Siemens Healthineers AG

XETRA:SHL

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to Siemens Healthineers Quarter 2 Fiscal '19 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.

[Marc Koebernick, Head of Investor Relations]

Thank you, Claire. Good morning, ladies and gentlemen. Welcome to our Q2 conference call. My name is Marc Koebernick. I joined Healthineers at the end of last year to take over the responsibility for IR from Florian. I'll be doing a bit of road shows, have met one or the other, the sell-side analysts. But I'm sure there are still many more hands to be shaken or correspond in the coming months. In any case, I'm looking very much forward to your interesting views and many fruitful discussions with you.I'm sitting together with Bernd Montag and Jochen Schmitz, who will be taking you through to our Q2 results and giving you an update on some important developments in our company. Following that, as usual, there will be a chance for you to ask the questions to Bernd and Jochen. [Operator Instructions] Some things never change.And now I pass the word to CEO of Siemens Healthineers, Bernd Montag.

[Bernhard Montag, CEO & Member of Management Board]

Yes, thank you, Marc, and good morning, everybody, and welcome to our Q2 earnings call. Q2 2019 was a strong quarter with strong performance especially in Imaging and Advanced Therapies. Both segments posted strong organic revenue growth in Q2. Imaging grew with 7% and Advanced Therapies even with 9%, in both cases on the back of healthy -- of a healthy equipment order backlog. We have been highlighting this healthy order intake in preceding quarters, which now started to materialize in Q2. We continue to see a healthy order book driven by a strong equipment growth and a book-to-bill that stays well above 1. In addition, the wins of several larger projects support this. Let me give you some color on these things in Q2. We have signed a 10-year partnership with a new hospital in Cáceres hoping to become an innovative reference center. We also have signed a 10-year partnership with the Red Cross Hospital in Lisbon, which opens one of the most modern heart centers in Portugal that we will manage the medical imaging equipment. In France, we signed a 12-year contract with Hôpital Foch in Suresnes, on value partnership that goes way beyond the pure technology management but includes operational consulting services.The adjusted profit margin in Q2 went up year-over-year by 50 basis points to 17.9%. On this adjusted margin, we have seen a headwind of minus 70 basis points from foreign currencies. Our Diagnostics segment is in transition ramping up Atellica Solution, hence profitability is dragged down by ongoing ramp-up costs. Additionally, effects from foreign currencies are also a drag on the margin in Q2. However, the margin picture has significantly improved quarter-over-quarter, and we are seeing our initiated measures to improve the ramp-up starting to bear fruits. I will talk in more detail on this in a few minutes.On earnings per share, on the back of increased profit, basic earnings per share increased by 24% versus prior quarter -- prior year's quarter, which was burdened by IPO costs. For the fiscal year 2019, we confirm our guidance.As you saw on the slide before, we are a strongly growing company. We believe in continued growth for us in our core Imaging markets. Hence, we are grasping the opportunity of a needed capacity expansion to significantly enhance our location in Forchheim with an innovative technology center for high-energy photonics. We decided to expand this location in Forchheim in direct proximity to the CT and x-ray as well as Advanced Therapy businesses. As a result, the new technology center will not only consist of an ultramodern factory for x-ray tube assemblies and x-ray generators. It will also include a new R&D and logistics center alongside the existing factories for CT as well as x-ray equipment. Having R&D and production under one roof is also a clear benefit and will further optimize processes. The close interaction of the existing final assembly factories and the 2 new production facilities will reduce production costs, enhance the quality of products and provide sufficient room for future growth. For example, CT scanners are built in Forchheim thus shortening the supply channels for x-ray tube assemblies and generators used in these products to a minimum. We will invest around EUR 350 million into this project. Production start is planned in 2023.With this capacity extension, our CT and x-ray factories will be able to supply demand until 2030. With the new technology center for high-energy photonics, we demonstrate our ability to innovate, adapt and improve to a dynamic market environment. We are determined to manifest our position as an innovation and market leader in imaging equipment.Our leading position in Advanced Therapies is underlined by our new ARTIS icono, which sets new standards in especially neuroradiology. The ARTIS icono is an angiography system which is able to provide, on one hand, superior imaging support in a broad range of clinical use cases in the interventional lab. An extremely attractive proposition of the new system is its ability to conduct stroke diagnosis and treatment in one room. Compared to other existing systems, the ARTIS icono offers significantly enhanced 2D and 3D imaging. With this better image quality comes the ability to reduce the required radiation dose. With ARTIS icono, the areas of the cranial base and skullcap can now be represented with practically no artifacts in the 3D visualization. By improving the visualization of [ 3D views ] that occur in the cranial area, the ARTIS icono is now possible to skip prior conventional imaging for diagnosis in case of a suspected stroke. Together with perfusion data for therapy guidance, this is for the first time available in the angio lab, the patient can now be diagnosed and treated in one stop in the interventional room. This shortens the so-called door-to-needle, the time between patient arrival and clot retrieval in an acute ischemic stroke. Any time saved in treating strokes can make the difference between living independently and living in a wheelchair. The incredible enhancement of image quality can be seen on the images below, especially on the lower right, where you see an extremely clear picture of a stent. Next to stroke treatments, the ARTIS icono can be multidisciplinarily used in hospitals