General Electric Company (GE) Earnings Call Transcript & Summary

Hello, everyone. Hello, everyone. This is Joe Ritchie. I run our multi-industry group research at Goldman Sachs in the U.S. Very excited to have GE's President and CEO of GE Healthcare, Kieran Murphy; as well as the CFO of GE Healthcare, Helmut Zodl, here with us today. We're going to start with a brief presentation that Kieran is going to give us and then move it over to Q&A, conducting the Q&A will be myself as well as Veronika Dubajova, who runs our medtech research out of Europe. So with that, I'll turn it over to Kieran. Take it away, Kieran.

Well, thank you very much, Joe, and Veronika, and it's a great honor for us to get the chance to present here today. So GE Healthcare is a world-class health care systems business and a pharmaceutical diagnostics franchise with 47,000 employees around the world, serving 140 countries, through top-tiered manufacturing plants, and we have 9,000 service engineers supporting an installed base of over 4 million units. We reach more than 1 billion patients every year. After more than a year that's been incredibly challenging for our customers, market fundamentals are strong and improving. While public and private health systems are having to ramp up capacity to deal with the backlog of procedure volumes and health systems around the world see health care as critical infrastructure and they're striving to increase access to health care and provide resilience in the face of future challenges. In terms of our operational business, we continue to deploy lean methodologies and decentralization and has to provide greater focus on business performance, driving accountability, which has really helped, I think, in particular, with our past performance over the past year. We continue to grow and invest in precision health. COVID-19, we believe, changed the trajectory of digital and telemedicine and, especially when clinicians want to work remotely and more safely, that caused an acceleration of these technologies. And so we're continuing to see more use of AI and machine learning, which we think is instrumental in driving productivity. Look, our global scale and our reach played a huge role in the response to COVID-19 across the world. And I'm proud of the way we ramped up key products in imaging, critical care and primary care, whether it was CTs, mobile x-rays, vents and monitors. They all helped to fight in the pandemic and I'm very proud of all the teams that helped to achieve that for our business. So now moving on to the market we operate in. It's a $50 billion equipment market, growing low to mid-single digits per annum and, of course, a rapidly growing digital market. That growth is supported by demographic factors, aging populations, growth of the middle classes in developing world, and of course, an increase in the incidence of chronic illness. All of this creates demand for more hospital capacity and the persistent need for earlier, faster diagnosis of disease. And of course, care was delivered more precisely and more efficiently. We have market-leading positions in our businesses; in diagnostic imaging, which is a $19 billion market. We have a broad range where we offer CT, MR, molecular imaging, x-ray, mammography and image-guided surgery. And then ultrasound, $6 billion market where we have -- we serve a lot of segments, and we're a clear market leader. Life Care Solutions, which is -- comprises our anesthesia, respiratory care and monitoring business. And for both businesses, we have a great services offering. And that's a really important business for us with around $6 billion in revenue. We'll talk more about that later, which is, again, critical to providing uptime and productivity for our customers. And then we have our PDx business, where we serve 100 million patients a year with these products for diagnosis in neurology, oncology and cardiology. Our supply chain in these products is strong and affords us cost leadership. And with new developments in immuno-oncology. And for example, yesterday's news on a new Alzheimer's product, these PDx products are critical to our team of precision health going forward. Then our businesses are underpinned by digital. Our Edison ecosystem allows us to deploy applications right where clinicians want them in their workflow, aiding clinical decision support, enabling faster throughput and addressing burnout of physicians. Turning to the next slide. I'm proud of the strong performance we've achieved in 2020 and in the first quarter of 2021. We grew revenue and margins and improved cash performance, and that momentum is continuing. The market fundamentals, as I mentioned before, are strong and improving. And we're confident we'll achieve low to mid single-digit revenue growth this year, driven by improved commercial execution and steady services growth. We are seeing