GE HealthCare Technologies Inc. (GEHC) Q1 2023 Earnings Call Transcript

Good day, ladies and gentlemen, and welcome to the GE Healthcare First Quarter 2023 Earnings Conference Call. My name is Livia, and I'll be your conference coordinator today. As a reminder, this conference is being recorded. I would now like to send the program over to your host for today's conference, Carolyn Borders, Chief Investor Relations Officer. Please proceed.

Thanks, Livia. Welcome to GE Healthcare's First Quarter 2023 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, Carolyn, and good morning, everyone. I'm very pleased by the solid performance we delivered in our first quarter as an independent company. The momentum we demonstrated last year has continued, and I'd like to thank our teams across the world for their continued dedication to executing on our precision care strategy. We delivered strong 12% year-over-year organic revenue growth with contributions coming from all of our segments, driven by increased fulfillment and invested EBIT margin year-over-year through price and lean initiatives focused on cost effectiveness, and we're on track to achieve our margin expansion goals for the year. We continue to monitor customer purchases of our products, and we are cautiously optimistic given resilient end-market demand. Supply chain challenges are improving, giving us line of sight throughout the remainder of the year. We continue to invest organically to deliver long-term growth, demonstrated by the 13% year-over-year increase in R&D in the first quarter, in line with top-line growth. In addition, we acquired tests to new technologies, markets, and clinical capabilities. I also want to highlight today's declaration by our board of a three-cent dividend. This reflects our confidence in the durability of our cash generation, a disciplined capital allocation strategy, and our commitment to returning value to shareholders. Overall, the momentum we see in our business gives us confidence in our abilities to deliver on our full year 2023 guidance. With that, let me hand the call over to Helmut to walk through our financials and business segment performance.

