Siemens Healthineers AG

XETRA:SHL

Earnings Call Transcript 2019-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Siemens Healthineers Q3 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, moderator. Good morning, ladies and gentlemen. Welcome to our Q3 conference call. The earnings release and the Q3 presentation were released at 7 a.m. this morning, you can find them on the IR website or in your e-mail box. I'm sitting together with Bernd Montag and Jochen Schmitz who will be taking you through our Q3 results and be giving you an update on some important developments in our company. Following that, there will be a chance for you to ask questions to Bernd and Jochen. May I just humbly remind you of the good old 2 question rule, yes? Some things never change.And now I pass the word to our CEO, Siemens Healthineers, Bernd Montag.

[Bernhard Montag, CEO & Member of Management Board]

Yes. Thanks, Marc, for the introduction. Dear analysts and investors, with this third quarter 2019, we have been able to further strengthen our leading global market position in Imaging and have shown also that Advanced Therapies is on track for outgrowing their target markets this year. In total, this has resulted in an organic revenue growth of 5.8% for the growth, continuing the very positive dynamic we were able to show in Q2. Imaging comparable revenue growth was at 8.4%, and that's even stronger than the strong Q2 and the strong comparable from Q3 last year. Advanced Therapies delivered 5% comparable growth, so also a good result in line with our medium-term ambitions for this business. With the continued strong order intake this quarter, we were able to bolster our level of comfort for the coming quarters.Despite the good revenue, we have seen the profit margin coming down 80 basis points year-over-year to 15.2%. In the Diagnostics business, profitability was weak with only 7.5% adjusted profit margin. Comparable revenue growth with 1.3% stayed behind the level of quarters 1 and 2. Earnings per share were again strong despite the weaker adjusted profit margin, obviously supported by the strong nominal sales growth but also by a rather low tax rate and lower financing costs, thanks to a successfully completed debt restructuring. And finally, we are reiterating our guidance for 2019 for all key financial group KPIs. We have proven throughout the year that our strong portfolio, and especially our Imaging business, is stronger than ever and able to compensate for the transition phase we go through in Diagnostics. This will also be the case in Q4.Now before I start my main presentation, as you have seen, there has been a separate press release this morning regarding changes in the Managing Board of Siemens Healthineers. Michael Reitermann, currently responsible in the Board for the Diagnostics business segment as well as for the regional sales and service organization, will be stepping down by the end of fiscal year 2019. Christoph Zindel, who is currently heading our global Imaging business, will join the Board. In the Board, Christoph will be responsible for Imaging and Advanced Therapies. I will assume responsibility for the Diagnostics business at board level as well as the enterprise services and customer services business horizontals and for our 3 global regions. Michael will be leaving the Board in amicable agreement. We wish him all the best for his future, and I personally want to express my deep gratitude and thank him for all his contributions.As I said, I do not want to distract from the fact that the financial results of our Diagnostics business are not what we expected going into this year. Nevertheless, I would like to put it a bit into perspective. We are convinced and the market confirms that we have an extremely competitive product and is well positioned to be a success in the mid- to longer term. The way there, however, is clearly somewhat more bumpy than we anticipated. There is momentum and shipments, for example, have continued to further pick up in the third quarter. We are now at a total of 1,230 analyzers shipped. Supported by momentum, especially in Asia, we expect the shipment number to significantly increase further in the fourth quarter. This is happening on back of a continued very high competitive win rate with larger and complex settings still being the most successful bucket. Especially this proves that the market sees and values the qualities of Atellica Solution: scalability, modularity and efficiency. With regards to the complex settings, we have further successes to report upon, especially in Europe. We, for example, just recently won 2 important deals in Germany, one with over 25 analyzers. Both I would describe lighthouse projects as they are with very renowned hospitals. One of the challenges that we are faced with is the speed at which we can take the systems live. As I explained in earlier occasions, our success in the more complex settings is at the same time a curse for the average time at which we bring the systems online. Also here, we can report a clear improvement compared to Q2. We were able to set 380 analyzers live in Q3, which represents roughly 20% more than in Q2. However, despite these rather positive news, the overall results for the Diagnostics business segment were weak. The unsatisfactory revenue development is very much an issue we can link to the Americas region. Both APAC, so Asia Pacific, and EMEA are growing at mid- to high-single-digit rates while the Americas is staying far behind. This is the picture for Diagnostics revenue as a whole, but also for the Atellica shipments. Here, we initially had far higher expectations for especially the U.S. market. The underperformance there make it impossible for us to reach our shipment target of 2,200 for this fiscal year. We currently expect to achieve around 1,800 for the year, which will still mean a marked acceleration to around 550 to 600 shipments in Q4 and would still mean an 80% increase compared to the 2018 number. We are addressing the U.S. market as one of the key initiatives of our Atellica Solution success programs. Aim here is to significantly improve the go-to-market as well as the commercial execution. For that, we have also made changes to the Diagnostics management team. Another element of the Atellica success program is the optimization of the platform. We have performed a system-wide hard- and software update across the installed systems, bringing them to the latest software version. This was a significant effort in the isolated third quarter and one important reason for the subdued margin, clearly of a rather one-off character. Making Atellica a success for Siemens Healthineers has always been a key priority for us. Obviously, this continues to be the case. It will likely take longer than we initially thought, but we will get there because this is a really strong product and I'm fully convinced of this.Now switching to Imaging. In Q3, Imaging and Advanced Therapies again showed an impressive performance. Basis of this performance is our ongoing stream of innovation -- of innovations, which drives revenue growth and leads to outstanding margins. With major product innovations over the last 12 months like the AI-Rad Companion, the ARTIS icono and the Biograph Vision, our innovation power ensures an ongoing strong equipment order growth. We have been outspoken about the strong order book throughout the year. Also in Q3, we continued our strong equipment order growth with mid- to high-teen equipment order growth both in Imaging and Advanced Therapies. This shows not only the strength of Imaging and Advanced Therapies this quarter, but also builds up a healthy base for revenues in the coming quarters. Hence, it is not surprising that we are continuing to gain market shares. With growing market share, the installed base grows, again delivering the basis for solid service revenue growth. Growing revenue together with the price premium, which comes with our innovative products, leads to market-leading margins with 20% and 19% year-to-date for Imaging and Advanced Therapies, respectively. We are able to achieve these industry-leading margins while spending more than 9% of our revenue in R&D, which translates in more than EUR 900 million together for Imaging and Advanced Therapies. This ongoing virtuous circle, the cycle of innovation, market share gains, recurring services, innovator margins and the ability to reinvest is one of our key success factors.Ongoing value creation is one part of our success. Another part, our long-term partnerships as a foundation for our future. For example, we were able to close a long-term partnership with the University of Missouri, a deal size greater than EUR 100 million. That 10-year collaboration includes the launch of research initiatives in the areas of precision medicine and digital health care solutions. The clinic, for example, received the MAGNETOM, the only 7-tesla MRT scanner approved for clinical use. With its high magnetic field strength, finest structures of the body can be visualized. This is especially useful for brain examinations and researching complex neurological disorders such as Alzheimer's disease. EMI and other scanners in the network are powered by remote assistance by our unique syngo Virtual Cockpit. The partnership includes not only access to innovations in diagnosis and therapy and digital health solutions, but as their trading resources for education. For example, mentoring programs and the development of joint curricula between Siemens Healthineers and the University of Missouri is an important part of the partnership. Students learn how to work with cybersecurity, data science, machine learning and artificial intelligence in the health care system, by the way, with our systems. Another element in forming a strong foundation is expanding our portfolio with new technologies. With the acquisition of Minicare BV, we strengthened our technology position in immunoassay point-of-care testing. Immunoassay testing is one of the highest-growth segments in the point-of-care testing market. The point-of-care cardiac segment, for example, forms a strong clinical need for higher-sensitivity troponin testing in a simple-to-use device. Minicare's handheld technology offers us the capability to miniaturize immunoassay testing for point-of-care applications. Together with the Atellica assays in our laboratory business, we create the industry's first end-to-end cardiac solution aiming to provide standardized high-sensitivity troponin results in the midterm. This acquisition also will enable the addition of point-of-care immunoassays beyond cardiac to further address clinical fields in the future. The integration of the analyte detection technology created by Minicare with our engineering expertise and global reach will enable health care providers to expedite immunoassay test results and deliver timelier patient care.With this, I hand it over to Jochen for a deeper look into the financials.

