Q2 2026 GE HealthCare Technologies Inc Earnings Call
Speaker #1: mode. After the speaker's will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. withdraw your question, please press star 11 again. conference is being recorded. would now like to hand the conference over to your speaker today. Chief Investor Relations Officer. Ma'am, please go ahead.
Speaker #1: ahead.
Speaker #2: HealthCare's second quarter 2026 earnings call. I'm joined by our president and CEO, Peter Arduini. Vice President and CFO, Jay Saccaro. And our controller and chief accounting officer, George Newcomb.
Speaker #2: Our conference call remarks will include both gap and non-gap financial results. Reconciliations between gap and non-gap measures can be found in today's press release, and in the presentation slides available on our website.
Speaker #2: 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.
Speaker #2: And with that, I'll hand the call over to Peter.
Speaker #3: Thanks, Carolyn. Good morning, and thank you for joining us today. We were pleased with our strong performance in the second quarter. Orders increased 11%, with strong backlog which grew 2.6 billion year over year, and book-to-bill of 1.15 times, all of which were at record levels.
Speaker #3: We're seeing healthy end-market demand in all three of our segments and across geographies, reflected in the growth of our differentiated products and solutions that improve clinical outcomes and productivity.
Speaker #3: The sentiment was, once again, reflected in our most recent survey of top U.S. customers. We're increasingly becoming a key productivity enabler for our customers as they navigate capacity constraints and workflow challenges.
Speaker #3: At the same time, the substantial changes that we've made in our commercial organizations and progress on our new innovations, many of which are AI-enabled, strengthen our competitive position and our delivering results.
Speaker #3: We've launched several new products from our pipeline with more to come, and these products position us well to contribute meaningfully through the balance of the year and beyond.
Speaker #3: We're also seeing continued traction in our service businesses, strengthening our recurring revenue base and creating additional value for customers. Fundamentally, it's the sum of all of these parts that gives us confidence in the remainder of the year and our medium-term outlook.
Speaker #3: Revenue growth in the quarter was led by strength in pharmaceutical diagnostics and advanced imaging solutions. Patient care solutions performed performance remained challenged. We're actioning improvement initiatives via our business system Heartbeat, with a focus on increasing shipment velocity and backlog conversion of our monitoring and anesthesia product lines, to deliver PCS revenue and margin improvement in the second half.
Speaker #3: A bright spot in the quarter was the strong PCS orders growth, particularly in monitoring, driven by our new platforms and recent Salesforce realignment. As we focus on accelerating recovery in this business, a comprehensive review of the strategics options is underway to determine the best path to maximize long-term growth and value.
Speaker #3: Including continued ownership, a sale, and other value-enhancing transactions. This is a business with depth and breadth that touches many areas within health systems. We have a healthy pipeline of new products in anesthesia and monitoring, as well as digital offerings expected to be introduced this year and in 2027.
Speaker #3: Moving to slide 4. Let's look at how we're delivering on our growth strategy, starting with how we enable precision care. D3 brings together smart devices and drugs, a disease-state focused and digital capabilities, particularly AI.
Speaker #3: Heartbeat helps us align customer needs, product development, sales and service capabilities more effectively, and together they help us bring innovative products to market faster and strengthen customer relationships, while improving the margin profile of the portfolio over time.
Speaker #3: Our D3 strategy is resonating with customers, and their interest in our differentiated solutions is reflected in our strong orders growth in the quarter, including broad-based contributions from ultrasound, MR, CT, patient monitoring, radiopharmaceuticals, and interventional labs, among others.
Speaker #3: This aligns to the global demand backdrop we're seeing for our technologies and underscores how our differentiated innovations and field teams are winning in the market.
Speaker #3: In the U.S., we're seeing strong interest in Fotonova Spectra, our photon counting CT platform, and we expect CE marking in the second half of 2026, which will expand our opportunity in Europe.
Speaker #3: We've also received great customer feedback on True Definition DL, our latest deep learning CT software upgrade, that enables nearly double the image resolution across the installed base.
Speaker #3: Like Air Recon DL, this is another good example of how we are using AI to enhance the clinical value of existing systems, while giving customers another pathway to enhance performance.
Speaker #3: We also offer this as a subscription model which brings recurring revenue. Together, these innovations highlight how we're expanding the value of our CT portfolio through new products and software innovations that appeal to customers.
Speaker #3: In PDX, we had a strong quarter in contrast media, and robust growth in U.S. radio pharmaceuticals. This reflects the growing demand for advanced imaging that requires the breadth of our PDX portfolio, as an example Vizimel, our amyloid PET double-digit revenue growth in the quarter, reflecting an increase in therapy adoption and an evolving Alzheimer's eco-care system.
Speaker #3: Which includes broader diagnostic capabilities to identify and evaluate at-risk patients. Additionally, we are on track with our Flekato ramp. In the quarter, we delivered 545 doses for the week ending July 24.
Speaker #3: This is approximately a 40% increase over April levels. We onboarded more customers this quarter, which we expect will lead to increased utilization in the second half of the year.
Speaker #3: Customer feedback and acceptance remain strong. Looking to the second half, we remain focused on continuing to build momentum and these important indicators of our long-term growth trajectory.
Speaker #3: We remain confident in our medium-term target of 500 million or more in annual revenues by 2028. Moving to business optimization. We continue to prioritize additional cost and price actions as we navigate a dynamic macro environment.
Speaker #3: We lead the industry in bringing AI to customers, and we're also equally focused on using AI inside the company to improve productivity, simplify work, and strengthen our supply chain so teams can spend more time on activities that create the greatest value for our customers.
Speaker #3: Since implementing the operational changes to create AIS and global markets, we have significantly increased our customer focus with channel changes that were completed in the second quarter.
Speaker #3: The AIS structure allows us to be a more nimble and agile organization. Before I turn the call over to Jay to review our financial results, I'd like to take a moment to thank him for his partnership and contributions to GE HealthCare over the past 3 years.