Thanks, Pete. It turned to our financial performance in 1993, revenue per cent year-over-year, and grew double digits at 2%. This was primarily driven by strong adjusted EBIT margin improved year-over-year to 14.1%, growing 150 basis points on a standalone basis versus last year. Margin was up to the higher volume, which was partially offset by the mix of products. In addition, we were able to mostly offset inflation and plan investments through our pricing and productivity actions. While we are pleased with our margin performance during the quarter, there is room for more improvement. We have lean action plans in place to continue to expand margins further through volume, price, and productivity initiatives across. Adjusted EPS was $0.85, up 35% on a standalone basis, driven by our strong revenue growth as well as margin expansion efforts. Free cash flow of $325 million was down $46 million, as expected, based on new spin-related items, which I will discuss shortly. Total company book-to-bill, which as a reminder is a calculation of total orders divided by total revenue, was 1.01 times. This was driven by strong revenue growth across all our segments, led by recurring PDX sales. We continue to see customers invest in solutions that drive better clinical insight and productivity across the U.S., China, and Europe. Moving to revenue performance, we grew 12% organically year-over-year. Foreign exchange was a headwind of 4% to revenue growth during the quarter. On a reported basis, product revenue increased 12% year-over-year, driven by PDX sales with strong demand from increased procedures. Services revenue grew 1% versus the first quarter of 2022. Our strong product growth will translate to services. From a regional perspective, we are pleased to see all regions growing with China up double digits. We are pleased with our margin performance this quarter, as we continue to focus on improvements in delivery, price, and productivity. We delivered a positive sales price for four consecutive quarters with growth in all segments. These efforts, combined with our productivity initiatives, enabled us to generate year-over-year and sequential gross margin expansion. We also continue to see supply constraints easing with spot buys and logistics costs down sequentially and year-over-year. The actions we've taken to broaden our supply base, coupled with the continuous application of lean principles, has helped us to re-qualify almost 8,000 parts since COVID began. This has led to the lowest number of red flags of 2021, enabling us to deliver for patients and customers, which is our top priority. As we look at our platforming initiatives, we have made good progress in CT with increased standardization of components across the portfolio. We've identified opportunities for simplification in sourcing, purchasing, and manufacturing. We are in the process of implementing similar changes in MR. Following our spin-off from GE, we are on track with planned exit of TSAs, with approximately 40 exited to date. We remain focused on reducing G&A costs, for example, with real estate expense and IT costs. Moving forward, we see opportunities to expand margins through additional actions, for instance in logistics with greater shift from air to ocean and greater platform standardization. Before I get into the segment commentary, let me remind you that in 2023, approximately $200 million of recurring standalone costs will be impacting our segment EBIT margin rates. These costs are generally allocated based on revenue and did not exist in turning to imaging. We saw strong organic revenue growth up 12% year-over-year. This was led by MR as well as molecular imaging and CT, driven by supply chain fulfillment improvement and growth in revenue from MPIs. Expect continuous high growth throughout the first half of 2023 that will normalize throughout the rest of the year. Imaging demand is expected to remain healthy, supporting top-line growth. Segment EBIT margin of 7.7% declined 120 basis points year-over-year as planned investments and mix outweighed at higher volume. Productivity and pricing initiatives more than offset inflation. We expect sequential margin rate improvement as we move throughout the year. Through lean efforts in imaging, we initiate a rolling 13-week schedule to maximize factory output and customer satisfaction. This will improve fulfillment as well as working cap. Overall, we expect steady growth in demand in 2023 with a number of drivers, including a continuous backlog of procedures, expanding indications for high-end diagnostic exams, and new therapies requiring precision imaging. Moving to ultrasound, we saw strong organic revenue growth up 10% year-over-year, led by cardiovascular, general imaging, and women's health products. This was driven by MPIs and improving supply chain fulfillment with fewer electronic component shortages. While we expect growth to normalize as we move throughout the rest of the year, we continue to see strong customer demand in both hospital and other care settings. Segment EBIT margin of 24.1% was up 50 basis points year-over-year. We realized benefits from productivity and pricing initiatives along with volume growth. This enabled us to offset headwinds through inflation and planned investments, including the caption health equity. We expect the average margin rate will remain generally in line with the prior year. We continue to focus on patient and customer-centric innovation, especially digital and artificial intelligent solutions. Moving to patient care solutions. Revenue was up 11% organically. This resulted from greater backlog fulfillment at Supply Challenges East, particularly for electronic components. We benefited from dual-site production for highly constrained problems. Revenue was also driven by the launch of key MPIs contributing to increased volume, such as CareScape Canvas and the B100 series of acute care monitors. PCS backlog remains strong, which will contribute to revenue growth into the future. We expect quarterly revenue dollars to remain relatively consistent throughout 2023. PCS margins of 14% increased 490 basis points compared to the first quarter of last year, driven by productivity, price, and volumes. These are partially offset by inflation as well as planned investments. Productivity in the first quarter was driven by favorable logistics and lower spot buys. We expect average margin rates to normalize throughout 2023. Moving to pharmaceutical diagnostics. We saw strong organic revenue growth up 19% year-over-year, driven by price, increased procedures, and the stabilization of supply. We expect continued revenue growth for the year based on favorable comparisons in the second quarter and the fourth quarter. Segment EBIT margin of 27.8% declined 70 basis points year-over-year, mainly driven by raw material inflation and planned investments. This was partially offset by price and volume and productivity, which also drove 480 basis points of sequential improvement. We continue to expect this segment to deliver strong EBIT margin performance. As we look ahead, we are investing in capacity to meet future customer demand. We generated $325 million of free cash flow. This was down $46 million year-over-year, impacted by $85 million of incremental post-retirement benefits payments and $42 million of interest payments, which were not in our 2022 actions. Without these new post-related items, year-over-year free cash flow would have been positive for the quarter. Working capital improved year-over-year, primarily driven by collections and inventory efficiency. We have leveraged Lean to implement a daily inventory management system. In the first quarter, we achieved solid results from controlling and better predicting inventory inputs and outputs with shorter lead times and improved revenue conversion cycle. As a result, we saw faster inventory returns and over $100 million of improvement in intra-quarter inventory. Strong cash flow generation will allow us to pay down debt and invest organically and inorganically in our business. We are pleased to initiate a dividend with opportunity. Our dividend philosophy is driven by prudent capital planning, as well as a strong revenue and earnings. Our balance sheet remains strong with significant financial flexibility. Let's move now to our outlook. For the full year of 2023, we are reaffirming our guidance. We continue to expect year-over-year organic revenue growth in the range of organic growth in the first half of the year versus the second half. In line with seasonality, we expect revenue dollars to grow first half to second half. Our current view is a foreign exchange headwind of less than one percentage point for the year. We continue to expect fully adjusted EBIT margins to be in the range of 15 to 15.5%. This would represent an expansion of 50 to 100 basis points over a 2022 standalone adjusted EBIT margin of 14.5%. We also expect to see an increase of the year to the second half, driven by higher volume and productivity benefits. We expect R&D investment to grow at the higher end of the 2023 organic revenue growth range. Our guidance for adjusted effect is 3 to 25%. Our full year 2023 adjusted EPS is unchanged in the range of $3.60 to $3.75%, representing 7% to 11% growth. This compares to 2022 standalone adjusted EPS of $3.38. We continue to expect free cash flow conversion 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 would represent up to 10 points of free cash flow conversion for the year. For 2023, we expect capital expenditures to be in the range of $350 to $400 million. I'd like to add that our second and fourth quarter cash flow will be impacted by interest payments, as roughly 75% of our interest expense related to a long-term debt is paid out in these quarters. Given this interest payment timing, we expect lower cash generation in the second quarter versus the first. Cash flow will be substantially higher in the second half of the year relative to the first half due to typical cash seasonality and annual timing of supplier and compensation payments. It has been a strong start to the year, and we are confident.

