Siemens Healthineers AG (OTCPK:SEMHF) Q2 2022 Earnings Conference Call May 4, 2022 2:00 AM ET

Patrick Wood - Bank of America

Veronika Dubajova - Goldman Sachs

Good morning, ladies and gentlemen, and welcome to Siemens Healthineers' Conference Call. As a reminder, this conference is being recorded. Before we begin, I would like to draw your attention to the safe harbor statement on Page 2 of the Siemens Healthineers' presentation. This conference call may include forward-looking statements. These statements are based on the company's current expectations and certain assumptions and are, therefore, subject to certain risks and uncertainties.

At this time, I would like to turn the call over to your host today, Mr. Marc Koebernick, Head of Investor Relations. Please go ahead, sir.

Thank you, operator. Dear analysts and investors, good morning, and welcome to our Q2 fiscal year '22 earnings call. All the relevant documents have been published this morning at 7:00 a.m. and are available for download on the IR section of the Siemens Healthineers' web page. I'm sitting here with Bernd and Jochen, who will be taking you through the results and the usual detail and will be available for your questions after their presentations.

May I remind you to stick to two questions in the Q&A. Other than that, we are ready to go. Please, Bernd, may I pass the word over to you.

Thank you, Marc. Good morning, dear analysts and investors, also from me. Thanks for dialing in again and expressing your continued interest in Siemens Healthineers. Since our last analyst call 3 months ago, a lot has happened. A previously unimaginable tragic war has started in Ukraine.

The ongoing pandemic has led to unforeseen strict lockdowns in China and has tightened an already challenging global supply chain environment even more. On a very positive note, we celebrated the 1-year anniversary of the combination of Varian and Siemens Healthineers. The past 3 months have also shown that the fundamental need and demand for highly innovative products and solutions for diagnosis and therapy is unchanged. Our financial performance in Q2 shows that we have been able to keep up the momentum from the past quarters despite these unprecedented challenges. We once again increased our order backlog remarkably with an excellent equipment book-to-bill rate of 1.22.

And despite the macroeconomic and geopolitical challenges, comparable revenue growth was excellent at 16%. This was driven by outstanding 37% growth in Diagnostics, including €680 million of rapid antigen test sales. Varian contributed €706 million to our revenue, again, with a very strong equipment book-to-bill rate of 1.31. Imaging and Advanced Therapies' comparable revenue growth continues to be strong at 6% and 8%, respectively. The adjusted EBIT margin for the group came in at 17.9% in Q2, holding up well against FX headwinds and elevated procurement and logistics costs on the back of a record quarterly rapid antigen test contribution.

Our adjusted earnings per share increased year-on-year by 53% and was €0.67 in Q2. On back of the strong antigen performance and the overall resilience the businesses has shown, we have raised the outlook for the group. In terms of comparable revenue, we now expect 5.5% to 7.5% growth compared with 3% to 5% previously. And for adjusted basic earnings per share, we now expect to €2.25 to €2.35 compared to €2.18 to €2.31 as this year previously. As mentioned, this increase is again the result of higher-than-expected antigen test revenues.

We now assume €1.3 billion of revenues from rapid antigen testing in this fiscal year. 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, which we have systematically built in the past years, a set of capability 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.

Precision therapy means using cutting-edge technologies to deliver individualized therapies, often with submillimeter accuracy, whether it's cancer, neuro or cardiac disorders. The importance of precision in treating patients is what makes Varian so unique in cancer therapies. It is also why Advanced Therapies is focusing on making more and more procedures minimally invasive by image guidance and robotic assistance. Precision improve 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 patients and for connecting patient training with precision therapy. Our unique capabilities allow us to pioneer breakthrough innovations to fuel our future growth along our 3 strategic growth vectors: Fighting the most threatening diseases, enabling efficient operations and expanding access to care. We derived our strategic growth vectors as a logical reaction to the key challenges in health care. They represent significant opportunities for us to tap into. We see unrealized possibilities to fight the most threatening diseases in the world like cardiovascular diseases, cancer and neurological disorders.

There's untapped potential to improve provider efficiency. Health care providers face staff shortages, consolidation and currently, more than ever, cost pressure. And our third growth vector addresses unmet access to health care for billions of people worldwide. Our innovative technologies and unique competencies are tackling exactly these opportunities. We will tirelessly strengthen them further as the holistic partner of health care providers worldwide.

Taking a look at how our customers are typically set up makes it even more obvious that we are the holistic partner for the C suite. The C suite of ever consolidating and transforming customer base. Through the breadth and depth of our portfolio, we provide offerings for virtually all critical departments. Our service offering ranges from highest rated product service to consulting to comprehensive value partnerships. This gives us an unmatched relevance for our customer base.

