Earnings Transcript for SHL.DE - Q2 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. Good morning from Erlangen, the analysts and investors. Our CEO, Bernhard Montag; and our CFO, Jochen Schmitz, will be taking you through the details of our Q2 results for fiscal ‘23 this morning. After the presentation, there will be a chance to ask questions. The Q2 ‘23 results were published this morning at 7

Bernhard Montag: 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 Q2. We saw overall a very strong comparable revenue growth ex antigen of 11%, driven by Varian, Imaging and Advanced Therapies. This growth was the result of excellent equipment revenue growth of almost 20%, paired with continuing strong growth of our service business. On top of this excellent growth, we were able to further strengthen our order book, and we achieved an equipment book-to-bill of above 1. Overall, including antigen revenues, we saw a 2.5% decline, given the significant antigen revenue a year ago. The drop in antigen revenues to almost zero led to a comparable revenue decline of 39% in the Diagnostics business. Diagnostics profitability was in addition impacted by €77 million transformation costs. As expected, Varian overcame its supply chain issues and delivered a truly outstanding comparable revenue growth of 27%. Its Q2 margin was at 14.4%. Imaging and Advanced Therapies had a strong quarter with comparable revenue growth of 13% and 10%, respectively. Imaging showed a strong margin expansion of 130 basis points in Q2, leading to a margin of 21.5% and Advanced Therapies delivered a strong margin of 16.8%. We had flagged a portfolio review process at Advanced Therapies at the end of Q4. Now we have decided to focus the Endovascular Robotics business, which you may know as Corindus, on neurovascular interventions. You will get more insight on this topic for me as well as from Jochen later in this presentation. Our adjusted earnings per share came in at €0.43 in Q2, down year-on-year for 2 reasons

