GE HealthCare Technologies Inc. ($GEHC)

Okay. We're on the clock. Good morning. I'm Matt Taylor, the medical supplies and devices analyst here at Jefferies, and I'm pleased to be joined by the management team from GE HealthCare. We have Jay Saccaro here, the CFO; and Carolynne Borders, who runs the Investor Relations function and we'll have about half an hour for Q&A. Side note, this room is usually 100 degrees. So I don't know what they did, but I guess they must have fixed the air conditioner here or we're just lucky that we're early.

We'll take it.

Yes, I'm excited not to sweat through this whole -- we'll make you sweat, Jay. Now we have some questions that I prepared here. And maybe I just wanted to start, Jay, with some reflections on how the year has started. Talk a little bit about the assumptions and guidance, but I really want to walk through some of the changes that you made to the guide in Q1. Maybe can you talk about why you did that and the confidence that you'll be able to hit the reset guide?

Great. First of all, Matt, as always, thanks for hosting us here. We appreciate your interest. We appreciate you following the company for so long. And then thanks to those that have joined us in the room, we definitely appreciate your interest in our company. A mixed first quarter in the sense that a lot of good from a demand generation standpoint, a lot of good stuff occurring in the market today. But at the same time, we did have some challenges that we foresaw with respect to costs throughout the year. And this really relates to some inflationary impacts. So we did have to adjust guidance downwards. We take that very seriously. We don't like to adjust guidance. But sometimes it's required and the appropriate thing to do as was the case here. First, on the demand side, we delivered orders growth of -- on a 2-year basis, 11%, which compounds at about 5.5%, 6%, which is a great order performance and exactly where we want to be. We delivered book-to-bill in the quarter of 1.07x. Now that includes a number of things that roll through at 1:1, namely our service business and our PDx business where revenue equals orders. So if you look at equipment only, we had a higher than 1.07x book-to-bill, which is a great performance. And the backlog sitting at $21.8 billion stands at a record. We also did our customer surveys in the quarter, and the backdrop in the U.S., in particular, continues to be very robust. So from a demand standpoint, the revenue in the quarter grew 2.9% as compared to 2% to 3% in the guide. Demand side and sales side started very strong. And I would also say, here's what's interesting that most of that was related to existing products on the market and commercial execution versus new products and new innovation, which will benefit future quarters. So really a nice story based on the desire for upgrading with our existing portfolio of products. Now there are a few new ones that had launched that benefited the quarter, notably Vivid Pioneer, which is an outstanding product really simplifies things for cardiac ultrasound. We're so thrilled with how that product is doing the receptivity, how it makes the lives easier for sonographers, very excited about that. But generally speaking, this was all about existing products on the market. So really nice demand backdrop. On the other side, we had a cost challenge. Obviously, we did not anticipate a conflict in the Middle East. That cost us on a full year basis, about $150 million in gross inflation between logistics costs and incremental costs related to things like rare earth elements. And then we had a memory chip challenge, which, as you all know, over the last several months, the cost of memory chips has just severely increased. And so we wanted to reflect an adjustment in our cost profile for that. Now interestingly, of this $250 million in inflation, we're able to offset a very reasonable amount. So we offset about $0.06 of -- we offset through price roughly $0.17. We offset through incremental cost actions that we delivered in the short term. So we offset a fair amount, but we thought the prudent thing to do was to reflect these escalated costs in our guide. Now as we think about the level of conservatism and this and that, we always try to have very achievable, conservative guidance. What we did in this case is we took commodity prices as we saw them at the time. We added a little bit of buffer to that. So we had some incremental contingency on the commodity price side. We also added some incremental operational contingency and we put that all together and the result was $0.15 of a reduction in overall guidance at the top and bottom end of the range. Again, I think it's the right thing to do. And I think for us, it sets us up in a way that will hopefully have a good performance through the rest of the year.

Okay. Maybe I'll just ask a couple of follow-ups on the points you brought up there. Let's start with cost that's where we ended. You mentioned putting in some buffer for the inflationary headwinds that you saw. Can you talk about how much buffer there is there? I guess one of the questions that I've gotten from investors is memory keeps going up. So do you have enough buffer to keep up with memory if it continues to rise in cost and how do you manage that?

