GE HealthCare Technologies Inc. (GEHC) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the GE Healthcare Third Quarter 2026 Earnings Conference Call. [Operator Instructions] please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Carolynne Borders, Head of Relations. Please go ahead.

Thanks, operator. Good morning, and welcome to GE Healthcare's Third Quarter 2026 Earnings Call. I'm joined by our President and CEO, Peter Arduini, CFO, Bill Grogan; and Controller and Chief Accounting Officer, George Nukem. Our conference call remarks will include both GAAP and non-GAAP financial results. Reconciliations between GAAP and non-GAAP measures can be found in today's press release and in the presentation slides available on our website. During this call, we'll make forward-looking statements about our performance. These statements are based on how we see things today. As described in our SEC filings, actual results may differ materially due to risks and uncertainties. With that, I'll hand the call over to Peter.

Thanks, Carolynne. Good morning, and thank you for joining us today. Before I review highlights from the quarter, I want to take a moment to welcome Bill. He brings tremendous experience and a strong track record, and I'm looking forward to partnering with him as we execute against our strategy and deliver on our priorities. Looking at our third quarter results on Slide 3. We delivered strong top line growth and margin expansion across all segments. Broad-based demand in advanced imaging solutions and pharmaceutical diagnostics supported healthy orders, book-to-bill and backlog. Heartbeat is strengthening how we run the company and helping our teams deliver on commercial and operational simplification. Great example of performance driven by Heartbeat this quarter is patient care solutions. The team identified root causes of prior supply challenges and implemented standard work and early management to drive ongoing improvements. This drove backlog conversion and stronger operational performance. Taken together, momentum in our business has enabled us to raise our full year 2026 guidance, which Bill will cover later in the call. Turning to Slide 4. Let's look at how we're advancing our growth strategy. We reached key regulatory milestones in the quarter on 2 imaging platforms with market differentiating features. We received CE marking for Photo Nova Spectrum, our Photon Counting CT system and Starguide GX, our spec CT system is pending FDA clearance. This broadens our ability to commercialize in more markets. We also expanded our ultrasound platforms in cardiovascular, women's health and general imaging. With the launch of several new products to meet the growing demand for noninvasive imaging. We continue to see general imaging ultrasound as an attractive market where we're investing for the long term. With growing demand, staffing constraints and more distributed care, Ultrasounds versatility across a broad range of exams is increasingly valuable. PDx delivered another excellent quarter with growth in contrast media and radiopharmaceuticals, including proprietary tracers aligned to disease states. This was supported by momentum in precision and growing demand for targeted diagnostics in oncology, cardiology, and neuro. Earlier this month, we announced our plans to acquire Sofie Biosciences. Upon close, this will establish a final mile footprint of U.S. radiopharmaceutical supply, it will also strengthen our pipeline through FAPI74, a Phase III PET tracer with the potential to help diagnose and treat a range of cancers and other diseases. Part B is driving improvement in execution across the company, keeping our teams focused on SQDCI, safety, quality, delivery, cost and innovation in that order and services, standardized digital support is helping our field engineers resolve more issues on the first visit. We expect this to save approximately 10,000 hours of field time across CT/MR and X-ray in the U.S. and get customers back up faster. In AIS, stronger standard work and operating rigor around variable cost productivity delivered incremental cost reductions, helping partially offset inflation. We recently entered multiyear strategic agreements with several leading technology partners to secure memory chips to strengthen the resiliency and predictability of our supply chain amid growing cross-industry demand for advanced computing components. We continue to pursue agreements to position us in the future. Lastly, before I hand the call over to Bill, Today, we announced that Jeanette Banks, who leads our PCS business will be leaving a CEO role at a noncompetitive publicly company. We thank her for her contributions and wish her the best. Leveraging our strong succession pipeline, I'm excited to announce that Neil Sandy, currently Head of Product Strategy and Management for PCS will become the CEO of the business. I have tremendous confidence in Neil's capabilities given his current role and more than 30 years of experience in the industry. We remain focused on building on the progress the team achieved in the quarter and we also are evaluating strategic options for this business. With that, Bill will walk through the financials and guide. Bill?