Jochen Schmitz: Thank you, Ben. Good morning to everyone. Glad that you are joining us again. Let me take you through the financials of our second quarter. We posted very strong comparable revenue growth of 11.2%, excluding antigen. Due to our very strong backlog, substantiating future revenue, we could already point in our last earnings call to accelerating revenue growth this quarter. As expected, we now saw in Q2 equipment revenue growth accelerating to almost 20% as well as accelerating service revenue growth. From a regional perspective, we saw a very strong growth across the board, excluding antigen. China stood out with a steep recovery to 25% growth, but also EMEA and the Americas posted very strong growth at 10% and 7%, respectively. Adjusted basic earnings per share declined year-over-year by 36% at face value. In the prior year quarter, we booked around €680 million in antigen revenues, which lifted earnings per share by around €0.23. It is fading away in 2023 as expected. In Q2, we booked only €4 million in antigen revenues. Also this quarter, we saw, as expected, charges of €77 million for the Diagnostics transformation, which we do not adjust for in our adjusted EBIT or adjusted EPS. Excluding the antigen contribution in the prior year and the charges for the Diagnostics transformation, earnings per share grew by 11%, in line with revenue growth. Let me give you some more color on the development of the adjusted EBIT margin in Q2. We still see inflation coming through in Q2, particularly in procurement costs. They’re now with much less escalations and spot buys than last year. Long-term procurement contracts for materials and components partly protected us in the past. However, we do see inflation impacts over time. On the other hand, we do see some easing in logistic costs, particularly from lower freight charges. In the segment, Diagnostics and Varian, we have a high exposure to freight costs. The increased procurement and easing logistic costs are roughly canceling each other out there. In Imaging and Advanced Therapies, where freight costs have a smaller share of total cost, we still see a net headwind from procurement and logistic costs as we do for the group. The impact on the adjusted EBIT margin in Q2 of the increased procurement and logistics cost year-over-year and from the diagnostic transformation costs amounted to over 200 basis points. If you adjust last year’s margins for the more than 400 basis points antigen contribution, the decline year-over-year is only around 100 basis points, which is more than explained by the over 200 basis points headwind from procurement and Diagnostics transformation costs. Both headwinds are clearly only temporary. So we do see underlying margin expansion mainly from conversion. Below the EBIT line, financial income net came in at negative €47 million, pretty much on the run rate we expect for the full year. Our tax rate of 23% is developing towards what we expect for the full year, but I will come to that when I comment on the outlook. One last comment on cash before we look at the segments, we saw very good free cash flow of €731 million pretax, driven by the cash-in of receivables. Obviously, as in every second quarter, we recorded the cash out for the dividend payment, thus negatively impacting the cash flow from financing activities. Therefore, leverage temporarily increased in Q2 and will come down again in the course of the second half. As always, you will find the EBIT to cash bridge as well as the net debt bridge in the appendix of this presentation, but now let us have a look at the segment performance in detail, starting with Imaging and Diagnostics. Imaging had very strong comparable revenue growth of 12.7% with broad-based growth across the businesses. On the margin side, Imaging showed strong margin expansion year-over-year of 130 basis points, driven by very healthy conversion. In Imaging, we started to see the first tailwind from pricing measures. However, as expected, pricing is so far only the smaller contribution to margin expansion. The larger part this quarter is a healthy conversion from the very strong revenue growth. We continue to expect in the second half of the year pricing will be a larger contributor to margin expansion. Foreign exchange tailwind of around 100 basis points was more than offset by cost increases, particularly for procurement and logistics. Diagnostics saw a sharp revenue decline as the antigen business faded almost to zero in Q2, having peaked at €680 million in Q2 last year. Excluding the antigen contribution, core business revenue was muted primarily due to the fading out of other COVID-rated tests, like PCR and antibody tests. The margin in Diagnostics was down year-over-year due to the significantly lower antigen contribution in the core business that had diagnostic-based headwinds from foreign exchange of around 150 basis points year-over-year and in addition, diagnostics book transformation cost of €77 million, which consists mainly of effects triggered by portfolio simplification. Hence, the vast majority of transformation costs were booked in the first half as expected. I will talk in more detail later in the presentation about the financial impacts of the transformation program. Now let’s look at Varian and Advanced Therapies on the next slide. Varian very successfully converted the strong order book to excellent revenue growth of 27% after resolving the one supply issue that we have reported in the last 2 quarters. This was achieved on back of impressive equipment revenue growth this quarter, significantly above the almost 20% we saw for the group. When looking at margin performance, Varian delivered a solid 14.4% burdened by negative mix effects as well as foreign exchange headwinds. The mix effect stems mainly from the significantly above normal equipment growth, which is rather margin dilutive. Also the conversion of the order backlog of these pent-up deliveries meant converting with older, less effective pricing. I would also like to emphasize that the commitment to do everything in our power to get the delayed equipment to our customers as quickly as we could did come at a certain additional cost. Advanced Therapies continued its healthy momentum with very strong comparable revenue growth of 9.9%, driven by a very decent backlog. On the adjusted EBIT line, Advanced Therapies saw a strong year-over-year margin expansion of 470 basis points, driven by very healthy conversion. In addition, the first positive effect of pricing measures started to take effect. A foreign exchange tailwind of around 200 basis points could more than offset cost increases, particularly from procurement and logistics. As Bernhard highlighted, Advanced Therapies decided to exclusively focus Endovascular Robotics business on neurovascular interventions. However, while this decision has triggered quite substantial one-off items, which I will comment on in more detail in a few moments, the investments into the Endovascular Robotics business continued to weigh on margins in Q2 to a very similar extent as in prior quarters. Now let us have a closer look at the dynamics of pricing and orders. Starting with pricing, and with the graph on the left-hand side of the chart that you have already saw in our disclosures from the last 3 quarters. We continue to expect our successful focus on pricing to lead to stronger margins, notably in the second half. The pricing measures are steadily gaining share in the backlog. As stated previously, there is a time lag of around 3 to 18 months on average, varying from product to product between order entry and revenue. As mentioned before, we already see the first measures taking effect in Imaging and Advanced Therapies. In Varian, this is not yet the case to the same extent since especially the LINAC business sits probably on the top end of the 3 to 18 months time lag between order entry and revenue. However, we also see the pricing measures phasing into Varian’s backlog, so it will be only a matter of time until we see the measures also taking effect here. Now let’s have a look at orders on the right side of the chart. As Bernhard has mentioned, in Q2, we further strengthened our order book on top of excellent equipment revenue growth of almost 20%. Varian stood out with an equipment book-to-bill of 1.05, but also Imaging and Advanced Therapies posted book-to-bill above 1. We saw some lumpiness in book-to-bill ratios in Q1 and Q2 this year, especially on the denominator. Q1 at 1.36 had softer equipment revenue, whereas Q2 at 1.01 had super strong equipment revenue. So looking at the first half year gives you a more balanced picture. In the first half of the year, the equipment book-to-bill was at 1.17, significantly above equipment revenues. On the graph, we also include the book-to-bill of the last