Speaker #3: Jay's helped build a strong financial organization and even greater financial discipline across the company, and has been an important partner as we've executed our strategy.
Speaker #3: We're grateful for his leadership and the impact that he's had on the business, and we wish him all the best in his next endeavor. During this transition, I have full confidence in George Newcomb, our incoming interim CFO, who has extensive experience.
Speaker #3: With that, I'll turn the call over to Jay to review our financial results. Jay?
Speaker #2: Thanks, Pete. I really appreciate the partnership, and it's been a privilege to work alongside you in such a talented organization. I'm also proud of all that we've accomplished together.
Speaker #2: And I have great confidence in the team and the strong foundation we've built to continue executing on the strategy delivering for patients, customers, and shareholders.
Speaker #2: With that, I'll turn to our second quarter financial performance on slide 5. We delivered revenue of $5.3 billion, representing 3.5% organic growth year over year.
Speaker #2: In line with our expectations. On a reported basis, we saw revenue growth across all regions. We had solid performance in product and service revenues, at 4.7 and 7.7% growth, respectively.
Speaker #2: Service growth benefited from operational performance as well as contributions from the recent Intellorad acquisition. Organic orders growth was robust, up 11.1% year over year, the highest since our spend.
Speaker #2: We saw orders growth across all of our segments, with particular strength in several of our longer cycle products in radiology, which represents our former imaging business.
Speaker #2: These products have longer sales conversion cycles, and we expect these orders to contribute to revenue more meaningfully in 2027. Book-to-bill was 1.15 times, also our highest since the spend, and we exited the quarter with a record backlog of 23.9 billion dollars, up 2.6 billion year over year, and 2.1 billion dollars sequentially.
Speaker #2: Approximately one quarter of the sequential increase is in product backlog, while the balance relates to multi-year service agreements that convert to revenue over time.
Speaker #2: Adjusted EBIT of 750 million dollars, included 23 million dollars in recognized refunds from IEPA tariffs incurred in the first quarter of 2026. Adjusted EBIT margin of 14.2% was down 40 basis points year over year.
Speaker #2: We delivered adjusted EPS of $1.13 in the quarter, up 6.6% year over year. Adjusted EPS benefited from $0.04 of tariff refunds and $0.02 due to a lower tax rate, year over year.
Speaker #2: Even when adjusting for these contributions, performance exceeded our expectations. Lastly, our free cash flow was $68 million in the quarter, which includes tariff refunds of $107 million dollars.
Speaker #2: For this quarter, given macro dynamics, we thought it would be helpful to include additional details on our margin performance on slide 6. Adjusted EBIT margin was 14.2%, down 40 basis points year over year.
Speaker #2: Let's walk through the drivers. First, year-over-year margin was negatively impacted by the challenging quarter in PCS, as well as incremental inflationary costs from memory chips, oil, freight, and other components.
Speaker #2: Despite these challenges, strong commercial execution drove volume growth, providing a margin tailwind year over year. Heartbeat is helping us better connect our product and commercial teams as we bring our latest innovations to market, supporting both growth and margin expansion.
Speaker #2: A great example is our Vivid Pioneer Ultrasound, which leverages a platform approach to achieve a lower manufactured cost coupled with differentiated AI capabilities that drive higher pricing.
Speaker #2: This product is performing better than we expected, and has allowed us to deliver a significantly higher gross margin than the prior platform. This development model is replicated across all of our products in our new wave of innovation.
Speaker #2: Meanwhile, we're focusing on daily management to enable incremental price and cost actions to help offset inflation impacts in 2026. We started to see these improvements take hold in the second quarter and expect this to contribute more meaningfully to margin in the second half of the year and in 2027.
Speaker #2: Even net of investments that we continue to make in the business. Lastly, the year over year impact of tariffs was neutral when including the benefit of refunds.
Speaker #2: Let's move to segment performance, starting with Advanced Imaging Solutions on slide 7. As a reminder, this is our first quarter reporting the combined business that was formerly known as Imaging and Advanced Visualization Solutions, and we are providing a recast of prior period financials on our website.
Speaker #2: Organic revenue grew 5% year over year. Driven by strength in cardiovascular and interventional solutions, CT, and molecular imaging. Even margin increased 90 basis points year over year, driven by volume and price, partially offset by inflation.
Speaker #2: We expect the combination of higher margin AI-enabled NPIs like those in MR and CT, along with elevated clinical and commercial expertise, to continue to drive growth.
Speaker #2: Moving to pharmaceutical diagnostics on slide 8, we delivered particularly strong organic revenue growth of 14.6%, with strong volume and pricing in contrast media as well as robust growth in our US radio pharmaceutical business.
Speaker #2: This was driven by increased adoption of disease-specific tracers across the portfolio. Even margin of 30 basis points year over year, benefiting from volume and price.
Speaker #2: Partially offset by planned investments in new products and our innovation pipeline. For example, we're making progress in our ongoing phase 2 and 3 clinical trial for a non-Gadolinium-based contrast agent.
Speaker #2: Which we believe has the potential to significantly advance the MR contrast landscape. Looking ahead, we continue to expect growth driven by global contrast demand and scaling of our US radio pharmaceutical business.
Speaker #2: As a reminder, current market demand is close to outpacing total market supply. We're a leader in contrast media, where we win through our focus on supply chain resiliency and delivering the diversity of SKUs our customers require.
Speaker #2: Moving to patient care solutions on slide 9, organic revenue declined 13.5% and segment EBIT was negative. We had operational fulfillment challenges in the quarter.
Speaker #2: As Pete mentioned, we've implemented several changes to strengthen supply and manufacturing capabilities that will address these issues. We expect to see supply improvement, which will benefit both sales and margin in the second half of the year.
Speaker #2: July has started well in this regard. On a positive note, PCS had strong first half orders growth, driven by monitoring as well as demand for our premium anesthesia product internationally.
