GE Healthcare Technologies Inc (GEHC) 2022 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the GE HealthCare Fourth Quarter 2022 Earnings Conference Call. My name is Michelle, and I'll be your conference coordinator today. As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today's conference, Carolynne Borders, Chief Investor Relations Officer. Please proceed.

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.

Thank you, Carolynne. And good morning, everyone. Welcome to our first earnings call as an independent publicly traded company. I'm incredibly proud of the work our team has done to complete the spin-off of GE Healthcare. The energy across the company is palpable and there's tremendous excitement and focus around our purpose to create a world where healthcare has no limits. I want to thank all of our team for their commitment to the customers and patients we serve as we chart our own path forward and execute on our precision care strategy.

Let's start with our fourth quarter 2022 performance. We delivered strong organic revenue growth of 13% year-over-year, reflecting an acceleration from prior quarters in 2022. These results were driven by continued robust demand, backlog fulfillment and improved pricing. In addition, supply chain pressures that we experienced earlier in the year eased, continuing the trend that we experienced in the third quarter.

Adjusted EBIT margin was 17.1%. Volume and price improved in the fourth quarter, but this was offset by inflation, mix, planned R&D investments and some foreign exchange headwinds. We saw sequential margin improvement as volume and price grew and logistics costs eased with the disciplined optimization actions, we've taken across the business. This result is equivalent to 16.1% on a stand-alone basis.

Adjusted EPS was $1.31, impacted by incremental interest from debt issuance, partially offset by volume and price. In order to facilitate comparability on a go-forward basis, we've also provided a stand-alone adjusted EPS result of $1.06. Free cash flow was $987 million in the fourth quarter, as we start to see supply chain issues ease, and we improve collections year-over-year.

Total company book-to-bill, which is a calculation of orders to revenues growth, was 1.07x, led by strong orders growth in imaging and ultrasound. For the full year, organic revenues grew 7% year-over-year at the higher end of our mid-single-digit growth target. And while China was impacted by COVID for most of the year, we saw increased momentum coming out of the fourth quarter, and we expect that to continue.

Globally, we have a healthy backlog heading into '23, as customers continue to invest in imaging, ultrasound as well as PCS. 2022 adjusted EBIT margin was 15.6%, impacted by inflationary pressures and planned R&D investments. This is equivalent to the 14.5% on a stand-alone basis.

Looking ahead, we have several levers to expand margins through strategic pricing, enhancing volume and mix and increasing variable cost productivity as discussed at our Investor Day. Adjusted EPS for the full year was $4.63, and our stand-alone adjusted EPS result was $3.38. Free cash flow was $1.8 billion in 2022, and Helmut will discuss guidance in greater detail here later in the call.

Overall, we're pleased with the strong performance we delivered in 2022. We're encouraged by the easing supply chain pressures and the resilient end market demand we're seeing across our portfolio, and we remain confident in our ability to drive sustainable value creation in 2023. I'd also like to highlight an important announcement we recently made with the appointment of Dr. Taha KassHout as our Chief Technology Officer.

Taha is leading our science and technology organization as well as our efforts to drive growth through clinical research and the advancement of our digital and machine learning capabilities, specifically our Edison Digital Health Platform. He joins us with deep clinical, digital and machine learning experience. Taha was most recently Vice President of Machine Learning and Chief Medical Officer at Amazon. Taha also served as the FDA's first informatics leader and he's joining the team at a perfect time as we accelerate investments in digital products and software.

As we invest in our business, we're continuing to make progress on enhancing our operating model to better serve customers to a simplified, more decentralized model. And we're reducing bureaucracy and the organization optimizing our geographic footprint and implement ending platforming initiatives across key product lines.

And with that, let me hand the call over to Helmut to walk through our financials and business segment performance. Helmut?

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 products, services business. We are pleased with product growth in the quarter that will lead to additional services revenue.

Now I'd like to take a -- 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 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 through 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, NPIs driving growth included our evolution Apex CT with a scalable detector as well as sNCT with improved imaging and workflow.

