Siemens Healthineers AG (SHL) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Siemens Healthineers Conference Call. As reminder, this conference is being recorded. Before we begin, I would like to draw your attention to the safe harbor statement on Page 2 of the Siemens Healthineers presentation. This conference call may include forward-looking statements. These statements are based on the company's current expectations and certain assumptions and are, therefore, subject to certain risks and uncertainties. At this time, I would like to turn the call over to your host today, Mr. Marc Koebernick, Head of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, and welcome to our Q3 Earnings Call for Fiscal 2026. I'd like to thank all of you for joining us today. This morning at 7:00 a.m., we published our Q3 2026 results. All related materials for today's results call and release are available on the IR section of the Siemens Healthineers web page. Our CEO, Bernd Montag; and CFO, Jochen Schmitz, will be taking you through today's presentation, as usual. After the presentations, we will have a Q&A session. As this has been working out nicely in the past quarters, we ask all participants limit themselves to one question each with the option to go back to the queue for a follow up. Additionally, please note that a full transcript and recording of today's call will be made available on our Investor Relations web page shortly after the session ends. Again, thank you for being here. And now I'll turn it over to our CEO, Bernd Montag.

Yes. Thanks, Marc, and also a warm welcome from my side. Let me start with a brief look at the key takeaways for today's call. This quarter, we had an outstanding equipment book-to-bill of 1.27 driven by our product strength and supported by new value partnerships. The latter includes 2 new sizable value partnerships with highly ranked health care institutions in the U.S. clearly underlining our market-leading position. But even excluding all value partnerships, our equipment book-to-bill was strong at about 1.17 in Q3, undoubtedly making up for the software softness we saw in Q2. Operationally, our synergetic core of Imaging and Precision Therapy performed solidly, growing 5% in Q3. While Precision Therapy had a very strong growth with 9% this quarter. The imaging growth was soft on tough comps of 12% in the prior year quarter and saw some revenue shifts into the next quarter. This shift will only be temporary, and we expect a clear acceleration in Q4 to get to decent mid-single-digit growth in fiscal year '26 in the Imaging segment as guided in November last year. However, Diagnostics is still challenged by the structural market rebasing in China and revenue dilution from our legacy platforms. This does not come as a total surprise but the expected slowdown of the decline for Q3 has not materialized in the Diagnostics business. When it comes to profitability, the reported excellent margin level was boosted by tariff refunds that we received in Q3. Excluding tariffs, we saw a decent underlying margin level despite headwinds like FX and inflation. As a consequence of the continued top line weakness in Diagnostics and due to the tariff refunds, we update our outlook for fiscal 2026. We are lowering the revenue outlook range from 4.5% to 5% growth to now 3.5% to 4%. In addition, we raised the lower and upper end of the EPS outlook range by EUR 0.15, which is exactly the impact of tariff refunds received in Q3. This shows that despite the lower revenue growth, the earnings are on track. Now let me briefly touch on 2 topics relevant for shaping our competitor. Just this week, we are showing great developments at ADLM, the biggest trade show in the diagnostic space with very promising customer feedback, paving the way for future growth. Also, let me share a brief update on the upcoming deconsolidation by Siemens. This deconsolidation is the final step in a journey that started with our legal separation 10 years ago. We are well advanced with our preparations for the spin and in very constructive discussions with Siemens AG. We are on track with our refinancing preparations as well as the discussions regarding remaining shared services and IT infrastructure. Having said that, now over to our latest value partnerships. We are very proud to announce that we have entered 2 large partnerships with highly renowned institutions in the U.S. Those partnerships are in total, very sizable altogether amounting to several hundred million euros in terms of equipment order intake. Let me start on the left-hand side of the chart. We are further strengthening our 35-year long relationship with Cleveland Clinic, one of the leading health care systems in the U.S. We are moving to the next level of cooperation with a new 10-year strategic alliance. For Cleveland Clinic, we will not only be the provider of multiple imaging and therapeutic technologies, but also jointly develop a state-of-the-art Theranostics cancer treatment program. We also signed a multiyear value partnership with Vanderbilt Health, a nationally recognized top-tier academic medical center. In this partnership, we will also serve as the provider of advanced technology for diagnostic imaging and radiation oncology. In addition, this close collaboration will empower health care innovation through scalable AI uses in radiology, personal medicine and workflow automation. In essence, both partnerships underscore 2 things. First, our unmatched relevance as a holistic partner for hospitals and health care systems; and second, the growing need for our unique capabilities of mastering patient winning precision therapy and health care AI. We are reinforcing this position by continuously innovating in each capability in patient winning, in precision therapy and in health care and the growth dynamics of our latest innovations are proof of that. We are gaining market share in CT based on our unique fleet of photon counting