Siemens Healthineers AG

XETRA:SHL

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Siemens Healthineers 2018 Third Quarter 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 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. Florian Flossmann, Head of Investor Relations. Please go ahead, sir.

[Florian Flossmann, Head of Investor Relations]

[Audio Gap] gentlemen, and welcome to our Q3 Conference Call. Our earnings release and Q3 presentation has been released at 7:00 this morning and available on our website.We have here today our CEO, Bernd Montag; and our CFO, Jochen Schmitz, on the call to review our Q3 results.Bernd will start with the highlights of the quarter, and Jochen will give more details on our financial performance. Afterwards, we will have time for Q&A with Bernd and Jochen.And with that, I would like to hand over to Bernd.

[Bernd Montag, Chief Executive Officer]

Yes. Thank you, Florian. Good morning, everybody. Thank you for joining, and welcome to our Q3 earnings call. Let's jump right in.Growth in this quarter has been strong with 5%. A very strong Imaging business has been the main driver, which grew by 8% in this quarter. Also at Diagnostics, growth improved sequentially now to plus 1% in Q3. And although overall growth at Diagnostics has still been low, we are pleased with instrument sales growing at double-digit. This is very encouraging since it points towards a growing installed base and, as a result, growing reagent sales going forward.Another positive development has been the accelerating Atellica shipment, more than 300 analyzers this quarter, more than doubling the size of our Atellica installed base. With a total of 560-plus analyzers in the market, we are fully on track to achieve our fiscal year '18 goals of 800 to 1,000 analyzers shipped as well as our fiscal year 2020 target of 7,000 analyzers.In this quarter, we experienced again heavy foreign exchange headwinds, which left its mark on our profitability. Our adjusted profit margin was minus 110 base points below prior year at 16.0% this quarter, heavily impacted by adverse foreign exchange effect of 140 base points.Profitability at our Diagnostics business has been lower. It has -- was held back by 2 special items this quarter. And initially, dilutive large automation contract and peaking Atellica ramp-up costs negatively impacted Diagnostics performance this quarter. Jochen will come back to this later, but we don't expect this effect to repeat in Q4.Foreign exchange headwinds and a higher tax rate affected our adjusted net income, which came in 7% lower than in the prior year quarter. Cash conversion is improving on segment level but has been held back on a company level by a special pension funding in the U.S. and cash out of IPO costs.We confirm our guidance of 3% to 4% organic growth and an adjusted profit margin of 17% to 18%.Now we go into more details. First and foremost, this quarter we introduced 2 new major innovations that expand our lead into the precision medicine. After launching our mid-range ultrasound platform Juniper earlier this year in Vienna, we just had another major product launch within our ultrasound business. End of June, we introduced our new ACUSON Sequoia, a completely new high-end ultrasound platform for general imaging. Perhaps you remember the name Sequoia. It has been the gold standard in radiology ultrasound around 20 years ago, and we acquired ACUSON. Our new ACUSON Sequoia is a brand-new system, built up from the ground with unique features. It offers a Deep Abdominal Transducer, called a DAX by the way in the stock market index, with unique depth of investigation and high-resolution imaging from the near to far field in real time. This expands ultrasound scanning towards physician medicine by enabling high-resolution imaging that adapts to patient's size and personal characteristics and therefore allows imaging with consistency and clarity. Journey becomes also faster because there's less need to adjust the focal point by scanning due to the high resolution from the near to the far field.Another major introduction is our new digital PET/CT, our new Biograph Vision now also available in the United States. It offers unseen resolution and performance in the field of digital PET/CT. Its proprietary technology has extremely small crystal elements, giving the highest resolution of large-bore PET/CT scanners. This enables the clinician to precisely detect smaller lesions than before and closely monitor the progress of treatment. At the same time, scanning is also quicker and with less radiation due to the system offering the industry's fastest Time-of-Flight performance. Furthermore, the system comes with algorithms, which are feeding artificial intelligence into applications used for different oncology.Not on this slide, but also an important market introduction, our high-sensitivity Troponin I test, which is now also available in the U.S. for both Atellica as well as our legacy Centaur.Now let's have a closer look at Atellica, where we are making good progress. Shipments accelerated materially in Q3 with more than 300 analyzers shipped this quarter, and we are well on track to achieve our target. Atellica proves to be highly competitive, and we are winning deals against all major competitors. More than 35% of the analyzers shipped so far have been to new customers, which is significantly above the 20% that we have assumed in our business plan for our fiscal year 2020 target.Some of the competitive takeaways in the quarter include ISG in Germany, Herlev and Gentofte in Denmark as well as the University of Southern Nevada in the United States.As we see accelerating shipments, please be aware that depending on the configuration, it can take up to 3 to 4 months from the time of shipping until the reagent revenue kicks in. It means that reagent revenues associated with Atellica will ramp-up a time lag to our shipments.At the same time, we are making good progress on expanding the menu and the market reach of Atellica. Seven additional assays has been approved in the United States, bringing the total menu now to 157 assays in this market. At the end of Q4, we expect to have 170-plus assays approved in the U.S.Our market registration in Japan and China are also on track. Japan is scheduled for the fourth quarter and China next year as planned.And with that, I hand over to Jochen to go through the financials in more depth.