Thanks, Pete. Let me start by saying how excited I am to have joined GE Healthcare. I've been impressed by the talent and commitment of the team and I look forward to helping to build on the existing foundation as we execute on the significant opportunities ahead. Now let's turn to our third quarter financial results on Slide 5. We're pleased with our strong performance on both the top and bottom line and with growth ahead of expectations. Revenue of $5.5 billion increased 6.2% organically, with growth across all segments. On a reported basis, we had strong performance in both product and service revenues at 6.7% and 8.1% growth, respectively. Organic orders grew 4% as a reminder, orders growth in the third quarter of last year was 5.7%, so we're growing mid-single digits on a strong baseline. On a trailing 12-month basis, organic orders growth was 4.6%. Book-to-bill was 1.03x, and we exited the quarter with a backlog of $23.7 billion, up $2.5 billion or 12% year-over-year. We made progress on margin expansion this quarter, delivering adjusted EBIT margin of 16.6%, up 180 basis points. I'll discuss the operational drivers in more detail on the next slide. With our strong execution in the quarter, we delivered adjusted EPS of $1.34, up 25.1%. Lastly, our free cash flow was $793 million, up $310 million versus the prior year. On Slide 6, we'll look at the drivers of margin expansion in the quarter. Our commercial execution helps us grow profitably as volume provided a healthy tailwind to margin. Additionally, the price and cost mitigation actions we've been taking across the business are starting to deliver a more meaningful benefit. Tariff expense was also lower than the prior year. Margin was negatively impacted by inflationary costs for memory chips as well as the impact of higher oil prices across our supply chain. As we think about our margin expansion framework, it is built around 2 key areas underpinned by Heartbeat, commercial execution and operational simplification. Starting with commercial execution. Our focus is on driving high-quality, profitable growth. This includes capturing strategic pricing opportunities, standardizing our product launch playbook and bringing new products to market at higher gross margins. As I've been coming up to speed on our business, a strong example is our Vivid cardiovascular platform, where differentiated AI-enabled capabilities supported premium pricing, while a simplified design reduced manufacturing costs. On the operational side, we are simplifying how we run the business and reducing complexity across the organization. This includes advancing product platforming, optimizing our structural cost base, streamlining internal processes to eliminate rework and the VCP examples Pete mentioned earlier together these actions are helping us improving efficiency and create a more scalable operating model, while supporting margin expansion. Let's move to our consolidated segment performance on Slide 7. Starting with Advanced Imaging Solutions. Organic revenue grew 4.5%, driven by strength in CT, cardiovascular Interventional Solutions and Surgical Innovations. EBIT margin expanded 130 basis points year-over-year, driven by volume, reduced tariff expense and price. This was partially offset by inflation. Demand for our cardiology solutions also increased, which was reflected in demand for our AI-enabled CT solutions, MR upgrades and cardiovascular ultrasound. Moving to Pharmaceutical Diagnostics. We delivered robust organic revenue growth of 13.8% with contributions from contrast media and radiopharmaceutical products. Segment EBIT margin expanded 50 basis points to 29.9%, driven by volume and price, partially offset by planned investments in new products and our innovation pipeline. As mentioned, we also announced the planned acquisition of Sofie Biosciences. Sophie's revenue will add approximately 1% of total company revenue on an annualized basis. In the full year of ownership, revenue is expected to grow in low double digits with accretive adjusted EBIT margin and adjusted EPS. Patient Care Solutions delivered significant sequential improvement in the quarter and year-over-year organic revenue grew 8.8% driven by improved operational performance, including better product fulfillment and monitoring solutions and maternal infant care. Backlog continues to grow alongside revenue. Segment EBIT margin expanded 480 basis points year-over-year, primarily driven by higher volume and cost productivity. Third quarter performance was better than expected with strong product fulfillment driven by daily management and improved supplier and factory execution. We expect this to benefit us in the future. However, keep in mind that the fourth quarter of 2025 had an approximate $45 million revenue benefit from the release of a product hold. Turning to cash performance on Slide 8. We delivered free cash flow of $793 million in the third quarter, the year-over-year increase was supported by a reduction in net tariff impact, including lower payments as well as refunds in the quarter. Additionally, operational profitability and timing of collections helped drive year-over-year improvements. We also increased our cash dividend by 14%, further enhancing returns to shareholders. Now let's turn to our outlook on Slide 9. Our continued execution gives us increased confidence in our outlook, as a result, we are raising several of our full year 2026 metrics. We now expect organic revenue growth of approximately 4%, adjusted EBIT margin in the range of 15.5% to 15.7%, adjusted EPS in the range of $4.95 to $5.05 per share and free cash flow in excess of $1.6 billion. We expect our adjusted effective tax rate to be in the range of 20% to 21% for the full year and foreign exchange tailwind to revenue of approximately 75 basis points. With that, I'll turn the call back to Pete.