year. As you can see, we continuously grow backlog with book-to-bill clearly above 1. This sets us up for equipment revenue growth in the future. On the back of growing equipment places, we also accelerated service revenue growth substantially. So we keep our high share of revenues – of recurring revenues alongside growing equipment revenues. Equipment order growth in Q2 was muted partially to very tough comps in the prior year, which was in the high teens and due to some volatility that we have seen historically with order intake in the more odd quarters. As you probably remember, we had excellent equipment order growth in Q1. We have seen lumpy order intake in quarters before, which is absolutely no concern to us because looking at the full year, equipment order growth is rock solid. But now from the top line to the bottom line on the next chart, I will explain the special items impacts for this quarter in Advanced Therapies and Diagnostics. Let me now give additional color on the financial impacts of the important measures Bernhard mentioned earlier. The decision to exclusively focus the portfolio of Endovascular Robotics business on neurovascular interventions was taken in Q2 and consequently, the related charges were booked in Q2. We do not expect any further material charges related to this topic. The charges were triggered by discontinuing the Endovascular Robotics business in cardiology, resulting in total charges of €329 million. Those charges related to portfolio decision were fully adjusted. Within the €329 million, the largest item was a €244 million impairment of other intangible assets related to the cardiovascular solution. These €244 million are included in the depreciation, amortization and impairment line for the reconciliation of EBITDA. We will not see the positive impact from the discontinuation of the cardio case in this fiscal year yet because we are ramping down activities in course of the second half. From Q1 of fiscal year ‘24 onwards, we expect to see significantly less margin dilution in Advanced Therapies from the investments in the Endovascular business. The margin dilution will not reduce to zero because we continue to invest into the neurovascular application. So the best assumption as of now will be that the dilution will half. At Diagnostics, a comprehensive transformation program is currently being executed with a newly established leaner organization with measures to streamline the portfolio. As stated previously, only the charges related to severance fall under our adjustment definition. The material part of the planned transformation costs for fiscal year 2023 was booked in the first half as planned. This included the €111 million cost in the first half, not falling under our adjustment definition, which were predominantly costs related to the streamlining of the Diagnostics portfolio. In the second half, we expect the charges to be primarily related to severance; therefore, we do expect less impact on adjusted EBIT in the second half. The assumptions from the beginning of the fiscal year of €100 million to €150 million transformation cost and around €50 million related to severance for fiscal year ‘23 remain unchanged. With transformation, running as planned, the assumption for 2024 and 2025 are also unchanged. We expect total transformation cost of €350 million to €450 million until 2025 to generate annual savings of around €300 million by that time. Now let’s look at the fiscal year with the outlook for fiscal year 2023. First, we confirm our outlook for fiscal year 2023. As I outlined before in this presentation, we saw very strong very revenue growth ex antigen in Q2, and the second half year is well supported by our growing backlog and our high share of recurring revenues. Therefore, we would expect to end the fiscal year clearly in the upper half of the range of 6% to 8% growth excluding antigen or of the minus 1 to plus 1 growth including antigen. On the earnings side, exchange rates have clearly changed from the assumptions in the outlook we gave in November 2022. And I would like to point out that this is not only the U.S. dollar that developed against our initial assumption, it is a broad group of currency that was – that has weakened since then against the euro. Including today’s spot and forward rates into our assumptions on foreign exchange results in a negative effect of more than €0.10 on adjusted basic earnings per share for fiscal year 2023 relative to our assumption for the guidance in November 2022. Therefore, we expect to end the fiscal year at the low end of the range of €2 to €2.20 for adjusted earnings per share. Let us now have a look how this outlook comes together from the bottom-up view via the segment performance, starting with comparable revenue growth. For the segments, Imaging, Varian and Advanced Therapies, we expect to end the fiscal year at the upper end of the respective ranges for comparable revenue growth, based on the strong revenue growth in the first half, very strong backlog and higher recurring revenues share. For the segment Diagnostics, we lowered the guidance for the core business excluding antigen to minus 2% to plus 1% comparable revenue growth and consequently for all-in growth to minus 26% to minus 23%. Please bear in mind that we booked €1.5 billion of antigen revenues in last fiscal year, whereas for fiscal year 2023, we expect only around €100 million revenue from antigen. I would like to give you the key reasons why we update the growth guidance on Diagnostics. There is no pent-up demand – almost no pent-up demand in the Diagnostics business. Therefore, we do not expect to fully catch up the revenues lost from the first half of the year, primarily from the situation in China. And obviously, we also took decisive actions to transform the Diagnostics business. That means that the organization will be doing a lot of heavy lifting executing the transformation. We are convinced that those measures will lead to our midterm ambition for Diagnostics, while weighing on the current performance of the business in this fiscal year. Over to margins. Both Imaging and Advanced Therapies have shown good margin momentum in the first half. In the second half, we obviously expect the pricing measures to be much more supportive adding momentum to already good effect from conversion. Hence, we are rather optimistic for their full year performance within their respective ranges. We also expect Varian to improve its margin sequentially in the second half based on conversion from the very strong top line. However, as mentioned before, due to the longer lead times in LINAC business, the pricing measures, which are gradually phasing into the Varian backlog do take longer to convert into revenues and margins. We currently expect Varian to end up rather towards the low end of its margin range. For the segment Diagnostics, we lowered the margin guidance for the core business to minus 3% to plus 1% adjusted EBIT margin in 2023 and consequently, the all-in margin to minus 4% to break even. Please bear in mind that the all-in margin includes the non-adjusted transformation cost of €100 million to €150 million and some contribution from antigen. Again, let me point out 3 main reasons why we updated the margin guidance on Diagnostics. On the positive side, we expect conversion from accelerating growth as well as the first savings from the transformation program to support margins in the second half. On the other hand, the worsening regional mix from lost revenues in China impact the overall margin. As having said before and we are convinced that the measures from the transformation program will lead to our mid-term ambition but weighing on the current performance of the business in this fiscal year. Below the line, we expect financial income net to end up within the guidance range. The tax rate in the first half was low due to the release of a tax provision in Q1 and we expect the tax rate in the second half to be around the high end of the range. However, for the full year, we would expect that we approach the range of 26% to 28% for our tax rate guidance from below towards 26%. Before we close, let me quickly share our current view on the upcoming quarter, our Q3. We expect to turn back to positive growth for Siemens Healthineers also including antigen for the group on the back of the expected very strong revenue growth in Imaging, Varian and Advanced Therapies. Our margins at Imaging, Varian and Advanced Therapies, we expect year-over-year expansion in Q3, driven by conversion and the pricing measures taking even more effect. At Diagnostics, we expect to turn back to growth in the core and sequential improvement of core margins, and we only expect very little impact on adjusted EBIT from the transformation side. And with that, I hand over to Marc for Q&A.

