This session of the Citi 2024 Unplugged conference. Everybody in the room, thank you for joining us. Everybody who's popping in or piping in from webcast, thank you for joining us. In the room we have Carolynne Borders, Investor Relations, virtually joining us, Jay Saccaro, CFO. I think we just get started. So thank you for joining us. You know, one of the things I realized as I was preparing for this meeting was that, GE HealthCare has just finished its first year as a standalone company. I'm sort of curious if you can give us a state of the union, where you were on, TSAs and all the other sort of good stuff that was established when the company was both initially spun out as, as we think about the LRP for revenue and margins.
Yeah, yeah. Great. Thanks for the question. And yes, we are excited to have celebrated our one-year anniversary as a public company just recently. What I would say is we're really proud of the progress in the first year as a public company. I think obviously important for us is demonstrating that we can commit, you know, meet our financial commitments. And I think we were able to do that in the first year. But we also saw really good momentum in a number of areas. We saw a very good momentum overall delivering sales growth of 8%. We delivered 60 basis points of margin expansion. And we were thrilled with the free cash flow performance, delivering $1.7 billion, 95% conversion. So from a financial metric standpoint, things were solid. But as we think about other aspects, I would point to a few things.
First, we had really good R&D spending growth. So that 60 basis points margin expansion included a very substantial growth in R&D, which is a very important enabler for the future. The second thing I would say is, we did a really nice job getting the entire organization mobilized around the culture, the mission, and also in putting in place critical talent throughout the organization so we have the right team in place for the journey ahead. So we felt great about that. We also were able to demonstrate kind of our philosophy around capital allocation, which is just smart disciplined capital allocation. If you look at 2023, we paid down $1 billion of debt enabled by this great free cash flow performance. We did a number of tuck-in acquisitions, met all of them high ROI tuck-in acquisitions. We continued to reinvest in the business as I described earlier.
So that capital allocation, I think, was on full display in 2023. And then finally, we did, you know, the fourth quarter of the year. Outstanding performance sets us up really well for 2024. Things like orders and robustness of environment, all of those things were really nice signals as we look to start the year. So I have to say, really pleased with the first year of progress. Gosh, we have so much more to do going forward, and we're obviously incredibly excited about those opportunities. But that's, that's where we currently sit.
One of the questions that I frequently get is, can you consistently deliver mid-single digit revenue growth and consistently deliver operating margin expansion? What's the answer to that, other than just simply saying yes?
We have solid end markets. These are end markets supported by dynamics that are going to continue into the future, we believe. Of course, there's going to be short-term volatility here and there. But the notion of utilization rates, procedure volumes going up, that's just a function of demographics and global demographics. So we have the right end markets, I believe. In addition to that, you know, we have some really interesting innovation that we're undertaking, both in terms of equipment, artificial intelligence, and actually also in terms of, you know, new, new and novel molecular imaging agents. So I think if you have the right end markets, the right new products, the right focus on pricing, the revenue story should be intact.
And then when you couple that with discipline around manufacturing productivity and discipline around G&A optimization, this, this equation, which I think is really important for us, and one we're intensely focused on, how do you grow mid-single, and how do you expand margins consistently? The equation is supported. And so now remind you, I did not say R&D savings. Right? My comments are G&A savings, along with manufacturing improvements. I think that's enough when coupled with pricing and new products to drive us forward, in terms of this EBIT expansion. But, you know, 2023 was a great example. Revenue growth was there, 60 basis points of expansion. As we move to 2024, we have a line of sight to this approximate 4% sales growth, along with 50-80 points of expansion.
And then as we move to next year, we'll hope we will hopefully continue this trend, supporting the mid-single aspiration, along with continued margin expansion. That whole story is one that, you know, we committed to in the Investor Day a couple of years ago, and we continue to feel good about.
Joan, maybe just to put a finer point, Jay, on your comment about R&D, if you look back at years ago, we were spending about $800 million a year on R&D. We have significantly increased that. We're delivering north of $1 billion now, which makes us more competitive and helps us to basically win more in the market.
Okay. TSAs, where are you on those? And when do they fully roll off?
