GE HealthCare Technologies Inc.

Good day, and welcome to GE Healthcare's third quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this call is being recorded. I would like to turn the call over to Carolyn Borders, Head of Investor Relations. You may begin.

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

Thanks, Carolyn. Good morning, everyone, and thanks for joining us today for our third quarter call. To start, I want to say we're pleased with our growth, margin, and cash flow performance in the quarter. Recently, we've launched several new products, which I'll talk about in greater detail later, and announced multiple strategic artificial intelligence based collaborations aimed at supporting new product introductions and clinical applications. We're honored to have received a grant from the Bill and Melinda Gates Foundation to develop ultrasound tools for less experienced healthcare professionals and support more effective obstetric and lung ultrasound screening for patients in low and middle income countries. We also signed a contract with BARDA, a division of the US Department of Health and Human Services, to develop advanced ultrasound technology with new AI applications for patients with lung pathologies and traumatic injuries. Both of these combined represent over $80 million of committed funding. Lastly, we announced a strategic collaboration with Mayo Clinic for innovation in medical imaging and theranostics to enhance precision diagnosis and improve patient treatment by using multimodal data, AI, and digital health solutions. We're excited about our recent collaborations and how this will help us deliver on our precision care strategy. The business has demonstrated resiliency and our team has executed this year. We're on track to meet our goals we set at the beginning of the year, and we're making good progress on our mid-range targets. Despite several macro challenges that occurred in 2023, we have been intensely focused on financial and operational execution to deliver on our commitments. Turning to slide three, we delivered strong third quarter performance with 6% year-over-year organic revenue growth driven by volume and price. Importantly, book to bill in the quarter was 1.03 times, slightly below our book to bill of 1.04 times in the second quarter. Customers cite rising procedure backlog as a reason for capital investments, particularly for products that we offer. Backlog remains robust at $18.4 billion, driven by services and imaging products, and remains more than $1 billion higher than pre-COVID levels, which gives us confidence in future quarters. Orders growth was 1% versus the same period last year. We recently completed a customer pulse survey in the US and see no significant change in sentiment on capital spending in the second half of 2023 versus the first half of the year. Orders growth can be lumpy in any given quarter, and results do not directly translate to near-term revenue growth. And this is why we give book-to-bill metric as well as total backlog. As it relates to China and the anti-corruption campaign, We saw a limited impact to our orders and revenue in the quarter. Both measures were up year over year. We continue to expect a limited impact in the fourth quarter. Also, as a reminder, fourth quarter 2022 orders experienced significant growth due to the China stimulus launched last year, which will influence the year over year comparisons next quarter. China continues to be an important market with a promising growth profile. During the quarter, we continue to make steady progress on our productivity initiatives and business optimization using lean. For example, delivery performance has improved over 15%, a direct result of implementing pool methodology. The number of purchase components classified as high risk for availability has reduced by approximately 35% year-to-date, and customer lead times have improved by more than 15% versus prior year. And lastly, customer satisfaction surveys for service have improved approximately 10%, supported by improvement in parts availability and the great efforts by the service team. On the profit line, we generated adjusted EBIT margin expansion while simultaneously accelerating R&D investment. This speaks to our execution capabilities as well as our commitment to funding long-term innovations. Turning to capital allocation, we remain committed to executing an optimized strategy with the focus on creating value for shareholders. Our strong free cash flow generation in the third quarter positions us to be flexible in our capital allocation priorities. We aim to deliver a dividend while continuing to evaluate organic and inorganic investments and deleveraging opportunities. Overall, global markets have remained resilient, our backlog remains healthy, and our team continues to execute. As a result, we're raising the low end of our adjusted 2023 EPS range, representing growth of 11 to 14%. Jay will now take you through our financials and business performance. Jay?

