GE HealthCare Technologies Inc. ($GEHC)

Good morning everybody. This is Travis Steed, the Bank of America [ Mantech ] analyst. And next at Vegas conference, we have GE HealthCare. We have Jay Saccaro, CFO. _President and CEO of Advanced Imaging Solutions and Carolynne Border, Vice President of Investor Relations on stage. Thanks for joining us.

Thank you, Travis. Appreciate the invitation to the conference. It's nice to see those in the room. Thanks for the interest in our company.

Great. Maybe just to start out, coming off Q1, the guide reduction, maybe just higher level a level set us kind of post Q1 Where things stand?

Obviously, a disappointing first quarter, right? We ended up having the lower guidance for the year, which is something we take very seriously. And for us, there were just some very dramatic inflationary costs that we're faced with that we had to reflect in the guidance going forward to put the appropriate level of risk into the guidance. But having said that, we are very optimistic about many aspects of the business and the long-term potential that we at GE Healthcare have. It begins with in the first quarter, you'll note that we grew orders a little over 1%. That was against the 10% comp. So very good performance from an order standpoint. From a sales standpoint, we came in at the high end of our expected range. So from a commercial standpoint, things are operating well. You'll note in the investor materials that we shared on the earnings call, there was a slide that we included, which reflected the pipeline and when we anticipate things launching. The pipeline has moved incredibly well with almost all of our products in line with expectations -- so we release to set this up for great long-term potential. We didn't spend a lot of time on the call emphasizing our management system, Harvey, but we've made tremendous progress on that aspect as well. So as I look to the future, and I look at really the long-term potential of the business, we feel really quite good. But as you point out, we did have to reduce guidance as a result of some of the challenges that we faced in the near term.

There was some stock buybacks from management and Board of Directors, if you want to address that? And what drove the change to buy stock?

So I can't speak for the others. I don't want to speak for personal investments of leaders. But what I will say is in the first quarter of this year, we repurchased shares at around $70. Now when we repurchase shares, we do so based on -- and we have an intrinsic value model, which is a discounted cash flow, and we compare that to the price of the shares. And so you can imagine, after the shares sold off very substantially relative to our intrinsic value calculation, the shares represent even a more substantial buy than they previously did. Why is that? Because the long-term fundamentals are intact. And this is just a short-term issue that we have to navigate and will reflect in price and so on. Once we've done that, the long-term value is very much intact. So I think that the other leaders on the team looked at the share price and perhaps did the same math and said, "Hey, these represent a great opportunity. And we don't report on buybacks during the quarter. We wait until the 10-Q. So I'll point you to that when that's filed.

But buybacks is still kind of an ongoing strategy for capital deployment?

Absolutely. It represents a great -- like I say, for us, from a capital deployment standpoint, first, we want to reinvest in the business to accelerate growth. second, and we have a lot of good programs. And all of that funding of R&D over the last several years has paid huge dividends in the pipeline that we have now, right? So reinvest in the business. number two, targeted smart M&A. In the first quarter, we closed Intelerad, which will represent a great deal for our company going forward. I'm so excited about how that is strategically accretive, but also financially accretive. It hit all of the marks. And then once we do those 2 things, we also have opportunity for share buyback. And so in the first quarter, we did some buybacks stay tuned on the second quarter. As I say, I think the shares represent a real value at this point. And so we'll continue that. And then, of course, we pay a dividend as well.

Okay. That's helpful. There was also a change to combine ABS, your Advanced Imaging Solutions business with AIS gets into AS. So just the rationale for that change and what made that change.

Sure, I'll take that. Travis. Thank you very much for the question. As we thought about first, how are customers buying where is the market going to? Where are they evolving to? They are evolving to a more customer-focused care continuum that runs horizontal. So what we saw within our own company was an opportunity to actually go get that and meet the customer where they're at as we think about larger enterprise deals. And where that is at, is that a patient comes in and gets their very first scan, and that scan is detected in you have a lesion, then that's diagnosed. Then it has to go into a step of preprocedural planning and then you need to go to an intervention or a theranostic or a therapy -- we have a unique opportunity at GE Healthcare to very much differentiate ourselves because we have such good products across the modalities. The opportunity now is to actually think horizontal into more solutions with data with AI in order to increase efficiency and workflow for health care systems and ultimately look to improve patient outcomes.

