Siemens Healthineers AG (OTCPK:SEMHF) Q3 2022 Earnings Conference Call August 3, 2022 2:30 AM ET
Company Participants
Marc Koebernick – Head, IR
Bernhard Montag – President, CEO & Chairman
Jochen Schmitz – CFO
Conference Call Participants
Patrick Wood – Bank of America Merrill Lynch
Hassan Al-Wakeel – Barclays Bank
David Adlington – JPMorgan Chase & Co.
Daniel Wendorff – ODDO
Odysseas Manesiotis – Berenberg
Graham Doyle – UBS
Edward Ridley-Day – Redburn
Julien Dormois – BNP Paribas Exane
Sezgi Oezener – HSBC
Falko Friedrichs – Deutsche Bank
Operator
[Technical Difficulty].
Marc Koebernick
Thank you, operator, and good morning, dear analysts and investors. First of all, thank you for — sorry for keeping you waiting. We had some technical problems here in the room. It was not to keep you waiting for longer for explanations of our results.
I’m sitting here with Bernd Montag and Jochen Schmitz, 30 minutes later than in the past occasions. We changed the timing of the call election to some feedback that we received from the sales side, and we hope this is beneficial to all of you in your processing of our reporting. That said, we will, as usually, run you through the details of the Q4 results that have been announced at 7:00 a.m. this morning. You will find all the documents: earnings release, the presentation and link to the recordings of this call on the website of the Siemens Healthineers IR page. There will also be a Q&A following the presentations, where you will get the chance to ask questions after registering for the queue. May I remind you our 2-question rule is still unchanged.
And now I would like to hand over to our CEO, Bernd Montag. Bernd, the floor is yours.
Bernhard Montag
Yes. Thank you, Marc, and good morning, dear analysts and investors, and thank you for your patience. Thanks for dialing in again and expressing your continued interest in Siemens Healthineers. Since our call 3 months ago, we have seen an unfortunate continuation of geopolitical challenges, the tragic war in Ukraine, the strict COVID-related lockdowns in China and the still challenging global supply chain environment.
At the same time, the past 3 months have once again shown that the fundamental need and demand for highly innovative products and solutions for diagnosis and therapy is unchanged. With our financial performance in Q3, we have been able to demonstrate our strength in unprecedented times. We increased our order backlog remarkably with an excellent equipment book-to-bill ratio of 1.31. With these order numbers, we really stand out in our field. We have been showing this relative strength for a quite well now, as you know, but we are especially proud of this quarter.
However, the significant decline in antigen revenue contribution and the lockdown situation in China led to a 6% decline in comparable revenues from very tough comps year-over-year. Let me remind you, last year’s comparable revenue growth was 39%. Excluding the antigen revenue contribution, we delivered growth of 1% against a very tough prior year on a comparable basis. We achieved this despite temporary meaningful headwinds from lockdowns in China.
These lockdowns hampered customer site access in the country but also affected some of our components supplied out of Shanghai. Varian delivered strong 8% comparable revenue growth in Q3, testimony of the ongoing strong momentum in the business and the combination. Advanced Therapies also continued its healthy momentum at 6% comparable revenue.
Imaging grew solidly by 3%. As expected, Diagnostics saw a sharp revenue decline due to a materially lower contribution from antigen tests from a very high comparable basis. The adjusted EBIT margin for the group came in at 14.7% in Q3. On a year-over-year view, margins were significantly depressed by further increases in procurement and logistics costs, the lockdown situation in China and lower antigen contribution. Our adjusted earnings per share declined year-over-year by 24% and were EUR 0.43 in Q3. Bear in mind, previous year quarter adjusted EPS benefited from a significant antigen contribution.
Despite the challenging environment in Q3, we reiterate our 2022 outlook, expecting comparable revenue growth of 5.5% to 7.5% and also our adjusted earnings per share range of EUR 2.25 to EUR 2.35. Jochen will explain the results of the quarter and the detailed outlook in more depth later. First, however, I would like to take the opportunity to recap what makes Siemens Healthineers so unique.
The basis of our success is a set of unique capabilities that we have systematically built over the past years, a set of capabilities, which we keep strengthening every day: patient winning, precision therapy and digital data and AI. Patient winning means adding more effective and efficient ways to accurately describe the state of an individual patient, having the ultimate vision of a digital twin of a patient in mind on which diagnosis, therapy selection and response control can be based individually. This is why we drive imaging to new levels of insights, develop new diagnostic tests and work on making imaging and diagnostics more productive and accessible.
I would really like to emphasize there is traction on these themes. For example, we recently hosted our first patient training days. They are both internal and external speakers. They shared their views on how patient twins can have enormous real-world impact and change how health care is delivered. Precision therapy means using cutting-edge technologies to deliver individualized treatments often with submillimeter accuracy, whether it’s cancer, neuro or cardiac disorders. The importance of precision in treating patients is what makes my Varian so unique in cancer therapies. It is also why Advanced Therapies is focusing on making more and more procedures minimally invasive by imaging, image guidance and robotic assistance. Precision improves results, reduces side effects, in short, makes therapies better for patients.
Our third strength is our unique competence in digital data and AI. It is key for scaling the application of technological advances for having the next patient benefiting from the knowledge generated by diagnosing and treating millions of other patients for connecting patient winning with precision cell therapy. Our unique capabilities allow us to pioneer breakthrough innovations to fuel our future growth and to be the holistic partner of choice for our customers. We are the partner for the C-suite at an ever consolidating and transforming customer base.
