Siemens Healthineers AG

XETRA:SHL

Earnings Call Transcript 2022-Q4

[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, moderator. Good morning, dear analysts and investors, and welcome to our Q4 2022 results call.

I'm sitting here with Bernd Montag, our CEO; and Jochen Schmitz, our CFO, who will take you through all the news and numbers in the right amount of detail and will then also be available for your questions.

All the documents have been published this morning, at 7:00 a.m.; and are either in your mailbox. Or you can find them on our investor relations website. [Operator Instructions]

And before I take up any more of our valuable time, I hand the word over to our CEO, Bernd Montag.

Bernd, please go ahead.

[Bernhard Montag, executive]

[indiscernible], Marc. Good morning, dear analysts and investors. Thanks for dialing in again and expressing your continued interest in Siemens Healthineers. It's good that you are listening because we have a lot to tell you today.

I will kick off today's call by looking back over fiscal year '22, the first year of the New Ambition phase of our long-term strategy, highlighting what we have achieved. It was again an extraordinary year in a very demanding environment. We have seen unhappy geopolitical developments, the tragic war in Ukraine, the strict COVID-related lockdowns in China and a challenging global supply chain environment. In these extraordinary circumstances, our team tirelessly supported our customers with excellent service. They kept the supply chains up and running and reacted with utmost agility to the demands and needs of health care providers.

The whole Siemens Healthineers team delivered an outstanding operational performance in fiscal year '22 underlined by continued market share gains. In terms of financial performance, it was also a strong year. We achieved our fiscal year '22 guidance, which we raised twice during the year. We posted comparable revenue growth of 5.9%, which is safely within our guided range of 5.5% to 7.5%. Adjusted basic EPS reached EUR 2.29, which is well within our guidance range. This was possible, thanks to a very strong Q4 finish across the board in revenue, profitability and new orders. Q4 was a really strong quarter in an economic environment that is still very challenging. In fiscal year '22, we also generated robust free cash flow of almost EUR 1.7 billion.

Finally, on back of this strong performance, we have decided to propose to our shareholders a more than 10% increase in the dividend of EUR 0.95 per share, fully in line with our dividend policy.

Equipment order intake grew in the low teens in fiscal year '22, an impressive growth rate taking into account that the growth rate was in the high teens in the previous year. What's more, this shows our strong performance in robust health care markets and proves our remarkable resilience. Varian also continued its strong equipment order growth during the fiscal year, resulting in an equipment book-to-bill rate of more than 1.3. We are well on track with the Varian integration. And with HyperSight, we have launched a breakthrough innovation for next-level radiation therapy at ASTRO last month.

With this review of an outstanding fiscal year '22, I will close this chapter. And we'll open a new one with our guidance for the new fiscal year.

In fiscal year '23, we want to continue where we left off by delivering strong revenue and earnings growth. We want to achieve 6% to 8% comparable revenue growth ex antigen. Including the rapid antigen business, we aim for a minus 1% to 1% growth. This translates into EUR 2 to EUR 2.20 adjusted earnings per share, implying year-over-year adjusted EPS growth ex antigen of 13% to 24%, tracking well over our mid-term ambition of 12% to 15%.

Our mid-term financial ambition remains unchanged. We continue to aim for annual ex antigen revenue growth of 6% to 8% and ex antigen adjusted EPS growth of 12% to 15%. We expect to achieve these ambitious targets despite a challenging geopolitical environment, thanks to our unique set of capabilities.

Our unique capabilities are the foundation of our success. I have shown this picture several times on past occasions. Hence, I will not dwell on it for long. Patient twinning; precision therapy; and digital, data and AI are our capabilities, capabilities that make us truly unique. They allow us to pioneer breakthrough innovations to fuel our future growth and to be the holistic partner of choice for our customers everywhere.

These capabilities are also key when we pursue our company-wide growth vectors, which I would like to remind you of on this slide: fighting the most threatening diseases, enabling efficient operations and expanding access to care. While we pursue these growth vectors, each segment keeps its razor-sharp focus on its own targets to drive our New Ambition strategy. This also means that every segment constantly evaluates its business resources and strategy to ensure that we keep maximizing value for customers and accelerating profitable growth. In this spirit, you will see on the next chart a further level of decisive measures at Diagnostics which we are implementing to increase the profitability and growth potential of this business. At Diagnostics, we have come to the conclusion that the dramatically changed macroeconomic environment demands immediate and comprehensive measures. Throughout the past quarters, external headwinds such as logistical constraints, component shortages, local COVID-related lockdowns; a delay into the launch of our CI 1900 low- to mid-end -- mid-volume analyzer, partially due to the pandemic; and elevated procurement and logistic costs have materially outweighed the significant operational improvements we have achieved.

We continue to receive very positive feedback on our Atellica Solution platform and to record strong competitive wins. With the launch of the CI 1900 analyzer, we are also continuing to deliver on our strong R&D road map. We just recently started the controlled rollout of the CI 1900 analyzer in Europe, and more regions will follow soon before we will see a fully fledged rollout next year. We have taken into account the learnings of our Atellica Solution launch and are very well prepared.

Last but not least, the pandemic has shown that our Diagnostics business can quickly adapt to unprecedented circumstances by building up an antigen test business which delivered EUR 1.5 billion of revenues in fiscal year '22 alone. Building on these successes, we will take decisive actions to compensate for the adverse external factors I mentioned. We will transform our go-to-market strategy, channeling our resources into key strategic regions by changing the go-to-market for other less-relevant regions. We will undertake significant measures to reduce complexity by reducing the number of our platforms by more than 50% over time following the CI 1900 platform launch. Our portfolio complexity has been a particular burden in the current challenging environment and supply chain environment. Especially with regards to this, CI 1900 is a very important piece of the puzzle. We will streamline our supply chain and service setup and run a leaner and more clinically focused R&D operation. Overall, we will create a much leaner organization and footprint with a significant reduction in internal complexity in the coming years.

The combination of these measures will allow us to achieve cost savings of around EUR 300 million by '25 and achieve our updated '25 targets for Diagnostics. We expect total onetime costs in the years '23 to '25 of EUR 350 million to EUR 450 million. We are aiming for revenue growth of 3% to 5% per annum until '25 and a margin range of 8% to 12% in '25. By the way, '25 consensus is very close to the midpoint of our target range. While this is below our previous financial ambition, it reflects a substantially changing environment. Our ambition is to take decisive action to overcome these headwinds and bring Diagnostics to a new financial level. We continue to view our original New Ambition goals as achievable; however, not in the previously foreseen time frame, i.e., not by '25.