Speaker #2: Backlog is well positioned, and in the second half of the year, we expect to deliver sequential improvement, driven by daily focus and weekly execution plans to drive volume and margin recovery.
Speaker #2: We expect FDA clearance for our premium anesthesia device in the second half of 2026. As we reflect on overall results in the quarter, while PCS continued to be challenged, we're very pleased with the performance in the remainder of our business.
Speaker #2: Turning to cash on slide 10, we delivered free cash flow of $68 million dollars year over year cash flow increased primarily due to tariff refunds, partially offset by working capital investments and capex to support growth.
Speaker #2: We returned capital to shareholders through the repurchase of approximately $200 million worth of shares and continued to pay a dividend. I'll now turn the call back over to Pete to talk more about the full-year outlook.
Speaker #2: Pete?
Speaker #3: Thanks, Jay. As noted throughout the call, we're pleased with the momentum in our business, reflecting healthy end market demand and continued commercial execution, which gives us confidence in our full-year outlook.
Speaker #3: We're maintaining full year guidance and this reflects 3 to 4 percent organic sales growth and 10 to 40 basis points adjusted EBIT margin expansion that gets us to a range of 15.4 to 15.7 percent.
Speaker #3: We're maintaining our adjusted EPS guidance in the range of $4.80 to $5.00, approximately 5 to 9 percent growth year over year. Free cash flow is expected to be approximately $1.6 billion in 2026.
Speaker #3: For the third quarter, we expect year over year organic revenue growth to be in the range of 3 to 4 percent, as well as low double digit adjusted EPS growth year over year.
Speaker #3: Now I'll turn to slide 12, which highlights the strategic value of creating AIS and how our team, our differentiated portfolio, and these unique advantages are advancing our growth strategy.
Speaker #3: We're in the early stages of our new wave of innovation, which is already driving strong results as reflected in our orders growth in the quarter, while also delivering higher gross margins as these products scale.
Speaker #3: Today, we have stronger commercial alignment with our customers, which includes three areas that we hear differentiate GE HealthCare. One, deeper clinical expertise. Our field teams, with their business alignment, create an agile team of experts able to address clinical and technical challenges.
Speaker #3: Two, our expanded service capabilities, which includes equipment maintenance and also a growing set of SaaS and software AI-enabled offerings, brings a broad toolkit to customers.
Speaker #3: And three, GE HealthCare brings enterprise problem-solving to all levels in the integrated delivery network globally. We hear from customers that our teams are collaborative, creative, and relentlessly focused on helping them solve their toughest challenges.
Speaker #3: These three areas allow us to get closer to our customers and help them solve increasingly complex clinical and operational challenges. Lastly, Heartbeat strengthens how we execute.
Speaker #3: It enables repeatable processes and a culture of accountability and connects our teams more closely with customers. While we're still early in our heartbeat journey, we're already seeing the benefits in global business system can bring.
Speaker #3: This focus is helping us win opportunities with leading institutions like the examples you'll see on the next slide. Catholic Health in New York wanted to expand their structural heart and electrophysiology programs, and improved productivity and consistency across care settings.
Speaker #3: Working with their team, we jointly built a roadmap for technology modernization and services support to address their needs. This includes our latest cardiovascular ultrasound, Vivid Pioneer, our interventional platform, Aulia, and comprehensive digital tools to create a disease state integrated solution, which strengthens Catholic Health's position in the market.
Speaker #3: Technology was an enabler, not a starting point. The result was an approximately $500 million agreement for equipment, service, and process expertise that will result in orders over time.
Speaker #3: We saw a similar dynamic with the University Hospital Essin in Germany, with a focus was oncology and theranostics. By aligning technology goals and targeted outcomes, we worked together to provide a fully integrated nuclear medicine solution that includes cyclotrons for tracer production, our new total body PET, and spec CT systems, and MIMS software for AI-enabled imaging analysis and therapy planning.
Speaker #3: These two examples show how we bring together our portfolio around disease states, not just products, underscoring the value of D3 and Heartbeat to deliver for customers.
Speaker #3: In summary, we've made meaningful progress with our innovation pipeline. New products are gaining traction, our commercial changes are demonstrating results, and our recent customer agreements show how those innovations are being pooled into larger long-term relationships.
Speaker #3: I'm proud of the AIS and PDX teams for their performance in the quarter, combined these two businesses grew approximately 6 and a half percent and expanded margin 100 basis points year over year.
Speaker #3: We remain confident in the fundamentals of our business, and I'm proud of our team's commitment to delivering value for patients and customers worldwide. With that, we'll open up the call for Q&A.
Speaker #1: Operator will go ahead and take questions. Operator, can you please open the line?
Speaker #4: Ladies and gentlemen, as a reminder, to ask a question please press star one-one on your telephone and wait for your name to be announced.
Speaker #4: To withdraw your question, please press star one one again. We ask that you please limit yourselves to one question and one follow-up. Please stand by while we compile our Q&A roster.
Speaker #4: Our first question will come from the line of Larry Beechelton with Wells Fargo. Your line is open. Please go ahead.
Speaker #2: Good morning. Thanks for taking the questions, and Jay, it was a pleasure working with you. I wish you nothing but the best of luck going forward.
Speaker #2: So of course. So for my first question, Pete, you know, I'd love to hear more color on what drove the strength and orders in Q2.
Speaker #2: Was there anything one-time, and how sustainable is that? And, you know, there are concerns around capital equipment demand in the US, given the ACA subsidy cuts.
Speaker #2: You know, what are you seeing? Thank you.
Speaker #3: Yeah, Larry, thanks for the question. Now, look, I mean, we were delighted with our orders performance in the quarter. I would say, look, I mean, 11% is an outstanding number.
Speaker #3: We've always talked about that being in the mid-single-digit range with orders is quite critical. I think we feel good about that as we go into the second half as well.