That's helpful. The -- I also wanted to ask on PCS. There was like an Pete alluded to on the call, strategic assessment in PCS. Just kind of curious what that referenced and what's going on in PCS.

Yes. PCS had a disappointing first quarter. Now it was largely expected. The way that their order sequences have sort of emerged. We have a lot of things being delivered in the second half of the year. So that was as expected. And we're launching a new product, a care station product for anesthesia. It should be very well received by the marketplace, but that too is a second half launch. So the first quarter was largely in line with expectations. But I will say, an 8% decline with the margin that, that business printed is not an acceptable threshold of performance for our businesses going forward. And so what Pete said is we're looking at strategic alternatives. Obviously, for us, there is an intense focus on the fix. So all activities are underway to kind of get that business going in the right direction. We should start to see that pay benefits in the second half of the year. And then just evaluating all of the different component pieces, what kind of role this plays at the company. All of those elements are things that we're looking at related to PCS.

Are there a lot of synergies in that business between the other businesses?

There are some, but it is not linked as, for example, ultrasound and imaging, as you see by the announcement today. Well, interestingly, what the changes that we've made allow us to do is really shine a spotlight specifically on PCS. You can see it's separated from the other businesses. It's discrete. So we really can shine a spotlight and watch that business improve.

And assuming it's a lower-margin business?

Clearly, it is a lower margin business. Now we have plans to improve the margin and the margin should improve over the course of the year, but relative to imaging and ultrasound in this new combined business and relative to, of course, PDX this would be the lower margin of the 3.

Okay. And I do want to kind of address the big top inflation. I think the thing that most investors are wondering is why they're big numbers in terms of total dollars. And so why is GE Healthcare seeing it and others aren't?

Yes. I think some more recent reports have indicated inflationary impacts on their financials. So we start to see that. Now looking at med tech specifically, we have a different portfolio. right? Our products are highly engineered products that have components from all over the world, and they are very substantial pieces of equipment for the most part. And so it's more exposed to things like rare earth elements. It's more exposed to freight costs as we ship them across the world. So taking a step back, in the first quarter, we had -- 2 things occur that really changed the profile of our inflation forecast. The first was the war in Iran. And essentially, what happened is you had oil costs go up substantially. Much of our freight costs, our fuel cost, jet fuel, all of that sort of substantially increased. That was about $100 million impact from freight and logistics costs. We also saw, as a result of this conflict a $50 million increase in other areas. So things like, for example, Helium was 1 component. There was a key helium facility in Qatar that was destroyed as a result of the conflict that added some incremental costs. So that whole package of items was about $150 million, and it was very much related to this Middle East conflict. The second component, and you probably read about this this weekend in the journal, is memory chip inflation. We've seen extraordinary increases in this cost category and it's impacted both our ABS and our imaging lines pretty substantially. And so we've seen a $100 million increase in a cost category that was much smaller than that last year. Now we're weathering the storm. We're navigating this in a couple of different ways. For 2026, we've put in place some cost measures to offset. We also have some pricing, but those benefits will even more substantially impact 2027.

I think another question that I get is you've had a lot of headwinds on margins with tariffs come through. You've had to offset some of that. Like is it just gotten to the point where it's just harder to offset some of these inflationary pressures. So you're just going to have to just take the margin hit right now because of all the tariffs?

Well, so we -- if you look back over the last 2 years, we've had 2 substantial impacts. One is tariffs, and that increased our cost structure around $250 million. And then the second is this inflation related to the items that I described moments ago, -- that's another $250 million. So here's the interesting point, right? Despite $250 million in tariffs last year, we still were able to grow EPS. And despite million in gross inflation this year, we are going to grow EPS mid to high single digits this year. And so I kind of take a step back and say, yes, we've absorbed extraordinary situations over the last 2 years. I do think the business has shown some level of resiliency despite that. And then as we move to next year, we will have more degrees of freedom in terms of pricing. Many of the cost initiatives that we're starting now will pay larger dividends, so I'm hopeful that we'll be able to offset a much more substantial portion of the gross inflation that we've experienced this year into next year.

Okay. So and I think a lot of people look at one of your competitors, their imaging business is 21% and low 20% margins and your imaging and ABS margins are kind of mid-teens. Like is that still an opportunity? I don't know if you -- I'm sure you look at peers and comps on margins. Just trying to think about, is that kind of the opportunity for this business still?

