General Electric Company (GE) Earnings Call Transcript & Summary

Okay. I think we can go ahead and get started. But welcome, everyone, to another session at the 20th Annual Morgan Stanley Healthcare Conference. I'm Drew Ranieri, one of the medical device analysts here. And I'm delighted to be joined by Peter Arduini; and Helmut Zodl, CEO and CFO of GE Healthcare. So exciting news with the spinout coming up in 2023. Before we kind of get into that, unfortunately, a quick disclaimer, but please see the Morgan Stanley research disclosure website. If you have any questions, please reach out to your sales rep. But Peter, Helmut, thank you for being here today. And maybe it would be helpful just to give some introductory comments, start at the 10,000-foot level of GE Healthcare and just spend a few minutes to introduce the company, the markets, where you're playing, and maybe remind us kind of what the spinoff -- spinout milestones kind of look like over the next few months.

Yes. Great. Well, first of all, Drew, thank you for having us here. We're very excited to be here. Yes, we had some great news this morning. Some of you might have seen the press release that's out there, kind of 4 pieces of information, that to spin -- our official week to spin out as a separate company will be the first week of January in 2023. Second piece is we announced our Board of Directors, you can find that online, 10 of us total. Larry Culp will be the Nonexecutive Chair, myself as CEO and 8 just fantastic other directors. I think as you'll see as a focused health care company, a significant amount of health care experience, technology, finance, also portfolio as well as some deep expertise in the Internet of Things capability. So I think we've got a really great group together. It's quite a diverse group as well, and obviously, I've had the privilege to get a chance to meet all of those. We also announced that on December 8, we're going to do an Investor Day here in the city. We haven't really given the details of a time yet, but we'll talk more about that in the coming weeks. And the last piece, we've already communicated though, is that we'll be trading on NASDAQ when we do come out with our call sign. We didn't want to make it too complicated, GEHC. So we were able to lock that down. So look, I'll just start out, Drew, a little bit of the framing of the company. We are a company that does a lot to impact patients' lives. We touch so many different disease states because of the devices that we make and play a really instrumental role in diagnosis as well as into therapy. And we play a significant role in the workflow of most providers around the world. Over 55% of our sales roughly are outside the U.S. Half of those are reoccurring-type revenues. And we focus on innovation to make that difference. We talk a lot about precision health. You'll hear more about that on a go-forward basis. And what is precision health? Fundamentally, the point is that all of this are slightly different. And the more you can be precise in the diagnosis, knowing those nuances, the better diagnosis, the earlier the diagnosis that can occur for you, that translates in a more customized, personalized therapy approach as well and then also, a specific way of monitoring you and managing you, particularly if it's a chronic disease. And so what does that ultimately mean? It means that you have better outcomes for patients earlier when you catch the disease state earlier. It also means, for the system, the more precise you can be, particularly with more expensive therapeutics and other devices, it can be more cost-effective because who you choose can directly benefit from that. You can be that much more precise. So at a high level, that's the focus that we have. We have a purpose statement that we talk about, which is about creating a world that has no limits in health care. And that's an important piece internally to drive what we do because we can touch many cases, both the outcome side as well as the productivity side within their system. So if you think about the products and services that we do, we're roughly in the $18 billion range of revenue. We have about 4 million installed base pieces of equipment around the world. Many of those are already connected devices. We have a large service organization that not only does break-fix, but offers other types of digital services as well and devices, such that you're probably quite acquainted with, MRI, CT, ultrasound, X-ray devices, advanced X-ray imaging, such as surgical C-arms, interventional cardiology labs, interventional labs used in vascular surgery, we play a leadership role in, as well as other critical products that are used in the hospital systems, such as monitoring and anesthesia, just to kind of name a few. And our focus with coming out, and this is one of the exciting parts I think about the spinout, is we believe we have a company here that can be a consistent mid-single-digit grower. I mean at its core, that's what's, I think, very important here. There are a lot of interesting trends coming out of COVID that actually are favorable to the devices that we make, on top of the aging population, you're all aware of around the world, and what that impact is. As you translate more chronic disease or more follow-up on musculoskeletal or cardiovascular oncology, it means more procedures and advanced capabilities of a lot of the things that we make. And so that being said as well on the top line side, we've invested in the last few years more in R&D. We're seeing more products come out. That's going to feed the near-term growth as well as good commercial execution and the ability to capture more value in the marketplace. And then the second piece is we believe that we can grow our margins over time as well to be a high-teens, 20% margin player. Some of that comes directly from what I just mentioned because of the higher gross margins we're going to be seeing coming out of our products. That's a double benefit lift, one of the great things, obviously, about a med tech business. The other aspect is we've got great opportunities to kind of optimize the business, how we think about rooftops, how we think about markets, our portfolios that we're in as well as just fundamental cost management and where we put our marginal dollar, and which is something Helmut and I have been spending a lot of time on, just thinking about that as our future allocations. So what's that all come together on, Drew, it really comes into, I think, it's a great value-creation story, where we can be a consistent grower. We've got innovation and market dynamics that are going to continue to push that. We can also drive margins with it. And I believe, for investors, the spin really unlocks a lot of the value that's inherent in what is GE Healthcare.