in the angio lab, therefore optimally utilized for a broader range of interventions.Our ARTIS icono is a perfect example of how we combine hardware, software and AI-driven innovation in all our products. AI and digitalization will be the major drivers for transforming health care delivery in the future.We have a strong position in this area with already more than 45 AI-based offerings. AI offerings are organized along with different levels of data consumption. At the first level, we have data generation from scanners and instruments. This information contributes AI offerings as product differentiators included in our devices embedded in the system itself. Like, for example, the FAST 3D Camera in CT, which aligns the patient body form and position with more than 100-hour task to help the operator to optimize the patient position in the CT and minimize radiation dose.The next step involves the immediate use of data such as software packages -- package offerings for reading, reporting and guidance sold together with the product. A good example is the AI-Rad Companion platform and its first application for chest CT image reading, which I presented in the last earnings call.One level further up, the complexity increases. Diverse data is being collected and analyzed around the patient. This is the level for predicting and claiming and prescribing the right treatment at the right time for the individual patient. Our first product here is the AI-Pathway Companion, a clinical division support system based on artificial intelligence. The top level involves the analysis of patient cohorts related to population health and outcome analysis. We are developing our AI and digital portfolio along this hierarchy and taking into account the increasing data integration effort, necessary access and rising complexity. We are perfectly positioned to drive the AI and digital development in health care. What makes us so optimistic with regards to our positioning our installed base and our machine room. We have a large and rapidly growing data lake of curated images, reports and clinical data, which is crucial to develop new AI applications. Only with sufficient high-quality data and the right infrastructure new AI algorithms can be developed and trained. With our 20 PetaFLOP supercomputer, we are able to run around 500 AI experiments per day.Now let's have a closer look at Diagnostics and in particular Atellica Solution. We continue to see excellent customer perception of the features and functionality of Atellica Solution. This is represented in the ongoing high-competitive win rate of well above 35%. In large settings, the Atellica Solution can fully use its competitive advantages like high throughput we see an even higher win rate. These large settings are primarily large customers, which we expect to play an active part in the consolidation of the lab part. Therefore, this high win rate in large settings is obviously also of strategic importance to us.Our test menu for Atellica Solution is comprehensive and competitive, and we continue to add further tests to the menu.Looking at the ramp-up of Atellica Solution in terms of geographies. As indicated previously, we now have received regulatory approval for Atellica Solution in China in early April, and this is very much in time with our plan. On shipments in Q2, we have shipped 410-plus analyzers in Q2, coming to a total of 790-plus in the first half-year. Thus Q1, we saw an uptick in shipments, and we expect to see more acceleration quarter-over-quarter in the second half of the fiscal year partially driven by the ramp-up in China. The indicated target of 2,200 to 2,500 analyzers shipped in fiscal year '19 remains very challenging. Although we see acceleration in H2 shipments from China and from other geographies, it is likely that we rather approach the targeted range from below. However, shipments are not means to an end and to indicate the ramp-up progress of the instrument placements. In terms of commercial outcome, it is probably not the best KPI. Therefore, let me make this clear at this point. We continue to expect to achieve both at market rates on the medium term into [indiscernible] a significant margin expansion in Diagnostics. With regards to this, let me give you some color on the overall status of the ramp-up of Atellica Solution.Last quarter, I pointed out that we have titled project management for this decisive phase of the ramp-up improving the overall processes. One quarter in, we are on track with the initiated process improvements. For example, we said in Q1 that we built a large backlog of analyzers being in installation. We also said that we had initiated measures to bring the installation time down to bring more analyzers live. These measures hit traction in Q2. We brought 20 to 30 analyzers per week live, as we had said in our Q1 communication. Consequently, in Q2, we now saw the number of analyzers going live picking up versus Q1, which leads to an increasing revenue contribution from Atellica Solution as well as the share of reagent revenues therein increasing. With further progress on installation times and the organization moving up the learning curve, we expect this good momentum of analyzers going live to continue in the second half of the fiscal year. This increasing share of reagent revenues from live analyzer stabilizes the top line contribution of the Atellica Solution franchise during the ramp-up. In addition, this higher share of reagent revenues absorbs a higher share of costs, thereby relieving some of the margin pressure from the ongoing ramp-up in Diagnostics.Jochen will later talk about how this is reflected in the financials of Diagnostics for this fiscal year. That said, let me just briefly preempt that this year's challenges in the live ramp-up and the FX impact at the Diagnostics segment are leaving some traces on our full year expectations for the business. Still, we are convinced, and I hope I made this clear, that improving this is only a question of time. The commercial success of Atellica Solution remains the priority of the company. Atellica Solution is a unique instrument in lab diagnostics. It is an extremely competitive offering, and it is very successful in customer perception. Since its launch, we made progress in this commercialization, and we expect further progress in the second half of the year to make Atellica Solution also a commercial success.With this, I hand it over to Jochen for the financials.

