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

Good morning, everyone. I'm Larry Biegelsen, the Medical Device analyst at Wells Fargo. Welcome to day 2 of our 2023 Healthcare Conference. It's my pleasure to introduce the management team from GE HealthCare. With us, we have Jay Saccaro, the CFO; and Carolynne Borders, the Head of Investor Relations. In terms of format, it's going to be a fireside chat. I think this is Jay's first fireside chat as CFO of GE HealthCare, if I'm not mistaken.

That's right.

So it's a real thrill to host this session this morning. [Operator Instructions] Jay and Carolynne, thanks so much for being here.

Thank you.

So Jay, I think before jumping into Q&A, I think you wanted to make some opening remarks.

Sure. Well, first of all, thank you for the invitation, Larry. I think we've been together in this venue now for probably 7 or 8 years, not in this venue, but in Boston generally. And so it's nice to be here with you today. Very excited about the opportunities at GE HealthCare. I think from our perspective, we were really pleased with the first half of the year performance, really the first half as an independent public company. Importantly, we saw a very solid sales growth with 11% sales growth, which was a testament not only to commercial execution, but also our ability to get through some supply chain challenges that we faced last year. We also had very solid order growth in the first half of the year, capping off with 6% order growth in the second quarter, very healthy backlog, $18 billion in committed backlog or backlog, I should say, generally. And I think as we look at that, it really is an important stage setter for our long-term performance. As we move down the P&L, we had protected investments in R&D. So I was very pleased to see R&D growth, and particularly, in the second quarter, you had double-digit R&D growth, which is a testament to our commitment to investment in new products and innovative new therapies. And we were able to deliver a solid bottom line, which allowed us to raise guidance in the second quarter as we looked at the full year projection. So good performance there. And then overall, I think the -- we continue to make progress in terms of operational excellence. We're coming off TSAs. We removed about 100 TSAs. And as I look at that, that's a real opportunity for us to enhance margin and performance over time. It starts with getting off the TSAs and becoming independent. So really good performance there. And then an intense focus in our manufacturing facilities on operational excellence initiatives. So I think that's another important stage that, as we think about this midterm concept of really enhancing the margin of the company, it starts today. So good start to the year.

That's great to hear. So Jay, you recently joined GE HealthCare from Baxter. What attracted you to GE HealthCare? And what changes can we expect in the metrics you focus on like free cash flow or how you report or guide?

Sure. I was -- obviously hard to leave Baxter. It's a tremendous company with tremendous opportunities. For me, I had previously worked with Pete. So I had a lot of experience with him and was excited to talk to him about the opportunity. But then as I looked under the covers a little bit more, I saw very solid and durable businesses. These are medically essential. Hospital systems are built around the products that we provide. So really essential products that we sell, one element. I also saw this idea of innovation and innovative tailwinds. What I mean by that is a lot of interesting new products like photon-counting CT machines, like handheld ultrasound and advancements there. But also in addition to that, digital and data supporting. So artificial intelligence, supporting the products that we provide, putting a layer on top of that became very interesting to me. And then also, as we think about this idea of very high-priced specific therapies for patients and the needs that those therapies have in terms of targeting, I think GE plays a very interesting and unique role. And the most prominent example of that today is Alzheimer's, where we're talking about scans and MRs, exams during the course of treatment, really enhancing outcomes for patients and really a necessary catalyst. But I think that's just one example of many. We call this concept care pathways where we're looking at patients across a care continuum, providing support for that. So I got very excited about that aspect as well. And then I would finally say, look, this is an early public company. And I felt like there would be real opportunity to enhance margin, enhance operational performance. And I have had some experience with that at Baxter. So I was hopeful that I could help on the journey here. So those are why I ultimately chose to join. As far as metrics, I think you mentioned free cash flow?

I did.

