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

Good morning, everybody. Just to make a quick reminder that presentations are not open to members of the press. I would like to welcome GE HealthCare here; Jay Saccaro, Chief Financial Officer; and Carolynne Borders, Head of Investor Relations. As I've mentioned, in all of these, happy to keep this interactive and if you do want to ask a question, we'll just get a mic over to you so those participating via webcast can hear the interaction as well.

So maybe we could just kind of start with kind of reflections here on Q1, a good start to the year, 4%. You've guided 2% to 3% for the balance of the year. So maybe help us think through some of the factors that played into the better-than-expected Q1 and then how that toggled over to the guidance that you provided for the rest of the year?

Sure. David, thank you. Thanks for the invitation to your conference. We really appreciate it. To those that have joined us here in person today, thanks for your interest in our company. And I know we have a few shareholders in the room. So we appreciate your support. We were pleased with the first quarter. Certainly, we had very robust order growth at 10%. That supported sales growth of 4%, which was a great start to the year. Book-to-bill, 1.09x, very solid. And we also had a record backlog. And so for us, as we look at the first quarter of the year, it really did set us up nicely for achieving our guidance for the rest of the year. And it was also supportive of our aspiration as we think about the midterm long-range plan that we've shared with investors. So really nice start. And by the way, the strength was broad-based. We saw strength in the U.S. certainly, but we also saw our Europe, Middle East and Africa business, it was flat on a reported growth basis. But overall, we had some orders as well growth in that arena. So a really nice start to the year. And China kind of proceeded in line with our expectations for the most part with a 1% decline. So broad-based strength across the portfolio and a really nice start to the year. Now of course, there are a lot of different elements coming into play when we gave guidance in April. And some of that included the tariffs, some of the potential changes to the U.S. health care system on the back of budget bills and so on. And so like what I would say is we wanted to reflect the strength of our internal business and the things that we're doing, but also reflect some of the macroeconomic uncertainties. That's why we did -- left guidance unchanged. And we'll continue to watch this and hope for the best as we move through the rest of the year.

And maybe just to clarify on the macroeconomic uncertainties, are these factors that you're seeing influence the business at the time you issued guidance or today? Or are these factors that have the potential to play out?

Yes. What I would say is, the environment has been very buoyant, okay? When you talk about 10% order growth and order growth in excess of that in the U.S., it's a really strong environment. And there's a lot of reasons that are contributing to that, but things are good. And so we're very optimistic about how things can work out. We'll have to see as we move through the year.

And it's hard not to touch on China. I think that was one of the biggest variables in the guidance update that you sort of went through last year. How are you thinking about China this year in terms of both the underlying dynamics and also how you're framing it in the guidance?

Yes. I hope -- so first of all, last year, we had to make a significant adjustment to China and to our total company guidance as a result of China. We had to lower China expectations by $500 million or $600 million. So that was really dramatic. But I think most participants in the market had a similar quantum of impact from the market change. As we approach this year, we really studied the multiphase tendering process and how that translated to sales. And I think, by and large, we've got it right. we're expecting a low single-digit decline for China for this year. And so far, that's -- we're seeing things that support that expectation. To your point, it is a big variable for us. With China declining, it took something which would be closer to 4% company-wide growth, and it lowered it to 2% to 3% because of that decline in China this year. So it is an important variable for us. But as we sit here, we expected -- we had a low single -- 1% decline in the first quarter, a little bit worse than that in the second quarter. And then in the third and fourth quarter, it will be closer to what we saw in the first quarter. And so I think -- and the reason I can say this is because we have a backlog that supports sales. A lot of the sales for 2025 in China will come from the backlog. And what we do is we schedule the backlog to specific dates. We have a pathway, and that's how we develop our expectations in addition to some orders. So that's how we have line of sight to what I'm talking about. Of course, things could change, but I think it's trending in line with our expectations.

And I think if you look at that from a year-over-year growth perspective, that would imply very little sequential growth in dollars because the comparisons get much easier in China as you pace through the year?