Globally we've already seen success using deep learning from improved image quality in MR with (inaudible). We're now very proud to be the first to extend those capabilities to Omni Legend PET CT with precision deep learning available in second 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 hospitals 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 edition 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 costs 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 continued 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 '21, 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 onetime 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, 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 a pricing strategy that is built around the value we deliver for 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 detector that will provide better product integration and, in any end, and improve 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 through 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 2.5x 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 full year adjusted EBIT margin to be in the range of 15% to 15.5%, reflecting an expansion of 50 to 100 basis points over the 2022 stand-alone adjusted EBIT margin of 14.5%. This includes the impact of approximately $200 million of stand-alone 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 stand-alone costs. We're 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.

Thanks, Helmut. Before we go to questions, I'd like to reiterate, how we're executing against our long-term growth strategy. Our teams are well positioned to deliver on our 2023 commitment. We're investing in organic growth as demonstrated by the introduction of over 40 new products at the RSNA event in November.

And with workflow solutions enhanced by AI to help healthcare professionals and Health Systems overcome the top operational challenges they face today, while also improving outcomes for patients. We're deepening customer engagement across care pathways, including oncology and cardiology. And we've announced some exciting new products, collaborations and investments that are changing the way healthcare is delivered.

On the M&A front, we recently announced the agreement to acquire IMACTIS, an innovator and CT interventional guidance. This acquisition, although small, is our first as an independent company and is a great example of the type of transactions that we plan to pursue. They add innovative technology in fast-growing areas that enhances the breadth of capabilities we can deliver for customers.

In Imaging, we're very proud to announce SIGNA Experience, an MR platform that was -- comes with an integrated set of solutions, including workflow capabilities, an intuitive user interface and deep learning AI applications such as Air Recon DL, which has already reduced scan times for approximately 5.5 million patients globally and is increasing efficiency for clinicians.

Globally, demand for minimally invasive surgical procedures continues to grow. In the U.S., for example, ambulatory surgical centers are performing more than half of all outpatient procedures. And to serve patients, our customers need efficient imaging capabilities. As a leader in surgery imaging, which is a high-growth and high-margin business for us, we see increasing opportunities for our OEC 3D C-arms to provide precise 2D and 3D images interoperably for many of the clinical applications being done in ASCs, including spine, orthopedics and pulmonary work.

During the fourth quarter, we also announced an $80 million investment in one of our facilities in Norway to increase capacity for our contrast active pharmaceutical ingredient. In our PCS business, we're excited about our Portrait Mobile patient monitoring solution currently available in Europe. This technology allows us to expand care into sub-acute therapy areas, giving providers the ability to monitor patients that aren't always monitored as thoroughly as they should be.

In Ultrasound, we're excited about the customer demand for our VIVID Cardiac ultrasound portfolio, which again is equipped with AI features that help improve consistency of assessing the heart muscle's function and significantly reduce the time it takes to acquire those imaging measurements.

And in Digital, we continue to make progress with the development of our Edison Digital Health Platform to help solve customer challenges. We have several pilots underway at hospital systems in the U.S. and Europe, and we expect that cloud-based or on-prem Edison Digital Health Platform will be a vendor-agnostic platform, aggregating data from multiple sources and enabling integrated care pathway management.

Our goal is that customers will benefit from a wide range of AI applications developed by us and third parties to make better connected decisions, operate more efficiently or better detect trends and populations. These are just a few of the examples of products and partnerships we've invested in to advance our capabilities in precision care. And so, with that, we'd like to open up the call for questions.

Thank you, Peter. I'd like to ask participants to please limit yourself 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 [ph], can you please open the line?

(Operator Instructions) One moment for your questions. Our first question comes from Drew Ranieri with Morgan Stanley. Your line is open.

Hi everyone, thanks for taking the questions.

Good morning, Drew.

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's been any risk of pull forward of capital sales just over the past year or anything? And I have a follow-up. Thanks.

Thanks, Drew, for the question. I would just say if I go around the world, start maybe in Europe, there's still robust demand at this point. I think as we've talked about in the past with different audiences that from different sick funds and tenders, to really drive incremental imaging capabilities post COVID.

