Q2 2023 GE HealthCare Technologies Inc Earnings Call
Speaker 1: Good day, ladies and gentlemen. Welcome to the Gee Healthcare second quarter 2023 earnings conference call. My name is Olivia and I'll be your conference coordinator today. As a reminder, this conference is being recorded. I would now like to send the program over to your host for today's conference, Callen Borders, Chief Investment Relations Officer.
Speaker 1: Please proceed.
Speaker 1: Thanks, Livia. Welcome to GE Healthcare's second quarter 2023 earnings call. I'm joined by our President and CEO , Peter Arduini, and our Vice President and CFO , Jay Socaro. Conference call remarks will include both GAAP and non-GAAP financial results.
Speaker 1: 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.
Speaker 2: Actual results may differ materially due to risks and uncertainties. With that, I'll hand the call over to Peter.
Speaker 3: Thanks, Carolyn. First, let me welcome Jay, who's joining us for his first earnings call with Ghe Health Care. Since he arrived last month, he's hit the ground running to immerse himself in our business and has been meeting with our global teams. You'll hear more from Jay shortly.
Speaker 3: Now let's look at our results for the second quarter. We delivered strong performance with 9% year over year organic revenue growth. This was driven by strong demand for NPI's and the continued value that we bring to our customers.
Speaker 3: We were also pleased to see global demand improve sequentially, delivering 6% orders growth in a second quarter, out from 3% in the first quarter.
Speaker 3: We're encouraged by healthcare providers, continued investment globally in capacity to improve patient care and productivity. Volume remains strong for surgical procedures, which drives demand for imaging services and surgical equipment.
Speaker 3: In the US, customers are investing in products to improve productivity and enhance overall competitiveness.
Speaker 3: In the rest of the world, we're seeing solid demand in hospitals and combined behaviors associated with increased procedures, as well as the need for more productivity to address labor constraints.
Speaker 3: We've made good progress on our operating priorities, including increased discipline utilizing lean as a management capability, and rigor in areas such as variable cost productivity.
Speaker 3: This resulted in a 14.8% adjusted EBIT margin, which was an improvement of 70 basis points from Q1. Just at EBIT margins were down slightly year over year on a standalone basis as we continued to invest in the business, with R&D spending up 16% year over year in the second quarter.
Speaker 3: Some areas where we've invested include photon counting, next-gen MR, and artificial intelligence optimized interventional cardiology.
Speaker 3: We're also further developing machine learning capabilities across all modalities to build interoperable ecosystems of devices and applications.
Speaker 3: We expect our investments to deliver value for our customers while laying the groundwork for the advancement of precision care.
Speaker 3: Turning to capital allocation, we're focused on pursuing a balanced strategy with the goal of creating value for shareholders. This includes investing organically, acting on the right inorganic opportunities, deleveraging over the near term, and initiating a dividend.
Speaker 3: With markets improving globally and strong execution in the first half of 2023, we have confidence in our ability to deliver on the full year. As a result, we're raising our full year guidance range for organic revenue growth by 1 percentage point and 10 cents in adjusted EPS at the midpoint.
Speaker 3: Jay will now take you through our financials. Jay.
Speaker 4: Thanks, P.
Speaker 5: Let me start by saying that I'm thrilled to be here at GE Healthcare at such an exciting time for the company. In particular, I've been really impressed with our team and the collaborative culture across the globe. I'm looking forward to being part of this collaboration and helping to drive our innovation and growth goals, which will ultimately deliver value.
Speaker 5: to our customers and shareholders.
Speaker 5: Turning to our financial performance.
Speaker 5: For the second quarter of 2023, revenues of $4.8 billion increased 7% year-over-year and grew 9% organically. This was driven by strong product growth.
Speaker 5: As Pete mentioned, organic orders were up 6% year over year. We've decided to include this metric going forward, as we believe it provides important information regarding demand and our future growth.
Speaker 5: Book to bill improved to 1.04 times versus 1.01 in the first quarter of 2023.
Speaker 5: Our total backlog continues to be healthy at $18.4 billion.
Speaker 5: On a standalone basis, second quarter adjusted EBIT margin improved 70 basis points sequentially, with progress on price, delivery, and productivity. However, it was down 10 basis points year over year due to inflation and R&D in commercial investments.
Speaker 5: Adjusted EBIT margin of 14.8% decreased 120 basis points year over year as price productivity and volume benefits were offset by inflation and planned investments. Note that this decline was primarily driven by standalone costs that we did not have in 2022.
