GE HealthCare Technologies Inc. (NASDAQ:GEHC) Q1 2024 Earnings Call Transcript

GE HealthCare Technologies Inc. (NASDAQ:GEHC) Q1 2024 Earnings Call Transcript April 30, 2024

GE HealthCare Technologies Inc. misses on earnings expectations. Reported EPS is $0.815 EPS, expectations were $0.9. GE HealthCare Technologies Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to GE Healthcare’s First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note that today’s conference may be recorded. I will now turn the conference over to your speaker host, Carolynne Borders, Chief Investor Relations Officer. Please go ahead.

Carolynne Borders: Thanks, operator. Good morning and welcome to GE Healthcare’s first quarter 2024 earnings call. I’m joined by our President and CEO, Peter Arduini; and our Vice President and CFO, Jay Saccaro. Our conference call remarks will include both GAAP and non-GAAP financial results. Reconciliations between GAAP and non-GAAP measures can be found in today’s press release and in the presentation slides available on our website. During this call, we’ll make forward-looking statements about our performance. These statements are based on how we see things today. As described in our SEC filings, actual results may differ materially due to risks and uncertainties. And with that, I’ll hand the call over to Peter.

Peter Arduini: Thanks, Carolynne and thanks to all those joining us today. We’ve made good progress against our key priorities for 2024. In the first quarter, we delivered margin expansion while continuing to invest in innovation to help solve the evolving needs of customers and patients. Healthy backlog, orders growth and positive book-to-bill position us for accelerated growth for the rest of the year. Today, we reaffirmed our 2024 guidance which Jay will discuss in greater detail. Now I’d like to highlight some milestones that illustrate our commercial execution. We’re making steady progress with large multiyear multi-modality deals across equipment and service, resulting in incremental share gains. In the U.S., we secured a 10-year strategic alliance with OSF HealthCare to deliver technology, digital solutions and equipment management services to help clinicians improve care delivery and patient outcomes.

We also extended our relationship with Hartford HealthCare to run through 2030. As a trusted partner, we’ll continue to work together to optimize their imaging fleet and provide specialized support from our GE Healthcare service technicians. Our care pathway strategy is progressing well, enabling commercial growth opportunities and introducing us to adjacent markets with attractive growth potential. For example, last week, we announced the expansion of our collaboration with Elekta to enhance their radiation therapy planning offerings using MIM Software which we acquired in April. In Spain, we announced the first global install of our Allia IGS Pulse system which is our market-leading cathlab design that we expect will be a growth vehicle in this important interventional cardiology market.

As we look to 2024, we see a growing funnel of opportunities for products like our IGS portfolio. Our strategic initiatives and trusted partnerships are taking hold and position us well for a future where health care is more connected, efficient and patient-centric. Looking ahead, our outlook reflects a strong global procedure environment, particularly in the United States and customers continue to be optimistic about capital investment and market normalization. These tailwinds, combined with our focus on execution, give us confidence in our ability to deliver on our commitments for 2024 and our medium-term goals. Now, I’ll pass it on to Jay who will take us through the details of our first quarter performance. Jay?

Jay Saccaro: Thanks, Pete. Let’s start with our financial performance on Slide 4. For the first quarter of 2024, revenues of $4.6 billion were approximately flat organically year-over-year. Recall, this quarter’s results followed the strong double-digit growth we delivered in the first quarter of 2023 which benefited from easing supply chain conditions and strong China stimulus sales. Organic orders increased 1% year-over-year, primarily driven by strength in the U.S., with orders dollars continuing to outpace sales, we generated a solid total company book-to-bill of 1.03x versus 1.01x last year. We also exited the first quarter with a healthy backlog of $18.7 billion. Adjusted EBIT margin was 14.7%, up 50 basis points year-over-year, with improvements in both gross profit margin and SG&A.

