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

I'm Larry Biegelsen, the medical device analyst at Wells Fargo, and it's my pleasure to host this fireside chat with the management team from GE Healthcare. With us, we have Pete Arduini, President and CEO; and George Newcomb, the Interim CFO. Also in attendance is Carolynne Borders, Head of Investor Relations. Pete and George, thank you so much for being here.

Thanks for having us, Larry.

So let's start with the strong Q2 results, Pete, 11% order growth, book-to-bill of 1.15. It looks like one of your competitors Siemens also saw a strong Q2 on those metrics. So what drove the strength in Q2? I know you said 3/4 of it came from service contracts? And how should we think about order growth in the second half of the year?

Yes. Look, Larry, I think Q2 was obviously a strong quarter to your point, over 11% growth. I want to clarify something though, is that -- that was all equipment and orders coming through the backlog that grew to 2.1%. The vast majority of that still doesn't come through orders. The way we recognize service is we'll capture a large contract. It will go into the backlog. And then as it's consumed, portions of that will come through. So I mean, again, big backlog build and 11% orders growth within the quarter. So it was quite good. Look, I think underlying that, the markets are strong. We're seeing still a lot of long waits to get scans. Some of that's driven by the need for many of our modalities now to be prepared for drug therapy or device therapy. And so that's been driving it. And then the other aspect is we're now bringing out more and more new products. And those new products are obviously driving some of the growth. So it was obviously definitely a good one, and we feel very good about what that means now for Q3 and Q4.

That's helpful. So that leads me to my next question. The organic growth guidance this year implies an acceleration in the second half of the year on a 2-year stack basis. So how much of the strong orders in Q2 contribute to that? And what are the other drivers?

Yes. I mean some of the Q2 orders will come through, but particularly in what was traditionally the previous ultrasound business, we'll see those come through. But some of the long items will come out more so of the backlog as we take a look in the second half of the year. Our ramp-up is the traditional setup is we typically have a stronger back half just based on hospital budgets and stuff. And so the ratios look quite good. I mean they're relatively favorable. I mean to give you an idea coming into the third quarter, we actually had a higher percentage of the actual revenue committed, which basically means the site has their site readiness, we verified it. We've got the configuration. We've made the product. And so we were pushing 80% coming in. So we feel quite good about what that looks like. And then because of our backlog, because of the ramp, we've got good visibility into Q4. So feel quite good about that ability for the acceleration and what it means here for '26 finish.

And just last one on '26. The margins are also expected to increase on a year-over-year basis in the second half. What are the drivers of the margin increase in the second half?

George, do you want to take it?

Yes, sure. So look, traditionally, right? Historically, we've had about 250 basis points lift in margins second half versus first half, right? And as you think about the drivers there with the NPIs, right? So a lot of new products coming out. We've got traditional productivity that we do, right? We've got price. We've got PDx, which continues to be strong for us, and then we've got the PCS recovery. So maybe thinking about that a little bit further with the NPIs, right, each of the products that are coming out now have a better margin than their predicate product. And as they start to mix into our revenue, then our margins will go up. On our productivity, we've got sourcing initiatives. We've got manufacturing initiatives. We have overall -- we announced earlier this year, the combination of our AVS and our imaging platforms, we should get productivity from that over time. Similarly with our commercial, we merged some of our commercial groups together. We should get synergies there. And as we -- as you think about price, we got a little bit of price in the second quarter as we reprice the orders that we have are taking now, we'll start to see that come through. And then continues to be a strong part of our business. And obviously, it's our highest margin business. And then lastly, look, we had a rough first half with PCS. We had some supply chain issues. We had some supplier issues. And as we start to push that out into the second half, we should see a recovery there and that should also be a margin lift. So you kind of package all that together. That's why we see the second half.

Very helpful. Pete, I mean a I heard your earlier comments that we saw the Q2 results, but there's a lot of concerns in the investment community about the health of hospitals because of some of these policy changes and ones that are potentially coming like 340B. What's your view and what's your visibility into some of these hospital capital equipment budget into next year?