You might remember from our Q1 communication that we entered into a strategic partnership with Oulu University Hospital in Finland for the next 10 years. In Q2, we added to the existing radiotherapy collaboration, another 10-year contract to jointly expand and modernize the radiology department. Furthermore, we entered into our first value partnership in Eastern Europe with Penta Hospital International for the new Bory Hospital in Bratislava, Slovakia. This strategic partnership over 15 years comprises the installation and service of imaging equipment as well as a significant education program focusing on innovative AI-based solutions to aid physicians in their work, for example, the AI-Rad Companion. This trend towards large multiyear deals is expanding and accelerating, and I'm happy to observe that our funnel of these kind of partnerships is stronger than ever before.

So stay tuned for more combined deals to be announced over the coming quarters. These unique capabilities, strategic growth opportunities and our unmatched relevance as a partner of choice for our customers are also the basis of our capability to grow while also being resilient in this challenging environment. We are all aware of the current dynamics, whether it's the still ongoing global COVID-19 pandemic, the war in Ukraine, or the difficult logistical environment due to the tight capacities or local lockdowns. Nevertheless, we were able to grow our business once again at a double-digit rate and we further expanded our strong order book with an equipment book-to-bill of 1.22.

We have shown throughout the pandemic that we can adopt in an agile fashion towards changing environment, for example, by building a rapid antigen test business to capture pandemic-related opportunities from scratch. We have been able to overcome supply chain challenges. With our strong global footprint, we are able to balance the impact of COVID-19 lockdowns. And thanks to our great innovative products and solutions, we can continue to benefit from unchanged, robust underlying growth drivers and at the same time, demonstrate pricing excellence based on our innovation leadership. These factors also keep me confident that we will continue to deliver resilient growth going forward.

So before I hand it over to Jochen for the financials, let me just say how proud I am of how we, as a team, continued to manage these unprecedented challenges and how we consistently work and deliver on our purpose to pioneer breakthroughs in health care for everyone, everywhere. Speaking of a strong team, I'm very pleased to announce that we have found a great successor for Deepak Nath. At the end of May, Sharon Bracken will be joining us to head our Diagnostics business. Sharon brings to the team more than 30 years of global business experience, including 20 years in, in vitro diagnostics. I'm really looking forward to the cooperation.

And with this, I hand it over to you, Jochen.

Yes. Thank you, Bernd, and good morning to everyone, also from me. It is my pleasure, as always, to provide you with some additional color on our Q2 financials. Let me pick up on what Bernd highlighted regarding our impressive ability to grow and our resilience. We increased equipment orders again this quarter with comparable growth in the high teens, driven by Imaging and also Advanced Therapies.

In particular, we saw excellent order intake in the United States. So we are happy with how the order intake has continued to develop, both year-over-year and sequentially. And we are equally happy about the remarkable revenue development this quarter, strong growth across the board and also strong underlying growth in the Americas and in EMEA, if you take out the rapid antigen revenues. Asian revenues were slightly down mainly because China is still running against tough comps from the prior year quarter. Adding to this, the lockdowns in China at the end of the quarter impacted revenues, mostly in the Diagnostics business.

Now moving over to profitability. On the right side of the chart, earnings per share were up 53%. This was driven by the strongly growing revenue that we converted to earnings with the margin holding up well despite a challenging environment. As you would expect, the headwinds in procurement and logistic costs have increased this quarter due to the further tightening of global supply chains. We now saw over 150 basis points of year-over-year headwinds in Q2 compared with around 100 basis points headwind that we saw in Q1.

Foreign exchange, as expected, remained a headwind in Q2 of around 150 basis points year-over-year. These headwinds were roughly compensated by the antigen contribution, keeping the margins steady on the level of Q1.

Now some comments to the line items below the EBIT line. Financial income, net, came in at minus €7 million in Q2, significantly less negative than the €30 million in Q1 due to a positive impact from our equity investments and instruments. These instruments fluctuate from quarter-to-quarter with year-to-date of minus €37 million financial income. We are in line with what we expect for the full year. The tax rate was also low in Q2 due to a positive effect from a tax procedure, more precisely a recognition of deferred tax assets that were booked in Q2.

This recognition was already envisioned for the full fiscal year. Hence, no impact on the tax rate that we expect for the full year.

One comment on our free cash flow in Q2. Free cash flow was relatively low this quarter at €164 million due to the cash outs of the incentive payments, something we regularly encounter in Q1 and Q2 and also due to the buildup in inventory levels to secure our ability to deliver to customers in the currently challenging environment. As always, in the appendix, you will find the free cash conversion bridge.

