Hello, everybody out there. Thanks for tuning in again to this third edition of the IR Quarterly Wrap-Up. It's actually pretty exciting that we got shortlisted for the IR Magazine award in the category Best Innovation in Shareholder Communications with our wrap-up. Keep fingers crossed. I think we deserve to win, but maybe I'm not fully objective on this. I also don't know who we are competing against. Well, we'll know late June. As last time, I'm here in Erlangen with Bernd and Jochen, and we are here to discuss the key topics that came up during our Q2 roadshow. So maybe to get us warmed up, Bernd, what were your highlights of the second quarter?
Yeah, for me, one big highlight was the continued very strong equipment book-to-bill of 1.08, bringing us at 1.11 for the first half of the year. We saw revenue growing by 3% on, as I think everybody knows, on very tough comps, and we had 11% growth in the previous year quarter. We also had very tough comps in China, yeah, where we were at -14%, but in the previous year quarter, grew by 25%, yeah. In Imaging, I mean, as we flagged, we have a fiscal year, which is more geared towards the second half. We have very good order momentum in the U.S. with book-to-bill in H1 above group level, continued strong EMEA, and we will see an acceleration in China.
Varian, very nice growth in H1 of 9%, margin at 16.2%, very well on track quarters, much more stable. Advanced Therapies delivered 8% growth, despite also their tough comps. And, last but not least, very good progress in Diagnostics, and the transformation program is progressing as planned. And with this, we confirmed our outlook in all KPIs, including the assumptions for this segment, and within that, we have upgraded the guidance for the Diagnostics margin.
Yeah, so picking up on this guidance confirmation, next to changing the Diagnostics assumption, we also took the China assumption out of the outlooks. We often got the question why we did that. I guess that's one for you, Jochen.
Yeah, I think it is. I mean, the answer is fairly straightforward. First of all, why did we put it in in the first place? When we were the first who had to put an assumption for China into an outlook because of our fiscal year, and the magnitude we explained was therefore part of the assumptions. Then with having H1 in the bag now, we have the worst of China already in the actual numbers. We have digested them, and what we now see in China on the ground is sufficient to get us to the group guidance, and consequentially, we took it now after half time out of the assumption. That's it.
True, but does that mean we are assuming a return to growth? Is this really necessary for Imaging to get into the guidance range?
Yeah, generally speaking, this is true, but let me reiterate first, yeah? I mean, what we said in the call is that we assume to see sequential, improving absolute revenue numbers in China. That means Q3 higher than Q2, Q4 higher than Q3, and the assumption on the Q4 number is that this would lead in Q4 also to growth rate, yeah? But even if China would not grow in Imaging in Q4, Imaging would still remain in the margin band, at a state of aspiring assumption, yeah? Hence, also for the group, as well as for Imaging, China is not that material for the remainder of the year, yeah.
With China somehow pushing Imaging margin a bit lower than initially assumed, do we still feel comfortable with Imaging in 2025, for example, compared to our pre-Q2 consensus expectation for the segment?
I mean, the underlying demand driver everywhere and in China is, at the end of the day, not affected by the temporary impact of the anti-corruption campaign we are currently seeing. Our clear assumption and expectation, based on what we saw and see in the market, is that this all will come back as pent-up demand, and then we have on top the stimulus program, which even underscores this assumption. Hence, when we look at the 2025 consensus on Imaging margin, we feel this is a very reasonable number, yeah? Now doing the math, when you look at what we qualified for the expectation for this fiscal year in Imaging, we quantified a lower half of the margin band, which would equal 21.4%. The expectation for next year on Imaging margin is 22.4%.
Delta is about 100 basis points, and that is above the normal 20-80 margin expansion band we see for Imaging. And, with having China as a pent-up demand driver in the back, I think that is a reasonable number.
Speaking of Imaging margin, we also often were asked what gives us the confidence in this H2 growth acceleration and the margin improvement. I guess that's another one for you, Jochen.
Yeah. I mean, let me start with the basis for revenue, which is orders, obviously, and we see good equipment order momentum. And when we talk about the acceleration in the second half, we talk about actually primarily or only about acceleration in equipment revenue, because we see the service revenue line, which represents about 40% of total revenue, growing very, very stable in the high single digits. And now coming back to equipment revenue, we have very good visibility in the composition of our second half.
Over 70% of the revenue for the second half is already scheduled from existing backlog, meaning there's already agreed-upon timing on when the equipment will become revenue, and 70% is a very good number, providing very good visibility, and this makes us very confident that we will see not only the volume, but also the mix in business lines and regions to swing back, substantiating the expected acceleration in the second half.
So, a very clear picture on the revenue side of things with really convincing arguments on the margin?
I mean , profitability was with 20.2%, significantly better in Q2 than in Q1. Margin in Q1 and Q2 was already better than in Q1, but still not fully back to normal, mainly due to the regional composition. Yeah, I would say emphasis on the China situation. The mix effects usually even out over the course of a fiscal year, so we expect a much better second half. Furthermore, when we look at the first half, we saw this unfavorable regional mix. Yeah, obviously, the impact from China, but also a very, very strong EMEA, which is not a bad thing per se, but from a mix perspective, it's not the most favorable region.
And in the second half, we expect the U.S. to pick up versus first half, which will help the regional mix, and as said beforehand, China will improve in absolute terms from quarter to quarter. And finally, as you know, the only seasonality we have is Q4. Q4 will be by far the strongest quarter, volume-wise, as well as margin-wise, and that gives us the confidence for the second half.