Yeah, TSAs are, we're, we're progressing nicely. We've exited 280 of approximately 450 TSAs. We'll have the vast majority, almost all of them done in 2024. The interesting thing about TSAs is that it's not simply coming off the TSA, that reduces costs. There's a little bit of cost because of profit, markup. But really, coming off the TSAs allows us to address things like IT costs, like real estate footprint. So as we go independent, it allows us to unlock the next level of G&A and other cost optimization. I have to say, I've been really impressed with what our team has been able to do. In December, we migrated like 80,000 email addresses from GE to GE HealthCare. And we moved everybody's Office instance from a GE-hosted to, to our own. So incredibly proud of the progress. And that was a big risk item for us.
We mitigated that. That's the same approach we're taking in 2024. And so our, you know, in terms of like Maslow's hierarchy, make sure that, you know, things operate well, and then you can do things like optimize costs. And so we're focused on that base layer. Once we have that, there's real cost opportunity in a number of areas.
All right. I want to spend a little bit of time talking about backlog. Every quarter there's record backlog. The book-to-bill ratio, I think, in the last quarter was 1.05x . Help us reconcile backlog, how you work through it. And do we ever want to see your backlog go down?
Listen, I think all of the metrics we share, 3 metrics, order growth, book-to-bill, and backlog. And we share them because we think all of them are helpful, taken in conjunction together to give you a picture of the health of the business. We thought about like eliminating one or two of them, but we said, you know what? It's when we do our analysis, we look at all three. We use all three as different, different sort of inputs into our thinking about future performance. And so would is, is it okay if backlog comes down? Sure, it's okay. And that may happen on a quarter-by-quarter basis. But generally speaking, we should see backlog grow over time. We had a number of orders come in, in the fourth quarter, some large ones, some unexpected.
As a result of that, we did increase the backlog, you know, more than $500 million, which was tremendous. Now, what does that mean? Well, what it comes down to then is, when will these orders materialize with respect to sales? Virtually all of our, the vast majority of our backlog has attached to it a specific order date at some point in the next, you know, call it zero to up to two years, and so it hasn't a delivery date attached to it. And then, you know, once we have that, then we could do the math on, okay, here's the guarantee, not guaranteed per se, but here's the highly confident revenue pile that we have. Then there's a second layer of what it implies about how much you have to sell over the course of the year.
And so backlog is an important input to that. You know, as we looked at the backlog, along with our expectations around what we would need to sell new this year, you know, we felt very good about the mix. And it allowed us to guide to the 4%, which is the number that we ended up going with for guidance for the year. And I think the backlog gave us increased confidence that such a level was achievable.
Excellent. Is there a way to think about what the backlog is building in? Is it a particular product, a particular sub-segment?
It's really across the board. And by the way, it's across the board from a product. But the other thing that's included in the backlog is our service backlog. And so, you know, we don't talk a ton about service, but it's a very important business for us. I think it's more than a third of our sales and maybe a little bit more of our profit. Servicing our equipment is crucially important. And it's a great opportunity for us to cement a close relationship with our customers, provide them outstanding capability and support. And then also kind of put us in position for future sales. And so the backlog includes both product and service. And what I would say about the fourth quarter backlog is it was pretty widely dispersed in terms of the new orders that we were getting.
We saw strength in many different areas in the portfolio. So, we felt quite good about the ending to the year. We're really pleased with the performance of all of our teams around the world. I do believe it sets us up well, you know, for 2024 and beyond.
So, Joan, about 60% of our backlog is comprised of services. The next biggest piece is imaging. And as you know, from when an order comes in in imaging to when it is installed and revenue is recognized is usually nine to 12 months. So that gives us very good visibility into what we will be installing and placing over the next few quarters.
Thank you. That's helpful. You want to spend a couple of seconds, minutes talking about the hospital CapEx environment?
Sure. On a quarterly basis, we spend a lot of time on this, because as you can imagine, it's just such an important driver of our overall orders and sales profile. What I would say is, in the fourth quarter of the year and into January, we did a lot of work meeting with our top customers, the key decision makers, surveying those top customers and our key decision makers. That was one input. We looked at all of the externally available data, and there's quite a bit. We looked at things like our own order trends and the velocity of order trends. We also look at hospital profitability indices and utilization indices, specifically in areas like imaging. The setup going into 2024 was meaningfully better than the setup that we saw going into 2023.