Thanks, Bill. I'd like to spend a few minutes highlighting PDx a great example of how we're executing our D3 strategy, which brings together smart devices and drugs with a disease state-focused and AI, enabling more precision care. PDx has delivered at least high single digits growth for 5 straight quarters. We're investing in strengthening our supply chain and manufacturing capabilities and expand where we can create value. As populations age and chronic disease rises, clinicians need imaging that answers sharper questions, which treatment for which patient and when Managing the diseases often requires imaging at several points along the patient journey from diagnosis to treatment to monitoring. Our agents are used in many of those imaging scans because each scan uses a dose PDx revenue is recurrent and grows with patient volume. About 3/4 of the portfolio today is contrast media, where volumes grow with global procedure demand. We're also investing in what comes next with our MR manganese-based contrast agent. It has the potential to address a nearly $1.2 billion market we're making good progress on our combined Phase II and Phase III international trial. The remaining balance of revenue contribution is from radiopharmaceuticals, one of our fastest-growing markets. Here, PDx drugs and our AI-enabled devices complement each other. Each new agent helps clinicians detect and monitor disease, which drives demand for imaging and our pet systems. We're seeing that in our molecular imaging business, which grew strongly again this quarter. That combination is a differentiator for us as the only company with proprietary molecules in a large imaging portfolio. We continue to see increased demand for our radiopharmaceutical portfolio, including Visma and Sarana and we're also seeing strong performance from established products like DaTscan, our spec imaging agent for patients with suspected Parkinson's disease types. Meanwhile, Forcado is on track we delivered approximately 680 doses for the week ending October 23, and we're seeing growing adoption across a broad-based range of customer types. Those include the existing Cardiac PET CT programs that have been partially or fully converted to Picado as well as others that are converting from spec to pet. This adoption reflects Vicado's diagnostic capabilities, longer half-life and flexible infrastructure. To help expand the final mile distribution of these radiopharmaceuticals, we plan to acquire Sofie Biosciences. Pairing Soffe's network with our manufacturing scale, will expand access and strengthen supply reliability, enabling us to directly manage a portion of our radiopharmaceutical manufacturer. It will also position us to advance the next generation of precision care, including PSMA, app and theranostics. Were the same molecules that diagnose the disease help guide targeted treatment. Simply put, PDx pay resilient recurring revenue today with a pipeline and footprint to extend that growth. In summary, we're pleased with third quarter results and importantly, the strong contributions from our team. Heartbeat is helping us strengthen commercial execution and operational performance. Our focus on standard work and daily management has been critical in driving more consistent performance. We continue to advance our new wave of innovation, achieving key regulatory milestones in the quarter, and we're executing on our priorities and our performance year-to-date gives us confidence in delivering on our commitments for patients, customers and shareholders. With that, we'll open up the call to questions.

Thank you, Peter. I'd like to ask participants to please limit yourself to 1 question and 1 follow-up. Operator, can you please open the line?

[Operator Instructions] Our first question comes from the line of Travis Steed with Bank of America Securities.

Bill, looking forward to working with you, congrats on the new job at GE. I'd start with the first question. I start with the first question on the CapEx environment. Just a lot of questions on 340B and the macro and kind of what you're seeing on the CapEx environment. And I did have 1 follow-up.

Travis, thanks. Look, I mean, as you saw and you heard our comments, we're pleased with the quarter results, the strong execution. I think you're starting to see some of the product differentiation coming through. But relative to the capital budget market, particular technologies like what we do in imaging from all of our survey data and discussion with ranks at the top of the list. I think you know we do a survey of kind of same-store sales with customers -- and fundamentally, I would say the energy and positive focus on that survey stayed the same. I mean it positions us well, I think, as we go into Q4 into next year. I know there's been some commentary around procedures pull back here and there in different areas. We haven't seen that directly either in scan data or actually contrast use data at this point and indicators that would demonstrate slowdown or changes like that have to be multiple, multiple quarters. So I think we start seeing it coming through in our equipment. One of the things about the imaging world is or other capital equipment. A lot of these are programs that are planned. You make a decision now for an installation that might be 12, 18, 24 months out. And I would say our funnel is as strong as it's ever been at this time. So we feel good about the trajectory as we come at the end of the year and as that converts into the beginning of '27.