Yes. No, and I know, Larry, even here at your conference earlier, there's been some discussions on procedure volumes and such. I mean what we do, just to kind of let you know, I mean, we -- we obviously spent a lot of time with hospital CFOs and CEOs, not just myself, but our teams, on actually scanning and taking a look at how budgets will be planned out. In many cases, they have a capital budget structure that's 3 years out. And this part of this discussion is interrogating to understand is it changing or not. We do a survey every quarter as well where we compare notes and stuff. And then we really try to get as much procedural data, and those are the combinations of things we look at. At this point, we really don't see any kind of pullback in our specific arena. And some of that gets into the -- what's been evolving in a really lot of since COVID is just the need again for imaging for even pharmaceuticals. I mean you go back 10 years, there weren't many drugs that said you need to have a pre-post scan. If you look now at the use of a lot of these because they're so expensive to determine efficacy, their scans are happening. The amyloid beta products, you know well, there's actually MRI needed to see if there's any type of adverse effects. There's PET scans needed. So that has created on top of the baby boomer window just a longer backlog to be able to access scans. And we aren't seeing a lot of change in that. Now you get into the current contemporary points you raised about the Medicaid changes all of our U.S. customers knew it was coming, right? It was kind of foreshadowed. So they've been working plans. And obviously, certain jurisdictions in certain areas, the mix shift is a little more painful than others. But we're not seeing that translate into -- I'm not going to spend capital. In some cases, you actually see people saying there's more of an urgency that we need to be able to get the right equipment that can bring in more higher mix procedures into the portfolio. And then on your 340B point, 340B, obviously, however, you use or how it's been used by hospitals. It has been used that way. I mean we don't foresee something taking place that goes back to ground 0 even if it were kind of capped off an expansion, it would still play -- it would still have an adequate role, obviously, in helping hospitals fund their needs. So we project at this point in time a reasonably stable environment. The #1 driver of that, though, is the amount of procedure growth that's underpinning.

That's helpful. Good to hear. China, a big part of your business. It grew low single digits in the second quarter, but you still expect China to decline slightly in 2026. So Pete, what do you see on the ground today in China, including VBP?

Yes. Look, I mean China has been a very, obviously, dynamics and understatement market over the last couple of years. I mean if you think of the prior to market and all of us down double digits. It's good to see that we're starting to see some stabilization. And to your point, Larry, we're still predicting to say we're going to be slightly down. But it's definitely being more stable and more predictable, which is step 1. I think the growth of VBP is a little bit of a double-edged sword, meaning it creates more price pressure. But it also provides transparency and visibility. Even for a company of our size and scale that's been in China, making things for over 35 years and being there for over 100 years, our visibility of what was transpiring was still some of the lowest in any country you participate in because there would be bills we just didn't see. When it becomes in VBP, you see it all. Now you may not want to participate at all, but your visibility goes up, and there's deals we've won at acceptable margin rates that we probably wouldn't have seen without it. I think the second thing is what it does is it actually elevates it to a level where the ability for certain players to maybe manipulate an outcome are pretty much eliminated. And I think that's one of the reasons the government likes the approach. So we've actually done a little bit better in VBP. We also are adjusting our go to market. You don't need to have the same extensive clinical structure or distribution structure. And so we will have different margin approaches that what we will pay to support that. And so I think those are all the things that say this is what means it's starting to stabilize. That being said, you have to be local. We moved the vast majority of our in China for China manufacturing there in the last 4 years. We still have last mile of another 10%, but that's critical because if you want to compete in China, everything you sell there, in many cases, it's going to be associated with price has to be sourced locally. Otherwise, one of the local players is going to have an advantage over you. And that's one of the strategies that we've been going after. And so I'd just say last piece, Larry. As we look into the horizon, it's hard to always predict how China is playing out. But I think we're going to see continued stability I think we've talked about this in the past. I don't think we see a big spike back up. But if we could move from negative territory to slightly positive and continue to improve that, that's the kind of expectations we would have that would help us achieve our longer-term goals.