cities now accounting for roughly 30% of our total CT equipment order volume. We have increased market shares of CT in the U.S. to levels we are used to from MRI. Another example is our DryCool technology in MR. This innovation now accounts for half of the units ordered in MR. It broadens the market for various use cases based on reduced total cost of ownership and a smaller footprint. With regards to the other half, we have a clear commitment to significantly expand the reach of DryCool technology in the midterm. Our Radiopharmaceuticals business is also gaining further traction in the U.S. The business delivers double-digit growth rates and is surpassing the USD 1 billion mark this year. Due to our broad distribution network and manufacturing capabilities, we are highly relevant for medical centers, but also for the IP holders. The next step is to drive this growth also in Europe. We have just announced a new 8x radiopharmacy the first in the U.K., delivering output at 8x the capacity of a single radiopharma facility today. In Precision therapy, our all-new angiography portfolio is now delivering the expected acceleration in revenue growth following FDA approval. It covers all clinical needs in interventional radiology, cardiology and neuro interventions and is powered by optic AI, delivering a new level of image quality and reducing x-ray dose. Variance position as a strong growth engine in Healthineers is unchanged. Key here is the continuous innovation momentum -- the new platform, which will be launched at ASTRO is expected to further contribute to this momentum. Health KAI and the ability to scale this on a global level is another strong capability of ours and is highly relevant for our customers. Our single CT coronary cockpit has just received FDA approval. This AI-powered application helps our customers to bring critical CT information into the cath lab. The cockpit is designed to automatically segment in label coronaries. It visualizes and quantifies plaque types for the whole coronary tree or individual lesions. This makes treatment better and faster. And finally, we have strong traction for AI tools for radiation therapy planning. We can enhance our large installed base easily with tools like auto counting of organs at risk. This enables dosimetrist and radiation oncologists to focus on revenue and fine-tuning resulting in faster radiation treatment planning and higher patient throughput. To sum it up, we continue to strengthen our unique capabilities, fostering our leading market positions across modalities. But also our Diagnostics business has important innovations to showcase. At this year's ADLM, the biggest trade show in this space, diagnostics launched Atellica Forte, an evolution of our proven Atellica solution chemistry and immunoassay platform. The Atellica Forte series represents meaningful innovation, reliability and progress while also reinforcing continuity, confidence and investment protection across the Atellica systems portfolio. It comes with a new digital architecture, the integration of AI agents with new productivity features and expand patient access to care with diverse sample types from venous blood to urine and even fecal samples. And now with innovative low-volume sampling options and integrated capillary workflows. Atellica Forte can run 24 CE-marked assay claims, including a comprehensive metabolic panel using as little as a fingerstick of blood and industry's best. Adding Atellica capability helps collab scale testing offerings easily and using existing infrastructure. This offers clinical labs greater patient reach and access to more testing volume without requiring expensive health care specialists. However, we are not only upgrading our analyzer. We are also focusing on clinical relevance by expanding our competitive diagnostics menu in the area of brain health. Our blood-based Alzheimer's research assays and a CE-marked NFL assay for multiple sclerosis now under FDA review. We are building a comprehensive biomarker portfolio to help advance earlier detection, monitoring and understanding of neurological diseases. With the updated Atellica platform and the great set of brain health research assays, the Diagnostics team is clearly differentiating from peers and improving its competitiveness. Now let me briefly summarize the quarter before Jochen will run you through the financials in more depth. The revenue growth picture is broadly unchanged compared to the second quarter. The synergetic core is performing well, especially having in mind strong comps in the prior year quarter by diagnostic suffers from the market rebasing in China and from revenue dilution from our legacy platforms. In terms of comparing quarters, the equipment book-to-bill in Q2 was clearly a weak spot. We committed to this recovery in Q3, and I'm very happy that it did more than that. The outstanding equipment book-to-bill of 1.27 is a documentation of our continued strength in the market. The 5% growth in the synergetic Corp was driven by a strong precision therapy quarter, which itself saw the strong swing back to growth of advanced therapies as flagged. Imaging posted softer growth this quarter. However, this is not a fundamental topic but a temporary topic of comps and shifts. The tariff refund supported the very high profitability in this quarter. Excluding tariffs, we had a decent margin level despite low absolute conversion and year-over-year headwinds from FX and inflation. The contribution from tariff refunds was 490 basis points in Imaging and 350 basis points in Precision Therapy, respectively. In Diagnostics, the continued year-over-year decline was expected and well flagged. The extent of the decline, however, higher than expected. Nevertheless, Diagnostics achieved sequential margin improvement, quite decent, especially considering the missing conversion. Jochen will give -- will now guide you through the financials. And with this, over toyou.