[Jochen Schmitz, CFO & Member of Management Board]

Yes, thank you, Bernd. Also a very warm welcome from my side. Bernd has already mentioned the key topic in this quarter. Let me give you some additional color on Q2 financials, and let me start with our order intake. We again saw solid order intake in Q2 with 5% organic growth. Equipment growth was particularly strong with double-digit growth driven by Imaging. Advanced Therapies, we began very solid equipment growth also this quarter. So in total, we continue our strong momentum of equipment order intake and maintain a very healthy order book for the remaining fiscal year.Let's now have a look at the slides starting with revenue. Comparable revenue grew in Q2 by 5.8% driven by strong growth both in Imaging and Advanced Therapies. As Bernd has alluded before, this strong growth were on the back of a healthy order book now partially materializing in Q2. Regionally, we saw significant growth in China and in EMEA. The Americas included the U.S., with very solid numbers.Now let's have a look at the profit line. Profitability increased year-over-year by 50 basis points with significant improvements both in Imaging and Advanced Therapies. These improvements were mainly driven by conversion from the strong top line performances and by our structural cost savings program. However, in Q2, the margin progression at group level was held back by negative headwinds from foreign exchange of minus 70 basis points. Please bear in mind that in Q2 prior year we had a positive onetime foreign exchange effect in central items. Excluding the negative swing back in central item this quarter, foreign exchange headwind is more towards 30 basis points. Comparing the minus 30 basis points against the foreign exchange headwind in Q1 '19 of minus 40 basis points, we see a slight increase quarter-over-quarter. We also expect this piece to turn [ full deal ] or slightly positive for the remaining fiscal year.Finally, net income increased year-over-year on a higher profit despite a higher tax rate. The tax rate this quarter was at 30%, which is currently the new normal level. The tax rate was good, with 30% considerably higher than in prior year quarter, where positive income tax effects led to a lower tax rate of 21%. On the flip side, pretax profit in prior year was held back by the IPO cost.Now let's have a more detailed look at our segments starting with Imaging. Imaging grew 7% this quarter with strong growth in Molecular Imaging, Computed Tomography and x-ray Products. As we said previously, we have a healthy order book, which now materializes partly in strong revenue growth this quarter. Regionally, we also saw strong growth contributing from EMEA and from the Americas. The adjusted profit margin improved by 170 basis points year-over-year mainly from the conversion of the strong top line performance and in addition from the cost savings program.Let's look at Diagnostics next. Diagnostics grew by 2% this quarter with increasing revenues from Atellica Solution. In the previous quarter, i.e., Q1 fiscal '19, we highlighted that the normalized Diagnostics growth was also around 2% since the positive 3% were on very easy comps. Coming from this normalized level of 2%, we see Diagnostics keeping the momentum on the top line with increasing revenue contribution from Atellica Solution. These increasing revenues from Atellica Solution also supported the margin recovery from the low levels in Q1. Adjusted profit margin came in at 11.8%, 180 basis points below prior year, but significantly above the previous quarter. However, let me point out that we also had a positive nonoperational effect in Q2. We had the revaluation of an accrual, which impacted profit positively in the magnitude of a high single-digit euro million number. Taking out this effect, we would look at an adjusted profit margin in Diagnostics of around 11% in Q2, which is still significantly better than in Q1. This was driven by increasing revenue contribution from Atellica Solution especially from reagents. The year-over-year margin decline in Q2, would then be at around 260 basis points compared to Q2 prior year and at 110 basis points if we compare it with the full fiscal year. Please bear in mind, foreign exchange headwind in Diagnostics was in the same ballpark as in Q1 at around minus 140 basis points.Now let's have a look at Advanced Therapies. Advanced Therapies posted a very strong quarter with 9% organic growth. Since Advanced Therapies is our smallest segment, it's also the one with the highest fluctuations due to quarterly mix effect this quarter obviously to be offset. Similar to the dynamics in Imaging, we also had a healthy order book at Advanced Therapies, which now materialized partially in strong revenue growth this quarter. The adjusted profit margin improved by 360 basis points year-over-year mainly from conversion of a strong top line performance and from the cost savings program. [indiscernible] the profitability in Q2 last year was also relatively low.Now let's turn to our free cash flow performance in Q2. In Imaging and Advanced Therapies, we had a solid cash conversion of 0.9 and 0.8, respectively. This represents our reliable cash generation driven by our tight control of operating working capital. Also, with our business being in a steady-state, we have a relatively low capital intensity, an expanding capacity, like we do currently in Diagnostics, increased CapEx spend reduces free cash flow obviously temporarily. Therefore, we do see in Diagnostics a cash conversion rate of below 0 mainly from investments in the extension of the Diagnostics factories as well as from additions to operating leases, which are currently a bit higher than normal. These investments ensure the future capacity and competitiveness of our Diagnostics segment, and with Diagnostics being in a steady-state, we expect it to be a very, very sticky business with solid cash generation. At Diagnostics, we also see a growing share of larger deals mainly driven by Atellica Solution. These larger deals generally do have a higher share of these instruments. Therefore, we also saw increased additions to the operating lease in Q2.And now coming to my last slide, which is the outlook. As Bernd has already said at the beginning of our call, we are confirming our outlook for all 3 key KPIs at group level. I believe in the strong comparable revenue growth and the good margin which we presented today. We have proven that despite the slightly weaker start into the year, we are well on track to achieve our full year guidance. Within the given ranges for revenues and profit, our confidence on revenue growth was a bit higher in terms of the ultimate level of delivery by year-end. At Diagnostics, we have experienced this year's challenges in the live ramp-up Atellica Solution and the major headwind from foreign exchange.We are now expecting the margin in the Diagnostics segment to be in the ballpark of prior year numbers excluding foreign exchange. Foreign exchange headwind for the segment in Diagnostics was clearly above minus 100 basis points in the first 2 quarters. And for the full fiscal year '19, we expect the headwinds still to be close to minus 100 basis points.And just to put this further into context, the margin of first half-year was 10% for Diagnostics. Bernd already pointed out earlier on his commentary on Diagnostics and Atellica, that this is obviously expected to improve in the second half of this fiscal year. And just to reconfirm what Bernd had highlighted, we continue to achieve growth at market rates on the medium term, and we want to draw from this a significant margin expansion at Diagnostics.With this, I hand back to the operator for the Q&A session.