[Jochen Schmitz, CFO & Executive VP]

Yes. Thank you, Bernd, and also a very warm welcome from my side. Let me now give you some more color on our Q3 results.Our order intake of around EUR 3.5 billion has been strong. This is 6% comparable growth year-over-year. Advanced Therapies has been growing very strongly, again, in the double digits. Imaging recorded mid- to high single-digit growth, while orders at Diagnostics grew at the same rate as revenues.Revenue growth accelerated further in Q3 with 4.7% overall comparable growth after 3.6% in Q2.All regions contributed to growth, with the U.S. growing by 7%, EMEA and Asia Pacific with 4% each. China had a weaker quarter with minus 4% on very tough comps, but year-to-date, revenue growth has been strong with 9% in Q3. Orders have been very strong with close to 20% growth. Hence, we do not see this as an issue but more as quarterly fluctuation.The adjusted profit margin was 16%, down 110 base points year-over-year, driven by strong foreign exchange headwinds of 140 base points and lower profitability at Diagnostics.After the IPO, we had to change the way we account for the Siemens AG stock awards that have been already granted to our employees. As part of Siemens, the valuation is locked in at date of grant. These are equities. On a stand-alone basis, this has changed. Now the valuation changes flow as cost items fully to our P&L and are spread out across our business segments and function across as they are now considered to be cash-settled instruments. Sorry, this was now a bit technical, but necessary at this topic of potential fluctuations will be with us until all Siemens AG stock awards are fully vested. This has been only partially compensated by a positive effect in our central items associated with a gain from the special funding of our U.S. pension plan. The effect from share-based payments, as explained before, had a negative impact on our margin of approximately 80 base points, whereas the pension-related gains and a positive impact of approximately 60 base points. Combined, these 2 effects reduced our margin by 20 base points.Adjusted net income came in at EUR 334 million, which is 7% under prior year quarter on lower adjusted profit and a higher tax rate of 32%.The interest expenses net were significantly lower in Q3 with EUR 34 million compared to previous quarter due to the more favorable capital structure post-IPO.Let's now move on one level deeper to our segments. As mentioned before, Imaging has been the driver behind our very healthy top line development. The revenue growth at Imaging has been very strong with 8%, driven by Molecular Imaging, X-Ray Products and Magnetic Resonance.Regionally, we saw strong growth across-the-board, particularly in the U.S.Adjusted profit margin has been heavily impacted by foreign exchange headwinds of more than 200 base points. Taking out the negative impact from foreign exchange, the margin has improved by 140 base points year-over-year.Diagnostics grew in Q3 by 1% comparable, another slight sequential improvement compared to Q2. Although overall growth is still muted, double-digit instrument growth, both in Q3 as well as year-to-date, points toward a growing installed base and subsequent improvement of reagent growth.Geographically, we saw modest revenue growth for Diagnostics in Asia Pacific and in EMEA and only flattish growth in America.Diagnostics profitability was low this quarter because of 2 effects, which we don't expect to continue going forward. Bernd has already mentioned the large automation contract in the U.S. Although the deal overall is margin accretive when looking at the full lifespan of the contract, it is the way it is structured that it had initial negative profit impact.Also, Atellica Solution's costs peaked in this quarter, which really have been hit by a combination of strong Atellica shipments with limited reagent revenues. With increasing