With the unique breadth of our portfolio, we provide offerings for virtually all critical departments. Our service offerings range from highest rated product service to consulting to comprehensive value partnerships. This gives us an unmatched relevance for our customer base. The recently announced strategic partnership with the Ohio State University is a strong proof point of this. This 5-year partnership builds upon previous successful collaborative projects includes a wide range of products and solutions from diagnosis to therapy planning to treatment, supported by digital and AI-driven solutions.
We are aiming at advancing personalized medicine and improving access to high-quality, cost-effective health care. We will provide comprehensive technology and services that will build on previous successful collaborate projects. The expansion of the Ohio State University Comprehensive Cancer Center will feature cutting-edge imaging treatment and treatment technology, including treatment planning capabilities.
Let me give you some examples from this partnership. Together with the Ohio State University, we improved access to care for obese and claustrophobic patients through the development of methods to advanced cardiac imaging with our new innovative MAGNETOM Free.Max. For its cancer center, you will provide PET-CT and CT solutions for high-precision diagnosis, treatment planning software, linear accelerators for cancer therapy and our Artis Q.zen for interventional cancer treatment.
With this, we offer solutions all along the cancer care treatment pathway, which is something no other company can offer. This partnership is a strong example of our unique strength we have with the focus and scale of our portfolio. This trend towards large multiyear deals is expanding and accelerating, and I’m happy to observe that our funnel of these kinds of partnerships is stronger than ever before. So stay tuned for more combined deals to be announced over the coming quarters.
Our unique capabilities and unmatched breadth and depth of our portfolio also makes Siemens Healthineers a unique investment case. Despite facing unprecedented times, we have been able to expand our order book substantially and grow our underlying business. We operate in structurally growing end markets that benefit from fundamental growth trends, such as demographics. We observe constantly rising demand for better access to health care. The increase of chronic diseases globally drives an ever-rising need to provide affordable and better health care solutions.
With our leading portfolio and consistent rollout of new innovative solutions, we are convinced we will continue our path of outperforming in our markets. Our products and solutions enable and advance next-level medicine. We are advancing ways of treating the most threatening diseases in cardio, cancer and neuro, whether it’s with our full range of offerings along the cancer pathway or in cardiovascular treatments with our imaging capabilities. In addition, our imaging diagnostics, guidance and monitoring capabilities are essential and will continuously benefit from innovations in the field of pharma and medical devices. One could say the world innovates for us, whether it’s an expanding field such as novel drugs, where frequent diagnosis is of the essence or in the field of interventional image-guided therapies using novel devices.
In challenging times like these, where our customers face staff shortages and inflationary cost trends, it is essential that we enable efficient operations and help improve productivity for our customers, whether this is with our AI and tech-enabled services or with our new generations of equipment that work faster and more precisely than ever. Furthermore, we generate growth by consistently expanding our markets. Either we expand organically with new solutions such as the MAGNETOM Free.Max, that bring MR into places where it has not been used before or, for instance, with our tech-enabled offerings at Varian, which allow for cloud-based treatment planning solutions in both developed and developing countries.
These are also strong examples of improving access to care in underserved countries. We have also shown in the past years that we are willing to take action on the M&A side if we feel strategic fits, and we will continue to do so in the future. These drivers guarantee strong, consistent growth. And this growth and additional revenue will come with a high level of resilience. About 55% of our revenues are recurring, either due to our service business, diagnostics reagents or software solutions at Varian. Adding to this strategic partnerships, such as the one with the Ohio State University, make us even more resilient as they guarantee a reliable recurring flow of revenues for years to come. As mentioned before, the order backlog for these large-scale deals is growing very fast. Our geographical diversification has proven to be an important resilience factor over the years.
You may have heard me say Medtech is global and health care is local. What do I mean with that? We sell our portfolio worldwide into more than 160 different health care systems. While general economic crisis often lead to synchronized global economic growth concentration, health care systems are therefore not as connected or correlated. So if, for example, one country faces challenges for whatever reason and the revenue growth is flat or even declining, other countries in the region mix — or very often counterbalance this effect with higher demand. The strong and resilient growth prospects we have are also paired with market-leading profitability levels. We have sector-leading margins in imaging and in Varian with further room for expansion.
At the same time, we have a clear road map to generate significant margin accretion in diagnostics and advanced therapies in the medium term. All of this combined makes Siemens Healthineers a unique investment case, with structural innovation growth and with attractive earnings growth and resilience. This offers strong shareholder returns for the years to come. And with this, I hand it over to you, Jochen.
Jochen Schmitz
Yes. Thank you, Bernd, and good morning to everyone also from me. I would like to pick up the topic of resilience that Bernd just talked about. In particular, the aspect of our strong order backlog is making us resilient to short-term market fluctuations. Our order backlog is sizable and continuously growing. And with that, we have our equipment revenues well covered for Q4, in fiscal year ’23, and even beyond.
The schematic graph on the left-hand side shows you how the orders after pricing measures we initiated our steadily gaining share in the sizable backlog. While the old backlog with old pricing is shrinking because it is built as revenues over time. Simply said, it is only a matter of time until the backlog fully reflects the new pricing measures. Obviously, this is not one single pricing measure we are looking at, But the continuous effort where we adapt prices in order to find the sweet spot between passing on costs and customer demand.