[Jochen Schmitz, CFO & Member of Management Board]

Yes. Thank you, Bernd. Also a very warm welcome from my side. Let's now have a closer look at Q3 financials, starting with order intake. We saw a very strong order intake in Q3 with 13% organic growth year-over-year, driven by strong equipment as well as service growth. Bernd has already given you some color on our very healthy equipment order performance in Q3, which is, so to say, the guarantee for future revenue growth and installed base growth fueling the service revenues.Let's now look at the Q3 P&L, starting with revenue. Comparable revenue grew in Q3 by 5.8% driven by very strong growth in Imaging and also strong growth in Advanced Therapies. On the basis of our very strong order intake, we are confident that we can continue to see impressive performance in Imaging and Advanced Therapies also in the coming quarters. From a regional perspective, we saw significant growth in China, strong growth in EMEA and slight growth in the Americas. The U.S. was flattish with the Diagnostics underperformance in the U.S.A. playing a major role here.Now let's move on over to profitability. Adjusted profit margin in Q3 came in at 15.2%. Year-over-year, this is a decline of 80 basis points, Q3 once again burdened by the ongoing transition of our Diagnostics segment. Diagnostics contracted their margin. The other segments, Imaging and Advanced Therapies, improved their margins in Q3 and hereby compensated for the Diagnostics segment. Looking at these 3 segments without central items, the marginal development would have broadly been even slightly positive. At central items, we had a positive one-off in the prior year quarter from a pension gain that impacted Q3 fiscal year '18 positively with 60 basis points. Hence, central items faced very tough comps year-over-year.To summarize, while the development in the business areas roughly canceled each other out, the year-over-year margin reduction mainly resulted from central items due to the positive one-off in prior year quarter.From foreign exchange, we did not see a material impact on group level in Q3, but a more diverse picture in the segments. I will provide more detail on foreign exchange effect on the segments on the next slide when we look at the segment performances.And now to the bottom line of the P&L. Earnings per share grew by 22% in Q3 year-over-year on the back of increased profit and lower tax rate. The tax rate was unusually low this quarter, following a one-off positive tax effect from the debt restructuring program. This should not be as extrapolated. We continue to see the tax rate in the lower end of the 28% to 30% range for fiscal year '19. Let me also point out the lower interest expenses that originated from the debt restructuring program mentioned before. We optimized our debt and capital structure for sustainably lower interest expenses, more on this toward the end of my presentation.And now to our segments, starting with a strong Imaging business. Imaging grew by 8.4% this quarter, continuing the strong momentum from the prior quarter considering that this very strong performance of Imaging was achieved despite the tough comps from the prior year quarter. We are very confident that Imaging is well set for the coming quarters. We saw particularly significant growth in Computed Tomography and Molecular Imaging but also strong growth from Magnetic Resonance and from our enterprise services organization. In the regions, we saw very strong growth both in EMEA and in Asia, Australia, the latter are driven by strong performance in China. Also in the Americas, we posted strong growth this quarter on tough comps from the prior year quarter. The adjusted corporate margin came in at 19.1% and thereby improved by 170 basis points, the same improvement year-over-year as in the previous quarter at Q2. The drivers of this profitability improvement remained the same as in Q2: conversion of the strong top line performance, and in addition, our cost-savings program. Our cost-savings program was initiated at the time of the IPO, so Q3 '19 is the first quarter where we compared the cost savings versus the quarter with the first effects from the stand-alone savings. Hence, the effects might be a little less pronounced due to tough savings comps, but we still see the benefits from the delayering. From foreign exchange, we did not see a material impact on the bottom line of Imaging, if any, a slight tailwind.Let's now move to Diagnostics. Bernd already addressed the challenges we faced in Diagnostics this quarter. Let me now give you some additional color on the financials. Growth in Diagnostics was muted in Q3 and slightly above 1%. In the regions, we saw very strong growth in Asia, Australia, particularly driven by China and strong growth in India. The Americas were underperforming, stemming from the current underperformance in the U.S., which Bernd has already addressed.The adjusted profit margin was at 7.5% in Q3. The margin decline was driven by 2 major headwinds in Q3, Atellica Solution ramp-up and foreign exchange.To better understand the year-over-year dynamics, you first have to remember that the prior year number was burdened by a large automation contract in the amount of 70 basis points. Hence, somewhat in terms of an adjusted starting point, the year-over-year margin deterioration was even over 400 basis points. Let me put this into perspective and explain the variance. Firstly, we see ongoing ramp-up costs for Atellica Solution due to the fact that we continued shipping instruments at increasing rates. This results in an increasing number of instrument installation, which are cost items for us in the beginning. At the same time, we continued to increase rate of setting analyzers live to drive reagent growth, which is the profit item for us. Currently, we see the rate of cost items and profit items both increasing while shipments are still higher than go-lives, resulting in an ongoing headwind from the transition to Atellica Solution despite also growing reagents from the new platform. This ramped-up headwind, therefore, is somewhat standing still at 150 to 200 basis points compared to Q3 last year. This quarter, this headwind was even more pronounced due to a globally rolled out performance update. Bernd mentioned this early on. This effort, which was clearly of one-off character, explained again around 100 basis points of margin pressure.Speaking of one-off effects, Q3 was additionally negatively impacted by effect of 50 basis points from an accrual, putting further pressure on the margin level in Q3.Finally, the foreign exchange exposure of our