[Operator]

[Operator Instructions] And our first question today comes from Scott Bardo from Berenberg.

[Scott Bardo, Analyst]

So the first question is on Imaging and the Imaging businesses including Advanced Therapies. Clearly, we've seen some strong performance in your fiscal ending March. And I think this sort of growth that you're posting is clearly materially higher than we've seen for both GE and for Philips. So I wonder if you can talk a little bit about here whether your performance really reflects market share gains or whether there is, in your opinion, a continued healthy underlying market support and demand. Perhaps extending those comments into China, are you seeing any impacts and benefits from this statement sort of Chinese authorities about increased position for Imaging solutions? Second question just relates to the Diagnostics division, please. I noticed that over the course of this quarter, the messaging surrounding the margin has changed somewhat than you were expecting to progress divisional margin here, and now I think you're outlining some more of a contraction. Can you please comment a little bit as to what has changed over this quarter to reflect more conservative outlook? I think you highlight that conversion into functional and revenue-generating systems has project -- has continued as planned. So I just wanted to understand on the cost side what is surprisingly a little bit more than we expected.

[Bernhard Montag, CEO & Member of Management Board]

Yes. Thank you. Let me take the question on Imaging. I mean we have clearly outperformed the market. So this is -- this growth comes -- driven by market share gains in all the businesses we are in. And we see an overall healthy global market in both segments. China remains an important growth contributor. And what we do not see is a special additional uptick here based on this paper, which very often gets quoted. I mean as we stated in several conversations, I mean, this is a paper, which is not an investment commitment or so, but more outlining what is the theoretical need in the country. But China is growing healthy and also was a good and important growth contributor for us. But mainly, main takeaway, we see a healthy market. The growth in both orders and revenue comes from gaining market share in a perfect market.