That's a -- as you know, that's a really important area that I've always been focused on and we'll continue that focus. So I don't -- as far as free cash flow, I think we've been pleased with the conversion expectations in terms of free cash flow. And I think it's going to be a continued area of emphasis for us. But we're still learning as a company, the best way to communicate with our investors, other stakeholders and shareholders. In the second quarter of the year, you would have seen us introduce a new metric. In the first quarter, we reported this concept of book-to-bill, which is a helpful metric but it also has a lot of different moving pieces related to it. In the second quarter, based on some feedback that we've received and some discussions that we had, we introduced the concept of order growth or organic order growth. And I think from my standpoint, it really is a better metric as we look at the long-term health of the business. I mean there's less ambiguity around it. So we'll look to continue to refine how we report, what we report and so on. But I think things like continued focus on free cash flow, the continued focus on margin expansion, all of those things are core to what we do.

That's helpful. I won't show up to a meeting with you without a cash flow statement, Jay.

Thank you. I appreciate that, Larry.

So Jay, switching gears, what's your view of the hospitals' capital equipment environment today?

Yes. Our view is it's -- we're encouraged by the environment. I think hospitals are seeing a return to procedures generally. Hospitals are prioritizing investments on CapEx that support productivity and patient care. They're investing in modalities where they can enhance growth. And I think a lot of what we do is targeted to those areas. Many of the products that we sell are prioritized as a result of that. But listen, since COVID, it's been a cautious capital environment, with investments really targeted to those areas that enhance the hospital in some specific way. And I think we've been fortunate that we have the right products to support that.

That's helpful. So no real change.

No.

That's good. And let's talk about the Alzheimer's opportunity that you mentioned. How is GE HealthCare positioned to capitalize on the opportunities in Alzheimer's given the FDA's recent approval of Leqembi?

Yes, we're -- first of all, it's so exciting to live in a world where we're talking about Alzheimer's treatment. I know all of us have or perhaps will be impacted by someone close having Alzheimer's. And so it's such an exciting world, right? And so there are some great new therapies out there, but I think we play an essential role in terms of supporting the successful delivery of those therapies. The way it works is Leqembi removes amyloid beta plaque. And it starts with having a PET scan to identify, do you actually have plaque that should be removed? Throughout treatment, a patient would undergo a series of MR exams to ensure that there are not negative reactions to the therapy. And then perhaps at the conclusion, there would be another PET scan to identify that the plaque had been removed. So we play a crucial role in terms of supporting successful therapy along the way, identifying who is best. And then in addition to that, ensuring that the therapy is being adopted successfully. This is -- like I said at their onset here, this is probably the best example that we have at this point of this idea of a care pathway, which is how can we support a patient through the entirety of their treatment. The interesting thing for us is we are talking to IDNs, and we're enhancing our thinking around how can we -- this is new ground for all hospitals, right? And so the question that a hospital asks is, do I have the right capacity to support this? Do I have the right capability? And we can play a role in terms of supporting them through that journey. And so that's -- we're enhancing that right now. What I would say is the other interesting aspect is the contrasting agent that's used for this, we're one of the suppliers of that. So with the PET scans that take place, there is an agent called Vizamyl which is used to detect the plaque in the brain and we're one of the few suppliers of that. So that's another great opportunity. This is -- it's admittedly really early days. I know there's a lot of optimism around adoption rates here, and we're certainly excited about that for many different reasons. But it's an area that we'll watch carefully as we move forward here. And I think, from my standpoint, this could be a big outcome for our company but also for society at large.

And so there was an article in the Wall Street Journal where GE HealthCare estimated this could translate into a $1 billion annual market opportunity. What's behind those assumptions, not the nitty-gritty, but broad strokes? And how much do you think GE HealthCare can capture?

Look, I think we have the right to play and win in the space. I really do. I think because as the only person who has PET scan, plus imaging agent, plus MR, plus real expertise in all of these, we can and should play a crucial role in terms of supporting this. A lot of this comes down to the pace of uptake, right? And so how these drugs do early on is something that we are keenly watching. And there have been a number of surveys of physicians and many of them are very optimistic about prescribing rates and so on. I think it's early days. And what's important from my perspective is I want to make sure that we have, to the extent that an upside case emerges, we have Vizamyl capacity to support that. We're ready with incremental PET machines and MR machines as necessary to support rollout. So we want to make sure that we're watching this very closely as adoption takes on, but it's still really early days.