First quarter adjusted EPS was $0.90, up 6% year-over-year, driven by improved margins and lower interest expense. And we generated $274 million in free cash flow from improved working capital. On Slide 5, let’s take a closer look at total company revenue performance for the first quarter. Organic revenue growth was approximately flat versus the 12% that we generated in the same period last year. On a reported basis, service grew 2% and product revenue declined 3%. Product performance was impacted by the difficult year-over-year comparison. Longer term, we see good growth opportunities in both product and service, including greater service revenue from a larger installed base. China revenue declined low double digits given the stimulus that benefited the first quarter of 2023 as well as anticorruption impact in the quarter.

EMEA sales were up slightly and sales in the U.S. and rest of world were flat with prior year results. Turning to Slide 6 and the progress we made in the first quarter on margin initiatives. Adjusted gross margin expanded 120 basis points as we benefited from commercial wins and productivity initiatives. We also delivered positive price in the quarter. Productivity is an ongoing focus for our teams and our lean practices continue to drive improvements. Our teams are expanding daily management and standard work to new areas while delivering on current commitments. All of our segments delivered mid-single digit or greater variable cost productivity and made significant platforming improvements. We’ve been making strategic investments in advanced manufacturing technologies, such as 3D printing and Additive, across our segments to enhance product capabilities and quality and improve variable cost productivity.

To date in the U.S., we have more 3D printing-related patents than any other imaging company with 51 [ph]. These investments drive lower cost and higher durability. For example, in MR, we’re applying these methodologies across the entire portfolio, saving us more than $1 million a year and improving performance and reliability. On SG&A, we continue to make progress with roughly 330 TSAs exited since spin and we’re well positioned to exit the vast majority of the remaining agreements this year. This will allow us to further optimize our cost structure in the future. We delivered solid progress in gross margin and adjusted EBIT margin expansion while continuing to fund strategic priorities for future growth. Now, I’ll turn to our segments. Let’s start with Imaging on Slide 7, where we had approximately flat organic revenue growth.

This was against a difficult comparison to the prior year when sales were up 12%. Segment EBIT margin was up 210 basis points year-over-year. We made progress on enhancing gross margin through productivity, price and service contract capture rate while investing in R&D. Margin expansion in this business remains a critical priority for us and we’re on track to the plans we communicated at our Investor Day. Customer demand for our Imaging products remains healthy as new therapies drive the need for Precision Imaging guidance. We’re excited about the impact our new product introductions are expected to have on both future revenue and margin. Turning to Ultrasound on Slide 8. Organic revenue was down 4% year-over-year, following double-digit growth in the prior year.

Segment EBIT margin decreased 200 basis points year-over-year, driven primarily by inflation and lower volume. During the quarter, the team’s strong focus on productivity through standardization and commonality across platforms, along with ongoing pricing strategies helped to partially offset these challenges. Looking ahead; our funnel is solid and we expect growth to accelerate as well as productivity initiatives to drive margin improvements in the second half of the year. Most notably, we also recently launched several exciting new ultrasound innovations that will benefit both top and bottom line performance. Moving to Patient Care Solutions on Slide 9. Organic revenue was down 4% year-over-year, driven primarily by in-quarter fulfillment delays and prior year COVID-related ventilator volume in China which drove double-digit growth last year.

Backlog remains healthy which positions us well for growth. Segment EBIT margin decreased 310 basis points year-over-year, due to inflation and timing of shipments. We implemented programs to drive productivity and price that we expect will improve our margin in future quarters. Moving to Pharmaceutical Diagnostics on Slide 10. We had another strong quarter generating 8% year-over-year organic growth, driven by price and continued volume growth. In the quarter, we saw encouraging progress with the first signs of sales uptick from Vizamyl in the U.S. and other countries. With additional Alzheimer’s therapy approvals, we expect more substantial increases in the second half of 2024. Segment EBIT margin of nearly 30% improved 190 basis points year-over-year, mostly driven by price, productivity actions and volume while we continue to invest in our robust R&D pipeline.