Speaker #3: And that converts that mid-single digit and mid-single digit revenue, again, which is aligned to our guide. So this is quite good. You know, there really weren't any particular one-timers or any type of, you know, business coming in from Q3.
Speaker #3: It was just really good execution at a street level with our teams. With a vast majority of it being our legacy portfolio. That couplemented with some of the new products helping to deliver.
Speaker #3: And then as we've done and I highlighted, you know, the addition of enterprise accounts. I think we had about six enterprise accounts that contributed to some of the growth.
Speaker #3: But again, there weren't any items that were significantly big ones that were outliers. It was broad-based and it was pretty consistent. I think if you look across molecular imaging, ultrasound, MR, CT, our vascular labs, you know, the ultrasound whole portfolio, we talk a lot about cardiac, but point of care, general women's health, everyone did well.
Speaker #3: And I would say there’s been a lot of focus by our teams on how we execute. So, you know, we talk a lot about heartbeat in the management system, but some of those things get down to how do we improve visibility.
Speaker #3: And we improve visibility meaning what deals we see to participate around the world and by a couple of points this quarter. That translated into a couple of points of higher win rate.
Speaker #3: And those are some of the actions that you can't always execute each quarter on, but it came together quite well. So that's the broader level of it.
Speaker #3: And again, relative to a beat on the orders, that's the way we'd like to see it. It was broad-based and consistent across the board.
Speaker #3: The other aspect I think you mentioned was how the markets are doing. You know, from a procedure standpoint, I know there's been various news in the marketplace.
Speaker #3: Our best procedures view is really how PDX is doing. And then actually how we would see some of the equipment that goes into procedure-based areas like cath labs.
Speaker #3: Both of those are doing very well. Our contrast agent business is doing extremely well. You heard Jay mention about the performance of the numbers.
Speaker #3: Both radiopharma as well as in contrast—and so that's a procedure-based business. And then in our vascular and surgical businesses, you know, both represent vascular procedures, ortho procedures, cardiac.
Speaker #3: All of those continue to do well. And we haven't really seen any pullback from surveys that we've done out there. I would remind you though that, you know, we are a type of business that when any type of challenge comes to the hospital, the ability to have an imaging study that can get to a diagnosis very quickly and move a patient onto the right type of therapy and be able to get them out of the system healthy, we typically see an uptake.
Speaker #3: And in many cases, with large deals, that's a big part of the discussion: What can we do to improve their overall productivity? So, thanks for the question.
Speaker #2: No, that's very helpful. And just for my follow-up, Pete, you know, we heard the Q3, you know, guidance that you gave. The comps get tougher in the second half.
Speaker #2: Help bridge the second half, you know, implied acceleration. You know, on a comp-adjusted basis, embedded in the guidance, you know, what are the drivers?
Speaker #2: Thanks for taking the question.
Speaker #3: Sure. Larry, maybe I'll start on this one. I think a lot of this comes down to the robust orders performance that Pete talked to.
Speaker #3: 11% on a quarter basis. If you look at it on a two-year stack, over 7% order growth. It really sets us up well heading into the second half.
Speaker #3: As we think about the first half, second half split, over the last few years, we've seen roughly 48% of our revenue in the first half and 52% in the second half.
Speaker #3: Our 2026 outlook is basically in line with this historic trend. And as we look into the third quarter, you know, one of the areas that we analyze is this thing called secured rate.
Speaker #3: How secure is the equipment revenue heading into the quarter? And, you know, our secured rate on equipment—we're at over 80%, nearly 85% secured entering the quarter.
Speaker #3: Which is up several percentage points versus prior quarters. So we feel very good about that forecast. Also supporting this second half growth will be PCS stabilization.
Speaker #3: We'll see a bit of that and fluorocardiology growth, and more broadly, radiopharmaceutical growth as well. So really, those are the contributors to the second half, which we feel very solid about at this point in the quarter.
Speaker #3: And from a bottom line standpoint—look, our seasonality is such that we have more profit in the second half than the first half. We typically do.
Speaker #3: Historically, it's roughly 55% in the second half and 45% in the first half. And historically, we see from the first half to the second half about 2.5 percentage points of margin improvement.
Speaker #3: Now, interestingly, we'll do a little bit better than that this year. And what it's going to come down to is really all the price and cost actions that we implemented in the second quarter that will carry us through into the second half, driving us over 300 basis points of expansion from the first half to the second half.
Speaker #3: With the other notable point being the new products that are coming in, which are higher margin, really helping the mix as we approach the second half.
Speaker #3: So really that's the story of the first half versus the second half, Larry.
Speaker #2: Thanks so much.
Speaker #1: Thank you, and one moment as we move on to our next question. Our next question is going to come from the line of Vijay Kumar with Evercore ISI.
Speaker #1: Your line is open. Please go ahead.
Speaker #4: Hi guys. Congrats and nice friend. Thank you for taking my question. Pete, maybe my first one for you on this pharma diagnostics. Another solid McKees.
Speaker #4: You gave us a look at our numbers. Can you just talk about what's driving it? It looks like the base business explorator is doing really well.
Speaker #4: What's driving that? And how do you think your explorator ramp is going? Are we still good for the half-a-billion number? Maybe the timelines are moving here.
Speaker #3: Yeah, Vijay, thanks for the question. Maybe I'll start at PDX and just kind of slow down through it to that point. So, again, we did have a very strong quarter, and it was contrast, and it was broad-based and radiopharma.
Speaker #3: And again, I think this is right on pace with many of the trends that we're seeing out there. You know, we've said in the past that we expect the business to grow in the high single-digit range.
Speaker #3: I think that's kind of the expectation. This was obviously a little bit higher performance within the given quarter, but it was broad-based.
Speaker #3: I think, I mentioned Vizimel. That was up significantly. And again, it's highly tied to the amyloid beta therapy adoption, doing well there. Our product DAT scan for Parkinson's disease was up quite a bit.
