Carolynne Borders:

Thanks, operator. Good morning, and welcome to GE Healthcare's second quarter 2024 earnings call. I'm joined by our President and CEO, Peter Arduini; and Vice President and CFO, Jay Saccaro. Our conference call remarks will include both GAAP and non-GAAP financial results. Reconciliations between GAAP and non-GAAP measures can be found in today's press release and in the presentation slides available on our website. During this call, we'll make forward-looking statements about our performance. These statements are based on how we see things today. As described in our SEC filings, actual results may differ materially due to risks and uncertainties. And with that, I'll hand the call over to Peter.

Jay Saccaro:

Thanks, Pete. Let's start with our financial performance on Slide 4. For the second quarter of 2024, revenues of $4.8 billion were up 1% organically year-over-year. Recall this quarter's results compared to 9% growth in the second quarter of 2023, when we experienced easing supply chain constraints. As you can see from our filing this morning, the continued market headwinds in China impacted total company sales growth in the quarter by approximately 300 basis points, meaning, global sales growth excluding China was approximately 4%. Organic orders growth was solid increasing 3% year-over-year, driven by strength in the U.S. and rest of world. Excluding a 300 basis point impact of China on orders, orders growth would have been 6%. Orders dollars continue to outpace sales leading to a strong total company book-to-bill of 1.06 times versus 1.04 times last year. As a reminder, equipment only book-to-bill is higher than total company book-to-bill. We exited the second quarter with a healthy backlog of $19 billion including strong services growth. Adjusted EBIT margin was 15.3%, up 60 basis points year-over-year, driven by continued improvement in gross margin with productivity and price. Second quarter adjusted EPS was $1, up 9% year-over-year, reflecting adjusted EBIT growth and lower interest expense. Free cash flow was in line with our expectations and was negative due to the timing of certain payments. On Slide 5, let's take a closer look at segment revenue performance for the second quarter. We saw very strong PDx sales growth of 14% organically, aligned to global procedural demand. China market headwinds negatively impacted both our Imaging and Ultrasound segments. Service revenue on a reported basis increased 2%. We continue to make very good progress on margin expansion. Let's walk through this on Slide 6. In the quarter, adjusted gross margin expanded 110 basis points, and adjusted EBIT margin expanded 60 basis points. The team has made significant progress, utilizing lean capabilities to focus on margin accretive actions. As a result of these actions, adjusted gross margin increased 100 basis -- 110 basis points and adjusted EBIT margin grew 60 basis points through the first half of 2024. Gross margin was particularly strong in PDx with volume and stabilization of raw material costs, and Imaging gross margin expanded, led by new product introductions. In our PDx segment, we hosted a Kaizen in our court facility in May, which led to over 1.5 million doses of annual capacity improvement and cycle time reduction. This is another great example of how lean enables us to increase our volume and expand margins. In IT, we're focused on permanent cost optimization actions that are resulting in ongoing cost savings. For example, we have consolidated more than 40 vendors supporting our applications to one vendor, as we signed a managed service agreement that has resulted, and more than $40 million of annual savings. As we exit TSAs, we're developing solutions specific to GE HealthCare's needs. For example, moving more to the cloud and reducing internal data centers, as well as consolidating the number of devices we use. We expect this to drive an additional $20 million of savings in 2024. On the gross profit side, we drove mid-single digit variable cost productivity across all segments in the quarter. In the second quarter, we invested more than $300 million in R&D, growing 10% year-over-year, while expanding our margin, recently introduced products with AI are driving higher margins. Now I'll turn to segment performance. Let's start with Imaging on Slide 7, where we had flat organic revenue growth. This was against a difficult comparison to the prior year when sales were up 9%. Growth in this segment was also impacted by China market headwinds. Segment EBIT margin was up 40 basis points year-over-year. We continue to make progress on enhancing gross margins through productivity and price, while also investing in R&D. Margin improved sequentially by 130 basis points versus the first quarter of 2024 due to volume leverage. New product introductions are contributing to particular strength in U.S. product demand. Turning to Ultrasound on Slide 8. Organic revenue was down 1% year-over-year, primarily due to China market headwinds. Segment EBIT margin decreased 120 basis points year-over-year, driven by lower sales in China and inflation. This was partially offset by cost productivity achieved through standardization and new product introductions. We continue to see solid customer demand, especially for our recently launched products. Moving to Patient Care Solutions on Slide 9. Organic revenue was up 1% year-over-year, following 9% growth in the prior year. Segment EBIT margin decreased 90 basis points year-over-year due to product mix, while productivity actions offset inflation, with expected contributions from new product introductions and a healthy backlog, we are well positioned to drive future growth. Moving to Pharmaceutical Diagnostics on Slide 10. We had another strong quarter, generating 14% year-over-year organic growth, driven by volume, pricing and new product introductions. Segment EBIT margin of 31.2% improved 450 basis points year-over-year driven by sales volume, productivity and pricing. We're pleased with the continued margin expansion in this segment. Security of supply remains top of mind for our customers, and we're continuing to make investments to enhance global supply of contrast agents and radiopharmaceuticals to meet increased demand. In particular, we're encouraged by positive developments in the molecular imaging market. We saw continued acceleration of Vizamyl doses delivered in the U.S. in the second quarter. These sales increased three-fold. Turning to Slide 11 on cash flow performance. In the second quarter, free cash flow was negative $182 million due to the normal timing of compensation and interest payments. We continue to expect strong cash generation for the full year. Free cash flow is expected to be substantially higher in the second half of the year relative to the first as a result of seasonality, given higher volumes as well as the timing of certain supplier and compensation payments that occur earlier in the year. Our strong cash flow profile continues to provide us the flexibility to advance our growth strategy, while reinvesting in the business and executing a disciplined capital allocation strategy. Now let's turn to our outlook on Slide 12. We're taking a prudent approach and are lowering our full year 2024 organic revenue growth guidance to be in the range of 1% to 2% due to temporary market headwinds in China. Despite this reduction, we're raising our guidance for adjusted EBIT margin expansion, which we now expect to be 60 basis points to 90 basis points year-over-year, associated with the continued momentum we're seeing on productivity and optimization initiatives, along with contribution from NPIs. We're reaffirming our expected -- our expectation for adjusted EPS in the range of $4.20 to $4.35 with growth of 7% to 11% and free cash flow of approximately $1.8 billion. We expect third quarter year-over-year organic revenue growth of approximately 1% and adjusted EBIT margin expansion to be relatively similar to second quarter. We would expect year-over-year organic revenue growth and adjusted EBIT margin in the fourth quarter to be the highest of the year. As you think about the year, I would note that we expect the revenue headwind from foreign exchange to be less than 1% in 2024. Now, I'd like to turn the call back over to Pete.

Carolynne Borders:

Thank you, Peter. I’d like to ask participants to please limit yourself to one question and one follow-up. Operator, can you please open the line?

Joanne Wuensch:

Good morning and thank you for taking the question. I think I want to spend my question on China, and trying to understand how you think about the pace of opening up new orders from the stimulus program. When do you anticipate it arriving and how as we put our 2025 models together, you think about this rolling into next year? Thank you.

Jay Saccaro:

Yeah. Sure. Just a little more detail on this adjustment. When we provided guidance last quarter, we were estimating roughly a $50 million decline in sales in the second quarter. But we actually saw something worse than that. It was closer to $100 million. And so in fact, as we look at the first half of the year, you can see in our disclosures, trend is down about 15% and we've assumed really as we look to the rest of the year, there's going to be no real impact from China stimulus sales. And also, we're kind of expecting a challenging market for the balance of the year. And so when you think about the guidance adjustment that we did as it relates to '24, at the midpoint of the range of the 1% to 2% range, it's roughly a $500 million impact in China relative to what we previously thought. When China starts -- stimulus starts to come through, it will be a positive development. But we're not trying to time this or estimate the timing of the stimulus package, we've taken it out. On the positive side, we do believe that we are well-positioned once stimulus starts coming through to take advantage of that, as Pete said. So overall, we think the market is a good long term attractive market, but clearly, this year is challenging. The only thing I would say is, historically, China has been around -- or last year's roughly 14% of our business. It will be much less than that this year in the 11% to 12% range, as we think about our current modeling.

Peter Arduini:

Thank you.

Larry Biegelsen:

Good morning. Thanks for taking the question. I wanted to start with the '24 guidance. Jay, as you mentioned, you lowered revenues by about $500 million, but maintain margins, actually increased margins a little bit and maintained EPS. So my question is, how are you able to maintain margins and EPS given the revenue reduction? I did have one follow-up.

Larry Biegelsen:

That's helpful. And Pete or Jay, I heard Pete, your comments about confidence in the medium term goals. Any high level thoughts right now on 2025? Do you expect some catch-up from China next year? And are you still confident in the mid-single digit growth outlook? Thank you.

Larry Biegelsen:

Thanks a lot.

Anthony Petrone:

Thanks. Maybe two-part question here. One is going to be on orders and bookings, and then the second will be on Alzheimer's disease. So the order number, plus 3% and book-to-bill 1.06, comes in despite the headwinds in China and I think a lot of that has to do with just state of the U.S. market. So maybe just a little bit on the U.S. market as it relates to funnel, specifically in the Imaging and Ultrasound segments. How much visibility is there and can this feasibly extend into 2025? And then for Alzheimer's disease, there's a couple of blood-based tests that had results out recently. Clearly, Vizamyl is at least in the early innings here, a preferred imaging solution to onboard Alzheimer's disease patients. So how does Alzheimer's disease play out from the PET/CT side when we consider new test potentially coming in? Thanks.

Peter Arduini:

Yeah. No, I think you covered it, Jay, but we just -- I think a train in the U.S. team just had a phenomenal quarter. And it is about products, but it is about -- we've talked about team itself, the talent upgrades that we put in place, the new sales disciplines and processes and really our enterprise value proposition that we bring to a big IDN. We had quite a few larger wins. And again, I'd even site some new product areas like in the vascular lab area, where we're winning growth in the IGT business and taking share that we haven't realistically in previous years. But it's an older installed base in the United States. So we think we actually have a pretty good replacement cycle that's going to continue on. Signals from our customers, particularly CFOs that we survey and such are positive about the investments. And the way this works out is when you see big growth in a lot of the med tech flowable businesses, catheters and such that are in the pharma side, ultimately, that puts more pressure to buy more equipment because you're putting more patients through the system. So we see that in delay coming through, but are quite confident about how we see the U.S. market. Anthony, your question on the radiopharmaceutical side, look, I think we're going to see a lot of different diagnostics pop up in many of these different phases. How well they'll be accepted and integrated into practice, I think, remains to be seen. I think as it relates to Alzheimer's specifically, I think all the baseline tests were done off of PET, pre and the post being able to actually see where the amyloid beta is, actually see the elimination of it on scans, we believe is going to still be a hallmark of the products. And then again, depending on how well those therapies take off, like most things, there will be lots of room for multiple products to continue to grow to do well. I would point though, back to this broader point about the CMS changes that just took place. Again, if you were doing scans and your radio -- your pharmaceutical product, again, in this case, the radiopharmaceutical diagnostic, you only receive maybe a few hundred dollars for reimbursement on it. And now you will receive something closer to the actual list price, which could be thousands of dollars, all of a sudden, the economics for a health care provider to move to that space makes a lot of sense. And if you have a larger distribution network of multiple molecules that you're bringing to that customer, you can contract that at a larger scale. And that's really what we're super excited about. Obviously, Alzheimer's being one part of that, but breast cancer, Parkinson's disease, cardiovascular disease down the road, all of those, we look and say, with some of these changes that have taken place, we're optimistic about what growth that can bring.

Operator:

Thank you. Our next question comes from the line of Vijay Kumar with Evercore ISI.

Jay Saccaro:

No. I mean, broadly speaking, the below the line assumptions are unchanged. And so as we look at it, we have a revenue reduction. It's supported by what we've put forth. I think it is a fairly -- it continues to be a fairly wide EPS range, and a lot of that reflects the uncertainty that we see in China. So no major changes below the line, but -- and feel good about, in particular, given the strong performance in the first half, along with the continued line of sight to some of these additional productivity initiatives, we feel good about delivering on this range.

Peter Arduini:

Yeah. I think -- look, I think we've got -- across the business, we've had some multiple updates and upgrades across the product family line coming to value MR products that we've just introduced come out with a significant amount of upgrade product. I think one of the things that's driving a lot of growth, particularly in MR is our upgrades to our deep learning module in that case, the [indiscernible] capability and installed base upgrades. In the Ultrasound space, particularly in General Imaging, we introduced a quarter back quite a few new versions updated that product line, that has done quite well. This is the logic plant. So there's almost four different derivatives there, plus in our volumes in women's health care line. And we're seeing those pacing on track, if not better. You might have seen our revenue in Ultrasound was a little light in this particular quarter. But as we go into the second half, we expect that's going to pick up. In fact, our orders was positive. We had good orders pick up here. So that's a positive sign as we look forward. I mentioned vascular and IGT. We're doing quite well with our surgical C-arm OEC business. There's a bunch of new software applications in-room capabilities that bring almost Cath Lab like capabilities into a mobile C-arm. Our Allia platform, we're doing quite well with, which is growing share. And I'd say on the PDx side, particularly, on our monitoring systems that are in room, the new monitors themselves, we’re seeing some nice pickup. So that’s the broader mix. And then what I was mentioning at Investor Day, we’ll talk about what we’re going to see in the ‘25 through ‘27 range. Now how we’re thinking about where we are with Photon Counting, next-generation MRI, broader capabilities within PET/CT imaging, just to give an example. So those are some of the bigger investments, obviously, we’ve been making for the past few years, and they’re well on track, and again, will be a highlight of our Investor Day in November.

Peter Arduini:

Thanks, Vijay.

David Roman:

Thank you and good morning, everybody. I wanted to dig into China a little bit further. Understanding that the stimulus is a bit of an unknown. Maybe we could just take a step back and you could talk a little bit about just underlying drivers in China because as you look at some of the third-party data, it looks like the vast majority of the installed base across Ultrasound CT and MR has been refreshed in the past four years. So how should we think about the medium-term underlying growth in China? And is it more than just stimulus impacting the outlook here?

Peter Arduini:

Yeah. I think you covered it, Jay, but just a couple of facts. As you know, David, I mean, the China population 1.4 billion, about 400 million have you say, pretty good access. There's 1 billion people that don't. So we have a partnership with Sinopharm with other broader distributor capabilities to be able to reach into that untapped market. And so that will continue to be a growth areas. It's probably also going to be part of some of the investments that the government is making. The other tidbit is that used equipment isn't actually allowed to be sold within China. And so there really isn't a recycling of used equipment around. It ends up being all new equipment coming in. And so that actually haven't has a higher effect on growth than in other markets where, particularly in the United States, where we have quite a bit of upgrades, and movement around equipment, that doesn't exist in China. So when we look at the numbers, I think we feel pretty good about what the longer term growth potential is just based on those facts.

Peter Arduini:

Yeah, David. It's a really good question. And obviously, we'll spend more time in some strategic settings on this. But look, at a high level, we have the strategy we focus on -- we articulated D3, which, again, is smart integrated connected devices that work together around a given disease state or care pathway, and enable to drive more productivity or better outcomes with digital AI features. And so if you take that EP example you had, the first part is having world class electrophysiology labs, that we can win the hardware. And the reality of it is, a few years ago, we probably didn't have all the right features. We do now. So we think from a standpoint of winning those labs, we're going to win at a higher rate than we did in the past. On the disease stage side of electrophysiology itself, we actually have folks that are primarily focused on that to say, how does ultrasound, how does the EP devices, how does the actual data systems work together so we can come up with a better solution. And we are working on that. It's one of the main reasons that we created the IGT ultrasound alignment because there's a lot more cardiovascular benefits in everything from channel to the development side. And to your broader point, when you start thinking about disease states, it opens your lens up to say, well, should I partner with this company more because if we do, we could solve this customer problem or should I buy this asset because together, these four things create more value? And to answer your question, absolutely, we’re expanding our horizons to think about what should be part of GE HealthCare.

