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

Okay. Great. Thanks, everybody, for joining. I'm Matt Taylor, the U.S. medical supplies and devices analyst here at Jefferies. And I'm really pleased to be joined by management from GE HealthCare, including Jay Saccaro, the CFO; and Carolynne Borders, who runs the Investor Relations function. So we're going to have 24.5 minutes here for some fireside chat Q&A. We might have a chance for a couple of questions here at the end as well. So Jay, maybe we can get started. I would love for you to sort of give people a little bit of a high-level overview of where GE HealthCare is post the spin. It's important to talk about. How things have transitioned since you've spun off from the parent? And maybe give us a review of how you think the company has done, and what's changed since the spin? How is that allowing you to operate differently?

Great. Matt, thank you very much for the invitation to your conference here. It's great to be here in New York City. Thanks to those joining us today in the room. It's great to see all of you, and thanks for the interest in our company. But yes, it's been a wonderful 1.5 years as an independent company. I joined just a little over a year ago. And I have to say the progress towards our midterm objectives and the progress towards our company's mission to create a world where health care has no limits has been remarkable. A lot of times, spin-offs, you unlock certain things that allow a company to do extremely well independently. And I have to say, I'm so pleased with our progress as a stand-alone company in a number of different dimensions. I think it starts with, first, how are you doing becoming an independent entity. And at its simplest, we've retired 330 TSAs of the 500 or so that we expect to retire. We've got some more work to do there. But really good progress in terms of establishing our own operational systems so that we can succeed as a stand-alone company. And by the way, once we come off all of those TSAs, there are optimization opportunities that will present themselves in the coming years as we think about how we more efficiently organize and support the business. So really good progress there. But I think perhaps what's most noteworthy is really the innovation, focus and progress. One of the things that I think our company does extremely well is what we call a worldwide product planning process. It's a very rigorous approach to R&D development, takes customer input and then it drives all the way to a series of initiatives that are funded at the end of the process. We did this for the first time a year ago as an independent company. It's something that Pete had done and I had done when he was at Baxter and even before when he was at GE, he had started it, but it's something that the company hadn't done in a number of years. So we started this innovation process, and we backed it up with robust funding. So if you look at our R&D growth rate over the last couple of years, we're talking about teens R&D growth. The first quarter this year, I think, was around 20% R&D growth. So really remarkable performance both from a ideation process and how can we commercialize new products process, but also supported by tremendous funding. So I would say the innovation has been a great story. And it's -- you see it in the launches that we have. We launched 6 products in our Ultrasound business, really refreshing a number of our different portfolios there in the first part of this year, and that's going to pay dividends, meaningful dividends in the second half of the year. So really good work on the R&D front. I would say also one of the interesting areas for us and you saw this in the first quarter results. In the first quarter results, we had flat sales growth and yet, we expanded gross margin 120 basis points. The reason we were able to do that is certainly because of some pricing. But remember, we did have inflation to offset. So there was some inflation offset to that pricing benefit. But the real reason we're able to do that is because of lean improvement initiatives that we are pursuing across the company in our manufacturing facilities and how we design our products and how we go to -- and how we distribute our product. So all of those efforts had a very substantial impact in the first quarter of the year. All of those efforts had impact last year. And as we look forward, I feel very good about our line of sight to continued gross margin improvements through the rest of the year and into next year as we see some of these programs come to fruition. And by the way, on the earnings call, we referenced a 3D printing initiative that we were doing in a couple of our plants. And it's a small impact in and of itself. It was perhaps around $1 million. But it's an illustration of the hundreds of initiatives that we are managing as a team to collectively drive the impact that we've laid out. So those are a few things. I mean, I think the energy around our commitment and our mission is clear, but those are a couple of areas that I would highlight as really unique benefits of being an independent company. This idea of innovation and adopting a lean mindset across the entire company.

Maybe one quick add to that. This is a good cash-generating business. It helps us fund our future innovation, and we were also able to pay down approximately $1 billion in debt last year, which strengthens our financial flexibility.

Great. And Jay, as you started to talk about margins, maybe I'll go there first and do this a little bit backwards of what I normally do. But would love to hear more about how margins could progress over time. So just to review. Your expanding margins this year. You're going to be kind of in the mid-15s on EBIT margins, but you've talked about the ability to get to high teens to 20% over the next few years. So I would just love for you to talk about the key margin drivers, some of them which you already touched on. And how investors should think about those different levers? And kind of what the cadence of margin expansion could be through that period?