And this brings me to the right-hand side of this chart. Duration from booking and order until billing can last between around 3 and 18 months. There are some products that turn faster, some slower, but overall, this is a good average assumption. So it needs between around 3 and 18 months until newly priced orders can be seen in revenues and margins. At the same time, we see unprecedented cost increases, as you all know. In the schematic graph, we show how we transition from the equilibrium in the past where we had low inflation to a higher inflation environment.
Due to the different phasing of cost increases and pricing measures, we see temporarily a compressed margin before we arrive at the new normal of a more inflationary world. Two things I would like to point out. Firstly, the temporarily compressed margins, which you’re already seeing are not a structural matter but only a matter of phasing over time. Secondly, the very backlog that provides us resilience needs time to adjust to the new normal.
Now let us have a closer look at the Q3 financials. Speaking of orders, let me give you an update here before we dive into our main KPIs. Bernd has been speaking about the funnel of partnerships like the one with Ohio State being stronger than ever before. We see this also in the excellent order growth for our value partnerships, which is clearly at a double-digit percentage, by the way, in this quarter, even at 80%. Equipment order growth has also been excellent again in Q3 in the mid-teens. This is especially remarkable considering the very tough comps in the prior year quarter while continuing the momentum from Q2 this year. This continued momentum of equipment orders is, in our view, a clear proof for our resilience.
But now to the main KPIs. Revenues in Q3 declined due to antigen. Ex-antigen revenues, we would grow by 1% on a comparable basis, holding up well in a challenging environment, especially the lockdown situation in China. Two things to point out here. First, we assume that the lockdowns in China are only temporary and that there is no structural impact on the Chinese market. The revenue development is not only affected by antigen but it’s also a result of generally very tough comps in the prior year quarter. So all in all, I believe it’s fair to say revenue is holding up well in Q3 given the circumstances. Also due to the resilience in our regional setup. Europe is solid with 3% growth ex antigen, while China was declining due to the lockdowns. Growth ex antigen in Americas is 1% on very tough comps. Bear in mind that last quarter we saw quite some pent-up demand after the pandemic trough.
Now to the earnings side of the chart. EPS declined due to lower antigen contribution and the tough comps I mentioned before. On profitability, we see sequentially further increased headwinds from procurement and logistic costs, the conversion impact from the lower China revenues, and of course, the lower antigen contribution. This, in total, lowers the margins by well over 400 basis points headwind year-over-year, which is roughly the margin decline you see year-over-year.
We also saw some tailwind from incentives. The financial income loss of EUR 69 million was considerably higher than the unusually low minus EUR 2 million in the prior year quarter, mainly because we had to account newly for hyperinflation of the Turkish lira. Our tax rate, on the other hand, improved year-over-year. One comment regarding cash, free cash was strong this quarter with a free cash flow conversion rate of 0.98. In the segments, we also saw very good free cash conversion. Hence, we have been able to further delever versus the previous quarters.
One observation on net debt at this point. The increase of discount rates has led to a significant reduction of the pension obligations. You can find the details on this in the appendix of our deck. Now let us have a look at the segment performance in detail, starting with imaging and diagnostics. Despite tough comps in the prior year quarter and temporary delays due to lockdowns in China, imaging had solid 2.5% revenue growth with very strong growth in MRI.
As previously mentioned by Bernd, the lockdowns in this quarter not only hindered customer site access but also affected some of our component supplied out of China. Specifically, molecular imaging and ultrasound posted declining revenues mainly due to temporary component supplier delays caused by the lockdowns in China. To make this very clear, the challenged situation in China with the lockdowns was unfortunate, but only temporary in nature and demand for our solutions remains strong.
On a year-over-year view, the adjusted EBIT margin in imaging was broadly on the prior year level. Margins were depressed by procurement and logistic costs that increased further and by the China lockdowns. These headwinds depressed the margin in total by more than 350 basis points year-over-year. Diagnostics saw a sharp revenue decline, primarily due to lower contribution from antigen revenues in Q3, which were around EUR 300 million, more than previously assumed for Q3. You can find more detail on the contribution from Rapid antigen business in fiscal year 2022 in our appendix.
If we take out the rapid antigen test sales, we get a revenue decline of slightly below 8% in the core business on very tough comps. In last year’s Q3, excluding antigen, revenue growth was very strong at 34%, benefiting also from other COVID-related tests. This year, growth is relatively muted, mainly due to lower testing volumes in China, which burdened sales in our routine care business. On the margin side, profitability decreased by 830 basis points year-over-year due to higher procurement and logistic costs, lower conversion from lower testing volumes in China and a lower contribution from the antigen business.
These headwinds depressed the margin in total by more than 550 basis points year-over-year with some tailwind coming from lower incentive provisions. In the operational business, core diagnostics faced obviously clear — also clear headwinds from higher procurement and logistic costs and lower conversion mainly due to lower testing volumes in China. Excluding these negative conversion impacts, underlying profitability in Q3 was in the low to mid-single digits.
