GE HealthCare Technologies Inc. (NASDAQ:GEHC) Q4 2022 Earnings Call Transcript

GE HealthCare Technologies Inc. (NASDAQ:GEHC) Q4 2022 Earnings Call Transcript February 1, 2023

Operator: Good day, ladies and gentlemen, and welcome to the GE HealthCare Fourth Quarter 2022 Earnings Conference Call. My name is Michelle, and I’ll be your conference coordinator today. As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today’s conference, Carolynne Borders, Chief Investor Relations Officer. Please proceed.

Carolynne Borders: Thanks, Michelle. Welcome to GE HealthCare’s fourth quarter and full year 2022 earnings call. I’m joined by our President and CEO, Peter Arduini; and Vice President and CFO, Helmut Zodl. 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: Thank you, Carolynne, and good morning, everyone. Welcome to our first earnings call as an independent publicly traded company. I’m incredibly proud of the work our team has done to complete the spin-off of GE HealthCare. The energy across the company is palpable and there’s tremendous excitement and focus around our purpose to create a world where healthcare has no limits. I want to thank all of our team for their commitment to the customers and patients we serve as we chart our own path forward and execute on our precision care strategy. Let’s start with our fourth quarter 2022 performance. We delivered strong organic revenue growth of 13% year-over-year, reflecting an acceleration from prior quarters in 2022.

These results were driven by continued robust demand, backlog fulfillment and improved pricing. In addition, supply chain pressures that we experienced earlier in the year eased continuing the trend that we experienced in the third quarter. Adjusted EBIT margin was 17.1%. Volume and price improved in the fourth quarter, but this was offset by inflation, mix, planned R&D investments and some foreign exchange headwinds. We saw sequential margin improvement as volume and price grew and logistics cost eased with the disciplined optimization actions we’ve taken across the business. This result is equivalent to 16.1% on a standalone basis. Adjusted EPS was $1.31 impacted by incremental interest from debt issuance, partially offset by volume and price.

In order to facilitate comparability on a go-forward basis, we’ve also provided a standalone adjusted EPS result of $1.06. Free cash flow was $987 million in the fourth quarter as we start to see supply chain issues ease and we improved collections year-over-year. Total company book-to-bill, which is a calculation of orders to revenues growth, was 1.07 times led by strong orders growth in imaging and ultrasound. For the full year, organic revenues grew 7% year-over-year at the higher end of our mid-single-digit growth target. And while China was impacted by COVID for most of the year, we saw increased momentum coming out of the fourth quarter and we expect that to continue. Globally, we have a healthy backlog heading into 2023 as customers continue to invest in imaging ultrasound as well as PCS.

2022 adjusted EBIT margin was 15.6% impacted by inflationary pressures and planned R&D investments. This is equivalent to the 14.5% on a standalone basis. Looking ahead, we have several levers to expand margin through strategic pricing, enhancing volume and mix and increasing variable cost productivity as discussed at our Investor Day. Adjusted EPS for the full year was $4.63 and our standalone adjusted EPS result was $3.38. Free cash flow was $1.8 billion in 2022, and Helmut will discuss guidance in greater detail here later in the call. Overall, we’re pleased with the strong performance we delivered in 2022. We’re encouraged by the easing supply chain pressures and the resilient end market demand we’re seeing across our portfolio, and we remain confident in our ability to drive sustainable value creation in 20 23.

I’d also like to highlight an important announcement we recently made with the ointment of Dr. Taha Kass-Hout as our Chief Technology Officer. Taha is leading our science and technology organization as well as our efforts to drive growth through clinical research and the advancement of our digital and machine learning capabilities, specifically our Edison Digital Health Platform. He joins us with deep clinical, digital and machine learning experience. Taha was most recently Vice President of Machine Learning and Chief Medical Officer at Amazon. Taha also served as the FDA’s first informatics leader and he’s joining the team at a perfect time as we accelerate investments in digital products and software. As we invest in our business, we’re continuing to make progress on enhancing our operating model to better serve customers through a simplified more decentralized model And we’re reducing bureaucracy in the organization, optimizing our geographic footprint and implementing platforming initiatives across key product lines.

And with that, let me hand the call over to Helmut to walk through our financials and business segment performance. Helmut?