Atellica reagent revenues, the transition impact will go down again already in Q4. When aimed at 2 effects together, they impacted Diagnostics profit negatively by around 150-plus base points in this quarter. As already mentioned, we don't expect these additional effects to repeat in Q4 and therefore expect more normalization of margin.On a separate note, our 2 recent acquisitions in Diagnostics continue to perform well. Fast Track Diagnostics saw revenue growth in the high single digits and Epocal saw even strong double-digit growth rate.In Advanced Therapies, we experienced another lower growth quarter. This has been expected as the structure and timing of our orders booked pointed towards another softer quarter. Since Advanced Therapies is our smallest segment, it experiences the highest quarterly volatility. Adjusted profit margin was down 40 base points year-over-year due to very high foreign exchange headwinds of more than 300 base points. If you take out the negative impact from foreign exchange, the margin has improved by over 250 base points year-over-year. This shows clearly the operational good performance and positive mix in this quarter versus prior year.After looking at the top and bottom line performance, now look at the cash development this quarter. At an operational level that means on a segment level before interest and taxes, cash conversion materially improved compared to Q2. Imaging with a cash conversion rate of 1.2. Advanced Therapies even higher with 1.6. Also, Diagnostics saw an improvement to 0.4 versus previous quarter. It is important to understand that the cash conversion rate at Diagnostics is structurally lower because of additions to operating leases, capitalized R&D costs over shorter periods and the amortization period and investments into the 2 factories in Walpole, Massachusetts and Shanghai, China.In Q3, we had nonoperational cash-out in our settled items from the U.S. pension funding of EUR 126 million and from cash-out of portions of the IPO costs of EUR 41 million. The cash flow statement you see this impact in our assets and liabilities. If we exclude these nonoperational cash-outs, the free cash flow pretax for the group is EUR 461 million, resulting in an operational cash conversion rate of 0.9 for the overall group.Now we are coming to our last slide, our guidance for fiscal year 2018. As Bernd has already pointed out, we reaffirm our guidance of 3% to 4% growth and adjusted profit margin of 17% to 18%.Below the line, we still expect a tax rate of 28% to 30% for the full fiscal year, probably closer to the lower end of the range as we saw positive tax rates in the first half of fiscal year '18.Interest expenses will likely be a bit higher in the range of EUR 170 million to EUR 190 million for the full year, partially on back of stronger U.S. dollar, foreign exchange has been a heavy headwind so far this year. Also in Q4, we will continue to face considerable foreign exchange headwinds as last year's Q4 has been hedged on very favorable terms. Just to remind, it's 1.07. Pound hedging of the U.S. dollar for Q4 is still above 1.20.With this, I would like to close and hand it over back to the operator for Q&A.

[Operator]

[Operator Instructions] Our first question today comes from Ian Douglas-Pennant from UBS.

[Ian Douglas-Pennant]

It's Ian Douglas-Pennant at UBS. So first on your long-term margin guidance that you have given. At what point do you need to revisit that if currency rates continue to move against you? And the second question is in the -- on the impact of the stock offering option revaluations. Was there any impact of these options in Q1 and Q2 or because you were under Siemens at that point, did it go straight to equity? And were any of the divisions impacted more or less than others? And the final subpart of that question is, at what point do all of those options kind of expire and so this isn't an issue anymore?

