Good day, ladies and gentlemen. Welcome to the GE HealthCare Second Quarter 2023 Earnings Conference Call. My name is Olivia and I’ll be your conference coordinator today. As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today’s conference, Carolynne Borders, Chief Investor Relations Officer. Please proceed.

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

Thanks, Carolynne. First, let me welcome Jay who’s joining us for his first earnings call with GE HealthCare. Since he arrived last month, he’s hit the ground running to immerse himself in our business and has been meeting with our global teams. You’ll hear more from Jay shortly. Now let’s look at our results for the second quarter. We delivered strong performance with 9% year-over-year organic revenue growth. This was driven by strong demand for NPIs and the continued value that we bring to our customers. We were also pleased to see global demand improve sequentially, delivering 6% orders growth in the second quarter, up from 3% in the first quarter. We’re encouraged by health care providers’ continued investment globally in capacity to improve patient care and productivity. Volume remains strong for surgical procedures, which drives demand for imaging, services and surgical equipment. In the U.S., customers are investing in products to improve productivity and enhance overall competitiveness. In the rest of the world, we’re seeing solid demand in hospitals and in buying behaviors associated with increased procedures as well as the need for more productivity to address labor constraints. We’ve made good progress on our operating priorities, including increased discipline utilizing lean as a management capability and rigor in areas such as variable cost productivity. This resulted in a 14.8% adjusted EBIT margin, which was an improvement of 70 basis points from Q1. Adjusted EBIT margins were down slightly year-over-year on a standalone basis as we continue to invest in the business, with R&D spending up 16% year-over-year in the second quarter. Some areas where we’ve invested include photon counting, next-gen MR and artificial intelligence optimized interventional cardiology. We’re also further developing machine learning capabilities across all modalities to build interoperable ecosystems of devices and applications. We expect our investments to deliver value for our customers while laying the groundwork for the advancement of precision care. Turning to capital allocation. We’re focused on pursuing a balanced strategy with the goal of creating value for shareholders. This includes investing organically, acting on the right inorganic opportunities, deleveraging over the near-term and initiating a dividend. With markets improving globally and strong execution in the first half of 2023, we have confidence in our ability to deliver on the full year. As a result, we’re raising our full year guidance range for organic revenue growth by 1 percentage point and $0.10 in adjusted EPS at the midpoint. Jay will now take you through our financials. Jay?

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

Thanks, Jay. Before turning to Q&A, I want to touch on a few exciting areas that GE HealthCare is focused on to address patient and customer needs. In Imaging this quarter, we announced two deep learning artificial intelligence technologies, Precision DL and Sonic DL. Precision DL is available on our Omni Legend PET/CT and enables faster scan times and smaller lesion detectability. Sonic DL leverages capabilities from our AIR Recon DL MR platform and acquires high-quality MR images up to 12 times faster than conventional methods. By enabling imaging with a single heartbeat, it reduces the need for repetitive patient breath holds making MRI more accessible for cardiac patients. In Ultrasound, we introduced the world’s first and most compact mini 3D transesophageal echocardiogram probe, designed for pediatric cardiology. It’s 57% smaller than an adult probe and it provides access to real-time 3D imaging for children who could not tolerate an adult size probe. This innovative probe technology is an example of our investment and leadership position in ultrasound. We continue to invest in commercial capabilities and expand further into adjacent and new markets such as point-of-care and handheld ultrasound. In PCS, we’re investing in monitoring solutions for critical care and acute patients. The introduction of CARESCAPE Canvas gives us a platform to build on for years to come and with Portrait Mobile being the newest addition on the platform. Portrait Mobile enables care teams to monitor the unmonitored by shifting the paradigm from periodic spot checks to continuous monitoring, freeing the patient from the bed while continuously monitoring for signs of patient decline. These are our first major introductions in monitoring in recent years and create an opportunity for installed base upgrades as well as new growth. In PDx, we announced the National Comprehensive Cancer Network guidelines, now recommend the use of FES PET imaging agent for estrogen receptor positive disease for patients. Cerianna is the first and only U.S. FDA-approved imaging agent to help clinicians assess reoccurring or metastatic breast cancer. The benefit of Cerianna is that it provides a whole-body view of estrogen receptor positive lesions in one exam. We’re encouraged that the addition of Cerianna to the NCCN guidelines will increase this adoption. Turning to recent news about advancements in Alzheimer’s disease therapies. Many of you heard about the FDA’s recent approval of lecanemab and all other promising models – molecules in the pipeline that have the potential to provide millions of patients high-quality quality of life, if diagnosed and treated early. Before now, the only option was to fundamentally treat the symptoms. As these new therapies become more widely available, there’s a need for precise and noninvasive imaging and digital solutions, which we’re well positioned to deliver on. Let me walk you through the opportunities for GE HealthCare. Our technology, including MR and PET scanners and our amyloid imaging agent, Vizamyl, combined with digital solutions, enables us to be a disease state solution provider for our customers. As you can see on the page, these breakthrough therapies will create new market opportunities for us in upfront diagnosis, safety monitoring and follow-up. This approach that we often refer to as D3, which is about smart devices and drugs, a disease state-focused and digital solutions and is a good example of how we think about care pathways and our evolving role to provide precision care. While it’s still early in the Alzheimer’s therapy journey, we remain very optimistic about the benefit for patients and the growth opportunities this will generate for GE HealthCare, as a partner to providers. In summary, we’ve had many accomplishments since our launch as an independent company and they have set us up for long-term sustainable growth. I’d like to thank our 50,000-plus team members across the globe for their dedication and contributions on our initial phase of growth. I’m pleased with the results we’ve delivered in the first half, with strong visibility into our second half, supporting our updated outlook for the full year. We’re seeing continued solid market demand for our products and services. We’re allocating our R&D spend into high-growth areas to drive long-term innovation, while also driving margin improvement actions. And our healthy backlog provides good line of sight through ‘23 and into ‘24. And with that, we’ll open up the call for questions.