We’re also encouraged by the continued strength of global procedures which drives the need for our Imaging agents. We’re executing on significant capacity investments to strengthen the security of supply for our customers and to deliver on our patients’ needs. Planned expansion at our Lindesnes facility in Norway is expected to be completed during the second quarter. At the same time, our lean methodology is foundational to delivering for our customers as we continue to increase patient dose capacity across our supply chain. Turning to Slide 11, I’ll walk through our cash flow performance. In the first quarter, we delivered free cash flow of $274 million. Our working capital improved year-over-year and reflected improved inventory turns and lower accounts receivable.

Many of our lean efforts and priorities associated with inventory management and the collection processes helped drive our progress here. Our strong cash generation, capabilities provides us with the financial flexibility to support future growth, leaving room for organic and opportunistic M&A to accelerate innovation. As previously disclosed, we strengthened our balance sheet by paying down $150 million of debt in the quarter. Now let’s turn to our outlook on Slide 12. In short, we are reaffirming our full year 2024 guidance. We expect a modest sequential improvement in second quarter organic sales growth and adjusted EBIT margin. As discussed in our fourth quarter call, we expect stronger revenue growth and adjusted EBIT margin in the second half of the year.

There are a few catalysts that will support growth through the rest of the year. This includes a number of new product launches that will accelerate growth in ultrasound. In addition, we expect to see growth in imaging supported by healthy backlog and a large order funnel. We expect continued growth in our PDx business as procedure trends remain strong. And in PCS, we have healthy backlog and expect the fulfillment challenges in the first quarter to resolve by midyear. With that, I’ll turn the call back over to Pete.

Peter Arduini: Thanks, Jay. Turning to our Precision innovation strategy on Slide 13. We’re excited about recent product introductions across our segments to address customer challenges and improve patient outcomes. The industry continues to be challenged with higher rates of clinical burnout, fueled by increased demand for imaging and caring for an aging population. Our customers need solutions that increase flexibility in staffing, scheduling and operations. Digitally enabled remote scanning and connected patient monitoring are ways we can help address these issues. In the U.S., GE Healthcare is the exclusive distributor of a vendor-agnostic system that allows clinical experts to provide remote MR, CT and PET/CT scanning support and image review.

By enabling virtual clinical experts to provide real-time guidance to technologists on site, we’re helping to address staffing shortages and streamlining operational workflows. Our Portrait Mobile and Monitoring Solutions platform recently introduced the Portrait Vital Signs monitor in the U.S. and Europe. This new solution integrates with the EHR, allowing clinicians to customize early patient warning scores like low oxygen rates and declining blood pressure to identify patient deterioration sooner. We’re also focused on advancing cancer research and creating AI to address some of the biggest challenges in cancer care. For example, immunotherapy has revolutionized the way we think about cancer treatment. However, patient outcomes vary with some response rates ranging from 15% to 30% in solid tumors and 45% to 60% in melanoma.

Because of this variation, a considerable amount of research is focused on determining treatment response. AI can potentially make a difference. In our Pharmaceutical Diagnostics business, we created AI research models in collaboration with Vanderbilt University Medical Center. It demonstrated a 70% to 80% accuracy in predicting cancer patients’ response to certain immunotherapies. What’s unique about the approach is that we created these AI models using routinely collected data available in the EHR, giving them the potential for broad deployment and adoption, methodology that was recently published in a peer-reviewed scientific journal. These AI models have the potential to help clinicians to match patients to the most effective treatment sooner while avoiding unnecessary side effects and costs and could be integrated into our digital suite of tools in the future.

We’re bolstering our leading portfolio in ultrasound with 6 new products introductions that includes significant upgrades, platforming solutions and new artificial intelligent applications for radiology, urology and cardiology. This is a direct correlation to our increased investments in R&D dollars. We’ve supported clinicians for more than 30 years with our premium general imaging platform, logic. And we’re excited to share that we’ve made significant enhancements. These include the launch of 3 upgraded premium systems and a new mid-tier solution, the LOGIQ Totus, all with AI and Vscan Air wireless handheld probe integration. Our new urology-based software feature, Prostate Volume Assist, is now available on several bkActiv imaging systems.