Speaker 5: It was also impacted by a challenging comparator versus the second quarter of 2022, when we delivered an adjusted EBIT margin of 16%. The result last year included mixed benefits with increased sales in higher margin services versus products.
Speaker 5: given supply constraints.
Speaker 5: Adjusted EPS was 92 cents up 12% versus prior year on a standalone basis driven by our strong top line growth in the quarter, but down 20% year over year due to interest expense. Free cash flow was down year over year.
Speaker 5: due to incremental interest and pension payments associated with our spend, which I'll discuss in greater detail shortly.
Speaker 5: Moving to revenue performance, we grew 9% organically year over year. FX was a headwind of 2% to revenue growth. On a reported basis, product revenues increased 11% year over year driven by strong procedural demand. Service revenue grew 1% which was impacted by foreign exchange.
Speaker 5: We continue to expect our product growth to translate to service growth in coming quarters, as service contracts do lag new product sales.
Speaker 5: All regions posted strong sales growth, including in China, where revenue growth was in the double digits. And we expect continuum momentum in the third quarter, as China continues to prioritize improved healthcare access.
Speaker 5: Let's move to margin performance for the quarter.
Speaker 5: While EBIT margin was down slightly year over year on a standalone basis as we invest in future innovation, we remain focused on driving margin expansion through operational initiatives and with progress on our separation.
Speaker 5: During the second quarter, volume increased in all segments and regions.
Speaker 5: We had positive sales price for the quarter with growth in all segments. We also benefited from AI-powered new product introductions at higher margins.
Speaker 5: We've made progress on our lean productivity initiatives with logistics being the main out performer as a result of improving rates and shifting delivery from air to sea.
Speaker 5: We also saw a decrease in spot bias.
Speaker 5: Enhancing our productivity efforts gives us visibility into future cost savings. In addition, we're making real progress reducing our skew count to simplify our portfolio and focus on higher margin products.
Speaker 5: On the separation side, we're very much on track with planned exits of TSAs, with approximately 100 exited to date. For instance, we continue to rationalize our IT services and applications to a fit-for-purpose model, and we're progressing towards outsourcing certain activities previously performed in-house.
Speaker 5: Across the organization, we're focused on optimizing G&A by reducing our real estate footprint, our IT costs, and other functional expenses.
Speaker 5: That being said, we expect the benefit of many of these changes in 2024 and beyond.
Speaker 5: As a public company, we're incurring approximately $200 million of recurring standalone costs annually that are now impacting our segment EBIT margin rates. These costs are generally allocated based on revenue and equate to roughly 100 basis points of margin headwind for each segment.
Speaker 5: Overall, we're pleased with the progress we've made in the first half of 2023, and we have line of sight to expand margins going forward through our focus actions.
Speaker 5: We're pleased with the progress we've made in the first half of 2023, and we have a line of sight to expand margins going forward through our focus actions. Now, let's discuss our segments.
Speaker 5: Turning first to imaging, we saw strong revenue growth up 9% year over year driven by molecular imaging CT and MR. We saw supply chain fulfillment improvements, stable demand in the past few quarters, revenues from new products.
Speaker 5: and also pricing initiatives positively impact results.
Speaker 5: Overall, imaging demand is healthy, supporting top line growth. Segment EBIT margin declined 190 basis points year over year. We made progress versus last year on productivity, volume, and price, though it was more than offset by inflation from prior year purchases.
Speaker 5: and planned investments.
Speaker 5: Importantly, margins improved 290 basis points on a sequential basis.
Speaker 5: Turning to ultrasound, we generated organic revenue growth of 3% year over year, following several quarters of strong revenue growth, reflecting significantly high backlog and fulfillment.
Speaker 5: Revenue growth in the second quarter was driven by cardiovascular and women's health. This included new product launches with AI capabilities aimed at driving improved efficiency in patient outcomes.
Speaker 5: Sigmund Eben-Margian of 22.8% was down 380 basis points year over year, primarily due to planned investments.
Speaker 5: Productivity and price more than offset inflation.
Speaker 5: Ultrasound margin performance reflects our investment ramp in new product introductions, such as advanced probe technology, products with more digital capabilities, and ultrasound-guided surgical navigation.
Speaker 5: We also have an inorganic investment with caption health, an artificial intelligence healthcare leader that creates clinical applications to aid in early disease detection using ultrasound.