Yes. Thank you, Bernd, and good morning. Let us start with the financial performance of the Imaging segment in Q3. Imaging posted soft growth this quarter due to tough comps of 12% in the prior year quarter and due to some revenue shifts into Q4. Consequently, we expect a clear acceleration of the imaging growth in Q4. I will give you more color on the sequential acceleration of the imaging growth later in the call. The imaging margin benefited from tariff refunds in Q3. Before refund, the imaging margin was at 21.6%, below a very strong prior year quarter with 23.7% margin. Last year's margin was additionally lifted by the shift of a government grant last year from Q4 to Q3. Considering the low absolute conversion from softer growth in this quarter. The imaging margin shows a decent profitability level in Q3. Now over to precision therapy. Our Precision Therapy segment showed growth in all its businesses, Varian Advanced Therapies and also ultrasound, led obviously by Advanced Therapies started to ramp up throughout Q3. On the bottom line, the precision therapy margin benefited also from tariff refunds. Before tariff refund, the Q3 margin was at 14.1%. Looking back, similar to imaging, we saw a very strong margins in the prior year quarter. day-over-year foreign exchange was an additional headwind. Yet the precision therapy margin declined only slightly after the strong prior year quarter due to conversion from strong growth. And now let's complete the segment run-through with Diagnostics. In Diagnostics, in Q3, we saw a continuation of the year-over-year revenue and margin decline rebasing in China and the revenue dilution from the tailing off of our legacy platforms. especially in North America, where the installed base of our legacy is particularly large. Looking at the bottom line, prior year's strong margin of 9.2% benefited from a positive one-off from the release of pension liabilities related to prior year periods. Excluding the positive one-off, the year-over-year margin decline is still material. It was driven by negative conversion from the significant revenue decline and additionally by headwind from foreign exchange. While margin ex refunds of tariffs of 3% is still low in Q3, we saw a slight improvement as laid out last quarter. Let us now have a look at how this all adds up to the group numbers. Let's start with the top line. Revenue growth this quarter was against tough comps of 7.6%, which obviously is also visible in certain regions. Americas and Asia Pacific were going against very strong comps, especially in the Americas of 14% EMEA returned to growth after being flattish on a high absolute level in the fiscal year. So EMEA was the growth driver in the region this quarter. China was down by 10% this quarter. On the one hand, diagnostics in China continues to decline due to the structural market rebasing in China. And on the other hand, the synergetic core in China declined against very tough comps of mid-teens growth in the prior year quarter. In absolute terms, the revenue in the synergetic core is over the year sequentially flat in line with our assessment that the Chinese equipment market is currently muted, yet relatively stable at a low level. Now let's have a look at the earnings in Q3. Earnings this quarter benefited from the tariff refunds. Excluding the refunds, we saw decent profitability of 15.4% despite soft growth in the quarter and despite ongoing headwinds from foreign exchange and first impacts from inflation in the supply chain. In the year-over-year comparison, next to the tough comps in revenue, we also had very good segment margins in the prior year quarter, in imaging and variant from very good mix and in imaging and diagnostic from positive one-offs in the prior year. Finally, the valuation of share-based payments linked to Siemens AG shares has had a negative year-over-year effect on this quarter. However, this quarter is the very last time we see an effect from this as we have changed the mechanism now. On EPS, there are 2 significant distortions in the year-over-year view. First, the refunds impacted this quarter by around EUR 0.15 impact from equity income in last year's Q3 of around $0.05. Highlight cash in absolute terms, amounting to over EUR 1 billion, also benefiting from the tariff refunds. The