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

Certainly. [Operator Instructions] And our first question coming from the line of Anthony Petrone with Mizuho. Your line is open.

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

Great. Thank you, Anthony. Appreciate it. So far, from a TSA standpoint, things are very much on track. We have quite a few to exit. In fact, we probably have over 400 TSAs to exit over the next several years, with the vast majority of those exits taking place 18 to 24 months following the spin. But so far, we’ve exited 100 and it really is setting the stage for our successful transition to a standalone public entity. Importantly, about 1/3 of the exits that we’ve had thus far are related to IT, another – about half of them are related to facilities. So I would say that there’s really good progress on setting ourselves up. And then once we have that in place, we can really start to optimize the long-term footprint, the long-term operations of our company. What I mean by that and in the prepared remarks, I made a statement about our IT area. IT is an area where we have tremendous optimization opportunities. I just spent a few days with the IT team walking through many of those opportunities, things like moving to the cloud many of the servers that are currently hosted, things like rationalizing the application service providers, all of those will give us a multiyear tailwind in terms of optimization of cost. But the first step is getting to standalone. And so, so far, so good on the TSAs. This is going to be a – this will impact 2024, ‘25 and ‘26, more than it does ‘23 but it’s crucial at this stage that we operate effectively as a standalone.

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

Hey, Anthony, thanks for the question. I mean, let me just start out with – I mean, we’re just living in a really fantastic window of time here, where between different therapies are coming up that are going to change patients’ lives. And I think it’s such a tremendous win for patients, these new drugs are coming out. Look, to bring this forward, as you know, governments, in our case, CMS with reimbursement, pharma and a company like GE HealthCare working with providers really what it’s all about. And I think that’s one of the interesting changes here, not only in this disease area but in other areas where we play a significant role in bringing forth these capabilities. I think 30%, 40% improvement, some early indications that earlier patients, better improvement gives us pretty strong confidence that these are going to be impactful. Think of us as the company that facilitates, so to speak, kind of the management of the disease. If you think about the last chart that I pulled up in the deck on 14, where we play a screening and assessment role with MR or our PET products, we play a major role in diagnosis with PET and are also radiopharmaceutical imaging tracer, Vizamyl and then actually treatment and monitoring. And in treatment, as you probably know, after each of the injections having an MRI to make sure that there aren’t any baseline side effects. And then we think longer-term monitoring to see what is the baseline of the amyloid beta reduction at that point. And that all encompassed with some digital solutions that can make reregistration, that can make integration, make the tool sets much easier outside of an academic setting, so that this can work for providers. And so our opportunity is to work with big IDNs as well to help them think through the problem statement that’s in front of them, of how do you provide this across rural care, concentrated city care, fleet management, and we think we can help make that happen. On the size of the opportunity, I think it’s a little too early to say. I think it’s not a huge opportunity in ‘23. But if you look over ‘24, ‘25, ‘26, depending on the uptake of the drug, which is going to be heavily tied to a companion diagnostic reimbursement, therapy diagnostic and the follow-on drugs, we believe that this is a pretty profound growth opportunity across the space. But time will tell how that ultimately plays out. The last point I would just make is that we’re really the only company that touches all of these areas, MRI, PET MR, PET/CT and the radiopharmaceutical tracer. And what’s interesting about the radiopharmaceuticals is – and I think you know this well, is unlike other drugs or a generic where it can be vialed and put on the shelf, this is a product that once it’s made, it has a half-life of under 2 hours. So it starts degrading. And we already have a large network in the U.S. and Europe as well to actually distribute these radioactive isotopes. And so as they evolve and they grow with other folks coming into the marketplace, I think that’s going to be an interesting opportunity for us to play as well. But I think, in the near-term, we’ll see how these pieces come together. But we’re super optimistic, I think, first for patients and their families; and then second, the opportunity that we can play.