And maybe just to add one point on that, Jay. This is why I think it's so critical to the point that Jay made a moment ago about us getting out and meeting with the customers to help them plan their fleet strategy as well as their imaging agent strategy so that we're proactively getting the customers thinking about what their needs will be in the coming years.

That makes sense. And some investors have been worried about blood test for Alzheimer's disease, eliminating the need for MRI and PET scans. What's your view?

We'll watch. I mean I think we're a few years away from relevant blood tests. And I think there are real benefits to sophisticated PET scans at the outset and at the end of treatment. We believe that, but we'll watch this very carefully. And then along the way, MR is not so much about a plaque question, but the MR exam is about inflammation and how is the patient tolerating treatment. So I think there's going to be a role for imaging in all of this and a really important one, but we'll watch the evolution of these blood tests as things move forward.

That's helpful. Jay, switching gears to China. You guys put up a strong 16% growth in China in the first half of the year. I believe, it's an important -- very important market for you, 14%, 15% of sales. A lot of cross currents there; procedure recovery, which has been good this year; macro headwinds that we read about; the anticorruption initiatives that we're reading about. What's your latest thinking on the outlook in China? And I think people -- in general, but I think people are really interested in the anti-corruption initiatives and how that might impact medtech companies like yours?

Sure. China is a really important market for us. To your point, it's like around 15% of sales. We've been there for 30 years. We've had a successful VBP participation for our PDx business a couple of years ago. So continued with our contracting agents in China. We have announced a partnership that we'll be pursuing for the non-premium segment. And so as we think about things like made in China, about 60% of our sales in imaging and ultrasound are made in China for China. China is also an important supplier to the rest of the world in a number of different areas. So we are very much -- it's been an important area of our operations and will continue to be. As it relates to anticorruption, we've said limited short-term impact, a little bit of disruption, but nothing substantial. And I think long term, having a higher bar for compliance, I think that's a good thing. And I think we will be prepared and are prepared to support execution in that environment because compliance is so important to us. In the short term, there have been some tender delays. We've pointed to that. We've seen -- but we haven't seen an impact to procedural volumes or anything like that and don't expect a substantial impact either to our second half performance or as we move to next year. It may impact some of the cadence of next year in terms of like first half versus second half, but nothing material as we think about an overall impact from this initiative. At the end of the day, patients need to be treated. And I think that will continue to happen in China. The government has shown a real commitment to supporting that.

So to put a finer point on that, the back half -- the mid-single-digit growth in the back half that you talked about on, I mean should be applied for the guidance, but you also talked about mid-single digit on the Q2 call. I know the anticorruption initiative came after your Q2 call. Is the mid-single-digit growth in the second half of the year, it sounds like that's still intact?

Yes. We don't have any -- we're not changing guidance. We don't really give updates during the quarter, as I've told you in the past, but when this initiative came out, we just -- we characterized it as a limited short-term impact.

And what gives you the confidence that it's limited in short term?

We have hundreds of employees in China that are working every day in terms of delivering our business and very focused on that. So it's on that basis.

Got it. And maybe switching gears then to the P&L. Jay, you talked about the margin opportunity high teens to 20% adjusted EBIT margin over the near term. How should we be thinking about -- which is, I think, 3 to 5 years -- how should we be thinking about the ramp there is like 17% in '25, 20% in 2027. Are those the right ways to think about it?