Thanks, Pete. Starting with our financial performance on slide four, for the third quarter of 2023, revenues of $4.8 billion increased 5% year-over-year and grew 6% organically. This was driven by increased volume and price. Book-to-bill was healthy at 1.03 times. Order dollars remained strong and continued to outpace revenues. On a standalone basis, third quarter adjusted EBIT margin was 15.4%. Sequentially, margin improved 60 basis points, benefiting from increased volume and productivity actions. Year over year, we generated 120 basis points of margin expansion through productivity initiatives and price, partially offset by planned investments and inflation. I'll elaborate on the actions we're taking to expand our margins shortly. Adjusted EPS was 99 cents, down 18% versus prior year due to interest expense, but up 14% on a standalone basis driven by increased volume. Pre-cash flow was up year-over-year due to our strong performance and inventory management. Moving to slide five, revenues grew 6% organically year-over-year. On a reported basis, product revenue increased 6% year-over-year and service revenue grew 5%. We saw strong organic revenue growth across all regions. As it relates to margin performance, please turn to slide six. Our adjusted gross margin of 41 percent in the third quarter was strong, driven by pricing and enhanced execution by our commercial teams, as well as variable cost productivity initiatives that we're driving. For example, in services productivity, we see lower logistics costs for parts and improved operational rigor. We also benefited from improving volumes and higher margin new product introductions. We're optimizing our G&A spend by rationalizing our real estate footprint and also simplifying our IT services and systems across the businesses to create efficiencies as we scale. We've also exited 130 transition service agreements to date. We expect some of the larger scale actions to have a greater impact on results in 2024 and beyond. We've made good progress and remain on track to deliver on our 2023 adjusted EBIT margin expansion guidance. This is primarily driven by gross margin expansion as we continue to invest in R&D, which was approximately 7% of revenues in the quarter. Now, let's discuss our segments. Turning to imaging on slide seven, We generated organic revenue growth of 5% versus the same period last year. This followed several quarters of strong year-over-year revenue growth, reflecting solid backlog and improved fulfillment in price. Revenue growth in the third quarter was driven by MI, CT, and MR. This included growth from several new product introductions aimed at driving improved patient outcomes and increased efficiency. Segment EBIT margin improved 150 basis points year over year as we made progress in driving productivity, price, and delivering higher volume. All of this more than offset planned investments. Importantly, EBIT margin also improved 150 basis points on a sequential basis. As previously noted, we expected that it would take a few quarters before pricing measures would catch up to inflation headwinds, and we're now seeing that happen. Turning to ultrasound on slide eight, organic revenue was down 1% year over year as we faced a challenging comparison versus the third quarter of 2022 when we delivered double digit organic revenue growth. Recall that the third quarter last year was the first quarter in which we started to realize improvements in our access to components for this business. Looking at the two year average, ultrasound revenue grew in the mid single digits. The market is stabilizing following COVID and supply chain challenges. We're continuing to execute and maintain our global leadership position. During the quarter, we saw a solid demand for newly launched products in our women's health and cardiovascular businesses. Segment EBIT margin of 22% was down 360 basis points year over year, primarily due to planned investments, including caption health and inflation. These were partially offset by productivity improvements. Our margin of performance reflects our commitment to both organic and inorganic investment, as well as technology leadership through AI integration as we seek to enhance precision diagnostics. In the U.S., our Venu Point of Care product portfolio now features AI for cardiac exams. This AI guidance technology provides real-time, step-by-step guidance to allow even new users to capture diagnostic quality cardiac images. We closed the caption health acquisition in February. Within six months, we incorporated this technology into our portfolio and we're evaluating other ultrasound use cases to drive future growth. Moving to patient care solutions, on slide nine, organic revenue was up 9% driven by volume and price as we were able to fulfill more backlog. Revenue improved as we continue to realize the benefits of supply chain-related actions taken over the past year. Performance was also driven by contribution from NPIs. PCS margin increased 120 basis points compared to the third quarter last year, driven by productivity, volume growth, and price, partially offset by planned investments and inflation. Investments support our monitoring portfolio transformation which enables broader metrics and device interoperability. We're excited about the new monitoring products that we recently launched and their impact over the next few quarters. Finally, moving to pharmaceutical diagnostics on slide 10, we had another strong quarter generating 12% year-over-year organic revenue growth. Segment EBIT margin of 28.2% improved 140 basis points sequentially but declined 230 basis points year over year due to raw material inflation and planned investments. This was partially offset by price and productivity actions and volume. We've seen PDX EBIT margins stabilized and we're encouraged by the strong continued growth of global imaging procedures, which drive the need for contrast agents. Turning to slide 11, I'll walk through our cash flow performance. We delivered strong results this quarter with free cash flow of $570 million up $22 million year-over-year. This was driven by better inventory management while absorbing interest and post-retirement benefit payments. Inventory improved versus prior year period as we continue to leverage lean and solidify our inventory daily management system. We're also realizing benefits from easing supply chain constraints and inflationary pressure. We saw solid results in controlling inputs while driving inventory turns for faster revenue conversion through lean events and activities organized across the business. I'm pleased with the fast progress addressing our legacy liabilities and cost structure. In fact, in the past quarter, we were able to achieve agreement to freeze our largest U.S. pension plan conserving cash that can now be allocated to fund investments to grow our business. The solid cash flow profile of our business positions us well for continued investment and deleveraging, and we remain on track to deliver free cash flow conversion of 85% or more for the full year. Now, let's turn to the outlook on slide 12. We continue to expect organic revenue growth in the range of 6% to 8%. As a reminder, our fourth quarter organic revenue growth will be compared against a very strong performance of 13% growth in the fourth quarter of 2022. We continue to expect full year adjusted EBIT margin in the range of 15.0 to 15.5% and the adjusted effective tax rate in the range of 23 to 25% for the full year. And given the strong performance to date, We're now raising the low end of our full year 2023 adjusted EPS range to $3.75 to $3.85 versus the prior range of $3.70 to $3.85 per share. With that, I'll hand the call back to Pete.

