Good morning, ladies and gentlemen, and welcome to the Siemens Health and 2019 First 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 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. Florian Flossmann, Head of Investor Relations. Please go ahead, sir.
Good morning, everybody, and welcome to our Q1 conference call. The earnings release and Q1 presentation were released at 7 o'clock this morning. You will find all documents on our IR website. Our CEO, Bernd Montag and our CFO, Jochen Schmitz, are here with us today to review the Q1 results. Dan will start with the highlights of the quarter and Jochen will give you more details on our financial performance.
Afterwards, we will have time for our Q and A. I would like to ask you to limit yourself to 2 questions to give everybody the chance to ask questions. And with that, I would like now to hand over to Bernd.
Thank you, Julian. Good morning, everybody, and welcome to our Q1 earnings call. And before diving into details of our quarter, let me remind you of our strategic priorities in fiscal year 'nineteen and beyond. With our team is helping us carry to 2025, we are strengthening our unique position in the market and are instrumental in making medicine more precise. We are advancing the therapies of tomorrow, optimizing the patients' journey through health care systems, and we are enabling our customers to have a more efficient and more patient friendly and delivery.
Digitalization and artificial intelligence are important catalysts driving these changes, and we are proud to be leading in this field. In this exciting and dynamic environment, we have great market leading products and a global motivated team of people. The global imaging, advanced therapies and diagnostics markets are fully intact. We expect to further expand our market innovation leadership in imaging, driven by recently launched products, including AI powered applications and solutions and biofuel products. Minimally invasive procedures see ongoing strong growth in areas like cardiology, interventional radiology and surgery.
Our advanced therapies products facilitate these treatment procedures through the use of image guided therapy. These sustainable developments will continue to benefit our Advanced Therapy segment. In Diagnostics, we will capitalize on our Teleka solution. It's a great product, a fact which we see confirmed in the current relevant phase. Digitalization and the application of AI will revolutionize the medical landscape.
We are at the forefront and will play a major role in this organization. However, we do not only look ahead and outside the company. We also challenge ourselves to maybe cooperate, to maybe drive, to maybe do business. With respect to this, the Healthiness Performance System will be a major catalyst of change fostering a leading culture in our young company and driving continuous improvement going forward. Now looking into our Q1.
Comparable revenue growth has been moderate with 2.5%. As Jochen will explain later, there is a mixed picture across the segments underlying this. We see a very healthy existing book to bill of 1.13, which is the precursor for accelerating comparable growth in the coming quarters. Diagnostics instrument growth was again strong in the high single digits. And we are continuing the Atellica solution ramp up with more than 370 analyzers shipped in this quarter.
The adjusted profit margin, however, with 15.5 percent is 60 basis points below prior year quarter, impacted by minus 40 basis points currency headwinds. Diagnostic adjusted profit margin has been weak with 8.1%. The drop in margin in Diagnostics has been driven by 2 main effects: foreign exchange headwind of 130 basis points year on year and higher Atellica Solution ramp up costs. While we do expect this to improve in the remainder of the year, we are monitoring the situation clinical solution is a great product, which will be successful in the global diagnostics market. I will give you more details on diagnostics in a couple of moments.
Cash is low due to inventory buildup and CapEx for the diagnostics reagent capacity expansion in the U. S. And China. I'm sorry. On the positive side again, basic earnings per share increased by 11% to $0.34 to confirm our guidance for fiscal year 2019.
As I said in the introductory words, we are at the forefront of the digital revolution in the Maytag sector. Let me give you more insights into our recently launched digital offerings in AI powered applications and platforms, which are transforming care delivery. AI powered solutions capitalize on the ever increasing volume of health care data and translate into concrete clinical and operational outcomes for our customers. We recently launched 2 digital companion platforms, the AI Red Companion for Chest CT, which is the first application of the new AI Red Companion platform. This intelligent software assistant identifies anatomies and potentially release relevant changes.
We are differentiating between the various structures of the chest highlighting them individually and mark and measure potential abnormalities. These filings are automatically captured in a positive report and thus increased productivity and quality in their global view. A second product launch is the AI pathway companion, a clinical decision support system based on artificial intelligence. The first application of our AI pathway companion for prostate cancer and will be scalable for further clinical disorders. This AI tool is designed to help optimize the process along the clinical pathway by intelligently integrating all relevant medical data together with imaging and diagnostic biomarkers of the patient.
