GE HealthCare Technologies - Q1 2023

Transcript

Operator (participant)

Good day, ladies and gentlemen, welcome to the GE HealthCare first quarter 2023 earnings conference call. My name is Livia, I'll be your conference coordinator today. As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today's conference, Carolynne Borders, Chief Investor Relations Officer. Please proceed.

Carolynne Borders (Chief Investor Relations Officer)

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. With that, I'll hand the call over to Peter.

Peter Arduini (President and CEO)

Thank you, Carolynne. 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. 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, improved pricing, and commercial execution. We expanded adjusted EBIT margin year-over-year through price and lean initiatives focused on cost and operational effectiveness. We're on track to achieve our margin expansion goals for the year. We continue to monitor customer prioritization of capital purchases of our products. 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 Caption Health and IMACTIS, which provide us access to new technologies, markets, and clinical capabilities. I also want to highlight today's declaration by our board of a $0.03 dividend for the first quarter of 2023. 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 ability 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.

Helmut Zodl (VP and CFO)

Thanks, Pete. Turning to our financial performance. For the first quarter of 2023, revenues of $4.7 billion increased 8% year-over-year and grew double digits at 12% organically. This was primarily driven by strong product growth across all segments. 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 versus services. 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's room for more improvement. We have lean action plans in place to continue to expand margins further through volume, price, and productivity initiatives across the company.

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 the 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 1.01x. 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 growth as we go forward. 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 growth 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 continued 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 flag parts since the first quarter 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 2022. 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. We expect continued 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 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 capital. Overall, we expect steady growth in demand in 2023 with a number of drivers, including a continued 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 through 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 from inflation and planned investments, including the Caption Health acquisition. We expect the EBIT 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 intelligence solutions. Moving to patient care solutions. Revenue was up 11% organically, driven by volume and price. This resulted from greater backlog fulfillment as supply challenges eased, particularly for electronic components. We benefited from dual site production for highly constrained products.

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 EBIT 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 demands. Next, I'll walk through our cash performance. During the quarter, 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 re-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 turns and over $100 million of improvement in intra-quarter inventory. Strong cash flow generation will allow us to pay down debt and invest organically in and inorganically in our business. We are pleased to initiate a dividend with opportunity for growth over time. Our dividend philosophy is driven by proven capital planning, as well as a strong revenue and earnings growth potential and a robust free cash flow profile.

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 5%-7%, with stronger 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%-15.5%. This would represent an expansion of 50-100 basis points over a 2022 stand-alone adjusted EBIT margin of 14.5%.

We also expect to see an increase in adjusted EBIT margin rate from the first half 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 effective tax rate remains in the range of 23%-25%. Our full year 2023 adjusted EPS is unchanged in the range of $3.60-$3.75 percent, representing 7%-11% growth. This compares to 2022 stand-alone 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 CapEx to be in the range of $350 million-$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 our 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 quarter. 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. In closing, it has been a strong start to the year and we are confident in reaffirming our guidance.

Now I'll hand back to Pete.

Peter Arduini (President and CEO)

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-pitch helical and gated cardiac imaging, which are just a few of our important milestones in development.

During the quarter, we also announced our acquisition of Caption Health, 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, this helps us obtain diagnostic images, providing advancements for patient care outside the typical hospital-only setting. 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 510(k) clearance of our CARESCAPE Canvas monitoring platform. This interoperable solution can flex based on individual patients' needs for precision 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 represent initial steps towards realizing mission-critical infrastructure transformation that leverages the Edison platform and enables artificial intelligence in 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. This includes our Vizamyl 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 Kass-Hout, 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, we see ongoing opportunities to drive productivity and growth. Our backlog remains solid, we're confident that we are investing in the right areas to drive long-term innovation. With reaffirming 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 and also access to care. This is a great example of the cultural transformation taking place at GE HealthCare. We'd like to open it up for questions.

Carolynne Borders (Chief Investor Relations Officer)

Livia, we're ready to open for questions.