[Jochen Schmitz, CFO & Member of Management Board]

And -- but your question on Diagnostics, I think what we've guided now for the -- for full fiscal year on profitability that we -- that I said, that we expect to be in the ballpark of prior year excluding foreign exchange, yes? This also leads directly to one of the reasons why we had -- really had the lower guidance, so to say, because foreign exchange comes in a bit higher than we expected initially at the beginning of the year. And second main reason is, I would say, that we do not see us to be able to make of, so to say, fully the low number of Q1, yes? But as you rightfully pointed out, we see exactly the progress we pointed towards in the last quarter where we said, "Okay. The increasing number of installed systems, we see a clear pickup in reagent revenue on Atellica, which will, so to say, help our profitability." And we could already see this in Q1, and we expect to see, as you also pointed out, a better profitability in the second half of this fiscal year relative to the first half of fiscal year. Do you want to shed some light on the guidance for Diagnostics.

[Scott Bardo, Analyst]

Very good. And in aggregate, just to understand the slightly softer margin development from Diagnostics. Is it a more fair assumption to assume the low end of your full year margin aspirations for 2019? Or do you still see the whole margin range in play?

[Jochen Schmitz, CFO & Member of Management Board]

Are you talking about total company? Or are you talking about Diagnostics?

[Scott Bardo, Analyst]

At the group level, yes.

[Jochen Schmitz, CFO & Member of Management Board]

I would say -- I think I also had pointed that in my speech. I would see -- I see the confidence level on revenue growth higher than on profitability to be in the upper end of the margin, yes, or the range. Therefore, I believe this -- I would say it would be prudent to see that we are in the lower half of the margin rate for the full company for this fiscal year.

[Operator]

Our next question today comes from Veronika Dubajova from Goldman Sachs.

[Veronika Dubajova, Equity Analyst]

I will keep it to 2 myself. My first question is a follow-up on Scott's question, actually. I'd love to understand when you look at your Imaging order and Imaging revenue growth, which segments of the market do you in particular see share gains coming from? Whether it's by modality, price or geography, I know you're going to say you've done well in everything. But if you can give us a little bit more flavor what in particular is standing out, that would be great. And then I have a follow-up after that, if that's all right.

[Bernhard Montag, CEO & Member of Management Board]

Thank you. So thank you [indiscernible]. I mean thank you for you already know what I'm going to answer. So I mean what we thought we saw to give some more light. I mean, we have especially somewhat stood out in terms of modalities. This time CT, x-ray and Molecular Imaging. We have been particularly happy with the development in EMEA, as well -- I mean -- and the greater Europe, so to say, in China. But in the end also, all geographies contributed. And when it comes to product mix within the modalities, no special thing to be highlighted. I hope that helped a little bit, okay?

[Veronika Dubajova, Equity Analyst]

No. That's very helpful. And then my second question is for Jochen. Can you give us an update, Jochen, on where you are with the realized savings against your original plan that you had outlined at the IPO? Where are you tracking at the moment? What are the savings that you've been able to realize? And what proportion have been reinvested versus dropped through to the bottom line?

[Jochen Schmitz, CFO & Member of Management Board]

Yes. Thanks for your questions, Veronika. I think we are making good progress on the structural cost savings program on the EUR 240 million. We have roughly or slightly more than 50% realized on it already because including the portion of last year, where we were above EUR 60 million of the EUR 240 million. And so it's working very well. So -- and as we also highlighted last year, when we guided for this last year, calendar year last year, as we guided for this fiscal year, we are reinvesting some of the money into -- particular into digitalization and AI. And this is also going according to plan, so we expect to see from the roughly EUR 140 million savings this fiscal year about EUR 50-plus million reinvested into digitalization and AI.

[Operator]

Our next question comes from Romain Zana from Exane.

[Romain Zana, Research Analyst]

First question is on Diagnostics. Can you please quantify the pickup of the number of analyzer going live in the quarter and maybe the current mix between consumables and instruments? If I remember correctly, you had an ambition to reach 50-50 ratio by the end of the year. And second question, regarding the cost saving. I noted that you did not mention cost savings as an element impacting the Diagnostics profitability. Should we understand you do not see the benefit of cost cutting in that division yet? Or is it because the tailwind is fully diluted or overbalanced by Atellica ramp-up costs and ForEx?

[Bernhard Montag, CEO & Member of Management Board]

Thank you, Romain. I think the first part of the question was the go-lives. So that's the initiated measures we have. We have now speeded up the additions to 20 to 30 analyzers per week, and that should give you a flavor of how the ramp-up also of the reagent revenue will be now come over time, and it's a positive -- it's a very positive development in terms of process improvement.