Helmut Zodl: Thanks, Pete. Let’s take a closer look at our financial performance in the fourth quarter. Revenues of $4.9 billion increased 8% year-over-year and were up 13% on an organic basis. Reported product revenues increased 13% versus the prior year, led by Imaging, Patient Care Solutions and Ultrasound. Reported Services revenues declined 2%, mainly due to the unfavorable impact of foreign exchange, partly offset by growth in our cloud services business. We are pleased with product growth in the quarter that will lead to additional services revenue. Now, I’d like to talk about the actions we are taking to increase margins through improving delivery, price and cost. As always, delivering for our customers is our number one priority.

We’ve improved our access to key components, measured by the number of red flag parts that indicate constraints and made good progress in the requalifying, redesigning and tool sourcing parts. In fact, we’ve requalified 7,700 parts since COVID began and we are now seeing the lowest level of red flag parts since the first quarter of 2021. We’ve also applied lean principles to improve our supply chain. A great example of how we apply lean across the organization was our CT’s output initiative this past quarter. We align factory output with customer installations to drive better end-to-end planning. This resulted in an improved customer experience and early deliveries in the quarter. We have achieved a positive sales price index for the third consecutive quarters now.

And this price accretion occurred across each of our four segments in the fourth quarter. We are pleased with our progress in pricing and have good visibility on price in our backlog. We are driving variable cost productivity for logistics and material cost reductions. We are also reducing our real estate footprint and optimizing our commercial organization. Turning to Imaging. We saw strong organic revenue growth, up 18% year-over-year, led by molecular imaging, CT, MR and surgery. Our customers remain focused on expansion of capacity and access to care. Looking ahead, we expect imaging demand will remain healthy supporting top line growth. Following strong revenue growth in the fourth quarter, we expect growth will normalize as we move into the second half of the year.

Segment EBIT margin declined 120 basis points year-over-year. We realized improving volume and price, but this was offset by headwinds from inflation, mix and planned investments. Our double-digit investment in imaging R&D this quarter reflects our commitment to innovation and commercial growth. During the quarter, NPI’s driving growth included our Revolution Apex CT with a scalable detector as well as Ascend CT with improved imaging and workflow. Globally, we’ve already seen success using deep learning from improved image quality in MR with AIR Recon DL. We are now very proud to be the first to extend those capabilities to Omni Legend PET/CT with precision deep learning available in select regions. Sequentially, EBIT margin increased 120 basis points, driven by improved volume and price.

We expect margin expansion in 2023 to be driven by NPIs, commercial execution, supply chain productivity, platforming, and digital. Overall, we are investing to drive technology leadership and have the opportunity to increase market share with strategic NPIs digital and AI leadership and a focus on care pathways. In addition, we’re making progress with platforming initiatives that provide a more consistent user experience and drive parts sensitization and cost reduction. Moving to Ultrasound. Customer demand continues to be strong in both hospital and other care settings. Organic revenues were up 7% year-over-year, driven by price, improvements in sourcing and fulfillment. Our customer-led innovation continues to drive healthy revenue growth with strong performance in radiology and primary care, women’s health and cardiovascular, and our handheld business delivered strong growth in the quarter.

We see continuous traction with our differentiated products, including our recently launched Voluson Expert 22 premium ultrasound system for women’s health and the Vivid E95 ultrasound addition advanced cardiovascular ultrasound. Both innovations are powered by advanced artificial intelligence tools to help improve workflow, efficiency and productivity. Segment EBIT margin contracted 120 basis points year-over-year. In the fourth quarter, price improved. However, we experienced headwinds from inflation and planned investments. In line with our lean philosophy, we are shifting from stocking inventory to make to order. This initiative is streamlining cost and reducing lead times. We are enabling this through redesign of parts, dual sourcing and platforming.

This is an initiative that we will be leveraging across the company, providing additional margin opportunity. Looking ahead, we are driving sustainable growth in ultrasound through continuous NPI innovation, commercial excellence and localization. The integration of BK Medical is also well on track. Let’s move to Patient Care Solutions. PCS had a solid fourth quarter, following a year of supply chain challenges, which improved as we exited 2022. Organic revenue was up 10% year-over-year, driven by volume and price improvement. Higher volumes were driven by supply delivery and the launch of NPIs. Looking ahead, we expect fulfillment to improve as we ship our backlog. PCS margins increased 410 basis points compared to fourth quarter 2021, with improving price and volume as well as lower cost, partially offset by inflation.