Thank you very much.

Thank you. And our next question coming from the line of Ryan Zimmerman with BTIG. Your line is open.

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

Sure. Maybe I’ll start with a couple of comments and then turn it over to Pete. And overall, we do appreciate your comments in terms of including order growth. We did feel like this was an important metric for us to share. What I would say is, we’re pleased with the strong second quarter orders coming in at 6%. I think, for us, we see health care providers continuing to invest globally in capacity to improve patient care. So all of that is very important for us and very – a critical driver long-term. And I would say, as we look at the second half orders growth, for us, we’re very focused on kind of driving this mid-single-digit area because it’s critical to the long-term model that we have as a company. For us, mid-single-digit growth is something that we’re targeting for the next several years. So we’re going to continue to drive performance and target that level. What I would say is, as it relates to the backlog, our backlog overall declined a bit. I think it was $19 billion and it declined to $18.4 billion, that’s simply related to the fact that revenues grew faster than orders. And so we have an incredibly healthy backlog at this point. We feel quite good about the quality of the backlog as well. So I think that’s something that we’re going to watch through the rest of the year because it does set up 2024 nicely if we can have a robust backlog in place as we approach Q4. So, so far, so good. There’s nothing other than that dynamic of faster revenues than orders that contributed to the decline, but we’ll continue to watch this. Pete?

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

That’s very helpful. And then Jay, for you, I’m looking back at the medium-term margin target from the Capital Markets Day. I think they were high teens to low 20s. And you called out the standalone costs. I assume those were factored in the guidance but just given kind of your early time in the company, maybe you can comment on whether you see those medium-term targets as more achievable, less achievable and just timing around those, if you’re comfortable sharing that in terms of EBIT margins?

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

Thanks for taking the questions, guys.

Thanks.

Thank you. And our next question coming from the line of Patrick Wood with Morgan Stanley. Your line is open.

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

Yes. So maybe I’ll start with the AI piece and then, Jay, if you want to add some color, what we can on the orders front. Look, Patrick, I think the artificial intelligence, obviously, it’s affecting all areas within all the economic areas around the world in different ways. I think, in our world in particular, the first levels, what it’s helped is actually kind of changing how product is used, making it more straightforward, automating many steps in productivity. So in the case of a institution that’s having labor constraints, which you can include almost all, being able to actually automate, which enables more throughput on that given higher labor dollar is a big deal. And so many of our products, we have 42 approved FDA AI-integrated applications that are out there, really one of the leaders in the space, that’s been a big deal. And what we focused on, I would say, different than maybe some of our competitors is, is not only on the new product but taking it back into the installed base. And why that’s so important and it gives us a differentiated value is, if you have four of our MRs already and you want to add two other new sites, upgrading those MRs with the capability that literally makes them state-of-the-art image quality of today, better than what’s out in the marketplace, as well as increases their productivity by 30%, 40% and sometimes 50% throughput, it’s a huge deal. And obviously, the ability to upgrade your own systems is only allowed to the manufacturer and then combining that. So that’s how – one area that we create significant value. The other area is simplifying kind of the diagnostic process and how that’s playing out. And that starts with, honestly, beyond AI, cloud-based computing and enablement of applications for the customers. And we’ll be demonstrating later this year our own store, so to speak, that allows reoccurring revenue for applications and access to them wherever that patient might be within that customer network. And then, longer term, which we’re leading to and we’ll be demonstrating later this year, is this whole idea of multimodal data integration. And it’s a really important aspect of the AI side that if you do have multiple exams or capabilities that you can get assistance in actually interpreting in what they mean and we’ll talk more about that. I think that’s going to also be an important part of this Alzheimer’s opportunity that we have as well as to kind of simplify, again, around a given disease state, how we actually support the case. So that’s kind of it on the AI front. I think a combination of added productivity and throughput but also new capabilities to think about how you manage a disease state differently. On the orders front, Jay, I don’t know what else you may want to add?

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

Really helpful. Thanks, guys.

Thank you.

Thank you. And our next question coming from the line of Suraj Kalia with Oppenheimer. Your line is open.

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

Yes.

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

Thank you. Do you want to start with gross margin, Jay?