Turning to Varian and Advanced Therapies now on the next chart. Varian contributed EUR 800 million to revenue in Q3, recovering pushed out revenues from Q2, revenues that were pushed out partially due to lockdowns in China in the last quarter. Q3 was the first quarter where we have comparable basis for Varian since the deal was closed in mid-April 2021. On a comparable basis, Varian delivered strong revenue growth in Q3 on the back of our strong order book, reflecting continued strong momentum in the business.
When looking at margin performance, please bear in mind that last year’s quarterly margin of 16.6% benefited from the mid-month closing time of the transaction and was hence around 150 basis points overstated The adjusted EBIT margin came in at 13.3%, burdened by procurement and logistic costs as well as negative mix effects.
Advanced Therapies continued its healthy momentum with 6% comparable revenue growth despite temporary delays from site access in China on the back of our strong order book and sustained demand. The Q3 margin fell to 7.7% due to headwinds from higher procurement and logistic costs. China lockdown that added up to more than 400 basis points and also the continued investment in the Corindus business.
And now let us have a closer look at the drivers in Q4, which will carry us to full year performance. The key driver for the margin recovery in Q4 is the top line. So let me highlight the drivers of absolute revenue performance first. We expect normalization in China as impacts on domestic demand and global supply chain will calm down. Thus, Q4 is expected to be, by far, the strongest absolute revenue quarter overall in fiscal year ’22, also due to our normal seasonality in this regard.
Varian will contribute with year-over-year growth in the second half and with the same seasonality of a strong Q4, and we increased the assumption for rapid antigen revenue for the fiscal year impacting also positively Q4. Hence, the strong revenue will drive earnings conversion and obviously additionally support margin in Q4 with degression effects additionally helped by improving mix. Year-over-year, we also expect a tailwind from provision we booked in Q4 last year for a special employee recognition bonus.
Now after looking at the drivers in Q4, let us have a look at the outlook for the full fiscal year. The most important point is that we confirm our outlook for fiscal year 2022 for Healthineers on a comparable growth rate between 5.5% and 7.5% and for adjusted basic earnings per share between EUR 2.25 and EUR 2.35. On the segment level, we partially updated our guidance, primarily due to the impacts from the China lockdowns and the further increased headwinds from procurement and logistic costs, which we now expect to be more around 170 basis points for the full year compared to our previous expectation of about 150 basis points. For imaging, we lowered both growth and margin range slightly, primarily due to the impacts from the China locked down in the past quarter, which we do not expect to recover fully in Q4 and the further increased headwinds from procurement and logistics costs, which I just mentioned. We now expect comparable growth of being between 5% and 7% for the fiscal year and an adjusted EBIT margin between 20% and 21%.
With this, over to Diagnostics. First, on the rapid antigen assumption, since we already reached our previous assumption of EUR 1.3 billion. We raised our assumption to EUR 1.5 billion for the full fiscal year, implying logically EUR 200 million for Q4. With the now raised contribution from antigen, one can also expect that the diagnostic full year margin will end up at the upper end of the unchanged margin guidance band.
Let me preempt the discussion on the quality of the outlook confirmation. Compared with the last outlook from May, we are compensating one negative impact with a clearly one-off character from Q3, namely the lockdown situation in China, with another impact, with a rather transient character, namely the rapid antigen volume.
For Varian and Advanced Therapies, we confirm the revenue growth guidance but lowered the margin range, primarily due to the further increased headwinds from procurement and logistic costs. We now expect for Varian 14% to 15%; and for Advanced Therapy, 11% to 13% adjusted EBIT margin for full fiscal year ’22. We lowered the financial income net guidance for the fiscal year due to the hyperinflation accounting now to minus EUR 110 million to minus EUR 130 million. The range for the tax rate is unchanged, but with 27% tax rate year-to-date, it is probably fair to assume that we will end up in the lower half of the 27% to 29% range.
To reiterate, we confirm our outlook for fiscal year ’22, which is considerably higher than our initial outlook from a completely different world in November 2021. Compared with the initial outlook, there were a lot of moving parts under the hood, primarily due to the fact that we saw unprecedented exogenous challenges this year.
To sum it up, I would like to share the 3 main drivers that were, in our view, essential for us to exceed the initial outlook. First, the quality of our teams, our scale and setup to let us navigate well through the supply chain headwinds; second, our agility to build up the antigen business from 0, in late 2022, to the current state; and third, our resilience to generate recurring revenues with a strong backlog in our global setting.
And with this, I would like to close my presentation and hand it back to Marc for Q&A.
Marc Koebernick
Thanks, Jochen. So first, I would give it to the operator to give you the registration instructions as usual.
Question-and-Answer Session
Operator
[Operator Instructions].
Marc Koebernick
So great. So the first caller on the line would be Patrick Wood. Patrick, you can ask your questions now.
Patrick Wood
Obviously, I’ll keep it to two. I guess the two I would have is, on the sort of cost inflation side of things, you’re flagging, obviously, procurement and logistics. Just if you could put any flesh on the bones there in terms of a little bit of details? Is it raw materials, labor, freight, like within those, what are the main buckets that you’re seeing that have been moving? A little bit of detail that would be great.
And then maybe on the second side of things. I know it’s always tricky, right, because you don’t have — it’s not like business with list prices or anything like that. But could you give us some sort of sense of the quantum of price increases? I mean, you showed in the chart, obviously, the pricing and costs sort of in the short to midterm eventually kind of converge. So should we think of that as — if you’re seeing whatever 8% cost inflation that ultimately the midterm blended, you’re putting through 8% pricing, is that the right way to think about it? Just some kind of sense of scale, that would be great.