Sure. Maybe I'll start with the categories and then talk about initiatives. As it relates to categories of margin, really pleased with the gross margin performance, as I referenced earlier. That will be the biggest driver this year. In the first quarter, we saw 120 basis points of improvement against 40 basis points or so of SG&A leverage improvement and R&D actually grew as a percent of sales. And so that construct will continue throughout the rest of the year. You'll see very solid gross margin performance. You'll see some level of SG&A leverage, but then you'll see R&D consume some of that. Now for our investors, we're not asking you to wait for margin expansion as we build up this R&D spend. We're delivering margin expansion despite R&D spending that's significantly in excess of sales. So that's one of the elements of the model that personally I'm most excited about. What happens next year, and this is to my comments from the start of this presentation. As we come off the TSAs, we start to have more optimization opportunity in areas like G&A. So in IT spending as a percent of sales, we expect that to decline in the coming years. And more so than we did kind of in this year time frame. As we come to standalone, we have the opportunity to optimize some of these spend categories, be it finance, IT or other back-office functions. Now we're also very diligent about protecting commercial investments, really important for us to win when we go to market. So we're protecting those investments, but very thoughtful about how we can be more efficient with some of these back office functional areas. And so next year, what will happen is you will see more benefit from SG&A and perhaps a little bit less from a gross margin standpoint. And so the benefit mix will shift a little bit for the coming years as we start to see this story approach that high teens to 20%. I have to say, when we think about what's going to drive it, we've seen really good progress on pricing. The environment is good. But actually, one of the benefits of being a stand-alone company is you can identify what are the most important levers to your success and what do you -- how will you focus on them. In our case, pricing became a crucial area. We wanted to ensure that we were capturing the value for the services and products that we provide. And so we started to price that way. And what we saw last year, north of 3% price in sales. This year, we expect to see 1% to 2%, and we expect to sustain that. That's an important driver of our continued margin expansion. The second thing I would say is innovation is going to have a very positive impact. As we launch new products, typically, they come with a higher price and a lower cost than the predicate. And so the result of that is a multifaceted margin benefit. So as we look at new product launches -- and then as we look at these optimization initiatives, be they lean on manufacturing or G&A opportunities, that's a third bucket that's going to contribute to this goal of getting to high teens to [ 20% ] in the midterm. We're racing to get there. And I have to say, as I've come on board, I've spent a lot of time testing the margin plan, assessing the margin plan, identifying new areas, identifying risk areas. And I have to feel very good about the long-term margin potential of this business and our goal to quickly get there. And what that means is you should see EBIT growth in excess of sales growth for a number of years.

Great, Jay. Thanks for that comprehensive answer. I'm going to get you to be more comprehensive with a couple of follow-ups, I guess I wanted to ask about your price sustainability comment. So you talked about 1% to 2% going forward potentially. Maybe help us understand how you're driving that. So you mentioned new products. You talked about focusing on it. Is the pricing really coming from the new product mix? Or is that more of kind of a pricing discipline muscle that's helping to drive price?

Well, certainly, there's some benefit from new product and their impact on price. I think that's just kind of a general buoyancy as you innovate. But I would say the interesting thing for me is we really, as a leadership team and as an organization have emphasized the importance of price as a lever for us to drive an improved P&L picture, as a lever for us to allow us to invest in R&D in accelerated manner. Everybody on the team has embraced and embodied this. And so we have a monthly pricing council. We have rigorous reporting, which we established over the last couple of years. And so for example, if you want to cut price on an existing product as a sales rep, previous to the last couple of years, perhaps you would have the opportunity to do so with limited oversight. Today, to the extent that you intend to price below what the current price on the market is or your price last year was, then you have to seek an approval from like the CFO of the region. So it's a very important step that we've added. We have detailed reporting, a cultural emphasis. And I think at the end of the day, you also have to have the fact that you have really good products with a tremendous service network that people like. And so if you have all of those conditions in place, if you're adding 1% to $1 million device, it's not going to be a make or break as far as decision-making goes, deferral of decisions, and we've seen that. And so I think from my standpoint, I'm really pleased with the cultural intensity that we've put around this important lever for us. Because pricing has allowed us to offset inflation, to invest in R&D to help expand our operating margin as a company.