Thank you, Helmut. Before turning to Q&A, I want to provide an update on some exciting focus areas in our business. In imaging, we're energized about the developmental advancements we're making with photon counting CT technology for improved spectral and spatial resolution, reduced radiation, and enhanced contrast to noise ratio of tissue at a molecular level. This step change in technology will help provide clinicians with more capabilities to significantly increase imaging performance across a variety of care pathways. We believe we're on the right path towards the industry's second generation of photon counting technology with a deep-silicon approach for even better resolution and clinical results. This technology will expand our imaging capability into high-pitched helical and gated cardiac imaging, which are just a few of our important milestones in development. We also announced our app, which expands access to artificial intelligence-powered ultrasound imaging guidance for novice users. We're utilizing AI to provide real-time expert guidance to the user, And this helps us obtain diagnostic images, providing advancements for patient care outside the typical hospital. While we'll be starting with cardiac care pathway, we expect to extend this to other specialties in the future through continued R&D investment. In our patient care solutions business, we've announced the FDA 510K clearance of our CareScape Canvas monitoring platform. This interoperable solution can flex based on individual patients' needs for precise care. The platform also offers continuous upgrade capability so hospitals can adopt new technologies at their own pace for efficient fleet management across the different care pathways they serve. This series of NPIs represents initial steps towards realizing mission-critical infrastructure transformation that leverages the Edison platform and enables artificial intelligence and patient monitoring. In neurology, we've been watching the emergence of disease-modifying therapies for Alzheimer's and the positive impact on patients. With the success of these advancements, we anticipate the need for more imaging. GE Healthcare is one of the only companies that has a full suite of products and solutions to support the entire Alzheimer's patient journey, and this includes our Vizimol diagnostic agent and PET scanners, which can be used to confirm diagnosis, and the MRI systems to monitor throughout the therapy. I'm also pleased with the initial progress that we've made since forming our science and technology operations, led by Dr. Taha Kashoot, our chief technology officer. Specifically, we're driving cloud adoption to deliver on our digital innovation strategy and also building out these capabilities into our device portfolio. Last week, we met with many customers and collaborators at the Healthcare Information and Management Systems Society, the HIMSS meeting, where we featured our growing portfolio of digital and AI innovations to help increase operational efficiencies, improve diagnostic confidence, and support early interventions. In closing, I want to reiterate that we're encouraged by the strong results we delivered in the first quarter. Our margin improvement initiatives are taking hold, and we see ongoing opportunities to drive productivity and growth. Our backlog remains solid, and we're confident that we are investing in the right areas to drive long-term innovation. And with reaffirmating of our guidance to the year, we're demonstrating our commitment to delivering for customers and shareholders. Lastly, our team continues to be passionate about making a difference for patients. We recently held our first patient care week, where employees had the opportunity to experience the real impact of our products, solutions, and services, and how they're driving and delivering better outcomes for patients. This is a great example of the cultural transformation taking place at GE Healthcare. With that, we'd like to open it up for questions.

Livia, we're ready to open for questions.

Thank you. Ladies and gentlemen, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A roster. And our first question coming from the line of Ryan Zimmerman with BTIG. Your line is open.

Hey, Ryan.

Guys, good morning. And I just want to start off. So the book-to-build ratio came in at 1.01. I think orders were down, if I'm not mistaken, from last year by about 3%, 2.7%. But just correct me if I'm wrong on that, Helmut, because it's just a summation number in the G deck from last year. And then, you know, how do you think about kind of the seasonality of this dynamic, the book-to-build ratio, as we progress through the year?