Diagnostics continues to be a significant headwind this quarter with minus 120 basis points year-over-year.And now to our Advanced Therapies segment. Advanced Therapies grew with 5% this quarter, another strong performance after the very strong previous quarter. In the regions, we saw significant growth in Asia, Australia, driven by very strong performance in China. The adjusted profit margin came in at 17.3% and thereby improved by 30 basis points year-over-year. The drivers of this profitability improvement are similar to Imaging, conversion of a strong top line performance, and in addition, our cost-savings program. From foreign exchange, we saw tailwind this quarter. On the bottom line, however, this was eaten up by a less favorable business mix.Now let's look at our free cash flow performance in Q3. In Imaging Advanced Therapies, we had again very solid cash conversion of 1 and 1.1, respectively. This highlights our ability to reliably generate cash in the segments, Imaging and Advanced Therapies, which operate in a steady state. In a steady state, we are able to convert profit to cash at a rate of 1 or slightly less while funding growth at the same time. At Diagnostics, the transition to Atellica Solution also remains a challenge in terms of cash. This segment, we had a cash conversion below 0 because we are investing in capacity expansion, i.e. diagnostic factories in China and the U.S. for future growth, also additions to operating leases, funding an increasing share of larger deals at Diagnostics and ongoing capitalization for further build-out of our Atellica Solutions platform are an investment for future growth at Diagnostics. On a group level, we saw increased cash outflows for income taxes paid in Q3. A bit of a background on this. In fiscal year '18, we saw extraordinary positive effects on income taxes paid caused by the transfer out of a tax group of Siemens AG to our now stand-alone group, Siemens Healthineers AG. Now in fiscal year '19, the Siemens Healthineers tax group, this is its second year. The tax profile has normalized and this led to a catch-up effect on income taxes paid in this quarter.Now let's have a look at our debt and capital restructuring program that positively impacted our net income this quarter and will continue to do so in the coming fiscal year. In our legacy debt structure, more than 90% of our loans are denominated in U.S. dollar. For that reason, we look for opportunities to adjust our capital and debt structure and to take advantage of the more favorable euro interest rates. We moved U.S. dollar debt to euro-based entities with respective foreign exchange hedges. The result of this move is that we now have around 70% synthetic debt denominated in euro. This reduces our total average interest rate from around 2.6% to about 1%, which reduces our interest expenses going forward. We implemented this new debt and capital structure in May '19, so we will see the first marked low interest expenses in Q4. For the coming fiscal years, we expect a reduction of interest expenses per annum in the double-digit millions. Speaking of the coming fiscal years, for fiscal year 2020 onwards, we have decided to slightly change our earnings KPI, the adjusted profit. We will move from our current definition, which was earnings before financing interests, tax and PPA adjusted for severance, to simple EBIT figure, again adjusted for PPA and severance. One advantage of this EBIT figure is there is no longer the need to distinguish between operating and financing interests. The change to the new KPI will have a minor negative effect on the margin. Obviously, earnings per share will not be affected by this change. You will find some more information on the back of the analyst presentation on the Investor Relations website. Also we will have to implement IFRS 16 in fiscal year 2020, which will have a minor positive effect on our new earnings KPI and minus negative effect on EPS. As said, this is only a technical update to inform you in due course. There will be no material effect on fiscal year 2020 and beyond from these 2 changes. As a matter of fact, they are somewhat offsetting each other.This brings me to my last chart on the fiscal year outlook. As Bernd has already said in the beginning of this call, we are confirming our outlook for all 3 KPIs at group level. We confirm our comparable revenue growth target. The strong comparable revenue growth in the last 2 quarters and comparable revenue growth of 4.7% in the first 9 months, we are well on track to reach the upper half of our revenue growth guidance at year-end. We confirm our margin guidance for the full fiscal year. An important factor of our reliability and resilience is our strong, balanced portfolio. This well-balanced portfolio gives us the ability to achieve our margin guidance driven by the strong performances of our Imaging, Advanced Therapies segments despite Diagnostics being in a transition phase. In addition, we expect foreign exchange tailwinds, and again, the corporate item line comparable to Q2 and Q3. However, we will most likely end up toward the lower end of the margin guidance, which we have been indicating with our Q2 disclosure call already.Having said this, let me point out that at the time the margin target was given at the beginning of this fiscal year, we expected a mild tailwind from foreign exchange on our adjusted corporate margin. This mild tailwind was, as we discussed earlier in our fiscal year, expected to cover for the impact of additional tariffs, which are currently slightly shy of 20 basis points negative. The different revenue mix and thereby a different net currency exposure than previously expected plus foreign exchange development during the year turned this mild headwind into a mild tailwind. This is not meant as a softening of any statement with regards to our guidance confirmation. On the contrary, this is an example how reliable and resilient our portfolio is in absorbing these unexpected headwinds.We also confirm our EPS growth guidance for fiscal year 2019. Our strong performance in the top line and thereby strong performance in the absolute profit line, supported by lower interest expenses, put us well on track to achieve our EPS guidance for the year.For the first 3 quarters, we have achieved an EPS growth of around 20% year-over-year with the strongest quarter, our Q4, still to come. In addition, Q4 will see the full benefit in our reduced interest expenses from our debt restructuring, which was implemented in May. Overall, we feel comfortable with our given guidance for EPS.With this, I hand back to Bernd for some final remarks.