Speaker 5: We've added resources in our commercial organization for increased visibility and capture rate. We continue to focus on our market leadership position, expanding visibility globally, and increasing China localization.
Speaker 5: We're excited about the growth opportunities in this business as we innovate and deliver differentiating technologies to the market.
Speaker 6: Te.
Speaker 5: Moving to patient care solutions.
Speaker 5: Organic revenue was up 9% year over year driven by price and volume. We were able to fulfill more backlog with an improved supply chain.
Speaker 5: Revenue was also driven by new product launches, and our backlog remains robust. PCS margins decreased by 50 basis points compared to the second quarter last year, driven by inflation and planned investments, which offset price, productivity, and volume growth.
Speaker 5: We're investing in a digital future across PCS, and in particular, we're excited about the monitoring new products launching in the next few quarters, which we expect will contribute to volume growth.
Speaker 5: Moving to pharmaceutical diagnostics, we see continued recovery of global elective procedures, which supported strong organic revenue growth this quarter. Top-line revenue was up 20% year-over-year, driven by price and the recovery of volume following the China COVID-related plant shutdown.
Speaker 5: The Redmond EBIT margin of nearly 27% improved 200 basis points year over year, driven by pricing actions, productivity, and volume. In addition, there were one-time costs in the Euroville corridor due to plant shutdown.
Speaker 5: This was partially offset by raw material inflation and planned investments.
Speaker 5: Next, I'll walk through our cash flow performance. The second quarter was impacted by spin-related items, including net standalone interest payments of $193 million, and $83 million of incremental post-retirement benefit payments.
Speaker 5: which were not in our 2022 actuals. Excluding these posts related, posts been related items.
Speaker 5: Free cash flow would have been positive for the second quarter and an increase year over year. As a result, we expect 2Q will be our lowest.
Speaker 5: Cash flow quarter of the year. Working capital improved year over year driven by better inventory management. As we've previously noted, we expect substantially higher free cash flow in the second half of the year relative to the first half due to seasonality and higher volume, as well as the timing of certain supplier and compensation payments.
Speaker 5: for 2023 in the range of 6 to 8% and increase from the prior range of 5 to 7%.
Speaker 5: Our current view is foreign exchange headwinds of less than 1 percentage point for the year.
Speaker 5: We expect revenue growth in the second half to be in line with our medium-term growth target of mid-single digits.
Speaker 5: We continue to expect full year adjusted EBIT margin to be in the range of 15 to 15.5%. This represents an expansion of 50 to 100 basis points over a 2022 stand-alone adjusted EBIT margin. We remain focused on driving margin expansion while continuing to drive margin expansion.
Speaker 5: new product introductions. Inline with seasonality, we respect the fourth quarter adjusted EBIT margin to be the highest of the year, while 3Q will be similar to Q2Q.
Speaker 5: We are also raising our full year 2023 adjusted EPS outlook to a range of $3.70 to $3.85, representing 9% to 14% growth versus 2022 stand-alone adjusted EPS of $3.38.
Speaker 5: $3.60 to $3.75.
Speaker 5: We continue to expect free cash flow conversion to be 85% or more for the full year, with stronger free cash flow generation in the second half. Our cash flow outlook assumes that legislation requiring R&D capitalization for tax purposes is repealed or deferred beyond 2023.
Speaker 5: The free cash flow impact of this legislation would represent up to 10 percentage points of free cash flow conversion for the year.
Speaker 5: impact of this legislation would represent up to 10 percentage points of free cash flow conversion for the year. Now I'll hand the call back to Pete.
Speaker 3: Thanks Jay. Before turning to Q&A, I want to touch on a few exciting areas that GE HealthCare is focused on to address patient and customer needs.
Speaker 3: In imaging this quarter, we announced two deep learning artificial intelligence technologies.
Speaker 3: Precision DL and Sonic DL. Precision DL is available on our OmniLegend PET CT and enables faster scan times and smaller lesion detectability.
Speaker 3: Sonic DL leverages capabilities from our Air Recon DL MR platform and acquires high-quality MR images up to 12 times faster than conventional methods.
Speaker 3: By enabling imaging with a single heartbeat, it reduces the need for repetitive patient breath holds, making MRI more accessible for cardiac patients.
Speaker 3: In ultrasound, we introduced the world's first and most compact mini 3D transesophageal echocardiogram probe designed for pediatric cardiology. It's 57% smaller than an adult probe and it provides access to real-time 3D imaging for children who could not tolerate an adult-sized probe.