[Jochen Schmitz, CFO & Executive VP]

Yes. Thanks for the question. I think midterm guidance and foreign exchange, so far we have no intent to change our mid-term guidance. I think if you look at the historical financials, and I think when we did the Capital Market Day, historically, financials on Imaging and Advanced Therapies were already within the margin ranges. Imaging was just at the low end of the range and AT was even slightly above the upper end, yes. And we made clear that this midterm guidance is also because of foreign exchange headwind. Let's see how that goes over time, yes. But we are not -- have no intentions to change it. With regard to stock awards, the impact in Q2 and Q2 -- Q1 and Q2 were much less, yes. They were also made -- we used the same accounting. We had to use the same accounting method on a stand-alone basis. It is depending, in particular, on the share price and volatility development of the Siemens stocks, which influences the valuation of those stock awards. And the impact on the different segments should be relatively similar, yes? So if you use the 80 base points, I think that is a good proxy for every segment. And the impact -- generally speaking, the impact or the base impact should go down year-by-year as those stock awards vested could be done within the next 3 years.

[Ian Douglas-Pennant]

Can I just quickly follow up on that? Maybe I should follow-up with Florian afterwards because it seems like the decline in the Siemens stock price in calendar Q1 was, roughly speaking, the same as the increase in Q2. So I'm obviously misunderstanding something as to why the impact wouldn't be exactly the same, but the other way around.

[Jochen Schmitz, CFO & Executive VP]

I mean, we should not go too much into option valuation here as we got volatility played also a role here. By the way, Florian's kind of whispering, but he said that, by the way, the logic also plays a role how does Siemens stock performs against peer basket, which will also influence, say, the relative performance against the peer basket will also influence to say the valuation, yes?

[Operator]

Our next question comes from Romain Zana from Exane BNP Paribas.

[Romain Zana, Research Analyst]

The first one will be on Imaging. I was wondering to what extent you would attribute your greater performance to the market acceleration as a whole or rather greater market share gains. And in that case, maybe softening competition leading here to [indiscernible] mainly because Philips also had a robust performance. How long do you still -- do you think it would be sustainable? The second question still on Imaging. I was wondering if you could give us a bit more granularity by modality. Have you experienced some acceleration in ultrasound? For example, is it still led by, let's say, your main leading franchise in Imaging?

[Bernd Montag, Chief Executive Officer]

Yes. Thank you, Romain. On Imaging, I think first off, the -- I don't think that we see a major change currently when it comes to the market growth data. So I mean, our basic assumption for the midterm is that the Imaging acceptance market rose by 3%. And for us, because of our leading installed base, our service business rose particularly by 5%, yes. And this is about 40% of Imaging, right. And these overall assumptions are also true currently. I don't see a reason to deviate from that. Our -- and I'm sure this has been another quarter of market share gains, and the assumption is right, yes, that not everybody could have won. And in particular, strength -- to answer the second point, we have particular strength in MRI, X-ray and Molecular Imaging. For ultrasound, it is a little bit too early to see the impact of the new product, which is really a spectacular add-on. First shipments happened in Q4 only, yes? So this has not been a contributing factor already for the top line revenue.

[Romain Zana, Research Analyst]

Okay. And if I may just follow up on ForEx and Diagnostics in particular. I was thinking that the bulk of the U.S. -- the bulk of the Diagnostics instruments were produced in the U.S. So can you just explain why you are experiencing such a big ForEx headwind on margin this quarter?

[Jochen Schmitz, CFO & Executive VP]

On Imaging? What's your question on Imaging?

[Romain Zana, Research Analyst]

On Diagnostics.

[Jochen Schmitz, CFO & Executive VP]

On Diagnostics, actually, we don't have headwinds from foreign exchange. We had slight tailwind from foreign exchange as in the other quarters of roughly 70 base points.

[Operator]

Our next question comes from Veronika Dubajova from Goldman Sachs.

[Veronika Dubajova, Equity Analyst]

I have 2, please. My first one is on the Imaging business growth. And I'm wondering, Bernd, how you're thinking about the momentum, not just for the fourth quarter, but really into 2019? If I look, the order book has been strong. Obviously, you're delivering some pretty impressive numbers. But the comps do get a little bit more difficult. So I'd love to get your thoughts on whether you think that this current mid-single-digit growth rate for Imaging that you're kind of tracking to on a 12-month basis, is that sustainable beyond the fourth quarter of this year? And potentially, could it accelerate? So that's my first question. And my second question is on the Diagnostics margins. And I was curious to hear your comments about, you expected to return to a more normalized level in the fourth quarter. Is the first half of the year a good proxy for what normalized margins in Diagnostics look like at this stage?

