Siemens Healthineers AG

XETRA:SHL

Earnings Call Analysis

Siemens Healthineers Reports Strong Growth Amid Challenges

In Q4, Siemens Healthineers achieved impressive revenue growth of 7% year-over-year, with a notable 16% increase in adjusted EPS. Despite challenges in China, margins expanded nearly 100 basis points, driven primarily by Imaging and Advanced Therapies. Free cash flow more than doubled, signaling operational efficiency. Looking ahead, the company anticipates 5-6% revenue growth and adjusted EPS of EUR 2.35 to EUR 2.50 for fiscal 2025, while also addressing a soft Q1 expectation. Key innovations in imaging technologies suggest potential future gains despite ongoing market challenges.

Strong Finish to Fiscal Year 2024

Siemens Healthineers concluded fiscal year 2024 with impressive results, achieving a 7% growth in comparable revenue despite challenging year-over-year comparisons. The company saw growth across all regions, with the exception of China, which faced significant market headwinds. Adjusted earnings per share (EPS) surged by 16%, showcasing robust operational performance that led to a nearly 100 basis points margin expansion across the board.

Performance by Segments

In dissecting the performance by segments, Imaging led the charge with almost 8% growth, driven particularly by strong demand for Computed Tomography and Molecular Imaging. The adjusted EBIT margin for Imaging reached a remarkable 24.2%, reflecting an increase of 180 basis points from the previous year. Varian, a steadfast performer, reported over EUR 1.1 billion in revenue with a solid 17.1% margin—its highest for the year. Meanwhile, Advanced Therapies sustained positive momentum, recording a 7% revenue increase and a 250 basis points margin expansion. Diagnostics, although slower with a 1% growth (excluding antigen tests), managed to increase its margin from 2% to 5%.

Guidance for 2025

Looking forward, Siemens Healthineers provided a solid outlook for fiscal year 2025, anticipating 5% to 6% growth in comparable revenue and guiding adjusted EPS between EUR 2.35 and EUR 2.50 per share. This projection indicates that earnings growth is likely to keep pace with revenue growth, with potential for low double-digit increases on the upper end. The company expects margin improvement across all segments, capitalizing on operational efficiencies and transformation efforts.

China Market Challenges

While the overall global market presents opportunities, China poses a significant challenge. The company anticipates a mid-single to high-single-digit revenue decline in the first half of fiscal 2025, with expectations for a flattish performance in the latter half. The longer-than-expected headwinds from China have prompted a cautious outlook, though the company remains optimistic about the long-term potential of this market.

Cash Flow and Cost Management

Siemens Healthineers' free cash flow notably more than doubled in Q4, amounting to EUR 2.1 billion for the entire fiscal year—a significant increase of over 60%. This positive cash flow trajectory is attributed to stronger earnings coupled with improved inventory management. The emphasis on operational efficiency and enhancement of the cash conversion rate, now at 0.9, exemplifies the company’s commitment to maintaining financial health while navigating through challenges.

Successful Transformation Initiatives

The transformation initiatives in Diagnostics have begun to yield positive results, shifting the margin from below zero in 2023 to between 5% and 6%. This shift is anticipated to continue, with further margin improvement expected between 200 to 400 basis points in fiscal year 2025 as the full impact of savings from restructuring measures becomes apparent. The investment of EUR 450 million in restructuring costs is paying off, supporting a streamlined operation.

Long-Term Growth Potential

Siemens Healthineers' strategic emphasis on innovation, particularly in Imaging technologies such as photon-counting CT, positions the company for long-term growth. The integration of advanced capabilities, partnerships, and operational efficiencies solidifies its market standing and enhances demand potential. With the company’s dual manufacturing strategy and local production facilities, it is well-positioned to respond agilely to market shifts in key regions.

Conclusion and Final Thoughts

Overall, Siemens Healthineers reflects a resilient performance trajectory bolstered by strong segmental results and an eye toward growth despite external challenges. The guidance for 2025 suggests continued operational strength in the face of headwinds, particularly from the Chinese market, while innovation and transformation efforts remain key drivers to leverage for future profitability.

Earnings Call Transcript 2024-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, operator. Good morning, and welcome to our fourth quarter 2024 earnings call. I'd like to thank each one of you for joining us today. At 7:00 a.m. this morning, we published our Q4 results and all the related materials of today's results release, they are available on our IR section of the Siemens Healthineers web page. In a moment, we'll hear directly from our CEO, Bernd Montag; and CFO, Jochen Schmitz, who will walk us through this quarter's results and provide insights on the past quarter, our outlook and on our growth prospects. After the presentation, we will open the floor for a Q&A session. [Operator Instructions] Additionally, please note that a full transcript and a recording of today's call will be made available on our Investor Relations web page shortly after the session ends. Again, thank you for being here.

And now I'll turn it over to Bernd.

[Bernhard Montag, executive]

Thanks, Marc. Dear analysts and investors. Our team has delivered an outstanding performance in Q4. We achieved growth in all regions. Only China was declining. This growth was on back of a healthy global market reflected by the book-to-bill of 1.12. Our comparable revenue grew by 7% ex antigen on strong comps of plus 11% in Q4 last year. This was driven by strong growth in Imaging, Varian and Advanced Therapies. We also saw a strong 16% growth in adjusted EPS, supported by impressive margins at Imaging and Advanced Therapies. I am especially happy about the good development of our free cash flow, which more than doubled compared to Q4 last year supported especially by good progress in our inventory levels. Jochen will expand on this in his part.