[Jochen Schmitz, CFO & Member of Management Board]

Yes. And coming -- Romain, coming to the mix topic, I think we are moving well into this range, anticipated range of 50-50. We're currently also with comes shipment volume, also depending on where you ship, depending is it an operating lease, or is it a cash sale, we're currently even slightly ahead of this 50-50 with regard to reagents, and that works relatively well as we have a good, I would say, well, we made good progress on setting our instruments live with 20 to 30 per week, which is a solid development. And coming back to the structural cost savings, we see also, I'd say that, positive contribution from those topics in the bottom line of Diagnostics, but they are, so to say, overshaded by the other topics and therefore we did not highlight them in particular, but they are also there, yes, so your assumption was right.

[Romain Zana, Research Analyst]

Okay. Just a quick follow-up on the first question. So is that fair to assume around, like, 700 machine being live compared to the 400 in Q1?

[Bernhard Montag, CEO & Member of Management Board]

Yes. As a ballpark number, I would say, yes.

[Operator]

Our next question comes from Patrick Wood from Bank of America.

[Patrick Andrew Robert Wood]

Patrick. And I also have 2 questions, please. And the first would be on Atellica. And just help us to understand how you feel about the long-term placement targets, given this is a slightly softer year so far. And sort of what's the change relative to your expectations in terms of the number of placements that mean that it's slightly behind this year versus maybe where you would hoped earlier. So that's the first question. And the second one I'm going to ask essentially the same imaging question everybody else did, but maybe from a slightly different angle, which is, okay, you guys are taking share, but the market overall does appear to be accelerating, if I look at the aggregated number and particularly if I look at the order books, it does seem like it's doing better. What's going on? What are you hearing from your customers? Is this still a case wherein hospitals in North America they're investing a little bit more? It'd be really helpful to understand how sustainable you see that? And what's driving it?

[Bernhard Montag, CEO & Member of Management Board]

Yes. Thank you, Patrick. I mean, with regards to the long-term Atellica shipments, yes. And for us, we communicated shipments, like I said, always been a means to an end for measuring the progress of the ramp-up. I mean there's other factors, go-lives, and it's what is the ratio of competitive conversions, how is the development of the legacy business and so on and so on, yes? And looking at the positive developments also on the competitive win rate, we continue to expect towards the goal that market rates on the medium term in [indiscernible] from this significant margin expansion in Diagnostics, which is in the end what the whole exercise is about I mean to see it in the P&L.In -- the Imaging question, I said it's a healthy market. And I mean, potentially, the market is now a percentage point maybe or so in the last quarters above the historical growth rates, yes? The -- looking at order books, I mean -- financially, first of all, there's a clear -- our growth is very much on based on market share gains, very good market share gains in this healthy market. And on the order side, what I would also highlight is that there is a tendency towards orders getting done, more bundled, but then they turn into revenue over a longer period of time, yes. So this is an indirect, I would say, this is a bit of a consequence also of a more consolidated market of people making longer-term decisions for one partner, yes? And we have also big successes. But this makes the order book bigger while revenue, the book-to-bill time is a bit different from what it used to be. So compared to, let's say, years ago, it is now -- it has become more important to also look at revenue, yes, to look at what is happening in the market because many of these larger deals have a long time to be fully converted into -- and having P&L effects.

[Jochen Schmitz, CFO & Member of Management Board]

And maybe I think if you look carefully into the numbers also of our competitors in the imaging field, in our therapy field, you see exactly what Bernd has alluded to that this translation of orders into revenue is not a -- timing-wise, not a 1 to 1, yes? And the creation is just to give you some flavor also on our numbers on -- we always gave guidance as we expect to see service growth with 5%, yes, and this is holding up well in this arena. So I think this is something we need to look into to find out what the quality of the order book with regard to revenue timing maybe is a key topic, yes.

[Operator]

Our next question today comes from Martin Wilkie from Citi.

[Martin Wilkie, Director]

This is Martin from Citi. Just coming back on Atellica. I know you say that your shipment is not necessarily key KPI, but obviously, there has been some difference. And I know you touched on it already. But just to clarify, you mentioned win rates in larger settings. And would you say that the difference versus your original expectations has mainly been with smaller customers and smaller projects? Or has there been a regional difference? I think, in previous quarters, you've mentioned the U.S., for example, tracking a little bit behind other regions. And so just to understand a little bit more about the customer type or the regional effect in terms of that shipment rate.