Right, I think, let me probably remind you, the calculation of the book-to-build is orders over revenue. So our first quarter book-to-build, and especially our PDX sales, in PDX we have a one-to-one ratio of book-to-build. The backlog, maybe if I'll cover that a little bit, grew sequentially. So our RPO is now at around $14.5 billion, which is up, you know, 1%. And we saw positive orders growth. We don't disclose order growth in details, but we saw positive order growth in the quarter. And our total backlog is, you know, in this. Again, this was a very strong quarter in delivering, you know, top-line revenue growth. RPO is slightly up on a year-to-year basis.

And, Ryan, I would just add, I think, you know, 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, you know, 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, you know, the team delivered what we needed to deliver, and, you know, we're on track here to what we believe we need for orders growth throughout the year.

And I just want to ask about, we've heard some comments about the diagnostic pipeline improving and then driving the procedural environment. We heard that from some of the MedTech peers last week. And, Pete, I'd love to, you know, get your perspective on the environment, particularly from a diagnostics perspective. I mean, you're seeing it probably through some of the imaging volume and just kind of how you think about the balance of the year from a diagnostic screening.

Yeah, Ryan, it's a really interesting question, and obviously we have a certain lens into it. But I think, you know, 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, you know, almost any type of therapy, whether it be into musculoskeletal, whether it be into cardiac, oncology, everything is heavily gated by some level of diagnostic to choose, you know, a better decision, whether it be an implant, some type of interventional device to precisely fit that patient. And so, particularly in the imaging world, you know, we're still seeing significant demand in procedures for customers, meaning that their backlogs are still quite long. And, again, we don't think this is necessarily a blip. We think that with the rise of many new therapies, you know, whether it be Tavar or whether it be pharmaceuticals that require more follow-up and measurement, just the need for what we do to make sure that you're getting the optimization and outcome. but also managing cost is there. So we see it quite strong, and it's interesting. It's not just a U.S. phenomenon. I mean, we're seeing this in most markets around the world. Helmut, I don't know if you want to add anything.

Yeah, maybe I'll add a little bit. I think especially devices and digital solutions, we've adjusted HIMS last week, a lot of discussions how our devices can really help drive productivity to reduce the shortness they're having. That's really a key focus of our customer, which drives demand.

Thank you. And our next question coming from the line of Anthony Petone with Mizzouho Group. You'll end this open.

Thanks, and good morning. 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? And, you know, 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.

Yeah, Anthony. You know, I would say not a lot's changed since we reported even in our fourth quarter from that standpoint. I think, you know, we're encouraged by kind of the steady recovery of the global procedures, which is really the underpinning of this, which says if you have a lot of patients that need procedures, they need planning, they need evaluation done, and you don't have enough equipment, you know, that drives demand. And, again, it's not always new sockets. It may be software and upgrades to your fleet to bring new capabilities. So we see that happening. And if I just go around the world, you know, China has strong growth. Obviously, COVID for a couple of years, things opened up, a lot of demand there. Our intercontinental market, Southeast Asia and Latam, we're seeing actually similar strong growth as specific countries and areas, Indonesia, different areas in Southeast Asia and Latin America investing. Western Europe's quite stable. I think the continuation of some of the sick funds investments that took place coming out of COVID really just starting to deliver on that equipment. And the U.S. is, you know, look, since COVID, people have been prioritizing capital. I mean, so that's no new news for us. But, again, what we keep an eye on is what they're deciding to put it against. And I think with nursing costs starting to flatten out, you're seeing a little bit more of, I would say, positivity on that spend. That being said, we think we're going to be in a capital prioritization kind of focus throughout this year, which is why, you know, we're cautiously optimistic.

That's helpful. And then the follow-ups, one for you, Pete, and a quick one for Helmet on Margin. and intrigued by the comments on Alzheimer's disease, and maybe just a little bit of a description. Is that something that, you know, is driving demand now? And, you know, when you look out, you know, how long do you think, you know, that tailwind to the business can be with just new drug therapies coming to market? And then quickly for Helmet on Margin, when we think about the $200 million of standalone costs, just sort of the outlook on when you can perhaps see leverage on those new costs that were brought into the business. Thanks again.