Thanks, Jay. Next on slide 13, I want to touch on a few exciting areas where GE Healthcare is investing to advance our precision care strategy. In imaging, we continue to make progress on the development of our photon counting CT technology. We've added Stanford Medicine as a research partner to scan human subjects on our photon counting CT prototype with deep silicone detectors. This innovation aims to enhance imaging capabilities and provide clinicians the information and data they need to improve patient outcomes across many care pathways. Photon counting CT technology with deep silicone, unique to GE Healthcare, has the potential to go well beyond the capabilities of traditional CT. And we look forward to continuing to gather data and incorporate feedback that will move our program forward. In ultrasound, we recently announced a collaboration with Nova Nordisk to advance the clinical and product development of peripheral focused ultrasounds. This marks our introduction into therapeutic ultrasound, exploring non-invasive, non-pharmacological methods to treat chronic diseases such as type 2 diabetes and obesity. Encouraging preclinical and early clinical data indicate potential use for people with type 2 diabetes. We are incredibly excited about the potential for this novel technology and its impact on improving patient care. In PDX, we recently made some exciting announcements to advance our delivery of precision care. For example, we signed a licensing agreement with Sophie Biosciences for phase two diagnostic tracers. The development of FAPI diagnostic targeted agents holds great potential for oncology and other conditions, including inflammation, fibrosis, and arthritis, by enabling detection of small primary or metastatic lesions. Finally, for the second year in a row, we topped the FDA's list with the most artificial intelligence enabled device authorizations of any med tech company, with 58. Through focused R&D spend, we're committed to bringing high growth innovative technologies to our customers to improve the way healthcare is delivered. These innovations will create differentiating value for GE Healthcare. Turning to slide 14, we recently centralized our care pathway strategy under our chief technology officer. Taha is leading our efforts to ensure that we are connecting our products across modalities for each disease state enabled by our digital solutions. On our last earnings call, I touched on this topic of Alzheimer's disease. Today, I'll discuss cardiology as an example, specifically AFib. to articulate how our solutions comprehensively address this condition. AFib, as many of you may know, is the most common arrhythmia diagnosed in clinical practice, affecting millions of people worldwide. It's often misdiagnosed or not treated appropriately, with up to 30% of cases missed in routine clinical exams. To advance our AFib care pathway, we recently launched CardioVisio, which integrates organizes and visualizes longitudinal patient data from multiple devices. Taking this data along with current guidelines from the American College of Cardiology, we were able to provide evidence-based clinical decision support from detection through monitoring. CardioVisio connects and presents the most relevant patient data from across the care pathway. And this helps to save time and identify more patients eligible for recommended therapies. This launch is an important step on our journey to integrate devices and digital solutions to assist cardiologists in caring for patients across the entire cardiovascular care pathway. In the future, we plan to expand CardioVisio to address additional areas such as coronary artery disease and structural heart. We also expect to launch similar innovations to support oncology and neurology by linking multi-vendor devices digital and disease-based solutions to better serve our customers and drive growth. Turning to slide 15, in summary, we've made substantial financial and operational progress year-to-date, demonstrating that our strategy is working. Our team continues to execute, and I'd like to thank all of our employees across the world for their dedication and efforts. Before taking your questions, I want to highlight the recent release of our first sustainability report since becoming an independent company. Corporate responsibility is core to our vision, and it embodies our purpose to create a world where healthcare has no limits. To learn more about our sustainability goals and future plans, visit our ESG page on our website. With that, let's open up our call to questions.