Speaker #3: Saryana and breast cancer. And then obviously Florcado is kind of our premier product within that area. And we're pleased with the progress. I think, you know, this won't always be linear.
Speaker #3: There are going to be bigger spikes at different points in time. But at this point, the 545 doses—which, again, is about a 40% increase. The other aspect I mentioned in the prepared remarks was the fact that we brought on quite a few new customers as well.
Speaker #3: Pretty much about that same ratio. And, you know, they will, when you bring them on, I think we've talked about this in the past, first 60 days, they're minimally productive.
Speaker #3: And then past that, they start increasing the amount of doses. And so we're in a really good spot here to ramp this up as we go into Q3 and Q4.
Speaker #3: You know, the longer-term opportunity of a half billion annually by 2028 is fully intact. I mean, again, remind people, if you think of the perfusion studies that are out there and the pet world, you get about 10% of those studies overall.
Speaker #3: That's roughly about the 500 million in revenue. So we think we, as we've always talked about, we have much a very good chance to do better than that.
Speaker #3: But we're focused on the half a billion here by 2028.
Speaker #4: That's very helpful, Pete. Jay, one for you. Look, there's never an ideal claim for transition. Seem a bit abrupt for us. Maybe talk about why now and where are we in the CFO search process.
Speaker #3: Vijay, obviously, it's very difficult to leave. You know, we've made such tremendous progress at the company on the innovation pipeline. Really setting up processes, establishing the heartbeat operating system.
Speaker #3: I feel so good about where the business currently sits. And where it's heading. And so it makes it very hard to leave. Also, the partnership with Pete and our leadership team has been a remarkable one.
Speaker #3: I have nothing but respect for that team. And I believe we have a world-class finance function that I've been privileged to work with. So all of that makes it difficult for me.
Speaker #3: What this came down to is a very unique opportunity at a great company to expand my role beyond finance. So that's what really this came down to.
Speaker #3: It's never an opportune time, but what I would say is I really do believe we've put the building blocks in place. That have, you know, set the company up going forward in the right direction.
Speaker #3: Pete, maybe you could talk a little bit about the search.
Speaker #2: Yeah, I'll take the search. I mean, obviously, EJ, we just kicked it off. We're going to move quite quickly as we dig into it.
Speaker #2: I think we're blessed with our market recognition, people understanding what we're doing with AI, how we're in the interesting seat to transform healthcare. So we've got a lot of interest that's out there.
Speaker #2: And so I would expect we'll be able to talk more about it here in the coming months, about how we're making progress against it.
Speaker #2: In the meantime, George, who's been with us over 38 years in many different roles, deeply involved in all of our operations over the past X years, at least since I've been here and beyond, is going to be a great partner here for me.
Speaker #4: Understood. Wishing you the best as you transition, Jay.
Speaker #2: Thanks, Vijay.
Speaker #1: Thank you and one moment for our next question. Our next question comes from the line of Rick Wise with Stifel. Your line is open.
Speaker #1: Please go ahead.
Speaker #5: Good morning, Pete. Hi, Jay. Pete, a question for you and then a question for Jay. You obviously talked about the new wave of innovation.
Speaker #5: And stepping back, just are you seeing the impact from that wave of innovation? Broadly speaking, is that what broadly at a higher level we're seeing drive orders?
Speaker #5: Should we expect to see that broad portfolio drive accelerated order growth as you look ahead for the next several years? How are you thinking about it?
Speaker #5: And most specifically, talk about the impact that having Fotonova Spectra now launched is having broadly on the full portfolio pull through.
Speaker #2: Yeah, Rick, thanks. Thanks for the question. Again, I think particularly if you look at this quarter, we really had all the things kind of come together.
Speaker #2: I mean, we've had some growth here from some of the new products. But again, in the spectrum of all the products that we've talked about, it's still under 20% of the value.
Speaker #2: Meaning it's still a smaller contributor. I'll talk about Fotonova in a minute, but Fotonova was a minimal contributor to the orders book. That's all still in front of us.
Speaker #2: What really drove CT was our breadth of our core product line. So, you know, you've got really good products that we've been able to raise some level of price—a fair amount of price—on them, and new products that actually have better cost positions and slightly higher price.
Speaker #2: That's in that book. But I think some of these changes we just talked about—we mentioned global markets and AIS—our ability to actually just execute better in front of the customer, to be able to describe why us versus someone else, to be able to focus on their problem and how to bring our products together to solve their problems.
Speaker #2: We've been focused on this quite a bit. And so that's a rising impact. And I give a lot of credit to our field teams, both sales and service, for that aspect of it.
Speaker #2: And then the piece relative to enterprise, there are more and more enterprise deals increasing. But I mean, just to put it in perspective, I talked about Catholic Health, which is a great partner.
Speaker #2: You know, only about a fifth of those orders are actually a part of what went in the second quarter. So there's still much in front of us.
Speaker #2: So, it was broad-based and consistent. And then, you know, I think when you look at MR, MR is an area for us that, you know, we have talked about investing in to increase margins.
Speaker #2: We've talked about increasing and changing the profile. The team's done quite well. The BOLD 3T, the new fully integrated user experience—which we updated just a few months ago—is the first change in probably 25 years in our MR platform. It's widely viewed as probably the best UI now in the marketplace.
Speaker #2: Making a big difference. The whole portfolio that's playing out in molecular imaging—our PET platform—what's happening there is doing well. PCS, as we mentioned, actually on the orders front, is doing quite well with monitoring for the new platforms that are out there.
Speaker #2: And then, in AI, and specifically in ultrasound and interventional, we're doing very well. And those products, you know, as Phil mentioned as well, have a faster turn.
Speaker #2: So they will contribute more to a revenue conversion in the second half. The traditional imaging products will be probably more so early in 2027, mainly because they have a room build out.
Speaker #2: But we're in very good shape there. And to your Fotonova question, things are on track. I had mentioned we need CE marking. That's going to be in the second half of the year.