Between MIM Software’s prostate fusion solutions and the power of AI, we’re strengthening our prostate-focused ultrasound solutions and improving the cancer journey for providers and patients. Earlier this month, we launched the Vscan Air SL with Caption AI Cardiac Guidance at the American College of Cardiology Conference. By integrating AI into our handheld system, we’re enabling clinicians to acquire up to 10 standard cardiac use with guidance, creating even more access and use cases for ultrasound point of care. For example, with AI in the palm of their hand, a primary care physician with less ultrasound experience may uncover heart disease sooner, or cardiologists can easily and automatically calculate a left ventricular ejection fraction, potentially diagnosing heart failure early.

We expect these advancements in Ultrasound to drive price and cost efficiencies over time and continue to realize more productivity while accelerating growth. We also continue to build our reputation as a trusted partner in ultrasound with several collaborations to address growing patient needs globally. For example, 2 leading public health agencies in China recently chose GE Healthcare to develop innovative technologies, patient management models and clinical trading programs to improve outcomes for patients with liver disease. In summary. On Slide 14, I’d like to thank our team for their focus and execution in the first quarter. I’m encouraged by the progress on the product pipeline and market outlook. This situates us well for an improving growth profile as we move through the year.

I look forward to sharing more about our progress and future innovation plans at upcoming conferences. I’d like to introduce that we will host our Investor Day on November 21 in New York City. We will provide more in-depth views on technology and innovation. With that, we’d like to open up the call for questions.

Carolynne Borders: Thank you, Peter. [Operator Instructions] Operator, can you please open the line?

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Q&A Session

Operator: [Operator Instructions] First question coming from the line of Suraj Kalia with Oppenheimer.

Suraj Kalia: Peter, can you hear me all right?

Peter Arduini: Yes, clear.

Suraj Kalia: My apologies for the background noise. So Peter, the obvious question, U.S. year-over-year was flattish. I get your point on China, in terms of ventilators and top comps. Can you set the stage for us in terms of the U.S. portion of the business, the flattish performance in the quarter and how you see it progressing through the year?

Peter Arduini: Yes, absolutely. I would just kind of start out to say from that standpoint is just remember, we talked about the compare with our toughest one of the year. So obviously, it gets better throughout the year. We talked about that in our guidance. But really, Q1 was impacted by — fundamentally, it was 2 items. And Jay touched this on the prepared remarks. One was some fulfillment delays in PCS. I think we’ve got those well in hand to have them resolved by midyear. I think that’s the first part of this. There were specific items, us about technology and more about actually delivery of the components. And then the China piece. And again, we know that anticorruption presents a challenging environment and we expected that to play out through midyear.

I mean those are really the 2 items. If I look at the U.S. specifically, we actually are seeing a more positive backdrop relative to orders funnel, relative to growth potential and really across all of our businesses. And I’d just say ultrasound, I talked a lot just on the call here about new products. 2023 market was somewhat down for the whole market in ultrasound. We see that actually turning around in ’24. And so the timing of our new product introductions is very good as well as in imaging. So I’m rather confident on how we’re going to see the capital landscape and the market evolve within the United States. But relative to the quarter, it was those 2 specific items that dampened our top line.

Suraj Kalia: Got it. And Peter, my follow-up, specifically within imaging, how should we think about backlog, i.e., business that is already in the hands flowing through in the next 3 quarters versus new orders coming in versus NPI and price increase. Just kind of give us how you all are thinking about within imaging as the year progresses which are the levers to be pulled? And how should we think about the cadence of imaging growth as the year progresses?

Peter Arduini: Yes. Great. Thanks. Let me comment and Jay, you can jump in as well on this. So we’ve got a very solid backlog for our imaging business. I think we feel quite good about the diversity of it, the mix of it and it actually being growing with price in the back. And then new platforming capabilities that are coming in like our IGS system, our new cath lab which will come in and actually bring better margins. So it’s positioned well from that standpoint. We think the profile is going to be more second half just as we’ve communicated. There hasn’t been a lot. We’re going to clearly see a pickup in the second quarter but the majority of it is more profiled out towards Q3 and Q4. And again, that really hasn’t changed from what we’ve laid out our initial guidance on.