And I would say also, you know, 2023 was a bit of a tough year from a hospital equipment standpoint. You know, we see a much better backdrop heading into 2024. And so, you know, I feel good about where we currently sit. Of course, we'll have to monitor this over the course of the year. We'll watch it very carefully. Things like Fed interest rate decisions and things like that, they do impact general sentiment. But right now, and you see it in the hospital reports, there is a level of, you know, sort of economic solidity that we hope continues through the rest of the year. And we feel as of now, we feel solid about the environment.
I want to pivot just a little bit to guidance. In 2023, GE HealthCare grew 8% organically. This year, guidance is for 4%. There's different pushes and pulls on it. There's a little bit of a debate in the people I speak to, whether it's conservative or whether it's realistic.
I hope it's both. I mean, for us, the way we look at it in 2023. We had a unique situation. For example, we grew the first quarter 12 organic. We grew the second quarter nine. And that was because of an acute situation precipitated by the supply chain crisis in 2022. Okay, that's, you know, we were able to clear a lot of that backlog, that urgent backlog. And, as a result of that, we saw 8% growth. We're not a sustainable 8% grower yet. And that's not, you know, that's not in our thinking yet. I hope someday in the future we talk about things like that level of growth, but we're not there. It was a unique year.
And so, if I were to simply—and by the way, the other thing I would say is, as we closed out the year, we were expecting 7% growth. We were guiding 6%-8%, and we were expecting in the range of 7%. And we did a little bit better than we thought. And so the 4%. You have to consider it in that context, 8% + 4%, you know, compounded at 6%. And so, you know, I think that as we look at our guidance, we think it's reasonable guidance. I hope it proves to be conservative. That's our goal is to provide reasonable and conservative guidance. And I hope we achieve that at year end. But in the meantime, I think it's a good start point for the year.
So this leads me to the next question of, should I look at it as 4 + 8 divided by two is six ? Or is there a way to carve out some of the, you know, unique experience that you had in the first quarter of last year that makes them more difficult comp this year to pull out that, catch up, sales, for lack of a better term? And that's that would be the normalized growth. I'm trying to get to normalized growth.
Yeah. Yeah, I think that there were probably 200 basis points of unique growth represented across 2023 in a number of different veins. So it's, you know, it's more. It's more of a mid-single performance adjusted for those items. And that's okay. You know, that's kind of consistent with how we looked at things and thought about things throughout the year. And you know, as you think about that adjustment, then our number looks, you know, looks more reasonable and understandable in the context of that.
Okay, that's helpful. Thank you for again, just this year, and we can talk about the LRP, too. How do you think about the gross margin drivers if in 2023 you expanded significantly and then guided to another 50-80 basis points in 2024 while investing in R&D? How do you think about that? What are the levers? How much of it is macro? How much of it is what you have in your control?
Great. Yeah, great question. I think, first, so most of our margin improvement will come from gross margin this year. R&D will actually be a detractor. There will be a little bit of contribution from SG&A. Now, longer term, SG&A will play a more prominent role. It's just back to your original question around TSAs. Until we're clear of some TSAs, there are some limitations in terms of what we can get after from a G&A standpoint, from an IT and real estate, etc., as I mentioned earlier. We'll start to see those play a more prominent role in 2025 and 2026. The lion's share of our margin improvement this year comes from gross margin. There's really a couple of different factors in play. One is pricing. We have established an incredibly disciplined approach to pricing around the company.
That's something that has supported margin significantly in 2023 and will support margin in 2024. Now, we have some visibility to that already, because there's some pricing in our order book that exists at this point. And so, as we see, as we look at that, you know, we feel very good about pricing and our ability to drive that 1%-2%, which is what we expect this year. Now, moving below that, though, the other area that has been a really positive surprise is the work that our organization is doing on cost productivity initiatives. We have our operations leader, Ken Stacherski, and all of his teams around the world have done an intense effort implementing Lean in all of our facilities. And the result is we've developed this flywheel of cost out initiatives.