So listen, I think we have adequate buffer based on what we've seen. If memory costs triple or fivetuple or something like that, of course, we would have to like look at this very carefully. But I think we've added adequate buffer. Importantly, we don't comment on performance in the quarter and we don't give updates on the quarter, but you can look at the price of oil. I mean that was -- the price of oil, logistics, freight and so on, which is correlated to that is at or below where it's below where it was when we put the forecast together. So listen, we feel okay about what we've put together from a guidance standpoint. I think we'll have adequate contingency at the end of the year, barring unforeseen shocks, which could have, of course, emerged. But as we sit here today, we haven't seen that.

One other specific question on this issue that I've gotten is, is there something about the chips that you use or the way that you contract that makes the rise of memory have more of an impact on your P&L than it does peers? Or is it more or less the same?

Listen, I think it will be similar impacts across the peer group. Now you have to look at near peers versus loose proxy peers because there are companies in "Medtech" that aren't exposed to chips like we are. But those that are, I think, are experiencing similar amounts, and you've seen that in a few of the earnings calls, folks have pointed that out. So it should be similar levels.

I think part of the dynamic here is that the capital equipment that we are delivering to the market, these are highly specialized devices. So we'll be more in line with a like a Healthineers or a Philips versus some other Medtech peers in terms of the amount of specialization that's required. And so that is another difference.

The only thing I would say is there's an important element to point out which is a temporal disconnect between cost and price. What I mean by that is the way our orders have historically been structured once an order is in the book, there is price risk that's borne by the supplier, and that's consistent across the industry. The good news for -- so the bad news for us is that it impacts us for a short period of time, and you see that in the guidance that we shared. The good news for us is that over time, we address price. And we'll get after this very quickly so that we can sort it out. the notion that we're only adding $0.06 in price this year versus our original planned expectations. That's not to say that there will not be a much more significant price impact next year as we reflect these input costs in our pricing strategy, it's more to say that much of the sales this year are already in the book versus next year and the year after, we'll be able to reflect new pricing.

And maybe let's go back to the other KPIs that you mentioned in Q1 that were positive. You had solid revenue growth, order book, book-to-bill in backlogs and without the benefit of a lot of new products that are coming. So we'd love for you to talk a little bit about how you think those KPIs could evolve through the year and specifically, do you think you could start to get some uplift as those new products launch?

So we definitely think that new products will benefit orders, equipment backlog, sales as we go forward. And really, the spirit behind moving the growth rate of the company structurally from where it has been to this mid-single digit, it's very much about new products. So what's happened this year is last year, we grew 3.5%. This year, we've guided 3% to 4%. But again, in both of those cases, not a huge impact from new products. As we start to bring in photon counting, as we start to launch total body PET, our next-gen SPECT solution as Flyrcado becomes a larger piece of the overall portfolio as we continue to innovate in MR with our Freelium offering. I encourage everybody in the room to check out on our website, the Investor Relations presentation from last quarter. Included in that is a page where we highlight all the new launches. That's what's going to take us up. And so you'll start to see it in orders. It shows up first in orders, and then it will be the catalyst that allows us to accelerate the sales growth from this 3% to 4% land where we've been in the last couple of years to something more robust than that.

Maybe you mentioned photon counting first. I don't know if that was by mistake, but that's the product that I get the most questions about. It's a big new category.

Definitely not by mistake.

And so could you talk about your solution there, maybe how it's differentiated and when we would start to see orders coming in both from the EU and the U.S.

Yes. It's interesting. We're really excited about photon counting. But I want to make a point of emphasis, which is our Revolution CT platform is doing really well today. And that's not photon counting. It's AI-enabled, technology-enabled, really a great offering or selling -- and we're ordering a lot of that particular product, which I think is just fabulous. Now what happens with Photon counting is a couple of things. We believe certainly relative to conventional CT, and we'll see how it compares to the competitive offerings, which we're excited to highlight. We believe relative to conventional CT, it provides better concurrent spectral and spatial resolution than offerings on the market. It's concurrent meaning you can enhance spectral resolution and spatial resolution with the same image at the same time. In addition, that will lead to better tissue characterization and it may actually change treatment choices as a result of the image that we're putting together versus conventional. So incredibly excited about what that will bring. We highlighted this at our RSNA last year. And what I will tell you is there was real excitement from clinicians around what this product is going to do. The pipeline is backing that up. Our pipeline we reported on the first quarter, and we're not -- this was a select data element that we shared. I'm not sure that we'll share on an ongoing basis. We'll see. But we highlighted on the earnings call a pipeline of over $100 million which is very early stage and very swift progress for a new product. So let's see what this can do. I think it will be an important element. As we talk about 27%, 28% growth, I think Photon counting will be an important feature.

