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Earnings Transcript for SHL.DE - Q1 Fiscal Year 2023

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: Thank you, operator. Dear analysts and investors, I'm sitting in snowy Erlangen, together with our CEO, Bernd Montag; and our CFO, Jochen Schmitz, who will be taking you through the detail of our first quarter results for fiscal 2023 this morning. After the presentation, there will be a chance to ask questions. The Q1 2023 results were published this morning at 7
Bernd Montag: Yes, thank you, Marc. Good morning dear analysts and investors. Thanks for dialing in and expressing your continued interest in Siemens Healthineers. Let me start by shedding some light on our financial performance in Q1. Once again, we were able to significantly increase our order backlog with an excellent book-to-bill, equipment book-to-bill rate of 1.36, thanks to double-digit equipment order growth in all segments. Comparable revenue growth ex-antigen was rather soft at 1%, primarily due to lower diagnostics volume in China and with Varian revenues held back by a supplier issue. Including antigen revenues, we saw a 5% decline given the significantly higher antigen revenue in the previous year quarter. The drop in antigen revenues led to a comparable revenue decline of 24% in the diagnostics business. Excluding antigen, diagnostics revenues also saw a decline, primarily due to the aforementioned lower testing volumes in China because of lockdowns followed by high infection rates. Diagnostics margin was slightly negative at minus 2% impacted by costs for the transformation program. And the margin was also burdened by the lower volumes in China. Varian comparable revenue declined by 4%, due to a spillover of supplier issues from Q4 into Q1, impacting our margins as well. Imaging and Advanced Therapies had a solid quarter, both with 5% comparable revenue growth. Imaging showed a strong margin expansion of 100 basis points in Q1, leading to a margin of 20.9%. And Advanced Therapies had a margin of 12% in Q1. Our adjusted earnings per share came in at €0.47 in Q1, down year-on-year essentially due to the mentioned tough comparable basis on the antigen side. Beyond this, increased procurement and logistics costs, transformation costs in diagnostics and the mentioned temporary headwinds we faced in China were compensated by positive tax effects. For the remainder of fiscal year 2023, we expect strong growth ex-antigen with meaningful margin improvement, particularly H2 rated. Drivers of these developments are our very strong order book, the success of our pricing measures and our expectation of a normalization of the COVID situation in China. Therefore, we reiterate our outlook for 2023, expecting ex-antigen comparable revenue growth of 6% to 8%. And also our adjusted earnings per share range of €2 to €2.20. Including antigen, we continue to expect minus 1% to plus 1% comparable revenue growth. As always, Jochen will explain in more depth the Q1 numbers, but first, let me recap briefly what makes Siemens Healthineers so unique, why are we such an attractive partner and what drives our sustained order growth. The capabilities are the foundation of our success
Jochen Schmitz: Thank you, Bernd. Good morning to everyone. Glad that you are joining us again. Let me take you through the financials of our first quarter in fiscal year 2023. I would like to start by giving some color on equipment orders first. As Bernd highlighted earlier, we posted broad-based strong equipment order growth of 16% in Q1, a very healthy dynamic both year-over-year, as well as sequentially since our impressive order growth momentum continues. In particular, we saw excellent equipment order intake in China. These impressive equipment orders resulted in an again, very positive equipment book-to-bill ratio of 1.36. We are very pleased with this continued momentum of equipment orders, which will be an additional support for us to achieve the expected strong revenue growth in fiscal year 2023. Now, over to revenues. Excluding rapid antigen sales, we saw soft revenue growth of 0.7% in Q1 due to lower diagnostics revenue impacted by lower testing volumes in China and varying revenues being held back by the known supplier issue. Including rapid antigen sales, we recorded a 5% decline of comparable revenue. Before we look at the development in the regions, a quick reminder. In October, we announced that we split our Asia Pacific operations into China and Asia Pacific/Japan. China is now its own region with its own management team, as it is the region Asia Pacific and Japan, which will allow both regions to address their full potential even better. And now to the Q1 development. The Americas region recorded solid 3% growth on tough comps. In EMEA, revenues declined as expected due to materially lower contributions from rapid antigen sales. Excluding antigen revenues on a comparable basis were on the prior year level. The new Asia Pacific Japan region achieved significant revenue growth, driven in particular by a sharp rise in revenues from rapid antigen sales in Japan. Excluding antigen, the region achieved solid growth on a comparable basis. The China region declined by 6%, mainly due to lockdowns at the beginning of the quarter and due to a high infection rate at the end of the quarter. All-in-all, considering the situation in China in Q1 and the supplier issue