Those cost out initiatives have paid big dividends in 2023, but will do so again in 2024. We expect that to continue going forward as we build the pipeline even beyond 2024. We feel really good about what we've been able to do from a cost out standpoint, and those efforts will continue. Now the question is, okay, well, those are all controllable. I feel very good about the controllable aspects. What's important for us is that we have a sort of supportive backdrop from a market standpoint. I think we have view to that. We understand that. So, as long as that materializes, I feel quite good about the gross margin expansion that we've laid out.
Of course, if there were a macro shock to the system, that's where it becomes more challenging if we talk about plan B's and so on. But at this point, you know, we we feel very good about the range of outcomes represented by the market and our ability to support that with execution on the cost outside to drive the outcomes we hope.
I'm gonna shift a little bit to products. And, Carolynne, I'm glad you're here. Do you want to talk a bit about the Alzheimer's opportunity?
Sure. We are very excited about Alzheimer's opportunity, given that we play across the entire spectrum for that therapy. So today, as you know, Leqembi is the drug that is approved and in the market. Hopefully soon, Lilly's drug therapy will also be approved. And that's when we think we'll start to see maybe a bigger uptick and more prescriptions being written. But if you think about where we play, we are at the front end with PET, PET CT, or PET MR that is used with our imaging agent, which is called Vizamyl. Today, Vizamyl sales are pretty small. We expect that, as that uptick starts to happen, you'll start to see Vizamyl increasing. That'll be one of the first signs. And then in the middle of the process of the therapy, MRs are required. Leqembi requires four to look for a hemorrhage and and swelling.
and then again, a PET at the end to look at, has that amyloid beta plaque reduced? So, over time, we think capacity will start to increase as well, because eventually you won't have enough capacity and equipment in the system. So we are working with our IDNs today on a fleet strategy to be able to plan for that. Then also we have the benefit of also supplying that imaging agent. And I would mention that ours, there are three that are available in the market. Ours is the only one that is FDA approved for color.
Okay. What other products would you like us to sort of focus on? I mean, it's such a broad portfolio, and I have to compliment you. I keep seeing press releases with regular basis of internal development, as well as external, R&D. But how do we think about this so that I don't spend all my time talking to you about margins?
Sure. So maybe I'll start, Jay, and then you can jump in. We're very excited about advancements.
Please do.
We're great. We're excited about the advancements we're making across the capital equipment portfolio. We believe we have become more competitive in MR. Sometimes you'll hear us talking about AIR Recon DL software algorithms that help with, basically image quality and also speed to process more patients in a day. But also on the artificial intelligence side, which is rather early for us. If you look today, digital revenues, which include AI, make up about a little north of $1 billion for us. But in the coming years, we think that we should see that growing more significantly. And that's obviously a great margin profile, type of a solution. So, you will see us rolling out more AI algorithms across the capital equipment base, and eventually moving to more of a SaaS model, which is obviously a longer term, more profitable model. So, Jay, anything you'd add?
No, that's a great a great overview. I think, you know, we're we're really intrigued by this whole, pharmaceutical diagnostics area, this PDX area, as Carolynne mentioned, Vizamyl, Flyrcado, we we in licensing, in license a novel tracer, FAPI. So I think this whole world is going to be one that, grows for years to come. And let's let's see how it does. We're optimistic and hopeful that some of these products can be transformative. But we're watching right now, and right now we're seeing little impact from them, which is appropriate, given the stage that we're at.
What about pricing? Where does that fit into this?
Pricing is important. I think we had a great benefit in 2023. We expect going forward this 1%-2%. And I have to say, Pete has done a wonderful job installing a culture of discipline around pricing at our company. Now all of our sales reps are thinking price in the deals that they're proposing. If there are reductions to price, there are approvals that are necessary. There's a level of tracking of this that we've never had at our company that we've installed over the last year or so. And so all of that has put us in the right mindset to achieve pricing.
When you're selling highly complicated technology and highly complicated service offerings on top of that, and you have constant innovation, those are the right conditions to have the right pricing, negotiations and discussions with your customers, and really just kind of capturing some of the wonderful value that you're providing to them. So I think we've seen a nice, a nice opportunity here. It's one that we think will continue going forward. It's really enabled by the work that's been done by our teams.