Got it. No, that's really helpful detail. And I want to ask about the macro, but before I do, just maybe about the precision health and you were talking about systems versus products. I mean GE covers so much, for 4 million devices, a lot of that connected. Is the portfolio today capable of doing the precision health, like from start to finish? And maybe this goes into like an M&A question down the road, but where do you need to kind of fill those gaps from a portfolio perspective?

Yes. I mean look, everything we do at some level is getting more precise. Is it precise enough to solve a specific disease state issue? In some cases, yes. I mean there's examples in prostate cancer where between the diagnosis procedure and MR, the handoff and follow-up of therapeutics integrated to molecular imaging, we're much deeper. Other areas, not as much. And so as you lay that map out and think about what products you have across disease states, where are some of these growth areas that we can contribute, and we're in the midst of doing that. I think it's one of the really exciting parts for us, is we think more about care areas or disease states. It also opens up a map of how you would think about tuck-in M&A, partnerships as well, how do we work the ecosystem to grow broadly. But we're deeply involved in all of our modalities at some level of precision. In fact, I think one of the really interesting things is, is just how much of our products now have embedded AI or machine learning, which, in many cases, is a proxy for more precise capabilities based on real data and automation to kind of simplify the use for the user.

Got it. Great. And maybe just on, on the topic on everybody's minds is just the macro environment. Again, you touched so many areas of the hospitals, different geographies, different specialties. But there's kind of been the ongoing debate about hospital customers' concerns about capital spending and some companies are talking about elongated cycles. So what is the GE Healthcare view here? Maybe what are you seeing in the field? And how are those conversations going with customers and their concern about operating budgets translating into capital budgets?

Yes. Look, coming out of Q2, and we look into the second half, we really haven't seen any significant, at all, pullback on capital spending. In fact, we're expecting acceleration here in the second half. I mean we've got a healthy revenue base. Our backlog is quite solid. And also, our ability to actually see what the order book looks like continues to advance. So we're not seeing any of that at this point in time. Obviously, around the world, the dynamics are slightly different. I think China, as an example, coming out of COVID, we're seeing more acceleration just based on that market being a little bit choppy. Europe is even slightly different post-COVID. There were a lot of investments made in outpatient centers and things post because of the learnings that came out of COVID, and so we actually have quite a business book that's going to grow and carry well into '23 for our European growth. And in the U.S., it's quite healthy. It's obviously a little bit different market, but we aren't seeing any types of pullback within capital. There's clearly -- our customers are keeping an eye on their cash flow and how that plays out. But I think as you know as well, there's all different types of capital. Meaning if you're opening up a new facility or it's maintenance capital, a lot of what we do, particularly in our core imaging world, actually increases productivity. And so just to give a specific example, we have a module called AIR Recon DL for MR. And the short answer of it is you can take a 15-year-old magnet that's installed in your facility, upgrade it with this, get state-of-the-art image quality. But in today's environment, it's even more important, 50% more throughput. So for those precious resources that you're struggling to get or are expensive, you can actually get that much more throughput during that window of time. And customers see value in that and are investing.

And just maybe a follow-up question here. You're talking about an acceleration in the back half for capital. I mean as you're kind of looking at the U.S. specifically, I mean, are there specific pockets of capital that are seeing that acceleration or seeing that demand a little bit more strongly coming out of the pandemic and more into an endemic phase?

Yes. I mean Helmut, you can jump in. I think we're -- our core imaging, to be able to enable more throughput through the institutions, our CTs, our MRs, our core -- actually -- our ultrasound business as well for different reasons across different disease states, all of those are actually accelerating here as we look into the back half.