And the follow-up question is more on backlog this quarter was down a little bit, book-to-bill, 1.03, it was the lowest since first quarter '24. Is that just lumpiness you're seeing quarter-to-quarter volatility? And I guess part of it is probably fulfilling last quarter's strong orders as well.

Yes. No. I think that's it, Travis. I mean I think, as you know, and many of the follows from an order standpoint, with big deals that we do that can be $100 million plus, you have some land in a given quarter, they slide out by a week. It obviously creates a significant lumpiness. But we feel quite good about the orders. Bill had mentioned, coming off a strong year last year, both PDx and AIS did well. I would comment that our pipeline of opportunities remain strong, is up which is an underpinning of the resiliency that we see out in the marketplace. So all of that, we feel quite good about it. I think from a standpoint of where we are with our capital equipment cycles and stuff, things are looking pretty good on the conversion. As I look out into Q4, our orders book looks a little bit better than we actually had in Q3.

Our next question comes from the line of Vijay Kumar with Evercore ISI.

Bill, congrats on role. I guess my first question, Pete, is on Facade. Your you gave the weekly dose assumption and the revenue run rate. How are you thinking about the PAT to 500 run rate exiting '28 how does Sofie help? I think it makes the last mile connectivity. But how should we think about the ramp when you think Sofia's part of GE healthcare -- does it improve your visibility to that $0.5 billion exit rate in fiscal '28?

Yes, Vijay, look, I think with Picato, short answer is we feel very good about the $0.5 billion exiting 2028. kind of -- as I mentioned on the call, we're progressing as we expected. Feel good about the momentum and the weekly build. I think we're seeing broad-based growth and interest I think 1 of the interesting areas is, as I think we know this started out as much as with heavy interest in pet users that were already in cardiovascular, and that continues. We're starting to also see now the broadening of spec users that are saying it's time to kind of start considering moving into the pet world. And that's important because if you remember, the long-term opportunity is over 80% spec that. So both of those are growing. I think our funnels at this point in time are up significantly, which is what we look at on a forward metric about opportunities and what our conversion rate would be -- one of the other key mix I mentioned last quarter was the amount of customers that we converted. We converted about the same percentage of customers this quarter as we did last -- and again, those will begin to build. It's a 60-day cycle of only a case or 2 until they get reimbursement, and then that can ramp up into double digits. So things look good. I think, again, the positivity that we see from customers you hear from customers on all the attributes discussed, image quality, dose management with larger patients, all those things are still playing out. And then just notably, I think I mentioned in the comments, the larger portfolio in radiopharma, meaning breast cancer imaging, imaging relative to other cancers and stuff continues to grow. And that's important because it also means that department within an institution gets more focused. So there tends to be more dollars allocated in that area as well, which we're beginning to see.

And maybe my second 1 on China. In the region got back to growth. Has this -- has China bottomed up? Is it back to growth -- what is the normalized outlook, Pete? And there are some questions coming on maybe imaging BP in China, if there is one, could you elaborate on what the impact is?

Yes, BJ, I don't know if I would give a full prediction as everything completely changed, but I can give you the play-by-play as we see it. And obviously, our quarter -- we've seen quarterly improvement within China. I think you'll see we had 7% in the growth in the quarter, albeit the majority of that was still driven by FX. It was positive within the quarter. And the market is definitely recovering. We're seeing activity improvement, which transit into consistency and tenders that are planned, tenders that are executed. We are actually seeing more VBP. But I would say we've been changing our tactics, what configurations we offer how we go to market that way, how we think about educating and interacting with a province or a smaller community and so I think our team there led by Will has done a really nice job of evolving the channel. That being said, I think there's still lots of wood to chop, so to speak, here on advancing growth within China. But we're pleased with the results that the team put up here for the quarter.

Our next question comes from the line of Matt Taylor with Jefferies.

This is Matthew on for Matt Taylor. I wanted to ask about these multiyear agreements you have with technology partners and particularly on securing our memory trip supply. Could you possibly expand on how this helps you manage your costs going forward?

