Siemens Healthineers AG (SHL.DE) Earnings Call Transcript & Summary

Good afternoon, everybody. I'm David Adlington. I head up the JPMorgan research team for MedTech in London for JPMorgan. It's my pleasure to introduce Dr. Montag and Jochen, CFO as well from Healthineers. There will be a presentation in a moment. Thank you.

So thank you, David. So as a preview, I mean, this is going to be a very important year for Siemens Healthineers here because many of you know that more shares will be available soon, yes. So that is why I will start a little bit in the beginning about really who we are so that this is really clear. And on the other hand, this is why we team up today, and Jochen will also present, which means I need to speak very fast so that he has also some time and doesn't criticize me too hard afterwards. So with that said, who are we? We are a clear market leader and compounder. We are a clear #1 in imaging and in precision therapy. We are seen as the go-to partner for the big institutions for the academic medical centers, 90% of them work with us. We are global, global in the sense of being present in 70 countries. We have an installed base of about 700,000 systems and an impressive number, 3 billion patient touch points per year. R&D is for us not a cost, but the lifeblood of the company. We invest more than anybody else. And that is what's driving our success, our growth, our margins. We invest about $2 billion. We are leading in AI in our field. We have 13,000 R&D employees, more than people in production. And in addition, and that's sometimes underappreciated, we are super strong when it comes to understanding the needs, especially of the consolidating customers and the 200 -- more than 200 value partnerships and the order backlog of EUR 6 billion from these big arrangements speak for this. So it's not only innovation, but also a great sales team with special competencies. Then looking at the P&L and how we segment it, we are the unique, #1, as I said, in imaging, 38% market share. That's 7 percentage points more than at IPO 8 years ago. Varian market share above 60% as an aside, since closing of the deal. The Varian market share has grown by 10 percentage points. So a real success, strong presence in Advanced Therapies with a lot of very exciting partnerships with companies like Intuitive, like Stryker, like Boston Scientific, like Biosense Webster, like Medtronic and Diagnostics on a very good path to transform the business and now on the track to further define its own strategy, its own structure because the synergies of that business with the rest is very limited. So it is a business in itself. Looking at where we want to go as a company with the rest of the portfolio, the chunk -- the biggest chunk and the exciting part of the portfolio is basically shown on this slide. And this slide is -- maybe it looks simple, but it is the thesis why Siemens Healthineers is better positioned for what defines the future of health care, in my opinion, in my unbiased opinion than anybody else because when you look at the diseases worldwide, 75% of global deaths that's globally are because of these diseases here, cancer, cardiovascular disease, stroke, neurodegenerative diseases. What all these NCDs, the noncommunicable diseases, have in common is they start slowly. It's a process. So the homework is to catch the disease early. But when you have found the disease, it's about a personalized treatment. It is somebody's cancer in this and this stage. It is somebody's stroke in this and this vessel. So you need personalization at scale. And this is what our company is set up for. This is what we optimize. This is how we strengthen more and more and more and more on the 2 pillars of our organization. It's on the one hand, patient twinning or this enormous strength we have in imaging in characterizing the patient. And then on the other hand, precision therapy, which means technology-based targeted personalized treatment and these 2 powered by the third aspect, health care AI to make sure that this personalization at scale can be done efficiently and by applying the world's best knowledge. So that's, in simple words, this is what Siemens Healthineers is doing. What it means in more detail in imaging, and I start clock right in the upper right, very strong position in MRI, more than 50% market share, for example, in the United States, which is quite impressive, I find, in a foreign country. One of our main competitors is sitting here, where we have a super strong position. We are working on the one hand, on rolling out the DryCool technology, but this is also where a super important topic plays a role, which I would call physical AI, so AI algorithms, which make the use of the system, which are closely linked with the hardware, which make the acquisition super fast and that interplay is shown very nice. We are very strong now in mammography also, super exciting, the opportunity, which we are not only having as an opportunity, which we are really grabbing in molecular imaging, where Theranostics and Alzheimer's drive growth. Our distribution business of radiopharmaceuticals, also known as PETNET is soon, maybe in this year already, in this fiscal year will be a EUR 1 billion business. And of course, our flagship innovation, which is a lot of talking about it and so on is our photon counting CT where we clearly set the trend, but not only set the trend, we are also miles ahead in