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

It's hard to discern between the 2. We've seen first half will be below the original expectations, and I do expect second half to be a little bit above. But a lot of that is related to deferral of order from first half to second half versus, oh, is this a new order that is a result of stimulus, it's really hard to discern between the 2 of those. We are expecting some of the sales that we've not seen to come in the second half because listen, procedure volumes continue, right? There's a real need for the equipment that we have. And so then the question is like above and beyond that, right, that will be what we'll have to see as we go into the fourth quarter.

Okay. Maybe shifting gears to margins. And you talked about it in your -- in response to the first question, you saw really nice margin expansion in Q1 despite revenue growth that was flattish. So maybe just talk about kind of what drove that margin? What has been driving that margin expansion over there since you guys have spun out. And how to think about margins for the rest of '24, given that revenue is going to be ramping throughout the year. So is there potential to see some margin expansion beyond what we saw in Q1.

So we feel good about the margin performance. And I think particularly noteworthy is we're able to expand margin 50 basis points, while at the same time, we grew R&D 20% so we had a very significant increase in R&D, probably outsized relative to the rest of the year in the first quarter, and we still grew margins basis points, which I think was something that we were quite happy with and pleased with. I think from our standpoint, in 2024, gross margin will be the critical driver of our performance. Now that's not to say it won't be in the future. It's just to say that I believe in future years, we'll see some incremental performance coming from SG&A leverage. As we come off TSAs, there's an opportunity for us to rethink the tools that we use, the systems that we have, how we organize all of those things are unlocked as we come off TSAs. We can really optimize the back office, but at this point, our primary focus on the SG&A line is effectively coming off TSAs by the end of '24 to get to stand-alone. Then rationalization of things like business intelligence tools is a discussion we can have in earnest. But our first priority is like make sure everybody's computer works and that we're hosting it, like those kinds of things, I think, are the critical focus in the short term. So in 2024, it's going to be more about gross margin improvement. And we were really heartened by the performance that we saw in the first quarter. And there were a number of contributing factors. First, the price was clear. We expected 1% to 2% price. We delivered that, and that was a key catalyst. The second thing though was we really did see a lot of what we call variable cost productivity initiatives. And we refer to this as variable cost productivity initiatives. We also refer to this as our lean programs at the company. But the impact of this in the first quarter was substantial. Things like how can we reduce waste in our plants? How can we simplify design? How can we use 3D printing. We used an example in our earnings call, and it was a small one. It was a $1 million example, but the reason we use that is because it's an illustration of the hundreds of programs we have undertaken to drive cost improvements at the company. And we have a very good line of sight to the activity necessary for this year to deliver on our variable cost productivity initiatives and we have line of sight to future years as well. So we feel really good about the progress we've made on our Lean program, and this will continue into the future. The other thing is you'll start to see mix and platforming and new products all benefit us. And so this concept of innovation, which is you'll have new products higher margins when we launch a new product, our expectation is it has a higher margin than the predicate device. In many cases, it will have a lower cost because we've simplified the design or we've used a more platform approach at the company. So all of these design things will come to bear and be another catalyst. And they were somewhat of a catalyst in the first quarter, but I think the benefits of this will be bigger in the future. And so really, really solid performance so far in the first quarter and a lot more to do, but we feel good about the 50 to 80 basis points for the year. And I think even more important than that, as we look forward to the coming years, we were able to make positive statements affirming how we feel about the midterm guidance and included in it is a lot of margin expansion.

Got it. And you mentioned the midterm guidance and the high teens to 20% operating margin. I think the Street has you roughly that getting that linear over the next couple of years. So -- and I don't know if you're going to be willing to talk about it, but it sounds like there's a lot of opportunities where you may be able to see some incremental or expansion or accelerating in that margin expansion in '25 and beyond. And I know you're not going to give guidance. But I mean, is the opportunity to see accelerating margin expansion there.

So I don't -- it's hard to give '25 guidance, and there's lots of puts and takes to guidance in a particular year. What I will say is we've been impressed with the capability of the organization to drive margin in the short term, had nice margin expansion last year. Backed it up this year. We'll have some more SG&A opportunity, leverage opportunity next year, continued gross margin. So the overall gross margin story is one we feel very good about and the overall operating margin one is one where we feel very good about. The only thing I'll say is we're not going to see R&D reduced as a percent of sales. I think we'll still see some continued investment there, but that pays off over the long term. So I think the margin story is one of the exciting aspects of the overall midterm guidance that we've given. And at this point, we feel comfortable with what we've put together.

And on the technology front, some of the things that are small today but have a lot of opportunity going forward are digital, artificial intelligence, machine learning, quite small today, but big opportunity as we roll that across the capital equipment base. And also molecular imaging, which is inside of the PDX business. That's maybe 25%-ish of those sales in PDX today, but big opportunities, and those are the very specialized radiopharmaceutical solutions that are designed for Alzheimer's and theranostics.

Maybe shifting gears a little bit, just the overall hospital CapEx environment. I believe on the call you said it was pretty stable. And I wanted to ask specifically if you could parse that out to U.S. versus some of the international markets, and what is it about the hospitals that are, I guess, the characteristics of the hospitals or what they're seeing that makes the environment stable?

