In the GE HealthCare Second Quarter 2023 Earnings Conference Call, Carolynne Borders, Chief Investor Relations Officer, welcomed the participants and introduced the President and CEO, Peter Arduini, and the Vice President and CFO, Jay Saccaro. Peter Arduini reported strong performance with 9% year-over-year organic revenue growth and 6% orders growth in the second quarter, driven by strong demand for NPIs and continued value to customers. He noted that health care providers are investing globally in capacity to improve patient care and productivity.

GE Healthcare is investing in products to increase productivity and competitiveness in the U.S. and in hospitals around the world. They have improved their EBIT margin and increased R&D spending to develop machine learning capabilities and build interoperable ecosystems. They are pursuing a balanced strategy to create value for shareholders, which includes investing organically, acting on inorganic opportunities, deleveraging, and initiating a dividend. They are raising their full year guidance for organic revenue growth and adjusted EPS.

In the second quarter of 2023, revenues of $4.8 billion increased 7% year-over-year and grew 9% organically. Book-to-bill improved to 1.04 times, and the total backlog was healthy at $18.4 billion. Adjusted EBIT margin was 14.8%, down 120 basis points year-over-year. Adjusted EPS was $0.92, up 12% versus prior year, but down 20% year-over-year due to interest expense. Free cash flow was down year-over-year due to incremental interest and pension payments associated with the spin.

The company posted strong sales growth in all regions, including double-digit growth in China, and is expecting continued momentum in the third quarter. They are focusing on margin expansion through operational initiatives and progress on their separation, with positive sales price growth in all segments and progress on their lean productivity initiatives. They are reducing their SKU count to focus on higher-margin products, and are optimizing G&A by reducing their real estate footprint, IT costs, and other functional expenses.

The company has seen strong revenue growth in the Imaging segment, driven by molecular imaging CT and MR, supply chain fulfillment improvements, stable demand, revenues from new products, and pricing initiatives. In the Ultrasound segment, organic revenue growth of 3% was driven by cardiovascular and women's health, with new product launches with AI capabilities. Segment EBIT margins have declined year-over-year due to planned investments, though productivity and price have more than offset inflation. The company is expecting to benefit from the changes in 2024 and beyond and has line of sight to expand margins through focused actions.

GE Healthcare reported organic revenue growth in Patient Care Solutions and Pharmaceutical Diagnostics, driven by price and volume. In Patient Care Solutions, revenue was driven by new product launches and a backlog remains robust. In Pharmaceutical Diagnostics, revenue was driven by price and the recovery of volume following the China COVID-related plant shutdown in the second quarter of last year. GE Healthcare is investing in a digital future across PCS, with new products launching in the next few quarters, which are expected to contribute to volume growth.

The second quarter was impacted by spin-related items, but excluding those, free cash flow would have been positive year-over-year. Working capital improved due to better inventory management. The company is raising its 2023 guidance for organic revenue growth and adjusted EPS, expecting organic revenue growth in the range of 6-8% and foreign exchange headwinds of less than 1 percentage point. They are expecting margin expansion of 50-100 basis points over a 2022 standalone adjusted EBIT margin, with the fourth quarter adjusted EBIT margin being the highest of the year.

GE Healthcare announced two deep learning AI technologies, Precision DL and Sonic DL, for their Omni Legend PET/CT and AIR Recon DL MR platforms respectively. The company also introduced a mini 3D transesophageal echocardiogram probe, 57% smaller than an adult probe, for pediatric cardiology. Lastly, GE Healthcare is investing in monitoring solutions for critical care and acute patients.

GE Healthcare is well-positioned to provide disease state solutions for customers, with technology such as MR and PET scanners and their amyloid imaging agent, Vizamyl, combined with digital solutions. This is especially relevant for Alzheimer's disease, as the FDA has recently approved lecanemab, and there are other promising molecules in the pipeline. Additionally, the introduction of CARESCAPE Canvas and Portrait Mobile has enabled care teams to monitor the unmonitored in a continuous manner, and Cerianna is the first and only FDA-approved imaging agent to help clinicians assess reoccurring or metastatic breast cancer.

GE Healthcare has seen success in the first half of the year, with strong market demand for their products and services, as well as a healthy backlog. They are investing in R&D and margin improvement actions to drive long-term innovation. They are also optimistic about the benefit of new breakthrough therapies for patients and the growth opportunities it will generate. Jay, the new CEO, was welcomed and congratulated for the solid 2Q performance and positive outlook. Anthony Petrone asked Jay about margins and Pete about Alzheimer's disease.

James Saccaro discussed the progress of the TSA roll-off, which is on track with over 400 TSAs to exit in the next several years, with the majority of those exits taking place in 18 to 24 months after the spin. He also mentioned that 1/3 of the exits are related to IT and half are related to facilities, and that there are opportunities for IT optimization in the future. Anthony Petrone then pivoted the discussion to comments on Alzheimer's disease.

Peter Arduini discusses how GE Healthcare is facilitating the management of diseases with both MR and PET products, with the potential to improve patient outcomes by 30-40%. He references the recent FDA approval of Leqembi and the CMS proposal to cover beta PET scans for beta amyloid plaque, which was released a week ago. He believes that this is a great time for new therapies that will change patients' lives.