at Varian, revenue held up well this quarter, also thanks to very strong service revenue growth. Now, moving over to profitability and to the right side of the chart. Earnings per share were down year-over-year, essentially due to the lower antigen contribution. Adjusted EBIT margin came in at 12.7% below the prior year quarter, due to lower contributions from rapid antigen sales, which impacted the margin by over 150 basis points negatively year-over-year. Other than that, we also saw increased costs particularly for procurement and logistics year-over-year, one-time costs related to the transformation program at Diagnostics and pandemic-related headwinds in China. These effects totaled to over 200 basis points of headwinds in Q1. Together with the low antigen contribution, this adds up to over 350 basis points of negatives in Q1. I will talk in more detail later in this presentation with regards to what to expect for revenues and margins in the course of the remainder of the fiscal year. Now, let us have a look at all the other line items. The Q1 tax rate came in significantly lower at 14% due to the release of a tax provision. Financial income net was minus €25 million, slightly less negative than expected, due to the interest-related part of the aforementioned tax provision release. Free cash flow was minus €77 million in Q1, due to inventory buildup for the scheduled acceleration of equipment revenues in the following quarters. In addition, receivables from Q4 antigen sales remained in the balance sheet as of Q1 closing as planned, holding back the usually strong cash collection in Q1 after strong Q4 revenues. For Q2, we expect a significant rebound of cash from operating activities driven by cash in from the Q4 antigen sales receivable and by the reversal of the buildups in operating working capital, particularly at Varian after the resolution of the supplier issue. Although we very rarely do have negative free cash flow in the quarter, we are not concerned since the basics of our cash generation are fully intact. We see the negative cash in Q1 as a merely timing topic, with future cash being, kind of stored in the balance sheet over Q1 closing. As always, you find the EBIT to cash bridge in the appendix of this presentation. Now let us have a look at the segment's performance in detail, starting with Imaging and Diagnostics. Imaging showed solid comparable revenue growth of 5.2% with broad-based growth in the businesses and in particular, very strong growth in MRI even after very strong growth in the prior year quarter. On the adjusted EBIT line, Imaging had strong margin expansion year-over-year of 100 basis points, driven by very healthy conversion. Foreign exchange tailwind of around 100 basis points was more than offset by cost increases, particularly for procurement logistics year-over-year. Going forward, cost increases will flatten out year-over-year in the course of fiscal 2023 and more so, we overcompensated by our pricing measures. So, foreign exchange is not the key to expanding margins at Imaging in fiscal 2023. The two key drivers for Imaging margin expansion in fiscal 2023 are conversion from growth and pricing. I will give additional color on that topic later in the presentation. To summarize it, it was a good start of the year for Imaging. Diagnostics had a less good start of the year in the core business, mainly due to the situation in China. But let me start with the overall business, including the antigen business. Diagnostics saw a sharp revenue decline, due to the expected lower contribution from antigen revenues in Q1, which were €63 million versus €329 million in Q1 last year. Excluding the antigen contribution core business, revenue declined by 7.3%, impacted mainly by lower testing volumes in China, due to the lockdown at the beginning of the quarter and high infection rates at the end of the quarter. The margin in Diagnostics was down year-over-year largely due to the lower antigen contribution. In addition, Diagnostics had €34 million one-time costs related to the transformation program. These costs include initial steps on product portfolio simplification. As Bernd highlighted before, the completion of the Atellica platform with CI1900 is the trigger for portfolio simplification. For the full fiscal year, we continue to estimate one-time costs of €100 million to €150 million as communicated in November. We expect the lion's share of these costs to be booked in the next quarter. In Q1, the margin contribution for antigen and the one-time costs related to the transformation program more or less balanced one another out. Therefore, the core margin was on the same level as the all-in margin. In the operational business, Diagnostic faced clear headwinds from the pandemic situation in China from foreign exchange and from increased costs, particularly for procurement and logistics. Now, let's look at Varian and Advanced Therapies on the next slide. Varian has further expanded its strong order book with double-digit equipment order intake growth and an impressive equipment book-to-bill of more than 1.6 in Q1. Varian posted a [comp revenue] [ph] decline of 4.5% as a result of the held back revenues due to the supplier issue I mentioned beforehand. This is the same supplier topic that held back performance at Varian in Q4 last fiscal. While the issue was resolved in course of Q1, it did still lead to substantial parts of Q1 revenues