And now let us have a closer look at the segments. When looking at the segment performance this quarter, we see strong revenue growth across all businesses despite further increased macroeconomic and geopolitical challenges. Imaging continues to be strong with 6.5% revenue growth driven by very strong growth in MRI and computer tomography, the latter despite tough comps in the prior year quarter. On the margin side, Imaging showed a good performance of 20%-plus EBIT margin, digesting headwinds from foreign exchange and further increased procurement and logistic costs. These headwinds added up to around 250 basis points headwinds year-over-year.

We will have a closer look at Imaging's margin development throughout the year later in this presentation.

Diagnostics stands out with 37% revenue growth in Q2, including around €680 million of rapid antigen test sales. On the margin side, profitability increased by 870 basis points year-over-year. This was possible despite around 400 basis point headwinds from foreign exchange and further increased procurement and logistics costs on the back of a very high quarterly rapid antigen test contribution. The just mentioned 400 basis point headwinds, however, are related to ex-antigen revenues. I will give more color on our updated rapid antigen test assumptions in fiscal year 2022 on the following slides.

Advanced Therapies continued to have strong growth this quarter with 8%, driven by a healthy backlog. The Q2 margins in Advanced Therapies was down to 12% due to headwinds from foreign exchange and further increased procurement and logistics cost of around 200 basis points in total and also continued investments in the Corindus business.

Now turning to Varian on the next chart. Varian again showed a very strong equipment book-to-bill rate of 1.31 in Q2, reflecting continued high demand and a further expansion of our strong order backlog. In this quarter, Varian's multidisciplinary oncology business signed an attractive service deal with the Cancer Treatment Centers of America. With regard to this, as Bernd has alluded to before, the funnel for our value partnerships looks very promising. In these partnerships, the Varian technology and services also play an important role.

So more good news to be expected from Varian in the coming quarters.

Varian contributed €706 million to revenue in Q2 being affected by revenue pushouts from Q2 to Q3, partially due to local lockdowns in China. Excluding these unforeseen effects, it is spot on in terms of what we planned for. Since we will recover these revenues already in Q3, our view on full year revenues at Varian remains unchanged. However, more on this outlook at the end of my presentation. The adjusted EBIT margin came in at 13.3%, in line with our expectations in terms of quarterly volatility this quarter, with a bit of downside volatility due to increased procurement and logistics costs as well as somewhat lower conversion due to pushed-out revenues.

As you may remember, we already shared with you in our Q4 2021 presentation that Varian usually has stronger margins in the second half of the fiscal. So we continue to expect an uplift in the margin level in the remainder of this year.

The Imaging margin development in the second half year was a point of discussion in the last quarterly call and also during the road shows and conferences following Q1 reporting. So let us have a closer look at that. Let me first remind you of our overall Siemens Healthineers setup for industry-leading margin. The left-hand side of this slide shows you what we have presented at our Capital Market Day in November last year. The drivers for our industry-leading margins are a function of our innovation leadership and its impact on pricing, our stable delivery on cost productivity to balance price erosion and cost inflation and our scale that gives us, on the one side, purchasing opportunities as well as cost aggression at growing revenues.

And of course, we are exposed to foreign exchange volatility. However, thanks to the combination with Varian, this is now also more balanced for the group overall. Most importantly, this setup works also in such unprecedented times.

Also the drivers for the Imaging margin picked up in the second half are anchored in this setup. Firstly, we expect the headwinds from foreign exchange of around 100 basis points to fall to around 0 in the second half. Secondly, we expect to see cost degression effects on higher revenue number in the second half compared to the first half. And lastly, we expect to see the implemented measures to come through in equipment revenues towards the end of second half, partly mitigating the further increased headwinds from procurement and logistic costs which have a negative impact on our ability to drive productivity in the supply chain.

For the full fiscal year, however, the implemented measures cannot fully compensate the further increased headwinds from global supply chains which is why we updated our Imaging margin guidance for the year. We will pick this up later when we speak about the updated group outlook. And adding to this, one comment on mix. As you know, mix can come in many fashions, for example, regional mix, and it's not easy to forecast. But in H1, we might have already seen the worst in terms of mix, meaning that if we see mixed impacts, in the second half, they will be rather create some upside than downside.

Now let us look more closely at Diagnostics. The rapid antigen test sales peaked in Q2 with €680 million worth of sales. H1 is, therefore, €300 million ahead of what we had expected. As we mentioned last quarter, the full year visibility on testing demand is still relatively low and the situation is very dynamic. Nevertheless, we still expect revenues to decline sharply in the second half as we move from a pandemic to an endemic environment.