Yeah, Anthony, look, on the Alzheimer's point, no, I don't think we're really seeing any impact on demand to date. But when you look at what can come, what the pipeline looks like, you know, we think there's going to be larger demand. I'll even pull the lens back a little bit further. It ties into part of Ryan's question as well. I think, look, bigger picture, imaging capabilities and diagnostics used to kind of manage how devices are executed, but probably even more importantly, expensive pharmaceutical injectable therapeutics, how they're utilized, how they're titrated, how they may be dosed, and the follow-ups on potential complications really seems to be a potential kind of norm in the future. So if you think about this case, neurosciences, if you think about in oncology with theranostics, if you think in cardiology with different follow-ups for structured heart or heart failure, we see that happening. And so, you know, we'll see how that plays out. But like in our case where we make the actual tracer Vizimol for amyloid beta plaque detection and quantification, really the only one that has that type of product that actually even colors it and separates it out, it hasn't been reimbursed. And so we believe once the therapies get reimbursement, like in other therapy areas, the companion diagnostics also do, that's what will enable some of the growth. And so I'm optimistic, you know, like most things, it will take a little bit of time. But over the next few years, I think there's going to be some interesting growth opportunities associated with that matchup. Helmut, do you want to take the margin question?

Yeah. So Anthony, I think around is $200 million of standalone costs. In 2023, we expect it with IT, Treasurer, and these costs, they are not in our segment margins. They were not in our segment margins in 2022. We're allocating them in 2023 based on revenue very generally, so I want to be sure that that is well understood. And to your question, when will we see leverage against those ones? To me, this is really dependent on how quickly we are exiting our TSAs. You saw me speak. We exited 40 TSAs in the first quarter here. We have more TSAs to exit that will take us into 2020 and 2026 as we are fully exited on the TSA side and can really build our own infrastructure. Thank you.

Thank you. And our next question coming from the lineup, Jason Bettner with Piper Sandler. You'll end this open.

Hey, good morning. Thanks for taking the questions. Congrats on a very nice start to the year. Maybe I'll start with organic growth. 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 four segments. I'm just curious if we should be thinking in the area of 1% to 2%, 2% to 3%, etc., 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, you know, maybe upward or downward bias in that pricing?

Yeah, Jason, it's Pete. I'll comment if Helmut wants to add anything to it. I think so. You know, it was a really great result, all four of our segments delivering quite nicely for us. And so from an overall growth standpoint, you know, we clearly saw volume as the key driver here and our ability to kind of move on our backlog, as well as some sell and install business as well that was taking place in our, and particularly our ultrasound business, and then the flow with its taking place in PDX and the injectable business. You know, I'd say we're in the 2% to 3% range relative to price coming through, and the vast majority of the rest of it is in pure volume and uplift.

Yeah. Maybe I'll let Alam say something about what Pete said. So this is our fourth quarter in a row now that we are seeing positive sales price. And as Pete said, you know, 2% to 3% accretion we expect in 2023. And in the outer years, that might, you know, flatten out what is the value we are providing our customers with those products. Because as we see new NPIs, we are looking very carefully what's the price accretion, but also what happens around margin accretion with those products. And lots of initiatives in place around VCP and platforming that will help and support that.

Thank you both. 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, 510K. But you were shown in a hymns here recently. Can you discuss where you're at with the FDA and securing the approval?

And then what early feedback can you share on Portrait Mobile for the markets in which it's available? yeah jason so so we're we're in with the agency we would expect here in the first half of this year to to be able to to move through unless there's other follow-up questions and stuff we're actually on the market in uh outside the united states primarily eu and and uh if you think of on portrait mobile it really takes this into new territory we we haven't really been a ward-based monitoring company, and so that's really our first entree into the area. We've already had some really good feedback from different customers on enabling continuous monitoring in the ward. I think one of the bets that we're making is, you know, coming out of COVID, there tended to be more continuous O2CO2 respiratory monitoring, and with the shortage of staff and stuff, being able to instead of episodically but constantly manage a patient, there's a big opportunity to manage your labor better by directly sending a message directly to a caregiver to check on that patient as opposed to just spot checking. So it's off and running. We'll talk more about it here in coming quarters, but we feel quite good about that as well. And then that's complemented with this introduction that we just received proof on which is the carescape canvas and the carescape is as a platform that actually has more ubiquitous use that can be used in acute care but also step down and you know what customers have told us is the challenge they have is you have to buy a different box from everybody for the different areas and carescape is one of those first platforms that enables you based on the acuity of the patient to add on more parameters but it's also designed for a future where you can actually gather the data on the patient and be able to apply artificial intelligence against it to actually predict when that patient is going to have issues. And so that's kind of our vision of why we're so excited about monitoring, is this potential in the future to be able to track constantly the patient, as well as predict when there might be an issue. So both of those are two new platforms for us, the first in many, many years, and we would expect that to be two of the horses in the monitoring group here that we'll be growing our business on.