cash conversion rate was very good with EUR 1.12 billion driven by strong cash collection and not by the refunds. The tariff refunds have a cash conversion rate of so to say, only 1 based on the cash-based accounting treatment of the matter. This means the cash conversion rate of 1.12 was even diluted by the tariff refunds. Consequently, we reduced the net debt compared to Q2 by around EUR 800 million to around EUR 12 billion and reduced leverage from 3.1% in Q2 to 2.8x in Q3. Growth in Q3 was lower than anticipated, primarily to the continued decline of Diagnostics but also due to softer growth in Imaging. In Imaging, we had already anticipated and flagged softer imaging growth due to the very tough comps in imaging with 12% in the prior year quarter. What we did not anticipate was that, for example, the site readiness in Q3 for installations in the field did not keep up with a very high factory output in Q3 driven by the very high demand for our dry cool portfolio. This is only a temporary topic. Hence, we expect revenue to shift from Q3 into Q4. Additionally, we expect very good growth momentum in CT. In Q3, growth accretion from Photon counting CTs was a bit muted due to a very tough comps in last year's Q3, the 2 new Photon Counting CTs, Prime and Pro caused a step change in revenue after the FDA. Now in Q4 this year, these 2 photon counting CT platforms are also available in China. This is just one driver of many for the accretion to growth from our photo accounting CT business to continue. Together with continued strong momentum in Advanced Therapies, we expect growth in the synergetic core to clearly accelerate in Q4 compared to Q3. Exceptional growth in our procedure business, our continuously nicely growing service business and the strong order book, backing our equipment business are the building blocks for the expected revenue acceleration in Q4. In Diagnostics, the rebasing of the Chinese market and the revenue dilution driven by the decline in legacy platforms continues. What did not materialize this quarter was a relapse of the OEM volume, particularly out of China. Also the year-over-year decline in the legacy platforms continues. Sequentially, so the quarter of this fiscal year were on a stable yet low level in terms of absolute revenue and we expect this level to slightly increase only in Q4. Hence, we expect a mid-single-digit percentage decline also in Q4, similar to what we have seen so far this fiscal year. Despite the weak year for the Diagnostics business, the group is on track for our underlying earnings growth this fiscal year. On the left side, slightly faded, you see the same earnings per share bridge from Q2, which is unchanged. Operational improvement in earnings per share is on track despite the continued weakness from Diagnostics and the headwind from foreign exchange and tariffs are as expected, so all as expected. Inflation in the supply chain, notable memory chips, raw materials and logistics started to come in with around EUR 0.01 headwind only in Q3, and we expect the P&L impact from inflation to intensify obviously, in Q4. With this, our assumption of around EUR 0.05 headwind in the second half from inflation in the supply chain is also unchanged. The only change in our 2026 earnings per share bridge is the tariff refunds which are roughly equivalent to EUR 0.15 EPS. Therefore, we raised our EPS guidance for fiscal year 2026 by exactly the amount of the tariff refunds. And this brings me to the next slide, the outlook slide. We update our outlook for fiscal year 2026. We lowered the revenue growth guide to 3.5% to 4%, primarily due to diagnostic revenue not recovering in the second half of this fiscal year. As outlined before, the slower-than-expected revenue performance in Diagnostics is due to the rebasing of the Chinese market, and the revenue dilution of the decline in legacy platforms. For adjusted earnings per share, we raised the guide to be between EUR 2.35 and EUR 2.45. So the EPS range is raised by the tariff refunds which amount to around EUR 0.15 in EPS. Thereby, the underlying EPS range remains unchanged due to the fact that the synergetic core is well on track. The downgrade in the diagnostics revenue does not have a material impact on earnings due to the currently low profitability in