And so, we see that continuing here into the future. China has obviously been a topic in the news. And although COVID was challenging in Q4, there was quite a bit of investment that we saw going into imaging in particular and in ultrasound. And we believe as the market there works through some of the challenges with COVID in Q1, but there's just a lot of pent-up demand. If you think about '22 and even '21 with some of the lockdowns, there's a lot of people that have a lot of procedures to be taken care of.

And in the United States, we were pleased to see with different customers that have reported as well as customers that myself, Helmut and the team have been talking to regularly, are seeing improving conditions. It doesn't mean that they're back to, say, '19 levels, but it means that we're seeing improvements in labor costs. The demand or backlog, meaning the need for imaging procedures, both in our interventional, diagnostic and ultrasound modalities, is still at a record high.

And so, we look, as we start the year, the demand is running strong. I think part of the piece that we all keep an eye on is CapEx prioritization in the United States, I think all indications are that people are being prudent and prioritizing, for sure. But many of the technologies that we offer tend to be prioritized to the higher end of the list and what customers tell us is, in many cases, that added productivity to get patients diagnosed faster, sooner, get them healthier and out of the system is one of the key attributes that we bring.

So, we're cautiously optimistic. But I'd say, with our large backlog that we have starting the year, we feel good about the horizon that we see here over the next couple of quarters.

Got it. Thank you. Maybe one other question just on the margin expansion, maybe more for (inaudible). But can you maybe help us just bridge the 50 to 100 basis points 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.

Yes, thank you, Drew. I think, so when we look at the overall margin expansion in the 50 to 100 basis points, there is a number of drivers in there. So clearly, volume is a driver, VCP, so we have a cost productivity, improvement in material cost improvement in logistics costs and also price is a key driver. So those are really, I would say, those key elements that are driving the levels positive improvement on the margin side.

If I look at the headwinds and against that, we're still seeing material costs elevated. So especially material cost that is sitting on our balance sheet, in our inventory currently. And we also continue to invest into the business, both for our growth, but also what we are putting innovation investment in R&D into the business.

So, these are really the offsetting elements. So, both of those elements together are really driving our 50 to 100 basis point margin expansion. And we're very focused on what is really in our control, which is price, VCP and obviously volume execution, that's really how we look at this margin expansion for 2023.

If I give you a little bit more color, Drew, on the four segments, obviously, as you've seen in the fourth quarter, the Imaging segment, very strong with its growth, we expect that growth, as we work through our backlog, continue especially for the first half.

So, there's going to be more close on the imaging side, but also all our other three segments, Ultrasound, PCS and PDx, we expect to grow in that range as we have laid out the 5% to 7% as we go forward. So, it's a quite good balance, as we go into the new year.

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

Good morning.

Good morning. Thank you very much and I'd add my congratulations on your successful spin and your results.

First question for me would be actually around your molecular imaging business, it 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 radiopharmaceuticals, there's a great opportunity, so 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.

Thanks Ed, for the questions. Yes, I'll start maybe a little bit with MI and frame it up, and then maybe Helmut, you can comment a little bit on price.

I would start first with saying, yes, I think one of the really interesting things that we're excited about strategically is we're the only company out there that actually makes the fuels for molecular imaging as well as, as the devices that capture to create the images themselves.

Why that's important is this rise of different technologies out there called theranostics, this combination of a therapy and a diagnostic together, and how you tune the device to the agent whether it would be in the neuroscience area, such as Parkinson's or amyloid beta plaque imaging or other parts of the body, there's a lot of longer-term benefits we think will come that way.

Our -- in the agent business itself, MI, the agents are about 1/3 of volume, about 2/3 is contrast imaging agents used in the X-ray equipment, but we believe that's going to be a growing area with, again, newer capabilities coming out of the pharma space that we play a critical role in helping do the diagnostics.

On the device side itself, we've got a great platform, a great team. We do some outstanding work here in the United States as well as in Israel on these devices, probably one of the deeper expertise capabilities on different technologies, whether they be BGO or LSO, different types of PET/CT detectors as well as the CDT expertise we have within our MI devices.