Okay, thanks, Jochen. I think our audience now got sufficient explanation on China Imaging and the outlook dynamics. Maybe now over to you, Bernd. We talked proactively in our call a lot about our innovation strength as a key driving force for our growth. So people followed up on these breakthrough innovations that we talked about and the themes of technology trickling down the portfolio, making their way up through the portfolio. Maybe let's start with photon counting. What's the status there?
Yeah, we are very proud and happy about the enthusiastic feedback we get for this innovation. Enthusiastic feedback shows in two ways. Yeah, on the one hand, with the number of systems we place in the big institutions and the big names, but also the front runners and opinion leaders, and at the same time, the huge amount of scientific papers showing the new world, which opens up for CT with completely new ranges of applications, and this generates the hunger, so to say, in the community, to get, to also get access to this technology, which currently we only offer at very high price points. Yeah, so it's a little bit of an open secret, yeah, that the plan is that we will also make it available for the next customer group with a, let's say, high or normal premium price point.
Stay tuned for what we will announce in the next months.
Great. But there's also a great example of expanding technology or innovation upwards in the modalities or price points, so kind of like a trickle up.
Yes. Very important, yeah, that, I mean, while we are working in CT to step by step cover all market segments coming from the high end with photon-counting CT over time, we have a very clear plan in MRI to make all of our portfolio using the DryCool technology and the AI-enhanced image reconstruction techniques by 2030. After the big success of the MAGNETOM Free family, we have launched the next product, yeah, at a higher price point, the first 1.5 Tesla system using this technology, and again, also here at ECR, very, very good response of customers. Also here, more will come in the next years.
Yeah. So the innovation machine is running at full steam, but we did get a bit challenged in the meetings with regards to looking under the hood and on the cash flow side of things. So what's your view on our cash generation ability at the moment, Jochen?
Yeah, I mean, actually, you are right. Yeah. Yes, Q2 was not great in terms of cash, mainly for two reasons. Firstly, we saw high operating working capital levels. However, this came rather expected with the strong second half in sales in front of us. Secondly, we had a relatively high cash out for tax payments, which doesn't make Q2 cash look better, but this is only a temporary topic in the quarter, and when we think about what is possible in improvement from now on, we target to free up about EUR 1 billion of operating working capital bounded over the next two years, means 2024, 2025.
This is cash that is trapped in the balance sheet as a result of the pandemic, right? We need to free it up again now as the market environment is changing again.
Yeah, sure. During the pandemic, and we had a, I would say, a very dedicated priority profile, we wanted to be able to deliver products to our customers, and deliberately, we allowed for higher safety buffers of materials which were short in other areas, and this was exactly the right thing to do in the pandemic from our standpoint. But now we need to get back to the operating working capital returns and levels we were used to work with pre-pandemic, so this is also a very realistic target. This year, we see a high skew of volume towards the second half, as several times discussed already. Yeah, and we will see about EUR 1 billion more, just to say, EUR 1 billion more in revenue in the second half than in the first half.
Therefore, let's see how far we will get in terms of inventory returns or reductions, but we—you can be rest assured we will push on it, and we will not only push on inventories, we will also push on accounts receivables, and, I'm pretty sure that we will see the first positive results from this program in the second half of this fiscal.
Great. Thanks, Jochen. So now, coming to the end of today's catch up, Bernd, we also got the question regarding what you were especially proud of recently, or something you would like to highlight. I think that's a nice one to wrap it up.
I think, two thoughts I want to highlight, or I want to really make sure that we appreciate it, that I appreciate it. On the one hand, I am extremely proud of the achievements of the Diagnostics team. Yeah, we increased the Diagnostics margin assumption by 150 basis points for the year, which represents more or less the impact of the longer useful life of our leased out laboratory analyzers. But it shows, more importantly, that we are fully on track with this Diagnostics transformation, which goes hand in hand with the achieved completion of the Atellica product portfolio. So, really kudos to the Diagnostics team. And then more on a longer-term view, I think the current discussion on China shows something we regularly talk about.
Yes, here are regional fluctuations, sometimes also impacting our whole fiscal year a bit, but it all evens out over time. Yeah, we deal with over 160 healthcare systems with uncorrelated dynamics. Local fluctuations cancel each other out on a global level, and they always share the same dynamic. Yeah, when there is a way of muting, the order or revenue line in a given country, it typically comes back as pent-up demand in the following years, and it's a proof point that the real driver for our business is the secular growth drivers, the non-communicable diseases, more access to care, the solution of the workforce, and productivity challenges in healthcare.
I was recently, maybe you have seen it, at the groundbreaking of our factory enlargement in Oxford, where we produce magnets for MRI, because the success of this business, including now the acceleration with the DryCool technology, is growing the demand so significantly. I'm proud that in my time in Imaging, most probably over the years I've been in this business, the number of MRIs Siemens Healthineers produces per year will grow by a factor of 10. I think a very nice long-term proof point of secular growth through innovation by Siemens Healthineers.
Great! I think that's a wonderful wrap-up. Today, actually, the day of the recording, is the opening day of a very traditional festival here, or if you are going to call it, in Erlangen, kind of a beer festival. So I think we all deserve maybe a mass this evening. It's been a good quarter, and I hope you have fun there. Jochen is actually sitting here already in a lederhosen, and I myself will also be going, but I'm not so Bavarian yet. I need to get used to this still. So I hope you enjoyed this edition three of our wrap-up and look forward to getting your feedback. Bye-bye.