procedure volumes increasing contributing to the rebound of our PDx business, and we see sequential market growth in imaging and ultrasound. We expect ongoing recovery as the vaccine rollout accelerates. China is a strong market for us and with over $2 billion in revenue and 5 manufacturing facilities, we played a key role in the pandemic response in China as they built out fever clinic capacity. We see continued momentum and maintain strong investment in localization there to capture that market and compete with the domestic players. We are increasing our R&D investment across the portfolio. We launched 40 new product introductions in 2020, and we expect to do more than 70 this year. 40% of our 2020 orders were from products introduced within the last year. Most of these NPIs include embedded AI and digital applications, which sit on our Edison platform, and we expect Edison-powered apps to increase more than threefold in 2021. At the same time, we continue to drive margin expansion, as you can see here, through variable cost productivity and structural cost down. Our implementation of lean has contributed to operational improvements and free cash flow growth, and we see free cash flow conversion at more than 100% in 2021. Looking ahead to '22 and beyond, we continue to see low to mid single-digit market growth, underpinned by the continued drive towards digital and AI solutions. And of course, we see many opportunities for ongoing value creation by operational rigor, smart investments and innovation. On the next slide, when I think about innovation here, we dwell on the theme of precision health, delivering more integrated, more efficient and more personalized care. Making this a reality requires the integration of clinical medicine and data science and applying advanced analytics and AI across each point of the patient journey. I'm going to share some recent innovative examples that you can see on the page here. In 2020, we introduced a great new product in our MR business, AIR Recon DL. This is truly a breakthrough, leveraging deep learning imagery construction technology. What that means is you get a much sharper image within 1/3 of the scan time. And as you can imagine, that delivers real productivity, reducing wait times and improving the patient experience, critical at a time when hospitals are dealing with backlogs for procedures. And then recently, we've unveiled a new handheld wireless ultrasound, the pocket-sized Vscan Air. It offers crystal clear images, a dual probe that enables whole body scanning and can be connected to a smartphone. We developed this product with over 100 clinicians around the world, so intuitive that they can pick it up and get it to work straightaway. I'd also like to highlight the launch of our latest Mural solution. Part of our Life Care Solutions business. Mural aggregates patient-specific data from disparate sources, such as monitors, labs and IV pumps and places that data in front of the care team regardless of their location. Thanks to our Edison architecture, we can scale this across the hospital or the health system, meaning clinicians can observe multiple patients and adhere to hospital care protocols. And then moving on to some of our new investment opportunities, organic and inorganic that support our vision of growth. Last year, we acquired Prismatic Sensors, a Swedish start-up. Their photon counting technology using deep silicon sensors has the potential to be a significant step forward and expand the clinical capabilities of traditional CT in terms of visualization of organ structures and improved tissue characterization and also potentially a low radiation dose. A second recent acquisition is Zionexa, a French biotech company with an interesting FDA-approved PET imaging agent called Cerianna. Cerianna is used in addition to biopsy to help inform treatment in patients with recurrent or metastatic breast cancer. We aim to scale this product and make it available to 75% of metastatic breast cancer patients in the U.S. by 2023, up from 25% today. With this acquisition, we are building a pipeline of oncology and neurology tracers to help physicians better personalize treatment. And then in summary, I would say, look, our global health care franchise overall is winning in attractive, large growing markets. We're leveraging lean to drive operational improvement and consistently deliver strong financial performance. And importantly, in partnership with our customers, we're striving to be a leading innovator, making precision health, a care that is integrated, efficient and highly personalized, a reality. I'm proud of our team and our momentum and I see the room for significant value creation through innovation, with opportunities to improve growth rates, expand margins and increase cash flow in 2021 and beyond. And with that, I'd like to hand back to Joe and Veronika for Q&A.