And combined between PET and MI, we think that this is going to be a continuing growth area. It's still, at this point, compared to MR and CT, a more moderate sized business.

But again, with the rise of these new technologies, and give you an example, if an agent comes out that needs this type of follow-up, to actually assess either amyloid beta plaque or other capabilities, we believe our MI technologies - the MI technologies out in the industry will really play a key role in helping driving that diagnosis. And then down the road can even play a larger role in the therapy process, either dose or delivery of agent. So, Helmut, you may want to comment a little bit on the pricing question.

Yes, thanks, Pete. So everyone, on price, we're quite happy with the progress we've been making on price throughout the year. So, we started really tracking in a price on orders in the last year. So, we have both 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 priced in our sale.

So in revenue, it started at the low single digit, it improved as it went through the third quarter. And we are now in first [ph] - some of our modality is in the mid-single-digit level what we are seeing on price. So, we really are happy about how performed. And we also have good visibility on price within our backlog. So, we already know what is going to happen and ship here over the next quarters and how much price is in that - in that backlog.

Michelle [ph], we'll take our next question.

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

Hey, guys. Congratulations on a - on a nice spring share and thanks for taking my question.

Thank you.

Maybe my first question's here on the guidance assumptions here. Peter, can you talk about any trends in the cancellation rates or cadence that we need to give our - when you look at the five to seven, what is pricing? How much of that five to seven do you have visibility, given the backlog and the booked-to-bill ratios here?

Yes, Vijay, look, good question. We have some actually quite good visibility at this point. With carrying a little bit of a 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 install-based products planned out as far as we can go, which is, in many cases, a couple 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 and 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 - if we look a that backlog, we know what the cost - the input costs are going into that. We have - we know what the prices 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 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.

Understood. That's helpful. And maybe one follow-up for Helmut. Look at EPS guidance here, assembly [ph] 11, between your organic top line assumptions and margin expansion, I think operating profit should be growing close to double-digits here. Any - what are you assuming for FX? And any below-the-line sensitivity here on interest expense or other items that we need to be aware of?

Yes, so Vijay, we have been, obviously, tightening up the range on the APPS guide. So, the $3.60 or $3.75 percent we believe is right in the middle. When you look at the upper and lower end of the revenue end, the margin expansion guide, so we wanted to tighten that range up. And two year or to the assumption question, so there is 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 - how you should look at that.

Yes, and I would just say, one of the things is we've got - and we've talked about improving supply chain, but again, improving isn't back to say the good ole days. All of our input costs have some added cost to them, it's why we've put a lot of focus on variable cost per activity.

We're carrying some inventory from spot buys and things, that was at higher rates. And we're going to see much of that continue into '23. But we have good visibility to it. And I think as we see how the economy plays out and how that plays out relative to inflation, we'll have better insights about what we can do about it. But again, our first half visibility looks quite good at this point in time. And again, we're optimistic that we're going to continue to see improvement throughout the year.

That's helpful perspective. Thank you, guys.

Thank you.

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

Good morning.

Good morning, Larry.

Hey, Pete. Hi, Helmut. 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 it - the backlog here. Is there - is there any way to quantify this? Is there - I mean, is this somewhat of a catchup if you will? And what are your expectations for that, for '23? Clearly, you're growing well in excess of historical market growth. And I had one follow-up.

Yes, Larry, I think particular to imaging we, obviously, as well as us and pretty much everyone in other industries, with the installed type products had some pent-up demand. And, I mean, that's part of our backlog, right? And we were able to deliver a higher percentage of that. That typically is more in MRs, CT, PET/CT, again, some of the bigger installation-based products. But it's affected the whole portfolio at some level.

And so, Helmut mentioned the words, we focused on making sure that we leaned in on getting the parts that we needed at the right time. It had a little bit of an impact on our cash flow, but we had the components available to ship, which then resulted in the higher growth. And I think with that we're going to see that into the first half. Now, we would - we would expect that will start moderating and get back to more classical, historic growth rates.