Yes. We still have a great opportunity from a margin standpoint to close that gap. And what it comes down to is a few things. First, this heartbeat business system how we operate the business in a lean manner is 1 key element to a lot of different things, more successful sales execution, more successful new product launches, but also our margin program. The new products that we're launching, many of them, in fact, virtually all of them, I should say, come at a higher price with a lower cost than the predicate. And so if you -- Phil can tell us all about Vivid Pioneer, which is a remarkable product for cardiac ultrasound, it is doing extremely well. and it's coming in at higher prices and lower cost. So it really is a wonderful element to the P&L when we launch those products. That innovation super cycle is happening now. And so we're sitting here, the second half of this year will benefit to some extent from it. But then as we move into next year, there will be much more substantial benefits from some of these new innovative products on the margin profile of the company. And then finally, just general cost discipline is an area we're intensely focused on. That will also play out as we move into next year.

On the memory side, specifically, there was a $100 million increase that you put in the guidance. I mean even since then, there's been some issues in terms of supply and strikes and some questions on where prices are going higher. Is there supply constraints. Just trying to think about what you factored in and ways you can kind of mitigate if those prices go higher or there's actually supply constraints in memory?

Sure. So with respect to memory, what we did was we took current prices, we assumed that they would exist for the rest of the year, then we added some buffer on top of that. And then we added some incremental contingencies, just general operational contingency. So we do have multiple layers to protect us against incremental costs. Incremental reduction should flow directly through. But incremental costs, we should be able to offset a portion of that before we run into a challenge.

In terms of supply, do you have supply lock for a certain amount of time or...

We do. We do and we're actively working with our suppliers to access incremental supply. We haven't seen this as a challenge to date.

Okay. And then same -- some kind of questions on helium and some of the other rare materials.

Helium, is up millions of dollars, right? So it's not -- but it's in that $50 million category. We were not supplied, I believe, for the most part, from the Qatar facility that was destroyed, but it did disrupt the global marketplace. We haven't seen shortage situations. The price is up quite a bit, but it's a very small component in the overall cost of goods profile of the company, which is why we haven't called it out as a discrete driver.

And most of our helium that we secure is not coming from the Middle East.

Okay. And in terms of pricing actions, you've got CPI up today. curious if there's ways you can think about offsetting some of those through pricing? And also how to think about the backlog, is there flexibility on the backlog that you have on pricing?

Our ability to reprice the backlog is more limited. Our ability to price new orders is wide open. And here's the thing. Our costs at this moment in time have structurally changed versus prior. And so we are looking at -- we're reflecting that in all of the decisions that we make with respect to new business orders and we're reflecting new prices as a result. We have to. Now the good news is we sell great products, and those products are becoming more innovative. So the compelling nature of that value proposition, we believe is still there, but we do have to reflect the higher costs that we're faced with.

Okay. Maybe skipping back to the revenue side or the top line side. You put up 1% order growth on the comp, 10% comp, like a big tough comp there. Just kind of curious what drove that? And I assume we should see accelerating order growth over the course of the year?

Yes. So we should -- we expect to see higher growth in 1% through the rest of the year, certainly given the very, very challenging comp that we had last year. I was pleased that we grew over 1% in the first quarter. Now here's the interesting thing. Over the last year, much of the strong order book that we put together was more about commercial execution and winning in the market than it was about new products. That was the reality. And even into the first quarter, the majority was existing products that we're selling. Now there are a few in our Ultrasound business, for example, I referenced 1 already. But there are a few where we've seen the new products start to bolster the order acceleration. But it's not really meaningful yet. That starts to pick up in the second half of the year, and it's even more pronounced as we go to next year. Over the midterm, we're expecting to grow sales mid-single digits. We guided -- we did 3.5% last year. We guided 3% to 4% this year. What that means is there will be a step up. And so we'll start to see that in the second half, but then also as we roll into next year.

Okay. And then maybe Phil bring you in a little bit, talk about some of the innovation of the portfolio and the 10 new products you're launching.