Got it. Maybe a question on utilization. This is selfishly another med tech debate that's kind of going on with -- you have MCOs kind of pointing to lower utilization and med tech companies are saying everything is kind of normal, to pre-COVID levels. But I mean, again, you're touching so many areas of health care worldwide. Just maybe shed some light on what you're seeing from the hospital utilization trends or anything you can kind of provide on an overall procedure environment.

Yes. As you know, we don't specifically track procedures at the same level, say, as an implantable company. But particularly in our pharmaceutical diagnostics business, we make the vast majority of the injectable pharmaceuticals for imaging and molecular imaging. And so we see that. And I would tell you, I think we still see increases in demand in what we're looking at. We know that there are significant backlogs to get studies done in many European countries. Some of that is tied to lack of equipment to access. And what I hear in the U.S., in some cases, there's still a lot of pent-up demand, but it's managed based on the amount of labor that a lot of the providers can bring in. So I think there's still a reasonably healthy amount. Now is it pent-up? The discussions of are there things coming post-COVID that people now with diseases are caught up to the procedures that they missed. Are they sicker? I don't know if we've got that type of detail around it, but we clearly see that the procedure volume is continuing still to grow from our perspective.

All right. And you kind of touched on this in your prepared remarks, but I think GE's market opportunity is somewhere around $75 billion, give or take, at least that's how you kind of framed it. And I mean, to grow kind of at your [indiscernible] means adding about $1 billion a year of incremental sales. So maybe just help or walk us through or walk investors through GE's kind of growth algorithm, a little bit more detail, maybe what you expect from a segment level, if anything. Or any kind of details, directions that you can provide?

Yes. Let me start, and Helmut, correct me if I miss something here. I would say, so like to your point, [ $80 billion ], if you want to grow mid-single digits, whatever $900 million to $1 billion-plus something, that's your calculus, right? So I think the first part starts with, from a growth standpoint, the investments that have been made over the past few years in R&D. And we're beginning to see the fruits of more and more products coming out to the market. I can think of, for an ultrasound, 6 or so, and imaging, multiple and PCS as well. So probably 10 to 15 products that could be $100 million contributing products over the next few years per year. So that -- not all of those will hit at the same level, but having shots on goal with a product portfolio like that of new products that are differentiated, that's a big deal. We've been fortunate that we've been increasing our win rates in the marketplace in the last few years. And so that translates with the largest service organization, really among any of the other peers out there, into higher capture rates with service revenue as well. So that would be a second -- a piece of it. And then just, look, good commercial execution. I mean I'm really focused with our teams on making sure we get the very best within the organization, how we think about win rate, visibility, how we think about our prospecting capabilities. And with a lot of that focus, we've been able to advance our capabilities, getting price in areas that we honestly haven't been able to get price in the past. And so that would be the combination. What else, Helmut, would you add?

Yes. Pete, I would just add, I think, and you mentioned that the service revenue, but the element of recurring revenue that we have in our business is about 50%. So we need to think about half of our revenues are recurring. This is anything from break-fix speed, such a service in the business. And the increase in volume on the capital equipment side is really helping that pull through over time, but also the PDx business or other supplies and also the digital business, which is very important, that it really brings all of our products together and links it, on the digital side, into it. Those are really key drivers. And one important aspect is really innovation at the end of the day, I think, in all of this. And I brought a product here. We couldn't bring a CT because we wouldn't fit in here. But I brought a small product, which is our Vscan Air. So this was a product -- it's a mobile ultrasound that wirelessly connects basically to the clinician's phone and is integrated into the back end of the network, into the hospital. So this product, we announced about a year ago, and throughout the year, I would say it took a leading position both in terms of volume and also in terms of price in this category. So this category didn't exist for us before. So within a year, we made this quite a product that is really leading in its space, which we're really quite happy about. So this is a level of innovation that we look at, yes.

Yes. And just to play off of Helmut's Vscan Air is this is a good example about expanding markets. So we are the leader in ultrasound worldwide through cardiovascular as well as in OB/GYN and other areas. This is really considered point-of-care ultrasound. And so as you can imagine, a lot of sonographers or such would like to use this device. But where this device really plays out is in the hands of a primary physician, right, so across town at many of the med schools that they will be teaching how to use this. And so instead of going to your stethoscope first, you go to Vscan Air. And then creating that digital ecosystem that those images acquired at the bedside or the clinic, then come and are integrated into a digital structure in that institution. So when that patient comes in and you're on a more sophisticated system, all that is linked. And that's one of the advantages, I think, that a GE Healthcare brings in kind of solving some of these ecosystems issues out there. And we can scan you later afterwards.