But what's interesting is you speak with customers, again, back on the list of their top capital buys, in many cases, diagnostic imaging equipment. MR ranks up there high. We'd mentioned the OECC arms in our remarks. Anybody that's doing any type of surgical imaging in outpatient center that's the preferred device. So, it's quite strong, but we are definitely running at a higher level. And our RPO or our backlog that we have is quite strong. And again, just to emphasize, we've got good visibility on that into '23 and well into the year.

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

Yes, Larry, so maybe I'll reiterate how we look at the overall guidance for the full year and the quarterly flow. So on revenue, we expect growth to be stronger in the first half, clearly. And that is driven by the backlog and also how we have lined up really past an inventory in the first half accordingly.

But the good news is going to be that I will - we still expect sequential growth in the - in the - into the second half. So typically, our Q3 and Q4 is higher than our Q1 and Q2. But growth rates we expect to be slightly lower than what we are seeing in the first half accordingly. So, that's the side on the revenue.

On the margin side, you will see, I think, in a more fixed margin expansion in the second half as we expect some of those productivity initiatives to take a hold, especially around BCP and cost improvement on the gross margin side. And the reason for that is really because we still have, as I think Pete said this earlier, we still have elevated costs that is sitting in our inventory on our balance sheet. And as we flush that in our inventory through we will have in the lower margins in the first half but then we'll improve into the second half.

And we're already seeing this based on those red flags passed of how much parts we have, how much parts we have to purchase, (inaudible). And so, that's going to be the side on the margins and more of that in the second half. And maybe I'll comment on cash flow also, just to be clear on that also.

So, a very large piece of the cash flow given our seasonality in our business we expect to happen in the second half, less of cash is going to be generated in the first half because of interest payments, because of some of the supplier payments that began in the first half as well. So, that's really how we - how you should look at the quarterly flow for 2023.

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

Hi, good morning. And thank you guys for taking questions. And congratulations on the successful spend as well.

Thanks, Veronika.

Maybe you guys can talk a little bit about the competitive environment that you are seeing. And I'm thinking, in particular, in imaging and ultrasound. Curious if you're seeing any changes. We saw one of your peers this morning cancel some historic orders, which they felt were at a lower price.

Is that creating opportunities? Or in general, are you seeing opportunities that are driven by the disruption that this one peer of yours has suffered? And maybe specifically, if you can comment on China and how the local strategy is playing out for you guys? Then I have one follow-up after that, but I appreciate this is a long question, so I'll let you answer that first.

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 the different places 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 we 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. And 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?

Yes, I did, which was China specifically, if you can just remind us what proportion of your portfolio is certified as local now? And when might we hit 100%?

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 would 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 it'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 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.

And I would just to put a finer point on it, Veronika, I mean, for what we have said as our operating plan for '23, we have all of that localized and feel quite good about it. As Helmut said, as we bring new products out, one of the big questions is how much are you going to localize versus not, but for what we need to compete we're in a very good position with localized components and that type of recognition that's needed in certain types of tenders or constructs to compete.

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

Hi, Anthony.

Morning, Anthony.

Hi. Hi, Pete. Hi, Helmut. Congratulations on the spin and a great initial quarter out of the gate here. So congratulations to the team.

Maybe a little bit on new product introductions, MPIs, and even that is certainly a contributor here. So in the plus 13% overall, I guess what percent of t hat actually came from new products?

And then when we think about the backlog, what is embedded in there for new products? What percentage of the backlog is going to flow through with newer systems that are recently introduced, let's say, over the last 12 to 18 months? And I'll have one quick follow up on capital allocation.

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 cases, 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, in some of the classic modalities, MRCT, 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?

Yes. I would just add, I think as Pete said, so the innovation and the new products are happening really across the portfolio. I would call out it's happening both on the device, and I talked about a couple of those innovation in my remarks, but it's also happening on the digital side.

So a lot of AI and machine learning that happens on the device accordingly, which is really a different way of introducing an NPI, so there's a lot of time spent on that by the team, which really helps clinicians significantly both get more productive but also have better patient outcomes.