They do get easier in China. And the interesting thing is with all of the volatility in the market over the last couple of years, the market is down quite a bit. And so it's interesting because we had anticorruption in '23, and then that rolled into stimulus, but actually stimulus because of some uncertainty around how it would precisely work ended up being a depressant to sales last year and even into this year. The interesting thing though is the equipment base in China ages by the day. And so I do believe there will be opportunity. We're cautious in terms of the long-term growth aspiration. We've taken it down from -- it was high single digits. We think the long-term expectation is closer to mid-single at this point. But at some point, there could be a catch-up that we've not modeled in our numbers just because of the aging state of the installed bases in China for all competitors.

Maybe just to add a point on that. We're seeing this stimulus behave a little bit differently than the one we saw in 2022, which was driven more so by the central government. And so this time, we are seeing the stimulus rollout across 31 provinces, which is part of the reason that it's taking a little bit longer.

Okay. I think some of the macro dynamics have overshadowed the business-by-business sort of product drivers. So maybe we could spend a little bit of time going into the individual businesses and walking through kind of performance and some recent updates. And I think it's -- we can start with PDx just given all the focus on Flyrcado and maybe just sort of talk us through kind of some of the dynamics in that franchise and how we should think about how the Flyrcado ramp planning and early kind of uptake is going?

Yes, this has been a real bright spot for us. PDx has been a business that's performed extremely well. And it's got really nice attributes in terms of recurring revenue and procedure-driven revenue, which is just great. So over the last several years, we've seen a nice mix of both volume growth and pricing with a bit of new product. And to a large extent, that's what we're going to see this year as well. It will be a mix of volumes driven by critical procedures on some pricing and then also the benefit of new products. The new product area starts to get really exciting for us as it relates, in particular, to Flyrcado. So far, we're in the launch phase of this new product. We got approval. We announced the first dose, and it's been very well received. We're working very hard to set this up so that we hopefully beat the $30 million target that we've shared with investors. And we're working very hard to line up success against that. And what that involves is really a number of different facets. It starts with, do you have capacity? And so in this case, you need to have "local manufacturing facilities." I put that in quotes to support rollout. And so for us, by year-end, we expect to have 30 radio pharmacies around the United States in support of basically 90% of the potential patient population. Right now, we're at 13%, that's progressing really well. The second piece is, we have reimbursement from a CMS standpoint, but you also have to have commercial carrier reimbursement set up, really good progress in those areas. And then the third is you have to support -- of course, you have to convince physicians that this is the right diagnostic tool, but you also have to ensure that you have centers operationalizing this in the right way. And so it's not enough to sign up a center because when you sign up a center, they're going to start with 1 or 2 doses on the way to converting a larger portion of their patient population. But when they start with 1 or 2 doses, you have to ensure that they have a good experience with those patients, and then they'll move from 2 patients to 4 patients, it's something much larger than that. And so for us, we're having success signing up centers, and then we're also really working hard to make sure those centers have a good experience with the product and GE Healthcare. And so far, that's going well. As I say, our hope is $30 million this year. That's our expectation. We hope to do better on a way to a number that would be meaningfully larger than that next year. And we're very optimistic about this particular product. But it fits into this whole area of pharmaceutical diagnostics where these are great products that we sell. We think we're a world-class manufacturer here, and there will be continued opportunity.

And obviously, Flyrcado has got a ton of attention just given its opportunity set. What other products would you point people to? Or are there other products in the pipeline that will come to surface over the course of this year? And how should we think about additional launches?