Let me now move on to Varian, where we have an exciting, new product to report. In fiscal year '22, Varian continued to gain market share from an already globally leading market position and further expanded its strong order book with a book-to-bill ratio of more than 1.3. At the recent ASTRO, the most important congress for radiation oncology, customers could witness Varian's new breakthrough innovation, HyperSight; and I have to say I'm really excited about this.

HyperSight offers substantially improved image quality at an increased speed. This new cone beam CT imaging technology can achieve diagnostic imaging quality in just 6 seconds, a true breakthrough in speed and resolution. HyperSight allows for substantially improved treatment planning capability right in the treatment room. HyperSight will be an exciting option for new Halcyon and Ethos systems, is available as an upgrade for existing Halcyon and Ethos systems and will also be available for TrueBeams in the future. HyperSight is a proof point of our broad offering of comprehensive cancer care solutions that is unmatched in the industry and a showcase of imaging and therapy coming together.

We are well on track to achieve our synergy targets. Throughout '22, we have -- we were successful in leveraging Varian's offerings and cross-selling opportunities whether as part of value partnerships or in the more transactional business. As I said earlier, we will keep making adjustments where our setup as a company or in the businesses is no longer right. As an example for this, Varian made the decision to transition Varian proton solutions to a service-focused business model as of October '22. In this new business phase, we will complete production and installation for existing orders. We will service these customers as well as our existing systems until they reach the end of their operational life. However, we will not be actively marketing or pursuing new sales of proton systems anymore.

Over the past 15 years, Varian installed or has in its backlog more than 30 proton solution sites supporting over 90 treatment rooms, with a capacity to treat tens of thousands of patients annually. By focusing on existing proton customers, Varian will be able to reallocate resources to make key investments across other areas of our business. That includes expanding our radiation and interventional oncology therapies, advancing an evidence-based medicine and building out our technology-enabled services.

Finally, in order to bring all cancer therapy solutions under one roof, we have transformed our cancer therapy business unit from Imaging to Varian as of [ October '22 ].

Let me close this part on Varian as follows. HyperSight is only the beginning. And more commercial successes and breakthrough innovations will be revealed at Varian in the time to come, so stay tuned, but Varian is not only one -- is not the only one performing strongly. Imaging and Advanced Therapies also continue to take share and deliver breakthrough innovations.

The successful growth of Imaging and Advanced Therapies is built upon the very attractive fundamentals of our industry-leading businesses. Imaging and Advanced Therapies spent more than EUR 1.1 billion on R&D in fiscal year '22. This budget drives our constant pipeline of new innovative products. For example, over the last year, we launched major product innovations like the Naeotom Alpha, the breakthrough platform for CT photon counting; and the MR family MAGNETOM Free. And we completed the ARTIS icono family by releasing the ARTIS icono biplane for cardiology and the ARTIS icono ceiling. Based on this innovation power, our world-class global service organization and our intimate understanding of customer needs, we have consistently outperformed our addressable markets for more than a decade.

This is demonstrated by unprecedented equipment order growth in the past fiscal year, leading the way to further increases in our installed base. On the back of this larger installed base, our service business is expected to grow sustainably with more than 6% per year going forward. Our track record of strong performance, innovation leadership and reaping of the benefits of our unmatched scale will continue. We will build strength on strength and continue to widen the gap with our competitors in performance and in scale.

Speaking of innovations and keeping the competitive edge, let me also briefly comment on Corindus. We believe that robotics will play an important role in endovascular therapies in the future. However, we have always been candid that, when it comes to the introduction of robotic-assisted endovascular interventions, we are in a situation of making a market. Establishing this market is taking longer and is more challenging than expected, compounded by the pandemic, with limited access to customers and hospitals. Hence, the adoption in cardiology, which is the focus of our current FDA-approved robot, has lagged our initial expectations. When we acquired Corindus, the key rationale for our investment was the unmet need in neuro and stroke therapy, and we continue to further develop a robotic platform for this application. Currently we are assessing options that will ensure the right focus for Corindus and a sustainable business development path within Siemens Healthineers. We will keep you updated on our findings and conclusions.

And with this -- and this brings me to my next slide, which is a repetition simply because it is and stays true: why Siemens Healthineers is a unique investment case. We operate in structurally growing end markets that benefit from several secular growth trends. With our leading portfolio and consistent rollout of innovative solutions, we are convinced we will continue our path of outperforming our markets. Our products and solutions enable and further next-level medicine. We are advancing ways of treating the most threatening diseases in cardio, cancer and neuro. In addition, our Imaging and Diagnostics guidance and monitoring capabilities will continue to benefit from innovations in the field of pharma and medical devices. One could say the world innovates for us, whether it's in the expanding field of novel drugs, their frequent diagnosis is of the essence or in the field of innovations in interventional image-guided therapies.

In challenging times like this that our customers face staff shortages and inflationary cost trends, our technologies are key to help improve productivity. This may be with our AI and tech-enabled services or with our new generation of equipment that are faster and more automated than ever. Furthermore, we generate growth by consistently expanding our markets with new solutions. We have also shown in the past years that we are willing to take actions on the M&A side if we see strategic fits, and we will continue to do so in the future. These drivers guarantee strong, consistent growth. This growth and additional revenue come with a high level of resilience. About 55% of our revenues are recurring. Adding to this, value partnerships are a very fast-growing part of our business and make us even more resilient as they guarantee a reliable recurring flow of revenues for years to come. The recently announced agreement with the University of Miami Health System proves that these kind of partnerships will continue to be an important source of growth.

Our geographical diversification has proven to be an important resilience factor over the years. The strong and resilient growth prospects we have are also paired with market-leading profitability levels. We have sector-leading margins in Imaging and at Varian, with further room for expansion; at the same time, with a clear road map to generate significant margin accretion at Diagnostics and Advanced Therapies in the medium term. All of this combined make Siemens Healthineers a unique investment case.

And with this, I hand it over to you, Jochen.

[Jochen Schmitz, executive]

Thank you, Bernd. And good morning to everyone also, from me.