Operator (participant)

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

Peter Arduini (President and CEO)

Hey, Ryan.

Helmut Zodl (VP and CFO)

Morning, Ryan.

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

Sorry, I was on mute there. Congrats, guys. Good morning. Just want to start off. The book-to-bill ratio, you know, came in at 1.01. I think orders were down, if I'm not mistaken, from last year by about 3%, 2.7%. Just correct me if I'm wrong on that, Helmut, 'cause it's just a summation number in the GE deck from last year. Then, you know, how do you think about kind of the seasonality of this dynamic, the book-to-bill ratio, as we progress through the year?

Helmut Zodl (VP and CFO)

Yeah, Ryan, I think, let me probably remind you the calculation of the book-to-bill is orders over revenue. Our first quarter book-to-bill at 1.01 is really reflecting our 12% revenue growth. With improved fulfillment and especially our PDX sales. In PDX, we have a 1:1 ratio of book-to-bill. The backlog, maybe if I'll cover that a little bit, grew sequentially. Our RPO is now at around $14.5 billion, which is up, you know, 1%. We saw positive orders growth. We don't disclose order growth in details, but we saw positive order growth in the quarter. Our total backlog is close to $19 billion, you know, in this.

This was a very strong quarter in delivering, you know, top-line revenue growth. At the same time, our RPO is slightly up on a year-to-year basis.

Peter Arduini (President and CEO)

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. 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. 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.

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

Got it. Very, very helpful. Just wanna 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. 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 perspective.

Peter Arduini (President and CEO)

Yeah, Ryan, it's a really interesting question. Obviously, we have a certain lens into it. 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. Particularly in the imaging world, you know, we're still seeing significant demand, and procedures for customers, meaning that their backlogs are still quite long. 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 TAVR 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. We, we see it quite strong, and it's interesting, it's not just a U.S. phenomena. I mean, we're seeing this in most markets around the world. Helmut, I don't know if you wanna add anything?

Helmut Zodl (VP and CFO)

Yeah, maybe I wanna add a little bit. I think, when spending a lot of time with our customers, especially devices and digital solutions, we've adjusted hints in the last week. A lot of discussions how our devices can really help drive productivity to reduce, you know, that, I would say, challenge on the backlog, and the, shortages on personnel that some of our customers are having. That's really a key focus of our customer, which drives demand.

Ryan Zimmerman (Managing Director and Medical Technology Analyst)

Got it. Thanks for taking the questions, and congrats on the quarter.

Peter Arduini (President and CEO)

Thanks, Ryan.

Operator (participant)

Thank you. Our next question coming from the line of Anthony Petrone with Mizuho Group. Your line is open.

Anthony Petrone (Managing Director, Senior Medical Devices, Diagnostics and Therapeutics Equity Research Analyst)

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. You know, maybe rounding out just the discussions with hospital customers. You know, what are you hearing on the capital spending front? 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. Maybe just your thoughts on CapEx environment, and then I'll have a couple of follow-ups. Thanks.

Peter Arduini (President and CEO)

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. Again, it's not always new sockets. It may be software and upgrades to your fleet to bring new capabilities. We see that happening, and if I just go around the world, you know, China has strong growth. Obviously, COVID for 2 years, things opened up, a lot of demand there.

Our intercontinental markets, Southeast Asia and Latin, 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. The US is. You know, look, since COVID, people have been prioritizing capital. I mean, that's no new news for us. Again, what we keep an eye on is what they're deciding to put it against. 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 gonna be in a capital prioritization kind of focus throughout this year, which is why, you know, we're cautiously optimistic.

Anthony Petrone (Managing Director, Senior Medical Devices, Diagnostics and Therapeutics Equity Research Analyst)

That's helpful. Then, follow-ups, one for you, Pete, and a quick one for Helmut on margin. 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? 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? Quickly for Helmut 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.

Peter Arduini (President and CEO)

Yeah, Anthony, look, on the Alzheimer's point, no, I don't think we're really seeing any impact on demand to date. 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.