Peter Arduini:

Thank you.

Matthew Taylor:

Hi. Thank you for taking the question. I guess I had one question on the PDx business. You talked a little bit about the Medicare changes, obviously, a big positive for that space. I guess I was wondering if that changes your thoughts on the long-term opportunity or the growth rate for the contrast media molecular imaging markets that you're in? And I was hoping -- you've called out Vizamyl a couple of times the last few calls with the great growth you're seeing there, if you could outline the opportunity for that or for Flurpiridaz just to give us a better sense of what they're contributing today or how you feel about them contributing to growth, especially next year as you launch Flurpiridaz?

Peter Arduini:

Yeah. I just think we haven't framed up what all the longer term growth yet will be on the molecules. But needless to say, we're more optimistic today than we were prior to the approval. And again, what we're working through right now and frame this up is just take an example, again, of a product that the hospital might be paying a couple of thousand dollars for, but they're getting reimbursed $200 for. Now in the future, they'll get reimbursed at what they're paying for it. And so to be able to detail that and have a discussion with an institution about how to build out a program that's actually going to be a value creator for them. And our confidence that the outcome capabilities for the patient is higher is very strong. So if you think about Cerianna for metastatic breast cancer, it's actually on many of the guidance documents now, but it's challenging economical for someone to actually implement it on a day-to-day process. On tomorrow situation, that changes. And the other aspect is probably even less about what we do on diagnostics and more about what pharmaceutical companies are doing with therapies. And so the more therapies that come out in the space, the more you need someone like a GE HealthCare that has the equipment, the data integration, the distribution capabilities and the diagnostic molecules to help kind of solve the equation. And so, we will obviously spend more time on this with investors, but this is a very positive direction and it's quite helpful for our growth strategies in the coming years.

Jay Saccaro:

Sure. So just to start, and I'll turn it over to Pete. First half decline in sales, 15%. As we look at the market and the orders in the market, and we're talking about market and tender activity versus anything share related, we think a prudent number is in this -- adjust down the number $500 million at the midpoint, leading to a high teens decline in the second half of the year. Now again, we've taken out the benefit of impact from stimulus on sales. And I would also say that through at least the third quarter, we have a very locked-up dynamic on orders and into the fourth. Now could we be wrong to the upside? We might be. But as we look at it today, we felt it was prudent not to try to time the impact on the fourth quarter in terms of sales, and we've removed that. I'm hopeful that we do better. But at this point, we think this was the right thing to do. We'll watch the stimulus really carefully as we think about what the impact on to 2025 will be. But we have continued declines in a tough market forecasted. And again, it's not a GE specific item. This is a broad-based market view that we have.

Peter Arduini:

I think Jay hit the point. So again, when this comes back, for us, this is really largely related to timing of the China stimulus program. So we're not betting on the timing. We think we've got our base case lined out well, which is really tied to our installed base, what's our secured business that we have here coming through the second half. And as I mentioned, we would expect to see some orders uptick later this year. But when we take a look at particularly the equipment we have between the time you win a tender, get an order, have the room ready and install it, that order to sales piece would be very tight. And hence, why we just decided to take it out.

Operator:

Thank you. Our next question comes from the line of Graham Doyle with UBS.

Graham Doyle:

Good morning, guys. Thanks for taking the question. I got a follow-up on China. So just when -- Jay, you kindly called out the actual number. It looks to me like there's kind of like 40% down in H2 versus your original assumption, which is obviously a very, very large change. And I just make sort of wonder what's the confidence then that you do with your midterm targets so starting from next year, given how volatile that market is? And to the point Matt made, I mean, I was with both Siemens and Philips today. And it does sound like they're not forecasting a decline of anywhere near that magnitude in the second half in China revenue. So is it genuinely just a lot more prudence or is there something happening in, say, the patient monitoring market that maybe the others are seeing? It would be great to get that color. Thank you.

Graham Doyle:

Okay. Just to the context of the question, why was it in there in the first place? Like at what point did you put stimulus into the guidance? At the start of this year, was it Q1 because it didn't seem like something that was that not certain to start. So I'm just trying to figure out how much more [indiscernible] will you have taken down?

Jay Saccaro:

I mean the only thing to add is, this is not even like so, we're seeing a depressed level of demand relative to normal as people await clarity. We think the stimulus is a good positive thing long term. But in the market, as we saw it in Q2, as we see Q3 quarter-to-date, it is depressing activity in the market thus far. And so that's why we made the assumption that we did.

Peter Arduini:

Yeah. Thank you.

Patrick Wood:

Brilliant. Thank you so much taking the questions. Apologies, if I heard this wrong. I thought you guys mentioned that Q3 was something like plus 1% organic. And so, of the implied Q4 step-up, qualitatively, how much is a function of those ultrasound launches relative to the strong U.S. Imaging market? Apologies if I missed this earlier, but if you could just unpack the 4Q, that would be really helpful.

Peter Arduini:

I think the other point you touched on it, Jay, is with some of the share gains we've had on some of the larger equipment a year ago, we actually have now service contracts growth, and we're expecting our service contract growth during the second half, not just expecting we can see it. It's already on the books. We'll step up a few points in the second half, and that has a higher margin. And obviously, it's already on the books.

Peter Arduini:

Yeah. I think it obviously varies quite a bit by modality. It varies by company, too, based on -- if you're taking a look at your own installed base or the overall, I think, in average, it's a little bit older than that. We have some modalities, particularly in MR, where it's probably even a few years older than that. And so that's really boding well right now for us doing upgrades and stuff on conversion. But we believe when we take a look at the whole of ours plus the installed base, there's actually a reasonable amount of replacement cycle needed because of the age.

Peter Arduini:

Thank you.

Suraj Kalia:

Good morning, Peter, Jay. Can you hear me all right?

Suraj Kalia:

Yeah. So thank you for taking my questions. And Peter, I'll throw both of them, you guys this way. And both of these questions are designed really for assessing the differential impact. So first on China, Peter, I wanted to piggyback on David's question from earlier. Your competitors are talking about value partnerships, local for local. And maybe set the stage, when China opens up right. Will the rising tide lift everyone equally or do you think there will be a differential impact? And part of me is also thinking, how is the book-to-build specifically within China, looking for the different people? And how should we think about when China opens up, what is the differential impact? Peter, that's one question. And I'll throw the second one also quickly your way. Radiopharmaceuticals, again, your competitors are talking about pharmacy networks that give them an edge in radiopharmaceuticals. Help us understand GE's buffers for growth in the segment, especially given what Medicare is doing? Thank you for taking my question.

Jay Saccaro:

Sure. I mean, I think we'll watch it over time, but we feel very good about the share position that we've been able to protect over time. And a lot of that comes down to the manufacturing that we do in China, for China, the large teams that we have on the ground that Pete described. So from a share standpoint, we've been fairly effective thus far. And so as we look at the next stimulus, we have all reasons to believe we'll be able to participate in that market going forward, and we're designing plans to execute on that.

Operator:

And this concludes the Q&A session. Please proceed with any closing remarks.

Operator:

And thank you all who participated in today's conference, and you may now disconnect.

Carolynne Borders:

Thanks, operator. Good morning, and welcome to GE Healthcare's First Quarter 2024 Earnings Call. I'm joined by our President and CEO, Peter Arduini; and our Vice President and CFO, Jay Saccaro.

Peter Arduini:

Thanks, Carolynne, and thanks to all those joining us today. We've made good progress against our key priorities for 2024. In the first quarter, we delivered margin expansion while continuing to invest in innovation to help solve the evolving needs of customers and patients. Healthy backlog, orders growth and positive book-to-bill position us for accelerated growth for the rest of the year.

James Saccaro:

Thanks, Pete. Let's start with our financial performance on Slide 4. For the first quarter of 2024, revenues of $4.6 billion were approximately flat organically year-over-year. Recall, this quarter's results followed the strong double-digit growth we delivered in the first quarter of 2023, which benefited from easing supply chain conditions and strong China stimulus sales.

Operator:

[Operator Instructions] First question coming from the line of Suraj Kalia with Oppenheimer.

Peter Arduini:

Yes, clear.

Peter Arduini:

Yes, absolutely. I would just kind of start out to say from that standpoint is just remember, we talked about the compare with our toughest one of the year. So obviously, it gets better throughout the year. We talked about that in our guidance. But really, Q1 was impacted by -- fundamentally, it was 2 items. And Jay touched this on the prepared remarks. One was some fulfillment delays in PCS. I think we've got those well in hand to have them resolved by midyear. I think that's the first part of this. There were specific items, us about technology and more about actually delivery of the components. And then the China piece. And again, we know that anticorruption presents a challenging environment, and we expected that to play out through midyear.

Peter Arduini:

Yes. Great. Thanks. Let me comment and Jay, you can jump in as well on this. So we've got a very solid backlog for our imaging business. I think we feel quite good about the diversity of it, the mix of it and it actually being growing with price in the back. And then new platforming capabilities that are coming in like our IGS system, our new cath lab, which will come in and actually bring better margins. So it's positioned well from that standpoint.

Edward Ridley-Day:

So my first question, just to follow up actually on the China stimulus plans. The new Chinese stimulus that is being discussed. We've seen headline details from the authorities there but not much more. Could you speak to what you see the benefit these might be for your addressed markets through the remainder of the year? And your peer yesterday was talking about some evidence of hospital submitting new orders as a result of the potential new stimulus. I don't know if you can speak to that first, please?

Edward Ridley-Day:

That's very helpful. And just a quick follow-up actually on your Radio Pharmaceutical business. If you can give us any color on when we should expect FDA approval for Flurpiridaz? And also any other updates that we should be thinking about or looking for in the remainder of the year?

Sezgi Oezener:

I hope you can hear me all right.

Sezgi Oezener:

Great. My first one is on your confidence on the full year '24 outlook. Given the lower book-to-bill, are you more on the lower end? Or do you -- are you equally confident on both ends of your guidance? And the second one is on your pricing versus volume comments. I've seen that the positive pricing comment. Has this been reflected formally across the segments as well as across the region? Some color there would be really helpful.

Operator:

And our next question coming from the line of Craig Bijou with Bank of America Securities.

Peter Arduini:

Yes, Craig, thanks for the question. It's a great question. Look, the reality of it is, is that over the last year plus, 1.5 years, we've actually had a positive book-to-bill ratio again. And we give that ratio with everything in, so that you can see not just the capital piece, but you kind of get a feel for the total composite of it.

Peter Arduini:

Yes. Let me start and then, Jay, you can kind of fill in some of the gaps on this. I think again, if you compare it to over a year ago, you're taking a look at an environment where hospitals were primarily in the red, heavily tied to labor cost. We're seeing that moderate and most of our customers, particularly our big important IDNs back in the black. So I think that's a quarterly. Relative to rates, it's obviously out there. It's a topic. We haven't really seen it come up in a major discussion that's limiting how things are playing out.

Larry Biegelsen:

A follow-up on China. So sales were down about 11% in Q1 in China. What are the expectations for the rest of the year? Does the new stimulus represent potential upside to the prior guidance? And I had one follow-up.

Peter Arduini:

Yes. Look, Larry, I would just say on your last point on robotics, it's not a -- from a surgical standpoint, it's not a top priority focus for us. I think from a broader standpoint of robotics and AI. And I mentioned our Allia IGS is actually a robot that actually comes into position and how it's used, it's one of the only that's actually used within the cath lab from that standpoint.

Ryan Zimmerman:

A lot has been asked. I want to ask two separate questions. One, [indiscernible] numbers were off to, I think, a strong start for Biogen, at least, that's what it seemed like. And so just curious how the conversation around Alzheimer's has changed at all? Or the trajectory that you're expecting, I think, for the uptake and kind of patient adoption? And then I have a second one on margins.

Peter Arduini:

No. I would say go ahead and ask your next question, Ryan.

James Saccaro:

Yes. Overall, I think we were very pleased with the first quarter margin performance. And gross margin, in particular, we expanded 120 basis points, really driven by pricing and productivity. Now there's an element that has not yet featured in our numbers, which is related to some of the new products that Pete referenced in his discussion. We'll see benefits from some of the new imaging and some of the new ultrasound products that will also support gross margin expansion.

Operator:

Our next question coming from the line of Graham Doyle with UBS.

James Saccaro:

Well, there's a couple of different views out there. There's a larger stimulus number that's in the trillions of yen that's touching multi-industry and that is money that actually is kind of stipend dollars, if you will, that will go to particular areas within health care and other industries. So what that direct distribution looks like it's a big number. That's more of what we're actually referencing.

Matthew Taylor:

I was hoping you could comment on 2 things. One is that you identified the catalyst in Ultrasound and the resolution for some of the fulfillment issues to resolve catalyst for growth inflection through the year in those segments. Could you help us understand how much inflection that could drive as you work through the launches and resolve the challenges?

James Saccaro:

Yes. And just at the highest level, Matt, I do think we have easing comps throughout the year, and I think that's supportive of the accelerated growth profile at a GE HealthCare level. With respect to PCS, we'll see accelerating growth as we move forward here, with the second half of the year, more similar to growth rates that we saw last year. And as we resolve some of the bottlenecks in the second quarter, we'll see some level of improved growth. But then again, more of those benefits will accrue to the second half of the year.

James Saccaro:

From a second quarter standpoint, we're looking at low single digits on the sales and continued -- we'll see a reasonable expansion versus the prior year. So -- and that will actually, the first quarter is the lowest quarter of the year. So we'll see a little bit more sequential margin expansion more similar to year-over-year improvements versus last year, similar to what we saw in the first quarter. So I don't have the -- we don't talk about consensus. We don't get into that. But I think those are the dimensions that are in play in the second quarter.

Peter Arduini:

Thank you, operator. Thanks, everyone, for joining us today. Hopefully, we addressed your questions. We've got all the right pieces in place here to deliver on our annual guidance that we've laid out, and we look forward to connecting with each of you and some upcoming calls or conferences in the next few months.

Operator:

Ladies and gentlemen, that concludes our conference for today. Thank you for your participation. You may now disconnect.

Carolynne Borders:

Thank you. Good morning and welcome to GE HealthCare’s fourth quarter 2023 earnings call. I am joined by our President and CEO, Peter Arduini; and our Vice President and CFO, Jay Saccaro. Our conference call remarks will include both GAAP and non-GAAP financial results. Reconciliations between GAAP and non-GAAP measures can be found in today’s press release and in the presentation slides available on our website. During this call, we will make forward-looking statements about our performance. These statements are based on how we see things today. As described in our SEC filings, actual results may differ materially due to risks and uncertainties. And with that, I’ll hand the call over to Peter.