I would like to start by shedding some light on our Q4 results. We topped off the successful fiscal year with renewed, excellent equipment order growth of around 10% in Q4. Please note that this is on top of a similar growth rate in the prior year quarter. This marks the eighth consecutive quarter with impressive equipment order growth, showing our very strong performance in growing markets. These impressive equipment orders led to an excellent book-to-bill of 1.21. It was spearheaded by Varian with the largest equipment order intake in a quarter since the closing of the acquisition and supported by excellent book-to-bill ratios in Imaging as well as Advanced Therapies.

Turning to revenues. We are very happy with the continued momentum of strong equipment and service revenue growth, especially as this was against a tough comparable, 14% revenue growth in the prior year quarter. For the group, antigen did not have a major impact year-over-year. Growth ex antigen was 5.3%, but it had an impact on a regional level, so let me give you some color on the regions ex antigen. In Europe and Asia, we saw very strong comparable growth ex antigen, 9% and 11%, respectively. Growth ex antigen in the Americas was flattish on very tough comps. Bear in mind that, in the second half of last year, we saw a significant pent-up demand in the United States.

The adjusted EBIT margin for the group came in at 16.8% in Q4, above prior year quarter, mainly driven by conversion from strong revenue. This overcompensated for increased procurement and logistic costs. In central items, we saw a year-over-year tailwind from a special recognition bonus provision in the prior year quarter.

Our adjusted earnings per share in Q4 increased by 22% year-over-year to EUR 0.65 on the back of the very strong operational performance.

Now let us have a look at the other line items. Financial income net was minus EUR 21 million. The Q4 tax rate came in at 26%, above the prior year quarter which was lower due to discrete tax items at the end of the last fiscal year. Free cash flow increased 19% year-over-year to EUR 454 million despite the strong Q4 revenue leading to an increase in receivables obviously at the year-end. In Imaging and Varian, we saw an overall very good cash conversion in Q4. In Diagnostics, cash was held back due to the lumpy antigen business impacting receivables at year-end. Excluding this year-end cash impact from antigen, the cash conversion rate for the group would have been at a very good 0.9 in Q4.

As always, you find the EBIT-to-cash bridge in the appendix of this presentation. And now let's have a look at the segment performance in detail. In the fourth quarter, we saw very strong growth in all 4 businesses despite tough comps in the prior year quarter.

Imaging showed excellent revenue growth on tough comps, driven by very strong growth in magnetic resonance and computed tomography. The adjusted EBIT margin in Imaging was above the prior year level and was the highest of this fiscal year in absolute and relative terms, driven by a strong conversion. This more than compensated for the higher procurement and logistic costs year-over-year and lower incentive provisions than the prior year had as well. Overall it was a very successful year for Imaging considering the circumstances, which ended fiscal year '22 with 5.8% growth and a 20.5% adjusted EBIT margin which is within our latest guidance range.

Diagnostic posted 6% growth driven by rapid antigen of EUR 232 million. Excluding the antigen contribution, core business revenues declined by 1.7 -- by 1%, sorry, impacted by lower PCR test volumes, whereas the routine care business grew slightly, also due to the easing of the COVID restrictions in China. The margin in diagnostic was up year-over-year on the contributions from the antigen business. In the operational business, core Diagnostics faced clear headwinds from procurement and logistic costs, as logistics are a particular complex topic for Diagnostics. We also saw headwinds from foreign exchange. All in all, these headwinds depressed the margins by more than 300 basis points year-over-year.

Turning now to Varian and Advanced Therapies on the next slide. Varian contributed EUR 820 million to revenue in Q4, which corresponds to a 5.2% revenue growth on a comparable basis on the back of an excellent order book, reflecting continued strong momentum in the business. Although we aim to book even more revenue in Q4, we were held back by supply chain challenges, with one topic in particular causing meaningful delays in production. We are already close to resolving this particular supply chain topic, and we expect the delayed production to catch up within the first half of fiscal year '23. When looking at margin performance, please bear in mind that the previous year's quarterly margins of 17.3% benefited from the onetime effects of a reduced risk provision. Excluding these positive onetime effects, which we disclosed last year, the margin in the previous year Q4 was 15.7%. The Q4 adjusted EBIT margin came in at 10.2%, burdened by the delays in the supply chain, as mentioned before, and cost increases in procurement and logistics. We also saw negative effects from foreign exchange, with the prior year mentioned effects adding up to more than 500 basis points headwind year-over-year in total.

Advanced Therapies continued its healthy momentum with 6.2% comparable revenue growth on the back of our strong order book. The margins in Advanced Therapies was down from Q4 '21 to 15.3% due to headwinds from increased procurement and logistics of more than 100 basis points. However, with the strong revenue growth in Q4, the margin recovered substantially versus Q3. Investments into the Corindus business continued to weigh on margins in Q4.

Now let us have a closer look at the current fiscal year, '23.

Before going into details of the outlook, I would like to pick up the topic of pricing measures we have been discussing in recent year -- quarters. We have started to see the pricing measures take effect successfully to safeguard margins while maintaining the strengths of our business. In the second half of fiscal year '22, we saw the traditional price erosion of equipment orders turning into price increases as planned. We expect this momentum to continue, as orders with new pricing are steadily gaining share of the sizable backlog. As explained in the last call, there's a time lag of around 3 to 18 months on average, varying from product to product, between order entry and revenue. We expect to see sequential margin improvements throughout the year. The improvement should accelerate notably in the second half due to the phasing of cost increases and pricing measures, as shown in the schematic graph below.

Now let us have a look at the outlook. After the successful first year of our New Ambition strategy phase, we will continue this momentum, further growing revenue and adjusted basic earnings per share on a comparable basis. Before we dive into the details of the outlook, let me highlight 3 topics. Firstly, we continue to be super transparent on the antigen contribution. At EUR 100 million, we assume no material contribution from the antigen business in 2023.