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. You know, we'll see how that plays out. But like in our case, where we make the actual tracer Vizamyl 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. 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. 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 gonna be some interesting growth opportunities associated with that match up. Helmut, do you wanna take the margin question?

Helmut Zodl (VP and CFO)

Yeah. Anthony, I think around this $200 million of standalone costs, in 2023, we expect an estimated $200 million of those recurring incremental expenses. Those are primarily for support functions, so it's IT, treasury, IR, and so forth. 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. I wanna be sure that that is well understood. To your question, you know, when we will see leverage against those one, 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, you know, quarter here. We have more TSAs to exit that will take us into 2024.

I expect we'll see leverage against these $200 million of incremental recurring spin costs, you know, as we go into 2025 and 2026, as we are fully exited, you know, on the TSA side and can really build our own infrastructure.

Anthony Petrone (Managing Director, Senior Medical Devices, Diagnostics and Therapeutics Equity Research Analyst)

Thank you.

Operator (participant)

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

Peter Arduini (President and CEO)

Morning, Jason.

Helmut Zodl (VP and CFO)

Morning, Jason.

Jason Bednar (Managing Director and Senior Research Analyst)

Hey, good morning. Thanks for taking the questions. Congrats on a very nice start to the year. Maybe I'll start with organic growth. Just as we peel apart the components of the one, two 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 price and tailwinds in each of the four segments. Just curious if we should be thinking in the area of 1%-2%, 2%-3%, et cetera, when we think at the corporate level. 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?

Peter Arduini (President and CEO)

Jason, it's Pete. I'll comment, see if Helmut wants to add anything to it. I think you know, it was a really great result, all four of our segments delivering quite nicely for us. 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 in particularly our ultrasound business and then the flow with it's taking place in PDX in the injectable business. You know, I'd say we're in the 2%-3% range relative to price coming through and the vast majority of the rest of it's in pure volume and uplift.

Helmut Zodl (VP and CFO)

Yeah. Maybe I left a little bit of comment, you know, on that as well, Jason, what Pete said. This is our fourth quarter in a row now that we are seeing positive sales price. As Pete said, you know, 2%-3% accretion we expect in 2023. In the outer years, that might, you know, flatten out a little bit to 1%-2%. What's really most important is the value we are providing our customers in with those products. We not only focus on price, but also really focus on the gross margin expansion because as we see new NPIs, we're looking very carefully what's the price accretion, but also what happens, you know, around margin accretion with those products.

Lots of initiatives in place around VCP and platforming that will help and support that.

Jason Bednar (Managing Director and Senior Research Analyst)

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

Peter Arduini (President and CEO)

Yeah, Jason. We're in with the agency. We would expect here in the first half of this year to be able to move through unless there's other follow-up questions and stuff. We're actually on the market in outside the United States, primarily EU. If you think of the focus on Portrait Mobile, it really takes us into new territory. We haven't really been a ward-based monitoring company, 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 O2, CO2 respiratory monitoring.

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, your labor better by directly sending a message directly to a caregiver to check on that patient as opposed to just spot checking. It's off and running. We'll talk more about it here in coming quarters, but we feel quite good about that as well. That's complemented with this introduction that we just received approval on, which is the CARESCAPE Canvas. The CARESCAPE is a platform that actually has more ubiquitous use that can be used in acute care, but also step down. 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.

CARESCAPE's one of those first platforms that enables you based on the acuity of the patient to add on more parameters. 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. 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. Both of those are, you know, 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, you know, group here that we'll be growing our business on.

Jason Bednar (Managing Director and Senior Research Analyst)

Excellent. Thanks so much. Looking forward to it.

Peter Arduini (President and CEO)

Thanks.

Operator (participant)

Thank you. Our next question coming from the line of Ed Ridley-Day with Redburn. Your line is open.