Speaker 3: This innovative probe technology is an example of our investment and leadership position in ultrasound.
Speaker 3: We continue to invest in commercial capabilities and expand further into adjacent and new markets, such as point of care and handheld ultrasound.
Speaker 3: In PCS, we're investing in monitoring solutions for critical care and acute patients.
Speaker 3: The introduction of CareScape Canvas gives us a platform to build on for years to come and with Portrait Mobile being the newest addition on the platform.
Speaker 3: Portrait mobile enables care teams to monitor the unmonitored by shifting the paradigm from periodic spot checks to continuous monitoring.
Speaker 3: freeing the patient from the bed while continuously monitoring for signs of patient decline.
Speaker 3: These are our first major introductions in monitoring in recent years and create an opportunity for install-based upgrades as well as new growth.
Speaker 3: In PDX, we announced the National Comprehensive Cancer Network guidelines now recommend the use of FES PET imaging agent for estrogen receptor positive disease for patients.
Speaker 3: Suriana is the first and only U.S. FDA-approved imaging agent to help clinicians assess reoccurring or metastatic breast cancer.
Speaker 3: The benefit of Suriana is that it provides a whole body view of estrogen receptor positive lesions in one exam.
Speaker 3: We're encouraged that the addition of Seriana to the NCCN guidelines will increase this adoption.
Speaker 3: Turning to recent news about advancements in Alzheimer's disease therapies, many of you heard about the FDA's recent approval of laketimab, and all other promising molecules in the pipeline.
Speaker 3: that have the potential to provide millions of patients high quality quality of life if diagnosed and treated early. Before now the only option was to fundamentally treat the symptoms.
Speaker 3: As these new therapies become more widely available, there's a need for precise and non-invasive imaging and digital solutions, which we're well positioned to deliver on.
Speaker 3: Let me walk you through the opportunities for GE Healthcare. Our technology, including MR and PET scanners, and our amyloid imaging agent, Visimo, combined with digital solutions, enables us to be a disease state solution provider for our customers. As you can see on the page, we have a number of different technologies that are available to our customers.
Speaker 3: These breakthrough therapies will create new market opportunities for us in upfront diagnosis, safety monitoring, and follow-up.
Speaker 3: This approach that we often refer to is D3, which is about smart devices and drugs, a disease state focused and digital solutions. And is a good example of how we think about care pathways in our evolving role to provide precision care.
Speaker 3: While it's still early in the Alzheimer's therapy journey, we remain very optimistic about the benefit for patients and the growth opportunities this will generate for GE Healthcare as a partner to providers.
Speaker 3: While it's still early in the Alzheimer's therapy journey, we remain very optimistic about the benefit for patients and the growth opportunities this will generate for GE Healthcare as a partner to providers. In summary, We are really hopeful that more $100 million will be made when it comes to long term adequate deliveries towhen it will be available, probably in the UK and throughout the United States.
Speaker 3: We've had many accomplishments since our launch as an independent company, and they have set us up for long-term sustainable growth. I'd like to thank our 50,000 plus team members across the globe for their dedication and contributions on our initial phase of growth. I'm pleased with the results we've delivered in the first half. With strong visibility into our second half, we've made a difference.
Speaker 3: supporting our updated outlook for the full year, we're seeing continued solid market demand for our products and services. We're allocating our R&D spend into high-growth areas to drive long-term innovation while also driving margin improvement actions. And our healthy backlog provides good line of sight.
Speaker 3: through 23 and into 24. And with that, we'll open up the call for questions.
Speaker 2: Thank you, Peter. I'd like to ask participants to please limit yourself to one question and one follow-up. Livia, can you please open the line?
Speaker 1: Certainly ladies and gentlemen to ask a question you will need to press star 1 1 on your telephone and wait for your name to be announced.
Speaker 1: Ladies and gentlemen, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A roster.
Speaker 1: And our first question coming from the line up Anthony if Tony with Miss whoo, how your line is open
Speaker 7: Maybe to recap on the TSA roll off.
Speaker 7: and when, you know, how many TSAs are left, and when do you expect to see, you know, leverage gains against those TSAs rolling off at the operating margin level? And I'll have a follow-up repeat on Alzheimer's disease.