I might stop short of giving annual parameters on it, but maybe take a step back. I think we have a real margin opportunity as a company. And I have personally spent a lot of time validating the plans, bolstering the plans in my first few months. And it really comes down to a few different things. One, continued commercial execution. We've seen ability to price our products and a real focus on that. We'll continue that. Number two, new products. The new products that we're launching, carry higher margins, bring incremental value to our customers. And so this innovation pipeline is an important unlocker of this long-term margin expansion. And then finally, we have this whole efficiency aspect. And I think this, kind of features in a number of different ways. First, from a manufacturing standpoint, tremendous opportunities for us to enhance operations. I've been very pleased with the intense focus on operational excellence at the company. But then you have also this aspect of we're a newly independent public company. And we were a division of a larger company, and we are not optimized yet for being a stand-alone company. And there are real opportunities. One of the things I've discussed previously is this idea that our IT cost percent of sales are way too high. And the reason is because it's optimized for a division of a much larger company. We have a CIO and the entire team is galvanized around driving this down, while at the same time improving the support that we provide and things like moving servers to the cloud. That's millions of dollars of opportunity for us, and we have lists of opportunities that go down. And this is not confined to IT. For each of the functions that we have, we have those kinds of opportunities in place. So I'm very heartened by those opportunities that exist. While at the same time, we'll make sure that we continue to invest in R&D, because that innovation aspect that I characterized a little bit earlier is a crucially important long-term sustainable margin driver.

So Larry, maybe some of the near-term opportunities will be driven by what Jay referred to pricing, adding more innovation to the devices that we put out, adding more digital software, artificial intelligence. And then some of the longer-tailed things that are getting us closer to that 20%, if you will, will be some of the things that take a bit longer like platforming, getting more efficient in our operating base, exiting some of those longer TSAs like IT that takes a little bit longer to get done, reducing sites where they are redundant. We've identified 100 sites across the globe that we can reduce. So those are some of the things that are maybe on the longer end.

Got it. Jay, the long-term margin guidance was given before you got that. Nothing -- it doesn't sound like there's anything new to see basically. Maybe another way to ask it, now that you've been there for a little while, how are you thinking -- you feel confident in these margin goals, you see a lot of opportunities, it sounds like?

Yes. I feel and I said this on the call, I feel good about the margin plans that we've put together. How do you drive a margin transformation? You do it by having a whole set of initiatives and then you have to put the operational framework on top of that to ensure successful execution on that. And so I was prepared to come in and say, "Hey, we got to set up a margin transformation program." But I was so pleased to see that the program already exists. The team is in place. We have -- several times a quarter, we have a review of all of the initiatives like the one that I just described for IT, with accountabilities senior leadership led. I think that's a real catalyst for driving margin expansion, and it's been very easy for me to get up to speed on the plan. I put -- I have different ideas in certain areas. But generally speaking, we feel very good about what we have there.

That's helpful. Jay, you touched -- I wasn't going to ask about 2024, but you mentioned it earlier. So I feel compelled to ask.

This is our annual rite of passage here, right?

And this is why you come to this meeting. But in all seriousness, what are some of the potential tailwinds and headwinds to think about for 2024?

So we'll stop -- as we always do, we'll stop short of giving guidance for 2024. I think for us, what we're really focused on is I was heartened by the order growth rate in the second quarter, 6%, important number for us. I was also pleased with the robustness and richness of the backlog in place at $18 billion. As we go through the coming months here, we're going to -- we're intensely focused on that because while we are a capital business and there is attendant volatility associated with that, the backlog and the order growth are real indicators of future revenue performance. And so really focused on those particular drivers. As we move to 2024, we'll continue to watch the robustness of the capital environment, which, as I said earlier, at this point, is okay. We'll continue to watch things like China. Does that evolve in a way? We'll watch that very carefully. We'll watch Russia as well. On the other side of the coin, we will continue to watch things like how is the Alzheimer's uptake going. Vizamyl could be a real opportunity for us in 2024. So we have a lot of work to do in terms of refining the perspective on 2024, but I think those are a few of the things that we're going to watch very carefully.

And I was curious on China. You said it could impact the cadence in '24, but you talked about it having a short-term impact. I would imagine it was more short-term meeting '23. But why would it impact the cadence in '24?