The physician has all patient data at hand in one tool, for example, in multidisciplinary, EDG sports and can discuss diagnosis and recommendations for the patient treatment at this point. This enables to drive the right treatment for the right diagnosis and treatment at the right time for each patient individually. In the area of digitalization, we developed single virtual cockpit, a remote scanning assistance. Medical staff can use the software solution to connect remotely to scanner workplaces to assist personnel at different locations. This is especially important for locations where more sophisticated examination is required, and an appropriate expert would not be available.
An experienced colleague can sustain tune in in real time via video and provide guidance on how to operate the camera at the other location, we need to adjust protocol parameters. The ability to deploy experts across multiple locations reduces the number of undesired variations in reports and hence makes more helps making more accurate diagnosis, This makes workforce management more flexible, leads to a higher level of standardization and therefore, increases provider productivity.
Now let's have a closer look
at Akerlical solution. With Akerlika solution, we have developed a unique instrument in that diagnostics with an extremely competitive offering. And this is confirmed by the feedback we are receiving from our customers around the world: highest throughput per square meter, no separate step analyzer or lab needed, minimal hands on time through automated calibration and quality controls leading to a time reduction of over 50 percent. Intelligent AI enabled sample identification is also a strong enabler for increased productivity of our customers. However, in order to make full use of this new business, you need a comprehensive assay manual.
And we had a very competitive menu from the start and have been adding additional tests over the last year. 22 assays are approved in the EU as well as 185 in the U. S, including all important tests, as for example, innovations like our high sensitive propylene eye test. We see excellent feedback from the proformin test, for example, from the Orpital, Bozhoevichard impact in Paris. So let me summarize.
All those capabilities make the Matelicast solution the comprehensive lab solution, a high scalability to adopt to customer space with diverse layouts. Together, with the high throughput and the high scalability, Atellica solution is the preferred solution for large labs with large and highly automated instrument lines. The fee is confirmed with the higher than average significantly higher than average, I might add, win rate in large labs with automation fees. Now we are in the middle of the ramp up phase of our Telecast Solutions. Therefore, let's have a closer look at the implication of the ramp up in Q1 and fiscal year 'nineteen.
The ramp up costs, unfortunately, had a higher than expected effect on Diagnostics margins in this quarter. We have been highly successful in winning large automation contracts. We have won more deals than we initially expected. In the past, around 15% of all deals have been such complex automation projects. Now it's double the number, around 30%.
At the same time, the sales of our high throughput IM1600 immunoassay analyzer has been very strong as they are ideally suited for this customer system. These large deals are very attractive. On the other hand, if they generate high revenue per box and very attractive on the one hand as they generate high revenue per box. On the other hand, they are also much more complex and need more time to get life and run. This is one of the key drivers for the longer than expected time from shipment until you go live until the start of the commercial use at a customer.
With the high number of analyzers shipped last year and go live only stepping up at the end of Q1, we have built a large backlog of analyzers being in the installation phase. We are working to bring the time down, but it will take a few more quarters until all required changes are implemented. The number of current installation in a fixed cost base to support further growth had an unfortunate effect on diagnostics margins in Q1. Therefore, the dilutive effect of Atypical Solution on diagnostics margin increased by 200 basis points compared to Q1 last year. At the same time, our legacy business is performing well at margin levels in line with historic performance.
Main driver for the low Q1 margin has been the larger number of analyzers in the installation phase, while there only has been limited top line contribution from reagents from those new systems. The high number of go lives at the end of Q1 and in the following quarters, we expect reagent revenue to grow strongly and contribute increasingly to top and even more to the bottom line. The dilutive effect of Atellica will therefore get smaller quarter by quarter. With more analyzers in commercial operations, Atellica revenues will become a more meaningful indicator for the success of the solution. The Akermica RevPAR is the priority for the company.
We have all hands on deck, and we have tightened project management for this decisive phase of the commercial rollout. And now I would like to hand over to Jochen for more details on our financials.
Yes. Thank you, Bernd. And also a warm welcome from my side. Bernd already ran you through the key KPIs briefly. Let me start with giving some more light on our order intake.
We booked solid order intake in Q1 with 5% organic growth, driven by strong service growth. Equipment order growth was particularly strong in Advanced Therapies, whereas imaging had been flattish against a very strong equipment order intake in the prior year quarter, which was in the very high single digits. In aggregation, we are happy with our order book development with an equipment book to bill of 1.13. Coming to revenue. The comp revenue in Q1 grew by 2.5%.