turning this into a business and making a difference for patients. What does making a difference for patients mean? It means that it's really altering how a disease is managed in this case. This case it's just about what it does for cardiac -- for cardiovascular disease. And what you see here is basically when looking at the triangle I showed, it brings early detection to coronary artery disease because you have crystal clear images at the lowest dose. And I'm personally convinced that in the future, as much as mammography is the method for every woman above a certain age that this will be the method to fight coronary artery disease for every person above a certain age. Then once there is the disease, there is no interventional diagnostic imaging and no interventional diagnosis necessary anymore because the images are so good. And then powered by AI in addition, the system gives you treatment maps in a clear recommendation, which stent to put in there. So that is building the bridge following the triangle I showed to treatment, powered by AI. That's the beauty of photon counting CT in just one application. Then precision therapy, again, I start in the upper right angiography and very exciting because of the brand-new portfolio we have just launched with again, call it physical AI, AI-based denoising of the images in real time, which gives you crystal clear real-time images and depending what you want or the same image quality at much lower dose for the patient and for the interventionalist. Lots of, as I said, partnerships and new opportunities to drive the deployment of the wonderful innovations of our device partners. And then in radiation oncology, it will be a very exciting year because as Arthur Kaindl, the CEO of that business has spread as a rumor at our Capital Market Day. So we are -- so I repeat the rumor, we are shortly before launching a breakthrough when it comes to a new treatment device or you can always call it a new kind of therapy. So stay tuned for ASTRO in end of the fiscal year in our [ limit here ] in September, where we do a big step here also. So a lot of excitement here as well. And what this means clinically is that we have the opportunity under one roof to optimize on the one hand, the imaging, which is necessary to diagnose, to plan the treatment to inform the next step to use AI in order to do a digital handover to the treatment system. So this is what we do by using MRI for planning the treatment of prostate cancer. This is what we do with establishing theranostics with our PET scanners and with our leading distribution of radiopharmaceuticals. And on the right-hand side, you see what AI can do. This is a patient with multiple metastasis in the brain. In the past, you would have radiated the entire scalp, entire brain with a lot of side effects. Then in the next step, it was a super time-consuming topic to look at what should be the treatment plan and to kind of manually do this. Now it's done within minutes using AI and a patient like this can be treated. I talked a lot about AI, a little bit of what is the philosophy following the triangle. We optimize every step and automate it. We slice the elephant step one, patient to image, making sure that the acquisition of the image is done in the fast possible way with less user interaction with unwarranted -- without unwarranted variations, but with a lot of what I call physical AI, which is deeply integrated in the system to make the system faster and better, then image to report, automated analysis of the image and then we hand over to the plan. So imagine when looking at our road map, completely automated where without any user interaction, it's like stepping on your scale in the morning, your lung cancer screening is done without any person being needed, then the image to report and then in the case of treatment planning, automatic, this is the tumor. This is the metastasis. This is how the linac is programmed in order to do this or in the future, this is how the endovascular robot is performing the thrombectomy. And last but not least, and this always comes a little bit too short because we love to talk about segments and about innovation and so on and products. The strength of our teams because what we have in 70 countries is a team which can go deep, addressing a medical specialty, which is at the same time, broad because we can address all service lines in the hospital. We can talk to the department. We can talk to the C level. We can bring global knowledge to the local situation. This is how Mayo Clinic does it with us, as an example, or this is how people do it in Norway, what about you? We are a clinical leader for and the go-to company for entire medical specialties, whether it is cardiology, whether it is radiology, whether it is radiation oncology or neuro interventions, but we are also definitely and the value partnerships are a strong proof point for this, the go-to company for the C-level running the corporated care, the health systems in the U.S., for example, yes. And this is what the type of discussions we are having, how do you establish a theranostics center? How do you do stroke management in your system? How do you optimize the use of 60 MRIs in different locations? How can Siemens Healthineers help a customer. These are the type of discussions we have on top of being an innovation leader on the product level, on the AI level. And with this, as promised, I hand it over to Jochen.