The cost favorability drove roughly half of the upside and was associated with one time items. Sequentially, PCS margins increased significantly due to improving volume and price. We remain focused on innovation and commercial growth investments with R&D investment up double digits in the fourth quarter. Key highlights from the quarter include continued momentum with patient monitoring, including Portrait Mobile and CARESCAPE Canvas in Europe. Moving to Pharmaceutical Diagnostics. Organic revenues were up 2% year-over-year impacted by fewer procedures in China due to COVID as well as normalization of U.S. customer inventory. Margins were impacted due to inflationary pressures on raw materials and lower volumes. The team is executing on the pricing strategy that is built around the value we deliver for our customers and patients.

We continue to monitor the COVID situation closely in China and expect elective procedures to pick up when COVID infections decline. In the fourth quarter, we introduced a new GE HealthCare CT motion injector that will provide better product integration and an improved patient experience. Next, I’ll walk through our cash performance for fourth quarter and full year 2022. During the quarter, we generated $987 million of free cash flow, up year-over-year with improvement in supply chain and collections. With our focus on prioritizing patients and customers, our free cash flow declined for the full year 2022. But as we enter 2023, we are well positioned to deliver on our backlog. This is a robust and consistent cash flow generating business with a disciplined capital allocation strategy.

We are committed to a strong investment-grade rating and will employ a disciplined capital allocation framework. This will include paying down debt and evaluating accretive M&A that advances our precision care strategy. Our balance sheet is strong. As expected post spin, our day one cash balance was $1.8 billion. Day one leverage, excluding pension, was approximately 2.5 times, in line with our expectation. Let me now move to our 2023 financial outlook. For the full year 2023, we are reaffirming our guidance that was introduced on January 10, calling for year-over-year organic revenue growth in the range of 5% to 7%. We expect stronger organic revenue growth in the first half of the year with more normalized growth in the second half. We continue to expect fully adjusted EBIT margin to be in the range of 15% to 15.5%, reflecting an expansion of 50 basis points to 100 basis points over the 2022 standalone adjusted EBIT margin of 14.5%.

This includes the impact of approximately $200 million of standalone costs. Margin expansion in 2023 will be back-half weighted as transformation initiatives take hold. We expect 2023 adjusted EPS in the range of $3.60 to $3.75, reflecting a growth of 7% to 11%. This compares to 2022 standalone adjusted EPS of $3.38, and includes the impact of the standalone costs. We are assuming a tax and adjusted tax rate of 23% to 25%. Free cash flow conversion is expected to be 85% or more for the full year. Our cash flow outlook assumes that the legislation requiring R&D capitalization for tax purposes is repealed or deferred beyond 2023. The free cash flow impact of this legislation is approximately 10 points of free cash flow conversion for the year.

Second half free cash flow will be substantially higher than the first half of the year, in line with typical cash seasonality due to increased inventory as well as interest and compensation and benefits payments in the first half. Now let me hand back to Pete.

Peter Arduini: Thanks, Helmut. Before we go to questions, I’d like to reiterate how we’re executing against our long-term growth strategy. Our teams are well positioned to deliver on our 2023 commitments. We’re investing in organic growth as demonstrated by the introduction of over 40 new products at the RSNA event in November. And with workflow solutions enhanced by AI to help healthcare professionals and health systems overcome the top operational challenges they face today, while also improving outcomes for patients. We’re deepening customer engagement across care pathways, including oncology and cardiology, and we’ve announced some exciting new products, collaborations and investments that are changing the way healthcare is delivered.

On the M&A front, we recently announced the agreement to acquire IMACTIS, an innovator in CT Interventional guidance. This acquisition, although small, is our first as an independent company and is a great example of the type of transactions that we plan to pursue. They had innovative technology in fast-growing areas that enhances the breadth of capabilities we can deliver for customers. In Imaging, we’re very proud to announce SIGNA Experience, an MR platform that was €“ comes with an integrated set of solutions, including workflow capabilities, an intuitive user interface and deep learning AI applications such as Air Recon DL, which has already reduced scan times for approximately 5.5 million patients globally and is increasing efficiency for clinicians.

Globally, demand for minimally invasive surgical procedures continues to grow. In the U. S., for example, ambulatory surgical centers are performing more than half of all outpatient procedures. And to serve patients, our customers need efficient imaging capabilities. As a leader in surgery imaging, which is a high-growth and high-margin business for us, we see increasing opportunities for our OEC 3D C-arms to provide precise 2D and 3D images interoperably for many of clinical applications being done in ASCs, including spine, orthopedics and pulmonary work. During the fourth quarter, we also announced an $80 million investment in one of our facilities in Norway to increase capacity for our contrast active pharmaceutical ingredient. In our PCS business, we’re excited about our Portrait Mobile patient monitoring solution currently available in Europe.