So we have finished this year strong, as indicated early on. Let me briefly run you through the highlights of the full year 2024 from our perspective. First, I would like you to focus on the right side of the chart. We achieved our guidance. Again, let me allude to China. We achieved our group outlook despite significant headwinds from China headwinds on growth and margins that were much more intense and longer-lasting than we assumed initially. Despite this fact, we achieved our initial outlook nevertheless. Our business is fully intact. Our unique setup provides unparalleled resilience even when the going gets tougher. Looking at 2024 in its entirety here clearly proves this point.

We grew comparable revenue by 5.2% ex-antigen and achieved an adjusted EPS of EUR 2.23. We are proposing an unchanged dividend of EUR 0.95 per share for fiscal year '24. When we started the year, we introduced the concept of the 2 cores. On the one side, we have a synergistic core where Imaging, Varian and Advanced Therapies create a unique portfolio of products and solutions, elevating our relevance for customers. In this unique setup, continued innovation sets us even further apart from any competitor. In 2024, we again introduced significant innovations to the market, essentially across the board with the 1.5 Tesla MAGNETOM.Flow low helium MRI, our breakthrough innovation in mammography, the MAMMOMAT B.brilliant or the RapidArc Dynamic at Varian, just to name a few examples.

Our innovative strength and our unique portfolio as well as unique set of capabilities has driven continued market share gains for years already and again, in '24. So the strong book-to-bill for the group is the logical consequence of this strength achieved despite a weak contribution from China. I'm very proud of the team, which delivered this strong performance. I'm also proud of the successful transformation in our other core where we are transforming to win in the Diagnostics market. With the successful and diligent implementation of our transformation program, we have, on the one hand, prepared the business for future success and on the other hand, driven a step change in profitability. Jochen will give you some more details in his part. And on the next chart, I will briefly show you our outlook for 2025.

We are expecting 5% to 6% comparable revenue growth for the fiscal year '25. For EPS, we are guiding for a range of EUR 2.35 to EUR 2.50 per share. This highlights our expectation for very good underlying profitability improvements nicely overcompensating year-over-year headwinds from lower financial income and a normalizing tax rate. Jochen will give you more insights on the underlying assumptions for our outlook.

And with this, I hand it over to Jochen.

[Jochen Schmitz, executive]

Thank you, Bernd, and also a warm welcome from my side. Let me reiterate that this was an impressive Q4. We continued our strong order intake, grew revenue by 7% ex-antigen on very tough comps with growth in all regions except China and expanded margins by nearly 100 basis points ex-antigen. We were especially pleased that the margin expansion came from excellent conversion in Imaging, Varian and Advanced Therapies. And the operational improvement fell through to earnings per share. Adjusted EPS grew by 16% year-over-year ex-antigen. And of course, we are happy to report that we more than doubled free cash in Q4. I will add more color on this later. So as said, an impressive Q4.

Now let's have a look at the segment's performance in more detail, starting with Imaging. Imaging grew strongly by almost 8% against a very tough comparable of 11% growth in the prior year quarter. We saw particularly strong growth in Computed Tomography and in Molecular Imaging, where new tracers for theranostic drove volumes in our U.S. PETNET business. The adjusted EBIT margin in Imaging came in at an outstanding 24.2%. This corresponds to a year-over-year margin expansion of 180 basis points, driven by excellent conversion in the high-volume Q4. With this strong finish, as indicated, reached our margin assumptions for Imaging laid out in November '23 at the lower end with 21.1% despite significantly stronger headwinds from China than initially assumed.

Now let's have a look at Varian and Advanced Therapies on the next slide. Varian delivered a very strong finish in Q4 with more than EUR 1.1 billion revenue after very steady quarters in Q1 to Q3, each with more than EUR 0.9 billion. A great achievement also in terms of consistency, marking significant progress in comparison to last fiscal. The excellent growth of 10% was against very tough comps of 30% in the prior year quarter. Having in mind, last year's Q4 caught up on revenues from Q3 spillovers.

Looking at margin performance, Varian achieved a solid 17.1% margin, the highest margin quarter in fiscal year '24 after continuous sequential margin expansion every quarter in 2024. A really decent performance taking into account around 100 basis points of currency headwinds in Q4. Advanced Therapies continued its successful top line performance with strong comparable revenue growth of 7%. In terms of the adjusted EBIT margin, we saw an expansion of 250 basis points year-over-year driven by excellent conversion from growth in the high-volume Q4, nicely showing what the business is capable of returning consistently to industry-leading margin levels. And now let's have a look at Diagnostics.

Excluding antigen, Diagnostics continued to grow by 1%. Bear in mind that we still had roughly EUR 50 million of antigen revenue in last year's Q4, by the way, for the last time. Diagnostic achieved a year-over-year margin expansion from 2% ex-antigen in the prior year quarter to 5% this quarter. Margin was held back by prior period effects of over 200 basis points clearly with a one-off character. These were primarily related to increased provisions for reimbursement requests in the Italian health care industry, which related to prior year periods. Excluding this effect, the margin would have amounted again to about 7% in Q4. Hence, the business saw again very decent underlying margin expansion from the transformation program. Our strict execution of the transformation program made us achieve the envisioned EUR 300 million of total savings a year ahead of time. As a result, we see the step change in profitability at Diagnostics, and we are now a sounder business sustainably lower cost levels and significantly less complexity.