Speaker 5: Great. Thank you, Anthony. Appreciate it. So far from a TSA standpoint, things are very much on track. We have quite a few to exit. In fact, we probably have over 400 TSAs to exit over the next several years, with the vast majority of those exits taking place.
Speaker 5: 18 to 24 months following the spin. But so far we've exited 100, and it really is setting the stage for our successful transition to a standalone public entity. Importantly, about a third of the exits that we've had thus far are related to IT.
Speaker 5: Another, about half of them are related to facilities. So I would say that there's really good progress on setting ourselves up. And then once we have that in place, we can really start to optimize the long-term footprint, the long-term operations of our company. What I mean by that, and in the prepared remarks, I made a statement.
Speaker 5: about our IT area. You know, IT is an area where we have tremendous optimization opportunities. I just spent a few days with the IT team walking through many of those opportunities. Things like moving to the cloud, many of the servers that are currently hosted. Things like, incredible paired interface
Speaker 5: rationalizing the application service providers, all of those will give us a multi-year tailwind in terms of optimization of cost. But the first step is getting to stand alone. And so, so far so good on the TSAs. This is going to be a...
Speaker 5: This will impact 2024, 25, and 26 more than it does 23, but it's crucial at this stage that we operate effectively as a standalone. Thank you very much, and again, welcome to the team. And then maybe Pete just pivoting to the comments on Alzheimer's disease.
Speaker 7: You referenced Lekembe recently securing FDA approval here, and more recently than that, we've seen CMS actually propose local max to cover beta PET scans for beta amyloid plaque.
Speaker 7: That's a proposal that was put out there about a week ago. So when we take a higher level look at this demand cycle, you know, is there anything you can sort of bookend us on the early views on a TAM opportunity when we consider that there's MR involved here? There's also PET, CT, several, at several phases along the patient journey here.
Speaker 3: So maybe just your early thoughts on when this demand cycle begins and how large it can be for GE. Thanks again Hey Anthony, thanks for thanks for the question. I mean, let me just start out with I mean, we're just living in a really fantastic window of time here where between different therapies are coming up that are going to change patients lives and I think
Speaker 3: And I think that's one of the interesting changes here, not only in this disease area, but in other areas where we play a significant role in bringing forth these capabilities. I think, you know, 30, 40% improvement, some early indications that earlier patients better improvement, you know, gives us pretty strong confidence that these are going to be impactful.
Speaker 3: You know, think of us as the company that facilitates, so to speak, kind of the management of the disease. If you think about the last chart that I pulled up in the deck on 14, where we play a screening and assessment role with MR or our PET products, we play a major role in diagnosis with PET and are also...
Speaker 3: radiopharmaceutical imaging tracer, Visimo, and then actually treatment and monitoring. And in treatment, as you probably know, after each of the injections, having an MRI to make sure that there aren't any baseline side effects. And then we think longer term monitoring to see what is the baseline of the amyloid beta reduction at that point. And that all encompassed with some digital solutions that can make a...
Speaker 3: you know, re-registration that can make integration, make the tool sets much easier, you know, outside of an academic setting so that this can work for providers. And so our opportunity is to work with big IDNs as well to help them think through the problem statement that's in front of them.
Speaker 3: of how do you provide this across rural care, concentrated city care, fleet management, and we think we can help make that happen. You know on the size of the opportunity I think it's a little too early to say. I think it's not a huge opportunity in 23, but if you look over 24, 25, 26.
Speaker 3: depending on the uptake of the drug, which is gonna be heavily tied to companion diagnostic, reimbursement, therapy diagnostic, and the follow on drugs. We believe that this is a pretty profound growth opportunity across the space. But time will tell how that ultimately plays out. The last point I would just make is that we're really the only company.
Speaker 3: that touches all these areas, MRI, PET-MR, PET-CT, and the radiopharmaceutical tracer. And what's interesting about the radiopharmaceuticals is, I think you know this well, is unlike other drugs or a generic where it can be vialed and put on the shelf, this is a product that once it's made, it has a half-life of under two hours, so it starts degrading. And we already have a large...
Speaker 3: I think first for patients and their families, and then second, the opportunity that we can play. Thank you very much.
Speaker 1: Thank you. Our next question coming from the line of Ryan Zimmerman with BTIG. Your line is open.
Speaker 7: Hey, good morning. Thanks for taking the questions and congrats on the nice quarter here. I want to just talk about the implied order growth and appreciate you guys including that metric this quarter. I think investors were looking for that, but just the implied order growth in the back half of the year. You face some tougher coms.