Speaker #2: It's a little bit later than we initially communicated, but all in good shape there. We had really very good step-ups in the funnel. I mean, this is pre-order, but these are prospects that are qualified and ready to step into an order phase.
Speaker #2: So we're in quite good shape there. And again, that will be a significant growth driver here. As we get late to this year and into next year.
Speaker #2: And so, at this point in time, it's not a major driver within the orders book, but it will be in the future.
Speaker #5: Gotcha. Thank you. And Jay, wishing you all the best in your, you know, next job, new role. But you're leaving Pete, you're leaving your successor, and you're leaving us with the medium-term 2026–2028 outlook goals and targets: that mid-single-digit organic growth, high teens to 20% adjusted EBIT margin, high single-digit to low double-digit EPS growth, and 90% free cash flow conversion.
Speaker #5: Sorry to recite it all, but what's your comfort? What's, you know, what's your comfort as you're leaving or Pete, what's your comfort with the medium-term targets now?
Speaker #5: Thank you so much.
Speaker #2: So Rick, while we're here live, I'll let Jay here as make his comment. And then I'll jump in. Jay, maybe you want to hit it quickly.
Speaker #5: Yeah, Rick, we feel very good about the midterm story. And for us, what we always knew was that the midterm story would be unlocked by two things.
Speaker #5: One, the innovation cycle. And I'm so proud that we've been able to deliver on this. And now it's about executing commercialization that's going to drive that.
Speaker #5: And two, is implementation of an operating system—we call it Heartbeat—to drive rigor around commercial and operational aspects of what we need to do.
Speaker #5: And so those two ingredients are going to be the things that unlock this midterm story. And I have to say, though, both have been put in place and serve as an incredibly solid foundation.
Speaker #2: Yeah, now look, I think, Rick, we feel quite bullish about where we stand with our midterm targets. Jay hit it. I mean, look, it all starts with: do you have the right demand in the marketplace?
Speaker #2: Which is matched up with the right sales and service teams, but it comes with the right products. We believe we've got the right portfolio coming out.
Speaker #2: And that portfolio is yet to really deliver the type of results. I just mentioned the Fotonova ramp that we expect. All of those products have the opportunity for higher price.
Speaker #2: There's not been one product that we've introduced that hasn't come out that a higher value than its predicate. And customers are willing to pay for it.
Speaker #2: Why? Because it has a lot of embedded features that make them more productive, whether they're AI or just how they're built into it. And we've leveraged this platform approach, where we've been able to come up with, I think, better reliability but also better cost.
Speaker #2: Because of the reuse and leverage of different chassis. So the combination of those is faster growth and better gross margin. So there's a big chunk there Jay hit on Heartbeat, which again, I think you're going to hear more and more about what that does for consistency and better execution.
Speaker #2: And then this point I made in the prepared remarks about AI Inside. We see a significant opportunity to increase our own productivity with the use of AI Inside.
Speaker #2: So that as we grow, we can grow with a lower G&A, based on a higher base. And a lot of that is with the use of agents and tools that can help us be more consistent.
Speaker #2: So, we're locked in. We feel very good about our midterm targets. And honestly, this is a great quarter here to demonstrate that we're well positioned to deliver on it.
Speaker #5: Thanks to you both.
Speaker #1: Thank you. In one moment for our next question. Our next question will come from the line of Travis Steed with BOV Securities. Your line is open.
Speaker #1: Please go ahead.
Speaker #3: Hey, thanks for taking the question. And Jay, wellness is working with you and best of luck in your new role. I wanted to ask about inflation impact on margins.
Speaker #3: Anything you'd kind of call out or quantify this quarter? If you look at the different buckets you gave last quarter, memory, oil and freight costs, and other inflation buckets, how those are trending versus three months ago.
Speaker #3: And how you kind of think about the go-forward there.
Speaker #5: So, overall, from an inflation standpoint, what I would say is we saw a very volatile macro environment to start the year. We had the memory chip phenomena.
Speaker #5: We had the war in the Middle East impact logistics and freight and certain other metals. But so last quarter we had to take an approach to adjust the guidance.
Speaker #5: What I would say is, since then, things are, broadly speaking, tracking in line with our expectations. Memory chips have continued to increase, but much more modestly.
Speaker #5: So we're seeing, we've seen a little bit of increase since the first quarter call, but nothing notable. And oil, while it remains elevated, is down a bit from the previous peak.
Speaker #5: And so the 250 million dollar assumption, which included some cushion in it when we put together, when we put it together, is still the appropriate amount for where we sit today.
Speaker #5: You know, in the second quarter, inflation was about 120 basis points headwind, which was in line with our expectations. And I think for me, the most important aspect is in conjunction with that gross inflation, we put in place a series of mechanisms to offset it.
Speaker #5: Both in terms of cost and price. And we've made really good progress on both of those initiatives, which will support growth into the second half of the year, but then also into 2027.
Speaker #3: Great, thank you. And then kind of follow up on the PCS business, kind of the decline this quarter, any more color you'd give on that and when that business starts to stabilize.
Speaker #3: And then the PCS strategic review, how that's tracking and what you'd do do with extra cash if you got cash from that strategic review.
Speaker #2: Yeah, Travis, thanks for the question. Look, I think, you know, again, the first bright spot on PCS was we saw orders growth, particularly in the monitoring world.
Speaker #2: That hasn't performed at that level in quite some months. That's heavily tied to, I think, we refocused the sales organization the quarter that was completed.
Speaker #2: As well as some of the new products. So that's a super important point that needs to be out there. But the reality of it is, look, we had operational fulfillment challenges in the quarter.
Speaker #2: What do those mean? Short on supply of some critical components, things of that nature. Ultimately, that results in our inability to fulfill some of those specific orders.
Speaker #2: Obviously, we'll move out into the second half. We feel good at this point in time with the new focus that the team has in place, that we'll be able to fulfill those and correct those.