[Bernhard Montag, CEO & Member of Management Board]

Yes. Thank you, Jochen. Your comments around the 2019 outlook are the perfect bridge to this closing chart. The Capital Market Day in which we introduced our company is now over 1.5 years ago, and we have progressed as a company. Therefore, already earlier this year, we decided that we would like to give you the chance to meet key managers in person. We will give you this opportunity in December when we plan to have the business area managements present their capital market stories in London. We plan these presentations to be a deeper, but still compact look into what Jochen and I will be presenting to you in November as part of the Q4 results. For that day, we are envisaging a strategy and financial update to make -- and to make this clear from the start. This does not mean we are abandoning our midterm targets. On the contrary, we feel extremely comfortable for Imaging and Advanced Therapies with regards to growth and profitability. On Diagnostics, the tone is obviously a bit different. While the fundamental aspiration on Diagnostics is unchanged, i.e., reaching market growth and competitive margins, it is clear that it will take longer than we initially thought. At Q4 and the meet-the-management, we will present how and on what path we will get to the fundamental aspiration. We are currently developing the set of numbers and KPIs we will ultimately present to you to give the most holistic picture for the group prospectus. While we know continuity is something very valuable, we also incorporate the insights that we gain from observing, speaking and listening to you. To add some color, if I look at consensus expectations for the next 2 years for comparable revenue growth and EPS on a group level and compare this to our current view of the group perspectives, I feel very comfortable.That brings us to the end of today's presentation, and I'm either looking forward to questions now in the Q&A or to interesting discussions during our upcoming road shows and conference participations.And with this, I hand back to the operator for the Q&A session.