Secondly, as Bernd highlighted, we are undertaking comprehensive measures in Diagnostics to compensate for the macroeconomic headwinds, to achieve cost savings of around EUR 300 million by 2025. Related to these measures, we expect between EUR 150 million and EUR 200 million onetime costs in fiscal year 2023. Of these, we expect around EUR 50 million to be adjusted according to our adjusted EBIT and adjusted EPS definition. We expect the remaining EUR 100 million to EUR 150 million not to fall under our adjustment definition, which means they will affect adjusted EBIT and adjusted EPS in 2023. Let me repeat: These are simple onetime costs related, for example, to product portfolio simplification or leaner footprint. In the coming quarters, we will be obviously very transparent on the core diagnostic performance, which will exclude antigen and the transformation-related onetime costs. Thirdly, with the new fiscal year, we will implement 2 organizational changes related to the Varian segment. First, we moved the cancer therapy business unit from Imaging to Varian to further leverage synergies. And second, we moved the proton solutions from Varian to central items because this is what we normally do with businesses that move into a service mode only. In the appendix, you will find restated fiscal year '22 figures comparable to the new organizational setup in 2023.

Now finally to the outlook for the group in fiscal year 2023. We expect comparable revenue growth in fiscal year to be between minus 1% and plus 1%. This translates into 6% to 8% comparable growth excluding antigen. Bear in mind that fiscal year 2022 had a material antigen contribution of around EUR 1.5 billion. This 6% to 8% is exactly our mid-term target for the group, showing that we are on track with our New Ambition program. We expect adjusted basic earnings per share to be between EUR 2 and EUR 2.20. This translates into a 13% to 24% adjusted EPS growth excluding antigen, which covers our mid-term target of 12% to 15% obviously very well. This outlook shows that we are on track with our New Ambition program, with revenue growth being in-line and adjusted EPS growth above our mid-term targets.

Let me draw your attention now to the guidance ranges for the segments on the lower half of the chart. Let me highlight the following here. The expected comparable revenue growth in 2023 for Imaging, Varian and Advanced Therapies are all at least in line with or even above our mid-term guidance based on a very healthy service growth and the strong order backlog. The expected adjusted EBIT margins in 2023 for Varian and Advanced Therapies are also in line with the planned trajectory towards our mid-term guidance for 2025. For Imaging, the margin expansion of up to 210 basis points is clearly above the mid-term target of 20 to 80 basis points per annum, driven by a healthy conversion from the 7% to 9% revenue growth target, tailwind from our pricing measures and from foreign exchange. At Diagnostics, we are taking decisive action, as discussed, to bring diagnostic towards a new financial level, which is reflected in the updated targets from today.

Below the line, we expect a negative financial income net between minus EUR 150 million and minus EUR 170 million. Although the majority of our interest rates are fixed, we do have a few loans with a variable interest rate. We also had to refinance 2 loans at the end of the fiscal year, so we do see increasing interest rates negatively affecting our financial income. On tax, we guide now for a rate of 26% to 28%, lower than our previous guidance, reflecting our current setup with certain improvements of our global tax profile. In terms of market expectations, we would see the negative impact from increased interest rates and the positive impact of the lower tax rate almost balancing one another out.

Let me give you some more technical remarks, especially for our modeling. Central items now include the proton solutions unit from Varian. Therefore, it's best to assume minus EUR 200 million to minus EUR 220 million adjusted EBIT. And on the PPE -- PPA effects, best to assume between EUR 450 million and EUR 500 million in 2023. On translation, best to assume between 1 and 2 percentage points of foreign exchange tailwinds on absolute revenue. I hope this helps you to get a good understanding of the most important elements in our outlook for 2023.

Let me also share our current thoughts on the running quarter. On comparable revenue growth, we expect a slight negative development year-over-year for the -- due to the higher antigen contribution in Q1 prior year but solid growth, excluding antigen, slightly below our [ growth ] range for 2023. Varian revenue growth and margins in Q1 will probably be below its guidance range due to the supply chain challenges still holding revenue growth back in Q1. In Diagnostics, you need to keep in mind that we expect to see a material part of the EUR 100 million to EUR 150 million onetime costs potentially already impacting profitability in the first half of this fiscal year. Generally on margins, please bear in mind that we expect margins to be skewed towards the second half due to the phasing of the pricing measures.

And with this, I would like to close my presentation and hand back to Marc for Q&A.

[Marc Koebernick, executive]

Thanks, Jochen.

And I first give back to the operator for the instructions.

[Operator]

[Operator Instructions]

[Marc Koebernick, executive]

Perfect, so we kick it off. First questions will be coming from Hassan from Barclays.

[Hassan Al-Wakeel, analyst]

I have 2, please. Firstly, Bernd, when we spoke in the summer, you expressed some questions coming from customers on new hospital growth projects whilst you continue -- you saw continued strength in the recurring CapEx. How is this picture trending today? And I know the order growth dynamics in the quarter look strong, but they are a little sequentially weaker versus the last quarter, so should we read anything into that at all? And then secondly, could you talk through some of the detail behind the transformation initiatives that you're taking in Diagnostics, why these aren't being adjusted out of adjusted earnings? And if you could elaborate on the weaker core margin for 2023 and how you really think about the bridge out to the new targets that you've set out for 2025 in Diagnostics margins.

[Bernhard Montag, executive]

Yes. Thank you, Hassan. Overall when it comes to market environment -- I mean both on a global level, but also, I mean, part of your question, I think, is probably a little bit tilted to the U.S. We see very healthy demand. And there is no -- I wouldn't read any topic here into the pattern. I mean book-to-bill ratios are extremely high and positive on back of strong revenue, yes. And I'm very confident. And I think the amazing order backlog, which we could further increase in Q4, gives proof to this. I mean, some comments on Diagnostics before Jochen maybe can comment on the details about adjusting and not, yes: I mean, just to be clear, what is the situation? Yes. We have -- we are now at the point where we've always wanted to be, yes, with the Atellica portfolio being completed, yes, with the Atellica Solution in the level of cost and stability where we always wanted it, with a lot of positive customer feedback in the high-throughput labs and now with Atellica CI 1900 kicking in for the low- and mid-sized customers. That also means, yes, that the complexity of the portfolio is now the highest, yes, because the old product -- the older platforms are still there. The new products are -- they are in addition. And this is a little bit the challenge which we have, given the new situation, when it comes to how difficult it is to manage supply chains and also looking at the cost positions. And this is why we are now accelerating what normally would have happened evolutionary, yes. We are accelerating the transition to the very streamlined, super modern portfolio; and this acceleration is basically what we are talking about. I hope that this is clear. I mean, when it comes to the operational improvements ex special costs coming from the increased costs in the supply chain, I'm very happy with the progress the team has achieved, yes, so we also -- I also really want to mention this here, yes. So I hand over to Jochen.