A - Marc Koebernick: Thank you, Jochen. We already have some people queuing up for the Q&A, and let me just briefly remind you of our two-question rule. The first caller on the line would be Veronika Dubajova from Citi. So Veronika, please go ahead.

Veronika Dubajova: Hi, good morning. Bernhard, Jochen, Marc, thank you so much for taking my two questions. Really appreciate it. First, I just want to start big picture Diagnostics. And if I look at the direction of travel, obviously, it’s making it seem an even bigger stretch for you to get to your 8% to 12% midterm ambition. So just would love to get your updated thoughts on how realistic that midterm margin range for Diagnostics still is, and what is it that you need to do to turn this business around? What is going wrong? And what are you going to do to improve that? That would be the first one. The second one, just on order growth, Jochen, if you could confirm what the equipment order growth number was in the quarter? And then, Bernhard, would love to get any color from you on the modalities and the regions that were particularly strong this quarter. Those are my two questions. Thank you.

Bernhard Montag: Thank you, Veronika. I mean on Diagnostics, we are convinced of the margin targets we have given. And the transformation program is a very, very decisive set of measures to get us there. it is about radically simplifying the portfolio with migrating faster to the Atellica platform. We are very happy with the progress on the Atellica CI1900, which is completing the portfolio. At the same time, this improved or this radically simplified portfolio based on Atellica allows us now, and this is what is triggering the transformation costs to get rid of certain legacy platforms plus all the related efforts around them in R&D, in – later in supply chain in certain locations and closing down certain locations where these – the instruments and the reagents are getting produced, plus a much more verticalized way of running the Diagnostics business, including really pointing sales and service to where it’s making the fastest progress and contributes fastest to accelerating growth and improving margins, yes. So to some extent, the deeper the cuts and the more decisive the actions in this fiscal year, the more confident we can be about the trajectory moving forward. And we are confident that in Q2 – in the second half of the year, we will return to growth, and we will see the first savings kicking in. Jochen, do you want to add?

Jochen Schmitz: No, I think – I’d start with the orders and you might shed some more color on it. On the order side, when you just look at the growth rate, put it this way, it was flattish on the equipment order for the quarter. But again, I mean, when we look at the book-to-bill, I want to say that it sounds a bit, I would say, like a lecture, but it’s a fraction, it’s a fraction. We had the denominator a completely different number than last quarter. Therefore, we also need to be mindful. But on a super strong equipment revenue growth, we were able to increase the backlog, and I think that is a strong message. And when you look a bit deeper also from a regional perspective that you see that we saw regions with super strong equipment order growth and regions with muted equipment order growth. And in the areas where it was muted, it was a function of prior year superb growth. And I talked to you about growth rates in those regions, which were north of 30% last year, just to say that. So therefore, we are very satisfied with where we stand. And we are very, very convinced on the revenue growth going forward, as I highlighted in my comments to the outlook where we guided for Imaging, Advanced Therapies and Varian for the upper end of the range.