Diagnostics. As outlined before, we expect the tax rate to be close to 23% coming from the initial assumption of 24% to 26%. In financial income, net, we expect around minus EUR 330 million in fiscal year 2026, including a one-off tailwind from interest for the tariff refund. Let me also update you with our latest view on Q4. As outlined before, we expect a clear acceleration of revenue growth in the synergetic core with Imaging accelerating into the higher single digits and precision therapy continuing growth in the higher single digits maybe not fully at the 9% level of the current quarter. In Diagnostics, we expect a continuous decline at a mid-single-digit percentage level also in Q4. On margins, we expect in Imaging sequential margin expansion compared to the Q3 margin ex refunds from the accelerated growth. In precision therapy, year-over-year margin expansion will be tough against the very high prior year quarter of 17%. But we expect a good sequential improvement with the 14% margin ex tariff refunds from Q3 this quarter. In Diagnostics, we continue to expect a significant year-over-year margin decline at least sequentially flat compared to the Q3 margin ex refunds. Consequently, we expect for the full year the Diagnostic margin ex refunds to approach the full year assumptions from below, which is a mid-triple-digit basis points decline. Now that we have updated you for fiscal year 2026 and our upcoming Q4, let me now share some of our current expectations regarding already known impact for the next fiscal year 2027. As we come closer to fiscal year's end and being in the midst of our budget planning phase for '27, we want to provide with some thoughts on the 2027 earnings per share drivers. Baseline for 2027 is our 2026 adjusted EPS guide without the tariff refund i.e., a midpoint of EUR 2.25 as the baseline in 2026. On our last Capital Markets Day, we committed to double-digit EPS growth year-over-year over the midterm. We stated that we will be mitigating the EUR 400 million tariff impact by 2028. We're seeing positive contributions starting in 2027. The mitigation measures, as indicated, will not ramp up in a straight line. The EUR 400 million mitigation will be somewhat back-end loaded. Now what changed since the Capital Market Day is that additional inflation in the supply chain became a material macroeconomic headwind, especially in memory chips and certain raw materials and also in logistic costs. Currently, we would assume that the inflation headwind in fiscal year '27 will be roughly offset by the mitigation ramp for tariffs in 2027. While we are at the topic of headwinds in 2027, let me point out some other more technical effect that we already know today. The tax rate this fiscal year is expected to be closer to 23%, and initial assumption of 24% to 26%. We do not expect this low level to be sustainable, so we expect the normalization towards the normal tax rate of '24 to '26. In financial income, net, we previously pointed to minus EUR 340 million in fiscal year 2026. With the tariff refund, we also received a refund for interest so we now expect around minus EUR 330 million for this year. From this 2026 level, we see 3 main effects next year. The refinancing at higher rates that we did in March 2026 will annualize next year. Early next year, another loan is due to be refinanced at higher rates. The higher financing costs from higher rates will be partly be offset by a decrease in loan volume from organic deleveraging. In total, we would currently expect financial income net to decrease, meaning becoming more negative. By a mid- to high double-digit million euro number next year from the basis of the minus EUR 30 million this year. The refinancing is expected a normal course of business. This is not related to the deconsolidation by Siemens AG. As said, we do not expect a material impact from the deconsolidation on our financial income net and from what we know now, this also holds for fiscal year 2027. What we see next year related to the deconsolidation by Siemens AG are other recurring separation costs. We pointed to a mid-double-digit million number for this topic with the deconsolidation happening earliest in April next year. The cost will not reach the full fiscal year level in the next year. And with this, back to you, Marc.