With the additional orders we have received in the second quarter, we now assume around €1.3 billion rapid antigen test sales in fiscal year 2022. For the remainder of the year, we expect to generate revenues very front-ended and mostly in the United States. We will also discuss this later in our expectations for fiscal year 2022 in the outlook section.

Now back to Q2 performance. If we take out the rapid antigen test sales, we get year-over-year flattish revenue growth in the core business of Diagnostics, muted due to COVID restrictions in China which negatively impacted the sales in our routine care business. In Q1, we already saw solid growth in the core business. We see this as a positive proof point that growth for routine testing, in general, is back on track.

Now over to profitability. Diagnostics, excluding the accretion from antigen test sales was soft in Q2 due to valuation effects. In the operational business, core Diagnostics faced clear headwinds from foreign exchange and from the lockdowns in China. Excluding these, we see that the underlying profitability was in the mid-single digits, slightly below what we saw in Q1. Additionally, Diagnostics was again facing headwinds from procurement and logistics in Q2 with logistics being the larger topic in Diagnostics.

The fact that underlying profitability is roughly being sustained in this changing environment is another positive proof on that we are on track in Diagnostics to achieve what we have planned midterm.

Now let us sum up this presentation with our updated outlook. We have raised our outlook for fiscal year 2022, both for comparable revenue growth and adjusted basic earnings per share. We raised our outlook for comparable revenue growth to 5.5% to 7.5%. For Imaging, we now expect growth between 6% and 8% on the back of a strong order backlog and better visibility on the second half. For Diagnostics, we now expect growth in the mid-single digits due to the increased rapid antigen assumption of €1.3 billion of revenue in fiscal 2022.

We also raised the outlook for adjusted basic earnings per share to be between €2.25 and €2.35 in fiscal year 2022 due to the increased rapid antigen contribution, overcompensating the further increased headwinds from procurement and logistic cost. In short, in very high level, the raise of €0.16 from the initial guidance from November on the midpoint is the result of the updated assumption on antigen corrected for the higher procurement and logistic costs currently weighing on our profits.

In Imaging, we now expect the margin to be between 21% and 22% due to the fact that the implemented mitigation measures are not assumed to fully compensate the aforementioned headwinds. Albeit lower than before, the new Imaging margin guide constitutes a decent year-over-year margin expansion. In Diagnostics, we now expect the margin to be in the low to mid-teens due to the increased accretion from the rapid antigen business. Our current assessment of the challenging situation in China with the lockdowns is also reflected to the extent that we will see a more stable situation starting in the second half of Q3. This takes away some of the antigen upside for the remainder of the year.

The target bands for Varian, Advanced Therapies financial income and tax rate remain unchanged as seen in the gray print of this outlook slide.

On Varian, I would like to highlight that the chance to slip into the lower half of the margin guidance band is currently slightly higher than the chance to end up in the upper half. For Advanced Therapies, we expect to be more at the lower end of the margin guidance. In central items, the run rate of €70 million to date points to roughly €140 million for the full fiscal year which would be currently the best assumption for central items. This is more than what we said in November because we see good progress in setting up the ultrasound business as a company in the company as well as in rolling out our global ERP template for sales and service. Hence, we also incur costs more quickly in this regard.

Obviously, all move in the margin guidance and our assumptions on central items are reflected in the new EPS range.

Now if we turn to the upcoming quarter Q3. We expect a positive underlying growth momentum in the segments to continue despite the tough comps. We expect Imaging and Advanced Therapies to continue their strong growth trajectory from the first half of the year. For Varian, we expect a stronger revenue and margin quarter also given the aforementioned catch-up effect from pushed-out revenues. We expect a very different picture for Diagnostics.

Please bear in mind that our rapid antigen test guidance implies a remainder of around €300 million, which we expect to be very front-loaded. But in Q3 last year, we saw a significant antigen test contribution of around €600 million, leading to a very tough comparable basis, and consequently, we should see negative growth in Q3 in Diagnostics. Also the core business will remain be impacted in Q3 by the lockdown situation in China.

Regarding profitability, we expect with the run-up in the second half in the fiscal year, margins to pick up across the segments. Please keep in mind, the strongest quarter will be Q4 again, with the exception of Diagnostics due to the decreasing accretion from the antigen business.

And with this, I close my presentation and hand it over to you, Marc, for Q&A.

Great. Thanks, Jochen. A short interlude from the operator, just giving you the instructions that you need to know, and then we can start.

Great. So we can start. First one in the queue will be Patrick Wood from Bank of America. So Patrick, if you're ready, the floor is yours.

People expected, even if you didn't take into -- account the uncertainty that exists in the world. So I'm just curious how the conversations with the hospitals are going? And what do you think is driving I guess, such a dramatically strong order book across the piece? That's the first question. And then the second question, just curious in terms of the Diagnostics side.