Bernhard Montag: Yes. I can only echo that. I mean, I’m really extremely happy about this positive – I mean, building equipment backlog on top of a 20% equipment revenue quarter. I mean, I don’t know whether I had something like this in my life. So it’s something which is pretty amazing. Looking into the details you asked, I mean, on the modality side in imaging, there is basically nothing which stands especially out. It has been a mix as normal or more positively. I mean, everybody was contributing to both, the strong revenue but – and the strong order intake. I mean, especially also nice to see that Varian continues with a very strong order book. I mean, also here, in addition to the extremely strong revenue slice. And bear in mind, I mean, when we speak about 27% growth in Varian and – equipment is only about half of the top line typically, it means that the equipment revenue growth in Varian was, I mean, north of 40% and still a lot of orders coming in there.

Marc Koebernick: I think that must be sufficient color, Veronika, I hope.

Veronika Dubajova: Fantastic, thank you, guys.

Bernhard Montag: Veronika needs to decide this, but one more thing. I mean, regionally what we saw is basically across the board, a very good come back of China, strong Europe, U.S. strong in absolute terms, yes. I mean this is one of the regions where we had a very, very stellar Q2, but still, I mean, when you look at the absolute numbers, pretty amazing. So from that point of view, from a global point of view, very, very positive here.

Marc Koebernick: Okay. Thanks. [Operator Instructions] Next caller in the line would then be Hassan from Barclays. Hassan, you should be live now. Go ahead.

Hassan Al-Wakeel: Thank you for taking my questions. I have two, please. So firstly, on Imaging. Which modalities drove the strong revenue performance? I think you highlight more moderate growth in the Americas, and would love the color here. And why did you not decide to upgrade your guidance across Imaging and Varian despite, I guess, given growth is now towards the upper end of the growth guidance for the first half. And related to that, how are you thinking about H2 equipment orders, given you have another strong mid-teens comp in Q3 and 10% in Q4, I believe? And then secondly, if I look at the Varian margin for H1, it implies quite a steep acceleration into the second half to hit the lower end of your segment margin guidance. How are you thinking about this? And what are the building blocks to your mind? Thank you.

Bernhard Montag: Thank you, Hassan. Talking modalities revenue growth in Imaging, it is basically across the board, very, very strong in – and this double-digit growth was basically carried by all modalities. And I mean what is good about it is that especially also, this includes the high-margin businesses, which are, as you know, CT, MR and then followed by molecular imaging. Then there was a – which was second – yes, so orders, I mean here, we are, as Jochen also talked about, very positive about the book-to-bill ratios being in a similar level as in the first half of the year. And bear in mind, here, as Jochen lectured, this is a fraction or a ratio of orders to revenue. We had a weak revenue quarter or not so great. We are never weaker, but we were not so great in Q1 in terms of revenue, but we were, I think, pretty outstanding in terms of equipment revenue in Q2. I mean, that is what is distorting a little bit or changing the picture in the ratio of book-to-bill. But we are, as Jochen also talked about, very positive, is that the picture on the book-to-bill in H2 will be on a similar level as in H1. Growth rates, we are very positive to continue the momentum. When it comes to the guidance, I mean, we clearly said, we are looking at the upper end in growth rates, and that is basically why we decided to, I mean, to send this very clear signal, but not to change it. But there is nothing to read into it because we still believe it’s in the upper end, but not a completely different picture, but it shows also that we are very positive about the development.

Jochen Schmitz: Hassan, on the Varian margin, first of all, Bernhard highlighted and he talked about the, I would say, extraordinary equipment share in the revenue line for Varian and he pointed towards the more than 40% growth on equipment. And therefore, we had to live with, on this stellar revenue, a little, I would say, dilution in margin from a mix standpoint, equipment versus service. And going forward, I think that was your question, how do we get from the €14.5 million to the €16 million for the full fiscal. Further while, we expect, again, very strong revenue quarters for Varian in the coming quarters, but not to the extent we have seen in Q2. Therefore, we expect a significant help from just, as I said before, in equipment service mix. Secondly, as highlighted, we expect to see, I would say, the better priced backlog now taking a larger share into – constantly larger share into the revenue line of the equipment side of Varian. And these are the two main drivers of margin improvement in the second half.