Jay Saccaro:

Thanks, Pete. Let’s start with our financial performance on Slide 4. For the fourth quarter of 2023, revenues of $5.2 billion increased 5% year-over-year and grew 5% organically. This was driven by sales in Pharmaceutical Diagnostics, Imaging and Patient Care Solutions. Recall that this 5% organic growth was on top of the 13% we delivered in the fourth quarter of 2022, which benefited from easing supply chain. Organic orders increased 3% year-over-year. Order dollars continue to outpace sales, leading to a total company book-to-bill of 1.05x, up sequentially from 1.03x due to healthy product orders, including equipment. We exited the year with a record backlog of $19.1 billion, up $700 million sequentially. This performance gives us continued confidence in our expectations for 2024. Fourth quarter adjusted EBIT margin was 16.1%. Sequentially, margin improved 70 basis points, supported by seasonally higher volume while we expanded our investments in future innovation. Year-over-year, standalone adjusted EBIT margin was flat as benefits from productivity and price were offset primarily by investments. The lean methodology is at the foundation of our productivity, yielding strong performance in the fourth quarter with improvements in logistics, sourcing and services. Our teams came together to increase on-time delivery to our customers by 11% year-over-year with lean actions improving demand forecast accuracy, supplier planning and lead times. We also saw past-due backlog efficiency with a greater than 50% improvement year-over-year in Imaging alone. For the fourth quarter, we delivered adjusted EPS of $1.18, up 11% on a standalone basis. Free cash flow of $956 million was down slightly year-over-year. This was impacted by approximately $330 million of spin-related items, such as interest and post-retirement benefit payments. Turning to our full year results on Slide 5. For 2023, revenues of $19.6 billion grew 8% organically versus last year. All of our regions and segments saw positive revenue growth. Also important to note, recurring revenue, which drives revenue predictability and higher margin, was greater than 45% of total revenues for the year. Organic orders grew 3% year-over-year and book-to-bill was 1.03x. On a standalone basis, 2023 adjusted EBIT margin was up 60 basis points. Adjusted EPS of $3.93 exceeded our guidance and represented standalone growth of 16%. Free cash flow was more than $1.7 billion and translated into a strong conversion rate of 95%, which was ahead of our guidance for the year. This was driven by the solid progress we made in working capital associated with multiple initiatives focused on inventory and collections processes. On Slide 6, let’s take a closer look at segment revenue performance for the year. For full year ‘23, we delivered strong year-over-year organic growth of 8% for revenues. This was led by PDx with 18% growth, PCS at 8% and Imaging at 7% driven by both volume and price. Ultrasound organic revenue increased 2%. Recall that in 2022, we had multiple quarters of strong Ultrasound results as supply chain constraints eased. I’d also note that all segments delivered positive price in the year, reflecting our continued pricing discipline. Looking ahead, we believe all of our segments are well positioned as we move into 2024 from both an innovation and operational perspective. I’ll walk through more details on this for each segment shortly. Turning to the progress we made in 2023 on margin initiatives on Slide 7. As we move through the year, we drove sequential improvements in adjusted EBIT margin driven by volume, commercial execution and productivity. For the year, we increased adjusted gross margin by 120 basis points versus 2022 and delivered more than 3% in positive sales price for the year, ahead of our expectations. In 2024, we expect 1 to 2 percentage points of positive price as we deliver increasing value to our customers. We are also starting to see margin expansion from improving volumes and higher margin NPIs given our continued R&D investment. For the year, we invested more than $1 billion in R&D, equating to over 6% of sales, all while expanding margins. In 2024, we expect to be in the same range as a percent of sales or slightly higher, supporting our innovative shin pipeline. Our productivity initiatives have also gained traction as logistics costs continue to improve, spot buys decrease. And as we implemented cost-efficient design changes, we have also experienced improved labor productivity driven by a greater proportion of remote fix and the application of digital tools. Relative to G&A, we are optimizing our spend by rightsizing our real estate footprint and IT infrastructure to generate additional efficiencies. We made solid progress in exiting TSAs in 2023 with nearly 280 completed through the end of 4Q. We are on track to exit the vast majority of the remaining TSAs in 2024, which gives us confidence in our G&A optimization plans, an important part of reaching medium-term margin goals. Given our progress across the organization, we have solid visibility to deliver on our high teens to 20% adjusted EBIT margin target over the medium term. Now I’ll turn to our segments. As a reminder, in 2023, we incurred approximately $200 million of recurring standalone costs that impact our segment EBIT margin rates. We did not have these expenses in 2022. These costs were allocated based on revenue and equated to approximately 100 basis points of margin headwind for each segment. Going forward, these costs will be in our run-rate but serve as an opportunity to operate more efficiently in the future. Let’s start with our Imaging segment on Slide 8, where we generated organic revenue growth of 4% year-over-year. This was driven by improved backlog conversion and price. Growth was up against fourth quarter sales that experienced a strong double-digit increase in 2022. Segment EBIT margin was up 10 basis points year-over-year as we made progress on enhancing gross margin. Imaging equipment growth outpaced service growth in the quarter and for the year, which impacted margin mix as we build our installed base with future service growth opportunity. We saw strong progress in our product platforming initiatives across several modalities, including CT and MR. Customer demand for our imaging product remains healthy and our growing backlog is driven by new product introductions. Turning to Ultrasound on Slide 9. Organic revenue was down 2% year-over-year due to the impact of lower volume tied to a challenging comparison for the same period last year. We continue to have a positive outlook for this segment as we enter 2024. Segment EBIT margin declined year-over-year due to investments such as the Caption Health artificial intelligence integration. This year-over-year margin decline was partially mitigated by cost productivity as we drove standardization and commonality across our platforms. As we exited the year, we saw opportunities for Ultrasound equipment based on a combination of our commercial efforts and improving market conditions. With recent customer commitments and interest in new products enhanced by AI technology, we are well positioned as we enter 2024. Moving to Patient Care Solutions on Slide 10. Organic revenue was up 4% driven by progress on price and operational process improvements. Revenue increased as we fulfill more backlog in addition to contribution from NPIs. Similar to Imaging, recall that sales growth in the fourth quarter last year increased double digits due to easing supply chain environment. PCS margin decreased 320 basis points compared to last year driven by investments and onetime favorability that we experienced in the prior year. During the quarter, the team delivered on improved supplier lead times and lower inventory. As we look ahead, we’re excited about recent product launches that should contribute to future growth. Finally, moving to Pharmaceutical Diagnostics on Slide 11. We have another solid quarter, generating 23% year-over-year organic growth associated with an easier year-over-year comparison and pricing. Segment EBIT margin of 24.4% improved 140 basis points year-over-year driven by price, volume and productivity actions. We’re encouraged by the continuing strength of global imaging procedures, which drives the need for imaging agents. We are executing on our innovation strategy through investments in our pipeline across care areas, including the in-licensing of FAPI assets, which we believe will play a key role in targeting this protein to detect certain types of cancer. This is an area of significant potential for the nuclear medicine and oncology communities. Turning to Slide 12, I’ll walk through our cash flow performance. We exited the year with an improved financial profile, including a stronger balance sheet and enhanced financial flexibility to support our future growth. We generated free cash flow of $956 million during the fourth quarter, down $31 million year-over-year with standalone cash outflows. Inventory turns improved in the quarter, the highest they have been since the beginning of 2021. This is the result of our lean supply chain actions. We saw operational improvements, including lead time reductions and greater inventory turns in all segments. Our aged inventory balance decreased, and we have stronger input controls in place, including safety stock reduction and optimized stock planning. In addition, our collections improved as a result of our focused daily management system. For the year, we delivered strong free cash flow of over $1.7 billion. This equates to 95% free cash flow conversion. We also strengthened our balance sheet by paying down $1 billion of debt since the start of the fourth quarter. With a strong balance sheet and a balanced capital allocation strategy, we’ll continue to focus on organic and inorganic investment, deleveraging and paying a dividend. Now let’s turn to our outlook on Slide 13. For 2024, we expect organic revenue growth to be approximately 4%. This compares to strong growth of 8% in ‘23 that was driven by easing supply chains and price gains. I would note that we expect a foreign exchange headwind to revenue of less than 1% in 2024. We expect full year adjusted EBIT margin to be in the range of 15.6% to 15.9%, representing expansion of 50 to 80 basis points, given the progress we’re making with volume, commercial execution and optimization. We assume an adjusted effective tax rate in the range of 23% to 25%. The Pillar 2 global minimum tax is not anticipated to have a significant impact on our tax expense in 2024. On adjusted EPS, we expect to deliver between $4.20 and $4.35 for the full year, representing growth in the range of 7% to 11% versus 2023. Lastly, we expect to deliver free cash flow of approximately $1.8 billion for the full year. While we don’t give quarterly guidance, it’s important to note that given the seasonal nature of our business, the fourth quarter is typically the strongest period for orders, sales dollars and adjusted EBIT margin. We expect year-over-year organic revenue growth and adjusted EBIT margin in the first quarter to be the lowest of the year. Also remember that organic sales growth in the first half of 2023 was very strong at 11%. As a result, organic revenue growth is expected to be stronger in the second half of the year versus the first half in 2024. To wrap up, we’re entering 2024 from a position of strength as we executed well in 2023. Our solid backlog, order intake and adjusted EBIT margin progress gives us confidence in our ability to deliver on our guidance for 2024. Now I’ll hand the call back over to Pete.

Carolynne Borders:

Thank you, Peter. [Operator Instructions] Operator, can you please open the line?

Peter Arduini:

Good morning, Craig.

Jay Saccaro:

Craig, that’s right. Overall, as I said in my prepared remarks, the first half will be lower than the second half. And the first quarter will be lower than the second quarter. And really what this comes down to is the challenging comp that we saw in Q1 of last year. I believe we had 12% revenue growth, which was really a great performance in that quarter. Having said that, we still expect revenue growth in the first quarter and some level of margin expansion, albeit both of those lower than the full year rates.

Peter Arduini:

Hey, Craig, it’s Pete. Well, look, as you know, there is a lot of moving parts within China. We’ve talked a lot about this in the past. I think there is three things. I mean there is clearly a focus by the government to expand capabilities in medical coverage. And a lot of that comes down to our equipment, ultrasound CT as a first part. The second thing is there was a stimulus funding from last year, which was in Q4 and affected in Q1, where we did actually very, very well from a share and a growth standpoint. And then we have anti-corruption. What we’ve seen on the ground is it’s not that consistent in many different ways, meaning that certain provinces, there may be less. In fact, other provinces there may be more. I think that’s going to play out and throughout the coming year. We believe overall that the approach to drive better compliance in a very large country is a good thing and that there isn’t necessarily an end date as much as it’s a new policy approach about how you do business. And for a company like us, it’s kind of how we do business every country around the world. I think that lays it out that way. That being said, last year for us in China in the first half, we had a very strong first half. We grew over 20% organic in the first half of 2023. So we’re actually expecting our growth to be negative year-over-year. That’s contemplated in our guidance in the first half and then in the second half, resuming to growth. And so that’s kind of how we profiled it, and that’s part of our 4% guidance that we’ve laid out. Longer-term, we believe China, again, with 1.4 billion people, 400 million getting quality services today and 1 billion that need it is going to continue to be a growth market out into the future. But we’ve taken, I think, a prudent approach on how we take a look at no growth in the first half and then growth resuming in the second half.

Peter Arduini:

Thank you.

Peter Arduini:

Hi, Vijay.

Jay Saccaro:

So maybe I’ll talk first about the sales growth for the year and then talk a little bit about pricing because I think both of those were embedded in the question. Listen, we were very pleased with the performance to close out 2023. On a full year basis, we delivered 8% at the high end of the range, in fact, a little bit in excess of our expectations for the fourth quarter. And a lot of that came down to execution in terms of translating backlog into sales, which was a testament to all the work in many of our teams. And so as we look at 2024, we think roughly 4% is a solid number. If we think about it, we feel really good about 2023. We think the setup is solid. We think the business has proven it’s pretty durable amidst a lot of macroeconomic volatility in 2023. Our business performed pretty well. And so as a result, we did put on some incremental orders in the fourth quarter in the last couple of months of 2023, which was ahead of our expectations. So as I said. And so it’s early in the year. There is a lot of macro dynamics in play. Pete talked about one, but frankly, it’s a volatile world that we’re living in. And we set the 4% up. It’s a really challenging comp, but it’s set out with a very solid backlog, a solid book-to-bill ratio. And so hopefully, things cooperate and we move through the year nicely. Pete, why don’t you add to that and then we can talk about price?

Jay Saccaro:

Vijay, as it relates to price, like I said, we were pleased with price in ‘23. We delivered around 3% of price. And a lot of that comes down to a cultural focus at our company in terms of selling value and appreciation of our customers of the value that we’re bringing to the table. We are trying to innovate. You saw the R&D growth number in the quarter. We really are trying to accelerate innovation, and that translates to new and unique products. And so from our standpoint, that’s unlocked a lot of our pricing opportunity. What we expect, consistent with the midterm plans that we’ve laid out, is roughly 1% to 2% pricing in 2024, and we will continue that going forward. So I think this is about culture. It’s about new products, and that’s what’s really – and discipline in terms of how you construct your deals. That’s really what’s enabled this.

Vijay Kumar:

That’s extremely helpful, Pete. And one quick follow-up here. The margin expansion guide was really impressive, 50 to 80 basis points. How much of that is coming from gross margins versus operating leverage?

Vijay Kumar:

Fantastic. Thanks, guys.

Operator:

Thank you. [Operator Instructions] And that will come from the line of Matt Taylor with Jefferies. Your line is open.

Matt Taylor:

Hey, good morning. Thank you for taking the question. So I had a follow-up. You talked a little bit about the phasing with China. And I guess I was wondering if you could comment also on other geographies and how that phase through the year, is that growth expected to be more linear in the 4% assumption? And then the other part of that question is you mentioned the customer survey that you did recently. You thought was a little bit more positive. I was wondering if you could unpack that a little bit and talk about how much that went into your forecast.

Jay Saccaro:

Sure.

Jay Saccaro:

Yes, I think that – I think China is – listen, China is not a huge piece of our business, right? It’s about 15% overall. And so the dynamic that Pete described is one that we’re working through, and I think presents a nice opportunity for the second half of the year and beyond. As far as other geographies go, they do generally follow some of the same patterns that we – that I described as a company overall. We’re seeing – and really, it’s not about health of market or buying decision time frames, but rather it’s about the comparators that we’re dealing with. Q1, Q2, you’re talking about a blended 10% ish revenue growth. Q3, Q4, a little bit more normal. So really, it comes down to that in terms of why the growth is going to be the way it is for us in 2024. I wouldn’t point to other geographic factors other than that comp. Now as it relates to the hospital capital surveys, overall, we survey each quarter. And we go to our main customers. We talk to them. We have discussions in an organized manner using the specific tool that we have in place. And what we said in the third quarter is we were seeing some signs of optimism from that group. And then as we did our most recent survey, I would actually point to a couple of different things. First, we did see increased buying and ordering patterns in the fourth quarter of the year. As we closed out in particular, in December, there was a buoyancy to the markets, in particular, the U.S. market that sort of supported some of the things that we saw in the survey. The second thing is our internal surveys continued in terms of commentary on positive expectations for growth in 2024 and which I think that was a great piece of data as well. And then third, as we looked at general external information, there were a few things that came our way. First of all, hospital profitability is robust. We saw good reports from a number of providers, a number of indices, which report on general hospital health. All of those things were good. Second, sentiment surveys that other people conducted were also – we use words like constructive setup into 2024. We are not sitting here saying it’s going to be an unbelievable market. But we think it’s going to be a solid market as we approach 2024. Of course, we are watching Fed rate decisions because that will have another element as people look at installing capital and making ultrasound purchases. But by and large, we feel good about how we are thinking about 2024. Pete, do you want to add anything in terms of customer discussions?

Matt Taylor:

Thanks Pete. Thanks Jay.

Operator:

Thank you. One moment for our next question. And that will come from the line of Larry Biegelsen with Wells Fargo. Your line is open.

Larry Biegelsen:

Good morning. Hey. Good morning Pete. Good morning Jay. Thanks for taking the question. I am going to ask two pipeline questions. First, Pete, the slide say, you filed Flurpiridaz. You talked about it in your prepared remarks. Are you expecting approval in 2024? And there are about 9 million myocardial perfusion imaging tests in the U.S. each year, do you think Flurpiridaz can capture a significant portion of the NPI market over time? And I have one follow-up.