[Operator]

[Operator Instructions] And our first question comes from the line of Max Yates from Credit Suisse Bank.

[Max Yates, Research Analyst]

Just my first question is around Q4 margins. And I think to get to the lower end of guidance at 17.5%, you need to see margin expansion of something like 180 bps in Q4 group levels. So given the year-to-date trajectory of group margins, I was just wondering if you could give a little bit of color either on a divisional basis or maybe specifically around Atellica costs what gives you confidence in seeing such improved margin trajectory in Q4 versus what we've seen so far this year. That's my first question.

[Jochen Schmitz, CFO & Member of Management Board]

Good. Thanks for the question. Not unexpected, I would say, yes? I gave some guidance on the topic already during my speech. I will reiterate and maybe give a bit more color on it, yes? First of all, if you look at the margin expansion during the last 2 quarters on Imaging, they were, in both quarters, 150 -- 170 basis points. I do expect to see at least the same level in Q4, yes? We have good visibility on the expected revenue line in this regard for one quarter because everything is already in the factory and -- while less are in the factory, so therefore this will be a significant contribution, yes? And this is, as you know, it's more than 60% or 2/3 of our business, yes?On -- secondly, I mentioned that we expect foreign exchange tailwind in Q4. We didn't have tailwind for the last 3 quarters. Actually, we had a headwind in the first 2. This year -- this quarter, Q3 was flattish and now we expect in the ballpark of 30 to 50 basis points foreign exchange tailwind. Third aspect I brought up was -- which is the central item line. You might recall last year the central item line was roughly EUR 40 million, a bit heavy in the fourth quarter. We expect to see some normalization along the lines of Q2, Q3 of this fiscal year, which was more in the ballpark of EUR 20 million, yes, negative. And if you add this together, assume a decent Advanced Therapies quarter, yes, and we will target definitely a double-digit profitability level on Diagnostics, this will do the trick, yes?

[Bernhard Montag, CEO & Member of Management Board]

Numbers, yes.

[Max Yates, Research Analyst]

And maybe just a follow-up. Could you talk a little bit more around the Diagnostics performance in the U.S.? I think you called out a little bit of softness around the top line. Is that anything relating to market shares? Is it execution issues, delivery -- timing of delivery? I mean maybe if you could give a little bit more color on the situation and what you're sort of less happy about here specifically in that region.

[Bernhard Montag, CEO & Member of Management Board]

Yes. Let me take this question. I mean what I highlighted in my speech was, on the one hand, yes, that we are happy what is happening in Europe and in Asia Pacific where we see mid- and high single-digit growth rates in our Diagnostics business, yes, which shows that we can do it and that we really have pockets there where growth is picking up. Now there's special situation and that's a little bit of a history. I mean this is our historic stronghold, yes, because this is where the business which -- the foundation of our Diagnostics business have been headquartered. We are the market leader in the U.S. We have a commercial team, which basically played defense for a very, very long time, yes, because we had a strong installed base but not really a competitive product. And what turned out to be more difficult than we thought, yes, is to really get to the execution of rolling out the new platform in a flawless matter, yes? So to your question, this is mainly an internal execution topic. We have streamlined also processes we made, the business to report directly to the Diagnostics headquarter. Now we have changed management. It is a commercial execution topic.

[Operator]

Our next question comes from Sebastian Walker from UBS.

[Sebastian Walker, Associate Analyst]

Q1 Diagnostics as well. So first, maybe on the 7,000 placement target, could you give an updated time line as to how we get there and then how that impacts the timing of the growth and margin improvement in terms of your midterm goals? And I'll wait to ask my second one.

[Bernhard Montag, CEO & Member of Management Board]

Okay, Sebastian. I mean the 7,000 target has always been a means to an end here. And now -- and in the end, it is about profitable growth. What you have seen and what we discussed in the last quarter's meeting and road shows and so on has been that we -- that the shipment number has its pros and cons, yes. We are very happy about the competitive wins while the installed base conversion takes a little bit longer, yes, with the U.S. being one of the reasons. So I think the way to look at it is will we get to, as I said, competitive margins and competitive growth rates in Diagnostics? Yes. Will it take potentially longer than originally anticipated? Maybe to probably, and this is what we will give you an update on. And with what mix of shipments, yes, in terms of new customers and what speed of installed base conversion? We will talk about. But the shipment number is not the ideal thing. Currently, I would say the 7,000 are -- would be difficult to reach at that given time simply for the same reason as we also see this fiscal year that we are a bit behind the 2,200, which we originally planned for.

[Sebastian Walker, Associate Analyst]

Okay. That's fine. And then just specifically on the hardware and software updates that you did in the quarter, what exactly did those relate to? And why you have confidence that perhaps some of those issues are now behind you?