Underneath the group level, we saw a mixed picture that on the one hand, a moderate growth of imaging and diagnostics and, on the other hand, advanced therapies with very tough comps. Regionally, we saw strong growth in the Americas based on strong growth in the U. S. Also, Brazil contributed with very strong growth. Asia Pacific was soft this quarter with 1% on tough comps, especially in China.
Remember, we posted revenue growth in the 20s in China in Q1 'eighteen. EMEA was flattish this quarter on tougher comps as well. Q1 last year, EMEA grew by 6%. Now let's proceed with profit. On group level, adjusted profit came in at €545,000,000 with a margin of 16.5%.
This margin decline of 60 basis points can, to a large extent, be explained by foreign exchange headwinds of 40 basis points, primarily in diagnostics. We also saw a mixed picture in our segments. On the one hand, the imaging margin was strong with an improvement year over year, also benefiting visibly from our cost savings program. On the other hand, the segments advanced therapies and especially diagnostics posted lower margin this quarter. Finally, net income increased year over year on decreased interest expenses as expected with our post IPO capital structure.
However, the decrease in interest expenses was held back by a negative one off effect from foreign exchange related to the financing of our business in Turkey. For the quarters to come, we expect interest expenses to revert back to the levels seen after the IPO. The tax rate was slightly below, the also low prior year quarter due to a positive impact from an international tax procedure. Nevertheless, we continue to expect a tax rate of 28% to 30% for the full fiscal year. Now let's have a look at our segments.
Firstly, on imaging. The solid imaging growth was driven by strong growth, in particular, in computer tomography and molecular imaging. The adjusted profit margin in imaging increased year over year by 40 basis points from positive effects from conversion and visible benefits from the cost savings program. Let's now look at Advanced Therapies on the very right side of the slide. Advanced Therapies had a stellar quarter last year in Q1.
Hence, the business faced very tough comps in this quarter. As a consequence, revenue came down on these very tough comps by 4%. Just to remind you, Q1 2018, the business grew by 8 0.5%. As a result and also due to less favorable business mix, the margin came down year over year by 2 70 basis points. Still with close to 20% margin, it is on a very healthy level and at the lower end of our midterm ambition for the segment.
Finally, Diagnostics. Diagnostics grew moderately with 3%. Admittedly, this growth happened on the back of easy comps of minus 1% last year. Instrument growth was strong again in the high single digits. Going forward, we expect to see gradual sequential improvements in growth rates over the next quarters again like in 'eighteen.
But please keep in mind, the easy comp situation this quarter normalized our growth, would have been more around 2%. The margin in Diagnostic was weak in Q1 at 8.1%. The drop in margin has been driven by 2 main factors: foreign exchange headwind of 130 basis points year over year and higher Atellica Solution ramp up costs. The foreign exchange headwind in Diagnostics was primarily driven by the devaluation of emerging market currencies versus U. S.
Dollar. The higher ramp up costs for Matallica Solution impacted the margin negatively by 200 basis points year over year, as Bernd has explained before. At the same time, our legacy business is sound and has been performing on a stable level in the last quarter. Therefore, in Q2, we expect an improvement versus Q1 on the back of additional reagent revenue with high contribution from the installations in Q1. Now let's turn to our cash performance in Q1.
Cash in Q1 was seasonally low due to the increase of operating working capital, which was driven by higher inventories. Especially after the strong Q4, the increase in inventories is not surprising. Having in mind our good order book, we need a basis for our future revenues in the coming quarter. Also quite expected in Q1 and normal course of business, we saw an outflow in cash flow incentive payout for the full past fiscal year. Furthermore, as highlighted already last quarter, we see ongoing investments in our diagnostic factories, which drive CapEx space.
Now we come to our last slide, our outlook for fiscal year 2019. As Bernd has already pointed out in the beginning, we confirm our outlook for fiscal year 'nineteen. Procedure growth, I. E, the underlying growth drivers for all our businesses are intact for all segments. Thus, imaging and advanced therapies are fully on track for the full year, and we expect diagnostic to improve during the course of the year.
Our expectations for the year on tax rate and interest rate expenses remain unchanged. Although foreign exchange was a headwind for the group this quarter, we do not see material impact from foreign exchange for the full year since we hedged our U. S. Dollar position for the 1st 9 months in the fiscal year. And with this, I conclude my presentation and hand over to the operator for Q and A.