The investment of EUR 450 million transformation costs during '23 and '24, consisting of severance and other restructuring paid off. We now have a streamlined portfolio and as I said, a leaner organization and are significantly less complex. As we have further transformational potential, I will touch on the financial effects of the next phase of the transformation in our segment assumptions later in the call.

Let me now focus your attention from our segment performance on to our achievements in free cash flow. Free cash flow has not only more than doubled in Q4. Free cash flow has also increased significantly in the full fiscal year by more than 60% to EUR 2.1 billion. This was driven by higher earnings and by lower inventory levels, which improved the inventory turn significantly in Q4 year-over-year. Let me highlight another development in operating working capital turns. Turns of receivables, and I include here contract assets in that number remained stable in Q4 year-over-year despite the high volume Q4. This is visible progress from our cash program, which we also see in the consistently increasing cash conversion rates throughout the year, and we expect to see more progress from the cash program in 2025.

The cash conversion rate improved to 0.9 for the full fiscal year, driven by good progress in all segments. All segments reported a conversion rate in fiscal year 2024, which was on target to what we laid out back in 2021 at our Capital Market Day. So we keep the focus on improving earnings and operating working capital turns to drive free cash flow. But before we dive further into next fiscal year, let's have a quick recap on last fiscal year. In fiscal year 2024, we delivered every quarter more revenue and better margins sequentially as well as year-over-year. We were able to do this based on our strong fundamentals, a continuously expanding order backlog, substantiating future revenue growth, a consistently higher share of recurring revenue and the financial framework that protects margin expansion, for example, of our successful managed pricing measures to counter inflationary effects. And this added up to a very successful fiscal year 2024, but now let's turn from last year to the next year to our fiscal year 2025.

Also next year, we expect very good revenue and earnings growth. We expect comparable revenue growth of 5% to 6% in fiscal year 2025, and we expect adjusted basic earnings per share between EUR 2.35 and EUR 2.50. In other words, earnings will grow at least at the rate of revenue and on the upper end by low double digits. This earnings growth includes a year-over-year headwind in financial income and in tax expenses, which we expect to more than compensate with healthy margins expansion in all segments. Please be reminded of the fact that this is an outlook for the full fiscal year and performance in a single quarter may differ. I will add some more color on the expected segment performance on the next slide with the underlying assumptions for the group outlook.

Let me share first our underlying assumption on the development in China in fiscal year '25. We assume China revenue in the first half of fiscal year 2025 to decline mid-single digits to high single-digit percentage points. And in the second half of 2025, we assume revenue to be roughly at the level of the second half of fiscal 2024. Let me add that we expect healthy development in the other 90% of the business in the Americas, in EMEA and in Asia Pacific, Japan. And this brings me to the underlying assumptions for the group outlook for segments and other items. We assume for fiscal year 2025 revenue growth and margin expansion in all segments. On this slide, you see the assumption for each segment. We are giving a bit more color on the assumed margin expansion in Varian, Diagnostics since there are additional drivers, which come on top of the margin expansion from scale.

Varian continues to benefit from the combination, both in faster growth and in margin expansion. And the Diagnostic margin benefits from the transformation savings rolling fully into fiscal year 2025 as well as from further identified transformation potential. The assumption for Diagnostic also includes some headwinds from volume-based procurement in China, expected to impact the growth and margin expansion more in the second half of the fiscal year. Let me emphasize one thing. These are assumptions for the full year and quarterly performance may differ. That said, I would like to briefly allude to our current view on Q1. We expect a soft Q1 with revenue growth to be below the group outlook and Imaging, Varian and Advanced Therapies to be below the respective growth assumptions. With soft growth, we would also expect margin development in these 3 segments in Q1 year-over-year to be rather held back versus the full year assumption of broad-based margin expansion.

Bear in mind that Q4 with the year-end finish is not a good precursor for Q1. Diagnostics will stay on track on its transformation path. Two comments on the other assumptions. The year-over-year decrease in financial income comes from the falling away of extraordinary tailwinds from equity income in 2024. The tax rate normalizes in 2025 after we saw some extraordinary positive effects bringing the tax rate down in the last 2 years that we do not assume to repeat itself in fiscal year 2025.

And on that note, I hand it over to Bernd to talk about our more medium-term growth perspectives and sources of growth.

[Bernhard Montag, executive]

Thanks, Jochen. We have shown you this chart quite a few times before. Hence, I'm only bringing it up as a reminder. It summarizes the key long-term drivers of growth for our business and how we plan to address these drivers. To make this a bit more tangible, the following chart showcase 3 concrete examples for how we innovate continuously for better diagnosis and treatment, addressing key clinical needs. And one example that nicely shows how the world innovates for us. In this first example, I will show you how we innovate in cardiac care. Coronary artery disease affects more than 100 million people and results in millions of death each year, making it the most common cause of death globally. This results in about 13 million invasive catheter procedures every year. More than half of these procedures are for diagnosis purposes only where obstructive coronary artery disease cannot be excluded by the clinical assessment alone.