Larry Biegelsen:

That’s very helpful. And Pete, I would love to get an update on your progress with the photon counting CT technology. What are the next steps and milestones in the process to bring this to the market in the U.S. and outside the U.S.? Thank you.

Larry Biegelsen:

Thank you.

Peter Arduini:

Good morning Joanne.

Peter Arduini:

Yes, Joanne, it’s a great question. And I would say our strategies are evolving. And it will be, in many ways, multi-facet. So, just to give an example, in today’s world, where we have a product like AIR Recon DL, which again is this new way of actually how an MRI actually creates an imaging using artificial intelligence and the corresponding upgrades that we can take to our installed base. Today, those fundamentally result in a higher price value proposition, higher gross margins for an acquisition in that space. And I think there is still going to be plenty of those opportunities to say this product by itself and this product plus AI is actually 4 points, 5 points, 10 points higher in gross margin because of what it actually does. And that will still account for a reasonable part of our growth. The second part then is actually bringing certain capabilities via a SaaS model as their pure standalone software capability. So, take in my prepared remarks, I talked about the App Orchestrator. There is a great example of a product that will be cloud-based, can fit on many different pack systems and work with multi-vendor equipment. And customers may decide that at one hospital or their whole network, they want it. And so they could pay for one on-site capability of SaaS, they could pay for multiple. And then riding upon that will be applications from other third-parties. And we will have an opportunity to say, you will get 70%, we will take 30% as an enabler into our broader installed base in others. And so there is a multifaceted way. I would say in 2024, one of our big operating priorities or big priorities we have is really building out this go-to-market and monetization model. But it’s going to evolve everything from more value to a piece of hardware, which we can actually attain more value for all the way through different – almost down to buy the use capabilities. That – again, that’s going to expand over multiple years, but that’s how we are thinking about it and putting in place the right type of SaaS backbone for the whole company.

Operator:

Thank you. One moment for our next question. And that will come from the line of Graham Doyle with UBS. Your line is open.

Graham Doyle:

Good morning guys. Thanks for taking my questions. Can we just touch on China again, just to clarify one of the statements earlier? You said you are expecting no growth, but also negative growth in the first half. And just is it negative or no growth, i.e., flat? And just for the full year, are you expecting China to grow? And then just a quick clarification one after that on the order book. Thank you.

Graham Doyle:

Perfect. That’s super clear. And then just on the orders, I think you mentioned quite a sizable multiyear contract win. Does that get all booked in the Q4 ‘23 as well then?

Graham Doyle:

Perfect. And really quick one on that and photon came to you – you brought up earlier. Is it your expectation that on – I don’t know, like call it, a 5-year view, this becomes kind of the standard of care within CT more broadly as it becomes economic, and we should expect that this – most CTs in Europe and certainly the U.S. become photon counting?

Graham Doyle:

Perfect. Thank you very much guys. I will jump in the queue.

Operator:

Thank you. One moment for our next question. And that will come from the line of Anthony Petrone with Mizuho. Your line is open.

Anthony Petrone:

Good morning Pete. How are you? Good morning Jay. Congrats on a solid year and your post-spin. Maybe I will start, Pete, with just a question on Theranostics. You have it in the slide deck here. Obviously, GE HealthCare, well positioned on the diagnostics side. You mentioned growth organically and inorganically. Just wondering how you are thinking about the other pieces of Theranostics. You have therapeutics and supply chain. You can grow more in diagnostics. So, just maybe your thoughts on how that space is consolidating and where GE can play specifically? And I will have a follow-up for Jay on capital allocation.

Anthony Petrone:

Helpful. And Jay, real quick on capital allocation, uses of cash for this year. Is M&A more of the priority? You did $1 billion debt pay down and then just free cash flow conversion, that would be helpful. Thanks.

Anthony Petrone:

Thank you very much.

Operator:

Thank you. We do have time for one final question, and that will come from the line of Patrick Wood with Morgan Stanley. Your line is open.

Patrick Wood:

Hey. I will keep it to one, just given the timing. I will make it a short one. Thank you for the detail on the pricing side. Just kind of curious like how that’s flowing through on the service book. Obviously, you get the 1-year warranty, but where you are re-signing service agreements, are you seeing a similar kind of price uplift to what you are getting on the hardware side so that, that traditional ratio between the two is remaining relatively constant? Just curious what you are seeing there. Thanks.

Patrick Wood:

Thank you.

Peter Arduini:

Thank you. Thank you. Look, I would just like to close by saying thank you so much to our colleagues here at GE HealthCare. It’s been a great year. There has been a lot of great work and tireless efforts to go into the first year as a public company. But importantly, with all of that, the focus on our patients and customers to deliver safe, high-quality products that make a difference. It’s at the core of our lean mindset is customers first. We delivered on all of our commitments that we set to deliver in 2023 and as Jay and as we spoke about, really sets us up well for 2024. Investments we made in R&D are coming out. We have a full pipeline of new products and new clinical indications. With that, I would just like to say thank you for joining the call today. And we look forward to connecting with you at one of our upcoming conferences. Thank you so much.

Carolynne Borders:

Thanks, operator. Welcome to GE HealthCare's Third Quarter 2023 Earnings Call. I'm joined by our President and CEO, Peter Arduini; and our Vice President and CFO, Jay Saccaro. Our conference call remarks will include both GAAP and non-GAAP financial results. Reconciliations between GAAP and non-GAAP measures can be found in today's press release and in the presentation slides available on our website. During this call, we'll make forward-looking statements about our performance. These statements are based on how we see things today. As described in our SEC filings, actual results may differ materially due to risks and uncertainties. And with that, I'll hand the call over to Peter.

Jay Saccaro:

Thanks, Pete. Starting with our financial performance on Slide 4. For the third quarter of 2023, revenues of $4.8 billion increased 5% year-over-year and grew 6% organically. This was driven by increased volume and price. Book-to-bill was healthy at 1.03x. Order dollars remain strong and continue to outpace revenues. On a stand-alone basis, third quarter adjusted EBIT margin was 15.4%. Sequentially, margin improved 60 basis points benefiting from increased volume and productivity actions. Year-over-year, we generated 120 basis points of margin expansion through productivity initiatives and price, partially offset by planned investments and inflation. I'll elaborate on the actions we're taking to expand our margin shortly. Adjusted EPS was $0.99, down 18% versus prior year due to interest expense, but up 14% on a stand-alone basis driven by increased volume. Free cash flow was up year-over-year due to our strong performance and inventory management. Moving to Slide 5. Revenues grew 6% organically year-over-year. On a reported basis, product revenue increased 6% year-over-year and service revenue grew 5%. We saw strong organic revenue growth across all regions. As it relates to margin performance please turn to Slide 6. Our adjusted gross margin of 41% in the third quarter was strong driven by pricing and enhanced execution by our commercial teams as well as variable cost productivity initiatives that we're driving. For example, in services productivity, we see lower logistics costs for parts and improved operational rigor. We also benefited from improving volumes and higher-margin new product introductions. We're optimizing our G&A spend by rationalizing our real estate footprint and also simplifying our IT services and systems across the businesses to create efficiencies as we scale. We've also exited 130 transition service agreements to date. We expect some of the larger scale actions to have a greater impact on results in 2024 and beyond. We've made good progress and remain on track to deliver on our 2023 adjusted EBIT margin expansion guidance. This is primarily driven by gross margin expansion, as we continue to invest in R&D which was approximately 7% of revenues in the quarter. Now let's discuss our segments. Turning to imaging on Slide 7. We generated organic revenue growth of 5% versus the same period last year. This follows several quarters of strong year-over-year revenue growth reflecting solid backlog and improved fulfillment in price. Revenue growth in the third quarter was driven by MI, CT and MR. This included growth from several new product introductions aimed at driving improved patient outcomes and increased efficiency. Segment EBIT margin improved 150 basis points year-over-year as we made progress in driving productivity price and delivering higher volume all of this more than offset planned investments. Importantly, EBIT margin also improved 150 basis points on a sequential basis. As previously noted, we expected that it would take a few quarters before pricing measures would catch up to inflation headwinds and we're now seeing that happen. Turning to Ultrasound on Slide 8. Organic revenue was down 1% year-over-year as we faced a challenging comparison versus the third quarter of 2022, when we delivered double-digit organic revenue growth. Recall, that the third quarter last year was the first quarter in which we started to realize improvements in our access to components for this business. Looking at the two-year average Ultrasound revenue grew in the mid-single digits. The market is stabilizing following COVID and supply chain challenges. We're continuing to execute and maintain our global leadership position. During the quarter we saw solid demand for newly launched products, in our Women's Health and Cardiovascular businesses. Segment EBIT margin of 22% was down 360 basis points year-over-year, primarily due to planned investments including cash and health and inflation. These were partially offset by productivity improvements. Our margin performance reflects our commitment to both organic and inorganic investment as well as technology leadership through AI integration, as we seek to enhance precision diagnostics. In the US, our venue point-of-care product portfolio now features AI for cardiac exams. This AI Guidance Technology provides real-time step-by-step guidance, to allow even new users to capture diagnostic-quality cardiac images. We closed the Caption Health acquisition in February, within six months we incorporated this technology into our portfolio and we're evaluating other Ultrasound use cases to drive future growth. Moving to Patient Care Solutions on Slide 9. Organic revenue was up 9% driven by volume and price, as we were able to fulfill more backlogs. Revenue improved as we continue to realize the benefits of supply chain-related actions taken over the past year. Performance was also driven by contribution from NPIs. PCS margin increased 120 basis points compared to the third quarter last year driven by productivity volume growth and price, partially offset by planned investments and inflation. Investments support our monitoring portfolio transformation which enables broader metrics and device interoperability. We're excited about the new monitoring products that we recently launched and their impact over the next few quarters. Finally, moving to Pharmaceutical Diagnostics on Slide 10, we had another strong quarter generating 12% year-over-year organic revenue growth. Segment EBIT margin of 28.2% improved 140 basis points sequentially, but declined 230 basis points year-over-year due to raw material inflation and planned investments. This was partially offset by price and productivity actions and volume. We've seen PDx EBIT margin stabilized and we're encouraged by the strong continued growth of global imaging procedures which drive the need for contrast agents. Turning to Slide 11, I'll walk through our cash flow performance. We delivered strong results this quarter with free cash flow of $570 million, up $22 million year-over-year. This was driven by better inventory management while absorbing interest and post-retirement benefit payments. Inventory improved versus the prior year period, as we continue to leverage lean and solidify our inventory daily management system. We're also realizing benefits from easing supply chain constraints and inflationary pressure. We saw solid results in controlling inputs while driving inventory turns for faster revenue conversion through lean events and activities organized across the business. I'm pleased with the fast progress addressing our legacy liabilities and cost structure. In fact, in the past quarter, we were able to achieve agreement to freeze our largest U.S. pension plan conserving cash that can now be allocated to fund investments to grow our business. The solid cash flow profile of our business positions us well for continued investment and deleveraging and we remain on track to deliver free cash flow conversion of 85% or more for the full year. Now, let's turn to the outlook on Slide 12. We continue to expect organic revenue growth in the range of 6% to 8%. As a reminder, our fourth quarter organic revenue growth will be compared against a very strong performance of 13% growth in the fourth quarter of 2022. We continue to expect full year adjusted EBIT margin in the range of 15.0% to 15.5% and the adjusted effective tax rate in the range of 23% to 25% for the full year. And given the strong performance to-date, we're now raising the low end of our full year 2023 adjusted EPS range to $3.75 to $3.85 versus the prior range of $3.70 to $3.85 per share. With that, I'll hand the call back to Pete.

Carolynne Borders:

Thank you, Peter. I’d like to ask participants to limit themselves to one question and one follow-up. Operator, can you please open the line?

Q – Vijay Kumar:

Hi, guys. Congrats on a good -- Good morning, Peter. Congratulations and good execution here. And thanks for taking my question. I did want to touch upon your order commentary here. What was that China in the quarter? And can you quantify, what the order growth was for your capital book of business? And if you can have those numbers ex China, I think there's some debate on how big of a deal is China to order.

Q – Vijay Kumar:

Understood. And I had one follow-up here on margins perhaps, both for you and Jay. I think clearly you mentioned products like CardioVisio, AI solutions. How do you price these solutions? And what's the margin profile for these kinds of products and related to margins, I think you mentioned price caught up with inflation. Is that something we should be expecting to sustain into fiscal 2024? Thank you.

Jay Saccaro:

Sure. Vijay, we previously discussed expecting price impacts on sales this year in the 2% to 3% range. And then over the midterm plan that we've laid out continuing to see 1% to 2% price. And a lot of that is about the execution framework we have in place a culture around disciplined in pricing. And all of those ingredients are intact. So I would say we're very much on track for the 2% to 3% this year and we see signs that support the longer-term execution pathway that we previously laid out.

Operator:

Thank you. Our next question comes from Joanne Wuensch with Citi. Your line is open.

Jay Saccaro:

Hi, Joanne thanks for the question. The -- we're going to -- we'll stop short of giving guidance at this point but I would say that -- I would say a few things that can provide some color. First, really pleased with the execution so far this year. I think our continued focus on orders execution our continued focus on sales execution and margin enhancement really do set the stage for successful delivery of 2024 and beyond. Secondly, I would point to the backlog that we have in place. The backlog from Q2 to Q3 was essentially flat despite 6% revenue growth. And a lot of that comes down to a book-to-bill that's continued to be in excess of one. And so we're really happy with the backlog that's set up for 2024. The final thing I would say is we do regularly survey customers. Pete alluded to some of this. And we're seeing a decent backdrop set up for 2024. I think all of these elements are key ingredients and successfully delivering 2024. And so we're very focused on that as we go through our planning process in the coming weeks and months. Pete anything to add?

Joanne Wuensch:

Thank you.

Operator:

Thank you. Our next question comes from Anthony Petrone with Mizuho. Your line is open.

Anthony Petrone:

Good afternoon, Pet. Good morning, Jay. Congrats on another strong quarter here. I think I'll stay on the 2024 theme and maybe just to level set where the backlog conversion to forward revenues sort of sits on maybe an 18-month go-forward basis. So as we look at the ending backlog is it – should we be thinking that it's feasible that 60% of the backlog can be converted over the next 18 months? And are there any areas where that backlog conversion possibly got extended. We heard some competitors talking about elongated cycles for instance in China. And I'll have a quick follow-up for Jay on margins.

Anthony Petrone:

Very helpful. And quickly Jay just on the implied 4Q earnings would be $0.09 midpoint is up by $0.02 for 4Q. So just anything of note and as we look into the back end of the year here for the margin trajectory? And if there are any headwinds that we're seeing do those potentially slip into the first half of 2024. Again thanks and congratulations.

Anthony Petrone:

Thank you.

Patrick Wood:

Amazing. Thanks for taking the question. I mean taking a step back historically, it was tough to get paid for innovation. You have the slice wars and then you add Freelium and it was always kind of difficult to get price. But today, you guys did a great job in taking price mix on some of the recent innovations. I guess my question is like what do you think has changed? Is it just that the scope of innovation happening today is higher? And how should we interpret that so how you're thinking about pricing for photon counting longer-term? Thanks.

Patrick Wood :

Got it. Just as a very quick follow-up. Are you seeing anything notable on spec. I mean, like maybe with some of the bundled deals a higher proportion of free Tesla or like anything on the spec across the different modalities.