Thanks so much. Looking forward to this.

Thank you. And our next question coming from the line of Ed Ridley Day with Redburn, Yolanda Silvan.

Hi, good morning. Thank you for taking my question, and congratulations to 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 quality you can give us on the phasing of the imaging margins for the year and where we should end up, that would be helpful. And I also had a follow-up question on patient care. Obviously, a very positive start to the year. We've mentioned some of them, but product lines driving that growth. And also, I don't know if you can, can you give us an idea of how much imaging, and then we'll jump over.

So I'll start with imaging margins. So obviously we are very focused on expanding the EBIT margins in the high teens, in the medium term for imaging. And if you look at in the first quarter, our margins were at 7.8% for imaging. those were slightly lower than what we saw in recent because we were shipping a higher component of hardware versus services in the quarter. But as we expect the services pull through, we expect those margins to improve. And what we also still were impacted in the quarter was, I would say, the cost for inflation. So what we have seen of inventory that was sitting on the balance sheet for imaging specifically was bringing down that margin. And the last comment I want to make in this is also that our imaging margins, as well as the other segments, were impacted by the segment recurring spin cost. So those $200 million I just talked a little bit earlier are roughly 100 basis points, which is impacting by confidence that the imaging margins, as we go throughout the year, will improve accordingly as inflation is getting less and less.

Yeah, I mean, and the other aspect, as you could imagine, many of the imaging products are much more sophisticated components, a lot more chips and stuff. And so some of those are burdened with, I'd say, higher cost items that we bought last year to make sure we could deliver for customers. And as that inventory moves through, which we think, well, as we move into the second half of the year, we'll see some margin lift from, you know, better productivity just from our sourcing standpoint. To your question on PCS, yeah, we were quite happy with the performance overall. It was reasonably a wide-scale kind of success in the quarter. I mean, our monitoring business was double digits. Our MIC business, which is into the neonatal area, was quite well, and also our anesthesia business. And I would highlight anesthesia because actually at the end of – in last year, we actually received PMA for tidal control, which is actually kind of a management of kind of parameters of oxygen and capturing of the agents in a much more effective way. And we are able to be able to capture more growth because of that upgradability, but also some more value. So it's a good start to the year for our PCS business.

Thank you. And one moment, please, for our next question. And our next question coming from the lineup, Larry Biggelson with Wells Fargo Yolenis Open.

Hey, Larry. Hey, morning, Pete. Morning, Helmut. Thanks for taking the question. Pete, 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, you know, the comps year over year from the contrast shortage. But even when I looked at that business on a sequential basis, it was up a lot. So what happened there, you know, what went well, and had to think about, you know, think about it from here. And I had to follow up.

Yeah, Larry, the real impact from a comp standpoint will be more in Q2. There really wasn't a negative effect last year. There was a little noise in it just relative to COVID coming out. But this is really about procedures growth and the need to do contrast-based imaging. If you think about particularly in CT, in the vascular world, any type of intervention you're going to do, intervascular, you're going to evaluate, you need to have a contrast agent, whether it be the brain throughout the body. And so it's showing that robustness there. We also have taken some, I would say, appropriate price increases to deal with escalating costs of things such as iodine. And so the combination in there is that procedures growth, which is driving our volume, but then also the pricing that we've taken place in PDX. And so we would expect that that business is going to continue to put up strong numbers, both top and bottom, the rest of the year. Helmut, would you add anything?

Maybe I'll just add, because you must remember, Larry, in second quarter where we had supply challenges, you know, in our factory in Shanghai, so there will be, you know, higher growth in the second quarter. And last year, you know, a small impact from inventory, you know, in the U.S., so there's also going to be higher growth during that quarter. But overall, as Pete said, we're very happy, I think, with that business, both 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.

Thanks for that. And, Pete, obviously we've seen media speculation on M&A involving GE Healthcare, and I know you won't comment on that specific asset, but can you comment on your thoughts on M&A in terms of deal size, areas of interest and financial criteria? Thanks.