being pushed out into the next quarters, especially in the regions, Asia Pacific Japan and China. After seeing a strong month of December, with significant growth, we are confident of strongly accelerating revenue growth in Q2. Q1 adjusted EBIT margin was down from the prior year at 14.5%, burdened by the missing profit contribution from the revenue pushouts due to the aforementioned supplier issue, and cost increases, particularly for procurement and logistics. Adding to this, we saw a margin headwind from foreign exchange. In-light of these substantial headwinds, I would like to emphasize that the margin held up quite well at Varian. Advanced Therapies had a solid quarter with 5% comparable revenue growth driven by a healthy backlog. We are very happy with the continuous top line performance at Advanced Therapies. As you know, our smallest segment can be lumpy in the quarters, but we have seen solid growth numbers in Q3, in Q4, and now in Q1. The margin in Advanced Therapies was down to 11.6%, due to the cost increases, particularly from procurement logistics and also unfavorable mix effects. At the same time, Advanced Therapies saw tailwind from foreign exchange. The investments into endovascular robotics business continued to weigh on margins in Q1. Moving on from the Q1 results, let us now have a closer look at the dynamics we expect to see in the remainder of the fiscal year. Starting with pricing, and with the graph on the left-hand side on the chart, which you already saw in our disclosures from the last two quarters. We continue to expect our successful focus on pricing to lead to stronger margins, notably in the second half. The pricing measures continue to positively impact price levels in the sizable and growing backlog, where these improved price levels are steadily gaining share. As stated previously, there's a time lag of around 3 months to 18 months on average varying from product to product between order entry and revenue. Hence, we expect to see sequential margin improvements in fiscal year 2023, accelerating notably in the second half due to the phasing of cost increases and pricing measures as shown in the schematic graph on the left-hand side. Let us now have a look at the revenue growth dynamic in fiscal year 2023 and at the schematic graph on the right-hand side of the slide. We expect comparable ex-antigen revenue growth to accelerate from Q2 onwards to a substantial higher level than the soft 1% ex-antigen growth we have seen this quarter. Three major drivers affirm this acceleration of growth. Firstly, our sizable and growing backlog substantiates our expected equipment revenue growth. As I alluded to just before, we also see the price levels in the backlog improving. This will be another tailwind for the acceleration of growth. And of course, our recurring service revenues contribute with resilient continued growth. Secondly, after the resolution of the supplier issue at Varian, where it has accumulated pent-up deliveries, which will be shipped from Q2 onwards and accelerated revenue growth up and above the momentum we would have anywhere expected for the year. As said before, we already saw a strong revenue month in December with significant growth. Thirdly, China had weak revenues in Q1, due to the overall COVID situation, initially in Q1, tough lockdowns followed by exploding infection rates. At the same time, we recorded double-digit equipment order intake in China. We believe that China should benefit from the lifting of COVID control policy and from governance stimulus program. Hence, we expect a positive dynamic in China with revenue growth picking up from Q2 onwards. This dynamic will obviously also be a positive for the diagnostic business, which was the most impacted segment from the overall COVID situation in China. To summarize, we see that all indicators like the improved pricing, the scheduled backlog and even the low free cash flow due to significant inventory buildup are actually heading in the right direction and are supporting our expectations on revenue growth and margin expansion for the current fiscal year. And this brings me directly to the final slide for today the outlook. First message, we confirm our outlook for fiscal year 2023. Let me reiterate, on revenue growth, we see the outlook well substantiated by our strong order backlog, including the impact from our pricing measures, Varian pent-up deliveries and the expected positive dynamic in China. On adjusted earnings per share, we see it equally well substantiated by the profit conversions from revenue growth, improving margins from pricing measures and tailwind from foreign exchange. The guidance for our segments remain unchanged. In Q1, the situation in China predominantly impacted diagnostics, hence, we would point only for diagnostics to the lower end of the growth and margin band. Also due to the fact that we do not expect the lower testing volumes in Q1 to come back as pent-up demand. With diagnostic at the lower end of the guidance, the high end of the group outlook will obviously be more challenging to achieve. And with the U.S. dollar weakening versus the euro, foreign exchange will still be a tailwind, but obviously, to a lesser degree than before, as already well captured in the recent estimate updates and in the consensus. All-in-all, we continue to see the outlook for revenue growth and adjusted EPS as a very balanced view on the