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

Good morning, everyone. Welcome to the BofA Healthcare Conference. I'm Craig Bijou, one of the Medtech analysts here. And it's a pleasure to have GE Healthcare. And from the company with us is Jay Saccaro, CFO and Carolynne Borders, who's Chief Investor Relations Officer. So Jay, Carolynne, thank you, both.

Great. Thank you for the invitation to the conference. As always, it's nice to be here again. And it's nice to see everybody in attendance. Thanks for your interest in our company and support.

All right, Jay. So let's start with tariffs. And obviously, over the weekend, we heard about the reduction of tariffs, both from China to U.S., U.S. to China. You have been one of the companies that has been most affected by China tariffs specifically, at least within medtech. I also think you guys did a very good job of laying out your exposure and some of the mitigating actions that you're taking and what the impact that would have? So I guess, maybe just start with your reaction to the lowering of the tariffs. And then we'll kind of get into a little bit more detail there.

Sure. I think from our perspective, this is a great first step in terms of establishing a nice trading relationship with China based on the terms and the discussions that have started. I think from our perspective, we, as you mentioned, we're very impacted by global trade and in particular, we're impacted by this U.S. and China trade back and forth. We highlighted in our earnings material, roughly $0.85 of impact from tariffs of that $0.65 relates to U.S. and China. And so we were heartened to see the news. And hopefully, there's a temporary pause on a portion of the tariffs. So hopefully, the trade negotiations continue.

Got it. And you did highlight on the call, you maybe -- or I guess you had a good guess that you said if you -- if tariffs came down by 100 basis -- or 100 points, 100% on both sides, it would be a $0.40 impact, I believe, is the number that you use. So maybe just help us think about with the temporary tariffs, like is that still the right way to think about the impact from the reduction of tariffs? Or are there other -- are there some other factors -- and this, I guess, specifically for '25 that we should be thinking about?

Sure. I think that gives you a good rule of thumb. What we said on the earnings call is to the extent that there is an improvement in the tariff rate by 100 basis points reciprocally each way. The benefit of that and that occurred on May 1, that would be about a $0.40 tailwind to the guidance that we shared. So good news is the final amount is similar to that. Perhaps it's a little bit more in total. I mean there's a little bit of exposure in terms of an element that might revert in August. So I think on balance, it's a good planning assumption for now.

Got it. But -- and then just in terms of what you guys are going to do, I mean, you're still keeping your guidance irrespective of the lowering of the tariffs and I mean, no change that you're making today?

Yes. We're not adjusting our guidance today. Why? Because we gave you the sensitivity necessary to kind of think about the implications of the changing trade dynamic with China. And secondly, like who knows what's going to happen in the coming weeks in terms of new deals, in terms of different facets and how things go. So we'll take the opportunity in our earnings call in July to refresh guidance. And I'm hopeful that we'll have a trade deal with China that makes a lot of sense and continuation of what we've discussed here. And so we'll move forward along the lines of what we've laid out already.

And then I do think a lot of investors want to understand what that means for '26. You also gave a lot of color on the call, tariffs in '26 you expected the impact to be less than what it was in '25. And that was through additional mitigating steps that you were going to take. So how are you thinking now with the potential for lower tariffs about those mitigating steps? And how should we be thinking about what the impact will be in '26?

Sure. So for those who are not aware, we previously said we expect the 2026 impact to be $0.85 or below. And so we had basically done a lot of work based on the tariff structure that existed at the time to walk through a series of planning, supply chain initiatives that would allow us to lower the overall impact in '26. Because as you look at it, in 2025, the fourth quarter is the most prominent impact that we have or it was, I think it's still maybe. But the fourth quarter was the most prominent impact that we had. And so were you to simply extrapolate, you come up with a number much larger than $0.85. Our teams got hard to work in terms of identifying opportunities to mitigate dual sourcing of supply chain, thinking about more vocal for local manufacturing, thinking about simplification of bonded logistics routes, et cetera, et cetera. And so a lot of work went into it. And what we were able to say is look, if the tariffs stay where they're at, we feel good about the 2026 number. It's clear based on what we've heard and were these changes to remain in effect, we would feel even better. In terms of specific amounts, part of this will depend on the final nature of the deals because some of the things that you might be willing and interested in doing in a 150% tariff scenario may be different in a 50% scenario. You may have a different threshold. And so I'm excited about the deal that we have in place thus far and the opportunity that we have. And so we'll work very carefully and we'll have some updated perspective on this when we share guidance in July.