[Bernhard Montag, CEO & Member of Management Board]

Yes. I mean this has been a big concerted effort, and let me give you some -- let me shed some light on it. I mean yes, there have been some teething issues, yes? I mean this is a brand new platform with complete new hardware, our first modular system, a lot of software functionality and so on. So it is normal, yes, that after a version 1.0, so to say, you do a 1.1 or more. But the system is super intact, yes? The promise is fulfilled. It is about further stabilizing the system. Now what we have done in Q3 especially that basically after a year or more than a year of experience of systems in the field, there's a learning curve. The systems leaving the factory have that learning curve built in and now it was about a concerted effort to bring all the systems in the field to the same status of performance incorporating that learning curve, yes? So that is ideal for customer satisfaction, but it's also exactly what we need for productivity and service that there's 1 status of systems out there, yes, and that also frees up the resources, which we need for the -- for bringing systems live.

[Sebastian Walker, Associate Analyst]

Can I just ask to follow up quickly? So I guess was it one particular issue that you're seeing in the installed base that was live? Or was it a range?

[Bernhard Montag, CEO & Member of Management Board]

No. No. No. I mean this is a multitude of smaller topics, which we are -- which are -- which we are addressing, yes, from certain parts which are not super reliable -- which haven't been super reliable in practical use. Software update topics with the interface to the automation line. So a variety of topics, yes? I mean smaller things, but they add up, yes? I mean to some extent, normal adverse states, yes, that you need to refresh -- that you bring smaller teething issues out of the system, but nothing to worry about, yes, when it comes to the overall performance and promise of the system.

[Operator]

Next question comes from the line of Romain Zana from Exane BNP Paribas.

[Romain Zana, Research Analyst]

The first question is on Imaging. You mentioned that the division was well set for the next quarters. Can we fairly expect that you sustain at least mid-single-digit growth in Q4 then? And to what extent does strong organic growth is currently fueled by the improving product mix? And I will ask my second question after.

[Bernhard Montag, CEO & Member of Management Board]

Yes, Romain, thank you. On the Imaging side, I think this is a fair assumption, the mid-single-digit growth. And what we see is really a competitive strength, which we have. I mean a lot of the growth we have seen is attributed to market share gains, yes? Also when you look at the details of what competitors announced and what they say about diagnostic imaging, you see that and that is attributed to this -- to the strength of the entire portfolio. Did that answer your question?

[Romain Zana, Research Analyst]

Yes, definitely. The second one would be on Diagnostics. I was wondering also looking at most of the IVD pure lab space, to what extent, let's say, the weakness in the -- or let's say the lower growth compared to expectation on Diagnostics can also be due to a kind of slowdown seen across the markets? And maybe just a follow-up on that, for Bernd, if you could please share with us what will be the first new measures that you will take as the head of the Diagnostics division?

[Bernhard Montag, CEO & Member of Management Board]

Yes. Okay. I mean when it comes to overall growth in the market, I think I'm convinced market growth is intact, which shows it's in our hands. I mean you also know that in Diagnostics, I mean things do not move super quickly here because you need to -- I mean you need to get your systems and so on. You need to get the reagent revenue up and so on and so on. But the market is intact, yes? And I think that overall, when you add up the numbers of competition, our peers, I think that confirms the overall picture. Now coming to, I mean what you said. I mean to be clear, what will be our setup moving forward, so the Diagnostics business, and in particular, the lab diagnostics business, which is headed by Deepak Nath who joined us 1.5 years ago from Abbott, is the core of -- where this happens. This business reports to me. Deepak reports to me. We will work very, very closely. And it's really about streamlining the commercial execution so that really -- and that is also why the regions and service and Diagnostics are, so to say, one cluster of responsibility now in our -- in the Siemens Healthineers Board so that there is the utmost attention given to the topic, yes, and that there is no indirect reporting in whatever. So the topic really has right of way. I mean I will spend a lot of time in the upcoming weeks there. We'll be at AACC next week. So I think it is -- it helps us a lot, yes, that we have a strong team in Imaging there with Christoph. We have somebody, who, so to say, frees me up so that I can fully focus on helping the Diagnostics team.

[Operator]

And our next question comes from the line of Michael Jungling from Morgan Stanley.

[Michael Klaus Jungling, MD, Head of MedTech & Services and Analyst]

I have 2 questions and they're both related to Diagnostics. So firstly, a question to you, Dr. Montag. You sort of partly answered it, but I would like to get more clarity what you intend to do differently compared to the situation that we had previously now there is direct reporting to you? And in line with that question also why would you not bring in an experienced leader or proven leader in Diagnostics that can turn this business around rather than perhaps doing this sort of indirectly as you suggested in the press release? And then question number 2 is if I look at your visit to our conference in March of 2019, I do get the impression you expressed quite a bit of confidence in the turnaround, and I think you mentioned that the global inflation team that you had sort of installed was working well. And then sort of 3, 4 months later, we see a material change in the Management Board. I'm just curious why we suddenly see such a difference in action over the last 3 to 4 months if everything was humming along nicely or the greenshoots that you mentioned sort of in March? Could you explain a little bit what has changed why we now have this material change compared to your comments in March 2019?