Speaker 5: you know, if I'm not mistaken, and how to think about that in relative context to the RPO, which is down maybe about 120 basis points in total. Sure, maybe I'll start with a couple comments and then turn it over to Pete. Pete, and overall, you know, we do appreciate your comment in terms of including work.
Speaker 5: of very important for us and very, you know, a critical driver long term. And I would say, you know, as we look at the second half orders growth, you know, for us, we're very focused on kind of driving, you know, this mid single digit area, because it's critical to the long-term model that we have as a company for us mid single digit growth is something that we're targeting for the next several years.
Speaker 5: So we're going to continue to drive performance and target that level. What I would say is, as it relates to the backlog, our backlog overall declined a bit. I think it was $19 billion and it declined to $18.4 billion. That's simply related to the fact that revenues grew faster than orders.
Speaker 5: And so we have an incredibly healthy backlog at this point. We feel quite good about the quality of the backlog as well. So I think that's something that we're going to watch through the rest of the year because it does set up 2024 nicely if we can have a robust backlog in place as we approach Q4. So far so good. There's nothing other than that dynamic of faster revenues than orders that contributed to the decline. So I think that's something that we're going to watch through the rest of the year.
Speaker 3: But we'll continue to watch this. Pete? Yeah, I mean, Jay, I think you covered it all. I'd just say, Ryan, you know, we were pleased with the performance. Obviously, the step up from Q1. As you know, there's still a little bit of noise in ours and many folks' numbers coming out of COVID and which countries switched at what point in time.
Speaker 3: But this is about a real durable demand that we see, particularly in our imaging world and across the board. But I think that's where we're seeing aligned with our other comments about the productivity that those products bring. And also the backlogs that exist because of incoming procedures. This is how you diagnose, this is how you plan.
Speaker 3: to feed that backlog to set us up for in the coming years.
Speaker 8: That's very helpful. And then Jay, for you, I'm looking back at the medium term margin targets from the capital markets day. I think they were high teens to low 20s. He called out the standup cost. I assume those were factored in the guidance, but just given kind of your early time in the company, maybe you can comment on whether you see those medium term targets as.
Speaker 5: more achievable, less achievable, and just timing around those if you're comfortable sharing that in terms of EBIT margins? Sure. Overall, what I would say is I feel good about the margin targets that the company has put together. From my standpoint, we're a new public company, so there's a lot of...
Speaker 5: There's a lot of opportunity that's simply created by spinning off this enterprise. But then if you look at the drivers that we've laid out, commercial execution, innovation and optimization, there are real opportunities underlying each of these. From a commercial execution standpoint, this idea of disciplined around pricing.
Speaker 5: It really is embedded in the culture at the company. We've targeted 2 to 3% this year, 1 to 2% going forward. This idea of commercial execution and how we capture the real value that we're providing to healthcare providers in the products that we sell, I think it's something that's going to continue to bear fruit. From an innovation standpoint, I think we collectively are incredibly excited about.
Speaker 5: as a driver. And then finally, and I alluded to this a little bit more, you know there's a lot of low-hanging fruit that we can optimize as we move forward. And that's just true of any new public company. There are real opportunities for us to rethink how we provide IT services and other areas.
Speaker 5: So there's some great opportunity there. So generally speaking without being specific, I would say I feel quite good about it. You know, the last comment I'd make related to this is another aspect of the culture that's been impressive to me is this lean mindset. And so this idea of how do we get after optimization in our factories, how do we get after optimization in our end to end process?
Speaker 5: I think that's another tool in the toolbox that's going to go a long way to helping us transform the margin of the company.
Speaker 1: Thanks for taking the questions, guys. Thanks. Thank you. And our next question coming from the line of Patrick Wood with Morgan's family, Yelena Sophan.
Speaker 9: Perfect, thank you very much for taking the questions. I'll just keep it to two quick ones, hopefully. So the first one, all the books, nice plus six. I'd love if you could give any more detail pulling apart by the by, modality and imaging, or we don't need the numbers specifically. I'm just curious as to where you're seeing the biggest strength. I'd rely on modality or by region. Just a little bit more color that would be really handy.
Speaker 9: And then the second one actually is around the whole AI commentary side of things. Things like scam speed, acceleration, obviously there's implications for the install base, but is it a function that you can take better pricing and then maybe you get better penetration with therapeutic areas like cardiac that means that the install base remains.