company's performance in fiscal year 2023, and therefore, comfortably confirm the outlook for this fiscal year. And finally, let me share our current view on the current quarter, second quarter. As mentioned before, we expect strongly accelerating revenue growth in Imaging and Advanced Therapies and especially in Varian with the accumulated pent-up deliveries for Q2, where we expect growth in the higher teens. Due to declining antigen sales, we expect revenue in diagnostics to decline year-over-year. Just to remember, in last year's Q2, we posted the highest antigen sales in a single quarter of around €680 million, so there will be a significantly tough comps in Q2. With the expected normalization in China, we expect the growth in the core Diagnostics business to improve. On margins, please bear in mind that we expect to book €100 million to €150 million of onetime costs related to the diagnostic transformation program in this fiscal year that are not adjustable in our KPIs according to our financial performance systems definition. Let me highlight that this is important for us that we keep our KPIs consistent over time and at that time are transparent about such very specific one-time costs that we currently incur with the transformation program at Diagnostics. In Q1, we booked €34 million related to the transformation program, and we expect to book the lion's share of the remaining costs, which are not adjustable in Q2. With regards to the free cash flow, we expect a significant rebound of cash from operating activities in Q2. Also bear in mind that we will see the dividend payout again after our Annual Shareholders' Meeting in February that will impact our cash flow from financing activities in Q2 as it does every year. Of course, this does not affect the operating cash or free cash flow, but it will affect the leverage development in the single quarter. And with this, I hand over to Marc for Q&A.
Marc Koebernick: Thanks, Jochen. And before we get into the detail, first, let the operator remind you of the rules to register for the Q&A.
Operator: Thank you, gentlemen. [Operator Instructions]
Marc Koebernick: Thanks, operator. So, we start the Q&A with Hassan from Barclays. Hassan, you should be live now.
Hassan Al-Wakeel: Good morning and thank you for taking my questions. I have two, please. Firstly, could you talk about the strength in the order book, how this is constituted by modality and particularly interested in Varian, as well as by region. What was the contribution from the two larger contracts you announced in terms of the order book for the quarter? And secondly, could you talk about the weaker growth in Varian and the extent of supply challenges in fiscal Q1? Have you already started installations in fiscal Q2? And could you talk about your confidence around mid-to-high teens growth that is implied by your guidance for the remainder of the year? Thank you.
Jochen Schmitz: Hassan, thank you very much for your question. I will start with the order book and try to describe it a bit in more detail. Let me start. When we talk about order book, we primarily focus on equipment orders. That means the Unilabs deal Bernd was referring to is not part of this. The double-digit growth of 16% is without the Unilabs deal. It is and obviously entails the Atrium deal, but only the equipment portion of it, just to clarify. So that means when you look at this, I think this is – it is a significant part of it, but not driving, so to say, the numbers alone, yes. And Bernd gave you also guidance on what is the order backlog of our ES business. Overall, it's 4 billion out of, I would say, a total order book of 30 plus billion. That means we talk about at max 15% of orders coming from ES, and the current quarter was not very different in this regard. So, when we look at the regional distribution, we saw very, very healthy orders coming in across the geographies. We saw double-digit order growth in EMEA, in Asia Pacific Japan, in China, and we saw high single-digit order growth in Americas. So, it was healthy across the board. And when you also look via business areas, we saw double-digit equipment order growth in Imaging, in Advanced Therapies, as well as in Varian. So, it was – you can now say very broad-based across the board regionally, as well as business-wise.
Bernd Montag: Hassan to the second question, I mean, as maybe stated in other [circles already] [ph]. I mean, what is the background of the topic, we have one supplier of key electronics component who has shifted production from China to Mexico and has faced significant yield problems, which led to the fact here that we had to produce [indiscernible] for delivery, but needed to wait for that component. The situation is under control, yes. We have in December already had a very normal delivery schedule and now the team is catching up with the deliveries, the topic is fixed, and that is also why we are very confident about the Varian growth target or guidance for the full-year. Maybe as another comment, I also said this in the press call, this is one of the things where in the long run, Varian in addition benefit from being part of the Siemens Healthineers organization and its larger scale, yes, because typically, components like this we tend to have in-house, so that it's also much easier to manage situations like this, but specified a transient problem. And I'm very, very confident in the Varian team here.