Yes. We -- so we do a number of things. I mean, for us to assess orders and the capital environment, we do our own survey with our customers. We look at your survey and all the externally available work that's done, and there's a lot of quite good work and then we look at our order volumes. And what I will say is, in many of our markets, the CapEx environment is constructive. The reason for that, I believe, is there's good procedure volume growth. Hospitals are seeing decent profitability levels. We've seen staffing shortages ease so all of these things contribute to this positive environment that we're seeing. And we see it in the U.S., we see it in a lot of other markets. China is a little bit of a different story. We've discussed that earlier in this presentation here. But I think the market is set up for decent growth from a capital standpoint. And as long as procedure volumes continue, I do think that, that's an important driver in how hospitals think about the capital that they want to deploy.

And I also want to ask specifically on order growth. And I know we've talked a lot about revenue growth, and you guys don't guide to order growth. But it's been low single digits for the last couple of quarters. I believe I asked on the call also. But -- and the assumption is that it gets better, kind of gets to the mid-single-digit level that more coincides with the longer-term revenue expectations. So I guess -- and I think you touched on it, but what drives that acceleration or gets you back to that mid-single digits? It sounds like it's some of the new products. China probably has a factor in it. But maybe just a little bit more color on kind of how you see the progression of order growth, getting back to something that's more in line with your longer-term revenue growth perspective.

Sure. And you have to remember that there are some dynamics that occurred a couple of years ago with respect to COVID that have distorted order growth for the last several years. And so in things like monitoring or in certain areas of our PCS business, we're still working down backlog that was ordered in an urgent manner, and we're continuing to sort of move through that. And so I think you have to look at order growth, you have to look at book-to-bill and you have to look at backlog. With respect to book-to-bill, it's important to note that when we report book-to-bill, we include service at 1:1. We include PDX at 1:1 meaning orders and sales are equal, okay? And so the actual equipment book-to-bill is well above whatever the reported number was, the book the equipment book-to-bill was meaningfully above that. And so I think those are all elements that you have to keep in mind when you look at book-to-bill. And finally, with respect to backlog, our backlog is still $19 billion, $1 billion over pre-COVID levels. And importantly, as we look at backlog last year to this year, it's basically flat year-over-year despite 8% revenue growth. And so it's -- the reason that we give things like order growth, book-to-bill and backlog is because they're all pertinent and need to be looked at in conjunction to get a measure of the health of the business. Now to your point, over the long term, we'll want to see order growth tick up a little bit. In any given quarter, in any given year, there will be deviations and that's very -- that's okay. But over the long term, we'll want to see it tick up a little bit. Some of it will come down to pricing. Some of it will come down to the new products that I talked about. We talked about on the call, which will be a key catalyst. And then some of it will come down to attaching more service to our equipment. All of those things will contribute to the order growth story. And again, we feel in context, as we look at the health of our business as measured by some of these future metrics, we feel great about it as it sits here today, and then we'll watch it as we go forward. But you will start to see innovation play an important role and a catalyst for us.

Got it. That's helpful. We've roughly 3 minutes left. Maybe touch on the PDX business, and there's a couple of exciting new products that may contribute the end of the year or the second half of this year, but our more longer-term growth opportunities, I think you guys would agree. So maybe just touch on kind of what you're seeing today, how you expect some -- the contribution in the second half and then even the longer-term vision for those products?

So PDX had a great performance in the first quarter, high single-digit growth, and that was both volume and price contributing to it. But interestingly, if we think about some of the products that you're talking about, which can be real catalysts for the long-term growth of this business, they didn't feature in our numbers. They simply were not in our numbers yet. And I'll just talk about a few of them. First of all, Vizamyl. Vizamyl is incredibly exciting. We're so excited to be part of helping to mitigate the Alzheimer's crisis and Vizamyl is a crucial agent in that. And so we haven't seen a meaningful number from this yet, but the growth rate is a growth rate we're not used to seeing. This is not like a traditional Medtech device kind of uptake growth rate. The growth rate that we've seen so far is very substantial. We're not counting on this in our numbers very much at all this year. But could this be a source of upside? It could. It could certainly be a source of upside in 2025 as well as more and more patients are diagnosed for amyloid plaque in the brain. So we're very interested in this particular area. And as the second drug hopefully gets approved at some point here, it will be a further catalyst. So not large enough to talk about on our earnings calls yet, but building tremendous momentum. So watch that. And then secondarily, we have flurpiridaz, which is another one we've submitted for FDA. We expect approval at some point. We don't know when, we're optimistic that we'll start to see sales of this in 2025, but could be another really exciting contributor to growth long term in our pharmaceuticals diagnostic business. And then finally, we announced the deal last year in licensing of FAPI assets, which are a specific tracer for certain types of cancer where it does a great job. This is another product which could be a wonderful one for us long term. So what I like in particular about this PDX business is you have the core imaging agents which provide -- play a crucial role in health care systems around the world. But what we've been able to do with that expertise is expand into these adjacencies. Vizamyl, flurpiridaz, FAPI, others that we're talking about, either internally or collaborations that could be further participating in this whole theranostics value chain, which could be very exciting for us long term. Expect to hear more about that at our November Investor Day because I do believe it's a long-term wonderful growth driver. And the way for us to continue to pursue our mission to create a world where health care has no limits. But in the meantime, we're not counting on much for this year. But let's see, it could be a positive surprise.

Great. With that, I think we're out of time. So Jay, Carolynne, thank you again.

Thank you.