Hassan Al-Wakeel: Very helpful. And the Americas question on more moderate growth.

Bernhard Montag: On revenue, on orders.

Jochen Schmitz: On revenue, it was 7%.

Bernhard Montag: I think revenue was pretty decent, yes.

Jochen Schmitz: It’s a very good quarter. And remind you, you should also know that in the 7%, we have Diagnostics in there. Therefore, on the equipment businesses, we were in the double digits. So that was not, from our standard, a very solid quarter in Americas revenue-wise.

Hassan Al-Wakeel: Very helpful. Thank you.

Jochen Schmitz: You are welcome.

Marc Koebernick: Thanks. So that brings me over to the next caller. That will be David Adlington from JPMorgan. David, you should be live now.

David Adlington: Hey, good morning, guys. Thanks for the questions. Maybe just a bit more focus on orders and particularly your funnel of orders in the second half. I think you’ve mentioned that you’re looking at book-to-bill similar to the first half, which I think remember is 1.17. Just wondered how you’re feeling in terms of customer appetite for order growth? Are you seeing any signs of any particular concerns in the CapEx environment? And also any pushback on the price increases you’re putting through? Thank you.

Bernhard Montag: David, basically, it’s an unchanged picture on both topics when it comes to the health or healthiness of the market, but also the pricing situation. Looking at markets globally, we see a very stable demand, very good, very healthy Europe. It’s very helpful that China is now also a contributor. And we see the U.S. on track with a very solid continued demand for Imaging. I mean you see the trends towards building ambulatory centers. You see Imaging, but also radiation therapy just to be a key topic here, which kind of defines also what a hospital offers, including being – this is – I mean, on the imaging side, the diagnostic entry door of a hospital and there is continued interest. So that is very healthy. On the pricing side, we see a good development. So I think we have, as we called it several times, here developed a good pricing muscle. And when looking at the competitive situation, we see also that we have the power to – we have some pricing power simply because of the super strong portfolio we have. I mean this lighthouse product on one hand, but on the other hand, with a completeness of the portfolio when it comes to addressing all segments of the market, which we never had before, plus, of course, having competitors who are struggling on the margin side, which also kind of helps that undercutting us on pricing is not really a super great idea to make up for that.

David Adlington: Okay. Very clear. And maybe just a follow-up on photon-counting CT. It wasn’t really mentioned that much in the presentation. Just wondered any sort of further color in terms of demand profile there.

Bernhard Montag: Very positive, yes. I mean this is absolutely undisputed that this is the way to go. The discussion with customers is a when discussion, not an if discussion. When is the right time for a respective customer who also get one. I mean it’s clear, it starts more in the high end, but we see it now getting into the special imaging centers. It is the topic, which is a must-have or you cannot afford not to have it in academic medicine. And I can confirm and I said multiple times here, it is undisputed that this is the future standard, but also there is only one solution available with more to come, and by the way, from Siemens Healthineers.

David Adlington: Okay, thank very much.

Marc Koebernick: We have the next caller that will be Graham from UBS. Graham, please go ahead.

Graham Doyle: Good morning, thanks, guys. Just a couple of questions. One on China. So obviously, your order growth has been very strong this year, in part driven by sort of government stimulus. I was just wondering, would you have a sense as to how durable that is through the rest of this year? I suppose – and also how that will eventually convert into revenue. So that’s still a sort of 12-month outlook that we should be thinking about and therefore, the benefit coming next year? And then just a quick one on Varian. Obviously, a very strong top line performance. Is there anything that you’re now seeing commercially that’s driving better sales synergies, I suppose, because I know that’s something you have outlined at the transaction, but it’d be good to get a better sense and an update on that, please. Thank you.

Bernhard Montag: I mean, on China, we see this – the stimulus program has definitely been very helpful in restarting the growth engine and will help us on the revenue line for the quarters to come. But the good thing is, and that’s why I phrased it like restarting the growth engine, yes, that China is back to normal. And back to normal means, this is a market with high-single digit growth with the clear possibility for us to grow in double digits on a sustainable basis. And that is a big, big, big additional driver for us. On, the Varian side, I mean it just shows two things. From one hand that this is a very, very healthy market, radiation oncology, but also the other areas Varian is focused on in comprehensive cancer care, basically across all geographies. But in addition, it shows that we have a very strong competitive positioning with a much extremely complete product line here from Halcyon to TrueBeam to Ethos with now HyperSight as the first proof point of the combination of Imaging and therapy or Siemens Healthineers classic with Varian.

Graham Doyle: Great. Thank you very much.