Conventional CT scanners are limited, when it comes to cardiac imaging in terms of speed of image acquisition, spatial resolution and soft tissue resolution. Even the best of the traditional scanners can struggle with heavily calcified coronary arteries and stent imaging, making it hard for physicians to provide precise answers or concrete diagnosis or for the levers of clinical detail, conventional CT examination suffer from moderate specificity and positive predictive value. This is mainly due to the so-called calcium blooming an artifact, which is caused by high-density structures such as calcified plaques and metallic objects, which appear larger than their true size. Beside the effect on the stenosis grading, small but relevant components of plaques may be not recognizable in conventional examinations. Consequently, in most institutions, invasive procedures with a catheter are still the method of choice for an accurate diagnosis of obstructive disease, especially in challenging cases.

With photon-counting computer tomography, we developed radically call new technology, which will change this. Photon-counting computer tomography visualizes small coronary vessels, stents and plaques in high resolution without artifacts. It helps physicians to provide precise answers to guide treatment and therapy decisions, enabling them to perform angiography procedures even for the patients with stents and heavy calcifications. This significantly reduces the need for invasive procedures for diagnostic-only purposes. It allows for faster treatment and reduces the burden for patients. But every patient, every case is different. To achieve a maximum personalized treatment, interventionalists need precise information and seamless workflows. Our systems are embedded into a fully integrated workflow, allowing for faster pre-procedural planning with patient-centered scan protocols for detailed anatomic assessments. This significantly supports the intervention with our angiography systems and facilitates especially challenging procedures.

We are setting the standard in coronary CT angiography with our photon-counting CT technology. It is the technology of the future in CT, and this is just one example, how it is changing standards of care. More than 12 million people suffer from a stroke with more than half of them dying and many left with permanent disability per year. Stroke is a leading cause of death and disability worldwide. With an aging population, we will see a significant increase in the number of stroke cases and deaths from stroke. Almost 80% of stroke cases are caused by obstruction that is the blockage of arteries in the brain leading to reduced blood supply to the brain tissue. Brain cells start to die within minutes. Each minute, saved in the time between onset of symptoms and treatment of an acute stroke increases the chances for good clinical outcomes, rapid treatment may make the difference between living independently, and needing constant nursing care. Therefore, time is brain.

In order to do so, our customers need to understand the cause of the stroke to determine the right treatment. They need to understand the complex anatomy and flow dynamic. Therefore, image quality and a seamless and fast workflow are of the essence. We offer a versatile portfolio for fast stroke diagnosis and treatment. Let me pick out 2 innovations that speed up stroke care substantially. First, to save time right from the start, we are about to launch a CT scanner dedicated to ambulance cars triaging the patient while still on the road, thus enabling fast diagnosis to select the right treatment. Complementary to this innovation we provide a fast and easy data sharing platform between the mobile stroke unit and the hospital stroke connect.

Second, we offer a one-stop shop in stroke workflow, also known as angio-only approach, leading to a significant time reduction in door-to-reperfusion times compared to the standard workflow. Our customers can decide to skip computer tomography when the patient arrives in the hospital and to bring him or her directly to the angio suite. Our ARTIS icono can perform diagnosis and treatment as a one-stop shop on the angio system, and it pays off. We are market leader in interventional neuroradiology and are the leading partner in stroke care.

Another area of market leadership is our suite of offerings in the cancer care continuum. In contrast to stroke treatment, the cancer patient journey is less straightforward and linear and care is personalized and often multidisciplinary. We faced 20 million new cancer cases per year worldwide while the number of new cases keeps on growing. And every case is different. At Siemens Healthineers, we are bringing intelligence to the cancer care continuum by delivering intuitive and specialized therapy workflows, improving patient outcomes. Let me give you 2 examples. First, a radiation therapy workflow integrated with MRI intelligence. But by dedicating MRI for radiation therapy, computer tomography still remains an essential part of radiation treatment planning across many tumor types due to its high geometric accuracy morphologic information for controlling and electron density information that is important for dose calculation.

However, the improved target visualization in MR can be powerful due to its superior soft tissue contrast as many tumors are of soft tissue types. This enables better target delineation, better identification of organs at risk and better contribution to accurate treatment planning, delivery and monitoring, allowing daily treatments to be adopted to the patient's deformations and tumor response and enabling innovative radiation treatment delivery, including intelligent dose modulation. This helps clinicians to easily reduce dose to organs at risk, improve treatment plan quality and plan complex cases in less time. Second, we accelerate the adoption of newer modalities of care. Our latest example is an image-guided interventional microwave ablation system that is based on our leading imaging and radiation therapy competences. This interventional system further personalizes care as it directly addresses ablation zones and it is designed to spare healthy tissues for more predictable outcomes.

To sum it up, our ongoing innovations along the cancer care pathway allow for more targeted treatment in personalized therapies to improve patient outcomes. This will pave the way for future growth. Growth for us not only comes from our own innovations. It is also the result of the health care world innovating for us. New therapy approaches in cancer care and neurology based on innovations in pharma directly impact growth in our Molecular Imaging business and further substantiate our growth ambitions. Most prominent examples are Alzheimer's and theranostics with disease-modifying therapies that propel the need for our molecular imaging solutions. Alzheimer's disease and dementia impacts about 50 million people. About 1.5 million people die every year in the context of Alzheimer's disease complications.

