Siemens Healthineers AG (SHL) Earnings Call Transcript & Summary

Hello, everybody out there. Thanks for tuning in again for this second edition of the IR quarterly wrap up by Siemens Healthineers. We got quite some positive feedback. Thanks for that on the first edition. So we decided, let's keep on doing this. Just like last time, I'm here in Erlangen with Bernd Montag, our CEO; Jochen Schmitz, CFO; and we are here to discuss the key topics that came up during our Q1 roadshow. Maybe to get us started, Bernd, would you want to remind us what was important to know about last quarter's results?

So we were very happy with the growth momentum, the continued growth momentum we saw in both revenue and orders. Siemens Healthineers grew by 7% in revenue, and we had an equipment book-to-bill of 1.14, which means we continue with this momentum also for the quarters to follow. I was, in particular, happy that this growth came from all segments. I was in particular happy with the strong Q1 of Varian with a remarkable 22% growth. And with the impressive margin expansion we saw in Diagnostics year-over-year. Imaging, good growth and a little bit held back on the margin side because of mix effects. That was also one of the key discussion points in almost all of our meetings. So people wanted to better understand what these mix effects actually mean and understand themselves and better also get a feeling for what this weaker quarter means for the rest of the year at Imaging. I mean we have sometimes quarters where you see accumulation of unfavorable mix effects. In this quarter, Q1, we had a relatively strong EMEA revenue share. And EMEA is unfortunately not the most profitable region, but also other mix categories were a bit weaker in Q1. These are mix categories like business line or how many applications we sell together with systems at the same point in time. But we feel good about the margin range for the full fiscal year. We have good visibility due to the backlog we have, also due to a constantly high-growth service business. And as you know, we expect to see also a stronger second half contribution from China, which is a higher profitability region than EMEA.

Speaking of China, China did actually play an important role in many of the meetings. Investors are trying to assess the further evolution of the anticorruption campaign and especially also the assumptions that we've built into our outlook. So do we feel comfortable with them?

So main answer, yes, we feel very comfortable with the assumptions we made. Let me first reemphasize the Chinese health care market is very, very attractive for us, and we are extremely competitive with our long history in the country and a very strong local setup. When it comes to the campaign, it's not only about the campaign, but also how customers react to it. We see the campaign becoming more targeted. Customer behavior is more and more normalizing. As a proof point, we saw orders already picking up in Q1 compared to Q4. And all in all, as I said in the beginning, we stick to the assumptions we have baked into our guidance in the beginning of the year.

That's reassuring. again, on China, Bernd. There were also several investors wanting to understand what the impact of this VBP schemes on the business.

Yes. To quantify this in the first place, China represents about 10% of our Diagnostics revenue and VBP affects about 20% of that 10%, yes. So we are talking about 2% of global diagnostics revenue, which means that this is not a huge topic. And one needs to see that VBP is not very straightforward to implement in a razor-razorblade model. So this is still in its infancy in China. And I also want to say that measures like this and also others of the Chinese government, which are targeted to "cut out" the middleman in the health care distribution are not necessarily always negative for us, yes. So the idea to be closer to customers to be better and have a clear own go-to-market is also an opportunity for us on the volume and on the margin side.

So I take it, no material risk, maybe even an opportunity for the Diagnostics business, which is obviously positively surprised in Q1. So what was the driver of the significant margin improvement? And are we changing our 2025 targets now?

When we look at the margin expansion we've seen in Q1, it was ex antigen, 800 basis points. 3/4 of the 800 basis points are just solely coming from the transformation program, okay? It's a fair point that the prior year numbers were not super strong, but still more than 600 basis points coming from the transformation savings; about 1/4, about 180 basis points come from a different assumption we had to put in place for the depreciation of our ceded instruments. We check on them on the lifetime in the field of our ceded instruments every 4 to 6 years. We had to do the last change 5 years ago. And this positive message that our systems last longer in a razor-razorblade model, obviously, a very, very important topic, is a good message, which also impacted positively the quarter. But again, the transformation savings are the main driver behind the profitability improvement. People also wanted to read into this strong performance that we might now be closer to selling the business. We are very happy about what we see from a transformation savings program about the further verticalization of the business. We see good momentum on the Atellica franchise in our Core Lab Solutions business. And as we always said, diagnostic is an attractive business in an attractive market. Our main focus is creating value in this business. This is the sole priority we have, and this is, anyway, a non-regret move whatever will happen in the future.

But is the full year outlook for Diagnostics now too conservative?

I mean, we started, as you rightfully said, very, very good, with Q1. And I'm very happy about this. We are very happy about this, but it's much too early after Q1, now to change the guidance already.

Absolutely. And talking about full year outlook, people wanted to understand the comp situation with regards to the next quarters. Actually, we put this up ourselves, and how it all adds up for the full year. One might actually need to go one level deeper in the understanding here, right?

I mean, first of all, for the full fiscal year, we confirm our outlook in every regard, -- it means, first of all, for Siemens Healthineers overall for revenue growth and adjusted EPS, but we also confirm the main assumptions which went into this. That means all the segment data for growth as well as profitability. Regarding comps in the coming quarters, where we point to the tough comps in Q2, particularly for revenue growth. And when you look at Q3, it becomes a bit more tricky, as Marc said, because here we need to look into even 1 year earlier. Remember, Q3 2022 was a very weak quarter for our standpoint. And therefore, it's important not to only look at the growth rates, but also look at the absolute numbers, in particular, for revenue in Q3. And as you always know, Q4 is anyway the strongest quarter for Siemens Healthineers and it will also be the strongest quarter this year for Siemens Healthineers.

Finally, I would like to ask you, Bernd, what do you think people should actually understand in terms of what sets us Siemens Healthineers apart from the others out there?

Siemens Healthineers is all about innovation, about pioneering breakthroughs in health care. We innovate along the triangle of patient winning precision therapy digitalization and AI. With this, we play the key role in making the system more productive, overcoming staff shortage, fighting the noncommunicable diseases, bringing access to care for 8 billion people. We have a religious approach of investing a high single-digit percentage of revenue into R&D, and that puts us in the forefront, whether it's in Imaging, in AT or in the Varian business, 2 very prominent example, the Photon-counting CT or the MAGNETOM Free MRI technology with which we are democratizing MRI.

And maybe to close this for today, is there something Bernd that you are especially looking forward to in the next few days and weeks?

So in Siemens Healthineers, there is always something to look forward to. But in particular, in the next 2 weeks, I mean we have ECR coming up, the European Congress of Radiology. There, I heard rumors that the MR team will do the next step in bringing the technology of the MAGNETOM Free MRI to new price points, yes, to expand the technology in a "trickle up" approach. And I'm also very much looking forward to a joint management team meeting, which we will have together with Atrium Health, one of the biggest health systems in the United States and one of our very good value partners, which shows also how closely connected we are with the agenda of leading customers.

Great. Thanks. So Bernd, if you now triggered interest in our listeners with regards to the ECR. Actually, this is going to be published 2 days ahead of the show, and IR will be there to host you if you are spontaneously deciding to come to Vienna on the 28th of February, you could do that. Beyond that, I'm looking forward to seeing you at conferences and at latest then in our Q2 reporting in May. See you then. Bye-bye.