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

And on your question about AI, exogenous impacts and such, look, I think the key here is that our first level of AI that we have out right now, which again because of the combination of software upgrades and the value it brings – are bringing significantly higher margins into our sales when those are incorporated. I think an upgrade in an MRI unit relative to AIR Recon DL can have margin contribution that can rival a larger system. And I think that mix change over time is going to impact our broader products. To your point, most of our AI today is incorporated in our own proprietary Recon data. So it’s kind of our domain. And as we go beyond that, we look at, say, how we’re going to build this within this ecosystem and really embrace some of these technologies. The key is, to always be the face to the customer which, again, is one of our strong parts with our reach and be really trusted as someone that can help a customer navigate this ecosystem. If you think about cybersecurity, which we’ve been focused on for many, many years with so many different products that are out there, the privacy of the data and really having kind of the right committees we’re bringing together, we think about ethics and health care about how these come together, I think that’s at its core. One of the key reasons I wanted Taha to come in as our Chief Technology Officer, his background as interventional cardiologist, worked at the FDA on data statistics and then seven years at Amazon leading AI and ML is exactly this, is to be able to distill through and look at the right partnerships that we want to leverage because of our position. I think you probably know, about half of the data created in health care, we either are directly creating and are a part of it just based on the amount of 4K plus data that’s generated out of the imaging world. And with our integration and building platforms that can enable third parties but also create an ecosystem where for customers, this is the place you want to go to kind of leverage connectivity but also integrated AI apps, this is at the core of what we’re focused on. And so I would say, standby, I think later this year, we’ll be able to talk more about what our plans are and demonstrations around it. But this is an important part of it. We view it less as a threat, as more of how do we embrace it and give a door into health care as someone that really knows our customers well, understand their cyber concerns or security concerns and really helps think about how to solve their problems the right way. One of the interesting things that’s out there today is, there’s a lot of AI applications for diagnosis. But if they aren’t integrated in the disease pathway the appropriate way, they actually add work and complexity. One of our expertise is, how do you integrate them into your workflow, so you get the benefit for the patient but you also get the productivity for the system. And that’s really where we add a lot of value.

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

Hey, guys, congrats on the [nice bringing share] and thanks for taking my question.. Pete, my first question for you. One of your competitors called out order declines, Russia headwinds. So when you look at your book-to-bill of 1.04, was that a clean number? Was there a Russia headwind? I’m wondering what that number ex Russia headwind was? And when you think about your order growth versus your peer seeing declines, is that sort of signaling some share shifts in the industry?

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

And just to clarify that, Pete, how big is Russia for GE HealthCare? And what are then the declines in Russia, if at all, in 2Q?

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

And the decline in 2Q?

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

Understood. And, Jay, maybe 1 quick one for you. Your back half margins, I think there’s a 200-basis point step up versus first half. Looking at 2Q, it seems like OpEx came in slightly above. Maybe just talk about visibility in the back half margin step up?

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

Understood. Thanks, guys.

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

Good morning, and congrats on the strong quarter of PDx. Great to see your presence as the Nuclear Medicine Conference in Chicago. Can you provide more details on the manufacturing capacity for Vizamyl? Can you clarify how the manufacturing is contracted with manufacturing network at the moment? In other words, if there is surge in demand of this imaging agent for Alzheimer’s disease, how will you adapt to that quickly? Thanks.

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

Got it. Thank you.

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

Hi, Jason.

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

Go ahead, Jay.

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

Yes. No, just the fact that if you think of our PDx business, it’s fundamentally about a 70-30 contrast agent imaging business and 30% molecular imaging. And obviously, the more molecular imaging grows over time, whether it be theranostics or Alzheimer’s, other things I had mentioned about FES PET getting into metastatic breast cancer, that’s going to grow with even higher margins than the traditional side of the house. That being said, you really can’t do a vascular study without contrast. Obviously, without the agents, there’s actually limited capacity throughout the world. And we’ve – as we’ve talked about as well, committed to making the proper investments to shore up supply in the respectable markets. But, to Jay’s point, it will be a little lumpy here over the next couple of quarters because of the shutdown we had in Q2 last year, but we feel quite good about it. Think about all the surge in procedures that are taking place, for interventional procedures in cardiac, many of the different procedures that are happening that you’re seeing for other implantable devices. In many cases, there is a study that involves a with or without contrast study to get them there and that’s one of the underlying drivers in the marketplace.

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

Sure. So really a nice performance in the second quarter on imaging. I think that entire team is incredibly focused on margin enhancements and gross margin, in particular, along with pricing and productivity improvement. So I think that’s a – it was a great enhancement from the 7.7% to 10.6%. We do expect the second half of the year to be above the first half for imaging. And a lot of that does come down to some of these inflation purchases that we’ve had in the second half of last year, they do start to lessen from an impact standpoint. And frankly, this is our longest lead time business. And so we do see – that’s why it’s kind of lingered for the longest period of time. But we’ll start to see that ease in the second half of the year. So that will be another incremental tailwind for imaging margins. So you can expect to see, like I say, second half above first half, hopefully setting the stage for a nice 2024.

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

So thank you for joining us today. And look, we’re excited about the significant opportunities ahead as we work to help transform the future of health care and focus on the enablement of precision care. We look forward to connecting you at one of our upcoming conferences. Thanks for your time today.

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