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

Thank you. If you'd like to ask a question, please press star 1-1. If your question has been answered and you'd like to remove yourself from the queue, please press star 1-1 again. Our first question comes from Vijay Kumar with Evercore. Your line is open. Hey, guys.

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

Yeah, Vijay, let me, I'll start at a high level and then see if Jay wants to add some comments. I just start by saying that we're continuing to see solid end market demand really around the world and including China. And I'll talk about that a little bit more specifically. Again, if you step back, you'll recall that in 21, 22, as customers, all of us were coming out of COVID, we saw really strong demand in different products from an orders growth standpoint. Ventilators, obviously, but CT, ultrasound, monitoring for continuous monitoring. And then that was followed by 2023 this year, which is essentially a transition year with tougher comparisons. But, you know, that's what we planned for. And so as we look ahead here, really going even into 24, we're expecting that to be kind of the first year with more of a normalized market environment since COVID, which, you know, we obviously view as very positive. So, you know, relative to, you know, to Q3, You know it's been a as kind of printed market I would say is how we've seen things if you switch over to your point on China I'd say you know we saw a limited impact to orders and sales in in q3 as I mentioned in the in the comments here we were actually up in orders and sales over 22 and q3 and we expect limited impact in in you know q4 and So, you know, it's good results overall there. And I'm just very proud of Ye Hao and our team in China really did a really nice job and worked through some tough challenges, as you can imagine. We're starting to see signs of the anti-corruption campaign stabilize here. We started to in late September. You know, I think a lot of market events in early August were kind of stopped, but then resumed by October. There was a recent anesthesia congress that you know, all reports are it was back to full capacity, whereas certain meetings earlier were low. So we believe that we're going to, you know, see a similar kind of trend here continue on in the fourth quarter.

Understood. And I had one follow-up here on margins, perhaps both to you and Jay. I think, Peter, you mentioned products like CardioVision, AI Solutions. How do you price these solutions and what's the margin profile for these kinds of products? And related to margins, Jay, I think you mentioned price caught up with inflation. Is that something we should be expecting to sustain into fiscal 24? Thank you.

Yeah, Vijay, maybe I'll start and then, Jay, you can talk a little bit more about price. So we're still early innings on the AI monetization, but it's super exciting. Obviously, we're humbled to be in one of the leadership roles to have new applications out. But the way we think about it to start is, you know, AI inside our products, which is really across our portfolio now, as those products come out, you know, they will bring in some cases 3, 4, 5 plus points of margin accretion on a given product to enable that. I think, you know, our example that we talk about is in MR where where an MR system that has Air Recon DL on it has quite a bit of step up of margin over one that doesn't. And so that's going to continue to grow. As we bring something like CardioVisio in which you mentioned, which again, we're just beginning to roll out as kind of a core offering that will go across many products and will incorporate AI over time, that will be a SaaS model where it will be a reoccurring revenue model I would say we will price it based on value structure. And from a margin standpoint, we would expect it to have typical software margins, something north of 75%, 80% in that range. And so this is going to be a couple-year evolution as we grow this. But this, again, we believe is the future of multimodal data and really adding value to help solve customers' issues. So, Jay, maybe you want to comment about price. Sure. Sure.

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

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

Good morning, and thank you for taking the question. This is the time of year we start looking forward, and I'm curious about a couple of things. in any particular order, how you're feeling about 2024 street revenue consensus in the mid-single digits, and is there anything about the order book year-to-date that would imply or give implications for 2024 that you can share now?

Hi, Joanne. Thanks for the question. We'll stop short of giving guidance at this point, but I would say a few things that can provide some color First, really pleased with the execution so far this year. I think our continued focus on orders execution, our continued focus on sales execution and margin enhancement really do set the stage for successful delivery of 2024 and beyond. Secondly, I would point to the backlog that we have in place. The backlog from Q2 to Q3 was essentially flat. despite 6% revenue growth. And a lot of that comes down to a book to build that's continued to be an excessive one. And so we're really happy with the backlog that's set up for 2024. The final thing I would say is, you know, we do regularly survey customers. Pete alluded to some of this. And we're seeing a decent backdrop set up for 2024. I think all of these elements are key ingredients in successfully delivering 2024. And so we're very focused on that as we go through our planning process in the coming weeks and months. Pete, anything to add? No, I think you covered it.

