Q4 2022 GE Healthcare Technologies Inc Earnings Call
Your conference coordinator today as a reminder, this conference is being recorded I would now.
I'd like to turn the program over to your host for today's conference Carolyn borders Chief Investor Relations Officer. Please proceed.
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 <unk> <unk>. Our conference call remarks will include both GAAP and non-GAAP financial results.
Filiation 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 Thank you Carolyn and good morning, everyone well.
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 spinoff of GE healthcare.
The energy across the company is probable and there is tremendous excitement and focus around our purpose to create a world where health care has no limits.
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 we experienced in the third quarter just.
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 in logistics cost eased with the discipline 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.
Speaker 1: in price.
Speaker 2: ability to drive sustainable value creation in 2023.
Speaker 3: I'd also like to highlight an important announcement we recently made with the appointment of Dr. Taha Kashoot 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.
Speaker 4: specifically our Edison Digital Health Platform.
Speaker 5: 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.
Speaker 6: Tahal 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.
Speaker 7: 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.
Speaker 8: And we're reducing bureaucracy in the organization, optimizing our geographic footprint, and implementing platforming initiatives across key product lines.
Speaker 9: And with that, let me hand the call over to Helmut to walk through our financials and business segment performance. Helmut? Thanks, Pete. Let's take a closer look at our financial performance in the fourth quarter.
Speaker 10: Revenues of 4.9 billion increased 8% year over year and were up 13% on an organic basis.
Speaker 11: Reported product revenues increased 13% versus the prior year, led by imaging, patient care solutions and ultrasound.
Speaker 12: Reported services revenues declined 2%, mainly due to the untenable impact of foreign exchange, partly offset by growth in our core services business.
Speaker 13: We are pleased with product growth in the quarter that will lead to additional services revenue.
Speaker 14: Now, I'd like to talk about the actions we are taking to increase margins through improving delivery, price, and cost.
Speaker 15: As always, delivering for our customers is our number one priority.
Speaker 16: We've improved our access to key components measured by the number of red-flagged parts that indicate constraints and made good progress in requalifying, redesigning and dual-sourcing parts.
Speaker 17: In fact, we've requalified 7,700 parts since COVID began, and we're now seeing the lowest level of red flag parts since the first quarter of 2021.
Speaker 18: We've also applied lean principles to improve our supply chain.
Speaker 19: A great example of how we apply Lean across the organization was our CT output initiative this past quarter.
Speaker 20: We align factory output with custom installations to drive better end-to-end planning.
Speaker 21: This resulted in an improved customer experience and earlier deliveries in the quarter.
Speaker 22: We have achieved a positive sales price index for the third consecutive quarters now. And this price equation occurs across each of our four segments in the fourth quarter.
Speaker 23: We are pleased with our progress in pricing and have good visibility on pricing our backlog.
Speaker 24: We are driving variable cost productivity through logistics and material cost reductions. We are also reducing our real estate footprint and optimizing our commercial organizations.
Speaker 25: through logistics and material cost reductions. We are also reducing our real estate footprint and optimizing our commercial organizations.
Speaker 26: Turning to imaging.
Speaker 27: We saw strong organic revenue growth up 18% year-over-year led by molecular imaging, CT, MR and surgery.
Speaker 28: Our customers remain focused on expansion of capacity and access to care.
Speaker 29: Looking ahead, we expect imaging demand will remain healthy, supporting top-line growth.
Speaker 30: Following strong revenue growth in the fourth quarter, we expect growth will normalize as we move into the second half of the year.
Speaker 31: Segment debit margin declined 120 basis points year over year.
Speaker 32: We realized improving volume and price, but this was offset by headwinds from inflation, mix and planned investment.
Our double digit investment in imaging R&D this quarter reflects our commitment to innovation and commercial growth.
During the quarter, NPIs driving growth included our revolution APEX CT with a scalable detector, as well as SCT with improved imaging and workflow.