Yes. I was going to ask if every analyst gets to have one of those. But no, it's fascinating technology. And just as you're kind of thinking about digital and maybe kind of shifting sites of care, I'd be curious how you're thinking about monetizing digital assets and really, how key -- or how critical of a growth driver will be, I don't know, moving to physician offices or moving really kind of outside the hospital as you're thinking about your mid-single-digit growth opportunity down the road.

Yes. Yes. So I think there's -- I would unpack that in kind of 2 questions there. I'd say digital assets and then how do we think about it from critical care, out into other alternative sites of care. So on the first piece, as Helmut said, we do about a little over $1 billion today of software sales. Some of that has a subscription component to it. Some of that is transactional. But all of it has very high margins, is growing at a higher rate. And so our focus of all of our devices being smarter and integrated with those capabilities, so that, that mixup of the products brings higher margins and growth because of it, is a big focus. We think of -- when we think about that ecosystem, kind of think of it as kind of [ D3 ], so smart devices, a focus on how they integrate into a disease state and then digital connectivity between the 3, smart device, integrated disease state and then integrate the digital around that. And so many of our devices coming out today already have significant amount of artificial intelligence and machine learning algorithms built within that to make the device more capable. Many of them already are connected. How do we actually bring other data in and connect them between modalities is a key part. I think one of the big transitions that's an important one on how we think about patients and who we support going forward is this idea of care pathways or disease states. And again, back to my earlier example, if you think about prostate cancer as a journey, from diagnosis to therapy or breast cancer outside of the obvious reasons of a man or a woman, the different technologies, the different products throughout that way, how they interact, how the data hands off, how you integrate multimodal data into that, we think we are in a very good position to play a significant role. We don't think we're the complete answer, which is why our platform, the Edison platform, is an open platform for multi-vendor integration. There's very few customers anymore that just buy from one vendor. And when you get into broader domains of disease state, it takes a village, right, of many different companies to do that. And so that's our approach and via either subscription or SaaS models down the road, we have quite a few of our products that we're moving in that direction. So as Helmut said, 50-some percent reoccurring today. In a future world, you're going to see that reoccurring revenues increase as we evolve the model. To your other point, Drew, on moving out into the other areas, many people -- I'm sure people in the audience have an Apple Watch or a Fitbit or something, and you're collecting all this great data. You might have had the experience, you go to your doctor, you get all this longitudinal data. And the doctor says, "Let me look at your blood pressure today and a couple of other things." And they don't look at the data. Why is that? Not because they don't want to. It doesn't fit into their workflow. So what our view is on that type of a health approach is how do we work with the care structures today and bring devices that can be used in the home or alternate sites, but ultimately connect back into how diagnosis, how therapies are delivered. So I mean, I'll just give you a simple example. We did a partnership, just recently announced, with AliveCor. Some of you may know the 6-lead ECG system that you can use at your home to check. There's other products that are out there that do this, but we're going to integrate that into our MUSE database. MUSE is the largest ECG database in the world, used by cardiologists all over. Integrating that data back into MUSE, so that if you're working with your cardiologist and you're on a 12-lead back at the institution, you go home, are they checking you for AFib and arrhythmia, you can check. That data then gets directly integrated in. It's part of that care pathway. Economically, if they don't know, they send you out and say maybe we're going to put you on a couple of meds because we can't tell. So that's an example of more precision in an alternate site and digital integration to add value for a caregiver. And so those are just some of the examples that we see because of our position and our scope and scale of what we can bring to patients.

Got it. Great. Maybe to shift gears to margin expansion, I think, in the way that you kind of framed it, is high teens to 20s kind of operating margin. You're kind of in the mid-teens right now. But maybe what levers are kind of in place to drive margin expansion? You talked about recurring revenue to some degree. Is there a minimum commitment of what you think you can do annually? And just to toss in another one, I mean, obviously, we're dealing with the macro environment. So can you help frame kind of what the impact has been from maybe inflation and supply chain? And if things are stable or improving into the back half of this year and then next, how quickly can GE Healthcare really see recovery in the P&L?