[Jochen Schmitz, executive]

Yes. Thanks, Bernd. And I mean, Hassan, thanks for the question. And before we get too excited about what we adjust and not adjust, I will say the following. We will be, as I said, very clear and transparent of what we consider, so to say, onetime in nature and not onetime in nature, but we have for diagnostic in the coming quarters so that you have a clear picture on the underlying core operational performance for Diagnostics, yes. I mean we have a definition of what we adjust, and consistency is a -- has a high value, yes. As you know, we adjust M&A-related costs. We adjust PPA and we adjust severance, yes. And these other things, we will also adjust formally, but as I said, we will give you transparency on everything else which we consider as onetime in nature for Diagnostics, yes. By the way, we also obviously will include into this the antigen contribution. So that is very, very clear what we expect from Diagnostics or what we also see from Diagnostics. And that's also how we structured the outlook or the guidance for Diagnostics for fiscal year 2023, and that's why you have 2 sets of numbers [ just to say this ], yes.

[Hassan Al-Wakeel, analyst]

And the bridge out to '25 from this year's margin...

[Jochen Schmitz, executive]

when -- as we said, we look for cost savings of EUR 300 million, yes. You could easily translate EUR 300 million into a 5 to 6, 7 percentage point improvement in margin, depending on the growth profile and the top line, yes. This is one of the main drivers. Then we expect to see solid growth between 3% and 5% on average, yes; and I would say, further, so to say, running improvements from the measures we have already taken in the past, yes. And these are the main drivers behind the margin expansion trajectory by 2025 from today's level to the 8% to 12% we targeted for in 2025.

[Marc Koebernick, executive]

So next person online would then be David Adlington.

[David Adlington, analyst]

A couple on Varian, please. So firstly, on the supply chain issues, I just wondered what particular component was a barrier to your delivery in the fourth quarter. And I think you mentioned that you expect that to be still a headwind for the first quarter but then perhaps working through that for the rest of the year. And then just on the decision around proton and to shift it into a kind of no further expansion; and running -- and basically running the business, the installed base. I just wondered if there's any option to maybe offloading that business to a third party [ so you don't carry the ] costs going forward.

[Bernhard Montag, executive]

I mean, David, when it comes to the supply chain topic in Varian, this is -- it's is a very isolated topic. And as Jochen said, I mean, we are in a -- the team is really getting very well -- getting their arms around it together with the supplier here. And I mean we will see an impact still in Q1, but rest assured. I mean we give a guidance of 9% to 12% growth for Varian for the full fiscal year. We are confident, very, very confident, that this is -- but this is of very, very temporary nature. And I think the main headline around Varian is really, I mean, the momentum of the business, yes; the -- with HyperSight, the customer perception. Also the -- I mean I was personally at ASTRO. Seeing how the combination of Siemens Healthineers and Varian resonates with customers is really, really a joy to see. And I'm a little bit sorry, yes, for the team, yes, that they didn't get -- that they had a little bit of that setback in revenue, but on the other hand, it is just a topic of a temporary delay and we will recover this one, yes. On the proton topic, I mean, we are -- we really want to support our existing customers. We will continue -- I mean they put a lot of trust in Varian and Siemens Healthineers, and these are key customers. We will also continue to drive the research around FLASH. And we also see the financial challenges as completely, let's say, manageable, yes, because, I mean, there is no new business we -- no new projects which could bring in certain uncertainties or so. And we feel very, very positive about the service business, which we will now show in central items, yes.

[David Adlington, analyst]

Maybe just one follow-up, in terms of the radiotherapy market. What -- are you seeing any different dynamics in the radiotherapy market versus imaging? And it does look like you're taking a reasonably significant amount of share. Is that fair?

[Bernhard Montag, executive]

Actually, I mean, both -- I think both markets are very, very healthy. I mean the need for better cancer care is a real secular growth driver. Plus, the additional opportunity of bringing imaging and radiation therapy more [indiscernible] almost a topic to -- which grows the market, in a way, yes, with solutions like HyperSight. We are clearly outperforming the market, yes. The team is doing an amazing job there, and -- but I'm also positive about the underlying demand.

[Marc Koebernick, executive]

Great. So that brings us to the next one in line. That will be James Vane-Tempest from Jefferies.

[James Vane-Tempest, analyst]

Yes. And firstly, just on Imaging, the 7% to 9%. Are you able to tell us how much of that is price? And also how you're seeing the environment, given inflationary and macro concerns are still challenging and also customer financing costs have gone up, to get to your 21% to 20.5% (sic) [ 21% to 22.5% ] margin target. And then again just to come back to Varian, I guess, or the Q4 margin of 10%: The guidance doesn't seem quite a big step-up to get to 16% to 18%, so how confident are you the supply chain logistics will ease? And what other parameters is this based on given you've already said that Q1 is below the range? And should we interpret that as more of a 2Q, 3Q level, last year, of around 13.5% [ or so ], so far?

[Jochen Schmitz, executive]

Yes. Thanks, James. I mean, when you look at the growth profile we see for Imaging with 7% to 9%, yes, there is a certain portion coming from price, yes, but I would say, as you know, we come out of a price erosion environment, yes. We -- as I highlighted, we see now this price erosion environment turning into a slight price accretion environment on the equipment side and over time also on the service side. Therefore, I would not expect to see significant -- so to say, significant tailwind from pricing in the growth rate, in particular not in the current fiscal year yet, yes. The 7% to 9% growth level is a bit driven by pricing, yes. You remember our mid-term guidance is 5% to 8%, but it's based -- the confidence is based on the strong order book we have, yes. When you look at the order momentum, we saw very, very strong, yes; and we are very, very confident about this. By the way, we also see super good momentum on the service growth side, yes. So here we expect to see us almost in that range on the service side, yes, which gives a lot of stability into that growth profile.