Fantastic. And lots of questions for me as well as from Joe, but I also wanted to remind the audience, you can submit questions either on the webcast window or you can e-mail Joe or myself directly, and we'll make sure we post this to Kieran. But maybe let's start off and I want to kind of -- I'm asking this question to every single CEO that I'm interviewing today, Kieran, which is, give me your best sense for where you think the broader health care environment is right now. When you think about elective procedures, health care utilization, how far off are we from the pre-COVID levels? To the best of your guess, I guess. And any big changes by geography? And when you think about the utilization pattern, what does that mean for your business as you think about second quarter and the rest of 2021?

Sure. And I've got my colleague, as you know, Helmut Zodl, our CFO, with me here, so he may well chime in on some of these answers. I'd say for a start, Veronika. We look at scans, the number of scans performed on our equipment and at the volume of PDx contrast agents and so on. We analyze that on a weekly basis. And we're pretty much back up to the baseline of pre-COVID, which, of course, is a huge recovery from last year. And especially in a business like PDx, where that's after a week-on-week volume increase, I mean, that's clearly very good for our business. No, there are geographic variations here. China has been unbelievably strong this year so far, our business is growing double digit. And then in Europe and Japan, what we're seeing is very strong engagement by governments to sort of invest in infrastructure and ensure that there's resilience in the system. I would -- it's the same for RCIS. And of course, U.S.A., there's a really very strong, I would say, momentum in that market at the moment, and especially, in imaging because these hospital systems are facing long queues of patients who have pent-up demand from last year. So we feel really very strong about the markets right now. I would say, Latin America is more difficult. Some of the Southeast Asian countries are a bit more difficult. There's political turmoil in many of those markets with places like Korea and Australia very strong. India clearly is going through the pandemic wave now, and that's an unsettled market. But for the main markets, U.S., Europe, China, very, very strong market conditions and stimulus being provided by Japan. So I would say that we feel we've got off to a strong start. We feel good about the rest of the year. Helmut, perhaps you want to provide more color?

No I think, Kieran, you summarized it well. I think maybe a little bit comment here, and I spent quite some time out with some of our customers. And I would say, given the shortage on some of the personnel that some of the hospitals are facing, so our solutions around productivity, especially on the digital side, I think, are really what is helping customers carry through these challenging times here when elective procedures are really backed up by a quite large extent. So I think that is quite important. So we've seen the demand really coming back very strong, which is great.

Okay. That's helpful. And I mean, that was going to be sort of my next question, which is when I think about hospital CapEx, which obviously is a big driver of your business in particular. I look at the fourth quarter last year, first quarter of this year, it sort of seems like everyone's back, right? And the danger with that is always we over extrapolate because you have a bunch of pent-up demand. So as you think about the second quarter and the remainder of the year, do you think sort of the strength and recovery that we saw at the beginning continues as we move from here?

I would say, of course, you also have to consider the effect of comparison to last year. So a lot of the time Helmut and I, when we're looking at performance, we're looking versus 2019. And it's still strong if you compare it to 2019. And so I would say over the medium term here, we see quite strong -- quite a strong market, quite strong demand and ongoing recovery because for governments, I don't think they want to be caught on the back foot again. We're seeing here -- if I take an example of our CT business, CT demand is way higher than we would ever have expected. That's a market that's up, I suspect, over 40% from normal. And that's because there are new applications, of course, for scanning patients and looking at lung conditions in patients who've had COVID. And I think, generally speaking, where you have products like that, that are being used to scan and screen. People never again want to be shorter by capacity. There's also another important point, I think, when you look at the overall market, Veronika, in the mature markets, some of that installed base right across the system is quite aged. The average age of an MRI machine in the U.S. market is over 10 years. And so in a situation where you're facing a backlog of patients, and there's demand for innovation in medicine and there's competition amongst health care systems, they are investing.

That's helpful, Kieran. And maybe we can talk a couple of categories because I think there were some real tailwinds to your business last year from COVID. Just briefly, I want to talk about ventilation. And I've had this discussion with some of your competitors in this space as well. Just kind of your thought on -- have we seen a sustainable increase in the ventilator market in your mind, given this kind of desire to be prepared for the pandemic? And then do you think you can generate a higher sustainable servicing revenue line from the installed base that's increased? Kind of how are you thinking about this market?

Well, first of all, Veronika, ventilator is a very small business for us. Pre-COVID, we had like around 10% market share. So this isn't significant in the scheme of things for us. The most important piece for us is what's happening in CT and the MR in monitoring because that's where we get the strong revenue stream following and our ultrasound business has been phenomenal at the recovery we've seen. And a lot of the new product introductions I've spoken about have been in ultrasound. And it's -- that's where we see like hugely encouraging signs, frankly, because that's bringing recurring revenue as well as the step-up. So having said that, we have seen, of course, a step-up for ourselves and everybody else again this year in the ventilator market. But that doesn't bring the same level of service attachment as our imaging business, for example. Helmut, do you want to add any color for that?

I think you covered it well, Kieran, thank you.