Several groundbreaking immunotherapy treatments have recently emerged that work to reduce better amyloid plaques that are discussed as the main trigger of Alzheimer's disease and other dementias. The first 2 drugs have been cleared by FDA, and this is just the beginning. PET imaging plays a critical role in the Alzheimer's disease care pathways as it is one of the only modalities available to evaluate better amyloid plaque burden in the success of the new drugs. Adding to this molecular imaging is also the key modality for theranostics, a highly targeted and individualized treatment using a radioactive agent to identify and mark cancer cells and a second agent to destroy those cells. Theranostics has proven effective 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.

Our pharma pipeline currently covers 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. We offer the broadest PET/CT portfolio in the market from ultra high-end systems for research to systems targeted to bringing digital PET/CT to a broader market. This is combined with the leading PET radiodiagnostic pharmacy network in the U.S., which we are about to further expand into Europe. This is another showcase how we lay the foundation for another future growth engine, helping health care providers and patients to deal with noncommunicable diseases.

However, not only the depth but also the breadth of our portfolio stands out and makes us an attractive partner for entire health care systems. Lately, we signed and booked further substantial 10-year contracts, which sustain our growth profile. With Ballad Health, we signed one of our largest oncology partnerships, including a TrueBeam linear accelerators, which offer high precision treatment options for a broad range of patient needs in one Ethos adaptive radiation -- radiotherapy system, which also incorporates AI to prepare precise calculations for oncologists. Additionally, we provide a portfolio of products and services to support the health system's unified oncology ecosystem.

With the Ohio State University Wexner Medical Center, we signed one of the largest value partnerships in the U.S. with the aim to improve diagnosis and treatment across cardiology, oncology and neurology. The agreement aims to enhance clinical outcomes and drive value with initiatives related to operational efficiency, workforce development, digitalization and sustainability. These examples of long-term partnerships are great proof points that our innovative strength, our unique capability and portfolio are sound foundation of attractive medium-term growth. A foundation that is reflected in our midterm ambitions for beyond 2025. You may recall, we introduced this framework in November '23, and with the successful year '24 and our outlook '25, we clearly confirm this midterm ambition.

For group comparable revenue, we expect to grow mid- to high single digits and for adjusted EPS, we expect to be a double-digit compounder. This is supported by the segment trajectories where we expect continuous growth and margin expansion.

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

[Marc Koebernick, executive]

Thank you, Bernd. And I would just briefly ask the operator to remind the audience of the rules of engagement for the Q&A, and then we can get started.

[Operator]

[Operator Instructions]

[Marc Koebernick, executive]

Okay. Good. So we would get started now. And the first one on the line that would be Julien Dormois from Jefferies.

[Julien Dormois, analyst]

I will limit myself to 2. The first one relates to, I guess, the guidance for next year, for fiscal year '25 and particularly focusing on Imaging. You are indicating that you target low double-digit to mid-double-digit margin expansion. I think in previous conversations, you were still hopeful that you could deliver maybe up to 100 basis points of margin expansion. So maybe just trying to dissect what is behind this maybe slightly more cautious approach to margin expansion that mostly about China. Is there anything else behind?

And the second question relates to a broader question and it relates to the news that probably happened overnight and possibly the victory of Mr. Trump in the U.S. How do you envisage the possible return of tariffs in the U.S.? And how do you think you're prepared to something like this?

[Jochen Schmitz, executive]

Julien, on guidance, on Imaging, I think we were very clear about how we assume China in our guidance. And this has obviously also a clear effect on Imaging to say that upfront. When -- and maybe to recall, when we talk about Imaging, margin expansion in normal years, we guide for 20 to 80 basis points based on scale. .

When we had the discussion about what we expect for 2025 earlier, we were still back then assuming that China would be growing. And this would then make the 100 basis point margin expansion, definitely a possible scenario. And as we said in the call, we assume for China in the first half, a decline in the mid-single digits to high single-digit percentage points. And we expect the second half to be more on the level of the second half of fiscal year 2024. And this has obviously also an impact on margins. So the short answer is, yes, it's China.

[Bernhard Montag, executive]

Julien, for the other question on the outcome of the election, maybe first of all, when it comes to the U.S. market, we don't expect a major impact on demand or different health care policies. I think this is also an important angle, and it would have been -- would have made our customers nervous already in the last year in case they would have expected a change depending on who wins the election. Sorry, but your question was more around tariffs. .

Let me dissect it into 2 answers. On one hand, there is the topic of, let's say, a U.S. versus China situation. Here, we are very, very well positioned because basically, we have twin factory setup, we can deliver -- we deliver from China to China, and we deliver to the U.S. from the U.S. and from Europe.

I think the second question maybe is what is the impact of even more tariffs when it comes to potential Europe and United States situations. And here, let me remind you that despite Jochen and I may be speaking with a German accent, Siemens Healthineers is a company which has more employees in the U.S. than in Germany. Two out of the 4 segments are headquartered in the United States, yes, Varian and Diagnostics. And even in the Imaging segment, ultrasound and molecular imaging are headquartered in the U.S. So we are, from a trade flow point of view, much more balanced than sometimes people assume.

[Marc Koebernick, executive]

So then we go to the next one in the queue that will be Hassan from Barclays.