Globally, we've already seen success using deep learning from improved image quality in MR with ARE Condi L.
We're now very proud to be the first to extend those capabilities to OmniLatch and PADCT with precision deep learning available in cycle select regions.
Sequentially, EBIT margin increased 120 basis points during 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 MPIs, digital and AI leadership, and a focus on peer pathways.
In addition, we are making progress with platforming initiatives that provide a more consistent user experience and drive path standardization and cost reduction.
Moving to Despite
Customer demand continues to be strong in both hospitals and other care settings.
Organic revenues were up 7% year-over-year driven by price, improvement in sourcing and in 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 Xpert 22 premium ultrasound system for women's health and the Vivid E95 ultrasound edition advanced cardiovascular ultrasound.
Both innovations are powered by advanced artificial intelligence tools to help improve workflow, efficiency and productivity.
Segment Abit Marching 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 costs 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 continued NPI innovation, commercial excellence and localization.
The integration of PK Medical is also well on trend.
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 supplier 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 21, 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 size.
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 .
Thank you.
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 UAS customer inventory.
Margins are impacted due to inflationary pressures on raw materials and lower volumes.
The team is executing on a pricing strategy that is built around the value we deliver for customers and patients.
We continue to monitor the COVID situation closely in China and expect elective procedures to pick up when COVID infections begin.
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 decline 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 rate 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 included 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 20th, 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 percent.
reflecting an expansion of 50 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 percent.
This compares to 2022's standalone adjusted EPS of $3.38.
and includes the impact of the stand-alone costs.
We are assuming a tax, an adjusted tax rate of 23 to 25 percent.
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.
The second half of the 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.
Thanks, Omut. 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 Amactus, an innovator and 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 add 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 Cigna Experience, an MR platform that 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.
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 3DC arms to provide precise 2D and 3D images interoperably for many of the 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 subacute therapy areas, giving providers the ability to monitor patients that aren't always monitored 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 muscle's 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 US 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 in 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.
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?
please open the line. Thank you.
Again, to ask a question, please press star 11. If your question has been answered or you'd like to remove yourself in the queue, please press star 11 again.
One moment for your questions.
Our first question comes from Drew Raniere with Morgan Stanley . Your line is open.
Hi everyone, thanks for taking the questions. Morning. Morning and congratulations to you and the GE Healthcare team on the spinoff. 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.
risk of pull forward of capital sales just over the past year or anything. And I'll have to follow up. Thanks.
Thanks, Drew, for the question. I would just say if I go around the world, start maybe in Europe , there's still robust demand at this point, I think as we've talked about in the past with different audiences, but 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's 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 and...
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, 19 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, the demand's 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.
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 quarters.
Got it, thank you. Maybe one other question just on the margin expansion, maybe more for Helmos, but can you maybe help us just bridge the 50 to 100 basis point to the 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...
50 to 100 basis points, there is a number of drivers in there. So clearly volume is a driver, you know, VCP, so variable cost productivity, you know, improvement in material costs, improvement in logistics costs, and also price is key driver. So those are really, I would say, those key elements that are driving the positive improvement on the margin side.
If you look at the headwinds against that, we're still seeing material costs elevated, so especially material costs that are sitting on our balance sheet in our inventory currently. And we also continue to invest into the business, both for our growth, but also what we are putting innovation investment in R&D into the business.
That's really how we look at the margin expansion for 2023. If I give you a little bit more color through on the four segments, obviously as you've seen in the fourth quarter, the imaging segment, you know, very strong, you know, with its growth. We expect, you know, that growth as we work, you know, through our backlog continue, especially, you know, for the first half. So there's going to be more growth on the imaging side. But also, there's going to be more growth on the imaging side.
With Redburn, your line is open.
Good morning. Good morning. Thank you very much. And I'd add my congratulations on your successful spin and your inaugural results. First question for me would be actually around your molecular imaging business. This continues to drive growth in the wider imaging business.