Don't worry, I am planning to ask you about all the other businesses. It's my next one. Don't worry. But the next one on my list is actually patient monitoring, which I think, this is one where I personally get quite excited about some of the opportunities here. It sort of seems to me like COVID has really changed the way hospitals are thinking about patient monitoring outside of the ICU. I'm kind of curious, would you agree with that? And when you speak to your customers, and this is probably a question for both you, Kieran and Helmut, when you speak to the hospital administrators, what do they want when it comes to patient monitoring? And how willing are they to spend the money?

Well, so -- and I want to draw a clear distinction between outside of the ICU and outside of the hospital. So clearly, we are very strong in the ICU with monitoring right now. There's not that much monitoring done outside in the wards of the hospital. So that's the first step for us, and we see a huge opportunity there, and that's where we're seeing a lot of expansion. And that's kind of the significance of products like Mural, that it starts to expand the footprint we can have in the hospital of monitoring products. And then, of course, you're completely right. As I've always said that our job is to get patients into hospital as quickly as possible if they have a disease, would get them out of the hospital as quickly as possible because that's how we get productivity and make sure they never return. And so the key thing here is to that we can have monitoring outside of the ICU into the ward. And then naturally, I think there will be an increasing market over time for sort of home monitoring. But that's starting at a low level, and I think that will be a very slow ramp over time. Now because of Edison technology, our platform, the fact that we are working with a lot of collaborators in the space, we intend to build on that over time and innovate so that we can do better monitoring of patients and leverage our knowledge and experience we have from monitoring to extend outside of the hospital, and we are working on innovations in that space right now.

Great. Kieran, maybe I'll jump in here. Just thinking about this sort of a bigger picture, do you think that COVID has really kind of changed the -- how hospitals are thinking about delivery of solutions? And then specifically, you've talked about R&D, whether it's today or at the outlook call back in March, just very curious just how you're thinking about that in the context of maybe some of the changes that have occurred because of the pandemic?

Well, Joe, first of all, I made the remark in the past. I've had hospital CEOs tell me they've made more progress in the first 3 months of the pandemic in digital than they expected to do in the next 5 to 8 years. Because all of a sudden, there's no choice but to do more telemedicine, more patient consultation over video. And of course, in core business for us, which is radiology, we had to make all the technologies available to ensure that scans could be read. And if you look at what we're trying to do with Edison and investment in the cloud platform, for example, it means that we can really deploy a lot of our AI applications in that cloud setting. So it's a lot more flexible. And as far as our R&D spend goes, we've continued to increase our investment in R&D. It's going to be increased this year by between 12% and 15%. And a lot of that increase in spend is going into digital. And Joe, fundamentally, if you look at this market going forward, there's a rebalancing between innovation in hardware and innovation in software and data and analytics. And there's no question about data science and AI and machine learning are going to play a very important role here. And that's why we are heavily committed to Edison. We have a few hundred applications on Edison right now. We continue to collaborate with some of the best clinicians across the world to ensure we can continue to build those applications. And we have incubators in place so that we can also foster some of these start-ups that can develop novel AI applications on our platform. So there's no doubt that this is a game changer. The trajectory of digital has certainly changed, and that's accelerating. And if you look at our innovations like AIR Recon DL, where you get a better scan in top of the time, I mean it's just that sort of leap forward is phenomenal, frankly.

So Kieran, I'm listening to you today, I mean, you sound very bullish. And I know that you just -- you gave us your kind of medium-term outlook just recently in March and just kind of talking about growth this year, maybe flat to up next year. But it also sounds like there's just a lot of -- I don't want to say necessarily pent-up demand, but a lot is happening within the industry that could drive better growth. I guess maybe to the extent you maybe can comment on the kind of like medium-term outlook and whether there could be some maybe upside to the growth targets that you've given us just in the March time frame.

Joe, look, I'm going to defer to my colleague and friend Helmut here. I would say we feel very good about the business. We feel very good about innovation. We think the market is robust. I'm really pleased with the operational performance. And you saw that in our margin expansion and our cash flow. And so we have confidence. But I think as Helmut will point out, we are -- if you look at growth rate per se, we finished 2020 with 2 very strong quarters at the end of 2020. And so we also feel that we have to be sensible as we project forward here. Helmut?