Ed Ridley-Day (Head of Global MedTech and Life Science Equipment Research)

Hi, good morning. Thank Thank you for taking my question and congratulations on a strong quarter. Firstly, on imaging, great start to the year. If you could, perhaps, help us with the phasing on the margin. Appreciate a lot of investment, some of which you've spoken to today, given the opportunity. If there's more color you can give us on the phasing of the imaging margins for the year and where we should end up, that would be helpful. I also had a follow-up question on patient care. Obviously a very positive start to the year. You've mentioned some of them, but where were the particular strengths in the product lines driving that growth?

If you can give us an idea of how much of the growth in the first quarter was sort of backlog pull-through?

Peter Arduini (President and CEO)

Helmut, you want to start maybe with comment on imaging, and then we'll jump over to PCS?

Helmut Zodl (VP and CFO)

Yeah. I'll start with imaging margins. Obviously we are very focused on expanding the EBIT margins, you know, in the high teens, you know, in the medium term, you know, for imaging. If you look at, in the first quarter, our margins, you know, were at, you know, 7.7 or, you know, around 8% for imaging. Those were slightly, you know, lower than what we saw, you know, in the fourth quarter, there was a clear reason because we were shipping a higher and a component of hardware versus services, you know, in the quarter. As we expect, you know, the services pull through, we expect those margins to improve.

What we also still were impacted in the quarter was, I would say the cost for inflation. What we have seen of inventory that was sitting on the balance sheet, you know, for imaging specifically was bringing down that margin. The last comment I wanna make, you know, in this is also that our imaging margins as well as the other segments were impacted by the segment recurring, you know, spin costs. Those $200 million I just talked a little bit earlier are roughly, you know, 100 basis points, which is impacting basically each of the segments. We have, you know, confidence that the imaging margins as we go throughout the year will improve, accordingly as inflation is getting less and less.

Peter Arduini (President and CEO)

Yeah, I mean, the other aspect, as you could imagine, many of the imaging products are much more sophisticated components, a lot more chips and stuff. 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. As that inventory moves through, which we think will, as we move into 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, you know, 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. I would highlight anesthesia because actually at the end of 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. We are able to be able to capture more growth because of that upgrade ability, but also some more value. It's good start to the year for our PCS business.

Operator (participant)

Thank you. One moment please for our next question. Our next question coming from the line of Larry Biegelsen with Wells Fargo. Your line is open.

Peter Arduini (President and CEO)

Hey, Larry.

Larry Biegelsen (Senior Medical Device Equity Research Analyst)

Good morning.

Peter Arduini (President and CEO)

Morning, Larry.

Larry Biegelsen (Senior Medical Device Equity Research Analyst)

Hey, morning, Pete. Morning, Helmut. Thanks for taking the question. Pete, I don't think there's been a question on pharm diagnostics yet. That was extremely strong. Pete, help us understand, you know, how much that benefited from the comps year-over-year from the contrast shortage. Even when I looked at that business on a sequential basis, it was up a lot. How, what happened there? You know, what went well, how to think about, you know, think about it from here? I had a follow-up.

Peter Arduini (President and CEO)

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. This is really about procedures growth and the need to do contrast-based imaging. If you think about, particularly in CT and the vascular world, any type of intervention you're gonna do intervascular or you're gonna evaluate, you need to have a contrast agent, whether it be, you know, in the brain, throughout the body. 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.

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. We would expect that that business is continue to put up strong numbers both top and bottom the rest of the year. Helmut, would you add anything?

Helmut Zodl (VP and CFO)

Yeah, maybe I just add, because you might 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. In the fourth quarter, we also had last year, you know, a small impact, you know, from inventory, you know, in the U.S., so there's also gonna be higher growth during that quarter. Overall, as Pete said, we're very happy, I think, you know, with that business. I suppose the volume growth and also price is a strong contributor for the growth. Margins, as you've seen, are quite strong and will continue to improve. Yeah.