And I guess, maybe talk a little bit about the differentiation between your solution and your peers and how important is having some of these, I'll call them, gap fillers because you've been sort of catching up in certain areas. And it feels like with the slate of product launches that you'll have, you'll see kind of on par in every area, how does that enable you to compete for some of these strategic contracts that you've been buying for?

Yes. Interesting because if you think about it, we've been doing pretty well over the last several years despite a portfolio that had not been refreshed for the most part. And then we start to have launches and those launches like Vivid Pioneer. I was visiting with the sonographer, and she exhibited incredibly real excitement around what it's doing in terms of workflow simplification, speed to get through the process, making the sonographer's life easier with better image quality. Incredibly excited about the impact of Vivid Pioneer. If you go to an interventional suite and you talk to the ones that are now implementing Allia Moveo, they'll talk about how this product is making their lives that much easier. So we've been competing well with a disciplined commercial team, absent new products. Here we are with a set of gap closers, and I would contend in a number of areas, not only will the gap be closed, but we will advance beyond the current state. I really believe that. And we can -- all in due time, those discussions will take place. And it's probably more appropriate to have those discussions with doctors and physicians versus others. But many of these products will leapfrog. And so once you have that with the commercial organization that we have world-class with the service organization that we have world-class, we believe that's what's going to be the catalyst that takes us to this mid-single-digit growth. So I'm very excited about many of the products in the pipeline. As I said, you can see it on our website today, but it really is about accelerating progress and closing those gaps, advancing versus the current state and then commercializing them effectively.

And maybe we could just round out the tariff -- the cost discussion with tariffs. So we didn't discuss that in the first question there, but could you remind us what you're assuming for the tariff guidance this year, how that could play through next year and just where the points of uncertainty still are.

Yes. Certainly, there are points of uncertainty. What we've done is we -- last year, we had around $250 million of net tariff impact. I think it was roughly $500 million gross and then we offset with many mitigation actions. This year, we said is a little bit less or a tailwind versus last year. And that's kind of the working assumption that we have. Now I know that there are tariffs set to expire in June. And to the extent that tariffs -- sorry, July time frame, to the extent that tariffs expire and are not replaced with something else, perhaps that could be an upside for us. But what we've included is we've assumed that those tariffs run through the rest of the year at those current levels. And if that's the case, then we would be neutral. What I think will happen is the 122 tariffs will go away. They will be replaced by something else, perhaps a 232 investigation. And I'm hopeful that it becomes neutral or a tailwind. What we tried to do is include an assumption that reflects some level of conservatism relative to what could happen. So it might be an upside for us. We don't know. It's a very volatile world, and we'll watch this really carefully.

I think the other moving part is USMCA. How have you thought about that? And how would that impact things that were gonna change?

Yes. Listen, we'll have to watch. We definitely avail ourselves of the USMCA exemption. It's an important part for us. And again, by carrying the tariffs through the rest of the year despite they might expire, we're hopeful that this provides an offset to what could happen. We'll watch it really carefully though. And now the important thing is once we know what the final state of affairs is. We have ways to mitigate. Obviously, price is one, especially if it's an industry-wide phenomena. But in addition to that, there are decisions that we can make use of free trade zones, use of different suppliers, switching supplier locations for certain products. So all of those things, we can dynamically react to and we've done a really good job going from $500 million to $250 million was no small fee, right? And so -- and then the point is our goal was to mitigate more and more of that as we move forward. It's just we don't know exactly what the right strategy is at this point. Once we know what the guardrails are, we can implement effective countermeasures.

And maybe I'll just ask you one more follow-up on the pipeline. You talked about Photon Counting CT, total body PET. There's a number of other ones that are on that slide that could be meaningful drivers. What are the ones on that slide that you don't feel like get enough attention from the Street where the organization is a lot more excited on what investors appear to be?