Speaker #2: But ultimately, it's about shoring up our supply chain and our ability to deliver consistency—and deliver consistently. And so, Jeanette and the team have a daily and weekly focus on this.
Speaker #2: I'd say we've really gotten into the details to be able to get the business aligned and feel good about what we can do to address those.
Speaker #2: As we mentioned as well, I expect that we will see improvement here in the second half, quarter over quarter—I think both on the top line and the bottom line.
Speaker #2: This is a business that is heavily tied to its volume from a profitability standpoint. So as we move velocity, particularly in monitoring and anesthesia, through those facilities, you'll see the corresponding profit increase.
Speaker #2: You know, look, on the strategic review, Travis, to your question, you would expect us to be taking a look at this business in many different ways to say, how do we have this be a contributor?
Speaker #2: Weather needs to be addressed. That's job one. And again, I think, over the coming quarters, the efforts that we have to improve its profitability and improve its growth profile—I feel quite good about the level of actions that we have in place.
Speaker #2: That being said, you know, we're looking at multiple alternatives here. And so we have many different products that are in this portfolio. Do all of those fit?
Speaker #2: That's a fundamental question. This construct is of the geography of where we compete with that business. The construct of what our overall SG&A and level is.
Speaker #2: Those are all of the aspects there. Obviously, to the full extreme of, is this business better parked with someone else? So over the coming quarters, it will be about improvement of the business while simultaneously looking at those options.
Speaker #2: To your point on, you know, if you were to do something, would you do with the cash? I think it's obviously too early to discuss anything like that at this point.
Speaker #2: But our capital allocation priorities wouldn't change in either case, right? So, we've been very clear about that—Jay and I—in the past. That won't change going forward.
Speaker #2: You know, our focus on our organic investments is delivering some of the highest returns. We talked about those, and you're seeing that play through in our orders growth.
Speaker #2: We believe that inorganic, the right level of tuck-in deals can make a lot of sense for this business to continue to grow. And then we have other vehicles to distribute cash back, share buyback, and stuff.
Speaker #2: We've done some in the quarter. You know, most likely, as in all things, it's not one lever; it's the right combination based on time.
Speaker #1: Thank you. One moment as we move on to our next question. Our next question will come from the line of Robbie Marcus with JPMorgan.
Speaker #1: Your line is open. Please go ahead.
Speaker #4: Hi, this is Henry Ahn for Robbie. Thank you for taking the questions. I'll just ask both of them up front. So first on the generic omnipack, could you just talk a little bit about what you're seeing today in terms of the AB rated approvals?
Speaker #4: And a little more importantly, what you expect the impact to be in the second half of '26 and 2027. And then second question, on the EPS guide, the prior guide didn't include a rebate.
Speaker #4: So, today, why did you choose not to raise the EPS guidance, given the tariff refund and lower taxes that benefited the second quarter relative to prior expectations?
Speaker #4: Thanks.
Speaker #2: Jay, do you want to take the first one and then maybe I'll take the guide?
Speaker #4: Sure. So on annual, we
Speaker #5: haven't seen any impact at this point at all. What I would say is that the current contrast market demand is very close to outpacing total market supply.
Speaker #5: So it's a very tight market as we sit here today. And then as we forecast the market growing going forward, you know, our expectation is based on increased procedure volumes in places like cath labs, we expect the market to double in size over the next decade.
Speaker #5: So we're really talking about incredibly robust growth. With this growth, you know, there have been periods of tight supply over the years. So we believe there's room for incremental supply on the market.
Speaker #5: The other thing I would say is, generic competition is not new in these contrast media markets, and we've successfully navigated through multiple market cycles.
Speaker #5: And the way we do it, you know, it comes down to being a trusted and consistent supplier that comes down to having the full portfolio of products available and really being there when your customers need them.
Speaker #5: So listen, we never underestimate competition at all. We haven't seen an impact to date. We think that this market is going to be a tight one going forward.
Speaker #5: But then also we do believe that there are aspects that differentiate our offering relative to others. And then Pete, maybe on the guidance question.
Speaker #2: Yeah, I'll take the guidance question. So your question was, with some of the tariff cash benefit, how come you didn't raise? Look, I think we recognized four cents of adjusted EPS related to the 26 tariffs within P&L.
Speaker #2: I think others have taken more. At a four cents level, this being halfway through the year and multiple cost items, tied to oil, chips, still somewhat in flux.
Speaker #2: We just thought it made sense to kind of stay where we're at. Obviously, if those stay at lower levels, we'll have upside within our guide.
Speaker #2: I think we have the appropriate cushion here to meet and potentially exceed. And so it just made sense at this point in time to kind of hold where we're at.
Speaker #1: Thank you. And one moment as we move on to our next question. Our next question will come from the line of Joanne Winch with Citi.
Speaker #1: Your line is open. Please go ahead.
Speaker #6: Good morning, and thank you for taking the question. I want to pause on China and think about what is going on in that region in terms of provincial budgets.
Speaker #6: VBP pricing and anything else you can share. Geographically. Thank you.
Speaker #2: Hey Joanne, thanks for the question. Yeah, look, you know, there are always evolving dynamics in China. I would just say for us that when we look at China, the changes—the evolution—are not new or, I would say, out of the ordinary from what we're expecting.
Speaker #2: I mean, we had expected that China, over time, will continue to expand VBP constructs. We've seen, over the past couple of years, we've seen it in other industries that way.
Speaker #2: It makes sense. It aligns with their strategy on anti-corruption because they tend to be more transparent than non-VBDs. So, from that standpoint, we haven't seen anything out of the ordinary.
Speaker #2: We were pleased with our China performance in Q2, which I describe as in line with expectations. And we're making good progress in the most recent quarters.
Speaker #2: I think under Will's leadership, we've strengthened the portfolio. We've focused on clinical value propositions as well as we've stood up a provincial government affairs group that's been very helpful in how we think about properly positioning and strategic alignment on these VBPs, which again, based on the recent headline news, are going to continue to grow.