Yes, Matthew, I think we mentioned on the call that we've recently aligned at, I think, look, pull the lens big picture, -- it's no secret that the growth of data centers in AI has a big vortex effect on certain components around the industry. We think that's going to most likely exist for multiple years as this ramp-up goes. So we've taken an ecosystem approach to take a look at all of those things that could affect our business positively or negatively and reached out to the suppliers in the industry with what we believe is adequate lead time to secure first supply and obviously manage pricing the best that we can. At the end of the day, getting locked in pricing agreements on some of these things isn't probably realistic, but being in a favored nation status that we're first in line to be able to take advantage of both supply and price is what we've been able to do. So we feel quite good about where we are relative to some of the critical components like memory chips and stuff. But I think as others have talked about, over time, this will evolve into other components and stuff, and we're already focused on that. So feel quite good about the work that Will and the team have done broadly to be able to secure what we need to obviously deliver to our customers here, not only in the rest of the year, but into '27.

Our next question comes from the line of Robert Marcus with JPMorgan.

Congrats on the quarter. Two for me. First, -- can you talk to the guidance? It looks like it's factoring in a somewhat lower fourth quarter than -- the Street was expecting. And -- any early thoughts on '27, both top and bottom line. You do have some tariff refunds to overcome strong order growth trailing 12 months, can that translate into accelerating sales growth for next year? And then I have a follow-up.

Robbie, thanks for the question. I'll start maybe just on the '27 piece and then toss over to Bill to talk about implied Q4 on the rest of the year. I mean, obviously, we'll give guide for '27 as we normally do out in February. But I would say, look, there's a lot of moving parts. The momentum you can see this year on top line, we believe, will continue. Both what you're seeing from an order funnel, the translation of the backlog, how that's translating into revenue. So we feel good about the setup that we have moving into '27. And on the bottom line, it's a similar story. I think the majority of this year hasn't been heavily impacted by our new products that actually have higher gross margins. We'll see a higher percentage of that -- we do have some scenarios on tariffs and stuff, which we're in a little bit better position, but I would caution the fact to say that there's no static tariff rates these days. We have to see how some of that plays out. But in the world that we see today, we're in pretty good shape -- and then on variable cost productivity and price, we've been able to offset some of the major costs, not all of them with the combination of the 2. And I would expect all that obviously going to play through into '27. Maybe Bill, you can talk a little bit more about how we're thinking about the guide here for this year.

Yes. No, thanks, Pete. Exiting the third quarter, I think we feel good about the momentum right? We're building across the business and heading into the fourth quarter, our backlog is up 12% versus the prior year. We had another solid quarter of top line growth from an expectations perspective with healthy margin and EPS expansion, right, with margins coming in sequentially higher versus the third quarter. On the top line, though AIS and PDx will drive growth for us in Q4. As I said in the prepared remarks, PCS' growth will be muted a bit due to the product hold catch-up that we experienced last year, but they will grow sequentially and have healthy year-on-year margin expansion. So the implied Q4 growth range of that 3% to 4% is really more around the PCS product hold versus any deceleration we see in the market. So I think the guide appropriately reflects the strength we've seen while remaining mindful about the dynamic macro environment.

Great. Maybe a quick follow-up here. PCS had been trending pretty negatively year-to-date, had a really strong quarter here. How do we think about the underlying versus any onetime items? And if it is all underlying strength, what's driving that to shift so positively.

Yes, Robbie. Look, I think on PCS, and I'd mentioned this in some previous calls, we actually had some installations that had timing-wise, moved out more to the second half on monitoring projects. that's playing out as we had thought. And so again, those aren't onetime things. We're going to see that continue to play out through into the beginning and on through into the beginning in '27, but 1 of the bigger challenges we had in Q1, Q2 is just some of the supplier issues. And the team has really doubled down using our management system, our beat again, to really focus on getting out with our suppliers, where we've had supply constraints, how that ties out to demand capacity planning, both in our plants as well as with our customer sites. And I mentioned this focus on standard work and daily management. Think about it this way. I mean, this team has moved really from kind of a monthly, weekly cadence to weekly daily cadence and making sure that were there any gaps relative to product capabilities, if there's any take issues relative to parts and components that they're addressed. And I think they've got the right rhythm in place. And so we would expect that you're going to see continued improvements here from this point forward on PCS.

Our next question comes from the line of Joanne Wuensch with Citi.

Good morning. Bill, welcome to the GE Healthcare team. I'm curious what your first impressions are. How you're thinking about what you may implement or view differently for guidance -- and anything you feel like sharing with us now that you're here?