Yes. It's interesting because we talk about Photon counting, we talk about total body PET. We spent a lot of time on those. And I understand why because, listen, we're one of the, if not the leader in imaging today. And yet, there are markets that are foreclosed to us. We don't participate in photon counting. It's an increasingly -- it was a small sliver. It's increasing in size. We don't participate in total body PET today. These are two markets that will open up to us with the launch of these new products. So it is truly a blue ocean for us. And I -- so that's why we talk about those markets. But it's interesting because you go across the portfolio, and we are refreshing. I talked extensively about Vivid Pioneer. I'm personally really excited about that. Allia Moveo. This is for interventional suites, and it's a surgical C-arm. What's happened here is as the interventional suite targets more and more minimally invasive procedures, the flexibility needed in the space, the ability to move around the space is increasingly important. Allia Moveo, and you can get the hint in the name, is a more mobile offering that we have. It's more constrained in terms of the space that it utilizes. So it allows us to address the emerging needs in this. Guess what? People are really interested in this product. They love it. They're thrilled with how it's going. In addition, our MR upgrades. So we're going to be launching our MR with Freelium, which is an incredibly exciting offering that we'll have in place. And again, it enhances our MR, not only with new technical features, but also all of the hard work that we're doing on AI incorporated into the product comes in our next-gen MR offerings. We have a next-gen SPECT device that will move us further into theranostics. And then we haven't even talked about Flyrcado, which is a tremendously exciting product for us. And in addition to that, we're developing a -- today for MRIs, the contrast agent of choice is gadolinium. We're developing a manganese-based product, which we're incredibly excited about. This is a very large market. It's a growing market. And what this is, it's -- manganese is naturally occurring in the body versus gadolinium, which is not. So we think this will be a really interesting offering in the PDx business. That should be very exciting. Now again, it's not launching anytime soon. But the point is we have a number of things that are launching soon. And then we have things that are a little longer lead time. All of these things will contribute to this mid-single-digit growth story that we talk about.

Great. So maybe we could spend a minute on Flyrcado. It's kind of a trigger word for me. But we did a lot of work on that in the fall and identified what we think is a huge clinical opportunity but it's just been a little bit slower to evolve than we would have thought with the manufacturing coming online. You did make a lot of progress quarter-on-quarter. So I just would like to get some kind of updated understanding of how that could progress from here? And when do you think that will start to show in the numbers?

Yes. So first of all, we're increasingly confident in the $500 million plus by 2028. It's a really exciting product. Now it did take longer than we anticipated last year. And I don't know that I -- I've spent time with our customers a couple of weeks ago. We went to see a radiopharmacy in New York City. And so we saw that. And then we went -- we traveled with the dose to the cardiac imaging center at Langone at NYU. And I have to say, here's -- what I walked away with is it's a highly complicated product to make from a radiopharmacy standpoint. But radiopharmacies very quickly climbed the learning curve. So your first dose, maybe you're running at a 70% on-time delivery rate. But then as you optimize, you quickly get to 95% plus. Somebody like PharmaLogic, really good supplier, well above the 95%. Interestingly, but it's not something that on day 1, you can do. Then the second thing that happens is the doses travel in a small cooler or like -- looks like a cooler, but it's obviously a very safe container to the clinics where doses take place. They arrive at the clinics and it moves around the clinic in a different way than the clinics used to. So if you think about the barriers to adoption, it's not reimbursement, those pathways are now clear. But the barriers to adoption have been are my radiopharmacies supplying at the right rate. Because remember, we want people to be able to count on doses showing up. And then do our cardiac imaging centers understand how to work with the dose. And so those have been the two barriers. But guess what? The great news is the radiopharmacy network is moving to the right spot. We're not only onboarding new customers. We added 50% of the customer base since the beginning of the year, but the existing customers are getting comfort and migrating up in terms of dose utilization per site. So all of these things -- but again, you don't appreciate it until you see it. It takes time. And we're working with both the radiopharmacy and the customers to ensure that they have the optimal workflow so that they can effectively deliver the outcomes. It's clear clinicians love the image quality. I saw it myself. It was stunning image quality that this Flyrcado delivers. But getting it -- getting from dose manufacture to high-quality image is a complex process with lots of movement, and we've now -- we're helping our customers get there. So we took the -- we did roughly a $25 million run rate in Q1. We've taken that up to a $50 million annual run rate in Q2. So really good progress on this front. One of the things we decided to do this year in the first year of launch is to provide a weekly dose number from an illustrative week once per quarter as we go through the year. And so we'll have another number that we share in July and then October and then maybe we'll move on to a different process as we go forward. But we wanted to -- given the importance of this, and I know you've done a lot of work on this particular product, we want to share some data. So we'll have another data point for you in July.