What it was that made you particularly choose Sharon as a leader of that division? Is it her background? I think she spent a bit of time at Abbott, I'm thinking of that. Is that what you were looking for in terms of background? Or was there some leadership qualities?

Just curious how we should think about the leadership of that division over the next few years.

Okay. Thank you, Patrick. I mean, question number one, I mean I had the privilege to be able to travel again in the last weeks and months and have many, many conversations with customers. And I mean what it confirms is the type of technologies we offer is exactly what is needed because, on the one hand, there is a lot of growth, yes, simply in the demand of patients. Yes, so everybody is saying that the number of patients they are dealing with maybe a little bit of pent-up demand here, but maybe also realizing the secular growth drivers is a big topic plus also the topic that the staff shortage and so on, they are dealing with can only be solved by investing in a more modern way of delivering health care, yes?

So I talked to many, many I mean bullish customers, but I mean, bullish in a way of -- I mean they see growth, but they are also concerned about if they continue -- to deliver care in the way they do, they will not be able to keep up with that growth, yes? So this is the overall momentum. I mean this is a very strong U.S. message I'm now saying but it's in the end, similar when you look at building up the health care systems in low and middle-income countries, but also the renewed consciousness of how important health care infrastructure is for the competitiveness of a nation in countries like -- or in regions like Europe.

When it comes to Sharon. So I hope she's -- well, she can listen. I mean what we were looking for is somebody who really has successfully led an end-to-end Diagnostics business, has managed also integrations. She was -- Sharon was instrumental in integrating Alere into Abbott in creating a very, very strong franchise in the point of care arena. She has a strong background in -- with 20 years of experience in, in vitro diagnostics in -- on the engineering side, but also the special supply chain requirements in this business.

And she is so super passionate about this business and so happy to join one of the really big players here. And one lesson we have really learnt in Diagnostics is domain expertise is key. And this is also something which Deepak Nath did very well, bringing in many people with a strong background in this particular industry and Sharon adds to this.

So we now head to the next one in the queue. This will be Veronika Dubajova from Goldman Sachs. So Veronika, if you're ready, I hope we are.

I am ready. I will also keep it to 2. One, Jochen, I was hoping you can help quantify some of the China headwinds that you saw in the quarter. Specifically, I'm thinking if I look at the Diagnostics business ex-COVID-19, it seems pretty flattish organically. So I'd love to know what that growth rate would have been if you adjust it for China and also that Varian installation delay?

And I guess related to that, your degree of confidence that you can indeed complete the installations in the third quarter, what is assumed within the guidance? So that's my first question.

And then my second question is slightly bigger picture. Obviously, you had noted in your comments on the progress on ultrasound. And so I guess this is more a question for Bernd, but just curious what your most recent thinking is on the strategic value of that business and how you're thinking about the future? And when might we expect a fuller, deeper update from you on what's happening with that segment?

Yes. Thanks, Veronika, for your question. First of all, also following up on Patrick, I think when you look at the order development, and it's China-related, 1 second here, I mean you should see that the strong order intake was possible on a significant decline in China. That shows the underlying resilience of this business. And the China topics are clearly seen from our side as transitory in nature.

Therefore, I think this is also a strong message. What happened in China, I mean, we all know those lockdown topics, and the lockdown topics affected procedures and also the logistics in particular, and those logistic effects hit Diagnostics from an overall core business growth perspective. It took about 2 percentage points away from the growth trajectory. So we would have been, I would say, in the low single digits without the China effect.

On Varian, it was purely not an installation topic. It was more logistics to get the systems to the customers, that was what was holding us up in this regard. Therefore, we hope and we expect that we will be able to do so. And you also need to think about timing. If things like this happened in the beginning of the quarter, it might -- it doesn't affect the quarter at all, and in particular, on the equipment side of the business.

If it happens towards the end, then it can be -- we can have the effects we have seen here that it pushes things into the next quarter.

Maybe only a few words on ultrasound then I hand over to Bernd. I think ultrasound is a business which is in a very attractive market. It's a very important tool. And we have highlighted that ultrasound is an imaging modality, but it -- I would say, the driving forces behind success in ultrasound are very different than in our other imaging business. That's also the main reason for giving ultrasound the degree of freedom to develop further under our leadership, and that's the baseline for the company and the company concept.

So I think this is an attractive business in an attractive market.

Yes. I mean, not much to add. I mean, thank you, Jochen. I mean, the 2 things on ultrasound where one can really see that the team benefits from the renewed and even more emphasized focus and ability to build up the business in exactly the way this particular technology needs it. Good strength developing in the general imaging segment here with also share gains in the last quarter.