Patrick Wood:

Yeah, because obviously not every MR and CT scanners equivalent. And obviously, with -- especially with some of the bundled deals I'm curious as to how people are bundling purchasing and less direct pricing or the systems themselves that they're buying within those?

Patrick Wood:

Awesome. Thank you for taking the questions.

Operator:

Thank you. Our next question comes from Larry Biegelsen with Wells Fargo. Your line is open.

Larry Biegelsen:

Thanks for taking the – hey, good morning, Pete and Jay. Sorry one more on orders. I continue to get e-mails from people on this. So I'm going to ask you originally expected mid-single-digit order growth in 2023. Is that still the case? And if not just help us understand how you can grow revenues mid-single digits in 2024, if order growth is below that, or how does order growth translate? Why doesn't it translate into revenue growth the following year? And I had one follow-up on margins.

Peter Arduini:

Yes, I think you hit it. I think the key here is that the backlog is very healthy and that we exit the year with really the same level if not larger backlog than how we started. So, we're in that same range again which gives us confidence going forward. I would point out PDx continues to be strong as well which actually isn't a backlog business but that's a continual contract business as well as service growth. I mean we talked about last year gaining some share continuing to do so as we started this year. And the benefit of that is once the warranty period rolls off 113 you move into contracts. And so that's beginning to drive more service growth which has higher margins. It also has multiyear continuum to it. So, about half of our revenues are capital so to speak on a win basis on of the week whereas the rest of the business is actually recurring. So, we feel good Larry about the position of where we're at right now all things considered in the world.

Jay Saccaro:

Sure. I think as I've spent a lot of time on margin since joining the company a few months ago. And what I would say is we feel quite good about the margin plan. It starts with this culture of lean at the company. I've been really impressed with this idea the lean mindset and how we're driving operational execution improvements across the board. And so that's culturally an important backdrop. We've previously outlined three drivers of margin enhancements and I think all of them are intact. First, commercial execution. We've talked a lot about pricing today. It's a real area of focus for us in all of our business reviews and we've seen dividends this year and we expect continued pricing impact. The second area of focus is innovation. New products being introduced with higher margins. Pete talked about that earlier today. And we've seen that across the board and we talked about that extensively during the prepared remarks. And then finally this idea of optimization. And optimization comes in a lot of different ways productivity variable cost productivity initiatives that we have in place managing spot buys managing logistics costs managing G&A costs as well. Those are all clear areas of focus for us. And what I would say is on a year-to-date basis, we feel quite good. The third quarter was up 120 basis points over the prior year. We were able to execute on a few different areas of margin enhancement. And by the way Larry we were able to grow R&D a very significant amount. So, what we're trying to do is drive productivity and efficiency at the company while at the same time protecting dollars for investment in growth in areas like R&D. So far so good and we look forward to continuing to on that path as we move forward.

Operator:

Thank you. Our next question comes from Ryan Zimmerman with BTIG. Your line is open.

Peter Arduini:

Ryan, we were up. So -- and we were up over where we were the previous year. Obviously, could we've done better if we didn't have the anticorruption most likely, but the team did a very nice job on it. I think when you think about many of the different businesses, we have different cycles. I would say that if you're heavily predominantly a sell and install business, meaning you take an order in the quarter and you ship in the quarter, the anticorruption early effect could have had a strong effect on you. If you have more of a backlog and there's not a transaction, it's actually delivering it and shipping it for revenue. I think it could have a less effect on you. And we tend to have a larger backlog-based business. But in general, I just give a lot of credit to our China team that has done a really nice job being able to continue to execute in a market that has been a little bit unpredictable, but it's a market that we believe is -- continues to be a very important growth market into the future and all signs are that it's going to continue to grow in the future. But again, to translate into Q4, I would say we start Q4 with a much healthier view of China than we started Q3, but we still think there's going to be some level of effect equivalent to Q3 that will exist throughout this quarter as well.

Jay Saccaro:

Sure. We're pleased with the progress on TSA exits. So far we've exited approximately 130 of those about 20 were exited early. And a lot of this relates to IT supply chain facilities and then some other areas like HR and finance. So that whole program is on track. And as we think about 2024 and beyond, it's really important for us to get to independence to get the stability and then that allows us to unlock some incremental cost savings opportunities. For example, we have to make sure that we get our IT system stable and then we can talk about all the wonderful opportunities for optimization that we have. And so it's a real area of focus for us. And what I would say is so far so good as it relates to becoming an independent company supporting ourselves, pleased with the progress of the 130. We have a lot that are underway right now. At the end of this year beginning of next year, we'll make significantly more progress in terms of eliminating TSAs. And that starts to set the stage for incremental margin expansion as a stand-alone company.

Operator:

Thank you. Our next question comes from Jason Bednar with Piper Sandler. Your line is open.

Peter Arduini:

Yeah. I'll comment just on some of the markets and then maybe Jay you can comment on any of the comp comparison pieces that are there that I missed. But again, I think on the broader market particularly the US, we continue to see a solid backdrop. You heard me talk about the only kind of item that we did see was towards the end of the quarter some of the larger deals. We're taking a little bit longer because of this point that some customers when they estimated what the total project would cost versus when they were ready to cut POs they had a little bit higher cost. And so they had to go back through their process to get approval, which again sometimes could add 30 could add 60 days to the process. And again, I don't think this is a lasting item. I think as the estimates tighten up with what the real costs are going to be that will play out. And it's not wide scale. I think there's some major cities in the United States where the cost of labor and public work so to speak have gone up higher. That's really the piece there. I do think as we talk to most customers, Western Europe and the United States this pent-up amount of backlog of people waiting to get procedures whether they be cardiovascular, oncology, orthopedic procedures, the need for imaging, the need for other types of critical care support whether it be monitoring or anesthesia, we're still seeing as much demand or pent-up capacity, pent-up demand that's pushing on capacity as we did at the beginning of the year. Specifically for Europe, the team has been executing well on a tough macro environment. Obviously Ukraine, Russia and then some of the conflict in the Middle East. But with regards to our customers, we're seeing some of the similar dynamics as we see in the US with the approval process left taking longer, but there's clearly some regional variances by country, but we continue to see the funnel of opportunities growing. And again I think the trends are positive from a patient backlog procedure standpoint as well. And so again in general as we get out and speak with customers around the world, it's quite positive. The rest of the world, I would say Southeast Asia and Latin America actually continues to be very bright. We're starting to see some countries in Southeast Asia that are deciding to invest pretty significant amounts to grow their capabilities. And one of the first steps they typically invest in is having high diagnostic capabilities for their folks within their region. So that's kind of the view at that point. I don't know Jay if anything to add.

Ryan Zimmerman:

Great. Thanks. And then one follow-up just seeing a disclosure in the 10-Q regarding the amendment to your employee pension plan with benefits frozen effective December of next year. I know you mentioned in your prepared remarks Jay, can you provide some additional comments here just what's changing with this amendment? What are the mechanics? What does it mean from a liability or cash flow perspective for GE Healthcare?

Ryan Zimmerman:

Great. Very helpful. Thank you.

Suraj Kalia:

Good morning, Peter, Jay. Can you hear me all right?

Suraj Kalia:

Pardon the background noise. Gentlemen congrats on the quarter. So I'll post both my questions upfront. One for Jay and one for Peter. So, Jay I understand and appreciate the commentary about a robust demand and procedure backlogs. When I look at the risk mitigation, how should we think about the various buffers that GE has vis-à-vis all the geopolitical risks right now? That's the question for you Jay. And Peter forgive me maybe I misheard it. I thought I heard you say you are looking to have a strategic collaboration to get into therapeutics in peripheral disease maybe I misheard it was a type 2. And it just piqued my curiosity if now you're looking at potentially entering into some therapeutic segments. Gentlemen, congrats again and thanks for taking my questions.

Jay Saccaro:

Yes, sure. As it relates to your first question, it's interesting, because if you think about 2023, we've had a highly volatile macroeconomic backdrop. And yet the sales for our company have been quite resilient and ahead of our original expectations, we originally expected 5% to 7%. We now expect 6% to 8%, again confronted with a very volatile macro backdrop that we've discussed today and we've discussed on previous calls. What it really comes down to is a few things that buffer us. Number one, is the backlog that we've discussed. At the end of the day, when customers put in orders they typically have a very acute need that they would like satisfied with products that we have. And so that backlog -- that $18-plus billion backlog has served us incredibly well. The second thing that we have in place is the fact that we have nearly half of our business or so is recurring revenue. And so things like PDx, things like our Service business, these are all things that we can count on reliably, again even despite a volatile macro backdrop. The final thing that I would say is, as we have this lean operating model in place, it's really about efficiency and managing costs effectively, such that you have a third layer of protection against a volatile macro situation. So, overall I think the business has fared quite well and the setup is good for 2024 as we look forward. I will leave it at that and maybe turn it over to Pete for some final comments.

Operator:

Thank you for your participation. You may now disconnect. Everyone have a great day.

Carolynne Borders:

Thanks, Olivia. Welcome to GE HealthCare’s second quarter 2023 earnings call. I’m joined by our President and CEO, Peter Arduini; and our Vice President and CFO, Jay Saccaro. Our conference call remarks will include both GAAP and non-GAAP financial results. Reconciliations between GAAP and non-GAAP measures can be found in today’s press release and in the presentation slides available on our website. During this call, we’ll make forward-looking statements about our performance. These statements are based on how we see things today. As described in our SEC filings, actual results may differ materially due to risks and uncertainties. With that, I’ll hand the call over to Peter.

James Saccaro:

Thanks, Pete. Let me start by saying that I’m thrilled to be here at GE HealthCare at such an exciting time for the company. In particular, I’ve been really impressed with our team and the collaborative culture across the globe. I’m looking forward to being part of this collaboration and helping to drive our innovation and growth goals, which will ultimately deliver value to our customers and shareholders. Turning to our financial performance. For the second quarter of 2023, revenues of $4.8 billion increased 7% year-over-year and grew 9% organically. This was driven by strong product growth. As Pete mentioned, organic orders were up 6% year-over-year. We’ve decided to include this metric going forward as we believe it provides important information regarding demand and our future growth. Book-to-bill improved to 1.04 times versus 1.01 times in the first quarter of 2023. Our total backlog continues to be healthy at $18.4 billion. On a standalone basis, second quarter adjusted EBIT margin improved 70 basis points sequentially, with progress on price, delivery and productivity. However, it was down 10 basis points year-over-year due to inflation and R&D and commercial investments. Adjusted EBIT margin of 14.8% decreased 120 basis points year-over-year as price, productivity and volume benefits were offset by inflation and planned investments. Note that this decline was primarily driven by standalone costs that we did not have in 2022. It was also impacted by a challenging comparator versus the second quarter of 2022, when we delivered an adjusted EBIT margin of 16%. The result last year included mix benefits with increased sales in higher-margin services versus products, given supply constraints. Adjusted EPS was $0.92, up 12% versus prior year on a standalone basis, driven by our strong top line growth in the quarter, but down 20% year-over-year due to interest expense. Free cash flow was down year-over-year due to incremental interest and pension payments associated with our spin, which I’ll discuss in greater detail shortly. Moving to revenue performance. We grew 9% organically year-over-year. FX was a headwind of 2% to revenue growth. On a reported basis, product revenues increased 11% year-over-year, driven by strong procedural demand. Service revenue grew 1%, which was impacted by foreign exchange. We continue to expect our product growth to translate to service growth in coming quarters as service contracts do lag new product sales. All regions posted strong sales growth, including in China, where revenue growth was in the double digits. And we expect continued momentum in the third quarter as China continues to prioritize improved health care access. Let’s move to margin performance for the quarter. While EBIT margin was down slightly year-over-year on a standalone basis as we invest in future innovation, we remain focused on driving margin expansion through operational initiatives and with progress on our separation. During the second quarter, volume increased in all segments and regions. We had positive sales price for the quarter with growth in all segments. We also benefited from AI-powered new product introductions at higher margins. We’ve made progress on our lean productivity initiatives, with logistics being the main outperformer as a result of improving rates and shifting delivery from air to sea. We also saw a decrease in spot buys. Enhancing our productivity efforts gives us visibility into future cost savings. In addition, we’re making real progress reducing our SKU count to simplify our portfolio and focus on higher-margin products. On the separation side, we’re very much on track with planned exits of TSAs, with approximately 100 exited to date. For instance, we continue to rationalize our IT services and applications to a fit-for-purpose model and we’re progressing towards outsourcing certain activities previously performed in-house. Across the organization, we’re focused on optimizing G&A by reducing our real estate footprint, our IT costs and other functional expenses. That being said, we expect the benefit of many of these changes in 2024 and beyond. As a public company, we’re incurring approximately $200 million of recurring standalone costs annually that are now impacting our segment EBIT margin rates. These costs are generally allocated based on revenue and equate to roughly 100 basis points of margin headwind for each segment. Overall, we’re pleased with the progress we’ve made in the first half of 2023 and we have line of sight to expand margins going forward through our focused actions. Now let’s discuss our segments. Turning first to Imaging. We saw strong revenue growth, up 9% year-over-year, driven by molecular imaging CT and MR. We saw supply chain fulfillment improvements, stable demand in the past few quarters, revenues from new products and also pricing initiatives positively impact results. Overall, imaging demand is healthy, supporting top line growth. Segment EBIT margin declined 190 basis points year-over-year. We made progress versus last year on productivity, volume and price, though it was more than offset by inflation from prior year purchases and planned investments. Importantly, margins improved 290 basis points on a sequential basis. Turning to Ultrasound. We generated organic revenue growth of 3% year-over-year following several quarters of strong revenue growth, reflecting significantly high backlog and fulfillment. Revenue growth in the second quarter was driven by cardiovascular and women’s health. This included new product launches with AI capabilities aimed at driving improved efficiency and patient outcomes. Segment EBIT margin of 22.8% was down 380 basis points year-over-year, primarily due to planned investments. Productivity and price more than offset inflation. Ultrasound margin performance reflects our investment ramp in new product introductions such as advanced probe technology, products with more digital capabilities and ultrasound-guided surgical navigation. We also have inorganic investment with Caption Health, an artificial intelligence health care leader that creates clinical applications to aid in early disease detection using ultrasound. We’ve added resources in our commercial organization for increased visibility and capture rate. We continue to focus on our market leadership position, expanding visibility globally and increasing China localization. We’re excited about the growth opportunities in this business as we innovate and deliver differentiating technologies to the market. Moving to Patient Care Solutions. Organic revenue was up 9% year-over-year, driven by price and volume. We were able to fulfill more backlog with an improved supply chain. Revenue was also driven by new product launches and our backlog remains robust. PCS margins decreased by 50 basis points compared to the second quarter last year, driven by inflation and planned investments, which offset price, productivity and volume growth. We’re investing in a digital future across PCS. And in particular, we’re excited about the monitoring new products launching in the next few quarters, which we expect will contribute to volume growth. Moving to pharmaceutical diagnostics, we see continued recovery of global elective procedures, which supported strong organic revenue growth this quarter. Top line revenue was up 20% year-over-year, driven by price and the recovery of volume following the China COVID-related plant shutdown in the second quarter of last year. Recall that in the third quarter of last year, customers were purchasing more contrast media to secure supply. And in the fourth quarter of last year, COVID restrictions were lifted in China. Segment EBIT margin of nearly 27% improved 200 basis points year-over-year, driven by pricing actions, productivity and volume. In addition, there were one-time costs in the year ago quarter due to plant shutdown. This was partially offset by raw material inflation and planned investments. Next, I’ll walk through our cash flow performance. The second quarter was impacted by spin-related items, including net standalone interest payments of $193 million and $83 million of incremental post-retirement benefit payments, which were not in our 2022 actuals. Excluding these post spin-related items, free cash flow would have been positive for the second quarter and an increase year-over-year. As a result, we expect 2Q will be our lowest cash flow quarter of the year. Working capital improved year-over-year, driven by better inventory management. As we’ve previously noted, we expect substantially higher free cash flow in the second half of the year relative to the first half due to seasonality and higher volume as well as the timing of certain supplier and compensation payments that occur earlier in the year. Let’s now turn to our outlook. As Pete said, we’re raising our full year 2023 guidance for organic revenue growth and adjusted EPS. We now expect organic revenue growth for 2023 in the range of 6% to 8%, an increase from the prior range of 5% to 7%. Our current view is foreign exchange headwinds of less than 1 percentage point for the year. We expect revenue growth in the second half to be in line with our medium-term growth target of mid-single digits. We continue to expect full year adjusted EBIT margin to be in the range of 15% to 15.5%. This represents an expansion of 50 to 100 basis points over a 2022 standalone adjusted EBIT margin. We remain focused on driving margin expansion while continuing to innovate and invest in the business to drive long-term growth. We expect to see an increase in adjusted EBIT margin in the second half of the year relative to the first half. As we experience higher volume, we drive productivity benefits and also with the contribution from new product introductions. In line with seasonality, we expect the fourth quarter adjusted EBIT margin to be the highest of the year while 3Q will be similar to 2Q. We are also raising our full year 2023 adjusted EPS outlook to a range of $3.70 to $3.85, representing 9% to 14% growth versus 2022 standalone adjusted EPS of $3.38. This compares to our previous range of $3.60 to $3.75. We continue to expect free cash flow conversion to be 85% or more for the full year, with stronger free cash flow generation in the second half. Our cash flow outlook assumes that legislation requiring R&D capitalization for tax purposes is repealed or deferred beyond 2023. The free cash flow impact of this legislation would represent up to 10 percentage points of free cash flow conversion for the year. Now I’ll hand the call back to Pete.