Marc Koebernick: Thanks Graham for your question. We head on to Odysseas from Berenberg. So, Odysseas should be live.

Odysseas Manesiotis: Hi. Good morning. Thanks for taking my questions. A couple here on diagnostics, please. First as a follow-up to Veronika’s question, how far are you into replacing your legacy installed base with the Atellica CI 1900, and are there any KPIs you could share here? Would it be too optimistic to assume that you would have replaced the majority of your legacy low, mid throughput installed base with these instruments by the end of the fiscal year? And secondly, how far are you into reaching your historical run rates for China diagnostic routine testing in the past few weeks? And how does that compare to Q2? Thank you.

Bernhard Montag: To the first question, I maybe need to shed some light. I mean the idea is not to replace the installed base in one go. I mean what you do in diagnostics is selling basically a reagent contract, which typically is 5 years to 7 years. And then as part of this, if you don’t prolong an existing instrument, you deliver an instrument, which to some extent, we had that discussion also when it came to the Atellica rollout in the beginning more of a cost than a benefit here for our bottom line. So, from that point of view, it’s not a target here to as quickly as possible change the installed base. It is important to win reagent contracts and this is – and to migrate step-by-step the existing installed base to the new platform. So and that is where we are very, very well positioned and where the Atellica CI 1900 gets extremely good press from customers especially in this segment. But rushing this is not the business case. Jochen, do you want to add?

Jochen Schmitz: Yes. And maybe to add to this, what Bernhard said, which I fully concur with, obviously, is that the majority of the efficiency you can drive with just making this decision because you can then immediately refocusing your R&D towards Atellica only. You can immediately start optimizing your supply chain management footprint. And you can also start realigning and focusing your service network to this because you don’t need to train new people on legacy platforms and things like this, but only for example, only on Atellica. And obviously, your go-to-market is then very straightforward because it goes directly. Therefore, you don’t need to have replace the installed base by the new product, but the majority of the efficiency comes with just making those decisions, just to say this to add to Bernhard’s comments. Ex-China?

Bernhard Montag: Ex China, I mean the normalization of growth rates will probably take two more quarters, because there are moving parts. I mean on the one hand, what is happening in the market and also working through the transformation program. So, I think Q4, Q1 would be the answer.

Odysseas Manesiotis: Clear. Thank you.

Marc Koebernick: Okay. Thanks Odysseas. We head on to Falko from Deutsche Bank. Falko, please go ahead.

Falko Friedrichs: Thank you. Good morning. I have two questions left. And in your Imaging segment, out of the 13% organic growth, can you provide the volume price split over there? And also provide the split for us for the whole group in the quarter? And then a follow-up on Corindus, please, thanks for the color on the margin dilution from next fiscal year onwards. When do you think it can reach the sort of margin breakeven now? Thank you.

Jochen Schmitz: Falko, I think on volume price, I think mix I think that is – when you talk about mix in Imaging, I think it comes in a lot of flavors here. You need to be super mindful when you – I am not sure for what you want this when you build your model because mix comes regional mix, business line mix within business lines, product mix. And what I can tell you is we had very good volume, and we had the initial effects from pricing in it. Therefore, it is still dominated by volume and pricing and it’s increasing over time. And this is, I would say, most prominent in Imaging, followed by Advanced Therapies and with a significant distance with Varian because Varian has the longest lead times, just to say this. So, the growth in Varian was clearly dominated by volume only, so to say, just to say this. So, what was your second part again?

Falko Friedrichs: And Corindus, when can it reach breakeven on margin?

Jochen Schmitz: Yes. I think when you – what we have now done is the following. We have made a business decision where to stop selling into the cardiology field and to stop developing in the cardiology field. And what we did already so far to focus only on developing a new robot for the neurovascular field. That means we turned the business into an R&D project. And the R&D project is like every R&D project. It’s a J-curve. Whenever you start a new platform, you start with investing. And that’s what we currently do. Therefore, it will take until we go to market with a new product, then we will – when we start doing this, we will be relatively immediately being breakeven. But as I have said, it’s a project now, like every other R&D project in a very, very attractive field. Therefore, this is I would say, we talk about several years before we will go to market and then turn into breakeven.

Falko Friedrichs: Okay. Thank you.

Marc Koebernick: Thanks Falko. So, we have time for three more callers. If you would limit yourself to one question please, otherwise we will run out of time here. So Lisa would be next with your question. Please Lisa, should be live.

Unidentified Analyst: Great. Thanks. Just a question about China, clearly, it’s an increasingly important part of your business, very healthy growth recently. There has been a lot of focus on vBP and the government has been rolling it out to different subsectors of med tech. Can you just remind us how equipment is purchased in China today for you? And could you comment on revenues and EBIT from those actual purchases versus services that you provide and also any thoughts on the local competition from the likes of United Imaging and Mindray?

