GE HealthCare Technologies Inc. (GEHC) Earnings Call Transcript & Summary

Hello everyone. This is Rachel Vatnsdal from the JPMorgan Life Science Tools and Diagnostics team. I am glad to have GE HealthCare team with us here today. Similar to all the other sessions that you've been attending, this will be 40 minutes. The initial 20 minutes will be based on presentation slides from management and then followed by a Q&A session. [Operator Instructions] So with that, I will hand it off to Peter.

Thanks, Rachel. Good morning, good afternoon, everyone. I hope everyone is doing well. I'm Peter Arduini, President and CEO of GE Healthcare. With me is Helmut Zodl. Excited to be here. I think we're the youngest company to present at JPMorgan. We'll be a week old tomorrow. So anyhow. So thanks for your time and attention. It's been obviously a busy time for us as well, spinning out of GE historical spin. We actually just ran the NASDAQ bell last Wednesday at our facility in Waukesha. The day after we announced our new Chief Technology Officer, Taha, who joined us from Amazon, the Head of AI and Machine Learning there and also the Chief Medical Officer. Just announced a small tuck-in deal on CT [ of Max ] just yesterday, great biopsy and guided program -- image-guided program for CT. And then this morning, we actually preannounced our earnings and revenue. And so I'll start there with the press release if you hadn't had a chance to see it. We had a strong Q4. I think it's important we kind of get out the information to help people frame. We realize we have the existing holders as well as new people taking a look at the company, 12% organic growth in the fourth quarter, and that resulted in a 7% organic growth for us for the overall year. We also expect our adjusted EBIT to be -- outlook to be in the range of preannounced both on a GE and GE HealthCare basis. And then our free cash flow will be in the range, but towards the lower end of the range. And so we feel quite good about the performance of how we've done here within the end of the year, and we're off and running. We also, in the press release, you probably saw announced our outlook for '23, and just again to reinforce it here, organic revenue growth of 5% to 7%. Our adjusted EBITDA at 15% to 15.5%, which is roughly up 50 to 150 basis points on a pro forma basis versus '22. If you've been following us or were at the Investor Day, we showed this coming off of a 14.5% rate. Again, this is all in with our standup costs included. And free cash flow for '23, looking at 85% plus. We've obviously communicated that we have aspirations to go above that down the road. So again, excited to be here, and I'll maybe now transition to little bit more talk about the company. Our purpose that we've aligned for the new GE HealthCare is really create a world where health care has no limits. I think we all know there's plenty of limits within care today. And it really takes a village. And as a company with the reach and capabilities we have, a big part of our focus with our customers, with research partners, but also other companies across the ecosystem is to really partner on some of these big challenges and to focus on it, both from a product standpoint, a digital standpoint and particularly around a disease state, which really, as we talk about our strategy, we'll talk about our leadership and direction to invest in precision care and what that means, our focus in the company of accelerating overall growth, which we think we've got a great case laid out for as well as driving optimization, the direct result of that of being higher adjusted EBITDA margins in the near term. Midterm into the 17% to 20% range is what we aspire to achieve. And so a little bit about GE HealthCare. If you don't know a lot about us, roughly $18 billion plus in revenue, 58% of our sales come from outside the United States. So we're a very global company with a very global footprint, about 50% of those revenues are reoccurring. We'll talk a little bit more about that later on here. And we serve about 1 billion patients a year, 1 billion patients, individuals are involved in an imaging procedure or some type of hospital queue procedure where our equipment is involved. We got just under 19,000 employees that interact daily with commercial -- excuse me, with customers around the world, commercial teams, service teams, clinical, field research groups. And a large installed base, which gives us some real interesting incumbency to do lots of things, 4 million pieces of installed base equipment. And we spend about $1 billion on R&D annually. And a big focus as of recent has been our focus on AI integrated into our products, not just relative to post-processing, but literally how images and how capabilities are created. And it's put us in a leadership position, I'd say, in the industry on helping change some of the fundamental physics of how imaging is actually created today. Our business, as some of you may know, we operate in 4 segments, imaging being our largest, which is just about $9.5 billion in revenue. Everything from basic X-ray, mammography to vascular and interventional labs, peripheral vascular, cardiovascular, leadership roles in surgery and ASCs as well as molecular imaging, PET/CT, NUC Med, and then what many people know us by is our MR and our CT business, all of those in top leadership positions. Our ultrasound portfolio, #1 position around the world, very much clinically focused in different areas such as women's health, cardiovascular, radiology areas, and then a big growing area in point-of-sale, handheld ultrasound and tetherless type devices. Moving more and more into the primary care world is a big interesting growth opportunity. And then our patient care solutions business, which is a combination of -- we're one of the top monitoring companies in the world. Top anesthesia for delivering and managing anesthesia and gas at the bedside -- excuse me, at the OR table side to be able to drive volatile anesthetics as well as other types of anesthesia products. We have a diagnostic cardiology business as well as a neonatal business. And again, that's about $3 billion. And then our pharmaceutical diagnostics business, which kind of makes us unique in our peer group, it's an injectable pharmaceutical business that's solely focused on delivering and enhancing image quality. So contrast agents, obviously, would be the largest piece of that. But one of the biggest growing and exciting areas is molecular imaging. So radioactive tracers used in everything from amyloid beta plaque identification through products that are used in all types of oncology-based procedures, FDG and derivatives thereof. We