Yes. So obviously, we have Vizamyl on the market today, and that's been a source of great growth, and it's becoming a very meaningful number for us. And to a large extent, that's dependent on the success of the Alzheimer's therapies that are out there. So we continue to watch that, continue to support growth in Vizamyl. So that's one other. The core business is a huge growth driver, right? If you have a CT scan, you're going to have iodine or something like that. If you are having an MRI more often than not or very often, I should say, it's with a contrast agent that's gadolinium-based in many instances, we sell those products. So those core products are going to continue to grow. What gets interesting for me is there are things like we in-license a product called FAPI, which is for specific types of cancers that are heavy glucose consumers, this does a great job highlighting the cancer in unique ways. That's something that's in the future, will be a product that we launch. But in addition to that, gadolinium is one particular MRI agent. What we're developing is a manganese-based agents, which had certain attributes, which we believe may be very favorable and interesting to radiologists. And so that's another one that's going to be coming. None of these are near term. I think we've got enough near-term stuff to support robust growth in this, but those represent longer-term opportunities and our commitment to continue to evolve and advance this portfolio.

So if we think about PDx in the context of DLRP or -- I think you've talked about this as a 5% to 6% growth category. Is that a good way to think about it then Flyrcado layered on top of that?

Well, in our PDx, which our expectation is PDx grows faster than the equipment. And so we've said our company should grow mid-single digits over the next several years with PDx growing faster than that. So you could say a little bit above the 5% to 6%. Included in that is this $500 million-plus number for Flyrcado. Listen, my hope is the plus is large and that's what we're working towards. It's too early to say what the right number for Flyrcado is long term, but it is a real source of excitement for our teamwork. So -- and by the way, we want to create a world where health care has no limits. That's like the mission of the company. And Flyrcado helps that in a very meaningful way. And so we're getting after it. So -- but that's the assumption in the plan.

Maybe we could go over to imaging, which -- I think the imaging numbers get heavily impacted by the exposure to China and probably do mask some of the performance in other geographies. But one of the questions I frequently do get on imaging is what's happening competitively, especially versus Siemens? What's your kind of take on the competitive landscape and how you're doing in imaging?

If we look at share over the last several years in imaging, we've gained. We feel very good about the performance in imaging. And by the way, look at the order growth in the third -- in the fourth quarter of this year, the first quarter -- fourth quarter of last year, first quarter of this year, we had an incredibly robust order growth, in large part driven by imaging. Inclusive of CT, inclusive of MR. So we've had tremendous performance and good momentum in that critically important business. And by the way, even if you look at it over a 4-quarter period, you're still talking about 4%, 5% order growth, incredibly robust performance, a lot of that driven by imaging despite, to your point, the impacts from China. So we feel quite good about where imaging is heading. Why is that? We've made some significant investments in MR in the form of AI. And so specifically, AIR Recon DL is a product that we've been selling for years. And in our view, it really differentiates our MR platform. What it allows for is a faster higher-quality image with the use of AI. And basically, AI is used to improve the signal-to-noise ratio. And so incredibly exciting work that we've done with respect to that has led to robust MR growth. In the case of CT, we have also invested heavily in AI in support of that work. We believe we have a wonderful platform or high-end apex platform. We had tremendous CT growth in the third and fourth quarter from an order standpoint. A lot of that driven by investments that we've made. Remember, taking a step back, our R&D as a percent of sales just a few years ago, was 4.5% of sales. We bolstered that to 7% as a company. And a lot of that is geared towards imaging. A lot of it is geared towards other areas. Some of it has impacted our numbers already. Some will continue to impact into the future. But that's really what's supporting it. So some of these AI investments like Sonic DL, which cuts cardiac MR time substantially north of 50% in some instances, and why is this -- I talk about reduction in image times. And the reason I talk about that is because if you think about hospitals today, the MR suite is perhaps one of the most constrained areas. And so if there are opportunities to reduce time under image, to reduce the spin time, it's a big deal because it allows for more patient throughput. So it's those kinds of things that have, I believe, differentiated us and allowed us to improve our share position over the last several years.

Could I just add 2 other key products that we will be bringing to market next year in '26, it will be photon counting and full-body PET that will help our imaging. And we do have a very large global installed base. And so that's a natural target for us to sell into with those new products.

And on the imaging side, I know it's sort of a nuance, but any issues with rare earth materials as it relates to magnets or anything else that could impact or disrupt sales?