Hassan Al-Wakeel: Very helpful. Thank you both. And if I can just follow up, Bernd, obviously, a very impressive order number, but are you seeing any caution in the U.S. market incrementally in your customer discussions given what some of your competitors are saying?
Bernd Montag: No, actually not. I mean we have this – I think the U.S. market is very healthy. And when you look at it, the – I mean, what we provide is, on the one hand helping in big problems of our customers, which means the labor cost topic and also the staff shortage topic. It is of utmost importance to also invest into productivity. So, you can look at our type of equipment as an investment to overcome the challenges. And in addition, and that is especially true for Imaging, you know you don't – Imaging is the front door of a hospital. If you are not competitive, they are also a source of profits. So that is not an area where we see artificial ways of holding the breadth or so at the moment, and we don't see that the situation is changing. And I think this discussion about hospital CapEx and so on has been with us for a long while. And you have also seen that for a long while, the order book is proving the opposite, and I see no reason why this shouldn't continue.
Marc Koebernick: Thanks Hassan. So, we'll go on to the next caller online, that would be Veronika Dubajova from Citi. Veronika, should be live.
Veronika Dubajova: Excellent. Good morning and thank you gentlemen for taking my questions. I will keep it to two, please. My first one is on the Imaging margin, and Jochen, your degree of confidence and progression as we move through the remainder of the year, almost 21% is a good starting point, but I was just hoping you can spend a little bit more time quantifying the benefit you expect from price and the benefit you expect from declining procurement logistic costs. And if you can put some numbers around that so we can feel more comfortable with the full-year expectations there? That would be a good starting point. And then my second question is a bit of a follow-up from the topic that Hassan was touching upon. Just curious [indiscernible] about the competitive environment on the order side of things, in particular in Imaging. We've seen some very divergent performance from you and some of your peers. And I'm just curious what you're seeing out there in the market, maybe a comment on China specifically and whether that is a market where you're doing very well relative to peers. Thank you.
Jochen Schmitz: Veronika thank you for your question. I think as it came across, we were very satisfied with the margin profile of imaging in the first quarter, considering that the growth was very solid, but below our fiscal year guidance with 7 to 9. And when you look at the margin expansion opportunity, we have seen there with 100 basis points, really net-net because as I said, the foreign exchange tailwind was more than offset by still year-over-year higher procurement logistic cost. And we always need to remind ourselves year-over-year means October to December 2021, that was quite a different world we lived in at that point in time, and that's why it's still increasing. So, what we have more or less penciled in, in our full-year margin profile for Imaging is at the end, not a significant contribution from lower procurement costs year-over-year, but more from two things conversion from the top line, as well as – and this goes hand-in-hand, because conversion from top line, better pricing kicking in. And what is really, really good is that we see those pricing topics we have seen in the order book now already starting to find its way into the P&L. And when you look at our equipment businesses, we have in imaging, the modalities, which have – which have shorter lead times between orders and revenue than for example in AT or Varian. Therefore, we have seen here already in Q1, the first good signs of better pricing and revenue, which helped for the conversion, which we have seen. I hope that clarifies it a bit. And Bernd is taking the second question.
Bernd Montag: Thank you, Veronika. I mean looking at the competitive situation, we see, and I'm very proud of the team here, continued market share gains in orders across the globe and in the key geographies, [here] [ph] the U.S., but also in China. Some comments on China since you asked specifically about it, we are here in clearly in the leading position in the – when it comes to the peers. What we also see is, especially in a quarter like the last one, when there is also government programs that there is a bit of a momentum in the local competitors. But that is something which I think has two sides. Here on the one hand, it shows that it's a local topic. The Chinese market remains extremely attractive and super important for us. And it might be that in the long run, the competitive dynamic is a little bit shifting, say, in China, you can choose – here's the world market leader and innovation leader. But then there's also a little bit of a local hero, but it makes it harder, I believe, when you are a global Number 3 or Number 4 to stay a viable alternative. So that is a bit of what I see in China. And overall, for the year, in both orders and revenue, but also when it comes to the margin contribution. I'm very, very optimistic and also very, very happy with what the Chinese team is doing.
Veronika Dubajova: That’s very clear. And can I just ask Bernd was the China order growth much higher than the 16 that you reported or was it similar to the 16 that you were talking about for the order book overall?