[Bernd Montag, Chief Executive Officer]

Yes. Thank you, Veronica. When it comes to Imaging, I mean, Q3 has, of course, very interesting, very strong also after a very strong Q2 already. I mean, as you know, Q4 is, for us, always a very strong quarter. So don't expect the same growth rate on top of this extremely strong [Indiscernible] we had in the last year or so. So -- but we are very bullish when it comes to market and confident when it comes to this thing, another year with market share gains in Imaging. And outlook for the next year, I mean, therefore, as I should say here, I would expect Imaging to be clearly in our -- within the growth, we project in the midterm for the overall company of 46%. So the Imaging segment is -- assume it's to be in that range also in the next year.

[Jochen Schmitz, CFO & Executive VP]

On the Diagnostics margin, what does normalization means? I think, if you look at the guidance we gave, which is 150 basis points from those special items, we do not need to be repeated in Q4 and t share-based payments, let's assume the 80 base points also applies to -- 100% also to Diagnostics. Not knowing what share-based payments will do on the Siemens stock award in Q4, but I would say, between 150 -- 150-plus base points better than Q3 should be a good proxy in Q4.

[Veronika Dubajova, Equity Analyst]

Okay. And can I just follow-up, Bernd, on the Imaging growth? And I'm just curious, I look at your numbers, they look pretty strong. I look at the Philips numbers, they look pretty strong. GE sequentially seems to have seen some improvement, and I know you said you don't think the markets accelerated. So where do you think the share gains are coming from if we see the large 3 players performing as only as they are, who is the big player in the market?

[Bernd Montag, Chief Executive Officer]

Yes. I mean, I would -- I think if you look a little bit more closely, also when you look at the numbers of competition because I mean, to some extent when we -- we report out Imaging separately. And a lot of -- and while in others, it is a little bit -- it's part of whatever health systems or diagnostics and treatment and so on and so on. So when you look at core Imaging, I mean, Imaging in the sense of Diagnostics Imaging and ultrasound. And when you look closely then -- into the statements also of others, then I think it gives some light on that. In this area, we are very strong. And that -- it also makes and you add up here so that who is winning and who is not winning.

[Operator]

Our next question comes from Peter Reilly from Jefferies.

[Peter Reilly, Head of Capital Goods of Equity Research]

Can you hear me?

[Operator]

We can, indeed.

[Peter Reilly, Head of Capital Goods of Equity Research]

Great. I've got 2 questions, please. Firstly, I think, it's fair to say that ultrasound has been a long-running underperformer. But you've got some major new product launches out now. To this, can't your product portfolio, by and large, where you wanted? And are these new products inherently high-gross margin the ones they are replacing? And then secondly, and this may be quite difficult to answer, but the 35%-plus share of orders coming from new customers in Diagnostics and Atellica. Is there any way to characterize who these customers are? Are they large ones, small ones, are they winning in any particular regions or against any competitors? I'm just very interested in some more color on why you're winning such a high share from your customers compared to your expectations from 6, 12 months ago.

[Bernd Montag, Chief Executive Officer]

Okay. Peter, thank you. I mean, comment on ultrasound. We have a clear strategy in ultrasound of focus. So we focus especially on 2 segments, which is General Imaging and this ultrasound language for radiology and cardiovascular, the cardiology space. With the launch and the introduction of the ACUSON Sequoia as a real -- as a system, which is setting new standards in the high-end and with Juniper in the low-end and mid-range, we are covering the GI space extremely very much better than we have done in the past. And so this has been a long-term investment in R&D. And these products definitely also have a better margin position, yes, because on the one hand, there has been a lot of emphasis on design-to-cost. And on the other hand, I'm very confident that the special performance of this system also allow us to give us pricing power, yes, more pricing power than before.Then on the 35% in lab diagnostics, so I mean, I would -- without going into geography, I think the main -- the wins, which please us the most, is that we see that we are a very strong partner for those institutions -- larger institutions. And so these are often bigger settings like the [indiscernible] project, which we talked about last -- in the last quarter already. It's really about larger labs. The governing principle is productivity and really building the lab of the future. And take a fresh look at who is the best partner for automating, for reducing labor costs, for taking out variations and so on and so on. Then we are a very, very strong go-to company for them. So this is where most of the wins come from.