Yes. I think all the money that we put forth since spin and over $3 billion in investment, that is starting to pay off. And what you're seeing now is the most exciting new product innovations that we've ever seen in the future in this next decade than we've ever seen within GE HealthCare. And it's not just 1 product category, whether it's CT or MR, ultrasound or image-guided therapies. It's well balanced. You have material new NPIs hitting across every product modality over the next 6 to 18 months. So we're beginning to see this innovation cycle really pay off. It's very exciting. Plus you add to that, that we're meeting customers where they want to be met with the formation of AIS also gives us an opportunity to the platform better and to think more better horizontally. See if this element of [ Vault ] great product -- new products coming out in each of the modalities and then also horizontally how do we best operate to meet customers where their needs are. And so those 2 things together we're in a very good position based on the investments that we put forth the previous 3 years and frankly, are continuing into the future.

And on Photon Counting CT, -- do you think about that as like a share-taking ability? Is it upgrading your existing installed base?

We see it as a blue ocean. I mean I think there is a new area that we are going to enter into, and we had the ability to see what has been out there already. Yes, we are not first to market, but we're able to see how others are differentiating themselves so that we can pick our spots with a differentiated offering and enable ourselves to win. So I don't think it's actually as much cannibalizing our own installed base as it is going out and getting new passers.

What else kind of -- you talked about getting the sites ready to building the pipeline. Can you elaborate on kind of what all is involved in that for Photon Counting CT.

Can you repeat the question?

Yes. You've talked about getting sites ready and building the pipeline for Photon Counting CT. -- just kind of elaborate on that?

Yes. I mean so far, as of date I didn't check it this morning, but as of last week, we had a funnel of well in excess of $100 million already of a potential funnel. So as we just got approval, we're beginning to have the discussions with health care systems now across the course of Q3 and Q4, and we'll begin to see that convert into revenue as we get into the back half of 2016, but also '27.

Okay. And you expect kind of revenue contribution from these key new products in the first half 2017, right?

Correct, but it's much more beyond than just photon counting. There are other highly material products that's 1 product in 1 category. There are very material differentiated products across many modalities that are coming out.

And you're seeing that in the orders and backlog coming in.

For sure. I mean, we bring up Divid Pioneer a lot, but that product has done exceedingly well, well better than what our internal estimates were. We look to continue that momentum across other modalities.

Travis, we talked on the earnings call about particularly for imaging, when you think about sales funnel to order is typically around 5 to 6 months and then order to revenue is typically another 5 to 6 months, if that's helpful as a frame of reference.

Good. And when you just think about the overall imaging market, kind of your share position, are you share taking, share losing kind of just a state of affairs on the market in itself and just anything that you'd call out that's changing from a market standpoint.

The market in general for imaging continues to be strong. Just to be reminded, right, the ability for a health care institution to understand the detection is a critical care pathway component of being able to treat that patient. And so we continue to see imaging market growth strong and it will continue into the future. As far as our ability to take more share vis-a-vis the competition, I think we're doing well, and we're continuing to expand.

Okay. Then on just the overall capital environment, there's obviously some question marks on ACA and utilization and what that means for hospital budgets and kind of mix on healthcare. I don't know if you're seeing customers and capital spending, thinking about things differently or not, but...

Yes. We do a survey every quarter. I know you do as well. And our survey has been continues to be very, very strong. Our top customers are still interested in investing. Hospitals are very profitable at this moment in time. Utilization rates are great. And so overall, we think it's a good backdrop from a capital standpoint to continue to launch these new products into.

Okay. And then China, just kind of state of affairs in China at this point?

Look, we've done a lot in China to revamp or enhance our operation. It started with bringing in a leader, Will Song, who's done an amazing job. And really what he's focused on is commercial go-to-market, also the government affairs, making sure we have the right targeting of different segments. And the results have been actually pretty good. We're enhancing win rates in the market, which is great to see. We're also seeing a more constructive backdrop overall in the economy. So we expect -- we've budgeted China down that we're not changing that expectation at this point. But I will say we're starting to improve the predictability there, and we're also starting to be successful from a win rate standpoint, which is just great to see. Now Phil was there, I think, 2 times in the last month. So Phil, do you want to add anything from your perspective on the ground?

I wouldn't suggest to do that, Jay. But what I would say is that, in general, when I was there recently, the sentiment has stabilized. And I think we've met with a lot of senior people, party secretaries. We have a large footprint there as it relates to thousands of people, many manufacturing plants, and we still think it is a very good growing and the biggest health care market that is coming. Now how we actually are going to address that is going to be a very -- we're a very focused strategy will come in. We really honed in our clinical students and being able to pick our spots on where we're going to play and not play, and then also working with JV partners along the way.