Carolynne Borders:

Thank you, Peter. I’d like to ask participants, please limit yourself to one question and one follow-up. Olivia, can you please open the line?

Anthony Petrone:

Great. Thank you and congratulations on a solid 2Q performance here and a positive outlook on the second half. Maybe, Jay, I’ll start with you, one for you on margins and then I’ll hop over to Pete on the comments on Alzheimer’s disease. First, Jay, welcome to GE. Look forward to working with you. Maybe to recap on the TSA roll-off and when – how many TSAs are left? And when do you expect to see leverage gains against those TSAs rolling off at the operating margin level? And I’ll have a follow-up for Pete on Alzheimer’s disease.

Anthony Petrone:

Thank you very much and, again, welcome to the team. And then maybe, Pete, just pivoting to the comments on Alzheimer’s disease. You referenced Leqembi, recently secured an FDA approval here and more recently than that, we’ve seen CMS actually propose local MACs to cover beta PET scans for beta amyloid plaque. That’s a proposal that was put out there about a week ago. So when we take a higher-level look at this demand cycle, is there anything you can sort of book end us on the early views on a TAM opportunity when we consider that there’s MR involved here, there’s also PET/CT several – at several phases along the patient journey here. So maybe just your early thoughts on when this demand cycle begins and how large it can be for GE? Thanks again.

Anthony Petrone:

Thank you very much.

Ryan Zimmerman:

Hey, good morning. Thanks for taking the questions and congrats on a nice quarter here. I wanted to just talk about the implied order growth and I appreciate you guys including that metric this quarter. I think investors were looking for that. But just the implied order growth. In the back half of the year, you faced some tougher comps, if I’m not mistaken. And how to think about that in relative context to the RPO, which is down maybe about 120 basis points in total?

Peter Arduini:

Yes. I mean, Jay, I think you covered it all. I’d just say, Ryan, we were pleased with the performance, obviously, the step-up from Q1. As you know, there’s still a little bit of noise in ours and many folks’ numbers coming out of COVID and which countries switched at what point in time. But this is about real durable demand that we see particularly in our imaging world and across the board. But I think that’s where we’re seeing aligned with our other comments about the productivity that those products bring and also the backlogs that exist because of incoming procedures. This is how you diagnose, this is how you plan, surgically guide. So there’s strong demand in those aspects. And I would just say, we’ve talked about our mid-term guidance out into the future being mid-single digits revenue growth. And I mean, obviously standpoint here is that we’re – we feel quite good about what the orders funnel is coming in to feed that backlog to set us up for in the coming years.

James Saccaro:

Sure. Overall, what I would say is, I feel good about the margin targets that the company has put together. From my standpoint, we’re a new public company, so there’s a lot of opportunity that’s simply created by spinning off this enterprise. But then if you look at the drivers that we’ve laid out, commercial execution, innovation and optimization, there are real opportunities underlying each of these. From a commercial execution standpoint, this idea of disciplined around pricing, it really is embedded in the culture at the company. We’ve targeted 2% to 3% this year, 1% to 2% going forward. This idea of commercial execution and how we capture the real value that we’re providing to health care providers in the products that we sell, I think it’s something that’s going to continue to bear fruit. From an innovation standpoint, I think we collectively are incredibly excited about the innovation opportunities that we have. And frankly, if I were to say, what’s the biggest surprise coming in, it’s the richness and the depth of the innovation portfolio and this care continuum approach, which is just really remarkable from my perspective. So I’m quite excited about innovation as a driver. And then, finally and I alluded to this a little bit more, there’s a lot of low-hanging fruit that we can optimize as we move forward. And that’s just true of any new public company. There are real opportunities for us to rethink how we provide IT services and other areas. So there’s some great opportunity there. So generally speaking, without being specific, I would say I feel quite good about it. The last comment I’d make related to this is another aspect of the culture that’s been impressive to me is this lean mindset. And so this idea of how do we get after optimization in our factories, how do we get after optimization in our end-to-end process, I think that’s another tool in the toolbox that’s going to go a long way to helping us transform the margin of the company.

Peter Arduini:

Thanks.

Patrick Wood:

Perfect. Thank you very much for taking the questions. I’ll just keep it to two quick ones, hopefully. So the first one, order books, nice plus 6%. I’d love if you could give any more detail pulling apart, whether by modality and imaging or – we don’t need the numbers specifically. I’m just curious as to where you’re seeing the biggest strength, either by modality or by region? Just a little bit more color there would be really handy. And then the second one actually is around the whole AI commentary side of things. Things like scan speed acceleration, obviously, there’s implications for the installed base. But is it a function that you can take better pricing and then maybe you get better penetration in the therapeutic areas like cardiac, that means that the installed base remains healthy and large at a better price rather than needing fewer systems to scan the same number of patients, if you see what I mean? So any sense around like whether it’s pricing or grow through better, let’s say, adoption of radiology in areas where it wasn’t previously there, just curious how you see that dynamic? Thanks.

James Saccaro:

No, overall, like I said earlier, pleased with orders in the second quarter. I think for us that getting to that mid-single-digit really does unlock the long-term model that we have. What I would say, I don’t want to unpack too much beneath what we’ve shared for competitive reasons. But what I would say is, generally, we saw strength across geographies, which was great. And the 6% did include the very strong PDx number in it. So if we were to look for a more traditional line equipment type businesses, the orders growth was 4%. You could do that math, but I think it gives an illustration as to the health of the equipment businesses that we have, which is solid.

Peter Arduini:

Thank you.

Suraj Kalia:

Good morning, everyone. Pete, can you hear me all right?

Suraj Kalia:

Perfect. Jay, it’s a pleasure to be working with you again. Welcome to GE HealthCare. So one question for Pete and one for Jay. Jay, I’ll start out with you. Corporate margin is a little over 40%. Obviously, you’ve laid out a road map in terms of rationalizing TSAs, IT, product SKUs. Can you walk us through how should we think about corporate gross margins, let’s say, over the next four, six, eight quarters? What are the key things that we should be looking for? That’s one question for Jay. And Pete, if I could just quickly throw in a question for you, piggybacking on the AI question. I have a more higher-level question, Pete. So obviously, you’ll have a lot of AI/ML in your systems. Over time, how do you envision exogenous AI systems interacting with your system AIs? Do you ultimately believe this is going to be synergistic? Do you anticipate disruption? How do you hold pricing, whether it’s ChatGPT or whatever, but I’m more interested on the exogenous influences as you’ll try to grow and maintain your AI services business? Gentlemen, thank you for taking my questions.

James Saccaro:

Sure. So overall, in the second quarter, gross margin was up, mainly driven by price and productivity, which offset inflation. And I know that wasn’t your question but I share that because fundamental to our algorithm going forward is price and productivity offsetting inflation, along with the benefits of new products. So for us, this is an intense – this idea of securing a 2% to 3% price in this year’s numbers, securing 1% to 2% going forward, that’s a crucial enabler when coupled with a lot of the productivity initiatives that we have ongoing at the company. So I’ll stop short of giving a – of giving the 2024 gross margin number. But what I can say is, there will be a lot of the benefits of TSA and G&A optimization that obviously accrue to the SG&A line. But we do expect gross margin enhancements going forward, largely based on price plus new products, plus some of this work that we’re doing on productivity initiatives. Now as we think about the next couple of quarters, what I would say, generally speaking is, the third quarter will probably be in the range of the second quarter, with the fourth quarter being the highest of the year and a lot of that just has to do with seasonality benefits as is normally the case. But then as we move to next year, we’ll have that discussion in the future.

Operator:

Thank you. And our next question coming from the line of Vijay Kumar with Evercore ISI. Your line is open.

Peter Arduini:

Yes. Look, I would say, from a standpoint of overall market and share, our philosophy has been really balanced on getting the most value for our products in all the geographies and also balancing share. An ideal scenario for us is to hold or be slightly up in share but to be able to get the right value in all the geographies. And again, this ties back to price, gross margin, all the kind of things. That’s what we’ve been focused on. But we have done reasonably well here in the last 9, 12 months. And some of that is directly attributed to our metric we use, which is NPI vitality, which is new products generating sales. I mentioned monitoring, yet a big contributor but when you haven’t had a new platform in over a decade and you bring that out, there’s just a really nice installed base opportunity. And because it’s more of a cutting-edge opportunity, you also have an opportunity to go into others installed base and say, "Hey, maybe you should take a look at us." So I think we’re in a good position from that standpoint. Look, from the Russia point of view, we’ve been focused on the humanitarian support that has been supported by governments around the world. From a standpoint of call out, we didn’t believe there’s anything to call out because we’ve actually contemplated it in our overall guidance. And I would say, in the second half, as I said, it’s in there. If things drastically improve, maybe we could do a little bit better against that. But we’ve been factoring that in all along about what was taking place. The added process controls and things that the U.S. government had put in place, I think the team has managed reasonably well but it’s clearly had more of a extending the time to have a transaction take place. But again, just to reinforce, it’s contemplated in our guidance.

Peter Arduini:

So we basically – we don’t break that fully out. But Russia, as we’ve said in the past, is 2% or slightly below that in that range is what it represents for us.

Peter Arduini:

No, no. The total Russia business is roughly 2%, maybe slightly below that in sales that it represents against the whole company.

James Saccaro:

Yes. I think in the second quarter, it was an important improvement from the first quarter. We saw 70 basis points of margin expansion. And what I’d like to see, Vijay, is we did that in the face of fairly substantial R&D growth, which is great as we look to accelerate some of the new products that we have and some of the excitement there. So 70 basis points improvement from Q1 to Q2. As we move to the second half of the year, what I would say is, the third quarter is probably going to be along the lines of the second quarter from an overall margin standpoint. We always do have a substantial tick up in the fourth quarter and we will start to see some of the benefits from some of the activities on G&A impacting the fourth quarter. So you start to see a little bit of that impact coming through. And that’s what really drives up the fourth quarter to a much higher level than we’ve seen earlier in the year. And I think that’s also important because it does set the stage as we move into 2024 for continued margin expansion. So I think we feel good about line of sight. We’re watching things obviously very cautiously as we always are. But we have good line of sight to the margin expansion that we’ve laid out. And like I say, importantly, we saw a nice second quarter and a nice imaging margin growth from Q1 to Q2, which are key enablers for us long-term.

Operator:

Thank you. And our next question coming from the line of Yuan Zhi with B. Riley. Your line is open.

Peter Arduini:

Yes. No, great question. So as – again, your question is about Vizamyl, which is the radiopharmaceutical that is used and approved. It’s one of three out there but it’s the only one that actually is approved for color interpretation, meaning that you get a highlight film that actually shows a heat map, which we believe aids in the ability to kind of quantify and diagnose. As it is a radiopharmaceutical, you actually have to have a location where there’s a cyclotron and which we manufacture. As well as what’s called FASTlab, which is kind of a synthesis cassette-based structure, which enables fast conversion to make the product. So we offer all of those. We have our own sites and then we have a network of partners. I would just say from what we’ve seen as early indications of what the uptake would be, we believe we have added capacity – adequate capacity to ramp up to meet the needs. Pending on how successful molecule 1, molecule 2 and potentially future molecules will be, we can actually ramp up capacity with our network and our own investment. So I don’t see that being any type of a near-term issue for us. And again, as I had mentioned earlier, we’re just really excited for patients and their families and what this opportunity means. But it’s a critical point here that be able to actually have baseline visualization to see what the plaque quantification of amyloid beta is. And then after – while doing the treatment, be able to have MRI to monitor exactly how that patient is doing. And then we suspect further along being able to actually see what reduction in plaque took place later on in follow-up. So a big part of this, I think you know, is going to be the reimbursement out of CMS. We were encouraged that the one kind of Alzheimer’s scan per lifetime CMS indication. They came back and said that they’re looking to move that towards the MACs to make that decision. We hope that, that moves to a national coverage decision but the fact that it moved to the MACs to actually look at, it is encouraging step in the right direction. So we feel like we’re in pretty good shape based on what the demand curves will look like to meet the needs.

Operator:

Thank you. And our last question in queue coming from the line of Jason Bednar with Piper Sandler. Your line is open.

Jason Bednar:

Hey, good morning. Thanks for taking the questions and congrats on another nice quarter here. Wanted to start on PDx, that segment just put up again another quarter of really strong results. Understanding comps in the second half are a little bit tougher than the first half. You called out some of the factors influencing that situation. But I guess, is it right to think the absolute revenue run rate up here around $550 million to $575 million. Is that the correct baseline for PDx now moving forward? And then are there any notable geographic trends you’d call out when we look at that PDx strength?

James Saccaro:

Sure. On PDx, we did have a shutdown in the second quarter of our manufacturing facility in China related to COVID and that reopened in the third – there was a – it reopened towards the end of the second quarter, into the third quarter. So we did – we have a very challenging comp in the third quarter. That’s what everybody is referring to. And so what I would say is, from a total dollar standpoint, yes, I think that we’re – that’s the right range in terms of overall sales. But the growth rates will look a bit distorted by some of those comparator issues, as we look at last year. But I think your comment is a good one. I mean this is a great business for us. We’re pleased with the growth that we’ve seen and this will be an important driver, also as it relates to the last question as well. So this is a nice source of growth for us. I don’t know, Pete, if you’d add anything?

Jason Bednar:

All right. Very helpful, guys. And then maybe just as a follow-up for Jay. I appreciate all the color on gross margins here today in terms of modeling forward and the various impacts. I want to drill down maybe a bit more on imaging gross margin. You called out inflation from past component purchases as a factor and it’s totally understandable here, just as everybody is dealing with the inflationary effects. And then as you prepare with your balance and your inventory and whatnot. But as you look at your backlog and where you’re at with imaging product inventory, are we past the worst of those component inflation headwinds? And then along those lines, could you offer maybe some comments or your level of comfort around seeing imaging segment margins improve further in the second half from where we finished in 2Q? Thanks guys.