I would say from a broader order standpoint, we expect that we will see an uptick in broader imaging orders both in Q2, 3 and 4. Most likely having a larger step-up in the second half. And some of that’s tied to the China stimulus discussion that we had from an order standpoint. But even the U.S. profile, when you take a look at the products that we’ve got laid out, some of the big deals that we have visibility into the pipeline, they’re probably going to nest more so in that second half of the year.

Operator: And our next question coming from the line of Edward Ridley-Day with Redburn Atlantic.

Edward Ridley-Day: So my first question, just to follow up actually on the China stimulus plans. The new Chinese stimulus that is being discussed. We’ve seen headline details from the authorities there but not much more. Could you speak to what you see the benefit these might be for your addressed markets through the remainder of the year? And your peer yesterday was talking about some evidence of hospital submitting new orders as a result of the potential new stimulus. I don’t know if you can speak to that first, please?

Peter Arduini: Yes. So look, the data is unveiling as we speak. So I think we don’t have perfect information on it. But I think if you look at since our guidance, what is new is obviously, not anticorruption, that’s out there. And it’s going to continue, we believe, to be tough through mid-year as we said before, we believe that that’s going to continue to begin to improve in the second half. What is new is the stimulus. And from our understanding of it, the prior stimulus was more about low interest rates or relief relative to loans, where this will actually be specific cash grants which then would reach a larger group of institutions that aren’t just looking for loans but are looking for supplemental dollars to buy equipment.

So we think that, obviously, opens us up to a larger population. The second piece to that then as well is that its ability to be multiyear. And so we’ll see how that ultimately plays out. But those are the 2 characteristics. Relative to the rollout of it, I would say what we did see at the end of the first quarter is actually a little bit of tapping of the brakes of some orders in China relative to stimulus coming in and you say, “Well, why would that be?” Customers taking a look at to say, “I really want to understand the rules of it. So when I submit an order, I make sure I get the full benefit of the stimulus.” So we believe that there’s going to be clarity to the stimulus rules, so to speak, at some point here in Q2 and post those rules.

Then we would expect an uptake in orders. And then how that plays out, if the orders come sooner, there’s more possibility for sales within the year. If the orders come later, businesses like ultrasound that you can do flow shipments, most likely would benefit sooner. Whereas installed products would probably be a little bit later. But net-net, this is all positive and kind of how we see the landscape as we speak right now.

Edward Ridley-Day: That’s very helpful. And just a quick follow-up actually on your Radio Pharmaceutical business. If you can give us any color on when we should expect FDA approval for Flurpiridaz? And also any other updates that we should be thinking about or looking for in the remainder of the year?

Peter Arduini: Yes. Look, I mean Flurpiridaz, if it’s your reference, is an agent that’s in our PDx business that will be used for cardiac imaging and PET/CT. We think it’s going to be a really breakthrough approach to be able to do cardiac perfusion imaging and PET/CT. And a lot of it, as you know, is tied to logistics, the half-life and the ability to ship a product there as opposed to have to generate it in fundamentally seconds on site. File has been submitted to the FDA and we’ll provide updates here on the milestones. I think from what I hear from the team, we have everything in. We’re not assuming anything within our 24 guidance. I mean this will be more of a ’25, ’26, ’27 event as those ramp up. But all things good and we’ll be waiting to hear back from the agency, if there’s any questions or follow-ups that they have for us.

Operator: Our next question coming from the line of Sezgi Ozener with HSBC.

Sezgi Oezener: I hope you can hear me all right.

Peter Arduini: Yes.

Sezgi Oezener: Great. My first one is on your confidence on the full year ’24 outlook. Given the lower book-to-bill, are you more on the lower end? Or do you — are you equally confident on both ends of your guidance? And the second one is on your pricing versus volume comments. I’ve seen that the positive pricing comment. Has this been reflected formally across the segments as well as across the region? Some color there would be really helpful.

