GE HealthCare Technologies Inc. (NASDAQ:GEHC) Q4 2023 Earnings Call Transcript February 6, 2024
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 welcome to GE HealthCare’s Fourth Quarter 2023 Earnings Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker, Carolynne Borders, Chief Investor Relations Officer. Please go ahead.
Carolynne Borders: Thank you. Good morning and welcome to GE HealthCare’s fourth quarter 2023 earnings call. I am 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 will 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. Let me start by providing a few highlights from a successful first year as a public company. I am proud of how our teams executed to deliver robust financial results with performance that all met or exceeded guidance. In fact, our execution throughout the year allowed us to raise guidance twice. We have continued to increase our R&D investment, launching over 40 new innovations tied to our care pathway and digital strategy. As a result of our investments, we estimate that we have gained global market share in equipment in 2023. And once again, we topped the FDA’s list of AI-enabled device authorizations with 58, more than any other medtech company. Backlog remains robust led by an improved capital equipment landscape.
And we significantly strengthened our balance sheet as we paid down $1 billion in debt since the beginning of the fourth quarter. Our financial flexibility enables us to drive both organic and inorganic investment such as the Caption Health and IMACTIS acquisitions completed in 2023. More recently, we announced our plans to acquire MIM Software, which I’ll discuss in greater detail later in the call. We continue to build our position as a trusted partner. And here are a few highlights from throughout the year. On the commercial side, we secured multiyear enterprise deals globally with contract values totaling approximately $2.5 billion in 2023, fueling our growth. We also expanded our 4-year relationship with the University of Wisconsin-Madison by entering a 10-year strategic collaboration that goes beyond medical imaging to new frontiers and digital technologies and disease-focused solutions.
Separately, the Bill & Melinda Gates Foundation and BARDA, a division within the U.S. Department of Health and Services, are funding programs totaling over $80 million that will allow us to develop new AI applications for ultrasound, benefit patients in low and middle income countries and patients with lung pathologies and traumatic injuries. We also announced a collaboration with Novo Nordisk to advance the clinical and product development of peripheral-focused ultrasound. We’ve assembled a strong world class leadership team. Jay Saccaro joined us last year and has had an immediate impact. He has had the opportunity to assess our organizational needs, forecasting models, financial systems and processes and is adding significant strategic and operational value.
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Q&A Session
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Similarly, Taha joined us as Chief Technology Officer more than a year ago. And he has been charting our digital future and strategy while building a high-performing team of top healthcare technology experts. In 2023, we published our inaugural sustainability report, highlighting our progress and commitment to corporate responsibility and risk management. Lastly, we introduced 2024 guidance today, which Jay will discuss in greater detail. Our outlook reflects an improved capital equipment landscape. It also reflects continued strength on top of 2 consecutive years of high single-digit organic sales growth. Similar to last quarter, we conducted a survey of a broad set of U.S. customers, which supports our forecast for 2024. Our latest survey showed improved financial optimism and capital budget outlook versus the last survey in October.
Global procedures remain strong, which we believe all of this points to a constructive setup for the year. Now, I will pass the call on to Jay to take us through the financials and our business performance. And I’ll conclude the call with a discussion around our R&D commitments and the innovation we are delivering for customers. Jay?
Jay Saccaro: Thanks, Pete. Let’s start with our financial performance on Slide 4. For the fourth quarter of 2023, revenues of $5.2 billion increased 5% year-over-year and grew 5% organically. This was driven by sales in Pharmaceutical Diagnostics, Imaging and Patient Care Solutions. Recall that this 5% organic growth was on top of the 13% we delivered in the fourth quarter of 2022, which benefited from easing supply chain. Organic orders increased 3% year-over-year. Order dollars continue to outpace sales, leading to a total company book-to-bill of 1.05x, up sequentially from 1.03x due to healthy product orders, including equipment. We exited the year with a record backlog of $19.1 billion, up $700 million sequentially. This performance gives us continued confidence in our expectations for 2024.