Operator:

Thank you, ladies and gentlemen. I will now turn the call back over to Mr. Arduini for any closing remarks.

Operator:

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.

Peter Arduini:

Thank you, Carolynne, and good morning, everyone. I'm very pleased by the solid performance we delivered in our first quarter as an independent company.

Helmut Zodl:

Thanks, Pete. Turning to our financial performance. For the first quarter of 2023, revenues of $4.7 billion increased 8% year-over-year and grew double digits at 12% organically. This was primarily driven by strong product growth across all segments.

Operator:

[Operator Instructions] And our first question coming from the line of Ryan Zimmerman with BTIG.

Helmut Zodl:

Yes. Ryan, I think, let me probably remind you the calculation of the book-to-bill is orders over revenue. So our first quarter book-to-bill at 1.01 is really reflecting our 12% revenue growth. So with improved fulfillment and especially our PDx sales. In PDx, we have a 1:1 ratio of book-to-bill.

Peter Arduini:

And Ryan, I would just add, I think we had a strong quarter in Q1 of last year. The numbers came in this year right on track. We'll expect that to continue to grow. And again, just to emphasize Helmut's point, when you have a high performance on something like a flowable product like PDx and stuff, it fundamentally is kind of a net neutral one-to-one transfer through. But the team delivered what we needed to deliver, and we're on track here to what we believe we need for orders to grow throughout the year.

Peter Arduini:

Yes, Ryan, it's a really interesting question. And obviously, we have a certain lens into it. But I think if you step back when I'm out on the road talking to customers, and I've been with quite a few recently, you're just seeing that almost any type of therapy, whether it be in the musculoskeletal, whether it be in the cardiac, oncology, everything is heavily gated by some level of diagnostic to choose a better decision whether it be an implant, some type of interventional device to precisely fit that patient.

Helmut Zodl:

Yes, maybe I'll add a little bit. I think we're spending a lot of time with our customers, especially devices and digital solutions, we were just at HIMSS in the last week, a lot of discussions, how our devices can really help drive productivity to reduce that, I would say, challenge on the backlog and the shortages on personnel that some of our customers are having. That's really a key focus of our customer, which drives demand.

Anthony Petrone:

Congrats on a strong first quarter here. Maybe, Pete, a couple for you here. I'll just pick off where Ryan left off here. Maybe rounding out just the discussions with hospital customers, what are you hearing on the capital spending front? We've heard some, in certain cases, still very bullish outlook, certainly for imaging, but on certain high-ticket items, there seems to be a little bit of friction. So maybe just your thoughts on the CapEx environment. And then I'll have a couple of follow-ups.

Jason Bednar:

Congrats on a very nice start to the year. Maybe I'll start with organic growth. Just as we peel apart the components of the 1Q organic growth, are you able to quantify how much of that 12% may have come from pure price? It looks like you're calling out pricing tailwinds in each of the 4 segments. I'm just curious if we should be thinking in the area of 1% to 2%, 2% to 3%, et cetera, when we think at the corporate level? And then is that a sustainable figure as we look to future quarters? Or would you point us to maybe upward or downward bias in the pricing?

Jason Bednar:

All right. Very helpful. And I wanted to ask a follow-up just actually on Portrait Mobile. I think it was introduced almost a year ago. It's still pending 510(k), but you were showing it at HIMSS here recently. Can you discuss where you're at with the FDA in securing the approval? And then what early feedback can you share on Portrait Mobile for the markets in which it's available?

Edward Ridley-Day:

Congratulations on the strong quarter. Firstly, on Imaging, great start to the year. If you could perhaps help us with the phasing on the margin. I appreciate a lot of investment, some of which you've spoken to today, given the opportunity. But if there's more color you can give us on the phasing of the Imaging margins for the year and where we should end up, that would be helpful?

Peter Arduini:

So Helmut, you want to start maybe with a comment on Imaging and then we'll jump on...

Larry Biegelsen:

I don't think there's been a question on farm diagnostics yet. That was extremely strong. Pete, help us understand how much that benefited from the comps year-over-year from the contract shortage. But even when I look at that business on a sequential basis, it was up a lot. So how -- what happened there? What went well? And how to think about it from here? And I had a follow-up.

Helmut Zodl:

Yes. Maybe I'll just add, because you may actually remember, Larry, in second quarter, where we had supply challenges in our factory in Shanghai. So there will be a higher growth in the second quarter. And then in the fourth quarter, we also had last year a small impact from inventory in the U.S. So there is also going to be higher growth during that quarter. So -- but overall, as Peter said, we're very happy, I think, with that business, I suppose the volume growth and also price is a strong contributor for the growth and margins, as you've seen, are quite strong and will continue to improve here.

Peter Arduini:

Yes, Larry. Look, I mean we always are, as I've always mentioned, looking at M&A, I think it's a really important part of our DNA as a company, both to be really attentive to what's happening in our ecosystem and understanding where many of those deals will go. It's something that I started here, we do a weekly rhythm of looking at that whole atmosphere.

Veronika Dubajova:

If I can just revert back to one of the themes that's come up and Pete, I just was hoping you could maybe talk a little bit in terms of the order dynamics that you're seeing, each of the 4 businesses are seeing the strongest order growth and maybe the type of products that you're seeing those most tractions for as you look at across that hospital CapEx landscape? Is it a premium? Is it low end? And kind of how you're thinking about that?

Peter Arduini:

Veronika, it was a little hard to hear, but I think the first question was around orders growth, different modalities, what's growing. And the second part was about China and some of the dynamics.

Peter Arduini:

Okay. So look, I think from an order standpoint and business growth, we're actually seeing nice growth and planning on it throughout the year. As you know, there are certain quarters in certain cyclical plays that, that promote others more or less. But I think from a standpoint of a lot of our bigger traditional diagnostic Imaging equipment, whether it would be MR, our molecular imaging portfolio between PET/CT, PET/MR, our new med cameras, we're seeing actually strong demand as well as CT and those tend to be the 3 big items.

Helmut Zodl:

And Veronika, I can cover the China question here. So we really saw strong growth in China was up double digit in the first quarter. And we expect that demand to continue. We see good momentum going to the second quarter. And really, I think China is really back, so the manufacturing sites are all operating, COVID, it has basically disappeared. So we're quite happy with the overall performance of our teams delivering for customers and patients.

Peter Arduini:

Yes. And we've -- to your competitive question, I think dynamics, as we've been competing in China for many, many years, I don't think anything has fundamentally changed from that standpoint. We've really, as a multinational, led the pace of making sure that we have local content to be able to compete in tenders, making sure that we have local content to be able to have the cost positions to compete, and we believe we're in good shape to be able to do that. But as Helmut said, the bigger point here is after 2 years of COVID lockdowns, just like in the rest of the world, we would expect that there's some pent-up demand for procedures maybe latent disease, things of that nature that are going to drive the need for our products.

Vijay Kumar:

Congratulations on the Q1 print. Maybe my first one is here on the guidance here. Looks like Q1 off to a very strong start, perhaps coming in slightly above expectations, but the 5% to 7% was reiterated on the top line. Can you just talk about why the guidance perhaps the low end wasn't tweaked up? And clearly, that 12% in Q1, we've seen the backlog being worked through, component supplies getting better. How much of that back orders has been flushed out of the system? And how much is remaining? Perhaps some comment on how we should think about this guidance in back orders would be helpful.

Helmut Zodl:

And Vijay, to your question around the backlog, obviously, delivering for patients and customers is really our top priority. So reducing the backlog is key. And in the quarter, we have an RPO of around $14.5 billion. It was very slightly up on a quarter-to-quarter basis. So despite the strong shipments and revenue delivery of 12%, the backlog actually was up sequentially.

Peter Arduini:

Yes, at this point, I mean we're well positioned to obviously deliver upon our commitments. And again, if the year shapes up better, meaning that the macro environment improves and we get some better insights into how that plays out, particularly in markets like the United States, I think we're in very good shape to do better. But at this point in time, it's kind of prudent first quarter as a public company to kind of stay where we're at, and we're quite happy with the results.

Helmut Zodl:

Yes, I can cover that your question here. So price and productivity was more than offsetting what we saw as inflation and our investment. So we were quite happy what we saw on price. Pete was commenting a little bit earlier, we typically see 2%, 3% in price, and we expect that it will lead to be delivered in 2023. So that was quite positive.

Peter Arduini:

And I think, Vijay, we've talked about it and consistently is we expect our margin rate to be higher in the second half, given seasonality, but also productivity initiatives. And -- so we've got good progress on variable cost productivity, everything from logistics to other cost reductions. The thing we don't know is how that will play out with other cost of goods labor increases and items that are out there playing out. We think we've got very good plans to be able to deliver what we committed.

Operator:

And our last question coming from the line of Patrick Wood with Morgan Stanley.

Peter Arduini:

Yes. We haven't communicated yet specifically what we're thinking about. We'll talk about that in upcoming meetings.

Peter Arduini:

Yes, it's a great question. And I would say it's a pretty good mix between the two. Certain geographies have different characteristics. As you could imagine, in an inland growing China market, it's heavy on new sockets. In Europe, believe it or not, we're trying to see a little bit more new than old because there's more outpatients opening up centers.

Operator:

And that concludes the question-and-answer session. Speakers, please proceed with any closing remarks.

Operator:

Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

Carolynne Borders:

Thanks, Michelle. Welcome to GE HealthCare’s fourth quarter and full year 2022 earnings call. I’m joined by our President and CEO, Peter Arduini; and Vice President and CFO, Helmut Zodl. Our conference call remarks will include both GAAP and non GAAP financial results. Reconciliations between GAAP and non-GAAP measures can be found in today’s press release and in the presentation slides available on our website. During this call, we’ll make forward-looking statements about our performance. These statements are based on how we see things today. As described in our SEC filings, actual results may differ materially due to risks and uncertainties. And with that, I’ll hand the call over to Peter.

Helmut Zodl:

Thanks, Pete. Let’s take a closer look at our financial performance in the fourth quarter. Revenues of $4.9 billion increased 8% year-over-year and were up 13% on an organic basis. Reported product revenues increased 13% versus the prior year, led by Imaging, Patient Care Solutions and Ultrasound. Reported Services revenues declined 2%, mainly due to the unfavorable impact of foreign exchange, partly offset by growth in our cloud services business. We are pleased with product growth in the quarter that will lead to additional services revenue. Now, I’d like to talk about the actions we are taking to increase margins through improving delivery, price and cost. As always, delivering for our customers is our number one priority. We’ve improved our access to key components, measured by the number of red flag parts that indicate constraints and made good progress in the requalifying, redesigning and tool sourcing parts. In fact, we’ve requalified 7,700 parts since COVID began and we are now seeing the lowest level of red flag parts since the first quarter of 2021. We’ve also applied lean principles to improve our supply chain. A great example of how we apply lean across the organization was our CT’s output initiative this past quarter. We align factory output with customer installations to drive better end-to-end planning. This resulted in an improved customer experience and early deliveries in the quarter. We have achieved a positive sales price index for the third consecutive quarters now. And this price accretion occurred across each of our four segments in the fourth quarter. We are pleased with our progress in pricing and have good visibility on price in our backlog. We are driving variable cost productivity for logistics and material cost reductions. We are also reducing our real estate footprint and optimizing our commercial organization. Turning to Imaging. We saw strong organic revenue growth, up 18% year-over-year, led by molecular imaging, CT, MR and surgery. Our customers remain focused on expansion of capacity and access to care. Looking ahead, we expect imaging demand will remain healthy supporting top line growth. Following strong revenue growth in the fourth quarter, we expect growth will normalize as we move into the second half of the year. Segment EBIT margin declined 120 basis points year-over-year. We realized improving volume and price, but this was offset by headwinds from inflation, mix and planned investments. Our double-digit investment in imaging R&D this quarter reflects our commitment to innovation and commercial growth. During the quarter, NPI’s driving growth included our Revolution Apex CT with a scalable detector as well as Ascend CT with improved imaging and workflow. Globally, we’ve already seen success using deep learning from improved image quality in MR with AIR Recon DL. We are now very proud to be the first to extend those capabilities to Omni Legend PET/CT with precision deep learning available in select regions. Sequentially, EBIT margin increased 120 basis points, driven by improved volume and price. We expect margin expansion in 2023 to be driven by NPIs, commercial execution, supply chain productivity, platforming, and digital. Overall, we are investing to drive technology leadership and have the opportunity to increase market share with strategic NPIs digital and AI leadership and a focus on care pathways. In addition, we’re making progress with platforming initiatives that provide a more consistent user experience and drive parts sensitization and cost reduction. Moving to Ultrasound. Customer demand continues to be strong in both hospital and other care settings. Organic revenues were up 7% year-over-year, driven by price, improvements in sourcing and fulfillment. Our customer-led innovation continues to drive healthy revenue growth with strong performance in radiology and primary care, women’s health and cardiovascular, and our handheld business delivered strong growth in the quarter. We see continuous traction with our differentiated products, including our recently launched Voluson Expert 22 premium ultrasound system for women’s health and the Vivid E95 ultrasound addition advanced cardiovascular ultrasound. Both innovations are powered by advanced artificial intelligence tools to help improve workflow, efficiency and productivity. Segment EBIT margin contracted 120 basis points year-over-year. In the fourth quarter, price improved. However, we experienced headwinds from inflation and planned investments. In line with our lean philosophy, we are shifting from stocking inventory to make to order. This initiative is streamlining cost and reducing lead times. We are enabling this through redesign of parts, dual sourcing and platforming. This is an initiative that we will be leveraging across the company, providing additional margin opportunity. Looking ahead, we are driving sustainable growth in ultrasound through continuous NPI innovation, commercial excellence and localization. The integration of BK Medical is also well on track. Let’s move to Patient Care Solutions. PCS had a solid fourth quarter, following a year of supply chain challenges, which improved as we exited 2022. Organic revenue was up 10% year-over-year, driven by volume and price improvement. Higher volumes were driven by supply delivery and the launch of NPIs. Looking ahead, we expect fulfillment to improve as we ship our backlog. PCS margins increased 410 basis points compared to fourth quarter 2021, with improving price and volume as well as lower cost, partially offset by inflation. The cost favorability drove roughly half of the upside and was associated with one time items. Sequentially, PCS margins increased significantly due to improving volume and price. We remain focused on innovation and commercial growth investments with R&D investment up double digits in the fourth quarter. Key highlights from the quarter include continued momentum with patient monitoring, including Portrait Mobile and CARESCAPE Canvas in Europe. Moving to Pharmaceutical Diagnostics. Organic revenues were up 2% year-over-year impacted by fewer procedures in China due to COVID as well as normalization of U.S. customer inventory. Margins were impacted due to inflationary pressures on raw materials and lower volumes. The team is executing on the pricing strategy that is built around the value we deliver for our customers and patients. We continue to monitor the COVID situation closely in China and expect elective procedures to pick up when COVID infections decline. In the fourth quarter, we introduced a new GE HealthCare CT motion injector that will provide better product integration and an improved patient experience. Next, I’ll walk through our cash performance for fourth quarter and full year 2022. During the quarter, we generated $987 million of free cash flow, up year-over-year with improvement in supply chain and collections. With our focus on prioritizing patients and customers, our free cash flow declined for the full year 2022. But as we enter 2023, we are well positioned to deliver on our backlog. This is a robust and consistent cash flow generating business with a disciplined capital allocation strategy. We are committed to a strong investment-grade rating and will employ a disciplined capital allocation framework. This will include paying down debt and evaluating accretive M&A that advances our precision care strategy. Our balance sheet is strong. As expected post spin, our day one cash balance was $1.8 billion. Day one leverage, excluding pension, was approximately 2.5 times, in line with our expectation. Let me now move to our 2023 financial outlook. For the full year 2023, we are reaffirming our guidance that was introduced on January 10, calling for year-over-year organic revenue growth in the range of 5% to 7%. We expect stronger organic revenue growth in the first half of the year with more normalized growth in the second half. We continue to expect fully adjusted EBIT margin to be in the range of 15% to 15.5%, reflecting an expansion of 50 basis points to 100 basis points over the 2022 standalone adjusted EBIT margin of 14.5%. This includes the impact of approximately $200 million of standalone costs. Margin expansion in 2023 will be back-half weighted as transformation initiatives take hold. We expect 2023 adjusted EPS in the range of $3.60 to $3.75, reflecting a growth of 7% to 11%. This compares to 2022 standalone adjusted EPS of $3.38, and includes the impact of the standalone costs. We are assuming a tax and adjusted tax rate of 23% to 25%. Free cash flow conversion is expected to be 85% or more for the full year. Our cash flow outlook assumes that the legislation requiring R&D capitalization for tax purposes is repealed or deferred beyond 2023. The free cash flow impact of this legislation is approximately 10 points of free cash flow conversion for the year. Second half free cash flow will be substantially higher than the first half of the year, in line with typical cash seasonality due to increased inventory as well as interest and compensation and benefits payments in the first half. Now let me hand back to Pete.