That's helpful. And so it sounds like the national tender process that came out a few months ago, is something you're -- not sorry to put words in your mouth, but is that a net positive for you because of this visibility there -- or not? Is it -- how to...

Yes. It's -- I'd say it's not equal. We were expecting all -- like when this came out, there's a lot of people say, VBP is only going to be 15%, 20% of the market. I mean, we had modeled that ultimately, over time, it's going to be over half of the market. And we had looked at what are the pros and cons in a very stark way to say that, which then gets you into a mode of saying if this is where it's going to be, how will that play out? There's no doubt in the last quarter or so, we had some benefits and we did a little bit better in VBP. If you follow it, which I know you have in some of the other disposable areas, sometimes the price starts in the first round more challenging, and then it starts moderating back because customers want quality. Customers want service. In a disposable world, you can say, company A wins, company Bs out, all of Bs out and it's just A. In our world, you have an installed base. So there might be one new product. If you have 8 of these other products and you put a different one in, it works differently, is service differently. It causes more challenges. And so I would say we have a few more opportunities to kind of have the right type of discussion why you'd want to buy us other than just price. And if we get in early enough, we have those right discussions, think we can win. And so that's what we've been seeing. But again, it's still a challenging market, but it's a stabilizing market. And that really is what we want in our forward plans.

Okay. Good to hear. Switching gears to PCS. I guess 2 part question. One is, based on what George said earlier, it sounds like you expect some improvement in the second half. I just want to make sure I'm hearing that correctly. And second, what do you need to -- what needs to happen before you kind of conclude the strategic review?

Yes. Well, I think to George's point, again, the first half we had some fixable events that took place. Some of it was related to supply chain. Some of it was related to manufacturing. And most of it was associated with some older products that we just have had either end-of-life components, things of that nature that we've converted out. And so that challenged some of the supply chain. Most of that has to behind us, and we've been really focused on this quarter. I think Jeannette and her team have done a nice job of really focusing on moving from what would normally be monthly, weekly execution into weekly, daily. And that rhythm to make sure that the teams are on track because as George said, when you look at the profitability of that business, there's a reasonable amount of fixed cost. Filling the plants makes a huge difference for the conversion of profit. and we're on track. I feel good about the direction that we're going. And so the first step to any type of strategic look is, well, let's get the business back to what it should be able to do. And I think as we exit this year, I think we're going to be able to see that with improvement in Q3 and continued on in Q4. So that's step one. And then, look, broadly on the analysis, it's a really good portfolio of products. The question for us is the capital allocation. I mean if you think about monitoring one of the top monitoring businesses, top anesthesia business, diagnostic cardiology, 1 of the top 2 diagnostic cardiology businesses, a top 3 infant care business and a top 3 kind of disposable cups business. It's a diverse one. So the question is do all those things need to be together? That's one of the discussions. And are there pieces that would make sense to place else versus keeping this together? And then there's a fundamental question of the whole business. Do we keep it with the improvements we're making or is it better someplace else. And part of that discussion, Larry, will be less about, is this a good or bad business. It's a good business. Is -- could we put more capital to work in PDx or the new AIS and be able to drive that? I think by -- as we get through the end of this year, starting in next year, we'll have a really clear view of that. But make no mistake, job one is get it back on track. And I think we're off to the right start.

So it sounds like we can get an update on the strategic review conclusions. Maybe I'm thinking like the Q4 call by then, which...

I think we'll be in a window to tell more -- talk more about at that full time in February, yes.

Okay. That's helpful. PDx, really strong. Q2, almost 15% growth.

Yes. Great work there.

So what drove this trend? How are you thinking about the rest of the year? It does seem like supply one of your competitors contributed to some degree.

Yes. Do you want to start off on PDx and then I'll...