If I go back to artificial intelligence for a minute. It's a great buzzword. But what does it really mean for GE HealthCare? And help me understand, SaaS models translate to revenue with what kind of gross margins? How do I think about $1 billion going to something higher? I know I just asked you six questions there, but you get the idea.
Yeah, no, I I do. And I think, you know, frankly, when we have our investor day in November, Joanna, I hope you'll be there. We are going to talk more about this whole digital opportunity and laying that out. And we have a couple of important milestones that we're going to be achieving this year, that we'll talk about as we move through the year. But artificial intelligence today, today in our products is a big deal. And what I would say is the artificial intelligence that's impacting us the most at this moment relates to, how do I get a better scan or image quicker? And one that's more accurate and more descriptive. That's the artificial intelligence we're seeing today. And we have a couple of different great examples of that. One is AIR Recon DL, which is a very big business for us.
AIR Recon DL is basically allows you to take an MR exam, a significant reduction in time with better image quality from even devices that may be five plus years old. And so AIR Recon DL is a product that we sell, and we're selling a non-trivial amount of it. It comes in at a very high margin. It is AI in its truest sense. In fact, you know, some of the original use cases for AI is about like, you know, how do you identify the cat on the picture? Right? That's this is what we're doing for MR exams. We're basically enhancing image quality, reducing noise to signal ratios. All of those things are unlocked by this AIR Recon DL, which is a wonderful product for us today.
Now, with Caption Health, the acquisition that we did, basically Caption Health utilizes artificial intelligence to allow non-sonographers to take ultrasound images. How do they do that? By simply, you know, sort of looking at the image, using artificial intelligence, and then illustrating, did you get a good image or not? To the, sort of pseudo sonographer. And so those are two examples today that are having real impact on our business, in terms of artificial intelligence. As we go forward, I think the promise of artificial intelligence is substantial. And there are real opportunities beyond this simple, you know, image quality enhancement to things more about, how do we compare this image to a universe of images? and those kinds of things. So more to come.
But I would say, at this point, you know, we have north of $1 billion in digital revenue. I hope it grows substantially from there. Included in that number is a big contribution from AIR Recon DL. And so, we're investing heavily in things like foundation models and how we can expand beyond some of these areas to more broader applications across the portfolio.
How do you think about capital deployment? Share repurchases, debt paydown, M&A?
Yeah, I think I think 2023 is a great case study in terms of how we think about capital allocation. Number one, reinvest in the business, so that you can accelerate growth. In 2023, we accelerated investment in R&D well above sales, but still expanded margin. We also had a very substantial CapEx investment increase, and yet still grew free cash flow. So number one, reinvest. Number two is, you know, bolt-on acquisitions are a great vehicle for us to enhance our capabilities in unique ways. We basically did a number of them last year. We did Caption, as I described. We recently announced MIM's acquisition, which we're very excited about. And we also did Imactis. All of those are technology deals with very good ROIs in the midterm that are directly supplementary to the strategy that we have in place. And so bolt-on acquisitions, number two.
You know, number three, we'll continue to pay the dividend that we've outlined. We'll look at that over time. Number four, because of the outstanding free cash flow performance, we were able to pay down $1 billion in debt. And I expect, as we move forward, we will continue to, you know, improve the balance sheet a little bit more. But I think we'll look for alternative deployments fairly soon. And then, you know, and then over time, we'll evaluate share buyback. We don't have an authorization at this stage, but it's something that, you know, we'll look at over time. And so, as I think about it. Our, capital allocation approach thus far has been a very balanced one. When we deploy to R&D, we're looking for high returns. When we deploy to business development, we're looking for strategic fit.
We're looking for our ability to do something unique with the asset. And we're looking for high ROIs. And then, you know, beyond that, we'll move from there. I gave myself a thumbs up, Joanna. I'm not. I didn't intentionally do that. Hopefully.
Thumbs up.
Hopefully you agreed with the answer. So yeah, really, that's the overall story on capital allocation.
Awesome. I waited all this time, but I can't end the conversation without talking about China. And where you are on VBP anti-corruption. And then I know we were chasing down a new province potential issue. So could you just sort of catch us all up to date, please?