also then have, obviously, a large service business, which spans all of this as well as the digital platform, I'll touch on. So from a strategy standpoint, we talk about precision care. Precision care really is about how do you bring all this multimodal data around that specific patient, convert it into insights and be able to have it in front of the right clinicians at the right time. We think about that journey and what we in shorthand and kind of call D3, which is about smart devices that have integrated connectivity, they also have integrated artificial intelligence. Just as an example, I think in the next couple of years, we won't have literally any products coming out that don't have embedded AI. I mean it's just the way things are going. And again, more about actually how the machine actually operates and is integrated than actually say manipulation post processing lines. A disease state focus is something that we've been involved in over the years, but this kind of goes to the next level of really taking a look at customer use cases and challenges from diagnosis all the way through therapy and follow-up and looking at where we can play deeper both in partnership roles, M&A as well as our own organic products around that. And then our digital capabilities. We've got a growth again, as I mentioned, in machine learning, but also on a broader digital platform that we call Edison, with a significant amount of other products. Today, it's about $1 billion of revenue of software and digital products, growing at a faster rate than the company level, higher margins. We see an opportunity to extend this in the future. And so I'll talk a little bit about the accelerating growth. Historically, pre-pandemic window, we were probably in the mid-single -- low single-digit growth range. We've talked about our medium-term target of mid-single digits. We obviously just announced this morning for '23, we're going to be on the high end of that range at 5% to 7%. But these are some of the focus plans that we have in place. My anniversary now coming back to the company is literally about 1 year ago and probably a week right after, we jumped on a lot of these things from strategic pricing structures and capabilities to new product innovation focus as well as commercial execution, getting the right people in the right seats and such. I'll just touch on some of these things to give you a flavor for it, everything from as a new separate company raising the bar. Obviously, as an independent company, what we can do for stock appreciation for shareholders also applies to employees, creating a culture that can be more entrepreneurial. We're bringing some top leadership back into the company as well as new people excited to be a part of it. I think it's a really important part as we come out separately from GE. A focus on improving visibility. As a growth company, see more, win more is a really important part of our philosophy, getting those types of capabilities in place we've been building out. The more this moves outside the hospital into the doctor's office, it's super important. And I've touched on some of the other areas here such as strategic pricing, a focus on multichannel, hunters and farmers, if you will, dedicated hunters in specific modality areas if that's all they think, how to find those deals. And then specifically larger executive account managers that really know to how to take a look at significant large deals, they may be $50 million, $100 million deals in 5, 7, 10 years and how to construct a solution-based capability, doing both of those and doing both of those well is how we've been wiring the company to do that. And our service business is really second to none. We offer broad extensive service on all of our equipment as well as biomedical. We also have a large multi-vendor business. And with our growth and share over the last couple of years, the service business benefits from service contract growth following the 12-month warranty period. New products like blood of any business, but particularly in our world, I think one of the great things is when Larry came into the GE world a few years back, there was definitely more of an inflow of R&D money coming into GE Healthcare. And that benefited us from being able to introduce more new products really in the last 2 to 3 years. And so the pump is primed. We'll continue to invest to bring new products, but this is just an example at the radiological show we just had post Thanksgiving just a few weeks back. These are some of the new big launches that we've had. We've had good growth coming off of those. I think evidenced by the '21 sales where 35% of that growth was coming from orders that were taking place from new products. You'll see that green dot on there. That's to signify embedded artificial intelligence, as I'd mentioned before, that's fundamentally changing how certain products work. And just to give you an example, I'll point out to 2 on here, AIR Recon DL where it shows kind of that sagittal brain shot there on the page. Take someone's 10-, 15-year-old magnet and via the changes we made actually enables you to get 50% more patients through on that scanner, but also upgrades its image quality to the state of the art of any magnet that's out there today. And when you can do that, coupled with bringing new products that are leadership into an integrated delivery network, that's a key part of our growth strategy. The other one is the Vscan Air, which is the handheld ultrasound unit that you can see on the page here. And really, it's a great example of technology that's leadership capabilities, has the technical capabilities of the top systems maybe 8 years ago, but now is in the palm of your hand working with your iPhone or your Samsung, and then integrates your data back into the network. And again, these are other areas of growth factors that we see across our business. So the result of, obviously, the execution on the commercial side, which is driving price, driving better sales and conversion plus the new products is sustainable high-quality performance. I've mentioned early 50% of our revenues come from recurring capabilities and services is a big part of that. Our service contracts, multiyear agreements. We have our imaging agent business, which is roughly $2 billion of revenue on a recurring basis, consumables and software, which I mentioned. And our goal over time is through, obviously, increases in software and applications, more consumables and services to continue to grow that, is to have a larger portion in a recurring basis. We're setting up our capabilities and already have subscription-based models, but further down the road, the