Yes, Kieran, I think -- as you said, I think, so we are very confident. I think where the market is currently, as you -- as you've seen, we had 3 strong quarters in a row here. And I think we will continue to perform in line or better than the market as we go forward. Those single-digit growth rates we expect to continue to perform at that level and demand is strong as Kieran said earlier in CTs, in other -- other modalities. And specifically, the digital side, which I think it's not only about the hardware piece, but also what type of productivity those digital offerings can bring to our customers. So given the shortness in staff that some of the hospitals are seeing, so that innovation around digital and productivity improvement is really what is driving in the market, and we are right there where we want to compete.

I guess, maybe following on to that, Helmut, the point on digital, your services business has increased its penetration. I think you've got roughly a $17 billion backlog. It's almost 70%, I think, of your business today or your backlog today. I'm just curious, how is digital helping you increase that penetration? And then specifically, where are you seeing the most demand for your services business?

Right. So maybe I'll give you a couple of examples here. And then Kieran, please jump in as well. I think so give you 1 example around Command Center, for example. So Command Center is really trying to manage the workflow within the hospital. So how can the hospital -- at any point in time, we really look at what is the bed utilization and everything around that one. So that's really, I think, helping significantly specifically now as there is backlog on procedures to manage that whole workflow accordingly. And then as it goes to our services business, it's also important that we have the right timing for our services technicians there. So we optimize. We don't really disrupt the workflow in the hospital, so make that whole process much more efficient, that's how we look at that, really. Kieran?

There's another key point here, Joe, which is -- and it goes back to what I said about the age of the installed base out in the market. One of the features of our services business right now is we're seeing a huge uptick in the interest of upgrades as opposed to brand-new installs. And so if you think about the economics of that, what I said before about the balance between hardware and software, if we can walk into a 10-year-old MRI machine and do an upgrade pack and provide better analytics and software that really sort of renews that machine, the economics of that for our customer are phenomenal. And so that's driving a huge amount of interest in the -- in our service business. Plus very deliberately, we, of course, are always trying to increase the attachment rate of service to our equipment and not just in imaging, but right across our business in ultrasound and LCS. And we've been quite successful in the last couple of years in increasing that attachment rate. And that goes beyond sort of the break/fix contract we've looked at before. This is about managing a whole fleet so that we get a better uniformity, better software, better cybersecurity and ensuring that the customer's productivity is absolutely optimized.

And maybe I can just pick up on a couple of the things that you touched upon, Kieran. I guess the first one is just R&D. And would love to get a little bit of a preview from you, what are some of the things that are really exciting in the pipeline. You mentioned Prismatic in your prepared remarks. Obviously, there's photon counting CT. Some of your competitors have moved down the route of helium for MRI. There's lots of other stuff that's happening on the imaging side. So maybe help us dream what are some of the things on the drawing board that we should be excited about coming out of the GE business over the next 2, 3 years?

Well, so we're very excited about photon counting. And we are the only company to have this deep silicon technology as the basis for photon counting. And deep silicon is a critical differentiator here because it can absorb so many photon, you guess that from the name photon counting, it absorbs a lot of photons and high-energy photons to get this very high-quality image. And so the -- that's clearly an important investment for us. We continue to drive all the stuff I've been speaking about in digital. So we're spending a lot of money on Edison and the platform and ensuring that every single piece of equipment has embedded AI, and that all links to Edison. And so then I would say, in the rest of the imaging business, we've just launched a new product in our molecular imaging business. And we shouldn't forget the PDx business. And in terms of being a patient investor, we are actually pretty excited about the Biogen news yesterday because we had the Vizamyl, which is our amyloid diagnostic approved, it must be back in 2014, I think. And long behold, this is the first product that can -- where it can be a companion diagnostic. So we're actually pretty excited about that. So that's -- effectively, that's an investment we made that's on the market now. We want to do many more things like that, especially in the space of immuno-oncology. And so our PDx business, just to go back over that, about $2 billion in size, high margin, it's -- obviously, it's a very linear business, we can -- and we've been very strong in the sort of CT/MR part of that, but as we do more molecular imaging in neurology and oncology and the key trick here is to patients who are going to be suitable for these quite expensive immuno-oncology drugs. And so from that point of view, clearly, it opens up a whole new vista in terms of working with the key academics or trying to do research. Pharma companies who are trying to launch immuno-oncology products, but they have to go and find patients. And so that's the type of -- that PDx business is a space where we're really very excited to invest.