Peter Arduini: So maybe I’ll start. Then Jay, you can talk a little bit more about some of the book-to-bill and the cadence. But look, as I walked through just a minute ago, the impact for the first quarter, including the difficult comp, we expect that to alleviate through the year which, again, gives us strong confidence in our ability to hit our guidance. And again, 4 things. The comps get better quarter-over-quarter. Funnel growing on orders and sales. We have good visibility into, including our service funnel. So how does service grow? When you won share in a previous year, you have 1 year of warranty. When it comes off of warranty, it becomes part of a contract. We’re starting to see the benefit of that service growth now in ’24.

Three, the new products against across the whole product line but particularly in ultrasound and select areas in Imaging to new products and then an improving China. So that’s really the 4 items that kind of gives us confidence. Jay, maybe over to you to talk a little bit how we think about book-to-bill and price.

Jay Saccaro: Sure. From a book-to-bill standpoint, you have to recall that we include in our book-to-bill calculation, both service and PDx coming in at 1:1. So if we were to adjust those 2 items out, the actual book-to-bill is much higher. So we feel good about the overall book-to-bill that we have for the quarter. The other thing I would say is the backlog sits at near record levels. So we’re sitting at roughly $19 billion of backlog. We feel very good about the orders that we have in the backlog. It’s a robust pipeline of future sales that we have in place. So overall, that’s great. And then as we think about pricing, the pricing environment continues to be solid. We highlighted at the beginning of the year, we expect 1% to 2% in pricing impact to sales.

And we’re trending very much in line with those expectations. So we had a good quarter from a pricing standpoint. From a volume standpoint, I think Pete highlighted some temporary issues that we’ve been navigating which we expect to resolve. The other thing to remember is that comps get a lot easier as we move through the rest of the year. So I think all of those elements come into play as we were able to firmly reiterate guidance from a sales and an EPS standpoint.

Operator: And our next question coming from the line of Craig Bijou with Bank of America Securities.

Craig Bijou: I wanted to start on order growth. And you guys have seen low single-digit order growth over the last 3 quarters. And I understand that there are a couple of reasons for that. But wanted to see if you guys could maybe give a little bit more color on how that order growth translates into revenue growth in subsequent quarters. And your confidence that order growth will really accelerate over ’24 and then be able to drive kind of the mid-single-digit revenue growth target that you guys have put out there.

Peter Arduini: Yes, Craig, thanks for the question. It’s a great question. Look, the reality of it is, is that over the last year plus, 1.5 years, we’ve actually had a positive book-to-bill ratio again. And we give that ratio with everything in, so that you can see not just the capital piece but you kind of get a feel for the total composite of it. I think as long as that is a positive scenario and the backlog is almost about $1 billion higher than where it was pre-COVID, we’ve got a lot of gas in the tank to deliver on mid-single-digit revenue growth. So that’s just kind of how the profile of this works. And I think you guys understand with some of the capital that can be lumpy. So shipments tend to be a little bit smoother but you can pick up significant and a couple of large IDN deals in a given quarter and your orders can spike up in that quarter and that can be lower in the following quarter.

But that’s kind of how we see it from that standpoint. The interesting part here is that over the last, I’d say, 12, 18 months, the markets that we’ve played in and we track these with third-party data, have been probably in the neighborhood of only up 1 point or they’ve been down a couple of points, relative to different markets in the world. Our outlook, when we see what the rest of this year is and going into ’25, definitely brings a more positive view which we would expect to see orders pick up relative to those markets. So that’s one aspect of it. The other side is when you start winning share and I mentioned this on a previous comment and you start growing your installed base. The opportunity for the service revenue to play a bigger contributing component in revenue is there.

So you saw this quarter, we actually had positive growth within our service component. We would expect that growth rate to continue to advance, grow faster than it did in the first quarter this year which means in the second half, we have more service contributing to the growth. That service is already in the backlog and so we have visibility into it. So it’s a host of those things. And then obviously, the typical thing. 6 new product launches in ultrasound. We just refreshed the cardiac platform. We just refreshed the Voluson Women’s Health care platform, handheld, first cath lab that I would say that we’ve had in quite some time that is very competitive. Its robotic platform with new tube at CT platform which is doing well. New wider for MR, our new treaty.