[Bernhard Montag, CEO & Member of Management Board]

Yes. I mean a little bit of flavor here. Let's say, when it comes to customer type, I mean, what we are happy about is that, especially customers who want to change how they do -- how they organize their lab, yes, who really are upping their capacity, look at how to improve productivity and their cost position, yes, because of -- I mean there is of course constant also reimbursement pressure and so on and so on. These customers, in these customers, we have a win rate which is higher than we anticipated. And this is something which makes us very confident, and is a very good sign also for the future because this is -- these are real partnerships. These are customers where we play a key role as a partner. Extreme examples are like the case of this mega lab, Pardini, in Brazil and other examples that we have also things in the last 2 quarters. So this is a positive. What we see in the mid-market is that there's a tendency in the market that customers hold on a little bit longer to their systems, yes. So the time analyzers are used -- is getting a little bit prolonged in this piece of the market as when people don't see when they are not the movers and shakers of the market, when they are not investing into new capacity and so on and so on. In these customers, we feel a little bit less business or less shipments than we anticipated, but this is maybe -- the business also not as dramatic because they stick on also to the legacy systems. And these are also not the customers which -- who are vital for capturing future growth. These are not the consolidators or these are not the customers in which you grow your -- with the customer, so to say, yes? From a regional point of view, we are -- let's say, we feel more positive development than anticipated in -- especially in Europe and in Asia Pacific. I mean now with China coming online, we will see the mix effect, while the U.S. is a little bit behind.

[Operator]

Our next question today comes from Sebastian Walker from UBS.

[Sebastian Walker, Associate Analyst]

Just 2 questions please on Diagnostics, if I could. So first of all, in China, so Roche saw some major distributor destocking happening in the Diagnostics business there. Is that something that you're seeing any signs of as well? And then related to that, I just wanted to ask how reliant the Atellica shipment target and the Diagnostics growth ambitions are on the China development? And also any initial feedback that you may be getting there from -- on Atellica?

[Bernhard Montag, CEO & Member of Management Board]

Yes. Sebastian, thank you. I mean, regarding what you asked about Roche, or a competitor. I mean, I'm -- I don't know exactly what is going on there. My assumption is, yes, that this is not market behavior, yes, and -- but that this is a particular situation, which is something you have to have an eye on in all -- and even in every business, whether it's diagnostics or smaller imaging equipment or whatever. And that you work via distributors that you avoid channel stuffing, yes, that you whatever that you try, that distributors try to make their yearly targets by -- or somebody tries to make the yearly targets by putting stuff in the inventory of distributors, and then at some point in time, this fires back, yes? So my assumption, without having the insight is that this is a -- not a market topic, yes, but that's the particular tariff situation which one company had. And this is -- these are topics where we have a razor-sharp focus on because these topics are firing back badly, yes, if you don't manage your distributors tightly and in close partnership. So -- and from what we see -- what I have seen, the China team, our Chinese team is extremely well prepared for the Atellica launch. I mean the benefit is also that -- I mean some of the learnings we had in other regions we can now -- we will have -- we can take into account. There's a huge excitement in the team, so I'm super positive about the launch there.

[Operator]

Our next question today comes from Gunnar Romer from Deutsche Bank.

[Gunnar Romer, Research Analyst]

Gunnar Romer, Deutsche Bank. The first one would be coming back on Imaging. And I was wondering whether you can talk a little bit about price dynamics in the market right now, now that's apparently under somewhat higher demand. I was wondering whether you can translate that also in better pricing and also relative to historical standards. So any comments around pricing would be very much appreciated. And then coming back on the FX effects. I think, Jochen, you were very precise about FX effects for the Diagnostics business also in the remainder of the year. How does it look for the group as a whole? I think you had minus 40, now minus 70 basis points obviously against this comp effect. What would you expect in terms of FX effects for the group as a whole in 2019?

[Jochen Schmitz, CFO & Member of Management Board]