Jochen Schmitz
Patrick, thanks for your question. Let me start with the cost inflation topic. I think there’s not a lot to update in all honesty. I think we see still high — very high freight costs due to the capacity constraints which are still there. And we also see an impact from, I would say, due to the challenges in the supply chain also from sometimes being, say, forced to change the way how you transport stuff to customers. You normally would use sea freight, but then you need to use airfreight to be on time and things like this. So that has not changed on the freight side. We still also have certain shortages in parts which lead to buy at spot prices. And then you also see now kicking in also, I would say, the underlying inflationary things with more difficult pricing — other cost pricing, so to say.
When we talk — when you walk over to your second question, how do you envision pricing? And let me — as you rightfully said, it’s not that we have a global official price list, and you can see what we did here. It is — every deal we do normally is either a tender or a negotiated deal where competition is also offering and it’s depending on the configuration and other things. What do we envision to achieve? And I think I try to scribble — or we try to scribble this on the one slide.
The idea is that we want to cover, more or less, the additional cost we see or in other terms, the limits we currently see to get to our normal productivity levels. What do I mean with this? We have, first of all, to expect a higher merit increase around than normal. This is one aspect. We need to see — current thinking is that it might be 60% up to 100% higher than normal. And normally, it’s more 3%, and this is the one aspect.
When you think about material, normally, under normal circumstances, we get tailwind just from negotiation with suppliers about 2 percentage points on cost. Currently, we expect also for next year to see there another headwind of 1 percentage point or so. And this is currently productivity, which is missing. And we need to see that we can cover this with price increases over time. And I think as we highlighted with some of the time delay, I would expect that we will see still some compression of margin also reaching into fiscal year 2023, but we should be well set up for year-over-year margin improvement.
Marc Koebernick
So next on the line will be Hassan from Barclays.
Hassan Al-Wakeel
I have two, please. So firstly, following up on pricing. Do you expect the benefit from pricing in FY ’23 to outweigh the inflationary headwind? And can you commit to margin expansion in imaging next year? And then secondly, could you please talk about the order book by geography and modality? And why the growth is so much stronger than your revenue growth, and whether you’re seeing any pressure or any early signs of pressure in the U.S. given concerns on hospital CapEx?
Jochen Schmitz
Hassan, let me start with the pricing topic. Hassan, we are currently in the midst of budgeting or budgeting phase, and how we will exactly see, I would say, the pricing phasing into our revenue line next year is also depending on how much level of confidence we have already today or visibility we have already today on scheduling and other things. But what I would envision is the following, that we would see us getting into that flattening of or getting back to the normal thing towards the end of the fiscal year 2023. That’s what I would expect, current thinking, just to say this. Independent of what I said beforehand, I’m very much optimistic on margin expansion for imaging year-over-year next year.
Bernhard Montag
And when it comes to the geographic distribution, I mean we have seen good growth all over. I want to, in particular, highlight Europe with a very, very strong contribution, Latin America, Southern Asia. We have seen, which is not really a surprise, I mean in China, things were held back here. And this is a topic of the lockdowns here, which also resulted in less, let’s say, commercial activity, which is, I think, natural. And in the U.S., we saw underlying growth, but we were a little bit — had an issue of tough comps of a year with strong — previous year quarter with strong big deals coming in.
So overall, very healthy markets, and I want to explicitly include the U.S. into this. There, we see continuous momentum where we are also positive, as indicated, that we will — that there are more bigger deals to come similar to the Ohio example, which are highlighted in the presentation. And to the point of why orders are ahead of revenue, I mean on the one hand, it shows then there is very, very healthy demand. I think this is the most important message. And then, I mean, revenue, as you know, I mean there has been a temporary, let’s say, slow down because of the, I mean, topics we mentioned, from the China lockdowns to related topics, which slowed down some revenue in this quarter.
But we are very, very sure that — or not even sure that it is just a consequence that this will — we will be up for it in the quarters to come, including the strong quarter for which Jochen spoke about. Second effect of orders being ahead of revenue is a strength of us, and that is that we get more and more big deals, which then also have a longer time until they convert into revenue because it’s not just one transactional piece or one piece of equipment, but these orders are then installed over time.
Marc Koebernick
Next one in the queue would be David Adlington from JPMorgan.
David Adlington
So maybe just one on orders. Just wondered if you could were able to quantify the headwind to orders from the China lockdowns. I think you saw mid-teens reported this morning, but would you be in the high teens with or without that China lockdown? And then secondly, just on recurring revenues, I just wonder if you could talk to how inflation on the revenue side works with those recurring revenues? So obviously, you’ve got contracts there, long-term contracts. I think you have some inflationary clauses in that but all recapped at a particular level.
Jochen Schmitz
Yes. Thanks, David. I think to answer your question on China, bluntly, I think that was a double-digit decline on equipment order intake in China, and it was not low teens. It was high teens, yes. And on top of this, we achieved this 16% growth overall, including this. I think that shows, I would say, the strength and the resilience of our business due to what also Bernd highlighted in his speech, or I would say, unmatched global presence, which is also then often counterbalancing effects, certain effects in one country and even it’s the second biggest market we have currently.