Okay. That's helpful. And it sounded like the other bit that you're excited about is China from a geographic perspective. I guess, tell me what you're seeing on the ground there and I know there was a ton of excitement about the quota increasing a couple of years ago and then it kind of all was a little bit slow going. Do you think we've entered a new growth stage for the China market?

There's no question about it. What we've seen here over the past year in terms of the investment in Beaver clinics and just getting infrastructure expanded right across the geography of China, it has been amazing. And we've always had a very strong imaging business in China. And what we -- we see huge potential to grow businesses like monitoring and ultrasound, where we've had. So we have a lot of headroom to grow into markets like that. And I think the market potential there is really huge. And so more important than anything, we have a phenomenal new team in China. We appointed a new general manager, Yihao, 2 years ago. He's really top-class and he has built just a great team. We have 5 manufacturing facilities on the ground. They are all really high quality. And as you think about supply chain disruption, that's going on everywhere around the world. Right now, more or less, we're self-sufficient for many of these products in China, which we think is a huge advantage.

Okay. And maybe kind of stepping away and moving to bigger picture, I'd love to get your thoughts on how you think GE Healthcare fits into the broader GE organization. You knew this question was coming. If I look at some of your competitors, which I cover and follow myself, obviously, they've moved into independent entities, very health care focused. Kind of where do you see GE Healthcare? And I guess what are constraints that you see or maybe don't see on the business from being part of a bigger GE organization?

Well, look, I don't really see -- we don't see constraints. I mean you can see from the performance of the business. We're doing very well. I think we've really benefited from -- frankly, we've benefited from some of the home movement of lean right across GE over the past 3 years. And so I really think we've learned from being part of the business. And look, for Helmut and myself, really our focus day in, day out is organic growth, margin expansion, cash flow. And look, if we run a great business, all the -- we have all the options in the world open to us, we believe, and it's up to Larry and the Board. If we give them the optionality, and obviously, we know that they'll make the right choices at the right time.

So picking up on that last point, it wouldn't be a GE conversation if we didn't ask about free cash flow and margins. So maybe I'll -- we'll end it on this line. Clearly, GE Healthcare was a big contributor to free cash flow last year and is expected to continue to be going forward. Kieran, you guys have talked about a lot of your lean deployment, your ability to improve working capital, specifically inventory turns. I guess that the question is as we look out in the next couple of years, why wouldn't GE Healthcare continue to convert greater than 100% net income like it had last year? And what opportunity do you see there from an inventory perspective that you're really honing in on? Like where are we in terms of your ability to continue to improve the business?

And we're committing to more than 100%. Helmut, why don't you take up that?

Sure. Thanks, Joe. I think it's a great question. So we really call it here at GE Healthcare, cash is king or cash is queen, which is really very, very important for us. And things -- to me, it's really the ultimate measure of sustainable business performance. So we have a very, very high focus on our cash flow. And Joe, as you mentioned, inventory is probably one of the key drivers there. So we've implemented, I would say, a very granular management system, the way how we operate now on our cash flow, really looking at all the key levers around working capital. And we are very confident that we will deliver in free cash flow performance our guidance above 100%. And we are focused to maintain that as we go forward as well. So it's really, I think, very critical that we look at how can we improve that working capital performance. As I said, inventory, our AP terms as well as AR collections, and also linearity, I think, in our business is something, I think, that we can work on to improve as we go forward. So overall, I think we are happy where we are. We had good conversion in Q4, good conversion in Q1, and we want to continue really on that journey. And lean is really, I think, a key tool for that, both on the inventory side, on the order side and as well as on the supply chain side. So we're really very excited about the opportunity here.

That's great. Great to hear, Helmut. So Kieran and Helmut on behalf of Veronika and myself, thank you for participating at our Global Healthcare Conference. Always great spending time with you and hope you have a great rest of your week.

It's a great pleasure. Thank you very much for hosting us.

Thank you and stay safe.

Thank you.

All the best, Joe.

Bye-bye.