Speaker #2: So I think we view it from that standpoint. I also think it's, you know, our view on the dynamics of the region having greatly improved at this point.
Speaker #2: But we feel it's prudent to continue to assume kind of a year-over-year decline in 2026. That's what we've built into our plan. And there hasn't been any change there.
Speaker #2: Obviously, if that improves, that would be upside. But fundamentally, it's in line with what our current expectations are. And I'd say we're getting better at making the right configuration decisions.
Speaker #2: Getting the right clinical discussions happening to be able to perform at a better level.
Speaker #6: Thank you so much, and best of luck, Jay.
Speaker #5: Thank you.
Speaker #1: Thank you. One moment for our next question. Our next question will be from the line of Vic Chopra with BMO. Your line is open.
Speaker #1: Please go ahead.
Speaker #7: Oh, hey, good morning and thanks for taking the questions. Jay, thanks for all the help over the years. It was a pleasure working with you.
Speaker #7: So maybe the first question, you know, you've ordered you highlighted strong orders and growth and initiatives to ship to improve shipping velocity and backlog conversion in PCS.
Speaker #7: I'm just wondering what level of margin recovery you expect from fixing these challenges alone. And how much would PCS have grown if you didn't have these supply chain issues in the second quarter?
Speaker #2: Yeah, Vic, I'm not going to get into hypotheticals to kind of lay that out. But I would say, if you looked at our historical performance, when we had minimal challenges, we would expect to be back to that level.
Speaker #2: That's how I would frame it up. And again, much of that is specifically tied to velocity. We have a fixed cost structure without that velocity going through it.
Speaker #2: It has a disproportionate effect on profit. So, once we get velocity back, I think you can look at previous year rates, and that's what we’d expect to be getting back to.
Speaker #7: Okay, got it. And, you know, you’ve referenced this new product cycle—the back half of ’26 and into 2027—with new products across all modalities.
Speaker #7: Call it over the next 6 to 18 months. I'm just curious, Pete, which two or three NPIs do you view as the highest-margin and the highest share-gain opportunities?
Speaker #7: Thank you.
Speaker #2: Vic, it's tough to choose between all of your children, which ones you like the most. But look, I think the team has done a very good job of many of them having big contributions.
Speaker #2: Now, obviously, there are certain segments that disproportionately are bigger use models within a hospital. So our MR growth will have a disproportionate benefit from a profit and growth standpoint as we roll new products out.
Speaker #2: Our photon counting system, photon spectral will fall in the same way. And ultrasound across the board because you know what Phil and team have been able to do is leverage that platform approach across all of them.
Speaker #2: But I would say things such as, like, our vascular labs are very interesting, and that's a combination of we haven't traditionally performed as well there.
Speaker #2: We've had other competitors from outside the United States that have done better. And I think as we've talked about, we think we actually have probably the best system out there today that will come in multiple configurations.
Speaker #2: For us, that opens up competitive account doors that we haven't been able to compete in. So that’s, you know, that would be how I would frame that up.
Speaker #2: But you know, again, even in our mammography platform, we're doing quite well because now we have a very competitive image quality and performance capabilities.
Speaker #2: Our core X-ray platform—again, this has been just a maniacal focus to make sure that we're in a number one or number two position with all of our products.
Speaker #2: And that they're greatly enhanced with artificial intelligence tools. That changed the productivity paradigm for customers, and that's what we're seeing. So, early days yet, but we feel quite good about the receptivity at this point.
Speaker #1: Thank you. And one moment. Our last question is going to come from the line of Matt Taylor with Jefferies. Your line is open. Please go ahead.
Speaker #5: Hi. Thank you for taking the question. Hey, Jay. Good luck in your next role. It's been great working with you for 20 years, almost.
Speaker #5: Thanks, Matt. Thanks, Jay. So I just wanted to ask more about the outlook for costs. You talked about the levels versus your prior guide for this year.
Speaker #5: Could you talk a little bit about next year and how you're planning for the potential for increases in memory costs and, you know, oils and flux?
Speaker #5: But, you know, if oil goes higher, how would you be able to hedge against that with some of the mitigation actions and the pricing that you've implemented?
Speaker #2: Yeah, Matt. It's Pete. Look, I think the short answer is we have to be able to get adequate price to be able to offset those types of changes in the marketplace.
Speaker #2: All of our new products—we've been heavily focused on the cost side. And so, there will be a natural lift in gross margins based on all of that.
Speaker #2: But in particular, the price recall, we talked about raising prices and taking price actions in the first half. We will see more of an uplift of price here in the second half.
Speaker #2: And then, obviously, that will continue into the beginning of 2027. So I don't know, Jay, if you want to add anything else to it.
Speaker #5: Yeah, the only thing I would add, Matt, is if you look at the story in the quarter, it’s really related to a PCS challenge driving down overall margin for the company.
Speaker #5: Despite very, very high inflation in the quarter—some of the highest that we've seen in years in a specific quarter—we still expanded margin, excluding PCS, by I think around 100 basis points.
Speaker #5: So, a really remarkable story. You can expect to see more of that as we go into the future. And with the PCS business stabilizing, that too serves as a catalyst.
Speaker #5: So I think the playbook that we put in place this year notably cost management and price to offset inflation while there is a lag and we saw that in the second quarter, the lag does benefit Q3, Q4, and all the way into next year.
Speaker #5: Okay, great. Thank you, guys.
Speaker #2: Thanks, Matt. Thanks.
Speaker #1: Thank you. This concludes the question and answer session. And I will hand the call back to Peter for his closing remarks.
Speaker #2: Thanks, operator, and thanks, everyone, for your interest in GE HealthCare. We look forward to connecting with many of you here in upcoming discussions or at some of our investor events in the near term.
Speaker #2: Thank you.