On — I’m sorry, what was your question on the revenue side again? Can you repeat that? Yes, The recurring revenue topic, in particular, on the value partnerships also helped a bit on the — for example, on the order line a bit because we had to reevaluate the order volume and then increase the order book slightly because all the inflation clauses were booked. So therefore, this is helping, obviously, immediately. But the majority, in particular, on the equipment side is still transactional in nature, and therefore, it takes the time, and we depicted on the slide to work our way via revenue through our backlog.
David Adlington
Yes, I suppose the question, Jochen, was really around those recurring revenues like service revenues and the consumables and the diagnostics side, the inflation clauses that you have there, how quickly do they kick in? And are they capped or can you basically extract all the inflation?
Jochen Schmitz
I mean, we have a lot of significant variety of contracts in place, in service and also in diagnostics. And obviously, where inflation clauses are executable there, they kick in immediately, where, for example, on the service side, often contracts are also lasting only a year and then they are, as I say, renewed and then you have to renegotiate them in. Therefore, it does not kick in automatically. So it’s a mixed bag in this regard. And it’s — I would say, it’s also — I would say, an additional effort to get to this, so to say, contract compliance broadly and globally, but we will execute, obviously, accordingly.
Marc Koebernick
So next caller on line should be Julien Dormois from Exane.
Julien Dormois
I will also limit myself to two. The first one relates to the midterm targets. Just curious as you now envision midterm targets, whether there is any tweak or cut you will need to implement on that side? Or is it just that we should think about a lower jump-off point for the next few years?
And the second question is on diagnostic, and more specifically, on the sales trends, excluding antigen. So you have delivered probably a 1% or 2% sales decline in the first 9 months, excluding antigen. So how should we think about Q4 from that standpoint? And more importantly, are you still comfortable with the midterm guidance of returning that growth to the mid-single-digit trend of 4% to 6%?
Jochen Schmitz
Thank you very much, Julien, on this question. And as you know, our 23 to 25 midterm guidance is about per annum 6% to 8% comparable revenue growth and 12% to 15% adjusted EPS growth. And we feel, particular with regard to the starting point 2022 and ex-antigen, very, very comfortable to reach this also already next year, in 2023.
And when you look at diagnostics and diagnostics in terms of growth, I think when we look at the Q3, obviously, the lockdown in China was a big setback for Diagnostics in the core business. When you look at the core lab markets, and we look here primarily at the main competitors, you saw a flattish development in Roche. You saw a declining revenue line in it Abbott. And we also saw a declining COVID-related tests beside antigen in it.
So we were maybe slightly weaker than the others, but still, I would say, in line with this trend. When you think about diagnostics with regard to midterm targets in terms of margins, diagnostic has been obviously more vulnerable with regards to the impact of the pandemic. Therefore, it seems the midterm targets look a bit more stretched than in the other segments. But when we look at consensus, we believe that the consensus is well reflecting our current thinking.
Marc Koebernick
Good. Then we head to the next caller on the line. So that will be Graham from UBS.
Graham Doyle
Just the first one is around imaging. I know you referred to some delays in China. I was just wondering is there anything in Europe that you’re seeing around that slightly weaker growth in terms of installation delays and what could be driving that? And then the second question is just around semiconductor chips. We’re hearing more mix messages and maybe a little less positivity now than we were hearing sort of 1 month or 2 ago from some of your peers in terms of availability. What are you seeing there, both in terms of price and then availability?
Bernhard Montag
Graham, when it comes to installations and the ability to deliver instruments and equipment in Europe, very, very positive. And basically, the team did a very, very good job in installing. I mean we are more — if we have topics in it when it comes to outbound logistics, now and then, it’s more that we have on the U.S. — in the U.S. topics, now and then with site readiness, which means that when our customers rely on other third parties who do room readiness to other construction-type work and so on, they — this can — that we see temporary delays. I mean, not as a major huge thing, but it can cost a little bit of revenue now and then, and is one of the impacts, which has resulted in the lower revenue line in, in this quarter, but definitely of transient nature.
And the good thing is, I mean, we have the orders. It is just a question of when to deliver and not a huge shift of topics. The other question was, sorry, the semiconductor? I mean we are very involved in managing the situation. We feel pretty good about it. It comes with a lot of work. And — but our scale — but also the preferential treatment as a health care provider or as a company in the health care business has always helped us.
In addition, I mean, we have many core competencies in-house when it comes to medical electronics, when it comes to the next level of component assembly so that we can also maybe in a more agile way switch from 1 subcomponent to the other than possibly others can. So from that point of view, it is not an easy situation, but we are navigating it. And I don’t see the situation worsening at the moment.
Graham Doyle
Maybe just a really quick follow-up. So you don’t see it worsening in terms of where you might have expected to be now versus the start of the year, has that changed?
Bernhard Montag
Start of the year was definitely — let’s say, we were expecting a less difficult environment, yes? And when Jochen said that we are seeing now, I mean, more impact on the cost side, it is because of that, because there is a lot of topics where we had to find different solutions or buy components at spot prices and need to have extra effort, extra onetime effort to make sure that we can deliver.
So certainly, in November 21, when we laid out the targets for this year, the situation was definitely less turbulent, yes, because there was less of an expectation of a COVID “crisis” in China, and there was no global crisis insight coming from the war in Ukraine. And I think that is also, I think, explains why there is a certain deviation when it comes to things on the cost side. But also, I think it shows why these topics also have a transient character, in general.