Thank you, gentlemen. We will start today's question and answer session where we would like to ask you to limit yourself to 2 questions. And our first question comes from Max Yates of Credit Suisse. Please go ahead.
Thank you. Just my first question would be around the imaging outlook. Could you talk a little bit around what you're seeing in imaging equipment, particularly sort of CT and MRI scanners in both the U. S. And China?
Obviously, we've had pretty strong growth rates there over the last 12 months. And has anything changed in the way you're seeing the outlook as we start to hit tougher comparators in those regions?
Thank you for the question. I think the market is intact in both geographies. I saw similar picture then in the last fiscal year for us, it means we have a very healthy backlog. And revenue for the next for the remainder of the year is secured. You will see better growth rates in imaging over the course of the year, yes, also supported by these geographies.
Okay. And maybe just a follow-up on free cash flow. Could you just give any sort of detail around where you would expect free cash flow for the full year to come out relative to what you did last year? Should we assume that in line with profitability rising, assuming that happens, free cash flow should also be up relative to last year? Or are there any incremental working capital headwinds that we should be aware of?
Generally speaking, I think we saw, as I pointed out, a seasonally soft Q1, which was not surprising. We expect to see free cash flow from a conversion standpoint relative to the profit level on similar or slightly up level relative to prior year.
Okay. Thank you very much.
Welcome.
Our next question today comes from Romain Zana of Exane. Please go ahead.
Yes, good morning. Thanks for taking my questions. The first one will be on Diagnostics. I was wondering if you could give us more granularity on the gross margin and versus the prior year, just to know to what extent the price share could have been due to more important pricing position. Still on Diagnostics, you mentioned the high single digit instrument growth in Q1, but the organic growth was obviously including consumable and up only 3%.
So can you clarify why the consumables were declining year on year? And maybe also useful to have the proportion of consumables versus instruments this quarter versus prior year quarter?
Let me start. Thanks for your question. First of all, on the revenue growth question, please have in mind that the revenue mix is ninety-ten percent, yes? 90% revenue reagents and consumables, 10% instruments, yes? That does not mean that we were shrinking on reagents.
It just says that the 10% of the revenue were increasing with high single digits. Some light on the gross margin side. As we pointed out, I would say, the dilutive impact on gross margin of diagnostics from the higher ramp up costs in Atellica was in the ballpark of 200 basis points. And secondly, obviously, most of the profit impact on foreign exchange also transpired obviously in the gross margin. So this is, I would say, the main driver behind the development of the profitability.
It was in the gross margin. And that's for sure, you said something about pricing. I don't know if you've heard this, but pricing was definitely not a topic.
Okay. Got you. And just on the consumable side, so the growth on diagnostics, can you give us a figure year on year?
That is a no single digit.
No single digit. Thank you.
And our next question today comes from Veronika Dubajova of Goldman Sachs. Please go ahead.
Good morning, gentlemen, and thank you for taking my questions. I have 2, please, and they're both on the Diagnostics division. The first question is the ramp up costs, Johan, that you've alluded to. I know in the past you've discussed some of the installation timelines taking longer. Is that what's going on here or is there anything else?
And in the press release, you mentioned some measures that you have implemented. If you can discuss those and what those will mean, that would be helpful. Diagnostics business is the comment you have made in your remarks, you have kind of gradual growth improvement as you move toward through 2019. Does that mean that your expectation for the Q4 is that you exit the year at 5% for diagnostics? Or have I misunderstood what you're saying there?
Thank you.
Thanks for your question, Veronika. First of all, yes, you're pointing with your, I would say, your first hypothesis with regard to longer installation times exactly in the right direction. And as Bernd highlighted in his speech, what we see is several facts, yes? 1st of all, and we talk about that already for a longer period of time, we see higher competitive win rates than originally, I would say, and, yes? We talk about this higher than 35 percent on an ongoing basis.
And we win with a high portion of deals in high throughput, more complex settings. And this effect, which is on the one side a very positive run as it shows the competitiveness, the extraordinary, I would say, feature set of Atellica, the lift up line of SolarFone on the one hand. On the other hand, I would say, the initial downside of it is that the installation takes much longer because these are all projects. It's not just plug and play, like if you would just sell 1 analyzer or so. And this leads then to, first of all, the higher and longer installation times means higher cost at the beginning.