Larry Biegelsen (Senior Medical Device Equity Research Analyst)

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

Peter Arduini (President and CEO)

Yeah, Larry. look, I mean, you know, 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. you know, if you think about Imactis and Caption are probably emblematic of really what we look at. Again, to emphasize, with Imactis, it brought interventional biopsy capabilities into CT. We didn't have the best offering. This is gonna 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. We look for technologies, both channel enablement as well as capabilities to enhance our overall strategy. For the most part, they're typically tied, you know, deep into our plans that we have already laid out. They help enhance growth, some of our businesses. You know, we have programs going on in all of our businesses, in imaging and ultrasound, PCS, as well as PDX. 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.

I think it's an important part of our growth strategy over the next, you know, three to five years.

Larry Biegelsen (Senior Medical Device Equity Research Analyst)

All right. Thank you.

Operator (participant)

Thank you. Our next question coming from the line of Veronika Dubajova with Citi. Your line is open.

Veronika Dubajova (Managing Director, Head of Medical Technology and Healthcare Services Research)

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, Pete, I just was hoping you could maybe talk a little bit in terms of the order dynamics that you're seeing, which of the four businesses are seeing the strongest order growth? Maybe the type of products that you're seeing most traction for as you look at across that hospital CapEx landscape, is it premium? Is it low end? Kind of how you're thinking about that. Maybe just to 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 Q1, or do you think it continues into Q2?

Any comment you have on the competitive dynamics in China in particular in imaging would be helpful as well. Thank you, guys.

Peter Arduini (President and CEO)

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

Veronika Dubajova (Managing Director, Head of Medical Technology and Healthcare Services Research)

That's correct, yes.

Peter Arduini (President and CEO)

Okay. Look, I think from a 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. 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, PET/MR, our Nuc Med cameras, we're actually seeing 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 strong growers.

Our ultrasound business, you know, across the board has multiple opportunities, our handheld business, in particular women's health. 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 till peak year sales that we'll continue to see that. 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 gonna drive growth and also the new anesthesia platform. We see some pretty broad capabilities relative to our overall product.

Again, I'll just pull in PDX, obviously, that's driven as a flow product tied to procedures. We're seeing pretty broad strength across the board.

Helmut Zodl (VP and CFO)

Veronika, I can cover the China question here. We've really saw, you know, strong growth in China. It was up double digits in the first quarter, and we expect, you know, that demand to continue. You know, we see good momentum, you know, going through the second quarter. Really, I think China is really back, so the manufacturing sites are all 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. The stimulus, the market will remain strong, whether there is, you know, stimulus, you know, beliefs still out there, and we feel quite optimistic about, you know, the rest of the year, you know, for our China market.

Peter Arduini (President and CEO)

Yeah, we've, you know, to your competitive question, I think dynamics, you know, as we've been competing in China for 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. As Helmut said, the bigger point here is after two years of the 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 gonna drive the need for our products.

Veronika Dubajova (Managing Director, Head of Medical Technology and Healthcare Services Research)

Very clear. Thanks, guys.

Operator (participant)

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

Vijay Kumar (Senior Managing Director)

Hey, guys, congratulations on this Q1 print, and 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. With the five to 7%, was that reiterated on the top line? Can you just talk about why the guidance perhaps low-end wasn't tweaked up? You know, clearly that 12% in Q1, we've seen the backlog being worked through, component supplies getting better. How much of that backorders 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 backorders would be helpful.

Peter Arduini (President and CEO)

Vijay, look, I think good question. First starts off, we're super happy and excited about our first quarter results. I think if, you know, how we expected it to play out, it really, you know, landed where we had hoped. 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. You know, we had quite a few questions talking about the ramp-up and how we thought about that profile. That really helps de-risk the backside of the year. I think we're gonna have better insights into kind of the macro discussions, where capital is in items. You know, as I'd mentioned, we're cautiously optimistic right now.

With our first quarter as a standalone company, 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. At this point in time, you know, again, we're cautiously optimistic that we're on track. Again, I think of it as, in many cases, kind of reducing that type of ramp that we already had within our initial plan.