Fourth quarter adjusted EBIT margin was 16.1%. Sequentially, margin improved 70 basis points, supported by seasonally higher volume while we expanded our investments in future innovation. Year-over-year, standalone adjusted EBIT margin was flat as benefits from productivity and price were offset primarily by investments. The lean methodology is at the foundation of our productivity, yielding strong performance in the fourth quarter with improvements in logistics, sourcing and services. Our teams came together to increase on-time delivery to our customers by 11% year-over-year with lean actions improving demand forecast accuracy, supplier planning and lead times. We also saw past-due backlog efficiency with a greater than 50% improvement year-over-year in Imaging alone.
For the fourth quarter, we delivered adjusted EPS of $1.18, up 11% on a standalone basis. Free cash flow of $956 million was down slightly year-over-year. This was impacted by approximately $330 million of spin-related items, such as interest and post-retirement benefit payments. Turning to our full year results on Slide 5. For 2023, revenues of $19.6 billion grew 8% organically versus last year. All of our regions and segments saw positive revenue growth. Also important to note, recurring revenue, which drives revenue predictability and higher margin, was greater than 45% of total revenues for the year. Organic orders grew 3% year-over-year and book-to-bill was 1.03x. On a standalone basis, 2023 adjusted EBIT margin was up 60 basis points.
Adjusted EPS of $3.93 exceeded our guidance and represented standalone growth of 16%. Free cash flow was more than $1.7 billion and translated into a strong conversion rate of 95%, which was ahead of our guidance for the year. This was driven by the solid progress we made in working capital associated with multiple initiatives focused on inventory and collections processes. On Slide 6, let’s take a closer look at segment revenue performance for the year. For full year ‘23, we delivered strong year-over-year organic growth of 8% for revenues. This was led by PDx with 18% growth, PCS at 8% and Imaging at 7% driven by both volume and price. Ultrasound organic revenue increased 2%. Recall that in 2022, we had multiple quarters of strong Ultrasound results as supply chain constraints eased.
I’d also note that all segments delivered positive price in the year, reflecting our continued pricing discipline. Looking ahead, we believe all of our segments are well positioned as we move into 2024 from both an innovation and operational perspective. I’ll walk through more details on this for each segment shortly. Turning to the progress we made in 2023 on margin initiatives on Slide 7. As we move through the year, we drove sequential improvements in adjusted EBIT margin driven by volume, commercial execution and productivity. For the year, we increased adjusted gross margin by 120 basis points versus 2022 and delivered more than 3% in positive sales price for the year, ahead of our expectations. In 2024, we expect 1 to 2 percentage points of positive price as we deliver increasing value to our customers.
We are also starting to see margin expansion from improving volumes and higher margin NPIs given our continued R&D investment. For the year, we invested more than $1 billion in R&D, equating to over 6% of sales, all while expanding margins. In 2024, we expect to be in the same range as a percent of sales or slightly higher, supporting our innovative shin pipeline. Our productivity initiatives have also gained traction as logistics costs continue to improve, spot buys decrease. And as we implemented cost-efficient design changes, we have also experienced improved labor productivity driven by a greater proportion of remote fix and the application of digital tools. Relative to G&A, we are optimizing our spend by rightsizing our real estate footprint and IT infrastructure to generate additional efficiencies.
We made solid progress in exiting TSAs in 2023 with nearly 280 completed through the end of 4Q. We are on track to exit the vast majority of the remaining TSAs in 2024, which gives us confidence in our G&A optimization plans, an important part of reaching medium-term margin goals. Given our progress across the organization, we have solid visibility to deliver on our high teens to 20% adjusted EBIT margin target over the medium term. Now I’ll turn to our segments. As a reminder, in 2023, we incurred approximately $200 million of recurring standalone costs that impact our segment EBIT margin rates. We did not have these expenses in 2022. These costs were allocated based on revenue and equated to approximately 100 basis points of margin headwind for each segment.