And you mentioned before that as you, I guess, stress tested kind of the margin plans, the pathway there that you largely like what you saw kind of paraphrasing what you said. But you saw some new opportunities and some risks. So I was hoping you could maybe expand on that a little bit. Is there anything kind of big and new that you saw in the plan that was an opportunity that you'd like to highlight?

I think generally getting comfort with some of these G&A opportunities. I'll give you one small example. As -- our travel policy was something that we had not refreshed in a long period of time. And so from a spending standpoint, we were probably comparing unfavorably to other med tech companies to other peers. By tightening up that policy, is it going to generate $0.5 billion? No, it's not going to generate $0.5 billion in savings, but it will have some level of meaningful impact on our financial results. That's one small example of many things that we've identified that we're looking at and really trying to embody and incorporate into our plan, which I think collectively will help de-risk and support our aspiration to get to this high teens to 20%.

Great. Maybe we could switch gears and talk a little bit about the top line. So I guess the way I'll frame it is, you've outlined $84 billion TAM growing to $100 billion in 2025. And your different markets: imaging, PCS, ultrasound, you've outlined kind of a 3% to 6% growth rate for those. So, a, maybe just talk about what drives your markets at a high level? And talk about current market conditions, what you're seeing out there in terms of underlying trends on CapEx and the differential growth rates that are impacting those different segments.

Sure. So we've talked about this $87 billion addressable market with very favorable tailwinds supporting it. And I think as we look across the world, we have a global aging population, and that cannot be underestimated in terms of the constraints and strains that, that puts on health care systems around the world. We have increases in chronic disease rates that, too, again, strains health care systems. And on the other side, you have hospitals which are, in many cases, capacity constrained or with staffing shortages in place. So all of these conditions are natural dynamics that will support growth in our markets. In the case of imaging and Ultrasound, again, it comes down to this idea of how can you assist hospitals be more efficient, drive better patient outcomes, help with workflow. And we see real interest in those kinds of product areas. And that's a crucial driver of continued market growth. In the case of our PCS business, patient monitoring is an interesting one because we are actually still working through backlog from COVID. There was just an enormous increase in demand for some of these products really monitoring patients carefully, understanding. And so that's been a source of growth for us. And from a revenue standpoint, we'll continue to be. In the case of PDx, again, favorable dynamics. Our PDx business is largely speaking driven by patient, by volumes and then some pricing. But procedure volumes is something that has been very robust. I think you all track this in lots of different ways. And I get to see it in our financial results when I look at our PDx business. It's the nearest term way we see the impact of procedure volumes in the market, and it's robust. Now there are other drivers of PDx. As we think about the growth in that particular segment, there are other markets that are early stage and emerging. The whole idea of theranostics, the whole idea of innovative imaging agents to support cardiac perfusion in terms of things like Flurpiridaz. The whole idea of Vizamyl in support of Alzheimer's. These are very new and nascent markets which represent, in our view, kind of interesting opportunities to accelerate market growth. But I would say, in our base case, the core of this driven by procedure volumes will continue to be robust. So I think we feel quite good about the markets that we're seeing. As we sit here today at this moment in time, the markets the markets are reasonable. We've seen a positive backdrop in the United States. The market has been quite robust. We see the survey that we work, that we do on a regular basis confirms this. In addition to our sales pipeline, our order pipeline looks robust. In markets outside the U.S., we're seeing good performance. Of course, I've talked extensively about the situation in China, which as a result of anticorruption along with a lack of clarity around some stimulus programs, that market has been challenging as we expected. But we do expect that market to resume kind of normal levels of growth as we approach the back half of the year and into next year. The interesting thing about China is if you look at our growth there over the last 3, 5 and 10 years, the line is outstanding. Now of course, in any given quarter, there is a lot of wobble around the line associated with various initiatives that are undertaken. But I think the approach that we've had over the last decades has been one that's rewarded us really well.

Maybe backing up for one second. I do want to touch on China a little bit more. But you talked about mid-single-digit growth in general this year, 4%. The first quarter grew a little bit basically. And so I was hoping you could talk more about cadence through the year of growth and your confidence in hitting 4%, which would require some ramp in the back half.