Yeah, 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. And, you know, if you think about Amactus and Caption are probably emblematic of really what we look at. So, again, to emphasize with Amactus, it brought interventional biopsy capabilities into CT. We didn't have the best offering. This is going to give us a leadership offering to really fill out the capabilities to grow our business. I talked about Caption bringing artificial intelligence into point-of-care ultrasound to start to make it more usable into populations of non-sonographers, which we think is a huge opportunity. And so we look for technologies, both channel enablement as well as capabilities to enhance our overall strategy. And for the most part, they're typically tied deep into our plans that we have already laid out. They help enhance growth, some of our businesses. And, you know, we have all of our businesses in imaging and ultrasound, PCS, as well as PDX. And I'd say one of the encouraging things is, you know, there's a lot of interest out there. And, you know, we'll be disciplined in our approaches about how we look at them. But I think it's an important part of our growth strategy over the next, you know, three to five years. All right.

Thank you. And our next question coming from the Lionel, Veronica Dubujova with CDE-Lanis Open.

Hi, guys. Good afternoon. And thank you for taking my questions. If I can just revert back to one of the themes that's come up. I just was hoping you could maybe talk a little bit in terms of the order dynamics that you're Which of the four businesses are seeing the strongest order growth? And maybe the type of products that you're seeing most traction for as you look across but hospital CapEx landscape, is it premium, is it low-end, kind of how you're thinking about that? And then maybe just a circle back to China and whether that stimulus program that you had talked about in prior quarters has now come to an end, and is that something that would have helped T1, or do you think it continues into T2? And any comments you have on the competitive dynamics in China, in particular, and imaging, would be helpful as well. Thank you, guys.

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

That's correct, yes.

Okay. So, look, I think from an order standpoint and business growth, we're actually seeing, you know, nice growth and planning on it throughout the year. As you know, there's certain quarters and certain cyclical plays that promote others more or less. But I think from a standpoint of a lot of our bigger traditional diagnostic imaging equipment, whether it be MR, our molecular imaging portfolio between PET CT, our NUC-Med cameras, we're seeing actually strong demand as well as CT. And those tend to be the three big items. I would say within our interventional world, particularly our surgery business with C-Arms, with the growth of ambulatory surgical centers, those are across the board has multiple opportunities. Our handheld business, in particular, women's health. And we would expect throughout the year, we had a strong cardiovascular quarter last quarter. We would expect that with the new launch of the Vivid product last year, the new Voluson product last year, All of those have, you know, two to three years until peak year sales that will continue to see that. And I think you heard me mention around PCS, we actually, with fulfillment, we also have more sell and install opportunities as well. And I think the new monitoring platforms are going to drive growth and also the new anesthesia platform. So we see some pretty broad capabilities relative to our overall product. And then, again, I'll just pull in PDX, but obviously that's driven as a flow product tied to procedures. So we're seeing pretty broad strength across the board.

Question here. So we really saw, you know, strong growth in China was up double digits in the first quarter. You know, we see good momentum, you know, operating. You know, COVID, it has basically disappeared. So we're quite happy with the overall performance, you know, of our teams delivering, you know, for customers and patients. and then the stimulus, you know, I believe still out there and we feel quite optimistic about, you know, the rest of the year, you know, for our China market.

Yeah, and we've, you know, and I think dynamics, you know, 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 two 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.

Very clear. Thanks, guys.

Thank you. And our next question coming from the line of, Vijay Kumar with Evercore ISA, Yelena Selpen.

Hey, guys. Congratulations on the Q1 printing. Thanks for taking my question. Maybe my first one 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, you know, 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, you know, and how much is remaining? Perhaps some comment on how we should think about this guidance and back orders would be helpful.

Yeah, look, I think a good question. So first starts off where we're super happy and excited about our first quarter results. I think how we expected it to play out, it really landed where we had hoped. And so that's a great result. I would say the big part here is what this does with a strong first quarter is it helps really de-risk the back half of the year. We had quite a few questions talking about the ramp up and how we thought about that. It helps de-risk the backside of the year. I think we're going to have better insights into kind of the macro capital is and items. You know, as I mentioned, we're cautiously optimistic right now. But with our first quarter, let's get a few more months under our belt. And then we'll reevaluate it here as we finish second quarter and take a new look at how that is. But at this point in time, you know, again, we're cautiously optimistic that we're on track. And, again, I think of it as, in many cases, kind of reducing that type of ramp that we already had within our initial plan.

And, Vijay, to your question, this is really our top priority, so reducing the backlog, you know, is key. And in the quarter, we have an RPO of around $14.5 billion. It was very slightly up, you know, on a quarter-to-quarter basis, up, you know, sequentially. Before we have, on top of the RPO, we also have, you know, other backlog that is cancellable where we see never really any major cancellations. The total backlog is around $19 billion, you know, exiting the first quarter, which we are quite happy with because this is going to take us, you know, well into 23. Some of these orders also go into 24. So we're quite happy.