[Jochen Schmitz, CFO & Executive VP]

Maybe to add a bit more on this. I think, we see now that we get strong feedback on the early adopters, which we got to clinical performance as well as hands-on time to run the lab. I think that's extremely, extremely well. And as Bernd point out, as those customers who are more sophisticated, more complex, that might also be one of the reasons why it takes a bit longer until we see the results coming from the reagent revenue stream as the implementation takes a bit longer. That's just a, say, a side note.

[Operator]

Our next question comes from Gunnar Romer from Deutsche Bank.

[Gunnar Romer, Research Analyst]

Gunnar Romer, Deutsche Bank. The first one on Imaging. Can you talk a little bit more about the growth composition in the quarter, i.e. how the 8% breaks down in equipment and services revenues? And then also, if you can just repeat what you mentioned in your prepared remarks with regard to order intake. The mid- to high single-digit growth in order intake, is that -- that relates to equipment orders in Imaging, is that right? Then the second question would be, again, on Atellica. You're talking about higher-transition costs. Can you give us a little bit more color what's going on here? Also, I think, even if we are adding back the 150 basis points drag, the margin is down sequentially despite some additional tailwind from currency, actually. And I think, when we entered the year, you were talking about gradual improvement, sequential margin improvements. What's going on here relative to your plans and expectations at the start of the year? Just a little bit more color on that would be helpful.

[Jochen Schmitz, CFO & Executive VP]

Okay, thanks for your question, Gunnar. On Imaging, I think, frankly speaking, the 8%, we've had even a slightly higher equipment revenue than there was revenue number in there. So very, very healthy on the equipment side. On the order number, the 6% here, the equipment orders were slightly higher, higher than the equipment orders. Equipment orders was in the mid-single-digit arena. On the Atellica transition costs, I think, as we pointed out, first of all, there's extraordinary contract, which put some burden on the margin in Q3. Those kind of contracts from the structural contract language do not appear too often. You know that was very, very special one, and we do not expect that next quarter. This was one reason. By the way, the foreign exchange tailwind is not different than in the other quarters. It's in the same ballpark. And on the Atellica implementation costs, I think what I mentioned briefly, my answer beforehand is that we see particular installations at more complex customer side than initially expected, and that means, in the meantime, the result is longer than expected. That means currently, the proportion of instrument revenue versus reagent revenue, it is for sure it's leading towards instrument, but it's leaning much heavier to instrument than maybe initially anticipated.

[Gunnar Romer, Research Analyst]

That's helpful. And just a quick follow-up, if I may, on the structural cost savings. You were targeting EUR 50 million in the second half. Can you let us know what was the number for the third quarter, please?

[Jochen Schmitz, CFO & Executive VP]

Yes, we are -- the EUR 50 million is still holding up. We are still with the EUR 50 million. I think a slightly bigger portion comes in Q4.

[Operator]

Our next question comes from Daniel Wendorff from Commerzbank.

[Daniel Wendorff, Analyst]

Daniel Wendorff, Commerzbank. Two on Atellica. Another question on Atellica, please. And if you look back the last 3 quarters, can you potentially give us a hint what the average number of analyzers placed for customers were? I mean, you gave us a few details here in Q2 and also in Q3. But when you look back over the last 3 quarters and setting in mind what you did in Q3, can you potentially give us a bit more color here? If it's changed or if it's not changed...

[Jochen Schmitz, CFO & Executive VP]

Sorry. Can your repeat that question, what was this question?

[Daniel Wendorff, Analyst]

Yes, the average numbers of analyzers placed per customer, all this has developed over the last 3 quarters. And the second question on Atellica would be. And can you give us a hint to the split of direct trade sales versus other financing models of the analyzers? And that would be good. And my last question would be on hedging. Given what you said on Q4, can you potentially give us a hint of how the situation will look like for 2019?