And then coming back to the margin expansion topic. I mean it's based on the back of conversion from the high growth [ we expect on ] better pricing finding its way, in particular in the second half, into the numbers. And then thirdly, it's also supported by foreign exchange. That's why we are very, very confident about the Imaging guidance. On the Varian side, I think it's -- I mean our guidance for this fiscal year on the margin side is 16% to 18% on a 9% to 12% growth profile, yes, so significant conversion. That is more -- also more growth than we have seen due to supply chain issues in fiscal year '22, just to say that. And when you look at the comparable margins of fiscal year 2022, we were close to 16%, so we start off, you could also even argue, on a -- I would say, on a conservative note with 16%, yes, going to 18%. Obviously we expect 17% or maybe 17%-plus, yes, [ if I'm ] the CFO, yes, but 17% is the midpoint, yes. And that's -- and I feel very good about this, yes.

[Marc Koebernick, executive]

So we head on to Graham from UBS.

[Graham Doyle, analyst]

Actually just one for me, which is obviously you spent a lot of time in the presentation talking about price and how that's going to influence margin next year, but I'm just wondering from a cost perspective. So if we think about chips, components and freight, it feels like that could be a tailwind depending on when you forward purchase, but one, is it a tailwind? And two, is that in your guidance?

[Jochen Schmitz, executive]

Yes, thanks, Graham. I think our assumption for fiscal year 2023 is still that we see that we are not in an environment where we see, as in the past normally, declining prices from our suppliers. We still believe that we will see certain price increases on average across every material we buy, yes. Therefore, we have not baked in significant easing on the costs side with regard to material. And we also have to have in mind that we also see higher merit increases in [ 2023 ] relative to what we have seen [ in normal setting. We ], I said that also in the past. Normally we plan with merit increases on a global level of 3%. This year, we plan more of -- on average, of a 5%-plus. And that is definitely weighing on the margins from a costs side standpoint, but as we said, due to the pricing measures we took, due to the success we see of it in the order intake, we expect to see, and particularly in the second half, a strong year-over-year performance on margins, yes.

[Marc Koebernick, executive]

So next one on line will be Julien from Exane.

[Julien Dormois, analyst]

The first one. Sorry if I missed that, but you -- could you just provide us with the growth in the equipment order book; and maybe help us reconcile what that means region by region, if there was any particular strength or weakness in the various regions? And just as a follow-up on the pricing questions and the measures you have taken last year: Should we expect a new meaningful round to be taken this year, which will translate into another round of margin upside into 2024?

[Jochen Schmitz, executive]

Julien, on the order book, I think in general the order book is increasing across the globe. I mean we -- as you know, we had a bit weaker quarters in Q2, Q3 on China. On the other hand, we had also weaker quarters on the revenue line in China in the same time frame, yes. Therefore, even in China, we saw an increasing order book. We are very happy with the order book in the United States, yes; and also in Europe, yes, with very, very strong growth. So it's actually a topic across the board; and also across the equipment order-driven businesses Imaging, Varian and Advanced Therapies, yes. On the pricing side, I mean, this is when we use the term market-adaptive pricing mechanism, whatever that exactly means. That means that we walk a fine line, yes, because obviously we want to get the better pricing through. On the other hand, we also want to keep our growth and market share momentum intact, yes. Therefore, this is an adaptive approach. It's not a one size fits all for all kinds of businesses or products in all kinds of markets. So it's very adaptive to where and what we do, yes. And we will adjust our procedures accordingly, so -- and maybe one last sentence: And it's maybe a bit too early to say what that exactly means with regard to margin accretion in [ 2024 now ].

[Bernhard Montag, executive]

And maybe, I mean, one comment, I mean, since you -- Julien, [ I think ] you mentioned price round or so, yes. I mean there is not a single event, yes. I mean -- as an historical analogy: I mean we had -- traditionally we have been -- seen price erosion, yes, because of innovation [ eating ], so to say, making the -- because of the obsolescence, so to say, driven by our own innovations, but we also didn't have price decrease rounds, yes. So it is about setting targets what price levels to achieve in the individual negotiations with the customer in a competitive situation, yes. So there is not the singular moment of a price lift or so. It is about adjusting price levels in the individual situation and using the pricing power we have. And as Jochen said, I mean, we like what we see, yes. And we see it nicely coming in, in orders. We see it slowly growing into the revenue line. And that is also why we are very confident about the margin targets and the uptick in margins which we communicate with our guidance for this fiscal year.

[Julien Dormois, analyst]

Okay, that's very clear. Just a quick follow-up. Would you mind providing the number for growth in equipment order book in Q4 if you have it...

[Jochen Schmitz, executive]

I think it -- I mean, when you look at it, I think it -- yes, yes, yes. I think it's -- I mean I said 10% growth on equipment orders. It was slightly lower on the revenue line, yes, on average, on the revenue line. And therefore -- now I need to have the base effect. I know that the order book in the full fiscal year grew by about 15% or so, yes. That's what I know out of my head. I don't know it for Q4, but it was another strong addition to the order book, yes.

[Marc Koebernick, executive]

So next one on -- in the queue is Veronika Dubajova from Citi now.

[Veronika Dubajova, analyst]

I have 2, please. One -- and I apologize. This might be slightly controversial but just wondering, given the challenges in the Diagnostics business, whether there has been any discussion on the senior level of management as to whether this remains a strategic part of the business. And I appreciate your thoughts on that and whether it makes sense for Diagnostics to remain part of the company. And then my second question is just trying to bridge the mid-term guidance for Varian given that you've now removed proton and moved it to the central items. Jochen, if you can give us now your mid-term expectations for where Varian margins should be, given that, that would be really helpful. Apologies if I've missed that, by the way, but I didn't catch that during the presentation.

[Bernhard Montag, executive]

Yes. Thank you, Veronika. I mean, on the Diagnostics side, first of all, I mean, what I really want to stress is that, when it comes to what the team has achieved with Atellica, with the Atellica family now, which is addressing exactly what the diagnostics market needs, yes, in an environment where staff shortage is a topic, yes, where it's really about bringing in efficient systems, I like very much the position which we are building, yes. And it is an attractive business and it's an attractive market. And it's now about quickly, let's say, getting rid, so to say, of the cost base of, let's say, old razor-razorblade businesses which we still need to support, yes. So this is where we are. So this is -- and it is a bit of an unfortunate topic; and also not so great for the team here, that the raising cost and supply chain challenges are weighing on the margins, especially when it comes to the legacy business, yes. So this is why this is an attractive business and an attractive market.