Helmut Zodl (VP and CFO)

Vijay, to your question around the backlog, obviously delivering for patients and customers is really our top priority. Reducing the backlog, you know, is key. 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. Despite the strong shipments and revenue delivery of 12%, the backlog actually was up, you know, sequentially. As I've commented before, we have on top of the RPO, we also have, you know, other backlogs that is cancelable, where we see that 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 gonna take us, you know, well into 2023.

Some of these orders also go into 2024. We're quite happy where the backlog is at this stage.

Peter Arduini (President and CEO)

Yeah. At this point, I mean, we're well positioned to obviously deliver upon our commitments. 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. At this point in time, it's kind of prudent, first quarter as a public company to kind of stay where we're at, and we're quite happy with the results.

Vijay Kumar (Senior Managing Director)

Absolutely. That makes sense. One follow-up on the 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 buy dynamics was in Q1? When you think about, like, EPS guidance for the year, what is being assumed for FX for the year and, you know, the margin range of 50 to 100 basis points perhaps? Should we be thinking about the higher end of the range?

Helmut Zodl (VP and CFO)

Yeah, I can cover that, your question here. Price and productivity was more than offsetting, you know, what we saw as inflation and our investment. We were quite happy what we saw on price. Pete was commenting a little bit earlier, we typically see two,3%, you know, in price, and we expect that it will be delivered in 2023. That was, you know, quite positive. In terms of currency, we saw a four percentage points impact on currency in the first quarter. For the full year, we're looking now at, you know, less than 1 percentage points of impact, you know, on currency to the top line. It clearly has gotten slightly better.

As Pete said earlier, we are quite early in the year. This is our first quarter out here, we're committed to the 50-100, you know, basis points of margin expansion, you know, for the full year. Yeah.

Peter Arduini (President and CEO)

I think, you know, Vijay, as we've talked about it and consistently is, you know, we expect our margin rates to be higher in the second half given seasonality, but also productivity initiatives. 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. As Helmut said, it's still early in the year and, you know, we're on track to what we committed to.

Vijay Kumar (Senior Managing Director)

Understood. Thanks, guys.

Operator (participant)

Thank you. Our last question coming from the line of Patrick Wood with Morgan Stanley. Your line is open.

Patrick Wood (Managing Director)

Fabulous. Thank you so much. Morning, Peter. Morning, Helmut. I've got two quick ones.

Peter Arduini (President and CEO)

Morning.

Patrick Wood (Managing Director)

Morning. I 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. How do you view this technology? Do you view this as like marketing's 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 timeframe than that for you?

Peter Arduini (President and CEO)

Yeah. Look, good question. I would say the first answer is how we're thinking about is what it's gonna 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. 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.

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. 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, 10 years? I think that'll be the adoption question. A lot of that is about the cost curve.

Our approach with Deep Silicon is based on the fact that we can actually ride a cost curve, we believe, more effectively than a rare earth element approach. 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 products at select 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, you know, Photon counting CT will play a key role, we believe, in the future of that as well.

Patrick Wood (Managing Director)

Then, timeframe on commercialization, any indication there for us?

Peter Arduini (President and CEO)

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

Patrick Wood (Managing Director)

Sure. Totally understand. Then last one for me, I guess. More around the kind of Q1 and the recent trends you've seen. 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?

Peter Arduini (President and CEO)

Yeah, it's a great question. I would say it's a pretty good mix between the two. Certain geographies have different characteristics. As you could imagine, in a inland growing China market, it's heavy on new sockets. In Europe, believe it or not, we're starting 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. The new growth typically is tied to probably more of an outpatient imaging or tied to an ambulatory surgical center type environment.

Patrick Wood (Managing Director)

That's more than I would've thought. That's, that's really helpful. Thanks so much.

Peter Arduini (President and CEO)

Great. Thank you.

Operator (participant)

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

Peter Arduini (President and CEO)

Thank you. Look, in closing, you know, we're very pleased with the strong start to the year, and we see significant opportunities ahead of us that 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. We look forward to keeping you updated on our progress. Thank you for joining our call today. I'm sure we'll see many of you at some upcoming conferences. Thank you.

Operator (participant)

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