I think the point about the customer feedback is really the most important part. I mean, Jay and myself, obviously our old teams get out quite a bit around the world and talk one-on-one with CEOs and leaders of health systems. And again, both the commentary as well as our surveys that we do routinely kind of lean to the fact that second half compared to first half is very consistent on market and capital outlook. You know, we're not a company that's typically driven by procedures, but obviously the procedures drive our business and that continues to be strong. And then I would say we're hearing more and more incremental positive views about 24 from customers. You've seen prints recently from some customers, but also just from a standpoint of with their aging installed base and the procedural growth, many customers are thinking ahead about their needs and future. And obviously, we see this as a healthy outlook. So we're optimistic about how we see making the turn into 24.

Thank you.

Sure.

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

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

Yeah, Anthony, I would say, you know, when we think about our backlog, you know, we actually felt it's quite solid. I mentioned that it was 18 point, you know, 18 and change, $18.4 billion. With book-to-bill, you know how the math works. As we actually are having a book-to-bill that's positive, meaning that it's actually more orders are going in than revenues going out, We'll start next year with a backlog that's pretty close to where we are today, which is super healthy. And it's about a billion dollars above where we were pre-COVID. So that gives you plenty of gas in the tank to be able to continue to drive revenue. And again, with this business that can be lumpy on the orders front, that's an important dynamic. You know, I mentioned in China, I know there's been a lot of different news from different companies. We obviously felt the effects of the China anti-corruption early about customers disengaging at some level. But as that reintegrated in later in the quarter, obviously we put up good numbers with being able to outperform the previous year. The only other comment I would say relative to Q3, you know, in the U.S. towards the end of the quarter, we did see some longer deals. taking a little bit longer. And as you kind of peel the onion back on that, what it really is about is that some customers are seeing some higher project costs, more on the labor and construction side for install compared to their initial budgets. And so the deals are getting done for sure, but what that means is they may have to go back to their finance committee and say, hey, this is going to be 100 grand more and actually get another approval. And so, you know, I think that works its way through the systems as those estimates and the actual costs match up in the coming quarters. But that's probably the only thing we've seen that has kind of played out on the time horizon.

Very helpful. And quickly, Jay, just on the implied 4Q earnings, the beat 9 cents, midpoint is up by 2 cents for 4Q. So just anything of note as we look into the back end of the year here for the margin trajectory and if there are any headwinds that we're seeing, do those potentially slip into the first half of 24? Again, thanks and congratulations.

Yeah, thank you. Thanks for the question and the comment. Overall, we're pleased with the performance year to date. I think what we've seen across the board is the resiliency of the portfolio, continued focus on margin execution. I think all the key ingredients are in place. By the way, I would also point out very strong free cash flow performance in the third quarter, which is an intense area of focus for us. So I feel very good about what we delivered in the third quarter. As we move to the fourth quarter, the probability, our confidence in our ability to achieve the full year outlook has definitely increased. We raised the low end by five cents, which implies two and a half cents. We don't really have material changes to the fourth quarter outlook. We feel solid about that. I would point out that there were a couple of cents of FX. The way our FX forecast worked out and the subsequent rate moves, we had a bit of favorability in EBIT in the third quarter related to foreign exchange, a couple of cents. And then the fourth quarter is a couple of cents lighter than the forecast we put together. That's the most noteworthy item. Other than that, I think we're going to focus on continued execution in the fourth quarter. and setting ourselves up for a successful 2024. Thanks again.

Thank you. Our next question comes from Patrick Wood with Morgan Stanley. Your line is open.