The one I'd point to more specifically would be gadolinium, which we are applying for the special licenses to be able to continue that supply. But we do have more than a year's worth of supply in gadolinium, so we feel comfortable with that. There are certain rare earth elements that are used for imaging equipment that we're obviously going to pursue a similar path on licenses.

Then you have sufficient inventory of that as well?

We have not have any issues with production stop on that.

Okay. And then, on some of these AI features, like how do you make money? Have you figured out the business model?

So the answer is like we've been selling -- we've been generating revenue from AI for years, and it's not insignificant amount of money. For a company that does a lot of different things, we have a decent amount of AI revenue. Why? AIR Recon DL is the prime example of this. If you can help solve the problem for hospitals to make older magnets a little more efficient, a little more diagnostically capable, they'll pay for that. And so what we've been -- and by the way, with new magnets, with new MR machines, to the extent that you can attach a piece of software that makes it more efficient and more diagnostically capable, people pay for that. And so we've chosen to model that through a purchase price distinct for AIR Recon DL. And it's been a real -- it's a nice driver for us. And by the way, part of the reason it's a nice driver is because not only is it incremental revenue attached and the attachment rate is nontrivial, but at an incredibly high margin sales. So we've been very pleased with that. Now listen, there are other areas that are more complex to monetize. And I get that as you look at certain futuristic uses of AI. But when you talk about the basics of, hey, help me make my image faster and more readable, people will pay for that. And in the case of AIR Recon DL, Sonic DL, direct product areas, we've seen the real benefit from AI in terms of sales. We expect to have $1.2 billion in digital sales in the current format, and we believe that, that's going to migrate to $1.8 billion in the next few years. And a lot of that is on the back of some of these products. Now it does get a little more esoteric as we talk about things like Command Center. Command Center is a great product, which is helping hospitals organize their workflow more efficiently with the use of AI. And so we're talking about a Command Center in the cloud version that we're developing. We're really excited about that. But that has -- those -- we have not impacted sales that much to date through that. That's more in the coming years. But direct product has played a big role in terms of sales impact in the short term.

That's very helpful. And that's a good segue. I want to see if we can get through PCS and AVS and then I want to cover margins in everyone's favorite tariff topic. But it's a good segue to PCS, like better, like better, what's the deal on that business? How are you going to get that business to grow?

So well, look, PCS is a business which did benefit from some very intense dynamics coming out of COVID. And to a large extent, that kind of shape the curve for '24 and some of this performance that we've seen to date. But here's the interesting thing about PCS. We help hospitals solve very important problems that -- in terms of patient monitoring and patient care that is -- can save significant money, that can -- and drive outcomes in positive ways. So we're really optimistic about this area over the midterm. We have a number of new products in development that will support this in both the U.S. and outside. And importantly, we hired a new leader, Jeannette Bankes, who's a longtime med tech executive, highly skilled, and she's kind of shepherding this area for us. There's a lot of great opportunity in terms of our own internal development, but also in terms of business development and other areas. I would say though that from my standpoint, this is one that, again, has this a bit of a COVID overhang. And that should sort out over time because the core products are necessary capable, and we have a lot of really neat internal innovations coming soon.

So that was a pull forward coming out of COVID, basically?

What happened coming out of COVID and even in COVID, there was robust order growth, like off-the-charts order growth for a period of a couple of years, and then we paid that off, '22, '23 into -- even into sales growth in [Technical Difficulty]. And so we've moderated our expectations for that business. But again, it's one where long term we're very excited about.

And then lastly, on AVS, like I'm kind of -- I'm waiting for like the breakout quarter here because you go into any hospital and EP volumes, structural heart volumes are all growing at very robust rates. They're also constructing labs, expanding capacity, not yet seeing that play through into your business as a derivative of that. Is that a fair assessment? Like how should we think about that business?

So I'm going to pace this piece of the transcript and share with the business leader, Philip Rackliffe.

Yes, please do.