Carolynne Borders:

Thank you, Peter. I’d like to ask participants to please limit yourself to one question and one follow-up, so that we can take as many questions as possible during the one hour that we have allotted for the call. Michelle, can you please open the line?

Drew Ranieri:

Hi, everyone. Thanks for taking the question.

Drew Ranieri:

Good morning. Good morning and congratulations to you and the GE HealthCare team on the spin-off and Pete welcome back to more earnings calls. Just maybe first to start on the macro environment. I think there’s still some concerns that there will be a capital spending slowdown at some stage. Your results, I mean, you’re pointing to ongoing demand across your portfolio, but maybe just help us kind of square what you’re seeing from the demand side globally? Maybe what product categories are getting probably the most interest? And do you think there has been any risk of pull forward of capital sales just over the past year or anything? And I have a follow-up. Thanks.

Drew Ranieri:

Got it. Thank you. Maybe one other question just on the margin expansion, maybe more for Helmut. But can you maybe help us just bridge the 50 basis point to 100 basis point of improvement for the year. Maybe just talk about, is this all really gross margin-driven or on the leverage side? But just trying to get a better sense there and maybe how your 5% to 7% organic growth guidance really will drive that margin expansion and if there’s any particular segments that are really going to be the primary beneficiaries? Thank you.

Operator:

Our next question comes from Ed Ridley-Day with Redburn. Your line is open.

Ed Ridley-Day:

Good morning. Thank you very much, and I’d add my congratulations on your successful spin and your results. And first question for me would be actually around your molecular imaging business, this continues to drive growth in the wider imaging business. Could you help us better quantify the benefits you see there, particularly what percent of your imaging business does this represent roughly? And also in pharmaceutical diagnostics, you have provided the market breakdown between contrast and molecular. But what percent of pharmaceutical diagnostics is radio pharmaceuticals? It’s a great opportunity. So it’d be great to have any color you can give on that? And just a quick follow-up on pricing. Could you give us an idea of the price – rough price increase you hope to push through for this year? Thank you.

Helmut Zodl:

Yes. Thanks, Pete. So Ed, on price, we’re quite happy with the progress we’ve been making on price throughout the year. So we started really tracking price on orders last year. So we have both a management system that looks at the orders, but also looks at how much price we have in sales. And in sales, since the second quarter, we have price in our sales or in revenue. It started at the low single-digit. It improved as it went through the third quarter. And we are now for some of our modalities in the mid single-digit level what we are seeing on price. So we were quite happy about how we performed, and we also have good visibility on price for this in our backlog. So we already know what is going to happen and ship here over the next quarters and how much price is in the backlog.

Operator:

Thank you. Our next question comes from Vijay Kumar with Evercore. Your line is open.

Peter Arduini:

Thank you.

Peter Arduini:

Yes, Vijay. Look, good question. We have some actually quite good visibility at this point with carrying a little bit larger backlog than we normally do. One of the advantages of that is we actually have greater visibility out into the distance about what the deals look like, what the margin is on the deal, the timing thereof. And one of the things our operating teams in each of the segments have done a very nice job is actually speaking with customers and getting all the installed base products planned out as far as we can go, which is in many cases, a couple of quarters out, which is longer than we have historically done, but we did that purposely just based on some of the questions within the macro environment. And so that gave us more confidence obviously here about what customers want, when they want it and we’ve got some pretty good visibility into that. Other businesses such as ultrasound that have more flow capabilities based on prospecting funnels and stuff, we have quite good visibility as well. So if we look at that backlog, we know what the cost – the input costs are going into that. We have – we know what the price is in the backlog. So again, for those deals, it’s quite good. We clearly have orders coming into the system that will feed into that backlog. We know what our current pricing is. And we’ve also either taken some price increases or had some that would cut in. And keep in mind, there’s a couple of different ways to think about price looking at your configurations and really optimizing them is something that we started last year. And I think that’s of high value. Our new NPIs, we really focus on getting the right value for the customer and pricing it right the first time, which typically then aligns to making sure that we have the right gross margins associated with it. And then classic price increases on many of our products. So again, the combination of those gives us a pretty good view into how we see the year at this point, but probably more so a better lens on the first half.

Helmut Zodl:

Yes. So Vijay, we have been obviously tightening up the range on the EPS guide. So the $3.60 to $3.75, we believe is right in the middle. When you look at the upper and lower end of the revenue and the margin expansion guide, so we wanted to tighten that range up. And to the assumption question, so there’s about 2.5 basis points of negative impact from FX assumed in those numbers, very little below the line. So that’s really how you should look at it.

Vijay Kumar:

That’s helpful perspective. Thank you, guys.

Operator:

Thank you. Our next question comes from Larry Biegelsen with Wells Fargo. Your line is open.

Peter Arduini:

Good morning, Larry.

Lawrence Biegelsen:

Hi, Pete. Hi, Helmet. Thanks for taking the question. One on the top line, one on the margins. Pete, you talked about clearly Q4 results were very strong, 18% in imaging. You talked about the backlog here. Is there any way to quantify this? Is there – I mean, is this somewhat of a catch-up, if you will, and what are your expectations for that for 2023? Clearly, you’re growing well in excess of historical market growth. And I had one follow-up.

Lawrence Biegelsen:

Thank you. And Helmut, on – well, sales and margin cadence, appreciate the color. Maybe if you could help calibrate us a little bit more. How much lower do you expect second half organic growth? Is it going to be below the 5% to 7%? And then margins kind of how much lower in the first half, do you still expect to be down year year-over-year? Thanks for taking the question.

Operator:

Our next question comes from Veronika Dubajova with Citi. Your line is open.

Peter Arduini:

Thanks, Veronika.

Peter Arduini:

Yes, Veronika, I would say, look, from an environment in the marketplace, I would say a little bit just because of some of the dynamics here that there’s quite a bit of demand that’s actually out in the marketplace when you look at these backlogs of imaging procedures. And so all of the different players, I think, at some level are having some positive benefits of this market. I mean, again, the prioritization of the CapEx just doesn’t apply to GE HealthCare, right? It applies to everybody. And so we’re expecting that there’s a reasonable healthy amount of demand out there. And everyone at some level has had different experiences and challenges with their supply chain. So there is some similarities. At the same time, we think because of the investments that we’ve made over the past few years, we have some products that are winning share more so about the capabilities they bring to patients and customers than a situation where maybe one or two of our competitors are in. And so I mentioned molecular imaging, where we’ve got leadership positions. What we’ve done in MR with our image quality as well as productivity, our CT surgery, what’s come out with ultrasound, that’s how we’re winning the day and in many cases, taking share in different marketplaces. I would say we are really being balanced about what we go after to make sure that we get the right margins and capability around. So that’s an important part of our overall strategy. I would say to your China question, look, there’s always been lots of local competitors. In many of our modalities for 10 to 20 years, there’s been 5x or 4x the amount of competition within China for China versus the rest of the world. And I think, as you know, we’ve been competing there for many, many years, manufacturing for over 30. So we have a pretty good handle on it. And with some of the stimulus funds that were – the government put out really at the beginning of Q4, we’ve been seeing some robust demand for imaging equipment, in particular, both ultrasound and the whole spectrum of the imaging portfolio. And again, I think we’re going to see that continue into beginning of next year. And so we’ve been able to be quite successful we believe in competing against, both multinational as well as local competitors. We see ourselves, in many cases, as local – as a local player in many of our modalities again because of how we actually design and make products in China for China. You have another question?

Helmut Zodl:

Yes. So, Veronika, we have a very large components of our portfolio is localized. And I would say it’s not close to 100%, but not far off 100%, that’s how I will answer the question for most of our modalities. And we continue to expand that on an ongoing basis because it’s not only the localization of the manufacturing, but there’s also the innovation in China. So having specific product that’s really made for China, made in China, that’s really how we look at it. So innovating for the China market then accordingly. So this is quite high percentages. The teams worked very hard. And we have a long – as Pete said earlier, we have a long history in China. It’s an important market for us. Our brand is very well recognized, which we are proud of and we are continuing to innovate for customers in China.

Operator:

Our next question comes from Anthony Petrone with Mizuho. Your line is open.

Helmut Zodl:

Good morning, Anthony.

Peter Arduini:

Yes, Anthony, I’ll make some comments and Helmut feel free to jump in. I think again, in this business having new products that bring solutions that solve some of the challenges for customers, in many case, productivity, products that help deal with some of the labor challenges or expertise and then solving big issues for patients. We’ve been quite fortunate with a lot of our launches recently again and some of the classic modalities, MR, CT, we mentioned about the PET system that has integrated AI on it. All of those have played a key role. I think in the fourth quarter, we were in the upper 20s, high 20s or so relative to vitality rate on new products that have been recently launched. My metric typically is if you’re above 20% in that range, that’s a very good vitality metric, then you were closer to 30% within new products that are out there. I think there’s quite a bit of demand as we talked about for certain products in outpatient centers and there’s still quite a bit of demand in updating, in some levels, an older fleet within the acute hospitals around the world. Helmut, do you want to add anything?

Peter Arduini:

Yes. And the last part, Anthony, is I think from a service standpoint, as we sell these more highly sophisticated products into the installed base, 12 months out, the probability of capturing that for a service contract because of the sophistication of the product and really the limited amount of other folks that can provide the type of services needed for one of these advanced products will then become more reoccurring revenue growth down the road. And so that type of capture rate involved with leading products, it’s an important part of our equation on growth.

Peter Arduini:

Yes. Thanks.

Operator:

Our next question comes from Ryan Zimmerman with BTIG. Your line is open.

Helmut Zodl:

Yes. So Ryan, I think to the RPO, we feel good about the Q4 in a book-to-bill ratio of 1.07. And this really I think demonstrated that the markets are strong. The book-to-bill, the way how we define it is really, I think, a quite simple calculation across the whole portfolio. And you mustn’t forget, we had quite a large services business in this as well where book-to-bill is 1. Also the PDx business for us as a book-to-bill of 1. So when we look across the portfolio, you will see book-to-bill is actually higher in our imaging products, where we have obviously from taking the order until shipment takes a longer time and we’re quite comfortable with the backlog. Historically, that book-to-bill, I would say, has been running in similar ranges. It would have been up above the 110 level at certain quarters if we look at historically, but it’s running at a very solid basis at this stage. As it relates to our RPO, the RPO, as you mentioned, is a big amount that we have disclosed and we’re quite happy with that backlog. The RPO, the way it’s defined, I want to be also maybe clear on, it’s defined as backlog that is non-cancelable. So we also have backlog that is non – that is cancelable, where we see very, very little, very few cancelations from our customers because they’re committed to the product, that’s really how we look at that RPO. And we’re exiting the year at a very strong position both on the RPO side as well as the total backlog. And just to be clear, the RPO, it is $14 billion. I don’t know if they did better $10 billion number you quoted came from, but it is $14 billion at the end of 2022.

Helmut Zodl:

Thank you.

Operator:

Thank you. Our next question comes from Jason Bednar with Piper Sandler. Your line is open.

Peter Arduini:

Yes, Jason, I think – look, I think China, it’s obviously tricky to fully estimate how things will play out. I mean, we’re cautiously optimistic. But again, if you pull the lens back, you look at the market, you take a look at how, in many cases, procedures have been suppressed over the last 18 months at least potentially even 24 months. Things are clearly opening up. And yes, there’s challenges within the hospitals now with COVID patients and such. But if we think of our own facilities that we’ve been able to keep running through Q4 when COVID levels were up 60%, 70% in the environment, we were able to do that with learnings we had from how to run it in the first half of 2022. But we’re now seeing a lot of those rates, particularly in the bigger cities, where a lot of the businesses transacted to drop off quite a bit. And so our estimates would be Q1, I think, is going to be a little bit choppy based on the type of products. If I think of flowable products like our PDx is tied to procedures, probably a lower level of a procedure volume in that quarter versus how we would see quarters two, three and four. But on equipment, we actually would expect that it’s still going to be reasonably strong and it’s driven by a different dynamic, which is the stimulus funds that are out there and requiring products to be taken on install. We also make some products that actually help assist with COVID patients whether it be monitoring events or other products in CT and stuff. So there’s a bunch of different activities going on, but we would expect that China will continue to ramp throughout the year. And again, we can’t predict all the different changes that may take out, but our take at this point in time is Q1 a little bit more tempered and then continue improvement throughout the year.

Peter Arduini:

Yes. No, I think, look, I would just say on broader pricing, our job to get price really comes down to is to bring more value to the customer to help solve their problems. And the more we can create products that really solve a bigger issue, we can get our fair share of more pricing. And so having your organization, your teams aligned and thinking that way, having a gross margin focus as well, is something we’ve just driven across the company and build into compensation plans, build into focus. So I think that’s an important part. And it goes for both equipment and services. Obviously, with services, there’s a different type of horizon, usually multi-year how you think about it. We’re also investing in innovative new services, whether they be different types of remote capabilities, Again, when you think about the brake fix side of our business, these are highly valuable products that being down for half a day or a day can wipe out a lot of profits for the institution. So if you have capabilities to be able to keep the product up running, customers are able to pay more for that. The other aspect is there are other services with an S on the end and some of those are digital on how you run your operation or how you can run capabilities. And in that – those cases, we can obviously ask for even higher prices as well as better margins than what we would have from normal brake fix. But we’ve been successful at taking selective increases. And again, with more of these advanced products, the related service contracts for them will also have a tail of better pricing down the road as well.

Yuan Zhi:

Good morning. This is Yuan, and thank you for taking our questions. I have a couple of them related to the pharmaceutical diagnostic business. First, on PDx. PDx was listed as a revenue priority. Can you elaborate between molecular imaging and contrast media, which segment would drive the growth you guys have mentioned? And I have a follow-up question. Thank you.

Yuan Zhi:

Got it. Thank you for the helpful color there. The follow-up question is our understanding is that the product such as Optison for ultrasound and with Vizamyl for Alzheimer’s disease PET scan maintaining a healthy gross margin. Can you maybe help us understand what prevents competitors to lower price and gain a larger market share, while at the same time, what stops other companies entering the space and making generic compounds of this product? Thank you.

Operator:

That concludes the question-and-answer session. Please proceed with any closing remarks.

Operator:

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect. Everyone, have a great day.