Yes. Yes. So I think -- look, obviously, we did see strong growth, I mean, on our core contrast media product, right, where as we see it out in the market, right, the supply is just about keeping up with demand so that from our perspective, that continues to be strong for us. Our radiopharmaceuticals continues to do well and is ramping as we would like. And then I think as we look out into the rest of the year, again, with the procedures that Pete talked about, we don't see a society of demand on that. So I think that's that -- from that perspective, that's how we think about PDx.

Yes. And it's a really cool business, and it's kind of entering into a renaissance window. It's interesting contrast business has been around for 35 years. It's been generic for the last 18 to 20, yet it's still growing. And a lot of that is underlying, Larry, when you talk to all the device guys that need CT imaging to support it or anything that's happening in the vascular lab, neurovascular, peripheral vascular or cardiovascular, there's contrast agents. You know in the outpatient world, there's growth there. That's driving it. And to George's point, between us and the other key suppliers, I mean, supply and demand is just matching up. And so to this point about other entrants coming in, there's been, over the years, 8, 10 different entrants that come in or come out, it's not the easiest generic market, meaning it's not you put a replacement bottle on the shelf and it gets a script. You got to be in the hospitals as you got to be working with injector companies in those things. But I think we view there's probably some room for expansion just based on this market is projected to double over the next 10 years. And we're already seeing that linearity in that ramp matching that. So I think our business, we feel good about where it is and what we are able to do to protect that and grow based on our differentiators, which are supply continuity, the amount of features, the alignment with injectors. And then on the radiopharma side, this is -- it's continuing to ramp, but not just in Flyrcado, which is the myocardia perfusion product, you know, Larry, but also Cerianna for breast cancer. We're starting to see Vizamyl ramp up quite a bit. These are all double-digit growth products. And I think we're going to continue to see that as you see the efficacy of the diagnostics and then also how that works with therapy. So a big part of our play is continue to build out that business to be more robust across the value chain. I think of this NMP acquisition we did in Japan is both CMO type distribution, but it's also new molecules. And the CMO area is also quite a profitable area, the ability to develop your own molecules and leverage them in different geographies. All those things give you differentiation that's hard to duplicate. And then obviously, if you align that with what we do in pet, what we do in spec and have the equipment, we're one of the few companies that actually can kind of bring these solutions together for customers in a really exciting area, but can be a complex area if you don't have someone like GE Healthcare to kind of simplify it for you. So I'm quite bullish on where we're headed there. And I think what you saw is emblematic of both of those businesses continuing to do well.

That's helpful. A couple of follow-ups. Is -- the one short term, is Grebe still having supply issues in Q3 or you see a...

I don't want to comment specific about any other player, but let's just say, in our space, there's still some supply disruptions that are happening. Yes.

Okay. And then on the generic OmniPay, you know what your competitor is saying publicly in terms of their kind of aspirations. I guess one question is initially, they're going to go after the spot market. How big is the spot market relative to the contracted market, which is probably a little more protected?

Well, it plays back to your previous question about what are some of the other shorts out there. But spot market could be 20% of the business, depending on where people are at different points of time with availability and such. But again, the demand around the world is growing. I think because of our global footprint, we also have the opportunities to move from one country to another based on demand, also based on how we take a look at profitability or where we want to supply it. So I think from that standpoint, we're actually in pretty good shape, what we contract, how we think about it. And again, just to remind everyone, sometimes we get in these discussions, people think this is a $1,000 dose drug. I mean, we're talking about maybe $15 to do a full-body CT study. And the cost of goods on these products when you start getting down into the single digits based on iodine and stuff, make these challenging to make profit. And so we're not talking about huge numbers. The other aspect is when you do an ANDA and you come out, you pick one product to go to follow, right, their NDA. But these products are fundamentally interchangeable. And so I think as spot market opportunities come up, there's still room for a player out there to do reasonably well, and all of us sort of continue to grow.

And I think your LRP calls for PDx growing high single digits?

Correct.