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 install 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.

Very helpful. And quickly on capital allocation. It's been dynamic out of the gate here. You did the tuck-in with IMACTIS. We also had the debt recapitalization with the spin. And of course, you're doing internal investments with contrast, expanded the plant last year. So maybe just high-level comments on capital allocation when we think of internal investment the debt service out of the gate here post spin, tuck-in M&A and then return to free cash holders? Again, congratulations.

Yes. Thanks.

Yes. Thanks, Anthony. So the way we look at our capital allocation, first and foremost, we are very happy with our strong investment-grade ratings we received last year. This is important for us access to capital, but it's also equally important for our customers. I mean, Pete just talked about long-term services contracts.

People want a strong financial partner that they know that's going to be with them for many years, sometimes decades only. So this is first and foremost, very important. Obviously, investing in the business is a key priority. We increased our R&D investment substantially in 2022.

It was up more than $1 billion that was spend on R&D now. And going forward, we expect that to really grow with the revenue. But when you then look at the rest of the capital allocation, obviously, this is a strong cash-generating business. I'm talking about 85% or more of free cash flow conversion.

And we will use and deploy that cash to continue to invest organically into the business, but also out of the free cash flow, inorganic investment. IMACTIS was one example. Pete and I spent a lot of time with our M&A team to look at opportunities because I think it's important for us to see what is out there and make sure that we have good transparency and visibility and then make decisions that are going to be very disciplined for such acquisitions if they fit into our portfolio and they are accretive both at the topline growth but also from a profitability perspective.

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

Hey, thanks for taking the questions, and I echo everyone else's sentiments for the first quarter here. So just wanted to ask about two metrics that you're giving to The Street, and one is the book-to-bill ratio. I know there's been a lot of questions on it, but I would appreciate historical context in terms of how to think about that 1.07 ratio and how to think about it on a go-forward basis?

If you could give us any quantitative perspective from prior quarters on the book-to-bill ratio and just how to think about that? And similarly in that vein, and I'll ask my follow-up, is is there's about $10 billion in remaining performance obligations, at least as of the filings?

And so, just if you can, Helmut, elaborate on the length of those obligations, how far those extend out, how those are realized over the coming quarters, and then how to think about that $10 billion on a go-forward basis? Is that kind of the par level to think about 4G healthcare as we think about it going forward? And if you'll be giving out these kind of metrics going forward? Thank you.

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 must not forget we had quite a large services business in this as well where book-to-bill is one, also the PDX business for us has a book-to-bill of one.

So when we look at [closed] portfolio, you will book-to-bill is actually higher in our imaging products where we have obviously from taking the order, ample shipment takes a longer time. And we are 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 1.10 level at certain quarters, if we look at historically. But it's running at the -- at the very solid bases at this stage.

As it relates to our RPO, the RPO, as you mentioned, is a big amount that we have this close. And we are quite happy with the backlog. The RPO, the way it's defined, I want to be also maybe clear on it, defined as back of it is [non-cancelable]. So we also have backlog that is not -- that is [cancelable] where we see very, very little -- very few cancellations from our customers because they're committed to the products.

That's really how we look at 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 (inaudible) $10 billion number you quoted came from but it is $14 billion at the end of 2022.

Thanks, Helmut. Thanks for taking the questions.

Thank you.

Thanks, Ryan.

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

Hey. Good morning everybody. And again, I'll echo the congratulations here on the quarter and the guide and with the spin and everything. I do want to touch here on China and build on the discussions from prior questions. I think most acknowledge there's some level of kind of demand in that market.

I know you've referenced it, Pete. It might be tough to call right not but how do you see the China market unfolding here for GE Healthcare in 2023? And really as we look throughout the year if there's any cadence you'd like us to think about it. And then maybe if you could speak to what you've embedded in the guide for China this year?

Yes, Jason. I think -- look, I think, you know, China, it's obviously tricky to fully estimate how things will -- 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 -- 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 help assist with COVID patients, whether it be monitoring events or other products and 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 is a little bit more tempered and then continue improvement throughout the year.