[Bernhard Montag, CEO & Member of Management Board]

Okay. So this is Bernd. Thanks, Michael. Multitude of questions. I mean first of all, I mean let me maybe get back to the fundamentals on the Diagnostics side, yes? Atellica is the right product, yes? We are super convinced. The market confirms it, customers confirm it. We are what we face and what I'd call more bumpy than expected is the execution of -- the flawless execution of the launch, yes, and that means from really getting to installation process, which is a solution and not a box, having all the service functions in place, having commercial execution in place and turning people who -- and that is maybe mainly the topics we had in the U.S., yes, who used to be farmers of the installed base to hunters of getting new systems installed, yes? So this is what Siemens Healthineers is up -- what needs to get right, what we need to, yes, get right to fully capture the Atellica opportunity. The change, which you now heard, this maybe sounds now more dramatic, it is not. It is something, which was -- which now for us didn't come as a -- it was not a surprise. It is something which was, let's say, here for a while to just make clear that now we make it, as we call it, in Germany [Foreign Language], yes, and really bring this super important topic to the next level. Then your question about leadership. We have an industry expert who joined us, yes, that is Deepak. And I am very convinced of him, yes? And he has his arms around the topics. And he is as convinced as I am about Atellica as a product. So there's no need to make changes. It is about now fully streamlining things and getting really every aspect of the organization in the full execution mode.

[Michael Klaus Jungling, MD, Head of MedTech & Services and Analyst]

Great. I mean I think we could follow up on this. So when you give us more details at the Capital Markets Day, you will not surprise us with any material changes to the strategy. You will be more of a focused way of approaching the market, is that a correct interpretation?

[Bernhard Montag, CEO & Member of Management Board]

Yes. I mean maybe let me give you a little bit of a flavor, yes? I mean I don't know whether you have been at our Capital Market Day in 2018, January 2018. And so -- and this meet the management or the update will be in December, yes, so which is now 2 years later. And what you -- what we will do more is -- I mean I think in the initial Capital Market Day, we spoke about -- we introduced the business, we spoke about this is who we are in Imaging, this is who we are in Advanced Therapies and this is where we want to go in Diagnostics. We didn't speak so much about where we want to go in Imaging, where we want to go in Advanced Therapies, so we will speak a lot also about what is the projection of the exciting businesses in Imaging and in Advanced Therapies where you also know that in the last 2 years we have -- or since Capital Market I think we have rather outperformed expectations, yes? But we will also speak about how we will continue this momentum, yes, and grow into new opportunities. While on the Diagnostics side, yes, we were -- in this business, we were behind expectations and we will speak about how we will catch up and what the exact time line will be as a guide rail. It is clear that we stick to the overall expectation of you and you guys for the top line of the group, top line development, plus EPS. And more details to come here because otherwise we could have the meeting now here.

[Operator]

Next question comes from the line of Patrick Wood from Bank of America.

[Patrick Andrew Robert Wood]

Perfect. Two for me, please. On the Imaging side, obviously you had very strong growth a little while now and your margins are already high. But I'm just curious, if you were in our shoes, how do you think over the next year or 2, not so much about the growth, I think you guys commented on that, but more about the margin structure as warranties begin to run off and some of the service revenues come through? Just curious how you think we should be getting our heads around that. And then the second one is just, again, on Diagnostics. Not to belabor the point, but in Americas, it seems to imply that you guys are declining there. I guess my basic question is, is that a function of either a higher attrition rate in the base business or alternatively could it be that some of the base labs that you're selling into the midsized lab area are seeing lower test volumes as tests migrate to the reference labs? Just help us understand how that business is declining at the moment, that'd be helpful.

[Jochen Schmitz, CFO & Member of Management Board]

Yes, let me start on your Imaging question. You see the strength of this business. It's growing mid-single digit or higher, yes? We see strong momentum on equipment orders, yes? We see also solid conversion into the margin. We admit today that 20% we expect still strong Q4 to come. There should be definitely upside to the 20% year-to-date number on fiscal year-to-date number we gave 1.5 years ago, the guidance that we want to be midterm, the 20% to 22%. Some of you already saying that this midterm guidance on the margin on Imaging was more short-term guidance. And generally speaking, it became a short-term guidance. So what I envision and maybe it's a bit of reiteration what Bernd said is that we see when we give also our planned update on midterm targets for the businesses that we will see maybe some further room also for margin expansion in Imaging. But it will not be skyrocketing because we are clearly here on a path of an investment path with regard to digital. And here, we enter then immediately into the strategic side of things, yes? And we always guided that we believe to keep this business running as it is or even better and transform this into something, I would say, more promising in the future we need to keep the R&D intensity up. And therefore, we do not expect to see skyrocketing margin even with these such solid growth numbers, but there might be potential for some margin expansion.

