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