Bernhard Montag: Thank you. I mean the equipment – let’s say, there is a public and a private market in China. I mean private market does private decisions. Yes, it is, I mean, there are not many chains, but this is – I mean, give you a rough feeling is maybe 30% or so of the business. 70% is public hospitals, who do independent decisions and typically do a RFP, a tender process in which then they compete. And both markets are very healthy. And I also believe when it comes to, since you mentioned, vBP, I mean when it comes to building healthcare will certainly be – I mean on the one hand, there is big demand here, but there is also high interest when it comes to – and this is why there is also – there has been the stimulus program and then it’s very much about also how to further invest into a modern infrastructure in the country, so which is why we are very positive about the sustainability of the demand curve in China. Looking at competition, I mean Mindray is not really a company we run into so much with our businesses or in parts of the public business, especially in the lower end segments or in the smaller hospitals here. Local competition plays a role, especially United Imaging. While on the other hand, we see, let’s say, the number two and number three in global competition have a little bit weakening in China.

Unidentified Analyst: Thanks a lot.

Marc Koebernick: Okay. Thanks Lisa. So, we quickly hand over to Robert Davies from Morgan Stanley. Robert, please your question.

Robert Davies: Thank you. My question was just around equipment purchasing. I am just wondered whether you saw any regional weak spots in terms of customer financing and just around deterioration in credit conditions. Just be curious if there is any particular pockets of weakness because it seemed like you were flagging, obviously, strength across the board. I just wondered if that was an issue for any of your customers?

Bernhard Montag: I mean the short answer, no, and not in the mix. we saw – I mean there is – I mean it’s – I would say healthcare is local, med tech is global. When looking at key geographies, it doesn’t come up as a theme. Jochen, do you want to add?

Jochen Schmitz: When you look at it, when we look at regional wise, I think we have a very, very healthy situation in general. In particular, if you look over a 2-year timeframe, there is nothing which makes us nervous in this regard with regard to, I would say, more macro terms around us. We have also – as we said, for example, Varian is working in all markets. It had super strong equipment revenue growth again. So, I think there is nothing really what is really hindering us getting – or keeping our very well, I would say, backed up growth trajectory for the overall business.

Robert Davies: Okay. That’s great. Thank you.

Marc Koebernick: Thanks Robert. So, the last question of the day comes from Sezgi. Sezgi, please ask your question.

Sezgi Oezener: Hi. Thanks for taking the last question for me. Just on your book-to-bill ratio, what would you deem a normalized book-to-bill ratio be? Would you expect it to revert to one level when all the tough comps and COVID waves and everything is over, or how should we consider the normalized book-to-bill ratio?

Jochen Schmitz: Hi Sezgi, now I need to lecture to myself mostly. I think I would say, in general, I think when you look at the first half, 1.17 is good number. Is it always 1.17, but we expect to see the similar development in the second half. So, I would say north of 1.1 is something I would say I would consider a normal trajectory, a more normal one. But it’s always a bit tricky with book-to-bill. We need to be careful with this because it has a nominator – a denominator. And they are not – the two lines are not connected necessarily in a quarter, just to say that.

Bernhard Montag: I mean another way to look at it, but we need to give more color on this. I mean when you say, assume 1-year time between quarters and revenue, I mean just for the sake of math and if you want to grow by 8%, and you take out any pricing and currency effect here, so the number would be 1.08. But there are moving parts in this. But we will noodle on this so that we give a better answer.

Jochen Schmitz: And maybe just to say that, Bernhard implied logic, which is good. But I would say, also I think I had that in mind. On top, we have this faster-growing ES business, which is a structural topic, which brings it above the 1.08, just to say this, that’s why justify my number.

Bernhard Montag: Jochen, I understand you are right, because then my one with your hypothesis does make sense.

Sezgi Oezener: Thanks very much.

Marc Koebernick: Thanks for that question, Sezgi. So, that was the last question of the day. It is now from me thank you for the good discussion. I am looking forward to continuing this dialogue with you in our road show and several conferences, which we are taking part in the next two months. Last but not least, I am looking forward to our Meet-the-Management on the 7th of December in Forchheim. We are inviting you to join us for an exciting day of touch and feel of our innovations as well as our production and, of course interesting presentations from our four segment heads. If you have not received an invitation and want to join, please do reach out to the IR team. With that, I would like to say goodbye. Stay healthy and invested in us.

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.