[Hassan Al-Wakeel, analyst]

Firstly, another on China. Can you talk about the guidance for next year and your assumptions for China to be down mid-single digit to high single digit in H1 and flat in H2? And how conservative you think these are given order trends over the last year? And is stimulus something that would be upside? And what are your latest thoughts on stimulus? And then secondly, you called out the strength in CT in the quarter. What's driving this by region? And to what extent are you seeing a significant contribution from photon counting CT? And how is the mix of customers for this technology trending? And is it becoming a lot broader than academic and teaching hospitals?

[Jochen Schmitz, executive]

Hassan, let me start with China. I just make sure that we -- that the China assumption is, again, very clear. Mid single-digit to high single-digit percentage points decline in the first half. And then the assumption for the second half is, as you rightfully said, more flattish relative year-over-year.

We expect our assumption to be a prudent assumption. And why did we pick this assumption at this point in time because we have not seen yet a significant trigger point for a turnaround. This -- the bigger part of the stimulus program is still work in progress. And there is obviously a lot of pent-up demand, but it's unclear when this will come back. And that are the main drivers behind our prudent assumption on China for this fiscal year.

[Bernhard Montag, executive]

Hassan, when it comes to the CT-related questions. I mean when it comes to the timing, this is largely an effect of the very strong U.S. revenue slice in the second half of the last fiscal year and especially in the fourth quarter, which contained a lot of also CT business. So -- and we also assume a pretty strong continuation of the U.S. momentum, which was a little bit back-end loaded in the last fiscal year. .

When it comes to photon counting in general. I mean, first of all, maybe I want to say on this topic of you kind of imply, it's in the academic centers, and that is -- is this a limitation or not. So first of all, it is super important to be in the academic centers, not only because it's a market, but because these are the trailblazers for creating new standards of care. Here, we are extremely happy with how things are going, how new applications are developed. And one of the examples I gave in the presentation is really about new ways of using CT. We currently have as customers, on the one hand, the academic centers, we have the high-end imaging centers who differentiate by quality using the technology as a strong proof point for their own leading position. .

And we have many, many early adopters where the technology is, for example, used for initiating like cardiac screening programs and totally new applications. So the conviction in the community is stronger than ever that -- this is the method of the future, and that is just a question of time when every institution will have a photon counting CT. And it's a half well-kept secret here that you can expect at RSNA, the next step when it comes to bringing this technology to additional price points and with this 2 additional market segments.

[Marc Koebernick, executive]

So we move over to David Adlington from JPMorgan.

[David Adlington, analyst]

Apologies if you addressed this, I missed part of the call, but maybe I'm afraid just going back to China. Maybe you could remind us what the orders have done there over the last 12 months and through Q4? And just returning to Hassan's question, how that translates into the sales profile you've given for this year and whether that could impact that second half flat expectations? Just moving on from that, really, it's just a slightly bigger picture question. Are you seeing any increase in China for a China -- China policy and Imaging? And does the local competition do you think have the capacity to really step into that opportunity?

[Jochen Schmitz, executive]

David, let me start again with the -- how we baked in from an assumption standpoint, China into our outlook. First of all, first half mid- to high single-digit decline, second half flat. This is the assumption we baked into our outlook. As we -- as I said before, and we believe this is a prudent outlook. What I did not say is that we -- and I think we should say that always that we still believe this is a temporary topic in China and that the China market will stay attractive in the mid- and long term, absolutely.

When we look at the equipment order development over time over the last quarters, we see a relatively low level, but relatively stable low level. And that is the main assumption where we said we have not seen yet a significant trigger, which would have changed our assumption to be a bit more prudent with regard to China.

And with this, I hand over to Bernd.

[Bernhard Montag, executive]

I mean, the question about local competition and potential tailwind given to them. And first of all, I really want to make clear that what we see in the anti-corruption campaign is affecting every vendor or every company. And this is not what sometimes people suspect a means to make it harder for the multinational companies. And maybe as 2 proof points for this. I mean we have in overall in the last 12 months, slightly gained market share in China in this difficult situation. And when you look at the numbers of United Imaging as one of the local companies, you also see that they saw a significant decline in their numbers, including some heavily loss-making quarter.

I mean, overall, it's very much about building scale in China, which we have successfully done, and we are continuing to build on this. We have, as you may know, about 8,000 employees in China. We have our full product line in CT and MR and so on and so on in -- also in Varian as a local production and also about 1,000 R&D engineers.

And so from that point of view, we are very well positioned, and this scale helps us and a little bit of a different way to look at it is, yes. I mean we maybe grew up or at least I grew up. When I grew up in imaging and CT and so on, I learned there is 4 companies, yes, or 3.5 global companies when it comes to the world, yes, so there's Siemens Healthineers or Siemens Medicine Technique back then. GE, Philips, and then there was Toshiba, which is now Kioxia.

And what you see is that in China, it's just a different game. It is a Siemens GE United Imaging game. In imaging, and you can basically see that those who are lacking scale have a real difficult time in this market. But I'm very optimistic about our position and we get a lot of also encouragement of and support when it comes to the local authorities.

[Marc Koebernick, executive]

So we go to the next one in the queue, that will be Hugo from Exane.

[Hugo Solvet, analyst]

I have 2. First, on the E.ON 2025 midterm ambition. Could you confirm that the double-digit adjusted EPS growth, assume or not the China recovery and relies on not on the China recovery. Second on Diagnostics, could you explain maybe a bit on the incremental transformation potential that you are uncovering or is it expected to play out this year?