And then but is maybe not so visible to the outside simply because, I mean, ultrasound is just about 3% or so of our overall revenue, is a crowned jewel in the business is the catheter business, ultrasound-based catheters, which are instrumental in guiding procedures in cardiology or in -- especially when -- with a strong presence in EP, where we work with Biosense Webster, but with a quite exciting opportunity also to become the tool of choice when it comes to guiding structural heart procedures. So this is not so visible to the outside yes, but something we are very excited about and which kind of fits to the overall theme of combining Imaging or patient winning with the delivery of therapy.

Great. So thanks, Veronika. Next one on the queue would be Julien Dormois from Exane. Julien, you're ready to ask your questions?

Two on my side. So the first one, which relates to the order book. You have given good granularity U.S., very strong growth and a slowdown in China. But would you mind elaborating a bit more on European trends because they might be conflicting trends between the stimulus money that is becoming available to hospitals. So are you seeing any positive signs on that?

Or is that completely offset by what happened in Ukraine at the moment, meaning that hospitals are trading a bit more cautious? So a bit more on Europe would be very helpful.

And then on the Diagnostics business, unless I missed that, I think you have not commented on the guidance for Diagnostics, excluding antigen. So just wondering whether the sales guidance for the core business is still in the 2% to 4% range and the margin is still expected in the mid- to high single-digit range, please?

Yes. Thanks, Julien, for the two questions. I think the momentum of equipment order intake in EMEA was also holding up well. I commented on China, and we saw about a 10% decline in China. And we saw a significant increase in the Americas and also a double-digit increase in Europe.

So Europe is, at least was holding up well, and we expect a decent year for Europe to also on the order side.

On the Diagnostics side, when you look at the update or the upgrade of our outlook, we increased it by 250 basis points, more or less on the top line, €600 million more antigen in there is about a 300 basis points increase -- or would mean as 300 basis points increase. We see due to the China situation, in particular, but also other, I would say, other challenges in the supply chain in Diagnostics, some effect on the core business, so that we expect to be more in the 0% to 2% on the core business for this fiscal year. And margin-wise, I would expect us to be in the mid-single digits.

Clear for you? Okay. So then we'll take the next first one in the line that would be Will Mackie from Kepler. Will, the floor is yours. Please ask your questions.

Two questions. You gave a good explanation of the uptick expected in the second half of the year. in margin, partly supported by price to offset the incremental cost headwind. Could you just talk a little to the pricing environment for equipment and the acceptance that you're seeing with customers to pass through the value chain, these higher cost headwinds? And was there any -- in light of the price increases, which I'm sure you're instigating in some markets, do you think there was any pre-buy associated with that in the quarter?

And then my second question comes back to China. Could you provide perhaps an update on the status of the Chinese business against the backdrop of the rolling lockdowns across the country and when you expect some relief from this to occur during Q3?

Yes. Maybe, Will, I start with your second question. Our -- or the assumption we have baked into our outlook is that we see more normalization in May -- mid-May of the quarter. It's -- man, this is a tricky one. Nobody knows this exactly.

But this is what we have baked in. So if it will last much longer, we will most likely see an impact, in particular, in the Diagnostics business because that is directly impacted if there are lockdowns, patients cannot go potentially to the hospitals and testing volume will go down. But we will need to see. But there, with this, you know what we have baked into it as an assumption.

Yes. And Will, when it comes to pricing and the acceptance, I think, first on this, two groups to be convinced, I speak as a CEO now. One is the own sales force and the other one is the customer. And both fully understand it. And I start with our customers because they experience this in very much also when it comes to other categories of products where it came even earlier, like I mean when they have logistics topics, when they have smaller ticket items, when they have supplies of consumables and so on.

So they experience this, so to say, much earlier. So that -- plus it is the experience of them as also as -- I mean, they are also private consumers. So it is, from that point of view, very well understood and also expected. And the same is true when it comes to our sales force. When it comes to your question of prebuy.

I mean, we are very, very conscious when it comes to our pricing measures. And we know very well how to balance volume and price quality. So from that point of view, we are extremely happy that we also under these constraints in this new environment could continue our strong track record of book-to-bill ratios in the 1.1 to in this -- or 1.2 arena.

Thanks, Will. So we head on to Odysseas. I have to admit, I'm not totally sure if I took that name correct. Anyway, excuse me, if I was wrong, from Berenberg, the floor is yours.

Could you please give us some color on how you're planning to seek higher reimbursements on Naeotom Alpha Scan? And are you continually receiving this? And if yes, when around should we expect it? And then I have a follow-up.