Okay. That's helpful. Thanks, Pete. And then maybe just as a follow-up with respect to pricing, I'll come back to that topic here. Pete, you and the team do have a lot of confidence in pricing [tailwind] supporting growth here going forward.

I know we've talked a lot about price increases on products and goods. But I guess how are you seeing pricing play out in the services side of your business and are you anticipating similar pricing power there over time with your service contracts. Thank you.

Yes, no. I think look, I would just say on broader pricing our job to get price really comes down 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 focuses well is something we've just driven across the company and built in to compensation plans, built into focus. So I think -- I think that's a important part. And it goes for both equipment and services.

Obviously with services there's a different type of horizon using 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 break 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 and running, customers are able to pay more for that.

The other aspect is there 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 -- than what we would have for normal break fix.

But we've been successful at taking selective increases. And again, with more of these advanced products they related service contracts for them will also have a tale of better pricing down the road as well.

Our next question and our last question comes from Yuan Zhi with B. Riley. Your line is open.

Good morning. This is Yuan. Thank you for taking our questions. I have a couple related to the pharmaceutical diagnose tech business. First, PDX. PDX was listed as a revenue priority. Can you elaborate on between molecular imaging and contrast media? Which segment will drive the gross you guys have imagined? And then I have a follow-up question, thank you.

Yes. No, look, good question. PDX is definitely a growth driver. And again, I just want to reframe as we've talked about our businesses, all of them have growth opportunities and all of them have margin expansion but PDX has more of a growth priority up front.

And I think at both sides of the -- of the PDX, both are contrast business as well as our MI business we're expecting to see accelerated growth. As an example, in contrast with the growth of the imagining procedures that we're talking about, anything that needs a contrasted base capability like a vascular study, with our leadership position in contrast ionized imagining, we're going to continue to see that -- that increase.

So I think that's one. On the molecular imaging side, again, with the rise of new agents that are out there, whether they be in prostate or different neuroscience based agent, we would be expecting to see that pick up.

I would say the contrast agent is probably more of a temporal or closer '23 impact and the MI is probably -- has more or an impact later in '23 into '24 just to kind of give you a profile of how we think about the growth there.

Got it. Thank you for the helpful color there. The follow-up question is our understanding is that the product such as the [ultrasound] for ultrasound and Vizamyl for Alzheimer's disease [pass scan], maintaining a healthy growth 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.

Yes. No, it's a good question. I would say, first of all, they do have healthy margins. One of the interesting things about our pharmaceutical diagnostic business both in contrast and MI that you had referenced is the proprietary nature of how we make it.

I would say the capital hurdles of the infrastructure and then the sophistication of the infrastructure. And just to give an example, if there is a typical molecule in the pharmaceutical world that comes in a 10 mil vial and a generic comes out, people can have five ready, they can be shelf stable, they can be shipped around the world, stored for two years.

Many of our agents are made that have half lifes, they're radioactive right, that only can live for maybe a couple days. And so you literally have to have production capabilities, cyclotron setup, a distribution network on how to delivery radioactive capabilities to pharmacies, we have that infrastructure and that know how.

And so even though some of these will have patents on them, the actual barriers to entry are more around the infrastructure and capability than they are based on particular IP and the normal pharmaceutical space.

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

Thank you. So look, in closing, let me just reiterate how excited I am about our path forward as we invest in our business. The emphasis on innovative products in high growth areas, many we talked about today. We delivered strong organic revenue growth and sequential margin improvement fourth quarter and we expect to capitalize on robust demand in '23 as we execute on our revenue drivers across each of our segments.

And we're also optimizing the business through lean. We've given quite a few examples today and this gives us confidence in our ability to reach our margin targets and drive meaningful shareholder value over the long term.

Our full team is united and excited about our purpose driven approach for the benefit of customers and most importantly patients that we serve. So thank you for joining us today and we look forward to seeing you at one of our upcoming conferences that we'll attend. Thank you very much.

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