So that's some of the kind of the green shoots you're talking about was the win rate in China?

That's right.

Now maybe moving over to Picato. You're seeing some progress there versus kind of January. I'm just understanding kind of what your some of the kinks you're working out and the workflow and how things are going with Picato?

Flyrcado has been going great. We're thrilled with the progress that team has made over the last several months, really over the last 6 months, as we've gone into full launch mode of the product. From a rate standpoint, I think we were at around $25 million in annual run rate. It's bumped up to about $46 million run rate 1 quarter later. So really good performance over the course of the quarter. We're very focused on continuing to drive that on the way to $500 million plus in revenue by 2028. Now interestingly, there are essentially 3 different elements in play to optimize the launch. You have to make sure that your customer economics are solid. They understand the reimbursement pathway. You have to make sure that you have the manufacturing workflow correct at the radiopharmacies. And then finally, you have to make sure that in the facility, the facilities are optimized to open up adoption of Flyrcado. And what was heartening for me in the first quarter was not only did we see new customers, which you would expect to see, but also we saw very good and solid ramps at existing customers. And I had the opportunity last week to travel around New York City with a dose of Flyrcado. Basically, we started at Pharmalogic, which is 1 of our suppliers. We saw how that was made. We watched it. It's a very complex process. A company like that is supporting us with very high production rates, successful on-time delivery rates. But mind you, when you launch this product for the first time, new batches are hard to make. And you have to learn how the product works and learn all the nuances of the specific product. And so PharmaLogic is doing a great job supplying us. We then took the dose and then went to NYU to see it delivered in a cardiac imaging center. And what was interesting for me is there are so many little pitfalls in the process that could exist that could disrupt the successful adoption of Flyrcado. And it's up to us to help our customers work through those because each customer is unique in some way. But at the end of the day, there is a standard work opportunity for us. And this goes back all the way to our discussion of heartbeat helping our customers optimize their process so that they can open up the flywheel of adoption. That's exactly what we're doing with them. So as we think about the 3 barriers, reimbursement, supply chain and then also customer adoption, customer workflow. We feel great about what we've been able to do in the quarter. Let's see what happens in Q2.

And then I assume there's kind of the balance between utilization at sites and adding new sites and kind of 2 different ways to grow. But what do you think about the growth in Flyrcado. Is it more of a linear ramp to the $500 million? Or is there a point where you can give an unlock and kind of can go more so to.

Let's see. I don't -- we've stopped short of giving Flyrcado guidance. We did commit this year to give a number each quarter representing an illustrative week for doses. So we'll do that again. But as far as the adoption rate, we're very focused on thoughtful adoption. What I mean is we're not adding a bunch of customers unless we know those customers will have a good experience. If we know that, we'll bring them on board. If we don't, we're going to be hesitant to add them to the roster of customers. And so far, it's been playing out very well. We are adding customers at a good pace. And then at the same time, we're also ramping existing customers, which is exactly what we want because at the end of this, the 2026 Q1 number is not important in the context of what we're trying to do. What is important is that we have successful adoption and great customer experience using this novel new program.

Okay. That's helpful. And I forgot to ask 1 question on the margin, just kind of this year question. Gross margins, 13.5% in Q1, stepping up to 17%. Sorry, I said that wrong. But the the second ramp, half ramp in gross margins. I just want to understand like the ramp there.

Yes. So second half margins will be higher than the first half margins for a few different reasons. First, normal seasonality. Q4 is typically our biggest quarter with the highest margin. Second, the benefit of the new products from a sales standpoint, we do start to see more benefit in the second half than the first half. That's another driver. Third, you heard -- you saw us with a $90-plus million tariff number in Q1. That goes down by the fourth quarter of the year. So it's another tailwind. Now offsetting that, we have the inflation. But like I said, we have that sort of baked into the math. -- that supports the second half acceleration.

Okay. And anything else that you want to end with before in close?

No, I think we hit it. We're incredibly excited about what we've put in place from an innovation standpoint, from a management system standpoint, our heartbeat business system, and now it's about accelerating and navigating a very volatile world.

Okay. Thanks a lot.