Speaker 9: healthy and large at a better price rather than needing fewer systems to scam the same number of patients if you see what I mean. So any sense around like whether it's pricing or growth through you know better let's say adoption of radiology in areas where it wasn't previously there just curious how you see that dynamic. Thanks. Yeah so maybe I'll start with the AI piece and then Jay if you want to add some color what we can on the orders front.
Speaker 3: straightforward, automating many steps and productivity. So in the case of a institution that's having labor constraints, which you know, you can include almost all being able to actually automate, which enables, you know, more throughput on that given higher labor dollar is a big deal. And so many of our products, you know, we have 42 approved FDA.
Speaker 3: AI integrated applications that are out there, really one of the leaders in the space. That's been a big deal. And what we've focused on, I would say different than maybe some of our competitors is, is not only on the new product, but taking it back into the install base. And why that's so important and it gives us a differentiated value is,
Speaker 3: If you have four of our MRs already and you wanna add two other new sites, upgrading those MRs with the capability that literally makes them state-of-the-art image quality of today better than what's out in the marketplace as well as increases their productivity by 30, 40, and sometimes 50%. Through put, it's a huge deal. And obviously the ability to upgrade your own systems is only a lot of...
Speaker 3: and we'll be demonstrating later this year, our own store, so to speak, that allows recurring revenue for applications and access to them wherever that patient might be within that customer network. And then longer term, which we're leading to and we'll be demonstrating later this year is this whole idea of multimodal data integration.
Speaker 3: And it's a really important aspect of the AI side that if you do have multiple exams or capabilities, that you can get assistance in actually interpreting what they mean. And we'll talk more about that. I think that's going to also be an important part of this Alzheimer's opportunity that we have as well.
Speaker 3: is to kind of simplify again around a given disease state how we actually support the case. So let's kind of end on the AI front. I think combination of added productivity and throughput, but also new capabilities too.
Speaker 5: think about how you manage it is a disease state differently on the orders french a i don't know what else you know overall like like i said earlier please with orders in the second quarter i think for us that you know getting to that mid single digit uh... really does unlock the long term model that we have uh... what i would say i don't want to unpack too much
Speaker 5: beneath what we've shared for competitive reasons, but what I would say is generally we saw strength across geographies, which was great. And the 6% did include the very strong PDX number in it. So if we were to look for a more traditional line equipment type businesses, the orders growth was 4%. You can do that math, but I think it gives an illustration as to the health.
Speaker 10: Jay, it's a pleasure to be working with you again. Welcome to GE Healthcare. So one question for Pete and one for Jay. Jay, I'll start out with you. Corporate margins, a little over 40%.
Speaker 10: Obviously you've laid out a roadmap in terms of rationalizing TSAs, IT, product skews, and you know, can you walk us through how should we think about corporate gross margins? Let's say over the next four, six, eight quarters.
Speaker 10: What are the key things that you should be looking for? That's one question for Jay. And Peter, if I could just quickly throw in a question for you, piggybacking on the AI question. I have a more higher level question, Pete.
Speaker 10: So obviously you'll have a lot of AI ML in your systems. Over time, how do you envision exogenous AI systems interacting with your system AIs?
Speaker 10: Do you ultimately believe this is going to be synergistic? Do you anticipate disruption? How do you hold pricing? You know, whether it's chat GPT or whatever, but I'm more interested in the exogenous influences as you all try to grow and maintain your EI services business.
Speaker 5: thank you do you want to start with growth margin uh... sure uh... so so overall in the second quarter gross margin was up uh... mainly driven by price and productivity uh... which offset inflation and i know that was in your question but i share that because
Speaker 5: Fundamental to our algorithm, going forward is price and productivity offsetting inflation along with the benefits of new products. So for us, this is an intense, this idea of securing the 2 to 3% price in this year's numbers, securing 1 to 2% going forward. That's a crucial enabler when coupled with...
Speaker 5: a lot of the productivity initiatives that we have ongoing at the company. So I'll stop short of giving the 2024 gross margin number, but what I can say is, you know, there will be a lot of the benefits of TSA and GNA optimization that obviously accrue to the SGNA line, but we do expect gross margin enhancements going forward, largely based on price plus new products.
Speaker 5: plus some of this work that we're doing on productivity initiatives. Now, as we think about the next couple of quarters, you know, what I would say generally speaking is the third quarter will probably be in the range of the second quarter, with the fourth quarter being the highest of the year. And a lot of that just has to do with seasonality benefits, as is normally the case. But then as we move to next year, we'll have that discussion in the future. And on your question about AI exog...