Could you help us quantify the benefit you receive here, particularly what percent of your imaging business does this represent roughly? And also in pharmaceutical diagnostics, you have provided the market breakdown between contrast and molecular.
But what percent of pharmaceutical diagnostics is radio pharmaceuticals? That's a great opportunity. So it'd be great to have any color you can give on that. And just a quick follow-up on pricing.
Could you give us an idea of the price, rough price increase you hope to push through for this year? Thank you.
Thanks, Ted, for the questions there. I'll start maybe a little bit with MI and frame it up, and then maybe, Helmut, you can comment a little bit on price. I would start first with saying, yeah, I think one of the really interesting things that we're excited about strategically is the
is we're the only company out there that actually makes the fuels for molecular imaging, as well as has the devices that capture to create the images themselves. Why that's important is this rise of different technologies out there called Theranostics.
this combination of a therapy and a diagnostic together, and how you tune the device to the agent, whether it be in the neurosciences area, such as Parkinson's or amyloid beta plaque imaging or other parts of the body, there's a lot of longer term benefits we think will come that way.
In the agent business itself, MI agents are about a third of volume, about two-thirds is contrast imaging agents used in the x-ray equipment. But we believe that's going to be a growing area with, again, newer capabilities coming out of the pharma space that we play a critical role in helping do the diagnostics.
On the device side itself, we've got a great platform, a great team. We do some outstanding work here in the United States as well as in Israel on these devices. Probably one of the deeper expertise capabilities on different technologies, whether they be BGO or LSO, different types of PET CT detectors.
a more moderate sized business. But again, with the rise of these new technologies and give you an example of an agent comes out that needs this type of follow up to actually assess either Emily beta plaque or other capabilities, we believe our MI technologies, the MI technologies out in the industry will.
will really play a key role in helping drive that diagnosis. And then down the road, can even play a larger role in the therapy process, either dose or delivery of agents.
So Helmut, you may want to comment a little bit on the pricing question. Yeah, thanks, Pete. So add on price, we're quite happy with the progress we've been making on price throughout the year. So we started really tracking price on orders in the last year. So we have both management system that looks at the orders, but also looks at how much price we have in sales.
And in sales, since the second quarter, we have price in our sales or in revenue. It started at the low single digit. It improved as it went through the third quarter. And we are now, in some of our modalities, in the mid-single digit level, what we are seeing on price. We are happy about how we perform.
And we also have good visibility on price for this in our backlog. So we already know what is going to happen and ship here over the next, you know, quarters and how much price is in that backlog.
Michelle, we'll take our next question.
Thank you. Our next question comes from BJ Kumar with Evercore. Your line is open.
Hey guys, congratulations on a nice spring here and thanks for taking my question. Thank you. Maybe my first question is here on the guidance assumptions here. Peter, can you talk about any trends in cancellation rates or cadence that we need to be aware of? When you look at the five...
at this point, you know, with carrying a little bit larger backlog than we normally do, one of the advantages of that is we actually have greater visibility out into the distance about what the deals look like, what the margin is on the deal, the timing thereof, and one of the things our operating teams in each of the
segments have done a very nice job is actually speaking with customers and getting all the install based products planned out as far as we can go, which, you know, is in many cases, a couple quarters out, which is longer than we have historically done. But we did that purposely just based on
some of the questions within the macro environment. And so that gave us more confidence, obviously, here about what customers want, when they want it, and we've got some pretty good visibility into that. Other businesses, such as ultrasound, that have more flow capabilities, based on prospecting funnels and stuff.
we have quite good visibility as well. So, you know, if we look at that backlog, we know what the cost of the input costs are going into that. We know what the price is in the backlog. So again, for those deals, it's quite good. We clearly have orders coming into the system that will feed into that backlog.
started last year and I think that's of high value. Our new NPIs, we really focus on getting the right value for the customer and pricing it right the first time, which typically then aligns to making sure that we have the right gross margins associated with it. And then classic price increases on many of our products. So.