Is Diagnostics? Yes. I mean you look at the portfolio of our portfolio. There are certainly portfolio elements which are more synergistic to each other than others, yes. Diagnostics is more a business in itself which does not as much benefit from being together with Imaging as it -- for example, Varian does or as Advanced Therapies does. And it's not as significantly a part of value partnerships and so on and so on. So look at it more as a business in itself. The success of Diagnostics doesn't depend too much on being together with the other 3 segments. And the success of the other 3 segments doesn't depend too much on Diagnostics, but it is an attractive business in itself.

[Jochen Schmitz, executive]

Veronika, on the mid-term guidance or 2025 guidance on the margins in Varian. I mean we use the term "well above 20%." That stays well above 20%, yes. The question is what does well above mean. On the -- and just to clarify: On the proton therapies, we have very clear plan to reduce the weighing of the margins on -- of proton on Varian over time. The expectation currently is, for example, for this fiscal year, that it is 1.5 to 2 percentage points which might weigh -- would have weighed, so to say, on them. And this was a, so to say, reduced profile over time, yes. That's what you could in theory add to the expectations we initially had, but well above 20% stays as well above 20%.

[Veronika Dubajova, analyst]

Very clear. I was hoping you could be more precise, but understood.

[Marc Koebernick, executive]

Okay, so we head on to Odysseas from Berenberg.

[Odysseas Manesiotis, analyst]

I have 2 please. Firstly, on your low- to mid-throughput Atellica instrument, I understand you're primarily looking to replace your legacy installed base here, but could you give us some thoughts on gaining market share within the low-, mid-throughput lab space? And what sort of competition are you going against? And the second one, on Varian, also on the new upcoming launch, HyperSight: Adding to this your very strong order book [ as well as Q4 ] helped by the supply chain issue-related installation delays rolling into next year, would it not make more sense to forecast towards the upper end of your 9% to 12% guidance next year? Or do you expect some of the supply chain issues to persist early on in the next few quarters?

[Marc Koebernick, executive]

[indiscernible] repeat the first question that -- would it be possible...

[Bernhard Montag, executive]

We had some acoustic problems to understand you, yes, so...

[Odysseas Manesiotis, analyst]

Yes, of course. So I was asking on your low- to mid-throughput Atellica instrument launch. I understand you're primarily looking to replace your legacy instrument installed base here, but could you give us some thoughts on gaining market share within the low- to mid-throughput lab space? What sort of competition are you going against?

[Jochen Schmitz, executive]

I mean what you see -- I mean we are just starting with the controlled rollout of CI 1900, which is our low- and mid-volume analyzer based on the Atellica, so to say, technology platform in Europe. We are going to launch this in -- towards the second half of this fiscal year, yes. And it's definitely a very attractive technology. It improves significantly, I would say, our relative position, yes, because it's an analyzer, well, obviously, which I said is based on the same technology platform as the larger-, the high-volume throughput analyzer, the larger Atellica. This gives us a lot of momentum in -- not only in the mid- and low-volume labs but also in hub-and-spoke settings, yes. Therefore, we have high hopes and high expectations to gain share in this segment with this new technology, yes. The other major topic is -- behind this is, with CI 1900 now being available for us, we have now the opportunity to consolidate our IA and clinical chemistry franchise to Atellica, yes. And that is what Bernd was talking about beforehand, yes. We are now in that position. And that will give us a lot of also operational tailwind, yes, from being able to focus on the R&D side, on the supply chain side, on the service side, on the go-to-market side and things like this, yes. And this is, I would say, the main driver behind also the transformation program, which we now can accelerate significantly, yes. So just to say this, yes.

On the Varian HyperSight. I mean I'm not sure that I understood or heard your question fully. I think the HyperSight topic was just, so to say, launched at the ASTRO, yes, so it had no impact on the order book in fiscal year 2022. And I think you also asked, is our 9% to 12% revenue growth a bit conservative considering the strong order book? I mean I think 9% to 12%, for me, sounds not too conservative. I think it's exactly in the -- based on the mid-term targets, yes. And as I said, we still have, I would say, a certain impact from the supply chain topics which came up in Q4 in our Q1, yes. We try to -- or we will resolve that in the first half, yes. And therefore, I feel now very, very good about the 9% to 12%. If this is conservative and will show being conservative, we will update you accordingly, yes, but for now we'll take 9% to 12%.

[Marc Koebernick, executive]

Let's head on to Robert from Morgan Stanley.

[Robert Davies, analyst]

The first one was just around some of the supply chain issues. You obviously flagged some of the headwinds in Varian. I just was curious. Across the Imaging business -- I mean, again, you've got large pieces of equipment that you're sending around the world. Have you had any sort of significant challenges on the Imaging side? I guess I'm trying to get to the bottom of how different is the supply chain structure in the Varian business to that in Imaging? Was my first question. And then just sort of following up on some of the points you made earlier about the combined offering across radiation therapy and imaging: From a customer standpoint, obviously there was a time when those weren't as integrated or didn't [ combined offering ]. What's the sort of key difference or the element that sort of gives you a strong competitive advantage there that you sort of didn't have before? Why is that going to force customers to come to you if they've previously operated in an environment where that was something that didn't exist?

[Bernhard Montag, executive]

So on the supply chain side. I mean in Imaging, when I'm -- so the team would hate me if I say we don't have challenges, yes, in the supply chain because we are working very, very hard, yes, to make this all possible. I think what is the -- what is, let's say, historically a little bit of the difference is, I mean, Imaging has an enormous scale, yes. And we have set up the business in a way that many of the -- in many of the sites, R&D and production are co-located. We have our own technology centers. And as part of our, let's say, innovation basically with a focus on out-innovating both in performance and on the costs side, we always kept major core competencies in house. And this is something which is now helping us also, when it comes to -- when we -- when you, when we compare it to peers, in making us much more [ resilience ] in weathering the supply chain storms, yes. We can qualify new components much more easily. We don't have to -- we have in-house discussions instead of negotiations with suppliers and so on and so on. Varian historically doesn't -- simply doesn't have the same scale, yes; and benefits currently a bit from the scale and also the -- our negotiation power and so on when it comes to key suppliers, but when it comes to certain interruptions, we are not completely immune, yes. So -- and -- but I believe that this is something which also over time will make us even more resilient also on the Varian side, yes. But again, I mean, I wouldn't over -- let's say, over-interpret that topic, yes. I mean this is a small dip in growth rate, yes, which we -- you will see in -- over 2 quarters, yes. But again the -- I mean the demand is there, yes, and the systems are about to get delivered, yes. And we have a lot of [ linacs ], yes, which are waiting to get completed, yes, which is like a nice picture for the -- also for the 9% to 12% growth.