I was -- I'm not 100% sure we understood the question. So I only -- I understood that it's about the Naeotom Alpha, but can you repeat the question, Odysseas?

Yes, sure. So are you looking -- are you planning to seek higher reimbursement to seek -- to have conversations with others how the reimbursement on Naeotom Alpha Scan compared to conventional CT?

Okay. Thank you for the question. I mean, the -- this is a longer term, let's say, upside potential to look at areas, whether we can, so to say, establish new type of procedures, which require the specific advantages of Photon Counting CT. For the time being, the excitement around the product is there also without additional reimbursement because in the end here when it comes to early adopters are research customers. And on the other hand, customers who would want to differentiate in quality, which is a huge segment.

And maybe bear in mind here, when you look, I make an analogy, there is no higher reimbursement for a 3 Tesla MRI compared to a 1.5 Tesla MRI but still a large -- very large fraction of the market is in 3 Tesla simply because it is also a quality "competition" but also when it comes to delivering the best care to patients, it comes to having the best technologies, and patients and referrers are picky and choose where to send their patients. So it's not just a question of reimbursement. On the other hand, as I said, we are also looking at expanding the use of CT by establishing new procedures.

Bernd, and one on your new MRI the MAGNETOM Free.Max so focusing on getting new customer demand, have you seen a good take-up here in terms of, let's say, market share gain or a market share expansion or a market expansion from customers that didn't have on the practice so far?

So what we see, I mean, it is actually a market expansion. So which means bringing MR to customers or sites where MR wouldn't have been possible before. So in the first step, it is growing the pot. And by being the only one who compete in this additional pot it then eventually also means market share gain. And this is exactly what we see.

So we see the first systems going into orthopedic clinics or going to outpatient centers where so far, there was only X-ray or CT because suddenly, it becomes economically viable to install in MR, or you can operate MR with less trained staff, or you can install the MR on the 14th floor in Manhattan and so on and so on. So we see what we wanted to achieve here, which means bringing MR to places where it wouldn't have been before.

So we head down to the next one in the queue that will be Q - Daniel Wendorff from ODDO. Daniel, please go ahead.

We just lost him. So sorry about that. Maybe reenter the queue, please, Daniel, and we'll take you next. But before that, we would have Kate from Citi. So Kate, please go on.

This is Kate Kalashnikova from Citigroup. A couple of questions. The first one is on supply chain exposure to China. Could you remind us roughly what proportion of your global portfolio today is manufactured in China? And directionally, how this differs across the divisions?

What's your manufacturing footprint in China? And then secondly, could you share some color on what's driving this increase in supply chain headwinds to 150 bps for the full year? Are you expecting essentially now no improvement in fiscal Q4 versus some improvement previously? Or are you seeing worsen in logistics costs or component shortages due to China lockdowns?

Kate, good question on China. We have -- currently, China is the biggest focus of the Chinese business or the Chinese operation is to deliver from China to China. And in the last years since -- I mean, coming from -- also triggered by the, let's say, "trade war", the balance of whether it is for us, more cost-effective to deliver out of China to, for example, the U.S. or to Europe versus to deliver from the sites in Europe has shifted a little bit. And this is a big strength of our setup that in many products, especially on the Imaging side, we can decide from there to deliver.

And we have, on the other hand, made big progress when it comes to being able to fulfill the Chinese demand also in the high end of the operations in China. So the -- basically, the export is currently from China to the rest of the globe is currently not as super decisive factor for us.

Kate, it is relatively straightforward what role, I would say, the assumption on the procurement and logistics headwinds up relative to Q1. Minus Bernd highlighted and the world has faced a completely new situation, War in Ukraine in the second half starting, which put even more pressure on the logistics. And the main driver behind the increase is even more tightened logistic capacities. Just to make an example, we cannot fly over certain territories anymore. And therefore, this has gotten even worse.

Therefore, the main driver is logistic cost behind, the increase. It has nothing to do with the mitigation measures. The mitigation measures are fully in place. They are primarily driven by pricing. And then we had -- we discussed that on this call beforehand.

So it's really higher logistic costs. That's the main driver behind it. And as I said, this is, from my standpoint, in general, cyclical the topic. The very, very tough question is, how long will be which cycle here, so to say.

Thanks, Kate. So now we can go on to the next one in line. Daniel, I hope this works now. Sorry for the mess up. So Daniel Wendorff from ODDO should be live now.

Yes. It's Daniel from ODDO. I hope you can hear me now. Two questions, if I may? The first one on the multiyear partnerships that -- and that they become more important, as you pointed out, Bernd.

Is that shift changing competitive dynamics at all or maybe in your favor? So any more color you can provide there would be appreciated.