Again, the combination of those gives us a pretty good view into how we see the year at this point, but probably more so a better lens on the first half.
Understood. That's helpful. And maybe one follow-up for Helmo. Look at EPS guidance here, 711. Between your organic top-line assumptions and margin expansion, I think operating profit should be growing close to double digits here.
What are you assuming for FX and any below the line sensitivity here on interest expense or other items that we need to be aware of?
Yeah, so we have been obviously tightening up the range on the EPS guide, so the $3.60 or $3.75, we believe, is right in the middle when you look at the upper and lower end of the revenue and the margin expansion guide. So we wanted to tighten that range up.
And to the assumption question, there's about 2 and 1 1 in a basis point of negative impact from FX, assumed in those numbers, very little below the line. So that's really how you should look at it.
Yeah, and I would just say, one of the things is, you know, we've got, and we've talked about improving supply chain. But again, improving isn't back to, say, the good old days. You know, all of our input costs have some added cost to them. It's why we put a lot of focus on variable cost productivity. We're carrying some inventory from spot buys and things that was at higher rates.
looks quite good at this point in time. And again, we're optimistic that we're going to continue to see improvements throughout the year.
That's helpful, Prospector. Thank you, guys.
Thank you.
Thank you.
Our next question comes from Larry Beigleson with Wells Fargo. Your line is open.
Good morning. Thanks for taking the question. One on the top line, one on the margins. Pete, you talked about clearly Q4 results were very strong, 18% in imaging. You talked about the backlog here.
Is there any way to quantify this? Is there, I mean, is this somewhat of a catch up, if you will, and what are your expectations for that for 23? Clearly, you're growing well in excess of historical market growth and had one follow up.
Yeah Larry, I think particular to imaging, we obviously as well as
us and pretty much everyone in other industries, with the install type products, had some pent up demand. And I mean, that's part of our backlog, right? And we were able to deliver a higher percentage of that. That typically is more an MRCT.
PET CT, again, some of the bigger installation based products, but it's affected the whole portfolio at some level. And so, you know, Helmut mentioned the words we focused on making sure that we leaned in on getting the parts that we needed at the right time. It had a little bit of an impact on our cash flow, but we had the components available.
What's interesting is you speak with customers again, back on the list of their top capital buys are in many cases diagnostic imaging equipment, MR ranks up their high. We've mentioned the OECC arms in our remarks. Anybody that's doing any type of surgical imaging in outpatient center, that's the preferred device.
So it's quite strong, but we are definitely running at a higher level and our RPO or our backlog that we have is quite strong. And again, just to emphasize, we've got good visibility on that into 23 and well into the year. Thank you. And helmet on on on a well sales and margin cadence.
appreciate the color. Maybe if you could help calibrate us a little bit more. How much lower do you expect second half organic growth? Is it going to be below the 5 to 7 percent? And then margins, how much lower in the first half do you still expect to be down year over year? Thanks for taking the question.
So maybe I'll reiterate how we look at the overall guidance for the full year and the quarterly flow. So on revenue, we expect growth to be stronger in the first half, clearly, and that is driven by the backlog. Also, how we have lined up really past inventory in the first half, accordingly. So, we expect growth to be stronger in the first half, accordingly.
the site on the revenue.
On the margin side, you will see, I think, more of the ex-margin expansion in the second half, as we expect some of those productivity initiatives to take hold, especially around VCP and cost improvements on the gross margin side.
MR, CT, PET CT, again, some of the bigger installation-based products. But it's affected the whole portfolio at some level. And so, you know, Helmut mentioned the words we focused on making sure that we leaned in on getting the parts that we needed at the right time. It had a little bit of an impact on our cash flow, but we had the component.
from prior quarters in 2022.
Justed EBIT margin was 17.1%.