ability to do [ buy ] use as well as different types of recurring models is a really important part, we think, of our future. Which then leads into the third part of the strategy piece, which is the optimization and using lean, which is deep embedded within our organization to really find new and creative ways each day to do better. This demonstrates here the historical 15% to 18% and the reoccurring spin cost here which is in the $200 million range. If you tie out what I said on pro forma, that's roughly the 14.5% basis, that we grow off of a go-forward standpoint in areas such as strategic pricing, volume and mix, productivity programs, across the board. You can imagine as a stand-alone company with TSAs, we have systems opportunities. We have rooftop opportunities. We have geographical opportunities to really optimize our cost structure because we're still running off a base of a large multi-division company. And so over time, that will give us productivity, as well as each of our individual businesses that are now verticals who own all the way through manufacturing and our commercial teams have the metrics, they are measured on the results and they actually now own the resources to be able to drive change in gross margins as well. And we think there's some really interesting opportunities on the commercial front end with value, not just pure price, but how we think about gross margin and solving customers' problems, and then the input costs. And obviously, some of the near-term benefits are better logistics and input costs coming out of the COVID window. And so this is our 4 businesses. The reason I like to show it in this way is, obviously, all of these guys are focused on growth. They're focused on margin and they're focused on free cash flow. But not every priority is created at the same level. And so the imaging team and PCS, which actually have some great growth opportunities, first and foremost, are focused on how do we drive up our margins. So they have some very thoughtful laid out plans on how to move from the teens into the higher teens and open to the 20% range over time with our margins, while also growing the business. Some of this ties to platforming, some of this ties to actually how we think about configurations and geography. But this is a really important part of how we're kind of focusing on specific things that can change the complexion of our overall P&L. And on the right, with ultrasound and PDx, both of those, if you recall, in the sheets are 30% roughly EBIT margins -- adjusted EBIT margins. This is an area where we want to find new ways to grow, and in ultrasound with it moving more in other sites of care, being able to prospect more feet on the street, more digital reach into new markets, it's a big opportunity to be able to grow that at a faster clip. And with our #1 leadership position there, the more we see, the higher probability win rates we have within those marketplaces. And for PDx for our agents, I would say, for contrast, I think there's some growing demand with the amount of imaging procedures, and so being able to expand our capacity there and growth is important. And also the rise of theranostics and other imaging, molecular imaging-based agents, we think that MI is going to also be a growth vehicle for us here into the future. And then underneath that, you see it's underpinned by strong service delivery within a region and world-class enterprise account management. Coming into a large account in IDN and really at the [ president ] of the hospital level all the way through working a multiyear deal that addresses fleet management and bigger issues. And then our digital platform is about having a consistent approach of digital connectivity across the globe. And I mentioned Taha joined us as Chief Technology Officer, he'll have many aspects of that, but digital in particularly will be all reporting in. And we think that's really important to be able to leverage a very consistent approach to driving that. And then the result of all of that is obviously strong cash flow generation, which gives us more financial flexibility. I already mentioned that our focus in '23 is 85% plus free cash flow conversion. And then over the longer, midterm is moving that obviously up into 90s. This is a great business for generating cash. I think it's going to give us plenty of firepower over the near and midterm. And it's an important aspect. It's also a critical part of how we'll measure our teams all the way down through the P&L, which again will drive revenue, adjusted EBITDA and free cash flow results. And with that then is aligning this capital allocation to the strategy we talked about. As you can imagine, a big part is tied to innovation, both on the R&D and product side, but also commercial innovation. You can see we've had about a cumulative $2.5 billion over the past few years spent there. M&A is going to be an important part for us over time. The IMACTIS deal that we just did, I think is a good example. Feature set that adds to our capabilities, things that can take us into a slightly new area while leveraging a core of our capabilities. And so that will be 5 now announced since 2020, just a few in the last x months. And then minority investments in strategic collaborations. I spent my last decade plus in a mid-cap and really appreciate the need to be able to grow an ecosystem. You can't own everything. You need to actually be able to have broader partnerships and relationships. And this is an important part of how we're thinking about solving some of these bigger issues. And obviously, digital enablement will be a really important part of that strategy. And just kind of wrapping up here to say, look, we think there's never been a better time to be in health care. It's why an asset like GE HealthCare with our capabilities at this point in time, when there's so much needed in care, we're just super well positioned. I personally believe this whole focus on precision care, where we can bring multimodal data and turn it into insights and bring it to the point of impact when decisions need to be made is a really big deal. And we are so well positioned to do it because we are in all of these institutions. We understand the care pathways and in many cases, generate a majority of that data. And so doing it in an open system-wise that all players can participate is an important part of the strategy. And then with that, a focus on our innovative products and specific plans and commercial execution to be able to drive consistent mid-single-digit growth as well as become a 17% to 20% adjusted EBITDA player. And so with that, Rachel, I think we'll stop there and if you go to Q&A.