Marc Koebernick
We hand over to Falko from Deutsche Bank.
Falko Friedrichs
My first question is on Varian. So which regions drove most of this pretty good growth in the quarter? And is that already driven by some meaningful cross-selling that you’re doing? And then secondly, on your COVID antigen tests, where exactly are you still selling those tests? And are you seeing some early demand from customers for potential COVID wave the winter months? Or is that still too early to say?
Bernhard Montag
I mean when it comes to Varian growth, I would say, all over the place. So very positive development. I mean, of course, I mean, China wasn’t also easy for Varian. I mean, similar effects of challenges, but overall, extremely positive momentum all over the place. And yes, we see very positive development from the cross-selling. I mean, just as an example, the Ohio deal, which we — which I highlighted is a combined deal as a day-to-day example. I had lunch with this customer today here. So with the radiation oncologists who was key to get us to this deal. And maybe also help to make it a combined deal and the momentum on the, let’s say, cross-selling or cross-relationship leveraging side, which is maybe the best way to explain it, is extremely positive.
To the COVID antigen test topic, we see currently the demand in Japan, which is a bit of a, I mean, new development, I mean, compared to where we started the year, which is also a reason why we are now adding this additional EUR 200 million to our outlook here because that was in — let’s say, it’s whether you — I never call a pandemic positive here, but it’s, for us, a windfall that this unforeseen development is happening.
And when it comes to the next year, I mean, our plan is to be ready to take any opportunity as we do today, with the example of Japan. But our plan is not to put this into the “equity story” of Siemens Healthineers. The equity story is that we are agile and prepared but not that you and your colleagues should assume that this is a long-term component of our business. Will there be — or is there a potential that there is a “spillover” into the next year? Is there — are there potential next waves? Yes. But we will always look at it as an upside. Jochen, do you want to comment?
Jochen Schmitz
Mike, maybe on the Varian topic, I think one interesting factor to have in mind, when you — where we would have had a complete comparable quarter growth in Q3, we would be showing a double-digit growth rate for Varian. And you might recall that I said last year’s margin was kind of overstated, where did this come from? It came from daily revenue count starting at the 15th of April last year.
But on the cost side, which is not directly revenue related, you can just take half the month. Therefore, last year, we had a particular strong second half of the month, means if you say tough comps. And you might recall in Q2, we had push out of revenue into April, in particular, in China, in Varian. This happened in the first 15 days, which do not count into the comparable growth rate. It’s very technical. But just to underscore, I would say, our satisfaction with how the Varian — or how the combination is working and we are talking here double-digit revenue growth rates underlying, which I think is an important note to make.
Marc Koebernick
Now next caller in the line would be Ed from Redburn.
Edward Ridley-Day
Firstly, just a follow-up on the U.S. hospital discussion. As discussed, there has been some discussion amongst your peer group, including the U.S. leaders on the pressure, particularly on smaller IDNs on their capital budgets. But my question relates to the underlying reason, which is the wage inflation in the U.S. and the shortage of hospital staffing, which remains very present as we’ve heard throughout the reporting season.
To what extent do you think that has affected your revenues this quarter and year-to-date. Can you give us some color on that? Maybe that would be helpful. And secondly, just to give us a quick comment on your preparedness for a full gas shortage in Germany in the second half or the calendar year, i.e., fourth quarter and going into your fiscal ’23, clearly, there is the risk of that deteriorating further. And if you could speak to your preparedness for switch alternative sources of supply that would be useful?
Bernhard Montag
[Technical Difficulty]. And that debate, I think, the strong order book so that this is — I mean that this should not be a concern. And we have a very, very strong outlook also when it comes to the deals we want to close in the last quarter. And when it comes to revenue, this is definitely not an impact at all. I mean if there were impacts on the revenue line, it was just the topics I was referring to what we have had — I mean this is not a scientific number, 2% to 3% more revenue in the U.S. compared to what we finally — eventually posted. Then it is simply because of the — on the one hand, some smaller inbound logistics topics, and on the other hand the topic of really getting the installations done at the exact time until 13th of June in — including having all the sites ready, having all the construction work done and so on and so on, which currently is now and then more challenging than it used to be in more — or in less turbulent times.
The gas shortage topic, we — first of all, I mean as an indicator, we have a target to be carbon-neutral in a relatively foreseeable future. So we know relatively well how much and not we depend on fossil fuels, and that is a very — we are pretty independent of all this. We are not an energy-intensive company. So this is not a concern to have. So there is nothing in our sites, which could be at risk because of gas shortage. So this is simply not the major of the business we are in.
Marc Koebernick
So there’s still a bit of a queue we are trying to get through. Maybe we go to one question per caller from now on. So Sezgi from HSBC would be next.
Sezgi Oezener
So then I’ll reduce it to one. Just looking at your outlook, which was [Technical Difficulty] we see that comparable revenue growth as well as adjusted EPS is maintained, yet you’re guiding for lower adjusted EBIT margins, both in imaging and in Varian and AT a few percentage points. Also, you’re guiding a bit higher financial expense. So should we think differently about the adjusted EBIT margin outlook?