Bernd Montag: A bit higher, a bit higher. And I mean, the positive thing is, I think there was a – I mean, Hassan's question in the beginning, about the ES contribution or ES Enterprise Services where your partnerships, which is more in the 15% range or so in the rest of the world. So, in China, it is a pure transactional business, yes. So, this is not a market for value partnerships mostly since it is more hospital by hospital. So very, very good order growth there.
Veronika Dubajova: Terrific. Thanks guys.
Marc Koebernick: Thanks, Veronika. So, we head over to Graham from UBS. Graham, there's time for you, Your two questions now, please.
Graham Doyle: Good morning, guys and thanks for taking my questions. Just one on the guidance. I know at the end date, you should have talked about the upper end of the range being a little more difficult to achieve, but just thinking about some of your comments around cost tailwinds, maybe not being in your guidance. Do you feel like things like freight and chips might make things a little bit easier for you in the second half? And is that maybe some sort of upside or fact there? And then could you just talk more generally about supply chain? So, is that now really improving for things like Imaging as well? Thank you very much.
Jochen Schmitz: Graham, I believe it is a bit too early to pencil in, I would say, more tailwind from potentially lower costs in the second half. But obviously, we are well prepared to participate if that really happens, yes. As I said, our guidance for the business is built-in, I would say, on a solid print with regard to the cost items. And if there is upside to this, we will update you accordingly. But as we said, with the first quarter in Diagnostics, which was a tough quarter also in the core business due to China, I think we are currently, I would say, I do not see us moving all of the guidance range at all to the upper end, just to say this, even if there is a bit better cost position, yes? But as we go through the year and as we see how that stabilizes and becomes sustainable, we might update you on this. Just to say that. Sorry, Graham, on the second part, I'm not sure – what was the additional where actually you had there on the SDN side? Can you please repeat that?
Graham Doyle: Sure, so it's just around supply chain. So obviously, you've seen an easing of the situation in Varian. I'm just wondering if you were comparing maybe imaging now to maybe where you were in the summer of last year, how much better things gotten – and do you still need – are you still striving for some components in some areas?
Jochen Schmitz: I'm not sure. I think the Varian topic is a very specific topic as Bernd alluded to. I think that is, and you could even argue it has nothing to do, really, not really something to do with the supply chain challenges we were talking about due to the, I would say, the consequences of the pandemic right? It's a – yes, the world is talking about, you're right. And I think, therefore, it is of a different nature. I think the important topic is we have fixed it, we have now the yield we need to work through our pent-up deliveries in Varian and the team is full steam working on it.
Graham Doyle: Okay. Super clear. Thanks a lot guys.
Marc Koebernick: Thanks Graham. So, we head on to David Adlington from JPMorgan. David, please ask your questions.
David Adlington: Good morning guys. Thanks for the questions. So, obviously, one of your competitors canceled some orders with their customers during the quarter. I just wondered if you've seen any benefit of that on your orders in the quarter, and I suppose on a sort of more medium term, do you see a potential for further gains as a result of some of those issues at your competitor? And then just on China, just given the evolving situation, obviously, very rampant COVID situation in China. Just wondered any risks around installations in the second quarter that we should be thinking about?
Bernd Montag: Yes, David, this is not – when it comes to this cancellation topic, this is not something we consider. And we also don't see it as an issue. I mean – and when we give the guidance and the let's say, the perspective for the full-year, including Jochen's chart how margins will recover with the pricing measures kicking in, it takes into consideration that we have some older orders at different price levels. What we don't have is orders at crazy price levels. I think Siemens Healthineers was always disciplined in pricing, also because we have a little bit of a more global approach to it. So, we are a company which values its commitments. And also don't see – and the price for valuing our commitment is not high. And I believe, I mean, to your point, there is a potential upside here that this is not helping customer satisfaction when it comes to what other companies are doing, yes. But I mean, I don't want to quantify this, but I believe when you want to be a trusted partner, you should stay to your commitments.
Jochen Schmitz: David, you also talked about the potential installation risk in China. And when we look at what happened in the last quarter of the calendar year that, I would say, the highly populated areas in China went through a real pandemic heat wave, so to say. Our assumption is that we have most of it behind us and that we get back to normalization. And therefore, we also expect that we should be in a position to install in a more normal fashion than we have seen over the last quarters in China due to the – more to the lockdown situation than the COVID policy release situation. I don't have a crystal ball, what can happen, but I would say the current signs we have, and also, I would say the messaging from our local teams is clearly, I would say, cautiously optimistic that we are back to normal in China with regard to supply chain and logistic processes with regard to downstream installation processes and things like this.