We are very excited about this business. And part of the putting of the two together was for some of the reasons that you specifically mentioned in your question here. And what I would say is this business has been negatively impacted by China. So that's definitely a factor. But there is a real opportunity for growth. There's constrained procedure volumes. EP labs are completely constrained today. So there's opportunity for builds and growth. And so as we think about the long term, this is an incredibly exciting business for us. And by the way, you look at the growth and the order growth that we're seeing in this area, we had a series of launches a little over a year ago, where we're starting to see that momentum play out, in particular, in the U.S. market where some of those new innovations were geared. We're seeing really good momentum. And some of the workflow improvements that we've made, the incorporation of Caption Health to simplify, incredibly optimistic about the core ultrasound business. And then to your point, the surgery business that we have, there's a lot of opportunity there. So this one is a nice long-term growth driver for us.

And before we go to the P&L, maybe it's helpful just kind of to frame out for folks, just the cadence of product launch to revenue because I think it's a little bit different with capital equipment than some of the other markets that we cover. So you get a product approved, you got to do some marketing, physician education, hospital CFO, blah, blah, blah. And then you get the order and then there's revenue. Like is there a good like bogey you could give us to think about product approval to revenue contribution time lines?

The answer is it depends. But to your point, it's not an immediate -- it takes time. And so for example, in Flyrcado, we're talking about changing workflow in centers. It just takes time to build that up. So we had the approval, we had the first patient, but we're only talking about $30 million in kind of calendar year revenue. And a lot of that is based upon this idea of taking conversion, education. And so what I would say is the more innovative the product is, the more time it takes to explain the benefits, sell the benefits and then bring to revenue into impact. And Flyrcado is a unique example. The time frame is a little bit longer. But as we bring new MR devices with new AI capabilities [Technical Difficulty] radiologists or technicians to change perhaps how they think about the workflow of their procedure at least to some extent. And so when you do that, it's -- that's incremental sales. So could it be 6 months? It could be 6 months from approval to meaningful orders or sales. It could take some time to do that. But at the same time, stay patient, stay investing in R&D and set yourself up for this bolus of new launches. Like in 2026, we laid this out at our Investor Day. We have an incredibly robust set of products launching in 2026. There will be some revenue impact in '26 and then '27 and '28, it should be very robust. Things like whole-body PET. Whole-body PET is not a market we play in today. We don't sell whole-body PET. This represents a great untapped opportunity for us but it's about getting it out, explaining our benefits to our product, we should get that, and that should have an impact in '26.

Excellent. Let's touch on tariffs. I think, obviously, the impact that you had communicated on our earnings call was, I think, as expected, but toward the large -- the higher side of what we saw across med tech. We -- I don't know, we have tariffs, we don't have tariffs. Right now, we're on a variety of pauses. How should we think about de-tariffing for you guys? And maybe remind people of the framework that you laid out on the earnings call?

Sure. So on the earnings call, we basically said we have roughly a $500 million net impact from tariffs. Over $1 billion gross with [indiscernible] MCA qualifications offsets that we had, we got $1 billion down to $500 million for 2025, which is $0.85. Our expectation is that next year is below $0.85. Why? Because we have incremental mitigation activity that we're working on that will have more of an impact next year. Some of it is dependent on the final contours of trade deals that are put in place. So we have to wait and see before we pursue all of the mitigation that we'd like to pursue on final trade deals. But that's why next year is less than this year. This year is $0.85. We also said for investors that the vast majority of our impact is between the U.S. and China corridor back and forth. $0.65 of the $0.85 is in that U.S.-China corridor at the very elevated rates that were present at the time we gave guidance. The rates were like over $1.25, really robust rates. And so what we said then was because that was such a big thing, we wanted to size that for investors. So we said, listen, if on May 1, there's a deal and the rates between U.S. and China come down bilaterally by 100 basis points, we would eliminate $0.40 of that $0.85 impact. That's what we were able to say at the time. Now fortunately, rates came down. It was May 12, and they came down 115%. So we were in the right range as we thought about that. And of course, we assume that, that would be sustained for the full remainder of the year. So we're still sort of contingent on that. How do we think about this going forward? Look, it's hard to say. We're going to watch very carefully what happened. Our assumption is on July 7, rates go back to the Liberation Day rates. And so we're going to watch that very carefully what deals get done, what happens with the U.S.-China trade dynamic. And all of those things will inform what we give -- when we give guidance. But I think from our standpoint, intensely focused on mitigation. Meaning, looking at dual source, looking at making local for local, looking at working with our suppliers to get supplies from the right countries. All of those things, we're going to continue regardless and then evaluate the cost. If it's prohibitive to do it, we, of course, wouldn't do it. But I think there are a whole set of no regrets moves that we'll continue to work on that should benefit us and then we'll be ready for whatever happens in the July time frame and share guidance. I think our guidance philosophy will be the same as we've given so far which is whatever the rates are -- have been announced, reflect them in your guidance. I mean, if there's a pause, assume the pause is going to end, reflect that in your guidance. I think we'll put all of those principles in place.