Got it. And then maybe one more on tariffs. I believe on the Q1 call, you said PDx, any impact to PDx was not included in the tariff estimates that you made. So wanted to make sure that, that was true and understand your position on PDx? And then even with the new executive order on pharma, that's out, what potential impact could that have on the ultimate tariff impact for you guys?

Yes. I think there's a key question, which is at the center of this, and we don't have clarity on the answer to it yet. Is PDx, the pharmaceutical diagnostics included as part of the Section 232 investigation, what is it in relation to the most recent executive order? And we don't exactly have clarity on whether PDx is involved or treated as a pharmaceutical with respect to those definitions. Our contention and belief is, these are diagnostic products used in conjunction with imaging equipment to kind of identify better characterize elements in the human body. And so it doesn't feel like it's a pharmaceutical product. So that's kind of what we're working through right now. and really looking to ensure that we have the right support to make that contention and that the administration sees it that way as well. But it's a very different thing. And so we'll have to see how this plays out. I don't have a clear answer at this point yet. But we're working through that.

Got it. Maybe shifting away from tariffs. And just a couple of weeks ago, you presented pretty strong Q1 results, 4% revenue, organic revenue growth, record organic order growth. So maybe just -- and it well ahead of your guidance. So maybe talk about kind of what you saw in the quarter, what went better than what you were expecting and some of the drivers of the particularly strong order growth?

Yes. We were really pleased with the order growth in the first quarter. 10% was a record for us. It was on the back of a fourth quarter, which was pretty good. I think we had 6% order growth in the fourth quarter. So stacking 2 quarters in a row of very robust growth. Over the last perhaps year, we've seen a robust environment in U.S. Imaging, first of all, radiology and imaging is an area in -- many hospitals, which is constrained. And so there's real interest in expanding or getting the latest equipment, because it's revenue generating. It meets an acute need in the hospital. So there's real interest in equipment. And that played out in the first quarter. We saw a very robust sales orders for imaging for our AVS business. Lot's of broad based interest. The second thing is from a European standpoint, we did see a really nice performance. In the financial statements, you would see that the European business grew 0%. There was actually a bit of growth on a constant currency basis. But what was interesting to me is we saw really good performance from an order standpoint. Not to the level of the U.S. by any stretch but solid order growth coming from our European business, which we had not seen in a while. There have been some overhangs in Europe as it related to stimulus in the 2021, '22, even a little bit of '23 time frame that was impacting performance. And we also did a reorganization about a year ago, centralizing Europe under an international leader. Well, that commercial execution orientation has started to play real dividends. We're really pleased with the Nuffield deal, which we announced, but also lots of collaborations with governments and ministries of health and health care institutions across Europe. So we're seeing good momentum there. China, we've discussed kind of -- it was a low single-digit decline, largely speaking, what we anticipated. We're not anticipating that market. We're going to see some recovery, a little bit of better performance in the second half off of down mid-single in the first half, but no real changes to our perspective on that market. So it really came down to robust performance in U.S. and Europe and robust performance in imaging and AVS within that.

Got it. I do want to ask about China. I want to ask about the guidance. But just given some of your comments on the strength of order growth in the U.S. and Europe. Maybe just talk about the broader hospital CapEx environment. And kind of what you're seeing there? I know you do a lot of surveys. It seems to be pretty still robust. There doesn't seem to be a ton of [consternation] about recession or other pressures that may limit buying. But just wanted to get your perspective, what are you hearing from your customers?