Yes. Thank you, Jochen. Let's go to the q&a [Operator Instructions] And for transparency reasons, I would just kind of now give you the order of appearance of the first 3 callers. First, I have Graham and then I have Veronika and then I have Hassan on the line. So let me now first go to Graham Doyle from UBS.

Jochen, just to the slide you ran through there on Slide 15, where you're plotting the sort of EPS path for 2027. Is it fair to kind of contextualize that and say with all the information you have today in terms of inflation and the macro that you consider this to be kind of a prudent or conservative view in terms of what you can deliver. And maybe just push that slightly further. Are we looking at that chart and thinking mid-single-digit EPS growth from the sort of clean base is a sensible starting point for next year?

Yes, Graham, thanks for your question. And obviously, we try to be as transparent as we can based on the current planning status we are in -- and therefore, we provide this slide. When I look at it, I think this is, I would say, a very today is always, I would say, a disclaimer. We don't know what we don't know. And I would see it the following. If you really want to base it out, I would say, we start with EUR 2.25 as the baseline for 2026. And I would consider us to be in the position to show net-net of all the effects growth from the 225. How much? We need to see as we walk our way through the planning phase. This is really, I would say, base, base, baseline, yes.

Over to Veronica

I'm going to just follow up on that fiscal '27 burger. That's okay, Jochen. I think one of the things that comes up a lot in discussions is obviously I'm just curious if you can share some preliminary thoughts on whether that's included in that bridge that you've presented. And then obviously, also as you work towards the diagnostic separation, any costs related to that, is that included in that bridge as well? So if you can give us some color on those 2 items, that would be super helpful.

Yes. obviously, both topics were not mentioned. That is a signal on the bridge and we talked about the separation costs from Siemens, we talked about recurring costs in the ballpark of 50 or mid-double-digit EUR 50 million, yes. This does obviously not include any branding fees. And based on the current assumptions and the discussions we have with Siemens, which are very constructive, we don't expect to have a branding fee in the coming years, just to say this clearly. On the separation cost potential separation costs for Diagnostics, they are not built into that bridge because if and when they would occur, we would also adjust for them because that is -- that would be then a portfolio measure. And I think that as we also adjust potential gains and losses from portfolio transactions, we also to say -- adjust the related cost of it. So therefore, it is not in but would be adjusted.

That's very clear. And can I just quickly check. On my math, it's EUR 0.05 from tax, EUR 0.05 from the net interest expense and EUR 0.02 to $0.03 from separation. So the headwind sort of EUR 0.10 to EUR 0.15 seem reasonable to you or I guess, EUR 0.15 maybe?

Say that again? Sorry, it was difficult to hear in the beginning.

I was just double checking my math. So from what you said, it's about EUR 0.05 headwind from the tax rate, EUR 0.05 headwind from the higher interest expense and somewhere less than EUR 0.05 headwind from the separation. So I was just kind of trying to quantify that, is it a fair assumption?

That makes a lot of sense. I think these are meaningful. Yes, absolutely.

Great. Thanks, Veronika. So next one will be Hassan from Barclays.

Another follow-up on the helpful bridge -- impact from inflation as it relates to tungsten and memory costs into FY '27 at current spots. And if the lower end that you're pointing to of Well, I think we're interpreting as mid-single digit. Whether that assumes any deterioration in inflation from here drives the acceleration beyond '27 back to double digit and beyond given the midterms.

Yes. And on the Tungsten side, I think that is also a volatile topic. And we have seeing it peaking to 6x, I would say, the prices, and they came down again to 2x to 3x the pricing as we need to see what -- this bridging item is also a bit fading because we don't know exactly, and we need to -- before we go out with the concrete guide, we need to -- we take every second. We get additional information about the future to quantify that more clearly, yes. Just to say this on think the question is on memory chips, mine, we expect to see this topic on an ongoing basis now for this year, 6 and EUR 27 million. Question is how long will that last and will then create additional year-over-year effects. From our standpoint, at some point in time, that should be over because Otherwise, you can make also so much money with that stuff that people will start using their capacity also for this. You could at least argue like this. Therefore, when this starts to normalizing and again, then we should not have this headwind anymore on a year-over-year basis. And then we should see, I would say, the operational -- the underlying profitability improvement in the business showing a as the net EPS growth, that's why we feel still good about our midterm ambition. But again, we don't know what we don't know. Thank you. Is that clear?

Okay. Then next 3 people on the line would be first Julian Dormois, then Julian Ouaddour and Oli Reinberg? So starting with Julian from Jefferies.

Probably more of a high-level question, and you obviously signed to high-profile partnerships this quarter. but we also had some mixed messages, I would say, from hospitals in the U.S. about procedure trends and that sort of stuff. So just curious how your conversations are going with U.S. hospitals these days. Do they seem a little bit cautious for the second half and maybe for 2027. And the question would also extend to Europe. We start to hear a bit more about potential health care reforms also hitting hospitals at some stage. So just curious how your conversations are going with your customers?