So then to your comment about what is it when it comes to imaging and radiation therapy. I mean just as an -- so I come back to the triangle I like to paint, yes, of patient twinning; digitally -- digital, AI; and therapy. This is what we now bring to cancer treatment. And what it means is -- I mean speaking about, for example, [ at ] ASTRO, the discussions Chris Toth and I had with customers, yes. It's like, okay, now for example, you have HyperSight, yes. That gives you CT imaging -- CT-like imaging in the treatment room. Now you can think about, hey, why don't I think about using MRI for treatment planning. And let's have a discussion about the dedicated MR for radiation therapy which Siemens Healthineers is building so that I also have biological information for treatment planning. And we had Dorin Comaniciu, the head of our AI program, in the discussions, yes, which is about, hey, how can we use AI to automate treatment planning and so on, yes. So we are -- for radiation oncologists and for oncologists in general, we can now really talk about optimizing the whole chain of treatment delivery, yes, planning, targeting treatment simulation, treatment delivery and also survivorship instead of just -- or let's say instead of looking at a much more narrow aspect only, yes. And that makes us an even more attractive partner for radiation oncologists. And it is very, very encouraging to see how customers react to this, yes.

[Robert Davies, analyst]

And then maybe just as one final follow-up, just some clarity around the cost reduction/savings line in Diagnostics. Apologies if I missed it, but did you give any sort of phasing of timing and benefits of that?

[Jochen Schmitz, executive]

I mean, as I said to -- I think we gave you, I would say, 3 sets of numbers, yes. We said, the onetime costs of the program, EUR 350 to EUR 450 million until -- for the whole time frame until 2025; EUR 100 million to EUR 150 million, so to say, unadjusted onetime costs for this fiscal year; and cumulative running savings until 2025 of EUR 300 million. I would -- and we also said that we expect to see also the onetime costs kicking in already in the first half to a certain extent or to a material extent. And I would expect to see the majority of the savings kicking in really from a -- beyond what we -- beyond levels what we have guided for, for this fiscal year in 2024 and 2025, yes.

[Marc Koebernick, executive]

So we have to wrap it up soon. I think -- still 3 people in the queue. [Operator Instructions] And we would go over to Falko next, from Deutsche Bank.

[Falko Friedrichs, analyst]

So my one question is on your mid-term guidance, which you confirmed despite the seemingly lower expectation for the Diagnostics business, in '25. So maybe you can talk a bit about which other businesses can potentially compensate for the shortfall in Diagnostics. And is it still the case that the full range of your 12% to 15% adjusted EPS growth guidance is doable?

[Jochen Schmitz, executive]

Falko, I think, when you look at it -- I mean look at the profile, for example, we guided for this fiscal year, yes. And you can see that we were up with regard to growth profile in 2 businesses, yes, Imaging and Advanced Therapies. I mean you look at the guidance we gave on the margin expansion for Imaging, yes, which is clearly ahead of the 20 to 80 bps, yes. And there is also some -- always some wiggle room in between, yes, because there are things that are changing. So we feel very, very confident about the 6% to 8% and the 12% to 15% in the full range, yes. Just to say this, yes, and maybe just give you an example of what is covering up for a slightly lower margin profile in Diagnostics, yes.

[Marc Koebernick, executive]

We head over to Sezgi from HSBC.

[Sezgi Oezener, analyst]

One question. I just wanted to ask about the order book. You mentioned on Varian side's that HyperSight wasn't on the order books yet, but I was more wondering about Imaging side. Are the -- has the weight of MR and Naeotom increased within the order book? Or is the price differential still a factor limiting growth? And how do you compare the order book growth within these products versus the rest of the older portfolio?

[Jochen Schmitz, executive]

Sezgi, I think the -- I mean we had very strong momentum on the MRI side or also on the revenue side but also on the order side over the last quarter, so I think we feel very good. We also see good momentum on molecular imaging, on CT, on X-ray, yes. So it's actually relatively broad-based, yes. So we do not see major shifts with regard to the portion or relations we have in our revenue line in Imaging relative to how the order book looks like, yes. So it's very relatively stable with regard to the relations of the different businesses and their respective [ size ], so the order book does not vary significantly from the revenue share, yes.

[Marc Koebernick, executive]

So that brings us to the last one in the queue. Sorry, Ed, for you being last but at least -- not least. Ed, please ask your question, from Redburn.

[Edward Ridley-Day, analyst]

Yes. I had a -- also a follow-up on order book development. Thanks for the color that you have given, but could you talk a little bit about how you see the order book developing in Imaging through this fiscal year, particularly with what we're hearing from some of the hospitals, particularly in the U.S., and the pressure on their budgets; some of -- some health care equipment companies talking about some pressure in the funnel? If you could give some color on how you expect the order book to develop, I think that would be very helpful; and also within that, how you see it developing in China over the next 6, 9 months.

[Bernhard Montag, executive]

Yes, Ed. Thanks for the question. I, we are very confident. And we see very, very solid and robust demand. And this is first -- this is a global message, yes. I mean looking at -- from China to Europe, to -- but also including the United States. We are part of the solution, meaning we are part of making health care more efficient, helping to overcome staff shortage topics with the productivity our systems bring in. The -- it's about dealing with a lot of demand on the patient side. There is enormous procedure growth globally but especially also in the United States. And the -- so from that point of view, I'm also very confident on the order side, yes. And when you look at Q4 order intake, it's -- I think it is a very, very nice proof point, yes, that -- another proof point, yes; or the eighth proof point in a row, yes, when it comes book-to-bill, yes, that the demand is there. And the concerns, yes, which you addressed, yes, were -- are, so to say, not new, yes. And please take it like this, yes.

[Marc Koebernick, executive]

So that brings us to the end of our call today. Thanks for the good questions. And we look forward to seeing you on the road, in many meetings and conferences in the next few months; also in Chicago, at the RSNA, where we have several meetings where you could take part. And beyond that, I wish you stay safe and healthy.

Goodbye.

[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.