[Jochen Schmitz, CFO & Executive VP]

Yes. I can -- can you start with the first question?

[Bernd Montag, Chief Executive Officer]

I'll start with your second question. I hope that -- so currently, the ratio of -- let's say when it comes to the business model on the Atellica side, it's about 50-50 between [ feeding ] replacement and operating leases. When it comes to the number of analyzers per customer, I don't have a number on the -- to top of my mind, [indiscernible] because this is very extremely -- I mean, as an extreme case. I mean, we talked about the 50 Atellica analyzers, which are part of one contract here in the [indiscernible]. So this can vary a lot. So I would suggest that you follow-up on that -- our IR team will follow-up to give you a little bit more detail on this. But I mean, as I said, maybe as an indication, so that we are happy about many of large deals, which is a good thing, which on the -- which exactly relates to the strength of Atellica, which -- and I want to reiterate here, as what Jochen said, which -- on the other hand, currently has a little bit to short-term impact, that it takes a little bit longer until placement or shipments turn into reagent revenue, because of this complex settings and connecting Atellica analyzers, who tracks and so on. And then to foreign exchange, Jochen?

[Jochen Schmitz, CFO & Executive VP]

Yes. Turning to our hedging policy. We hedge at least 3 months in advance, 75% of the net currency position. So we have started hedging into Q1, on rates, which are relatively close to rates, which are currently in place. So let's see how that pans out, it's difficult to say. So far, it looks that we should have some tailwind year-over-year next year from foreign exchange as currency stays as it is.

[Operator]

[Operator Instructions] We'll take our next question from Max Yates from Crédit Suisse.

[Max Yates, Research Analyst]

Just my first question is around Advanced Therapies organic growth. Obviously, we're growing sort of 1% this quarter. Is that a growth rate that you think reflects the market? Do you think you're under growing the market here? And maybe if you could give a little bit of color around how you see that growth rate continuing in the next few quarters. Is it something you're aiming to step-up? And what is constraining you from growing faster in that division?

[Bernd Montag, Chief Executive Officer]

So, yes, when -- Jochen has already spoken about that this -- you know this is the smallest segment, and this is -- that's also why it's most hit by quarterly fluctuations. I mean, when you look at maybe one data point is year-to-date, after 9 months, I believe, yes, it's 4%. Let me just confirm. I hope, yes, it's 4% growth, yes. And it's also a good number for roughly -- for the full year. And we also are very happy with the order book. And both in Q2 and Q3, we saw very strong orders in Advanced Therapies. So from that point of view, we believe, we are very comfortable with the business. And when it comes to longer-term outlook, I mean, we are seeing a 4% market growth in -- on equipment in this field. And we definitely want to grow in tough markets in the longer run, so which again fits well to the 4% to 6% overall target for the company in between.

[Max Yates, Research Analyst]

Okay. And maybe the second question would just be around the M&A pipeline. If you could talk a little bit around your pipeline, whether you're seeing any interesting opportunities out there and broadly, how you're finding valuations in the market currently? So any comments around -- sort of intentions there or areas of interest. If you could just update on that, that would be great.

[Bernd Montag, Chief Executive Officer]

Yes. I mean, we have specified, that, I mean, the areas of interest for us is in the space of Advanced Therapies. On the one hand, it is about expanding our presence in Diagnostics, especially in the molecular space, and the Epocal and Fast-Track Diagnostics acquisitions speak for that. As good example, also with strong track record and as the third area, the topic of which [indiscernible]. For us, the primary topic is really the strategic fit. And not so much doing M&A for the sake of M&A here. So from that point of view, of course, we have kept an eye on valuation. But most importantly, it is about the strategic fit. And we have our eyes open, but again, strategy must be, and synergies must -- is the main topic for us.

[Max Yates, Research Analyst]

Is it fair to say that the M&A targets are probably more in the pipeline at least to probably more geared towards bolt-ons than larger deals? Or do you continue to sort of assess or have both larger and smaller?