I should ask you because you all do a great quarterly survey that we read, by the way. But -- we do a quarterly survey of our top customers. And I think it corroborated a lot of what you saw as well, which is the environment is not bad. I know that there's a lot of uncertainty around what's going to happen with new budgets and what implications does that have for '25 and '26. How does hospital profitability look in that new world, a lot of questions about that. But at the same time, we've seen thus far this year, it's been solid. And good order, certainly good order momentum in the first quarter, and that's continued through April. So it's been a nice start to the year, and I think we'll watch it very carefully. And we survey this every quarter and we look at not only like the aggregate, but the rate of change, and I know you do the same thing. And so it will be interesting to see how this shakes out. But thus far, we have not seen a dramatic negative impact as a result of concerns. And on the contrary, the environment has been robust.

So commenting on -- on global procedure growth too. We're continuing to see that remain very healthy. That bodes well for our pharmaceutical diagnostic business. So it's both CapEx and procedures.

Maybe a quick follow-up on that. The survey or your customers, how focused are they on '26? Because I think that's always something that comes up within our -- even our CapEx survey. And when we think about it, we think about the near term, you can say that the budgets are in place, they're going to be buying. But what's the prospective thought on '26? And is there any -- so are they actually thinking out to '26 when you talk to them?

A little bit. I do think the crystal ball gets a little cloudier as you forecast out a year, or 2 years. And I think it's more reliable. When we asked the question, hey, what are your plans for the remaining 9 months of the year? There's pretty good line of sight to what expectations a hospital has in terms of deployment of capital. As you look forward a year or 2, it's a little bit of a softer call. And so I would say that we put more reliability in the short-term questions. We do ask some questions longer term, but I think the reliability is much more in the short term.

I want to talk about guidance. So we talked about the strong Q1. Guidance for the full year on the revenue side, you kept -- you reiterated and you gave some Q2 guidance of 1% to 2%, which is obviously a step down from Q1. So maybe just talk about how we should be thinking about the rest of the year? And what are some of the factors that despite the 4% growth that was actually above in Q1, above your guidance that you reiterated. So are there any other concerns that we should be thinking about? Or maybe just kind of walk us through how we should be thinking about the cadence of growth throughout the year?

Sure. I think for us, the way we put together the revenue forecast, you have roughly half of your business, which is recurring revenue. And that -- and not exactly recurring but behaves like recurring revenue. What I mean by that is, our PDx business, very volume-based, kind of moves along in a fairly linear manner. Our service business too, another business that moves along very linearly. That's about half your business. The remaining piece of your business is equipment related, and in the case of the equipment-related business, we look at a number of things as we put together the revenue forecast. We look at the order funnel that we have. And then we base -- we look at historic conversion rates of that order funnel to orders. That gives us orders that we need for the particular forecast period. We also look at the backlog. You'll recall we have a record backlog in place. We're so proud of the tremendous work that we were able to do to secure this great backlog. But then what happens with the backlog is every piece of equipment in that backlog gets a date. Most -- many of the dates are this year, some are next year, but you have hard dates on all of that. And that allows us with a high degree of fidelity to give a revenue forecast in the -- by this point in the year, you're likely over 80% "secured." And from our standpoint, as we put together this forecast and as we look at the Q1 result, the words we used on the call were increasing confidence in our ability to deliver the year. We felt really good about all the elements, the ingredients that I just laid out for you, order funnel, anticipated conversion to orders, plus your secured backlog, that whole mix gave us a high level of confidence in what we're going to be able to do. We didn't change guidance, but we feel good about the 2% to 3%. And I think we'll hopefully continue to deliver on that amidst a very volatile macro backdrop, but so far, so good. Now as it relates to the second quarter, again, this comes down to very specifically, when are you delivering things. And so part of the reason why Q2 might be below Q1 or Q3 really simply comes down to when are things slotted for delivery. A lot of those orders that we had in the first quarter come in the second half of the year, which is fine with me, right? As long as it's penciled in and secured and we have a commitment from our customer, whether it comes in Q2 or the second half, it's not really an issue for us. So we have a lot of that coming in the second half of the year. I think it sets us up very well. We also have some coming in 2026, which also I don't mind from my perspective, starting to secure 2026 revenues allows our business to behave, perhaps, less like a pure capital business and more like a planned capital or even recurring business. What I mean by that is, if there are sales that are committed in 2026 attached to new facility builds, well, that's great. Like we know it now, and it goes into that secured calculation that I described earlier.