Thanks, Bernd. Yes, also a warm welcome from my side. Bernd has talked about elevating health globally, and we also do this to create shareholder value, obviously. And therefore, I want to talk briefly about how we want to be reliable revenue, earnings and cash compounder and have also a very, very solid capital allocation framework in place. And obviously, we do this under a robust framework work of environmental social and governance that works fine, and it is very important for us. And when we talk about this circle here, which is depicted on the slide, let me start with reliable revenue, only giving you a few data points to this. When we talk about reliable revenue, we talk about recurring revenue. It is obvious that the recurring share of revenue in diagnostic is 90%. That is part of the business model. But also in imaging as well as in precision therapy, the recurring revenue stream is meanwhile 50% of revenue comes from service, biggest portion but also from the recurring aspect of our value partnerships, our large and long-term contracts. And what is relatively new and was maybe not so clear yet to most of it, it's coming from procedure-based revenues, which are growing fast. Bernd mentioned PETNET, but it's also ultrasound-based catheters and also our Interventional Oncology business, which is meanwhile representing a number of more than EUR 1 billion of revenue. So very reliable revenue streams. On the profitable growth side, we drive profitability by driving pricing excellence. We have premium pricing in place across the portfolio due to our innovation leadership position in general, and we will execute on this in a very, very rigid way. We drive our advantages coming from economies of scale being the market leader in almost all businesses in the imaging and precision therapy space. And lastly, we have a very, very clear mindset in place to drive productivity, catering for all the headwinds we see from other areas. This is about profitable growth. Organic growth investments, we are committed to keep our innovation leadership in place. Therefore, we are committed to a very, very strong R&D team, very, very strong R&D pipeline, translating into 8% to 9% of R&D spend every year. This translates into more than EUR 2 billion of R&D spend every year. Obviously, on the go-to-market side, we look into that very carefully. We currently spend about 17% of revenue into SG&A. And obviously, this is always an area where we can look for productivity. But I would also consider this in the next 5 years to stay in a range between 15% and 17%. Obviously, from an organic growth investment, we also invest in CapEx, in our facilities, in particular, the manufacturing facilities, but also in growth engines like our radiopharmacy network in PETNET in the U.S. as well as in Europe. And this all translates into very reliable free cash flow. We generate 0.8 to 0.9 cash conversion rate every year, and that's what we also commit for the next 5 years. And this is something which we could even improve over time as also our diagnostic business became meanwhile, a cash conversion contributor over time, which was not always the case in the past. And obviously, when you generate reliable cash flows, you also need to think about capital allocation. We have a dividend policy in place. We want to have a stable and growing dividend. That means we have just changed, I would say, the strict regime to tie this 1:1 to our net income development, but stable and growing dividend policy. And obviously, with the change in shareholder structure, we will also consider share buybacks as a potential means to drive shareholder value if it makes sense. Obviously, after the acquisition of Varian, we are still in the process of deleveraging the business. We have meanwhile delevered from 4x net debt over EBITDA to below 3x to 2.8x net debt over EBITDA. We commit to go to 2.5x over the next 24 months and keep our balance sheet and strength. We have meanwhile a very attractive rating in place from Moody's in the A category, which is very nice and which also prepares us for whatever is coming in case we need to accelerately refinance our debt structure because of the shareholder structure change. And then obviously, we will drive our disciplined M&A activities in a meaningful way, short-term. We will not go for a major acquisition. This is clear, but we will also consider and screen for meaningful tuck-in acquisitions if and when it makes sense, if and when it creates shareholder value. With this, let me move on to the outlook for this fiscal year. We plan to grow the business again between 5% and 6%. And this assumes no tailwind from China. No tailwind from China is baked into the 5% to 6% like last year. We expect to be in our adjusted EPS between EUR 2.20 and EUR 2.40. The midpoint is below the level of prior year because we face due to the strong euro, significant headwind from foreign exchange, around EUR 0.15. We also expect to see headwind from tariffs of about EUR 0.15. This adds together EUR 0.30 headwind. And we want to compensate most of it, but we currently do not see us in the position to compensate everything. Underlying, this means an EPS improvement in the double-digit area. When you put this together and set this into, I would say, into the longer-term development of the company, we were able within the challenging time of the new ambition phase since 2022 to grow our adjusted EPS by 11% CAGR. We see, as I just explained, 2026 from an EPS development as a year of transition. And then we commit to get to double-digit EPS growth starting with 2027 again. How do we do this? We have a clear plan in place to mitigate the impact from tariffs completely by 2028 by driving an additional productivity program, which will cover half of the EUR 400 million headwind we have from tariffs as well as looking into, I would say, market adaptive and smart pricing, driving pricing to a certain level up to add additional EUR 200 million of profit to the bottom line to cover up for the EUR 400 million of headwind from the tariffs. We see this all fits very nicely together into the strong line of driving shareholder value. And when we summarize this and look at the period of 2027 to 2030, you find here our portfolio split into 2 pieces. First of all, the synergistic core, how we call it, out of imaging and precision therapy. Our ambition is to grow in this synergistic core 6% to 9% per annum, starting with 2027. And we expect to grow on the diagnostics side, what we call our second core that we will improve the growth trajectory towards the mid-single-digit growth. And you see that we have also ambitious margin expansion targets in Imaging, where we are by far market as well as margin leader, we expect to be able to expand margins driven by additional scale we come -- we will generate in the business. In Precision Therapy, we have a more dedicated margin expansion target of 100 basis points per annum on average coming out of significant margin expansion potential in Varian in Advanced Therapies and also in our dedicated ultrasound business. And in Diagnostics, unchanged, we target a mid-teens margin level by 2030. If you summarize that all for the entire company and bring the 2 things together, you see that our plan is to grow the company between 5% and 7% in revenue over this period of time and grow EPS double digit, as mentioned beforehand, maybe a few words towards our current quarter, just repeating what I've said when we started off the year, we will expect a slightly weaker start into the year, as explained, we will not be in the range of 5% to 6%, as we discussed before and because we expect in our Diagnostics business, driven by China, by the volume-based procurement initiative, a clear decline. We also expect in our, so to say, most lumpiness business in AT, a slightly softer start, which based on, I would say, a normal start in imaging as well as in Varian, slightly lower revenue growth than the 5% to 6% for the full fiscal year in Q1. And in Diagnostics, just to remind all of us, this significant headwind from the volume-based procurement program will also have -- will also find its way into the P&L because it's primarily price driven and price, unfortunately, not so much volume-driven price goes one-to-one into P&L. Therefore, it's a tough quarter for diagnostics. And with this, I hand it over to David to structure the Q&A.