David Adlington: That’s great. Thank you. Maybe just a cheeky follow-up, you mentioned that you had very strong service growth. I just wondered, I may have missed it, were you able to quantify the growth in service revenues?
Jochen Schmitz: David, normally, we said we’d strive for 6% service growth. And in Q1, it was even a bit better than 6%.
David Adlington: That’s great. Thank you very much.
Marc Koebernick: Thanks David. So, we move on to Sezgi from HSBC. Sezgi, please ask your questions.
Sezgi Oezener: Hi, thanks for taking my questions. I will have two, please. First of all, given how much in focus, the photo accounting was in RSNA, and now some peers are also talking about doing similar, bringing similar products in the market [indiscernible] talk about. How does the outlook look? And what's the weight of CT content within your order books? Are you seeing any market share gains in CT versus other imaging segments? That's the one question, please. And the second, the tax provision that you saw, was that related to Varian or a different matter that we would know? And do you expect – I mean, if it was reserved, I would assume that you expect it to remain so, but does that have impact, any changes on your tax outlook for 2023 and beyond?
Bernd Montag: Yes, Sezgi. Thank you very much for the question on counting CT. I mean, first of all, it was really very amazing to see the momentum at RSNA. I mean one of my personal highlight was being at a user meeting via the first customers were presenting on what that technology is doing and how it is really changing clinical practice. I mean, something we normally internally don't like. Many people say, well, I can do stuff, which I normally do with MR, but there's also topics of – which were simply unheard of, plus the additional benefit you always have of much lower patient dose or X-ray dose. So, really amazing momentum. And the positive is also that there is violent agreement in the community that this is where the field is going, that it will become the standard like multi-slice CT was in the beginning of the century. And that is also what is, what I want to say like, and it sounds arrogant, but it meant seriously in the statements of our competitors that they don't doubt the technology and say, hey, we will do this too. So that means it is a big confirmation. And the good thing is that we are extremely ahead in terms of where we are, not only in the technology, but also when it comes to having user meetings where people look at how they deal with patients, how they change clinical practice and so on and so on, which is something completely different than having a prototype installed in two years from now. So, to quantify it a little bit, CT is 30% roughly of our imaging volume. And out of that 30%, I mean, the high-end is maybe in the 10%, 20% range, yes, extremely margin accretive. And this is an area where I mean, we are basically a little bit a league on our own already with the dual-source CT. And in a way, this is – in this segment, it is not so much a market share game. It is a market expansion in a make market game.
Jochen Schmitz: I think coming from – I think you asked very widespread questions. Now, we go to the tax topic, Sezgi, as you rightfully said, it was a provision, yes. Therefore, we – there was a trigger in our Q1, which led us to release the provision. I would say, it is a more normal topic, which can happen. The trigger was set by the process of a tax audit of a country. And therefore, I would say, something in the normal course of business, what can happen. Is it something which drives in a sustainable manner, our tax rate outlook down. I would say, no. And as you know, we had for five years, a tax range guidance of 27 to 29, for our first five years. We lower that by 1 percentage point for this fiscal year to 26 to 28. This release of the provision, obviously, is tailwind to end up more in the lower-end of the band than in the upper-end of the band, yes, just to say this. But I think it's not necessarily a precursor for expectation that we will lower the band quickly again, just to say this.
Sezgi Oezener: [One-off] [ph] from the past. Thank you.
Marc Koebernick: We still have quite a long queue and actually the call according to our invitation is already over. I think we will extended it another five minutes, but we will not make it fully through, and we'll get back to you guys. So, the next one in the queue would be [indiscernible] from Bank of America. So, [indiscernible], please go ahead and ask your questions.
Unidentified Analyst: Thanks very much. Good morning, everyone. Very quick follow-up for me on Graham and David's questions. So, very strong order intake. And you stressed a very strong revenue from MRI within [liquid] [ph] and Imaging. One of your peers recently mentioned that basically, they couldn't take any new order in MR due to a lead time exceeding year. So, could you – the first question, do you take new orders like in this modality? And then could you maybe share your lead time for MR and also the rest of the business, if it's possible? Thank you.