And then I would have follow-up question on the supply chain issues you're currently seeing. So what are the main constraints? And what have you baked into the guidance on how the situation here might develop over the next 2 quarters?

So I start with the competitive dynamics when it comes to the multiyear partnership or the generally, let's say, changing our role from a supplier to a partner as market -- as it may sound. It is an absolute reality. And -- I mean I've witnessed this in -- again, in the last months where I did an intensive traveling and reconnecting with customers. Why is this happening? On the one hand -- where is the need?

And why is it in our favor? The need is simply our customers get bigger and bigger. They are consolidating the roll off the C level gets becomes more and more important compared to the department only. It is running a huge service business, so to say, in health care, a people-intensive business, where they have their hands full to manage employees. They have so and so many open positions.

They need to work on patient satisfaction. They need to negotiate with payers and insurers and so on and so on.

So the need to have one strong partner who keeps -- who is keeping them up to date, who is a -- partner, sometimes, even a consultant, gets bigger and bigger instead of managing an army of suppliers who are knocking on the doors of the departments. So this is the need. And we are in an extremely strong position there because of the breadth and the strength of the portfolio. We can offer when it comes to this at about as said also in the slide here, which was a repetition of the CMD, we cover all the critical departments, whether it is Imaging, Diagnostics or the delivery of care in cardiology with AT, with Advanced Therapies or -- then with the strong add-on of Varian, this -- and it's not only that we have something, we have the best product there, and people know this.

And we are -- and that is what currently makes us absolutely unique and allows us to have conversations, which we couldn't have before. But on the other hand, I'm sure, conversations which are much more relevant to have with us than with anybody else.

On the supply chain side, what are our assumptions we paid into our outlook? First of all, on the top line, we expect and we assumed to be able to have very -- or almost no impact on the top line on a yearly basis from the supply chain challenges. That's why we kept our guidance or even -- so they raised, for example, on Imaging, the lower end a percentage point up. So again, Imaging, 6% to 8%; Advanced Therapies, 5% to 8%. We kept the Varian guidance despite a weaker quarter in Q2.

And we only lowered a bit, so to say, implicitly the guidance on the core business in Diagnostics. But this is not the classical supply chain topic. This is primarily related to the lockdown situation in China. This is a different reason. We should not make those things up.

From a cost standpoint, we have baked in for procurement and logistics OpEx about 150 basis points into our guidance for the full fiscal year. The businesses are slightly different impacted by us -- by this more or less, most -- or the more equipment-heavy businesses are a bit less affected by it. They are more in the 100 bps and Diagnostics is very much exposed, in particular, on the logistics side, and there is more around 250 to 300 basis points.

Thanks, Daniel. So we have two people left in the line. So next one be Sezgi from HSBC. Sezgi, the floor is yours.

And congratulations on the results. Just two for me, please. First of all, can you quantify or try to quantify the impact of the war in Ukraine and Russia on revenue and margins and give some examples on which segments were hit the hardest by this? And second of all, what shocked my attention on your presentation is your remarks on the decline in pricing erosion that you've been experiencing. So my question is whether the decline in pricing erosion has been more driven by Imaging segment or the others?

And how you see that spreading between the segments? And is that coupled with the change in your order pricing policies? So has anything changed basically in terms of the pricing that you've been applying to your growing the order book?

I can start on the way in Ukraine. I think -- as you know, we are proceeding with deliveries because we deliver normally under humanitarian regime. So we are exempt from sanctions to a certain extent. But independent of this, we see an impact on the revenue line from this, but we have a strong order book so that you will not recognize it in our numbers at the end of the day because we will replace, so to say, revenues, which we might would have expected from this region with revenues in other regions. So you will not really recognize it.

And as I said beforehand, the war in Ukraine has an impact on the cost side for the overall business, even more tightened regime on logistics and other areas, which raised, so to say, the expectation on the effect of supply chain cost from 100 basis points to 150 basis points. I can also comment quickly on the pricing situation. I think we drove the pricing excellence topics across the board, and it's not very different from its success in the different segments. And we see already, the first, I would say, positive impact in our order book where we have good visibility with regard to the pricing we take in. That gives us, I would say, some confidence that we will see the mitigation coming.

Okay. So we have the final -- I would say, final question, Will, because you already were in the queue. So Will from Kepler, go ahead.

Great results. Congratulations. My question was just answered.

Good, then. This takes us to the end. Thanks for the thorough discussion. Thanks for the good questions. We look forward to more quality interaction with you in the next 2 months, either in person or in several conferences that we're going to or virtually in our post results road show that starts tomorrow.

So stay tuned, stay healthy and bye-bye.

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.