If it's a Q1 versus Q2 or Q3. Again, we'll watch this very carefully. And I think we'll talk more about it probably on our upcoming earnings call. But we just want to make sure that we are finally tuned into all of the dynamics, and we'll reflect it in this year's numbers. But when we give guidance in February of next year, we'll make sure we have -- that's a key factor that we will have watched.

And Carolynne, correct me if I'm wrong, but the long-term organic growth for the company when you spun out was mid-single-digit growth. Is there -- Jay, is there anything like the comps are really tough, right, in the first half of the year, they will be in the first half of next year, right, because you have such a strong first half of this year. Is there anything that besides the China -- the China comments earlier, anything else that creates a headwind for mid-single-digit growth next year?

Again, we'll have to -- we'll wait and see in terms of what -- for me, it comes down to how we're doing on order growth, how does the backlog look? That's just such an important driver. And the quarterly cadence, I think these are all things that we'll have to work through and watch carefully.

And is there anything going through the P&L right now that you're aware of that could impact margins next year?

I don't have any specific comments to make on specific items. For us, the margin of the company represents a real opportunity, and we want to get after it year after year. I think we've got robust plans in place. So stay tuned on that front.

Okay. Fair enough. And switching gears, Jay, on capital allocation. What are your thoughts on M&A in terms of deal size, areas of interest, financial criteria, et cetera?

Sure. I think M&A represents a very interesting opportunity for us. We did a deal this year called Caption Health. And really what Caption Health is about is it's about artificial intelligence technology that supports ultrasound. And what it specifically does is it allows somebody who is a perhaps not highly trained sonographer to have guidance that allows them to put together an ultrasound. And if you are a trained sonographer, you can move through your exams more expeditiously as a result of this technology. It's a great example of a technology that directly relates to a product area that we have and allows us to more effectively deliver our offering. And so that's the kind of deal that we love to see. We are the logical owner of that asset. We can drive a differential value based on the other products that we provide. A couple of years ago, we did a deal called BK Medical which is similar. It's about ultrasound therapy in terms of supporting cardiac intervention and using ultrasound to do that, another technology offering. So as I think about M&A going forward, clearly, our wheelhouse will be in those areas where we have a strategic gap where we think it's more appropriate to close it inorganically. And there will be numerous opportunities like that. And we're spending time. Pete and I meet with the BD team every single week, reviewing the pipeline, reviewing the strategies and the gaps and how these products will help close those gaps. So very excited about the idea of bolt-ons. When we do, we're very focused on ROI in years 3, 4, 5 and 6, we want to have a very robust return on the investment. And then we don't rule out larger deals, but it's just that there's -- given that the strategies that we have in place, there are a lot more smaller targets that represent opportunities for us than the big large deals. So I would expect over time, you'll see hopefully a steady stream of these kinds of acquisitions that bolster our offering. From a capital allocation standpoint, we -- as you know, we spun out with some debt, also some unfunded pension liabilities. And so I think one of our priorities in the near term is to use some of this free cash flow that we're generating in 2023, along with 2024 and start to pay down some of that -- some of the debt. And as we rehabilitate that, we'll be able to open up the aperture on other vehicles return capital to shareholders along with business development. But I think in the short term, call it, the next 18 months or so, a priority is some of that debt pay down.

That's helpful. And ROIC, the goal -- the target is what for you guys in like year 5?

We've said cost of capital historically. And I think there's a lot that goes into that. And there's a lot of other factors in addition to that, that we need to look at: strategic fit, accretion growth, all of those aspects become quite important in addition to ROI and not only in year 5, but also how does it look in year 3, 4 and 5? Because if it's 1% going to 10% from year 4 to 5, there's probably some risk in that pro forma that you need to be mindful of.

Constant capital, high single digit, low double digit?

That's -- I think that's what we've said. You we can see that.

That's helpful. So you talked about photon-counting CT technology as an opportunity. What's the progress there?

Good progress. We're a few years away from the launch of this important platform. I think what it allows for is more detail in terms of characterizing tumors for oncology. And we think that the silicon technology that we use really allows for a depth of analysis and insight. And we're hopeful that this comes to market and then becomes a great product for us that differentiates our CT offering.