Perfect. Thanks, guys. Maybe before we dive into the individual business, maybe a couple of bigger picture questions. China has obviously been a drag on the business for the last probably 2 to 3 years. And this time last year, you were quite conservative. I think some hope for upside for China as the year progressed didn't quite come through. You still point towards a flat market in China this year. Maybe I could -- maybe start philosophically, when you think about China, do you think about that returning to the sort of growth you saw historically from a growth perspective? Secondly, are you seeing increased competition and increased willingness for the local government to use local players? And then finally, how will that impact margins?

Okay. So first of all, I mean, looking at what Jochen also presented, I mean, the good thing is that, I mean, we have been able to grow the business globally without China contributing because we call it a drag. I mean, in the last 2 years, to grow by 6%. And despite Diagnostics not contributing, despite China not contributing and have been able to deliver the double-digit EPS growth. So just as a commercial break. When it comes to China, I mean, we assume that, I mean, for this year, we are prudent. Again, we assume a flat development for the market and us. I mean, Jochen said about -- talked about the special situation with Diagnostics, which is a transient effect, but which hits us, especially in the beginning of this year. And we have baked in an assumption of 5% growth in China for the market and us in this -- for this midterm outlook, which you see on that slide. So -- and that means we are positive on the one hand, that China returns to growth, but on the other hand, not to the levels we have been used to. And as I said, this is what we assume for market and us. That means why we have a very strong ambition and not only ambition, but also track record to gain market share in the rest of the world in China, the track record and ambition is to grow with the market and to defend our -- the position we have.

Perfect. And then just on the other headwind you faced this year on the tariff side, you point towards offsetting that through a combination of cost efficiencies and pricing over the next 3 years. Is there any thought about shifting any manufacturing to the U.S. or anywhere else?

Let me start first with the mitigation measures we put in place. We started as one productivity program, we call that Lean for Growth, where we, so to say, put additional productivity targets into the organization. The teams are working on it very diligently, and I'm very much convinced because we have that more or less in our own hands that we will deliver on the EUR 200 million plus in that respective time frame. On the pricing side, the other EUR 200 million, and also to put this into perspective, we talk about a percentage point better pricing based on EUR 20 billion of revenue, EUR 200 million is 1% of EUR 20 billion over a period of 3 years. That means if you divide that by 3 years, it's 0.3%. So you can say, oh my God, that doesn't sound too over aggressive. But you need to understand this is based on premium pricing we have anyway in place, and we put this on top. And the limiting factor for us in this regard is that we do not -- we are not willing to deviate from our market share gaining strategy in the businesses, which is, from our standpoint, the main driver, which put us where we are today as the undisputed leader in imaging, in Varian and also in Advanced Therapies. And value-add structure, this is, I would say, a topic which needs a lot of diligence. You don't just shift value add because value-add structures are shifted based on competencies. That's how we are structured. And if we will do so, we will look in all angles. And maybe just the obvious thing, we're just moving it to the U.S. might be an option, but maybe not necessarily the most sustainable option, but could be. So we will look into this. We have plans in place and can execute if necessary.