Jochen Schmitz
I’m not 100% sure that I fully understood your — I think I know where you’re going. I would say, when you look at the outlook and our confirmation of the overall outlook, obviously, it is — it got more challenging to get there, more stretch, so to say? And in particular, also due to the financial income side, which is about EUR 0.04 stretch to it. And — but when you look, for example, at your consensus or the consensus out there on imaging, I think that is more or less in line margin-wise with what we guide for between 20% and 21%.
And I think we feel, as we said, we confirm the outlook, we feel good to be in that range. And that’s what we strive for. But obviously, we need a strong Q4 for this, but we have all the ingredients in our hand to make this happen. And that’s also why we highlighted this, in particular, with an extra slide in my part of the presentation, how to get there. And as you know, seasonality is helping here. We expect to see clearly the largest revenue line. We will get the better conversion. We will get the better digression. We have additional EUR 200 million from antigen. We expect, by the way, Varian has a very similar seasonality pattern or we will get this benefit on top — though, therefore, we feel good about a strong Q4 based also on our backlog. We talked a lot about it. And that’s it, so to say, from our side in this regard.
Marc Koebernick
Next one on the line and third but last would be Odysseas from Berenberg.
Odysseas Manesiotis
So I got 1.5 questions on diagnostics. So firstly, in an effort to tell how impactful China was here, could you please quantify the share of sales from the region in Diagnostics this quarter compared to the usual 15% fair share you get from this region?
And just to get a sense of the margin outlook here for the quarters ahead, base business always. Now given that it’s usually a more difficult space to take through price increases, would you say this is one of the divisions you would be less confident in matching consensus expectations? Mostly even though you said that consensus expectations for the years ahead are in line with your thinking.
Jochen Schmitz
What you say — I would say, when you look at China lockdown impact, we had a double-digit decline in China on the revenue line, on Diagnostics. And Diagnostics represents about 15% of revenue for Diagnostics in the core business. Therefore, I think this was a big topic. The second part of your one question is, so to say, on diagnostics. I think I answered that question a bit before when I talked about midterm guidance. In terms of margins, Diagnostics has been more vulnerable with regard to the impacts of the pandemic because the pandemic impact directly impact revenue generation. When you have lockdown, patients cannot go into a hospital, then there is no testing, then there is no revenue.
And this, I think, is just the example why it’s much more vulnerable. Also, the supply chain itself is more complex relative to the other businesses in Diagnostics we are in, and this puts also additional challenges on that business besides the additional cost we see. You always saw that the supply chain and logistics headwinds, in particular, due to logistic challenges are higher than in the other businesses. As far as midterm margins are concerned, they obviously — the targets look a bit more stretched than in the other businesses, definitely. But from our standpoint, when we look at consensus with regard to midterm in Diagnostics, I think this is something which is already well reflected from our side just to reiterate this.
Marc Koebernick
Let me maybe just briefly add, so in case you are not aware where consensus sits for 2025 on Diagnostics, that’s slightly shy of 13% EBIT margin.
So next caller would be Daniel Wendorff from ODDO.
Daniel Wendorff
I have a question on the value partnerships you highlighted there during the presentation. What percentage of revenues do they already really contribute to imaging and also Varian revenues? And how profitable are these already for your P&L? And maybe is there other inflationary clauses in there as well if you think of 5- to 10-year contracts?
Jochen Schmitz
I start with the technical aspects first. I would say, as I said beforehand, the value partnerships are long-term contracts. They have, in general — or they are, in general, completely protected against inflation because they are all indexed. And we have even seen some tailwind in the order intake number due to just to revaluation of the contracts due to the indexation clauses. So that is, I would say, a clear answer to this.
Bernhard Montag
Number, when comes to what role do they play in the volume. I mean, they can on the order intake side of the respective businesses can get to up to 10% of the order line. They are of long-term nature, which means this type of revenue eats into the P&L at a slower pace. So there I would say, currently, this is — what is probably in the 4% to 5% range. Don’t take this too scientifically, but I see Jochen nodding, which is always a good sign when I improvise. And it is — and it will grow over time because at some point, it will, I mean, in a long — on a long-term basis, I mean, it will basically — I mean, the target is that this becomes also 10% of the revenue.
I mean this may be something we will only see in 5 years or so, but you will see a gradual increase of that component. And the good thing is, and that is also why we had this more fundamental slide about the recurring business and the resilient nature of our business, it is a — it makes our P&L even more resilient over time because it’s basically turning a transactional business into something which is even more predictable more recurring and also nicely protected on the margin side.
Jochen Schmitz
This explains also — sorry, one KPI, which was — which explains what Bernd was saying, we look at book-to-bill. The book-to-bill in the value partnership business is more factor of 2 instead of the 1.1 or 2 we normally see in the other businesses because of the timing of those contracts.
Marc Koebernick
I just had somebody in the queue, but that dropped off. So that kind of brings me — I hope I didn’t kick her off. So Delphine, if it was you and you wanted to ask your questions, just approach the IR team afterwards. So I would now end the call. Thanks to you, Bernd and Jochen. Thanks to you asking the questions.
I believe we had a lively discussion also because we got good questions from you. I look forward to continuing the fruitful dialogue during our upcoming post results roadshow, fully virtual that is, and in person at several conferences in September: London, New York and Munich. So goodbye. I hope you find time to relax and a nice summer break. See you soon.
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. The website address is corporate.siemens-healthineers.com/investor-relations.
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