Yes, thanks, Gunnar. First of all, on the pricing side on Imaging, I think we got a lot of question on the Imaging dynamics already burned, explained and how we see it. We do not see an exaggerated change in the market dynamics in Imaging, yes. And this is -- hold also true for pricing environment, yes. Therefore, we do not see any significant difference in pricing behavior, so to say. And as you know, in new equipment, the pricing is year-over-year developing in the 2% to 3% negative arena every year, which we'd cover now with our standard productivity programs very well. And this is -- it is not changing, yes. And as pointed out in different instances and this is something which is in the nature of our business, we sometimes see quarterly fluctuations of orders moving into the revenue line, which can carry different price erosion levels in it, yes. This is just quarterly fluctuations. It has nothing to do with market dynamics areas speaking. So market dynamics are holding up well also in pricing, but we do not see the significant advantage we've got, yes. Coming back to foreign exchange, so what we said right from the beginning, that we will see negative impact in the first half and some ease or slightly turning to the positive in the second half for the total company. The minus 70 basis points in this fiscal year quarter were the effect of a positive onetime -- primarily an effect of the positive onetime effect of last year where we -- you remember in Q2, we were still in the process of setting up the group structure, obviously from a new legacy standpoint under the regime of Siemens. And we hedged, so to say, the buy of our subsidiary in China and had a positive foreign exchange impact of this in the ballpark of a lower double-digit number, which we did not rightfully so which we did not allocate to the segment's, kept it in [ center ]. And this is the -- this is roughly 40 basis points of the minus 70 comes from this effect, of this not repeating effect, I would say. On the Imaging side and Advanced Therapy side, we were flat on foreign exchange in Q1. We saw very small positive effect, tailwind effect in Q2 on Imaging and Advanced Therapies and expect them to accelerate in the second half of this fiscal year.

[Operator]

Our next question today comes from Ed Ridley-Day from Redburn.

[Edward Nicholas Ridley-Day]

Just a couple of follow-ups. Thanks for some of the detail you gave you on Imaging modality growth, but if we could go a little bit further. Can you comment on ultrasound growth and MRI, that would be helpful. And another quick follow-up on your bundled agreements that you have. Can you give us a rough number of what those have reached now globally?

[Bernhard Montag, CEO & Member of Management Board]

So on #1, the -- I mean, if you're talking about modality -- I mean, our -- our MRI business is still very healthy. I mean it is certainly one of the icons of the company. It just -- It did not contribute as much to the growth in this quarter revenue growth, but looking at the market share levels, yes, plus the market share growth, I am extremely happy. And we will see a significant growth contribution on the revenue side coming from this business in the second half of the year. And maybe I'm also -- I mean this is also the business where the book-to-bill times are longer than in the, let's say, simpler to install modalities like x-ray and CT. I mean, in ultrasound, we are introducing the new products, yes, which are gaining a lot of traction. While at the downside of it is that the older systems are not getting enough -- are not getting the same traction anymore, yes. And also, this is something which will help in the second half of the year, when we have the full impact of the new products in the top line then.

[Marc Koebernick, Head of Investor Relations]

So we have time for one more question.

[Operator]

That last question comes from Daniel Wendorff from Commerzbank.

[Daniel Wendorff, Analyst]

And one on Imaging. And how important are software revenues meanwhile for the division? And if you could give a quantitative number here, that would definitely be helpful. And my second question is on Atellica, again. And can you potentially describe again what qualifies an Atellica placement as such, i.e., what needs to happen that you tick the box internally and also communicating externally when you talk about an Atellica shipment?

[Bernhard Montag, CEO & Member of Management Board]

So Imaging, I mean, when you look at the Imaging top line, I mean, first of all, we need to make sure -- again -- and the 40% of the Imaging top line is service, 60% is equipment. We count -- or let's say -- I mean equipment sounds a little bit hard bearish, yes. I mean what is meant with equipment is, so to say, the CapEx portion. So the piece of -- part of the deal, which is paid up at delivery. A lot of -- I mean, more than 50% of R&D in Imaging is software development. So products have a huge piece of embedded software plus additional software, which is typically part of the initial deal, yes? What is a smaller portion only in this software, which is sold independently, yes, as a later upgrade also, yes. And what currently is not yet, let's say, common in the market, and it's also depends very much and also how hospitals and health care providers can purchase. If other models like pay-per-use or cloud services and so on and so on. So this takes time to be established in health care. And so a lot of the software business is, so to say, embedded in the initial CapEx yield, but when you look at the source of differentiation, more than -- I mean, this is hard to quantify, but when we look at product differentiation, definitely, more than half of what makes our products special is the software and the workflow enabled by it. But it is hard and would probably be a little bit artificial to break this out as a separate revenue stream.

[Jochen Schmitz, CFO & Member of Management Board]

And coming back to your Atellica question. This is very straightforward. We count as shipments as we would count for revenue recognition, yes. That means whenever a customer accepts, let's say, the product we count it as a shipment, yes. This is -- it is not always with revenue recognition depending on the business model because sometimes it's operating lease, but the timing is exactly the same. Okay?So thanks a lot for taking part in the call today. As always, the team and myself will be available for questions. We will reach for you again at latest for the Q3 call. Thanks.

[Bernhard Montag, CEO & Member of Management Board]

Thank you.

[Operator]

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. A recording of this conference will be available on the Investor Relations section of the Siemens Healthineers website. The website address is www.corporate.siemens-healthineers.com/investor-relations. Thank you.