Perfect. Thank you, Peter. [Operator Instructions] So congratulations to you guys. As you mentioned, you're the youngest health care company that we have at JPMorgan that we...

It's really youngest at something, right?

Yes. So for investors that are new to the story, can you just walk us through really what drove the decision to spin out of GE. And then what's going to be different now that GE is going to be a stand-alone health care company?

Yes. I mean, look, I think for the GE HealthCare business there are a lot of things as an independent company, starting with just a focused Board with deep health care experience that can fundamentally transform how we think about what investments are and capabilities. I think that's one. Focus is a big deal. I think the other side is the ability to be a more agile, faster company. It's just enabled. I mean, we obviously take a layer out of the organization, but you have your own balance sheet to be able to invest in more forward-leaning type investments with maybe a little bit more of a midterm range to them with an investor base that's going to be expecting to see those types of opportunities. I think all those things came together to say we can create a company that can have a significant impact on patients and customers, but ultimately a much bigger impact as a separate company for investors. I mean at its core, that's what it's all about.

That's really helpful. And then during your Investor Day, you spoke about some of the opportunities for margin expansion, especially in that imaging and patient care solution businesses. So can you walk us through the puts and takes there between pricing, volume, and then productivity gains? And really what's assumed within the model from an inflationary standpoint?

Do you want to give it a shot?

So we see a very clear path in our margin expansion. So we'll start around 15%, and we'll grow that into the 17% into the 20s percent. That's really our objective, strategically where we see our margins going in. I think there's really 3 key drivers the way how we look at that one. First and foremost, it's about commercial excellence. Pete talked about this a little bit. It's about how we look at pricing, how we look at our front-end sales organization, and really, I think the focus that we are driving with those teams. That's really the commercial excellence. The second piece is around innovation. It's all about the product, how we bring the product to market. And how we have a new product with our customers to drive better patient outcome and also drive better productivity for our customers. So that's the second piece. And then the third piece of the leg is really around the optimization, and when we look at our business optimization, it's really a number of items. Again, it's organization-driven. Pete talked about the 4 different business segments we have. We are aligning each of our teams across those 4 segments. But there's also elements in the way how we go to market, for example. We don't need to have a subsidiary in every country. We don't need the rooftop bar in every location that we operate in. So we see a lot of opportunity to change in the way how we operate. And I think Pete mentioned earlier as well, today, we are operating a lot of processes as part of an umbrella of a very large company, what we were a few days ago. And that's really we have an opportunity as we exit our TSA, define our processes, really fit for purpose for our size and type of company. That's really how we look at the margin expansion algorithm. I think to your second question, inflation clearly has impacted us, I think, as an organization, but we are seeing a really good line of sight to be coming out of that. It happens both on the commodities, it's also happening really around logistics and other aspects. So we're seeing that really easing. So overall, I would say, a great opportunity of shareholder value creation ahead of us.

Great. That's helpful. And then maybe just going to the preannouncement, some of the guidance updates. So you guys preannounced the 4Q '22 revenue of $4.9 billion. That was underpinned by 7% growth, 12% organic growth. So can you walk us through where were the key drivers of the business strength here during 4Q?

Yes. And maybe I'll start and -- I think, look, we had broad strength really across all of our businesses. There was obviously certain markets around the world, there were certain COVID flare-ups and things. And I think as an organization, we actually did very well being able to, with some of the processes and capabilities that we had put in earlier in the year had actually played out quite well. So we were able to ship, be able to actually deliver for customers around the globe. But I'd say from an order standpoint as well as a sales standpoint, across all 4 businesses, in most, if not all of our geographies, we actually had broad positive results.