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

Yeah, Patrick, great question. Look, I think it's a convergence of many different things. Obviously, with the higher costs, that took place during the COVID window, sometimes that's a necessity for all to kind of reflect on your pricing strategies and where you are. And so I think that's some level of a beginning catalyst. It's been a really important part of our kind of strategy as a company to talk about that we want to be paid fairly for what we come up with. I think when you look at the ROI on many of the products we make, you know, they pay for themselves in months, not years. And many of these products are held for seven to eight years. So the return on investment, whether you're paying 2% money or 8% money is still very, very good. And I think that's part of it and getting the confidence in your commercial teams, um, that that's the reality and how to sell that value. I think that's been part of it. The other aspect is, is innovation investments. You know, if you're innovating and coming out with something every three to five years, versus something new every 18 months that you can actually ask a little bit more for because it actually creates more value, that also brings price up. And that's an important part of our strategy. But at the end of the day, we have to demonstrate that we bring more value for customers and show that the returns are there. And I think things such on the digital side and artificial intelligence that can actually reduce workflow It can actually take work out of the system and actually can treat more patients as a winner. We talk about Air Recon DL. You have a 10-year-old product. We do an upgrade. We actually ask a reasonable value for that that's higher margin than we would typically get on just the hardware alone, and you get a 50% increase in throughput, and we also take your capabilities to state-of-the-art. Those are the kind of things that we're excited about, and I think more of the software applications and capabilities we have coming forward are going to deliver on that.

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

When you say spec, you're talking about different specifications on the modalities, changes?

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

Yeah, I think, look, what's becoming, and as you know, in this industry, you know, there are very few kind of brand new customers to imaging, right? If you just take imaging and even take monitoring or anesthesia out of it. And so there tends to be a much larger fleet discussion that takes place. You know, you don't need state-of-the-art everywhere, but you need workhorse systems in certain parts, whereas you may need certain really cutting-edge capabilities in other areas. I mean, this whole Alzheimer's discussion that we're kind of helping Sherpa certain customers through on their fleet is where do you need the pet capabilities at? Where do you need the certain MR capabilities? How's that tied to infusion center? There's a lot more of that discussion going on and it tends to be a little bit more of a heterogeneous installed base based on needs. But again, that's how we can demonstrate How do you match up what you're trying to achieve, Mr. Customer, with which products that you need? And so this idea of a multi-site fleet strategy is becoming more and more a part of what we do, both domestically as well as big markets around the world. Awesome.

Thank you for taking the questions.

Thank you, Patrick.

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

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

Sure. So, Larry, in terms of order growth, I think one of the key things to consider is the book-to-bill ratio. We are still in excess, orders in excess of sales by a margin of 1.03 times this quarter. And we expect, you know, over time that, you know, that's something that we've seen for essentially the last seven or even more quarters. We've seen very robust book-to-bill ratio. And what that does is it allows us to set up a backlog which can allow for successful execution on sales in future years. And so I think, you know, for us, there's always volatility in a given quarter on orders. We've discussed that as it relates to this particular quarter. But overall, we feel quite good about what we've been able to execute on from both an order standpoint, from a book-to-bill standpoint, and then also a high-quality backlog standpoint. I think those are the three ingredients, all of which that we have to look at in conjunction with one another when we look at the health of the portfolio and the revenue projections that we have in place. So I think really that's the overall story. We don't really give orders guidance per se. It's something that we target over time. But, you know, we feel good about this setup. And furthermore, as we think about how customers are feeling, the surveys that we've done and also the customer reports that we're seeing indicate that the backdrop should be pretty good going into next year. So, I don't know, those would be a few comments that I'd make. Pete, I don't know if you want to add anything.

I think you hit it. I think the key here is that the backlog is very healthy and And we exit the year with really the same level, if not larger backlog than how we started. So we're in that same range, again, which gives us confidence going forward. I would point out, you know, PDX continues to be strong as well, which actually isn't a backlog business, but that's continual contract business, as well as service growth. I mean, we talked about last year gaining some share. continuing to do so as we started this year. And the benefit of that is once the warranty period rolls off, month 13, you move into contracts. And so that's beginning to drive more service growth, which has higher margins. It also has a multi-year continuum to it. So about half of our revenues are capital, so to speak, on a win-win basis of the week, whereas the rest of the business is actually reoccurring. So we feel good, Larry, about the position of where we're at right now, all things considered in the world.

That's super helpful. The company talked about getting the high teens to 20% adjusted EBIT margin over the medium term, which I think you guys defined as three to five years from 22 or 23. And before we initiated coverage, Jay, the company defined that, I think, at about 17% in 2025, 20% in 2027. Has anything changed? Are those still the goals? And is there any reason margins shouldn't increase next year? Thanks.