And it also plays a role, in particular, in the gross margin development, a delayed, so to say, relatively speaking, a delayed start of the reagent revenue stream. What we see and what we're very happy about is the stability of our, so to say, legacy portfolio, our retention, which also is holding up very, very well. So therefore, we have, on the one hand, a very strong message, which was not planned that way. Therefore, it was a bit surprising how it is about the intensity of this. On the other hand, we see the initial, I would say, negative impact on financial KPIs.
This is the start line, yes? On the growth side, what I said is, first of all, we saw almost 3% growth in Q1. The 3% were on weak comps. We normalized it, and I normalized it to 2% -ish, so to say. And then I said, I expect to see acceleration quarter by quarter as in prior year.
Will it then be 5%, we will see. But acceleration starting with 2, that was the storyline.
I was just going to ask a quick follow-up just because I understand a telecom is very complex and you're having some great wins with large customers. But as I look at your guidance, you are anticipating more Teleka installations throughout the remainder of the year. So what's your degree of confidence in margins actually improving from here? Because as I think about Q2, Q3, Q4, you're going to have more than the 3 70 analyzers than you had this quarter. How is that not going to be greater headwinds to margins as we move through the rest of the year?
I think the main difference will not be so much the cost side, but the how and the amount or the degree of kicking in of reagent revenue stream
with the, obviously, the
high profitability levels on top. That's driving the margin improvement on the Atellica side. Not so much the lower cost because we expect to ship and install throughout the year a lot of instruments, you're right. The main profitability push will come from the increasing reagent revenue stream when and when the instruments get or whenever we have more and more instruments being live and producing reagent revenue streams. Okay?
Our next question comes from Michael Jungling of Morgan Stanley. Please go ahead. Great.
Thank you and good morning. I have two questions around the diagnostics. Firstly, on Atellica. Of the total Atellica shipments that you've had so far, I think it's 1300, how many are live and producing revenues as of today or last week? Then secondly, on Diagnostics, your weak growth in Q1 is perhaps a little bit inconsistent with what we're seeing, for instance, from the Abbott result, which is showing 9% organic growth driven by Alinity.
Is it possible also that you are seeing some greater competitive headwinds from Abbott and alike that is causing a bit more of a challenge for you in Diagnostics? Thank you.
Okay. Thank you, Michael. I mean, the answer to the first question is easy. 400 is the number, yes? So we had by the end of Q1, 400 analyzers light.
But I mean, note this is end of Q1, so that doesn't mean that they have contributed the profitable reagents revenue for the entire quarter. But it is a very good and encouraging sign. And we will see this continuous ramp up following the wave of installations. Then when it comes to growth rates, this is clearly just a continuation of what we have seen over the last next years, yes, that simply it's the our installed base is because of the lower productivity of legacy systems and so on is not yet is not driving the same reagent growth. And so this is the picture and new system installations do not change the picture yet, yes, as in our case.
Yes.
Maybe sorry, I think you have to have the numbers here. The shipments are 13 70 plus, yes? So it's more in the 1400 arena than in the 1300. You have to have this clear, yes? And when we talk and maybe one aspect also.
The shipment KPI was just used because at the beginning, the revenue line will be dominated obviously only by instrument revenue. Therefore, as you know, the normal revenue mix is 90, 10, yes? 90 reagents, 10 instruments, yes? And therefore, if at the end of the day to also give a good prediction on what we can expect also from a bottom line perspective, it when you make sense to talk about really about revenue really on this side, yes, when you have achieved a certain meaningful mix of those 2 components.
Okay. Can I just follow-up on is if I look at the Alinity successor filed with Abbott, can I just confirm that you believe this has not had a negative impact on your shipments in your Q1 of a bit of a 300 or so
Atellicas? Yes. I can confirm that. We are very happy with Atellica, very happy as a data point with the competitive sale rate here. So, again, significantly more than 35% of the italicast, the soldshipped have been competitive wins, which is more than we anticipated.
And especially, these are wins in the customers in the bigger customers, which have high demand. So we are very, very happy and see the competitiveness of Atlantica more than confirmed.
And that's also why we fear not too bad about the topic, generally speaking, because the win rate in those high throughput accounts is something which should also lead, generally speaking, in the future also to higher revenue per box. And this is, at the end of the day, what drives profitability in this business.
Okay. And then when you talk about in the press release about you being a little bit more sharper or so in terms of the Atellica rollout, is this does this mean you have to employ more people, that you have to be a little bit more cunning? What specifically gives you the confidence that you'd be able to sort of sharpen the Atelica issue here? Just curious what it is, more salespeople, more technicians?