Perfect. If we get into the businesses, start off with imaging, which is I think the key focus for everybody. Good year last year, 8.5% growth despite those headwinds still from China. Your guidance this year is for more mid-single-digit growth. Is there anything we should be thinking about in terms of particular headwinds relative to last year to drive that slowdown?

I would call this guiding prudently because I mean, this has been a strong year for imaging, but there's no change in the dynamics. And so from that point of view, this is more a technicality that we set the targets overall as we are, but don't take it to -- don't look at the second derivative of growth and look at this as a slowing down.

Yes. I think the word slowdown, I think I also don't like that. I think it's -- this business is super intact. And when we gave guidance that we want to grow in imaging between 5% and 8%. And if you have a year where everything works fine and you get to 8.5%, that also creates then obviously a difficult starting point -- a more difficult starting point. And when you then grow only whatever, 6%, it's not a deceleration. It's mathematically one, but it's not really one. So we see us fully on track in imaging.

And I want to highlight within imaging, obviously been photon counting CT for the last 2, 3 years or so. How has the uptake of that gone so far? And what's the key attraction for customers that you're finding at this point? Of course the key attraction for customers?

So I mean, to quantify this, we have some numbers. I mean, we have cumulative orders for -- equipment orders for photon counting CT of EUR 1 billion and EUR 700 million in revenue. This has been very as planned and actually faster in the last year developed. So half of that number has been in the last fiscal year. So that means in the last fiscal year, EUR 500 million in orders, equipment orders, EUR 350 million roughly in equipment revenue. And that represents for our CT equipment business about roughly about 30% of wonderful business, high-margin business, attached with also, by the way, great service contracts. The main topic is, I mean, there's 2 things. First of all, literally photon counting CT makes every image better. I mean it's a little bit like a flat screen or like HDTV, everything is better. And so this is -- and at lower dose and with more information. But then I consciously chose the examples I showed. I mean it brings the CT -- not only drives new applications for CT, but it drives new CT scanners, like when it comes to preventive use, when it comes to screening for coronary artery disease. We are now -- we have introduced at ASTRO a dedicated system for treatment planning. So there's a lot of applications in this technology and now close to 1,000 peer-reviewed scientific publications show that the community has much to say about it. And this is not how the detector is built, but how it makes a clinical difference.

And over time, what sort of time period, where do you expect penetration of photon counting CT to get to?

So first of all, I am 100% convinced that there will be -- in a not too far future, there will not be any conventional CTs anymore. So this is a question of time until every scanner will be photon counting CT based. I mean we are at the forefront of that technology. And when you say -- and by the way, I also want to say that penetration comes in different topic because there is volume -- there's units, there's volume and there is profit. And when it comes to the penetration in terms of profit pool in the market, we have already gotten a huge share, simply because this is -- these are high-priced topics with high margins in a photon count -- photo counting CT generates the margin of 20 low-end scanners [indiscernible] .

Just we're out of time. I just want to make sure that on the Diagnostics side, over the last 2, 3 years, you are telling of the story around Diagnostics has slightly changed, becoming less and less core, I suppose, as I describe it. In terms of the message you're trying to get across the Capital Markets Day on Diagnostics, and where do you stand on future ownership of the business?

I mean, first of all, I want to make clear for the records that we have never said, I mean, including our predecessors a long time ago, let me say diagnostics and imaging or Diagnostics and Varian are synergetic. So to say, hey, we are gaining market share in imaging because we have diagnostics or we are outcompeting in diagnostics because we also have radiation oncology. This is a different business. And we have been very clear that we are not optimizing synergies. And now in this transition to Atellica, it was super important to also focus the business on that transition, but give the business also a clear independent structure or let's say, to manage the business operationally independently. It has its own sales force. It's completely verticalized. It only -- it also has this verticalized service. So -- and it is certainly not our intent that after maybe some people would say lengthy process of getting out of a conglomerate, Siemens Healthineers. My -- our target is not to be a conglomerate. So meaning corporate clarity and the clarity on what we want to achieve in managing the NCDs, as I talked about with the triangle is the priority. Diagnostic is under the same roof, but whether this needs to be the case in the long run is a question one can definitely ask. But for the time being, we have operationally independent structures, but we have no separate legal entities, no separate IT and so on and so on, but we are not trying to optimize togetherness, but optimizing the different -- needs of 2 different businesses.

Perfect. That's clear. I think we are pretty much at time we are. Great. Thank you very much, guys. Appreciate it.

Thank you.