Sure. China. China's been an important market for us for many, many years, and it's a market we've been committed to. But you know what? Oh, you have to acknowledge there's a lot of volatility and continue volatility. You look no further than 60 Minutes on Sunday night for data on that. Right? And so now it's a market that people, you know, are having a lot of questions about as our investors. China represents roughly 13% of our sales today. As we look forward, we think China will continue to be an important part of our story. There are volatile elements. Last year, we grew China 20% in the first half of the year, roughly organically, because of all of the stimulus packages that the government had put forth.
Then the second half rolls around, and there are anti-corruption initiatives in place, which definitely impacted some customer sentiment in the second half, and to some extent continue as we look at China in 2024. For us, really, the largest issue relates to this idea that we are comped against the 20% growth in the first half. And so, as we look at it, we're going to decline in the first half. We'll see some growth in the second half. And on balance, we expect growth for the year. But the primary impact is the lack of stimulus, this lack of stimulus that we're seeing in the first half, as compared to the prior year. Now, there is a bit of impact from some continued reticence amongst our customers related to anti-corruption. Anti-corruption is a factor that people are focused on.
So there is some hesitancies that we've seen. But we've started to see improvements in that. Our view is that it's more normal as we approach the second half of the year, which would be the one-year anniversary of the initiative. In some of the initial discussions, they were talking about a one-year initiative. So we feel good about that ending at some point. Now, there was some discussion about the Anhui Province. You know, Anhui's been doing centralized procurement since, I believe, 2015. As we think about Anhui in relation to total GE HealthCare, it's a very small percentage of our sales. And they've impacted product categories, which are two. I think it's simply, you know, maybe PET CT and one other product area, PET MR. Those represent a very small component of Anhui's revenue.
So, as it relates to this specific initiative, it's really a small impact no, limited no, material no material impac to our overall business. So that's, you know, of course, it's, people are very sensitive to this. What could it mean to other provinces, and so on? Listen, we'll watch it very carefully. But as it relates to this one province, which has been doing centralized procurement for 8+ years, with this one set of actions, we don't really see an impact.
If I was gonna look across your portfolio. I'm cross-reference it with 13% of revenue coming from China. What's of the 13%? Mostly imaging, mostly ultrasound. Evenly spread. How do you think about that?
So maybe I'll take that.
Heavily imaging and heavily ultrasound. Yeah, go ahead.
I was just going to say the very same. The biggest pro piece of what we sell in China is imaging, followed by ultrasound. Next would be pharmaceutical diagnostics. And the smallest piece is patient care solutions.
Of imaging, mostly MRIs, mostly CAT scans.
We do sell both in China, MR CT.
Okay.
We don't really break out product line sales by country.
I know. Well, just I'm trying, because I'm getting that question. It comes across. It comes through. All right. What else do you want me to ask you about? What are you itching to answer that investors are bothering you about? Not bothering, asking about.
Listen, I think I'd end where I began, which is, we're really excited about how far we've come and the road ahead. If I were to reflect back on the discussion that we just had, what I hope you walk away with is, we're intensely committed to solid financial performance in the short and medium term. While, at the same time, we're also intensely focused on spending on R&D, so that we can solve unique healthcare problems in the future. The vision of our company is to create a world where healthcare has no limits. My view is, as we do things like expand our software as a service offering, as we do things like enhance our artificial intelligence plus digital. I really believe that we're going to transform healthcare.
So I think the way we think about it, it's a short midterm opportunity, where our expectation is to deliver a very compelling economic model. While, at the same time, a delightful model longer term, as we make very substantial bets looking to transform healthcare. That's really, I think, in a nutshell, how we think about our overall business. And in the meantime, we're in, like I said, we're intensely focused on execution, on all aspects. So, that's really where I would conclude our remarks today. But, Joan, we really appreciate your interest and coverage of our company, the thorough work that you do. We appreciate the invitation to your conference. I unfortunately couldn't be there with you today, but I'm certainly there in spirit and virtuality. And look forward to seeing you in person soon.
Thank you, Jay. I hope you feel better. Carolynne, thank you for joining us in person.
Thank you.