Then maybe looking to 2023, you noted that you expect organic growth to be 5% to 7%. So could you walk us through the pacing of expectations here? And then how should we kind of contrast that with the 12% organic you did during 4Q? Just kind of walk us through the drivers on that '23 guide.

Yes. So when we look at the 2023 guide, obviously, we built up in our plans, our budgets over the last couple of months for 2023 which is a baseline for that. And then we really looked at also where do we see the lower range and the upper range on that. We have a very strong backlog that we're coming out of 2023. The [indiscernible] deal we disclosed in Q3 was around -- more than $14 billion. So that really gives us strength. And we're looking together with our commercial teams, what is happening with the scheduling of our backlog, how that is going to happen over the next 6, 9 months. And we have very good line of sight on that. So that really gives us good confidence, how we look at the revenue growth number for 2023.

Helpful. And then a few times during your presentation today, you mentioned the hiring of your CTO, Taha. So can you walk us through GE's advancement in that precision care strategy. Taha has great AI experience. So can you walk through why is this an important hire? And then how does this really oversee that research organization and drive greater adoption of that AI component?

Yes. So it's multifaceted. Obviously, for many of the companies that are presenting here have some form of a Technology Officer. Over the years, GE has -- GE HealthCare has had one. We haven't in the most recent past years. And so a really important part, I think, of this is kind of the structure that we have is the [ decomponents ] of building the products are built into those 4 segments. But I'm a big believer, and I think Taha as well as keeping some consistency relative to our digital approach, how we think about cyber, how we think about different APIs, how we think about capabilities. And so he'll have that group reporting in. We actually have a large research group that was part of the GE corporate group that is now a part of GE HealthCare, which is awesome. There's some super great capabilities there. Those will be reporting directly up through the CTO. And all of our field applied science and research that works with our partners. We get so many great ideas and capabilities from our customers in the field that have great research PhD students, then the conversion of that to product sometimes has been not as smooth. And I think we're going to be able to do a lot more of that integration. Much of this has an electromechanical part, but so much of it has digital. And as I mentioned, both in our products today as well as our platforms, machine learning is just across the board. And so with Taha joining us from one, as a cardiologist in background, spent time actually in biostatistics with FDA and also product development, but then the last 6 years with Amazon, Chief Medical Officer, but the Head of AI Machine Learning, it's the right balance for a company like us that wants to do both well on device and data, but we want to index more towards the data piece because we think it's a great enabler for the company.

Great. That's really helpful. Obviously, I'm going to have to ask a macro question. So can you just spend a bit of time talking about your portfolio and how you expect it to be positioned during this recessionary environment that it looks like we're entering. Are there certain parts of the portfolio that are more resilient than others? And then can you just talk about your customer purchasing behavior and what those conversations are looking like right now?

Yes. Maybe I'll start, and then Helmut, you can fill in some gaps here if I miss some stuff. So I mean, we've been out a lot with customers and interacting on what's going on. Obviously, the great part about health care in general is the broader resiliency across the kind of -- one of the things that's just evident is the amount of procedures that are actually waiting to happen around the world, as I've talked to customers in all continents, is actually unprecedented. When you look at the amount of imaging procedures and the wait times that are happening in big institutions that might have been a couple of weeks are now 4 to 5 months, that's happening all around the world. And so from our standpoint, there's a lot of questions, why is that. Questions from, are people coming into hospitals with more acute disease because of put-offs during COVID. Is there more use of our products because of how expedient it might be able to get to a diagnosis to deal with labor cost. A lot of those things are all in there in the factors of it. But we're seeing a significant amount of demand. And as Helmut talked about, our backlog again is at all-time level. And some of that is actually -- there has been some challenge in shipping, although we've done quite well in '22 based on our growth. There's also much more input demand for the products. So one of the things is we try to do is actually how we schedule out all of our installs over months and quarters. And we've spoken to a vast majority of our customers, and what they would tell us is as they're making hard decisions on capital allocation trade-offs, a lot of the things that we make are on the high end of that list. Why? Because they actually drive productivity to get more patients through. If you have a higher staffing cost, it actually is more productive to obviously get more patients through on a higher cost basis. So we actually feel quite good about how the situations are playing out. I think obviously, the labor cost situation for providers in the U.S., we keep a close eye on. And so overall, I think this is different in this type of recession, maybe in years past for those reasons. And the last part, I guess, I would just say, is maybe the insurance model obviously has evolved here in the states where more people have coverage.