Yes. Okay. Let's be a little bit of the color issue because I mean, first of all, we are here in a situation where we have success with the product. And we are, to some extent, here paying the price short term for the success because of the high number of installations, which we have now in the field. You can do the math, How many systems have been in transit, so to say, have been in the field without being live yet, yes?
When you look at the numbers I gave you, yes? So this is one topic. It's the sheer amount of systems. The second topic is, okay, taking Atellicas to loosen literally. This is more than a box here, and this is not about just unboxing an analyzer.
It is about significant changes at a customer side, which the customer wants. They want to reengineer their lab, and this is a process which takes longer on their end and on our end, especially because of that high amount of bigger projects. So what we have to do and what we are doing is making the organization fully ready for this change also in how we deploy systems. This is not only about delivering. It is about installing more complex solutions.
We have put our most experienced people on these installations. We are backfilling in other areas to make sure that we have the best people on this topic. And we also because this is a huge transition also for our organization, we run this for the next 9 months as a project, yes, with direct attention of the Board with very, very streamlined reporting Atellica product success and confidence into commercial success as soon as quickly as possible.
Our next question today comes from the line of Sebastian Walker of UBS. Please go ahead.
Hi, there. Thanks for taking my questions. I've got 2, if I could. So just first on diagnostics, Nattelica. So 400 live systems imply something like a 7 to 8 month lag time between shipments and go live.
So could you talk about where you expect that number could or that time could reasonably go to? And then also just on that, whether you're still comfortable with the 16 to 19 medium term guidance for the margins? The second question is on Imaging and AT on the China quotas. Could you maybe your commentary seems a little bit more muted here than some of the radiotherapy players in the market. Could you talk about perhaps why you're less positive on the opportunity and whether you've seen any pickup in activity in discussions with customers?
Thanks. Okay. Question on the time between installation and go live. Yes. So we anticipate this number for fiscal year 2019 on average in to go down to 5 months.
And the number varies between small installations, yes, and large topics like, for example, the PADI deal we talked about. Yes, there's more than 100 analyzers in 1 huge installation and so on. But we are targeting a significant reduction, but it still will be 5 months. And maybe as possible to qualify this a little bit, in our current installed base, 15%, as I said, 15% of the analyzers are connected to a track. In the Atelica deals, it is 35%.
So there's the aspect of automation. And the second topic is that even if there's no automation, it is very often now that replacing a set of independent boxes at a customer site with 1 integrated modular Atellica solution. It is about making the customer making the change of, for example, switching off their step lamp because this can be done now in one system. So we can do emergency testing in one topic, yes, whether it is about changing customer habits and making the customer feel comfortable with this workflow, which gives a lot of productivity gains in the future. So imagine this to be more than just switching on a box.
This is about making significant changes to enable somebody to have a much more productive, sophisticated medical factory. Yes, so this is what this is about, yes? I think the second question was about China. In China. So, I mean, I cannot I'm not too little about what other companies say.
I mean, I think I read recently in a report, I think, about Merion that they are also a little bit careful about these expectations. So what I want to make clear when it comes to these Chinese a new intent. It is what is theoretically possible. There's no funding behind it. There's no purchasing process behind it, yes?
So and from what I know, yes, without being an analyst, yes, I don't see that others are too bullish about this either. So we don't see on the ground in China that this document is changing behavior of our customers.
But we still expect high single digit growth rates out of China in imaging, yes? So we're still seeing this as a very, very important growth driver for our imaging franchise, yes?
Yes. So the good thing is to say that this document here is not putting it's not pulling the brake, yes? But it is and I think I had that in many one of our conversations with you and your colleagues, yes? This is not a document I would use to assess the outlook of the Chinese market, yes? The Chinese market is healthy.
We have good high single digit growth there and expect it to grow like this. But I think this or without this document, this is the fact, okay?
And you also asked about the midterm guidance on diagnostics with regard to profitability. We stick to this guidance. Remember, we said at the Capital Market Day, 3 to 4 years, yes? And this is still holding up, yes?
Perfect. Thank you.
Our next question comes from the line of Patrick Wood of Bank of America. Please go ahead.
Perfect. Thank you. I think
I have 2 remaining. Firstly, just a point of clarification on the imaging side. Just to confirm, the confidence that you guys have at growth improving through the year despite the tough comps is because of what you're seeing in your existing order book within the imaging franchise. So just to confirm that that's the case is question 1. Question 2, I'm just curious on the Diagnostics side, maybe to follow-up on the points made on Abbott.