A promising growth opportunity for the company lies in the uptake of the drug, which is dependent on a companion diagnostic reimbursement and the follow-on drugs. The company is the only one that touches MRI, PET MR, PET/CT, and radiopharmaceutical tracers, which have a half-life of under two hours and require a large distribution network. The near-term will show how these pieces come together.

The company is pleased with the strong second quarter orders of 6% and is targeting mid-single-digit growth for the next several years. The company's backlog declined slightly due to revenues growing faster than orders, but is still at a healthy level of $18.4 billion.

Jay and Peter discussed the quality of the backlog and how the demand is strong for their imaging products. They expect to see mid-single digit growth in revenue and mid-teens to low 20s in EBIT margins. James Saccaro added that they are comfortable with the medium-term targets and the standalone costs that were factored in the guidance.

The company has set margin targets and is confident they can be achieved by utilizing commercial execution, innovation and optimization strategies. Commercial execution focuses on disciplined pricing, and innovation is driven by a care continuum approach. Additionally, the company is focusing on optimization in their factories and processes to help improve margins. Overall, the company is confident that these strategies will help them transform their margins.

Peter Arduini discussed how artificial intelligence is affecting the economic areas of the world in different ways. Specifically, it is making product usage more straightforward and automating many steps in productivity. Jay may add more color to the orders front.

GE Healthcare is a leader in the field of AI-integrated applications, and focuses on taking new products back into the installed base. They offer upgrades to existing systems that improve image quality and increase productivity by 30-50%, and have developed a cloud-based system to provide customers with access to applications. They are also working on multimodal data integration to help interpret multiple exams.

Jay was asked about corporate gross margins over the next four to eight quarters and he laid out a roadmap for how to think about it, including rationalizing TSAs, IT, and product SKUs.

In the second quarter, gross margin was up due to price and productivity, which offset inflation. Going forward, the company plans to secure a 2-3% price increase and 1-2% productivity increase to maintain gross margin. In the next two quarters, gross margin is expected to stay in the same range, with the fourth quarter being the highest due to seasonality. Going into next year, the company plans to discuss further details.

Peter Arduini discusses the current level of AI and the potential for increased margin contribution when software upgrades are incorporated. He discusses the importance of being the face to the customer and having the right committees to ensure proper cybersecurity and privacy of data. He discusses the importance of having a Chief Technology Officer with the right background to be able to leverage the right partnerships and look at the data generated from the imaging world.

Pete Arduini of one of the competitors discussed the order declines and Russia headwinds. The book-to-bill of 1.04 was a clean number, and the order growth was higher than the peer's decline, signaling a possible share shift in the industry. Arduini's philosophy is to get the most value for the products in all geographies while balancing share.

Peter Arduini discusses the ideal scenario for GE HealthCare, which is to hold or be slightly up in share and to get the right value in all geographies. He attributes their success in the past 9-12 months to their metric NPI vitality, which is new products generating sales. He also mentions that the U.S. government has put in place additional process controls, which have extended the time of transactions, but this is factored into their guidance. Finally, he reveals that Russia represents around 2% of GE HealthCare's business.

James Saccaro reported that the company saw a 70 basis point improvement from the first quarter to the second quarter in terms of margin expansion, despite a substantial increase in R&D. He expects the third quarter margins to remain similar to the second quarter, but anticipates a substantial increase in the fourth quarter due to the impact of G&A activities. Saccaro believes the company has good line of sight to the margin expansion they have laid out and is confident in their ability to continue margin expansion into 2024.

Peter Arduini provides details on the manufacturing capacity for Vizamyl, a radiopharmaceutical used for color interpretation in diagnosing Alzheimer's disease. He explains that they have their own sites and a network of partners for manufacturing, and that they have adequate capacity to meet the demand. He also highlights the importance of baseline visualization to quantify amyloid beta plaque and MRI to monitor the patient's progress during treatment.

Peter Arduini and James Saccaro discussed the PDx segment of the company, which had another strong quarter. They noted that the second half of the year would be more challenging due to a shutdown in their manufacturing facility in China due to COVID-19. However, they said that the total dollar sales should be in the range of $550 million to $575 million.

Jay, Peter, and Jason discussed the growth of the PDx business and how it is made up of 70% contrast agent imaging and 30% molecular imaging. The growth of molecular imaging will have higher margins than the traditional side, but it will be a bit lumpy due to the shutdown in Q2 last year. The underlying drivers for the marketplace are the interventional procedures and with or without contrast studies. Jay was asked to provide more color on gross margins and the various impacts.

James Saccaro of Philips discussed the company's performance in the imaging segment, noting that the gross margins had improved from 7.7% to 10.6%. He also noted that component inflation headwinds should ease in the second half of the year, providing an additional tailwind for imaging margins. He concluded by expressing excitement for the opportunities ahead for Philips in helping to transform the future of healthcare.

The conference has concluded and participants are thanked for their participation. They can now disconnect.

This summary was generated with AI and may contain some inaccuracies.