[Bernd Montag, Chief Executive Officer]

Let's say, I mean when we look at -- I mean, when we do M&A, it will not change the face of the company, meaning, we have the 3 segments. We have 3 areas, we focus and when you look at it, it is by verticals. And we have strong horizontal capabilities, from 1 sales force to 1 digitalization strategy to 1 service organization. So if and when there is M&A, it will fit into that picture of the company independent of size.

[Operator]

Our next question comes from Daniel Gleim from MainFirst.

[Daniel Gleim, Director]

The first one would be on the 35% new customer wins. Could you please explain whether this is Atellica unit shipments or monetary value? If it is unit shipments, is the monetary value observation the same? That will be my first question. The second one, you seem to be on track to reach to 800 to 1,000 target for this year. If you could please comment. The competitors seem to be better. What could you say about your existing customers? How is the adoption going? If you could provide some color on that front as well, that will be highly appreciated.

[Jochen Schmitz, CFO & Executive VP]

Yes, thank you very much for the question. I think the 35%, or bigger than 35% is definitely related to the mid numbers for the analyzer numbers. But I would not expect that to be different from the value amount, yes. I don't have the numbers with me, but I would say it's relatively similar. I think with regard to the 800 to 1,000 units, I know as a target, I think, as you pointed out, we are still on track for this. The retention rates on our installed base is in the ballpark with a 90% as expected. And -- as we cannot ship in certain regions of the world like China and Japan, yes, they are -- obviously, we have no Atellica applications yet. On the other hand, we see a strong, I would say, strong inroads, in particular in Europe, as you can see from the numbers we gave you. And Asia is obviously, lower because of China and Japan. And we see, in particular also, in our own installed base, picking up demand on Atellica also in the America.

[Daniel Gleim, Director]

Maybe one add-on question on Japan. I think, in the previous presentations, you had indicated H2. And now it is Q4. Could that explain why we do not have a material acceleration in the third quarter when it comes to monthly shipments compared to the last data point you gave for the last months in the last quarter?

[Jochen Schmitz, CFO & Executive VP]

I would say, on Japan, it was always to be seen in the second half, as you mentioned. Now it's Q4. Japan is not a super important market for us, yes. The Chinese market is a much more important market with regard to Atellica shipment. So I would not -- I cannot confirm, you have said that there would be a reason for any, I would say, deviations in shipments, which -- this mostly in Q4 -- is in Q4.

[Operator]

The last question, please? Last questions?

[Operator]

Our last question comes from David Adlington from JPMorgan.

[David James Adlington]

Firstly, just on tariffs. I just wondered if you administer to get your heads around potential impacts. And any plans you might be putting in place to potentially mitigate any impacts? And just a follow-up on interest. As we look into the '19, obviously, you've upped your interest expense guidance for this year. Should we be thinking about that having -- on a bigger impact as a full-year impact for next year as well?

[Jochen Schmitz, CFO & Executive VP]

I start -- so let me start with the interest topic. I think the interest topic is -- we are seeing slightly higher net interest expenses than originally guided. With this -- it's partially still on the back of the stronger U.S. dollar, yes. If you recall, most of our debt is denominated in U.S. dollar. I think the original guidance we gave on a running basis is like [indiscernible] for full year. In the new capital structure, it was in the ballpark of EUR 120 million. Interest rate expenses net, I would expect that this will be -- that we will be in this ballpark of EUR 120 million to EUR 140 million. On -- let me start on tariffs. If you look at our value-added structure, in a lot of cases, we have value add coming out of Europe, plus U.S. or China. And -- So we have the ability also to redirect supply from China via Europe to U.S. So we do not see a significant impact from the tariffs topic. In this fiscal year. We expect to see after, with the redirection of the supply chain, and impact of the lower mid-single-digit arena on next fiscal year. They will stay as they are today, yes?

[Florian Flossmann, Head of Investor Relations]

So with that, I would like to close the call today. Thank you for everybody participating, and as always, the IR team and myself will be available for further questions. So thank you, everybody.

[Operator]

Thank you. 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's address is www.corporation.siemens-Healthineers.com/Investor-Relations.