Maybe if I just push you a little bit on -- you talked about the 6% organic growth in Q4, 10% organic growth in Q1. Obviously, there's some correlation to order growth and then subsequent quarters, whether it's 2, 3, however many, down the road, you're going to realize the revenue on those orders. So why -- I guess, why shouldn't we expect something closer to the 6% to 10%, I'm not suggesting that it's going to be that high. But even kind of getting back to your mid-single-digit target that you have.

Well, Remember, we talked about this year being this 2% to 3%, and a lot of that came down to performance in China. As China restores to a more normal level of growth it's a lot easier to get to our mid-single-digit target. And we're expecting that in the very near future to start to make that turn. So we'll talk '26, '27. We talked about mid-single digits from now until '28, and this year is not mid-single digits. So that implies the rest of the year is really start to become that. And so first of all, your comment is right on it. For me, it was really important to see that acceleration in order momentum. It's outstanding, and it's supportive of the long-term thesis, right? We said mid-single. To get there, you need good order performance. The only thing I would say is, before the 6%, I think we were 1% or 2% in Q3. So you have to look at this over a multiple period of quarters. And then Q2, we're not going to grow orders 10% again. That was a -- it was a great performance, don't get me wrong, but it was a little bit outsized relative to our expectation. So Q2 will be hopefully a good order growth, but not along the lines of what you've seen. And so this is just about building consistent momentum. And Craig, here's the interesting thing. What is starting to happen is a lot of the new products that we've launched. We talk about this vitality index of 50% which is really quite high, products launched in the last 3 years. And what you see is the benefits of that. That is triggering to some extent, people to decide to replace and to decide to purchase our equipment. So I think all of these things are starting to come together in a very good way, and I'm optimistic about where we can take this in the coming years. Based on that commitment to innovation that we had, based on the commercial excellence work that we've talked extensively about the enterprise partnerships, and then based also on the continued work we're doing in digital, all of those things wrapped together create a very compelling story. And I think support the long-term story from a financial standpoint.

Got it. That's...

I think it's worth noting, too, for investors that orders is the only metric to look at because sometimes that can be lumpy. So we'd like to also give you backlog and book to bill to take the 3 of those together, and hopefully paint a picture of how we expect to get to a revenue target of 2026.

Got it. That's helpful. Let's move on to China. We've been talking about China stimulus for over a year now and some of the uncertainty there. So maybe just kind of level set where we are within the stimulus, the progress that's being made today.

We're starting to see progress. I think we were surprised by the pace at which the recovery was occurring last year. And we ultimately had to reduce guidance in the second and third quarter as a result of what was going on in China. But as we got through, we really decomposed the stimulus process into a multistep, maybe 5-step process of initiation all the way through successful order to sale. And I think we got our arms around it reasonably well. What I would say at this point is things are progressing broadly speaking, in line with what we expected to see. The -- in the first quarter, we declined 1%. As reported, there were some negative FX mix in there. So overall, it was a decent quarter, kind of where we expected it to be. As we go to the second quarter, won't quite be as good as the first quarter based on -- and this is from a revenue standpoint. And this comes back to this question about when your backlog is getting delivered. And as we look at the second quarter, I think we'll see a decline more than the first. So on balance in the first half of the year, we're going to be mid-single decline. And then as we look out into the second half of the year, there are a few things that we take comfort in. One is the backlog and one is, schedule. Second is some of the stimulus starting to pay off even in the second quarter into the third quarter. That starts to benefit the second half and beyond. So we put these things together, and we feel okay about how the second half looks. I would also say, we feel good about what we've been able to do from a competitive standpoint in the market. As we've looked across the landscape, our performance was not bad compared to others in the market. And I think that was a testament to all of the hard work and execution focus from our team in China.