And when can we expect to see something from you guys?

A few years. We haven't -- I don't know if we've been more specific than that...

We've just said we're several years out.

Okay. And the -- I think GE still owns about 20% of GE HealthCare. What time frame do you expect GE to exit its remaining stake in GE HealthCare?

I think they own around 13%. We had a successful secondary offering in June that our team supported. And so that reduced the stake from 20% to around 13%. As far as their plans, I think that's probably best a question for them. I don't really have the ability to answer that, but we're here to support that. Whenever they choose to do it, we'll be here to support it. And I think -- thanks to you for picking up coverage of our company. We've had a lot of analysts do that, a lot of real interest in what we're trying to achieve. So I think I'm hopeful that we'll -- it will be an opportunity for new investors to come into this.

And Jay, you talked about AI as being another exciting area for GE HealthCare. Where do you expect to see the greatest impact?

That's a really interesting question, and I think it's kind of core to our strategy. We actually have seen a substantial impact from AI already. We launched a product a couple of years ago called Air Recon DL. And some of the earliest usage -- uses of AI relates to image enhancement and image matching and things of that nature. What Air Recon DL does is it basically takes an old MR machine, adds software to it that enhances the image quality and reduces the time to conduct an exam. It's a huge improvement. And so we've been selling that product already. And it's been very well received. And a lot of our new machines in addition to old machines are including Air Recon DL because folks like how much it enhances images and so on. And so that's one example. But taking a step back, I think this idea of digital at large and helping hospitals manage how they're going to address Alzheimer's with not only a technology hardware offering, but also a software offering that sits on top of that. We've made substantial investments in this area and building out a team. And the team is hard at work in terms of putting together artificial intelligence, yes, but also basic data and digital aspects that allow us to support more effective management of the products that we offer and what hospitals are trying to solve with them. So -- it's a little -- and I recognized right away that that's a bit of an amorphous answer, but you can expect to see continued investments in this area. We'll talk at RSNA about some of the products that we're offering related to the Edison platform and some of the enhancements that we're doing there. So very excited about what this will mean in the future for our company.

That's helpful...

And maybe just quickly on Edison. We're working with third-party app developers that are creating apps or tiles, if you will, that are very specific to disease care pathways. So those -- the intention is that we'll sell those on a SaaS model and you can offer to the hospital different types of very specific disease state care pathways to add on. So that's early stage because today, total digital for us rolls up to just north of $1 billion, but the goal is that this is hopefully going to be a big growth opportunity as we move forward.

That's helpful. Jay, another unique aspect of GE HealthCare is pricing. You've talked about 2% to 3% positive pricing in 2023, 1% to 2% going forward. How confident are you in those assumptions?

We feel good about those assumptions. I think this year, we talked about 2% to 3%. A lot of that was on extraordinary inflationary impacts that we saw last year, but we are now -- it comes down to how much pricing are you seeing in your orders, right? That's a key aspect. And we feel good about this idea of 1% to 2% longer term. I think what I've been really impressed with is the intensity of focus on margin and pricing from all of our sales teams. And so I think there is -- there needs to be a discipline around that aspect. And the organization has it. We're really trying to put forth a comprehensive product offering that our customers value. And so I think we've been successful so far, and we'll look to continue that.

Jay, we've got 1.5 minutes left. We covered a lot of ground. I wanted to give you a chance to close and leave people with any key messages.

No. And again, thank you for the interest in our company and picking up coverage. We appreciate that. We're a new company. We have great opportunities in terms of innovation and the role that we play in terms of health care. I'm incredibly excited and compelled by that. And underlying that, we've laid out a long-term aspiration and vision. At the same time, we're a new public company, we have lots of great opportunities there, too. So I'm really excited about what the future has -- holds in store for GE HealthCare. I'm thrilled to be there and appreciate everybody's interest in joining us today. So thank you all very much.

All right. Thank you, Jay. Thank you, Carolynne.

Thank you.