magnitude of kind of declines, I guess, in China, just to give us a sense and then the relative growth in the Americas would be very helpful.

[Jochen Schmitz, executive]

Robert, on the backlog side, I think when you look at our equipment book-to-bill ratio, you see we are currently slightly ahead of this. I think we are at 1.08. Year-to-date, we expect as pointed out at the beginning of the year, to be at the end of the fiscal year north of 1.1 because we expect a solid Q4, a very solid Q4. When we look at equipment book-to-bill, I think we see about -- when we do the math, I think about 5% -- 4% to 5% growth on equipment backlog in this fiscal year.

[Robert Davies, analyst]

Okay. And the second one is on the difference in orders by regions.

[Jochen Schmitz, executive]

And I think, as you know, we don't talk about all our growth. But when we look at markets, I think we are very -- in general, we are very satisfied with what we see with regard to activity in all our markets. And we see a healthy U.S. market. We see a healthy European, Middle East and Africa market. We see also a very solid APJ market. And I would say, the only market, which is currently as discussed now at length, which is currently muted is the Chinese market. And that drives also the book-to-bill ratios above 1 despite the fact that we see the muted China situation. And going forward, we also expect to see this continuing.

[Marc Koebernick, executive]

Okay. So maybe 1 question for Sezgi, the time if you keep it short. Thank you.

[Sezgi Oezener, analyst]

Hope you can hear me. I had 2, but I have to -- I'll try to narrow it down to one. Imaging, you mentioned some new therapies and turn offtakes and growing demand in Alzheimer's. Do you see that reflects to your order book? Do you see increased demand for PET scans and other products? And also where do you see -- or do you also see the same way radiotherapeutics demand reflect your order book similarly?

[Bernhard Montag, executive]

I mean -- thank you for the question. I mean, we see good growth in Molecular Imaging. I think it's also highlighted in the earnings report as one -- as I think the fastest-growing business in this quarter. And we see this, and that's also why we -- I mean, one of the reasons why we highlighted it that, I mean, there's a lot of excitement about CT and photon-counting CT, which is super great. There is a lot of strength in MR and that sometimes over or, let's say, draw so much attention that we -- that there is not so much talk about molecular imaging where there is really a lot of momentum. We see all this growing need for PET, SPECT CT scans. But on the other hand, we are also benefiting from these new radionuclides, and it is very good to see that our PETNET business is now in the mid-triple, triple-digit millions as a business and an additional growth contributor.

[Sezgi Oezener, analyst]

If I may, then as a follow-up there. You mentioned also like that you have the largest broadest portfolio. That should presumably lead to better margins in this product because competitive picture looks different on this product, would that support a higher incremental margin accretion in the midterm for Imaging?

[Bernhard Montag, executive]

I mean this is one -- certainly one contribution. I mean when you look at a little bit of details on the Molecular Imaging business, this is about, I would say, about 15% of the Imaging top line at Imaging at the midpoint, more or less of the Imaging margins. So CT MR a bit accretive. So it is one of many reasons why we are very positive about Imaging growth. I mean, Jochen made the calculation also about this fiscal year that we are losing about 2.5% or so of growth because of China and Imaging. So when you add this back to the numbers, it shows how fast the growth in Imaging is and what the true potential is. And that is also why we are very positive about the margin expansion and accelerating growth in the next year. I mean molecular imaging will definitely also contribute to this.

[Marc Koebernick, executive]

Okay. Thanks, Sezgi. So we are really out of time now, so I need to wrap it up. Sorry, Falko, we'll give you pole position in the sell-side breakfast on Friday for your questions. And that brings us to the end of the call today. Looking forward to the road show next 2 days in U.K. and the U.S. And then obviously, lots of conference participations in September. And if we don't meet and speak there, we hear ourselves at latest with the Q4 reporting in November. Till then, stay safe and sound. Bye-bye.

[Operator]

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. A recording of this conference call will be available on the Investor Relations section of the Siemens Healthineers' website.