This technology allows us to expand care into sub-acute therapy areas, giving providers the ability to monitor patients that aren’t always monitor as thoroughly as they should be. In Ultrasound, we’re excited about the customer demand for our Vivid Cardiac Ultrasound portfolio, which again is equipped with AI features that help improve consistency of assessing the heart muscles function and significantly reduce the time it takes to acquire those imaging measurements. And in digital, we continue to make progress with the development of our Edison Digital Health Platform to help solve customer challenges. We have several pilots underway at hospital systems in the U. S. and Europe and we expect that cloud-based or on-prem Edison Digital Health Platform will be a vendor agnostic platform aggregating data from multiple sources and enabling integrated care pathway management.

Our goal is that customers will benefit from a wide range of AI applications developed by us and third parties to make better connected decisions, operate more efficiently or better detect trends and populations. These are just a few of the examples of products and partnerships we’ve invested in to advance our capabilities in precision care. And so with that, we’d like to open up the call for questions.

Carolynne Borders: Thank you, Peter. I’d like to ask participants to please limit yourself to one question and one follow-up, so that we can take as many questions as possible during the one hour that we have allotted for the call. Michelle, can you please open the line?

See also 25 Lowest PE Stocks of S&P 500 Index and 11 Most Undervalued Blue Chip Stocks To Buy .

Q&A Session

Operator: Thank you. One moment for your question. Our first question comes from Drew Ranieri with Morgan Stanley. Your line is open.

Drew Ranieri: Hi, everyone. Thanks for taking the question.

Peter Arduini: Good morning, Drew.

Drew Ranieri: Good morning. Good morning and congratulations to you and the GE HealthCare team on the spin-off and Pete welcome back to more earnings calls. Just maybe first to start on the macro environment. I think there’s still some concerns that there will be a capital spending slowdown at some stage. Your results, I mean, you’re pointing to ongoing demand across your portfolio, but maybe just help us kind of square what you’re seeing from the demand side globally? Maybe what product categories are getting probably the most interest? And do you think there has been any risk of pull forward of capital sales just over the past year or anything? And I have a follow-up. Thanks.

Peter Arduini: Thanks, Drew, for the question. Yes, I would just say if I go around the world and start maybe in Europe, there’s still robust demand at this point. I think as we’ve talked about in the past with €“ in different audiences, that from different sick funds and tenders to really drive incremental imaging capabilities post-COVID. And so we see that continuing here into the future. China has obviously been a topic in the news. And although COVID was challenging in Q4, there was quite a bit of investment that we saw going into imaging in particular and in an ultrasound. And we believe as the market there works through some of the challenges with COVID in Q1, but there’s just a lot of pent-up demand. If you think about 2022 and even 2021 with some of the lockdowns, there’s a lot of people that have a lot of procedures to be taken care of.

And in the United States, we were pleased to see with different customers that have reported as well as customers that myself, Helmut and the team have been talking to regularly are seeing improving conditions. It doesn’t mean that they’re back to, say, 2019 levels. But it means that we’re seeing improvements in labor costs. The demand or backlog, meaning the need for imaging procedures, both in our interventional diagnostic and ultrasound modalities is still at a record high. And so we look as we start the year that the demand is running strong. I think part of the piece that we all keep an eye on is CapEx prioritization in the United States. I think all indications are that people are being prudent and prioritizing for sure, but many of the technologies that we offer tend to be prioritized to the higher end of the list.

And what customers tell us is, in many cases, that added productivity to get patients diagnosed faster, sooner, get them healthier and out of the system is one of the key attributes that we bring. So we’re cautiously optimistic, but I’d say with our large backlog that we have starting the year, we feel good about the horizon that we see here over the next couple of quarters.

Drew Ranieri: Got it. Thank you. Maybe one other question just on the margin expansion, maybe more for Helmut. But can you maybe help us just bridge the 50 basis point to 100 basis point of improvement for the year. Maybe just talk about, is this all really gross margin-driven or on the leverage side? But just trying to get a better sense there and maybe how your 5% to 7% organic growth guidance really will drive that margin expansion and if there’s any particular segments that are really going to be the primary beneficiaries? Thank you.