Great. I guess -- could you address -- you mentioned increased confidence in the $500 million-plus starting from about $50 million run rate in Q1. So I guess, could you talk about how linear you expect that progress to be? Is there sort of a tipping point that happens what are some guideposts that we should look forward to track your progress?

So the way to track -- we'll give you another data point in July. What we want to resist -- I mean, here's the thing. We have an incredibly rich pipeline. Photon counting, total body PET, Allia Moveo, Vivid Pioneer. Vivid Pioneer is a monster product for us. So we have this incredibly rich pipeline. What we don't want to do, as we looked at this year and we talked about this rich slate, we don't want to give guidance by product. We really don't want to do that or interpolate. And so we have this number that's hanging out there, the $500 million plus. We can tell you we feel really good about it. How we're going to get there on a quarterly basis, we're going to leave that up to the reader to determine, but we feel very good about where we're going. We'll give you data points this year on Flyrcado. And so we'll be able to judge the next quarter, how it's going, but we feel quite good about what we've been able to do. And more importantly, the work that we're doing with our customers so that they can have confidence to increase the rate of utilization. So that's really what's going on.

Got you. And then with the few minutes we have here left, I wanted to address two other topics. One is China. So maybe we could talk a little bit about what you're seeing in China. If you could talk to whether there could be any kind of turnaround there this year and whether it could be a growth market for you in the future.

So China has been a challenge for us over the last several years. We had a lower guidance very significantly because of a market change in 2024, and that -- the frustrations or the challenges in that market continued in 2025. What I would say is we've done a couple of things. First, we brought in a new leader, Will Song and some other leaders, including our finance leaders new, Jennifer is outstanding. I just spent time with that team the other night. And making very good progress improving the predictability of performance in the market, making also very good progress on win rates. We're seeing improved win rates in that market in certain areas. So good progress there. We've modeled China down this year versus last year. That's what we've shared with you. Do I believe China returns to growth at some point? I do. And I think we'll, with the commercial execution, changing the approach in terms of how we go to market, increasing emphasis on certain areas like government affairs. We're really seeing good momentum in this market, and it will start to pay off over time. We're not changing the guidance this year, we expect it down. That's okay. but I am expecting this to normalize in the coming years. And it's not going to be a double-digit grower. I don't anticipate that at any point, but it should be a contributor at some point over the medium term.

Great. And maybe just to wrap up, I'd love to ask you about capital allocation. So since the spin, you paid down debt, you've done some deals, including the Intelerad acquisition recently. So I'd love to hear how A, that's going; and then B, how you think about balancing the opportunity of doing all these tuck-in M&As that you have in your pipeline versus buying back stock and where the shares are? So how are you thinking about it now?

Yes. So it's interesting because you look at the capital allocation approach, reinvest in the business, make sure we have the right R&D envelopes, capital spending so that we can deliver and exceed the plans that we've put together. That's priority #1. Once we've done that, we do pay a small dividend, but it really comes down to business development and share buyback. Business development, we want things that are accretive to growth, accretive to economics of the company strategically related to what we do. The deals that we've done for the most part are situations where we're the only one or two buyers for those assets. If you look at the Intelerad acquisition, if you look at what we've done with our ultrasound acquisitions over the years, these are situations where we're not competing with broad sets of groups because we can drive real incremental and differential value to the asset. That was absolutely the case with the Intelerad acquisition. And then we like to buy shares. From our standpoint, we have an intrinsic value model of the shares. In the first quarter, we repurchased $100 million in the quarter, and we did so at a price of $70. What that means is we believe that the $70 price represents a discount to the intrinsic value. The shares have traded off since then. You saw a number of management and board members purchasing shares in the quarter. We don't report our own share buyback activity until after the quarter is over. So stay tuned and see what the story looks like on our Q2 earnings call. Matt, thank you so much. We appreciate your interest in our company and the support. I mean also all the thorough work that you do.

Thanks, Jay. Thanks, Carolynne. Thanks, everybody.