At this point, I mean, we 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.

Absolutely. That makes sense. Then one follow-up on that margins here, clearly Q1 coming in. I thought Q1 margin performance was quite pleasing despite the spot buys. Can you comment on what the pricing versus inflation spot by Dynamics was in Q1? And when you think about EPS guidance for the year, what is being assumed for FX for the year? And the margin range of 50 to 100 basis points, perhaps, should we be thinking about the higher end of the range?

Yeah, 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 with what we saw on price. Pete was commenting a little bit earlier. We typically see 2% or 3% in price, and we expect that it really should be delivered in 2023 positive. In terms of currency, we saw a 4% percentage point impact on currency in the first quarter. For the full year, we're looking now at points of impact on currency to the top line. So it clearly has gotten slightly better. But as Pete said earlier, this is really quite early in the year. This is our first quarter out here. And we're committed to the 50 to 100 basis points of margin expansion for the full year.

And I think, you know, Vijay, as we've talked about it, and consistently is we expect our margin rates 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. If those were to improve, obviously that would be a benefit that would come through in the P&L. But as Helmut said, it's still early in the year, and we're on track to what we committed to. Understood. Thanks, guys.

Thank you. And our last question coming from the lineup. Patrick Wood with Morgan Stanley. You'll end this open.

Fabulous. Thank you so much. And morning, Peter. Morning, Helmut. I've got two quick ones, which hopefully should be pretty easy. I guess the First is on photon counting. You know, when you're thinking about that, you know, the initial clinical data from some of your peers has been, I would argue, very strong versus base CT systems. So how do you view this technology? Do you view this as like marketing is expansive in that, you know, you can get a good incremental price kicker on the back of these systems? Or do you view it as really a way to sort of increase barriers to entry and, I guess, consolidate share even more tightly amongst the top two providers relative to the broader pool? How are you thinking about that opportunity, and are you thinking about it? Are we talking commercialization within a year or two, or is it a longer time frame than that for you?

Yeah, look, good question. I would say the first answer is how we're thinking about is what it's going to do to help with diagnosis, you know, patients and how it can change the game. I think, you know, we all think that photon counting has the potential to be a game changer. And the point being is, you know, it brings some of the capabilities of MR tissue characteristics and things of that nature that today you don't get on a CT scanner. So I think at a high level, part of this is taking a look at and saying the technology we're delivering on has the possibility to have many more, I'd say, energy separation levels, which actually can give you much more insights into what's actually happening at a molecular level, more so than the first generation products, which are based on cad tungstate for the most part. So that's part of it. I think, look, what we think is over time, all scanners most likely will move to that direction. You know, is that five years, ten years? I think that will be the adoption question. And a lot of that is about the cost curve. And our approach with Deep Silicone is based on the fact that we can actually ride a cost curve, we believe, more effectively than a rare earth element approach. And so that's how we think about it, that it will expand greatly. Obviously, as these products first come out over the next few years, they tend to be more elite, higher-priced institutions, but we're thinking ahead about how we can bring this to more of the broader masses. That's kind of it. We're very excited about it. I think it's a very interesting opportunity. If you think back to this whole point about characterization of diagnostics for drugs and things, photon counting will play a key role, we believe, in the future of that as well.

And then time frame on commercialization, any indication there for us?

Yeah, we haven't communicated yet specifically what we're thinking about. We'll talk about that in, you know, coming meetings.

Sure, I totally understand. And then last one for me, I guess, more around the kind of Q1 and the recent trends you've seen. And, you know, you touched on it earlier on the call, but any sense of how the demand is looking split by sort of new sockets versus replacement? Are you seeing a lot of new sockets come online, or is it more of a replacement market in the current environment?

Yeah, 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. In the United States, it's probably a combination of, you know, 60-40 install-based or fleet renewals with new growth. And the new growth typically is tied to probably more of an outpatient imaging or tied to an ambulatory surgical center type environment.

That's more than I would have thought. That's really helpful. Thanks so much.

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

Thank you. So, look, in closing, you know, we're very pleased with the strong start to the year, and we see significant opportunities ahead of us as we continue to innovate and solve some of these big challenges that we've talked about that our customers face in delivering high-quality care, you know, in and outside the hospital in a very cost-effective way. And we look forward to keeping you updated on our progress. Thank you for joining our call today, and I'm sure we'll see many of you at some upcoming conferences.

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