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

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

Good morning. Thanks for taking the questions. Just a couple of clarifying questions first for me. Did China actually grow because – If I look at comments from Philips, United Imaging, Mindray, I mean, all saw very meaningful declines. And I'm just trying to get a sense of what is happening in China and whether you guys are winning some share there or if the market is down as much as some of the others have suggested.

You know, Ryan, we were up.

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

Very helpful, Pete. And then Jay, you called out the TSAs. I'm just curious kind of where you're at from a percentage standpoint in terms of rolling off TSAs from GE. What kind of impact do you expect from those in 2024?

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

Thank you.

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

Hey, good morning. Thanks for taking the questions. Congrats on a good quarter here. I want to follow up on some of the prior questions on orders. Sorry to beat the horse here, but I think your comments on China will come as a relief today. But can you maybe provide some of that same directional commentary for orders and your other major geographies like the U.S. or Europe for the third quarter? Was the U.S. down a little bit based on some of those project cost comments you made? And does that mean Europe was up? Really just trying to put the puzzle together there. And then is there anything you'd call out for us to keep in mind from a comp perspective for the U.S. or Europe, like you mentioned, with the China stimulus program?

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

No, I think that's sufficient. Thanks. All right. Thanks. Then one follow-up, just seeing a disclosure in the 10-Q regarding the amendment to your employee pension plan with benefits frozen in effective December of next year. I know you mentioned in your prepared remarks, Jay, Can you provide some additional comments here, just, you know, what's changing with this amendment? What are the mechanics? What does it mean from a liability or cash flow perspective for GE Healthcare?

Sure. I would maybe take a step back and talk about we have a very active approach to managing the balance sheet. For us, you know, this idea of having a healthy investment-grade balance sheet is really core to what we're trying to achieve. I think we've got a very good cash flowing business, and what that will allow us to do is first enhance the debt side of the balance sheet, and then along the way continue with business development, and then also evaluate other alternatives, things like dividend, which we have in place, but also share buyback. And so very active approach to managing the balance sheet. As it relates to the pension, we had a very large pension liability. And for us, you know, we have an active approach there as well with respect to risk reduction. We froze a remaining portion of the U.S. plan, which is effective beginning in 2025. It doesn't really have a material impact on the size of the liability. The benefits are in 2025 and beyond. There will be lower service costs and lower projected cash contributions. everything else being equal. So what it really does is it sort of minimizes the range of outcomes with respect to the pension, eliminates some risk with respect to the pension versus creating a real economic windfall for us. So the savings will be in service costs over time and something that starts to show up in 2025 and beyond. All right. Very helpful. Thank you.

Thank you. Our last question comes from Suraj Kalia with Oppenheimer. Your line is open.

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

Yes, Rich, thanks for your question. Maybe I'll take the first one, and then Jay can talk a little bit about some of the broader demand procedures and how we're looking at it. What I mentioned was actually for peripheral use of ultrasound for for therapy so didn't mention actually going into other therapies but we actually have had some research work that's been going on for some time on the use of peripheral ultrasound to actually help out with stimulation of different nerves focus on the liver and to actually be able to change the course of certain disease states. And so this is very early, but it's a collaboration we announced with Novo Nordisk that will work together. And so this is what folks would categorize as bioelectric medicine. And again, peripheral focus ultrasound. If you're interested in it, there's actually been some articles. Most recently in 21, there was a great article in Nature about how the products can actually help modulate information, stimulate the liver. But this is potentially an opportunity for a way of a non-pharmacological approach to actually help change disease courses, as well as working in conjunction with pharmacological solutions. And so this is obviously a longer-term investment, but it's something actually that is actually funded in the near term with our partner. and we'll work jointly on this. But this is a pretty exciting opportunity to leverage what we know and partner up with a world-class pharmaceutical company. Jay?

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

So, look, thanks to everyone for joining us today. It's been 10 months since the spin. It's amazing how fast time flies. We've successfully worked through a number of the macro challenges, some we just talked about, and our team's really delivered well on its commitments. We're looking forward to closing out the year and maintaining strong momentum as we approach 2024. We hope to see many of you, and some of you if not, soon at the Radiological Society of North America in Chicago, one of our biggest congresses, at the end of November, or one at the upcoming investor meetings we'll participate in. That ends the call. Thank you very much.

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