Yes, it definitely requires some ramp in the back half. I think the one thing I would say, Matt, is -- if we were to look at what the compounded growth was over 2 years in the first quarter, it was 6%. So high single -- high mid-single-digit growth. If you look at throughout the rest of the year -- because comps ease, the actual 2-year growth rate doesn't really change materially. So the fact of the matter is we had an outstanding Q1 of last year. we are not normally yet. I hope 1 day, we may be a 12% grower. But we grew 12% in the first quarter of last year. And so backing that up with 0% this year, while a challenge from a 1-year perspective as we look at it over a multiyear framework, it's 6% growth. And I think if you look at each of the quarters, the comps ease as we go through the rest of the year. But the other interesting thing, as we think about acceleration to the second half is we will have some market normalization. So you'll see some normal volume growth in our markets. You will have the impact of innovation. I talked earlier about launching 6 new products in ultrasound. These are really great products with some very unique enhancements. It's the first time that we've attached a wireless probe to our ultrasound devices. Previously, all of our ultrasound devices would require a tethered probe, which is clunky to manage. Now we're seeing some real interest, for example, in adding this wireless probe to our ultrasound devices. So -- and that's 1 of many aspects of innovation in the 6 new launches that we announced. So as I look at the second half, you have volume growth, you'll have the impact of innovation positively contributing versus prior year. And you'll also have the impact of pricing. So those 3 things comprise the growth that we expected at the beginning of the year. And then in addition to that, we now have had a couple of things shift from the first half to the second half. One of those relates to -- we did have some supply chain issues in our PCS business. Those have principally been resolved, and we'll expect to pay off those sales in the second half of the year. So that point of growth that we lost in the first quarter, we expect to see that come back into fruition in the second half of the year. And then in the case of China, we are -- we saw -- we did see some impact in the first quarter and then we modeled some conservatism into the second quarter on the back of the fact that people are still hesitant in the marketplace as they await clarity on some of the stimulus package. That's largely speaking, playing out as we expected. So we'll see some of that, we expect to come back in the second half of the year as well. And so really, those are the dynamics that lead this first half slower growth to yield second half acceleration.

Services should also be solid in the back half of the year and growing given the high growth that we had in equipment in the first half of last year. There's typically a 12-month lag on that. So you should see that coming through in the back half of the year.

Maybe just ask one more on China. Jason, you talked about the clarity you're starting to see play out as expected. What are you hearing from customers? What are they seeing? And how is the process of actually getting reimbursed impacting the timing of orders?

Yes. I think what we saw in the first quarter towards the end of the quarter, post announcement and what we saw -- what we've seen in the second quarter is this idea that there is hesitancy amongst customers to submit orders to run tenders in advance of clarity around stimulus, which makes complete sense to me. Listen, as a customer, I would not want to run ahead of potentially some sort of free money or stimulus money. So I would want to wait until we have clarity. And so what we always expected is in the second quarter, there would be some level of collaboration between national government and provinces to provide clarity to all of the hospital systems that exist in China and allow them to proceed forward with tenders and all of this, what is real pent-up demand at this point. And so that process is working itself out. We're seeing conversations taking place between provinces and the national government. And we expect to have more to say on this with hopeful resolution when we talk -- when we have our earnings call, we hope to have a point of resolution at that point.

We're running out of time, but I wanted to ask another high-level China question. So some people framed the new stimulus as a 6% CAGR. It's kind of how it reads. But can you talk about what you think this means for growth in that market for your businesses over the next few years? Maybe give us a review of how China has been growing for you. You talked about that longer-term trend line? And then what you think you could achieve going forward? If you can talk about high level or any specific growth rates.

Yes, we -- I mean, we -- the China market has outpaced growth of -- our China business has outpaced growth of the company, which has been great. But as we look forward, we don't really give guidance regarding particular markets. What I can say is China has been a great market, and we expect it to continue to be an outstanding market for us. I think from our standpoint, it represents around 13-ish percent of our overall portfolio. And it's something that we've been very proud of our investments that we've made in manufacturing. We've been there 100 years manufacturing for over 30. So we think long term, we've gained share. And so we think over the long term, it's a very nice business for us. And the trends, you talked earlier about the demographic trends and the trends that we're seeing. Trends support continued growth. Now of course, in any given quarter, there has historically been some level of volatility. But that long-term line is something that we've been very proud to deliver on behalf of our company, and we expect to continue to grow.

Great. Well, I think we have to end there. But Jay, Carolynne, thanks so much for your time. Thanks for your interest in GE, and let's all go to a room at a more normal temperature. All right.