Bernd Montag: Thank you. I mean, we take orders. And simply because I mean our lead times are completely under control. I mean – and typically, to give you a little bit of a flavor, the lead times in imaging vary a little bit by business because the – let's say there are like basic X-ray systems, ultrasound or so, which are almost – they are – there is no installation required. Typically, so on the CT side, it's more in the 3 months to 6 months, if it's not a long-term multi-modality contract where you have multiple installations over time. In MR, it is typically a little bit longer, and that is more a customer topic, yes, since the MRI also requires typically measures on the sighting side, yes. So, it's room preparation. There is the shielding, which is necessary for the radio frequency and the magnetic field and so on and so on. Yes, so typically, on the MR side, it is more in a 6 months to 9 months range. So, but we have not – we did not have any situation where we had to walk away from an order or from a deal because we could not offer a delivery time for the customer, yes. So, I hope that answers the question. We won some orders because of this. But this is more – I wouldn't make this a big part of the market share gains we have. It's just another let's say, aspect of being the company with a leading portfolio and also the biggest scale and with this also the biggest stability of the business.
Unidentified Analyst: Perfect. Thank you very much.
Marc Koebernick: Thanks [indiscernible]. So, we come to the last one for today's Q&A, and that will be Robert Davies from Morgan Stanley. So, Robert, please ask your, we’ll give you two questions.
Robert Davies: Thank you. My first one was just around the ex-antigen profitability against some of the other global diagnostics peers. There's been a bit of a differential lately in terms of profitability. Just if you could give us a little bit more color of what's going on there and the expectation over the full-year and into next year. Where is the medium-term, kind of run rate on that business? And then the second one was just around your comments you made on Varian. You seem to, sort of obviously have a high conviction that that's coming back mid-teens next quarter. Just in terms of the profitability of that business, are we expecting a, sort of disproportionately large kicker on that volume growth into 2Q and then normalizing into the range? Just if you could, kind of, I guess, walk us through what your expectations are around profitability for Varian specifically? Because obviously, you've had a couple of quarters now where you've been below the range on the supply chain shortages. Are we going to see a, sort of spike and then a kind of normalization back into the range? Thank you.
Jochen Schmitz: Yes, thanks, Robert, for the question. Let me start with Diagnostics. We have a clear target out there for 2025 on Diagnostics to be ex-transformation costs if there remain any in 2025, around 8% to 12% margin, which is still below the best peer group there, which is clear. Therefore, it is an intermediate step, but I think we felt that it is meaningful to keep that time box in place 2025, and give guidance on the margin there. And we expect us to move with the transformation measures, which lead to 300 million additional cost savings until 2025, gradually into that window of 8 to 12. I hope that clarifies it. And as we said, over the last two years, we were in the low single digits margin territory. When you now look year-over-year, we had, in addition, supply chain, foreign exchange, China headwind in the quarter. If you add this all together, you could – it's about 600 basis points or so negative year-over-year table in the core without the antigen topic. And that is not too far off to where we have been in the past. And we all know this business is – has high contribution margins. And when you are faced with negative growth then you also are faced or impacted by this heavily. On the Varian side, to be honest, in this quarter, we shrank by 4.5% on the revenue line, and we grew significantly on the order line. Our outlook for the fiscal year is 9% to 12% growth. So, you can say double-digit growth. That means, and when you then look at the margin level of 14.5 relative to the full fiscal year margins, and that's also of 16 to 18, that's also – I feel relatively good about Q1, considering the very low revenue line in that quarter. Therefore, I was more – I would say, more positive about the margins, considering the low revenue line. Therefore, I expect us with conversion, better pricing, move up into that margin band relatively quickly based on the high teens margins, revenue growth we guide for in the current quarter, Q2.
Robert Davies: Okay. Thank you. That was great. Thanks.
Marc Koebernick: Thanks, Robert. So that brings us to the end of today's call. Thanks for all the questions. I promise you guys who are still in the queue, we'll make sure that you get prioritized tomorrow morning in our sell-side breakfast. And we look forward to communication in the next two weeks and days on road shows and conferences and at latest here and see you at our Q2 call in May. Bye-bye.
Operator: That will conclude today's conference call. Thank you for your participation ladies and gentlemen. A recording of this conference call will be available on the Investor Relations section of the Siemens Healthineers website.