I'm curious, who do you think you're taking the installations from if you're holding your base installations sort of in your base estate kind of flat with the legacy platform? Who do you think Intellica is replacing mostly in the market? It doesn't look like it's Abbott. So should we conclude that's Beckman? Or I'm just curious.
Thank you.
Okay. I mean, question 1 on imaging. I mean, yes, It is on the volume of the order book. I spoke about the very, very healthy book to bill on the equipment side of 1.13. It's also the funnel which we see, yes, of orders which we will generate.
And we are very, very confident that imaging will be will have a very healthy year. We'll have a much a very strong remainder of the year. So and partially, you can also when you look at one of the reasons, by the way, for the low
cash flow
in Q1 is also building up the inventory for the revenue to come in imaging in the next quarters. So here, we are very confident. And I think when you have followed our trial, while sometimes the growth rates in imaging fluctuate a bit quarter over quarter. We have seen this pattern. So imaging is in a very, very healthy state, yes?
The second question was I mean what I would like to remind you is the diagnostic market is not as consolidated as the imaging market. So the big three here have so us, Bosch EBIT, have about 48% of the market. So which initially means that when you are in a position like we are in here, I mean, with this 14% to 16% or whatever percent market share, there's 86% of markets you can grow from, yes, or you can take instruments from. This is not like a 2 or 3 participant game, yes? And that is I can say that there is one particular competitor we win especially from.
What makes me very, very confident is and something the team is also very proud of that we have won deals and especially very important deals against all big competitors with Atelica, especially with customers who have who are very demanding when it comes to solutions for the lack of the future. And there, Atellica is a great weapon to have.
Have. Fantastic. Thank you for taking my questions.
Our next question comes from Scott Bardo of Berenberg. Please go ahead.
Yes. Thanks very much for taking my questions. It seems to me that the placement targets that you set for Otilica, I think, towards the end of the year being 3,200 to 3,500 were heavily underpinned by your own installed base of systems in the market. And also I appreciate you're making some good with commercial wins. It feels a little bit that your existing installed base is somewhat sluggish to swap over to the silica.
So I wonder if you could comment on this a little bit. Is there any reference from your customers and the replacement targets that you put out for this year? Are you concerned about those at all given the dynamic you see in Q1? Also just following on Diagnostics, I think a few months ago, there was some confidence from the management board about improving Diagnostics margins about 100 basis points or so from what was actually a relatively weak last year. Obviously, we started off pretty soft here.
Is it still an attainable target to improve margins in Diagnostics 100 basis points year over year?
Okay. Thank you. I mean let me give you a little bit more of background here. When I look back, what we when I look at where we are today and compare what we have expected and communicated a year ago when we started also the IPO market to which we have our capital up to date. We are extremely happy about the competitive wins, about the more than 35% and that the system is received so positively by the professional customers.
When you talk about installed base conversion, I would draw a little bit of a silly picture. There are customers who basically want to leave their lab as is, yes? There are, what do you call, boxes. And the boxes come off contract, and they want to replace one box with another box. And then there are customers who really want to change how to do things and bring their automation, bring their operation to the next level.
We have a high win rate when it comes to those who want to bring their lab to the next level. When it comes to those who just on a regular basis, so to say, are up for renewal, they are sometimes a little bit slow in adopting the idea, yes, because before I have a new system, I want to make sure that it's really running because I don't want to change things, yes? I'm happy how things are, yes? So there, the adoption is a little bit slower. This is not this is a nice problem in business.
This is a nice problem to have because changing the installed base to Atelica without having more reagent revenue is not super critical for the P and L. The critical aspect is winning new customers and winning in the high productivity environments, yes? So from that point of view, the change in the installed base, yes, it's a bit slower. But the good thing is that we have more wins on the competitive side and more net revenues and more high throughput, high products that we see. Distribution.
And this is also one topic there for the financial effect. We have very well secured the installed base. We are happy with the legacy business and how it's holding us. On the other hand, the appellate cuts we put on top are currently not yet contributing as much as they do in the future in terms of reagents revenue. And that is why for the time being, we have this especially in Q1, we have this negative impact on the gross margin.