All right. And I guess in China specifically, when you talk about starting to see some of that the stimulus pay off, is that orders or revenue growth in the second half?

No. For us, we'll start to see a better revenue profile in the second half in terms of growth rates versus the first. We don't really give order guidance by country. We don't really report order by country. We did it a couple of times last year when it was just so important to the story and such a beneficial piece of information for our investors. But the problem with giving order growth by country is, it's inherently lumpy. And when you're talking about -- even China is a big country, sure, but in the grand scheme of like the entire company, it's relatively small. And so when you start talking about order growth and things of that nature, it can move around a lot in a given month or quarter.

And I guess the question is just the potential for stimulus benefit in the second half, which it sounds like there's some versus what it could look like in '26 when it really starts flowing?

Yes. We're hopeful that -- once we're through '25, you start to see a more normal China. Here's the interesting thing about that market. It's been challenging now for 6, 8 -- I mean it's been challenging for quite some time in that market. Actually, since the middle of 2023 or -- yes, middle of '23, when anticorruption was initially announced. So we had challenges for some time. But the interesting thing is, people aren't purchasing. Therefore, every day that passes, the installed base gets 1 day older. The desire to purchase gets 1 day more. And so we're starting to see that pent-up demand. So ignoring stimulus and ignoring all of these other factors, the fact of the matter is equipment is aging. And so that starts to represent an opportunity for us in and of itself. In support of our -- what we hope for this business over the midterm is mid-single-digit growth. Nothing -- we're not expecting high single digit but mid-single-digit growth over -- in the coming years.

Got it. I think we have a few minutes left. Let's just touch on Flyrcado. And obviously, recently launched, I think the general view of -- let's say, my view and then maybe the general view of investors is that, the expectation for the $30 million might be a little bit conservative in the first year. Maybe just talk about how that launch is going and some of the factors that get you to that $30 million for '25?

So first of all, we certainly hope you're right. And we are working so hard to make you right as well, to prove you right. So from our standpoint, it's all about successfully setting up all of the parameters to successfully launch and accelerate growth. And so it starts with previously getting the CMS reimbursement in the right corridor. We have that in place. Once you have that, you have to get your local manufacturing networks in place. We have 13 local providers who can deliver real time and by the end of the year, we'll be at 26 and we'll have roughly 90% coverage of the market by the end of the year from a supply standpoint. You have to have commercial carrier insurance in place. Another important step, another area where we're making really good progress. And then, those are all key ingredients. Then you have to sell it. And so there are a few hundred relevant centers where have -- that do most of the scanning and imagining in the United States. And so it starts with having the right segmentation and then putting the right sales plan in place with respect to each of them, so that we can convert. And then hyper care. Once you have them on, we have to make sure it's a great experience. And then once you have the momentum in place, you can build from there. So for me it's all of these building blocks. We have a very rigorous tracking mechanism that I actually get to see every week with the progress that we're making, how we hired the reps, how we onboarded the manufacturers, where are we with commercial carrier insurance, how many doses, how many centers, how many centers ramping, the ramp rate. All of that is in a weekly tracker that Pete and I, look at along with the rest of the team. And it's that kind of execution. This is not a simple launch, right? Because you heard me describe all the different elements that have to be in place. So far, it's going well. I'm pleased with each of the different ingredients that we have and that we've been able to put forth. And what I'm hopeful of -- for me, the most important number is, what's the December sales. Because this is a number that you don't -- it's not like a lot of things, there's year-end buying. This is not that because it expires. And so to the extent that we can get this ramped correctly, and certainly, I hope we beat the $30 million. And if we have a robust December number, all the work we're doing is to line up that number correctly. And so that as we move into '26, there's a very strong jumping off point. And then at that point, we've said, hopefully in excess of $500 million, that's our expectation. And hopefully, it's well in excess of that. Let's see.

Great. I think with that, we're out of time. So Jay, Carolynne, thank you very much.

Great. Thank you so much.