[Jochen Schmitz, executive]

Yes, Hugo. First, on the midterm targets as reiterated by Bernd in his presentation, and it's most likely a bit too early to say exactly what the assumptions are in detail, what we baked in here also. But I think it's also important to repeat what I said on China, we expect the Chinese market to be an attractive market in the mid and long term. And this, I think, gives you an answer. Obviously, we expect to see China contributing to growth in the future, absolutely.

Secondly, on Diagnostic transformation, I think first of all, we are extremely happy what we have seen so far in Diagnostics margin pivoted from slightly below zero in 2023 now to north of 5% between 5% and 6%, and we expect this to proceed this year with margin expansion potential of 200 to 400 basis points. This is the assumption we baked into our outlook. And this is, I would say, another significant step forward, and this significant step forward comes -- first of all, from, I would say, the full potential of the measures we have already taken in 2024, but also measures -- additional measures we can take while we, so to say, consolidate our legacy footprint.

And here, I deliberately use the word footprint because we also have saving measures, which kick in a bit later than others because we have stopped selling legacy platforms, but we have not yet because we could not yet because we have still an installed base of legacy resolve all, I would say, all the footprint which is needed to cater for the legacy platforms. And these are the main drivers behind further savings potential.

[Marc Koebernick, executive]

So we move on to Graham Doyle from UBS.

[Graham Doyle, analyst]

Just 2 questions for me. Firstly, on the Diagnostics business, the growth again for this year is low single digits. It looks reasonably slow, but obviously, that's been improving in recent years. So when do you think the mix can improve to some extent that Diagnostics [indiscernible] in line with the group? And then maybe just a second question on the guidance. I suppose it kind of related to China here, too, which is if you roll back a year ago, you took a view on China. And in the end, if things are worse than expected as it was for all companies. When you look at it now, it seems like you're pretty cautious say, look, given where orders seem to be right now. Do you think that you have built in a bit more buffer maybe this year and can withstand a bit more volatility in that guidance? Just to get a good sense of how your thinking has changed over the last year.

[Jochen Schmitz, executive]

Yes, Graham, let me start with China and the China outlook. I think as we said to give you again the full picture. The China market will remain an attractive market for Siemens Healthineers in the mid and long term, no doubt for us. Therefore, we see the market weakness as a temporary topic in the nearer term.

We assumed -- we believe that our assumption is a prudent assumption for this fiscal year, the mid- to higher single-digit decline in the first half and then the flattish development year-over-year in the second half. And as said beforehand, why did we do this despite the announced stimulus program. And obviously, the pent-up demand, which should kick in at some point in time, is that we have not seen yet a trigger, which would give us more confidence to have a more positive assumption baked into our outlook. That's it at the end of the day. And maybe repeat also what I answered to David beforehand is when we look at the trajectory of the equipment order intake in China over the last quarters, this is a relatively flattish line. And for us, a clear testament to that, the trigger has not happened yet.

[Bernhard Montag, executive]

Graham to the Diagnostics question. As you know, as a reminder, I'm sure you know, I mean, in the central lab portion of the business, which is about a little bit less than 2/3 of the Diagnostics revenue. We are now in a situation where we are roughly in a 50-50 split between the Atellica franchise as a revenue contributor and the legacy and the legacy revenues. The Atellica business is probably or, for sure, the fastest-growing business in the central lab market. It is continuously growing in the high teens at least. And -- but this is compensated for a while, by, on the one hand, the legacy going away and partially also switching over, but then there is also, to some extent, also intend to also make sure that not every nonprofitable leftover business is there to continue.

So it's also a bit of a question of how to -- how to -- in this case, how to balance good or how to differentiate between good and bad top line. So -- and this is in the end what -- why growth is still in the levels, which you saw in this year, yes. But on the other hand, of course, seeing that spectacular uplift of 600 basis points or so and profitability shows here that we are doing the right things.

We will in the next, I would say, in the next 2 years, we will still see this as the main story of this switch from legacy going down to Atellica burdening the growth rate. And I mean, we will see a stepwise improvement to then go into a, what I call it, 3% to 5% or so growth rate, which is the target when we look at the Diagnostics targets, they are a little bit below that also in the midterm -- below what we say for the group because you wanted to -- you asked whether it is "dilutive" to the group growth profile. So it is slightly also in the target stage most likely below the overall group growth.

[Marc Koebernick, executive]

So we move on to Robert Davies from Morgan Stanley.

[Robert Davies, analyst]

My first one was actually on the U.S. market. That's been a pillar of strength for you, I guess, over the last sort of 12 months. So I'd just be curious in terms of a bit more color and feedback of what's going on in the ground there? What's driving the strength? And how sustainable you think those kind of impressive growth rates are? The second one was just where we're at in terms of sort of China stimulus? And how is the mechanics working? Is it any clearer yet how that's going to sort of filter through? Is it actually sort of turning up in orders yet? Who is actually paying for it? Is it sort of coming as grants or loans? Any other color would be great.

[Bernhard Montag, executive]

Yes. Rob, thank you, I make one. In the U.S., it's the combination of, on the one hand, nice continued market share gains, but also a healthy market, I would say, healthy, not spectacular, healthy market. When you look at market share gains is driven by -- I mean, hands down, it's the best portfolio. And there's a great -- we have a great reputation. We are using our scale also to deliver the best service experience. We have -- we are just closer to the customer because we are just also the bigger and more successful team and customers somehow feel here that this is a great company to work with. I mean we are also humbled by the way and keep and stay paranoid in all the topics we are doing.