Speaker 3: contribution that can rival a larger system. And I think that next change over time is going to impact our broader products. To your point, most of our AI today is incorporating our own proprietary recon data, so it's kind of our domain. And as we go beyond that, we look at how we're going to build this within this ecosystem and really embrace some of these technologies. The key
Speaker 3: and really having kind of the right committees we're bringing together, we think about ethics and healthcare about how these come together. I think that's at its core. One of the key reasons I wanted Taha to come in as our chief technology officer, his background as an interventional cardiologist, worked at the FDA on data statistics, and then seven years at Amazon leading AI and ML is exactly this, is to be able to distill interest with us atheart, we're committed the least to how do we make sure that everybody has access to these small grants. So as I've said, the
Speaker 3: create an ecosystem where for customers this is the place you want to go to kind of leverage connectivity but also integrated AI apps. This is at the core of what we're focused on and so I would say stand by I think later this year we'll be able to talk more about what our plans are and and demonstrations around it but this is an important part of it.
Speaker 3: applications for diagnosis. But if they aren't integrated in the disease pathway, the appropriate way, they actually add work and complexity. One of our expertise is how do you integrate them into your workflow so you get the benefit for the patient, but you also get the productivity for the system. And that's really where we add a lot of value.
Speaker 3: But if they aren't integrated in the disease pathway, the appropriate way, they actually add work and complexity. One of our expertise is how do you integrate them into your workflow so you get the benefit for the patient, but you also get the productivity for the system. And that's really where we add a lot of value.
Speaker 5: Thank you. And our next question coming from the line of VJ Kumar would ever cry a silent is open. Hey guys, congrats on my spring share. And thanks for taking my question. Pete, my first question for you. One of your comparators called out, order, you know, declines, brush your headwinds.
Speaker 5: So when you look at your book, The Battle of 1.04, was there a clean number? Was there a Russia headwind? I'm wondering what that number, ex-Russia headwind was. And when you think about your order growth versus your peers up here seeing declines, is that sort of signaling some share shift in the industry?
Speaker 3: Yeah, look, I would say from a standpoint of overall market and share, you know, our philosophy has been really balanced on getting the most value for our products in all the geographies and also balancing share. You know, an ideal scenario for us is...
Speaker 3: to hold or be slightly up and share, but to be able to get the right value in all the geographies. And again, this ties back to price, gross margin, all the kind of things. That's what we've been focused on. But we have done reasonably well here in the last nine, 12 months. And some of that's directly attributed to, our metric we use would be...
Speaker 3: and because it's more of a cutting edge opportunity, you also have an opportunity to go into others install base and say, hey, maybe you should take a look at us. So I think we're in a good position from that standpoint. You know, look, from the Russia point of view, we've been focused on the humanitarian support that has been supported by government.
Speaker 3: You know, maybe we could do a little bit better against that, but you know, we've been factoring that in all along about what was taking place. The added process controls and things that the U.S. government had put in place, I think the team has managed reasonably well, but it's clearly had more of a extending the time to have a transaction take place. But again, just to reinforce, it's contemplated in our guidance.
Speaker 3: And just to clarify that, how big is Russia for GE Healthcare? And what have been the declines in Russia, if at all, in 2Q? So we basically, we don't break that fully out, but you know, Russia, as we've said in the past, is 2% or slightly below that, in that range is what it represents for us. And the decline in 2Q? No, no, no, the total rush of business.
Speaker 5: Yeah, I think in the second quarter, you know, it was an important improvement from the first quarter. We saw 70 basis points of margin expansion. And, you know, what I like to see VJ is we did that in the face of fairly substantial R&D growth, which is great as we look to accelerate some of the new products.
Speaker 5: that we have and some of the excitement there. So 70 basis points improvement from Q1 to Q2. As we move to the second half of the year, what I would say is the third quarter is probably gonna be along the lines of the second quarter from an overall margin standpoint.
Speaker 5: We always do have a substantial tick up in the fourth quarter and we will start to see some of the benefits from some of the activities on GNA impacting the fourth quarter. So you start to see a little bit of that impact coming through and that's what really drives up the fourth quarter to a much higher level than we've seen earlier in the year.
Ladies and gentlemen, this vessel teleconference for today. Thank you for your participation you may now disconnect.
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