And I think it's a perfect lead over to your second question, Scott, yes? The margin improvement in Diagnostics is primarily a function of the speed of installation and then, let's say, the timing and the amount of reagent revenue coming in. Obviously, with Q1 being weak on this side, we I think the margin improvement obviously became more ambitious, no doubt about this. But at the end of the day, the mechanics are holding up very well. It's about the speed of installation and how quickly we see additional revenue coming.
And that is also one of the reasons why we tighten management on the topic. And at the end of the day, our ambition is that we will at least, at foreign exchange, improve margins year over year.
Okay. Understood. And perhaps just one quick follow-up, if possible. Just on the Advanced Therapies business, which I appreciate can be a little bit lumpy, but there has been somewhat flowing growth over the last several months in that business whilst your competitor has been reporting quite good growth from its comparable business. So I just wonder if you could talk a little bit to your future in this segment.
Are there any major product launches to support better growth here? Perhaps just a little bit of a feeling for that business, please.
Yes. I think, you said a lot already. I think it's a bit more fluctuating this business because it's smaller. It's relatively dependent on single deals you either can take revenue for or not, yes? Therefore, the volatility of the business is higher than the others.
We are very happy with the business, in particular, with the very, very strong order intake we saw over the last 4 quarters on the equipment side. And therefore, we have a very good order book now. And we expect very, very healthy revenue growth coming in the next quarters. And I'm going to say more for the strategic aspect of the question, I would hand over to Bjorn.
And strategically, SKIA, this is a growth engine for us both from a business point of view but also from a little food medical footprint point of view. And we see diagnosis and treatment grow together. And but more on a short term basis, we have a very strong product pipeline with significant introductions within this year, which will contribute not only to the order book but also to revenue. So I'm very confident about this business. Very good.
Thanks, guys.
Okay. Operator, let's take the last question, please.
Our last question today comes from Gunnar Romer of Deutsche Bank. Please go ahead.
Gunnar Romer of Deutsche Bank. And thanks for all the explanations you provide around diagnostics. On the diagnostics business, one left from my side. Just curious whether you have an update for us when it comes to your strategy in molecular diagnostics and in particular, your relative preference of driving this organically or via M and A? And my second question would be on imaging.
It seems to me also when looking at numbers of your competitor that we're seeing a temporary market slowdown. Just curious on your comments around market shares. You've been upbeat on that over the last couple of quarters. Just curious whether these comments still hold true. And then also related to imaging, just a follow-up.
Can you remind us of what the order intake was? I think you talked about the book to bill, but what was the order intake growth you've seen in imaging equipment? Thank you.
Okay. I mean, comment on your molecular question. I mean, I think what is what became very clear in this call, again, is that we are the automation and industrialization, the high productivity company in diagnostics. And if and when we are interested in draw hand and when it comes to molecular, it is about what are ways to bring molecular out of the, let's say, the niche of our specialty lab. This is what our view on molecular is to make sure that at some point, this becomes as much an automated, easy to do test like immunoassay in clinical chemistry here.
This is the target. This is what we work organically on. This is also where we have made inorganic moves like the acquisition of Fast Track Diagnostics to speed up the development when it comes to ability to share which we better find outside, yes? And on the imaging side
No, I think, Madeline, I can take it over. I think you I really touched on the topic. Imaging had been flattish against a very strong equipment order intake on the equipment side last year. Remember, last year and the prior year quarter, we were at very high single digit equipment orders. Therefore, we are very, very happy with our imaging business, yes?
And we expect accelerated revenue growth in the coming quarters.
And in terms of market shares?
Yes. Okay. Market share, I am very, very confident that when you look at the last 4 quarters that we have on market share. This is also how to in marketing, how to look at it. I can't tell you about the last quarter.
I don't even have data. But this is to be looked at in a long term trend, and I'm extremely happy about the trend line of the last 12 months.
That's great. Just very final one, if I may, on tariffs. Is that still do you still expect the EUR 40,000,000 drag? Or has any changed anything changed in that regard? And what was the impact in the Q1, please?
I think, Jari speaking, we do not expect I don't have better information than you. We still expect the same thing, dollars 30,000,000 to $40,000,000 as pointed out in the Q1, mid- to high single digits amount of €1,000,000 affecting our numbers and obviously more on the imaging and ramp up inside than on the other businesses.
Thank you very much.
You're welcome. Okay. So thank you everybody for participating today. As always, the team and myself will be available for more questions if there are. So thank you everybody for participating.
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 Investor Relations section of Siemens Healthineers website. The website address is www.corporate. Siemens healthineers.com /investorrelations.