Another reason on top of the portfolio is that we are -- when it comes to addressing the C level and with the value partnerships, it really translates into significant business. And it is almost taking some of the market, call it, "off the street" because when we enter a long term -- into long-term agreements, then this is not a transactional business for the future, which one has to have a street fight over. And we are in a much more meaningful collaboration with these customers. So this combination of innovative strength of better ways of addressing customers and their specific challenges here from how to expand into ambulatory care, how to solve workforce challenges and so on and so on.

And plus, I mean, just having a really nimble sales and service organization is the sheer driver. When it comes to the market being intact, I mean, there is -- there is healthy demand, there is procedure growth plus there is this ambulatory care expansion, many people, many of our customers look at building up networks, looking into the outpatient market, nuclear settings, which in the end also helps us to continue to build up our installed base and footprint.

[Jochen Schmitz, executive]

Robert, on China, I mean, first of all, the stimulus program -- you asked particularly about the stimulus program is still work in progress. The only topic, which is relatively well defined is the smallest package, so to say, for the high-end 44 state-owned hospitals. All the others are still in the working. And when we look at the trajectory of the equipment order intake, it still has not picked up. It's very stable on a low level, and that is the missing trigger making us confident for delivering a more, I would say, more positive assumption relative to the prudent assumption of the mid- to high single-digit decline in the first half and then a flattish development in the second half, just to say this again.

But say, there's also again, in the mid and the longer term, we see -- we believe in the attractiveness of the Chinese market, and there is a lot of pent-up demand. The question is when will this kick in? Maybe one aspect because we had that topic before and on Diagnostics also. When we think about that a bit more I would say, slower growth trajectory in Diagnostics. We have also here from a growth trajectory perspective, a temporary effect, which is impacting the whole industry, which is the volume-based procurement initiative, particularly to Diagnostics in China, which was also highlighted by our main competitors and just to say this again.

[Marc Koebernick, executive]

As we are almost -- we are on the top of the hour, we have the last one in the queue that's Dylan from Stifel, and we'll just give him a chance to ask his 1 or 2 questions, and then we will close the call afterwards.

[Dylan van Haaften, analyst]

Just one for me. Just on photon counting, obviously, expected a lot from RSNA. Could you just remind us how you're looking at the replacement cycle as I think there's a pretty large tail of older CTs out there. And should we be expecting a disproportionate shift to photon counting similar to what we saw after the dual source CTs came out like 15 or 20 years ago?

[Bernhard Montag, executive]

So I had a little bit acoustic problems. And Marc looks like he has understood the question.

[Marc Koebernick, executive]

Maybe so you were making a parallel to the growth rates of CT when moving to dual source if we expect a similar evolution with photon counting? Is that what you wanted to know, Dylan?

[Dylan van Haaften, analyst]

Yes. Perfect.

[Bernhard Montag, executive]

Yes. I mean yes, let's say, I think the even -- maybe the more accurate, let's see what is the better comparison. I mean, when you look at -- I mean, dual-source is -- has been a huge driver of our growth in another historic analogy is the adoption of multi-sliced CT, which was around the early 2000s, which was a technology, which is similar like photon-counting CT, where everybody says, okay, this is going to be the future. And it's just a question of time when I need to have it here. Dual-source CT is a little bit of a different animal, yes because it was -- it stayed and was always meant to stay a technology which is for the high-end and mid-range or upper mid-range of the CT market, while photon-counting CT really has the opportunity to address step-by-step the entire CT market down to the entry level, yes, which is one of the topics also why we are -- what we are driving now, yes, how do we get into more volume? How do we hear this, why we build our -- build up our semiconductor factory for that special material and so on and so on.

We will have the economies of scale. And we are not only a leader in innovation, but also a leader in scaling the technology, which is now the much more important part of the game from our point of view, because I mean being ahead of the curve. And this will definitely enhance the growth profile in CT because it is, in a way, when it comes to -- out of 2 reasons. I think on the one hand, it has the tendency for everyone to shorten the replacement cycle because there is a real reason -- a big reason when you have whatever 7-, 8-year-old CT to say, well, now, when I change now I really have a significant change where there's more like a moderate upgrade of possibilities. .

And the other growth driver is and that is coming back to the remarks in the beginning in my speech that photon-counting CT also drives new applications like this noninvasive assessment of a severe coronary artery disease. It is -- it can come as screening a larger scale screening technology from lung cancer, but also then especially to arteriosclerosis, plus many, many other applications where it's not only driving procedure growth with new procedures, but it also will be deployed at new sites of care where so far there was no CT because there was no reason to have a CT. And in the end, I mean, -- what you will see at RSNA is -- will be a big step in this direction.

[Marc Koebernick, executive]

Exactly. That was just a queue that I want to pick up on. So thanks for the question, and thanks also for dialing in today, and the good, let's say, to the point Q&A. I think I wanted to get your eyes to the fact that we'll be on the road tomorrow virtually in the U.S. Next week we'll be in the U.K., also several conferences in the next weeks. And obviously, we have the RSNA coming up where we will be hosting booth tours and you'll be having a chance to see Jochen Schmitz in person as well. So a lot of things that you can look forward to, and we look forward to seeing you on the road or virtually in meetings. So till then, 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.