Okay. And are there any actions you're taking now in the midst of China pause, for example, that would impact second quarter results, whether that's running plants at high levels of capacity utilization, building inventory et cetera?

Not materially. When we gave guidance, we had some set of assumptions around the mitigation activities that we outlined and what the impact would be on inventory, what the impacts would be on costs and so on. Remember, on the earnings call, one of the things that we said is we are focused on managing costs in a very disciplined manner. But we are earmarking some of those savings for -- if there are costs related to tariff mitigation, we wanted to have dollars available for that. And so that's why we didn't have a -- there was not a big reduction or anything like that because, listen, there may be some onetime costs or specific costs related to tariffs that we have to address, and we wanted to be mindful to protect that.

Okay. Maybe we'll close on capital allocation. I mean, you announced the buyback authorization, the first one since the spin, I think at the time of the earnings call. I think your LRP had assumed really just cash piling up and no real deployment of the balance sheet. Maybe just give us an update how you're thinking about use of cash now?

Sure. So to your point, the long-range plan, the LTS that we shared had no real deployment of capital in the form of business development or in the form of share buyback or anything like that. We just had it accumulate. We did announce a buyback. And really, this is a tool that we want to have at our disposal for opportunistic deployment. When the shares are displaced, we want to be able to take advantage of that in a robust manner. And so we weren't -- without -- absent of buyback, we didn't have that vehicle available to us, which is why we put the buyback in place. But to be clear, we're really interested in business development as a vehicle for us. And we're excited about the portfolio that we have. We're really excited about the innovation that we have in place and how that's going to bear fruit in '26, '27, '28 and beyond. But there are unique opportunities for us to supplement with smart M&A. And what I found very compelling about our portfolio is there are so many areas in the portfolio where we have a unique and distinct strategic advantage that lends itself to acquisitions that would give us proprietary returns. And so we did a deal with a company called MIMS. And MIMS is radiation oncology workflow software. The interesting thing about MIMS is we would lose to a competitor that had better workflow than we had because we didn't have MIMS or if we won a deal, oftentimes, a customer would buy MIMS to put on top. So it was a great deal where it's a very unique transaction to us. It had very good financial profile as a result of that. That's the kind of deal that we want to do. But by the way, there are a lot of deals like that in the market today, which get us very excited about the opportunity for M&A. So -- and then we, of course, on the third, we pay a dividend. So from a hierarchy standpoint, reinvest in the business to drive returns, primarily in the form of R&D. Sometimes that requires some sales and marketing support, but primarily in the form of R&D. Evidence of this, 4.5% goes to 7% of sales from an R&D standpoint. Second is you focus on M&A as an opportunity to deploy. Third, we have share buyback and then, of course, we pay a small dividend. So we think it's a balanced capital allocation approach, but really excited about the opportunities that have been presented to us.

Excellent. Well, I think with that, we're at time. And Jay and Carolynne, thank you. Thank you for your support, and thank you for your participation.

Great to see you again, David.

Thank you.

Thanks, Jay.