[Bernhard Montag, CEO & Member of Management Board]

I would agree, yes, on the Diagnostics space. I mean you asked about the U.S. I mean a little bit of a feeling. I mean in the end, when we look at it, it is currently a bit of a question of the speed of how quickly we can win new customers to compensate for also historic losses in our installed base. And this is -- when you lose a customer like when we did for 1 or 2 years ago, there is a bunch of contracts, which have expired now. And now it's a question of how quickly can we make up for it with new installations. Currently, this has been a net -- a slight net negative, which is basically a toll we have to pay for our -- of not having a competitive solution for the high-throughput settings. Now we have it, but we have not been fast enough in winning over. I mean this is just a switch, which, as you know, from a basketball player, I call the switch from defense to offense in the U.S. And so it is mainly attributed to this. We are in extremely positive discussions with larger systems when it comes to, on the one hand, IBMs or at academic medical centers and you can also use our strength in Imaging to use the context to this level and so on. But we are also in very good discussions with the big commercial labs. So from that point of view, I'm optimistic. But what we see here is still a bit of the ghost of the past that we have not been -- we didn't have a competitive portfolio and now it's up to us to fully, also in the U.S., use the strength of Atellica.

[Operator]

We take our next question from Daniel Gleim from MainFirst.

[Daniel Gleim, Director]

The first one would be could you shed a little bit of color on what was the intended share of the budget for the U.S. and China in the 7,000 units you initially planned for 2020. That is question number one.

[Bernhard Montag, CEO & Member of Management Board]

Okay. Question number one -- I thought number 2 was coming. I mean I can't give you -- so this is now a little bit of a wild guess or more than a wild guess because I don't have the breakdown in front of me. I mean the reason also being that there is a time lag between the launch in the U.S. and the launch in China. There is a 1-year [ topic ] -- or a 1-year gap behind between the two because of regulatory reasons. I mean what I can give you as a -- and which is not a secret, I mean you know that our Diagnostics business, the revenue share of the U.S. is around 40%, a bit higher than the revenue share in the group overall. And I would guess that China is in the range of 15% to 20%. And let's say, in the steady state, this is also how I would look at Atellica shipments.

[Jochen Schmitz, CFO & Member of Management Board]

It was maybe a bit lower, I would say. Around 30% to 40%, I would say the volume market in the U.S.

[Daniel Gleim, Director]

Question number two would be we're roughly at 25% below the previous guidance midpoint, will you take the new guidance for '19. Could you give us some color on how much the other regions are below your initial budget? And what are the drivers here? And what I'm alluding to is that we know on the new customer, the competitive gains have been quite stellar versus your previous expectations. But on the existing customers, you're still lagging. Does the new product address the need for these customers, too? And when would you expect the conversions to go up? That is question number two.

[Bernhard Montag, CEO & Member of Management Board]

I mean in first order of magnitude, the shortfall in -- as compared to the original shipment target is a function of the U.S. So I am very happy, yes, about what we see in Europe where we won very important deals, where we have areas there, zones we call it, clusters of country, so to say, where we won up to 80% of the deals which were out there. And we are also very positive -- I mean also very positive about Asia Pacific and Latin America. I mean we had very big deals in Australia. We have very, very big deals in Latin America. I mean China, as you know, because of regulatory reasons, we are just starting, but it is very good. So here, we are on track and it shows that the product delivers and it's hitting what the market needs. And now it's really about making sure that we translate this momentum also to the U.S. market.

[Operator]

Our last question for today comes from the line of David Adlington from JPMorgan.

[David James Adlington]

Two like everybody else. Firstly, on the Diagnostics, one of your competitors has talked about some players applying deep discount. So I just wondered if price has been something you'd be flexible on with Atellica?And then secondly, just on Imaging. In China, I just wondered if you've seen any impact from the Chinese quoters so far and whether we should see an acceleration in China going forward from here.

[Jochen Schmitz, CFO & Member of Management Board]

Yes. Thanks, David. On the pricing topic, I mean we discuss that year by year and we do not see a particular pressure on pricing. But in -- as I said, deal on deal and depending on is it a competitive situation, is it your own installed base, is it the length of the contract and so on. So there are a lot of factors which play into pricing decisions you make, but we do not see any difference in pricing development compared to the past. It's relatively stable.

[Bernhard Montag, CEO & Member of Management Board]

Yes. And to your question on China, I mean China is a growth market. We see a very, very healthy growth contribution there, especially on the revenue side. As you may know, I am -- I'm more on the skeptical side when it comes to this quota because I always say this quota are more intentions than investment plans of the Chinese government. So it doesn't mean that there is money behind it or that there is -- or an education program for radiologists behind it. It is a positive in a way that there is actually a political will and not an upper threshold for imaging. But the effect on the market is more indirect than one maybe would assume in reading the documents. We are very positive on China. We will -- I'm convinced we will see in the market high single-digit growth. And we are very confident and determined to further win market share in China, so which gives us in the end a double-digit growth contribution in a sizable market. So that's the intent for the future.

[Marc Koebernick, Head of Investor Relations]

That was our last question for today. Thanks for the time you dedicated to us this morning. Hope we answered most of your, let's say, most burning questions. For all of the ones that we have not answered, we'll be on a road show in the next 2 days in London and Frankfurt and obviously be around at the conferences in September. That's it from us. Have a nice day.

[Operator]

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