Yes. So maybe I'll cover that one. So when you think about it, so we obviously have seen implications, not only on the margin performance in the first half, but as Pete said earlier, we are really focused on the top line growth, so mid-single-digit growth and the margin expansion into the teens and into the 20%. So what are really the levers we are pulling here to improve that margin? I would say it's, first and foremost, it's about innovation and growth, which is critical. And I'll show you one example here, with Vscan Air, and there's many of those out there. And the investment that we do in R&D is one lever for this. The second element, I would say, is also around pricing. Obviously, we've all seen in our industry the impact from pricing into our business. So that's really something that we have been improving on. And in the second quarter, actually for the first time in quite a long history, we have seen positive price flowing into revenue into our performance. So we feel really good of how we move price forward, again, works for both our customers and ourselves. And thirdly, I would say, it's really about the lean and optimization, which are [ we have this full ] mindset we have across the company, and it starts not only at the development side, the factory floor or the G&A, it's really across the entire activity that the teams are doing. So I can give you an example here, for example, what we are doing for our platforming. So using platforming to have less parts, using more common parts across the portfolio is quite critical, when in supply chain, where we are changing from shipping basically through warehouses or sometimes even through multi-warehouses, going for a direct shipment to our customer, which improves again, productivity, improves speed for our customers. So these are really the activities we are taking. And then the last one I would add is G&A. So reducing G&A spending and shifting G&A spend into R&D, again, to fuel the growth of the overall company and the top line. So these are really the key elements that we look at to drive those improvements. It's a little bit too early to talk today about commitment on margin expansion. And as Pete said earlier, we have our Investor Day coming up here, which I will talk and go a little bit deeper on that front. So we'll release that for that time.

You had to ask though.

Yes. But I'll ask another one. But that 20%, I mean, is that the end goal? Or is there kind of this is the first leg in the GE story as a separate company?

I mean I think we'll see as we evolve as a company. I think, obviously, the [ 17% and 20% ] would be quite a strong performance. I think as we think about how we would fund growth, the growth probably has a stronger prominence than the overall margin, but both of those are very important for us to be able to gain. So we'll see. I think as -- if we are successful with our goals to become a much larger digital player integration, I think there's a significant amount of opportunity beyond that when you think about what that actually means. And so that's further down the road. But I think it's one of the reasons that we're all excited about what GE Healthcare can be in the future.

Got it. And maybe just to come back to M&A for a moment. But maybe how are you thinking about strategic financial criteria as you're approaching M&A tuck-ins versus more transformational deals? And then kind of Peter, I mean, in your past life, there was a lot of pruning and portfolio optimization. Just how are you kind of thinking about that aspect for GE? Are you happy with all your children?

Yes. Yes. My personal children are very happy [ with it, just to say ]. So the first part is it's kind of early to kind of talk about -- we'll talk more about capital structure and how we're thinking about it when we get to the Investor Day in detail. But look, philosophically, M&A is an important vehicle for a company like us. I think we've got a great ecosystem that we work in. It's one of the great parts about med tech that so many smaller companies, are incubated, come up through. And when you start having more of these longitudinal views about either partner or acquisition, even if you're not buying, how you plug those in to solve a bigger issue, again, we think we can play a major role in it. And so we're probably more of a tuck-in type of a viewer. We've got lots of things to do. But I think M&A is going to be always an important lever for us. And I think, again, broadly, partnerships, distribution agreements, are also going to be on that list. I talked about this idea of multi-vendor approach. We want to demonstrate that you can make good money as a partner that we don't own as well. And I think that's an important distinguishing part about how we want to think about what platform means and how to integrate it in. On the portfolio, I'm just a big believer, a little old school on the fact that you got to constantly look at the portfolio and pressure-test it. So what's growing, and the things that are really growing, are you giving them the monies and the feed that they really need? Should we put more there? Should we squeeze other areas here? Is this asset better in someone else's hands than in our hands? And so we're looking at all those things. And I'd say we have a great portfolio, but expect to see in the future that we will probably take a different view and as we move forward on what we want to bring in and maybe some things that we'd shuffle around. In the near term, it's more about the products that we have, simplifying them for our sales team and our customers. Like a lot of med tech companies, we have a lot of SKUs. And if we had 30% less in a given area, we would manage the mix of the gross margins higher, and we would simplify the sales process. And we're doing that. And because of that, we're seeing, I'd say, greater productivity with our sales teams, and I'd say a little bit higher win rate.

Got it. Unfortunately, we would have to cut it right there.

Okay.

[ We just ran out of time ]. But Peter, Helmut, this has been a great conversation. And thanks for kind of introducing us to GE Healthcare. And I'm looking forward to December 8?

December 8, and I hope that all investors and analysts will be able to make it. So thank you very much, Drew.

Thank you.

Thanks, everyone.