Good afternoon, everyone. Suraj Kalia, Senior Medical Device Analyst at Oppenheimer. Really pleased to have Jay Saccaro, CFO, and Carolynne Borders, Chief of IR at GE HealthCare. Jay, Carolynne, welcome. Thank you for taking the time this afternoon. So I know this is a fireside chat, Jay. I'll just jump into questions, and I'll keep it freewheeling, and I'll let you take it whichever way you want. Jay, China is a really big topic that keeps coming up in conversations, especially with the Big Three in radiology. Set the stage for us in terms of, you know, how do you... what is China contribution for GE? But at the same time, what are the dynamics, you know, whether it's the government crackdown, anti-corruption, now there are centralized purchasing contract.
Set the stage for us in terms of China and how you see it evolving over the next 12-18 months?
Sure. Suraj, first of all, thank you for the virtual invitation to your conference. We appreciate it a lot. We appreciate your coverage of our company, and to those joining us, thank you all for spending time with us today. Look, I think taking a step back, China is a really important market for us long term. And I know you said 12-18 months. We've been selling in China, I think, for over 100 years or over 80 years. We've been manufacturing in China for more than 30 years.
It's a crucially important market for us, and while there has been a lot of volatility over the last several years and a lot of different actions and so on, at the end of the day, the line has continued to move up and to the right, as it has since we entered the market. Today, it's a meaningful piece, not a huge piece. About 14% of our business is in China, so it's important but not absolutely crucial. But that, well, we expect that to grow over time. Now, let's take a step back and talk about all the different puts and takes, 'cause there are things that have been great and things that have been more challenging. Great, you know, there was stimulus that took place in end of 2022 and the beginning of 2023.
That was a tremendous initiative. We were so proud to support that, and we benefited with tremendous growth in the first half of last year. I think on an organic basis, our China business in the first half grew maybe 20%. So really big numbers, coming out of China on the back of what was a bolus, which was stimulus. Then, of course, in the second half of the year, you know, we talk about anti-corruption, and that's something that we've worked hard to navigate. It certainly has complicated relationships with physicians and how things go, but I've been very pleased with how our team navigated that, and I think we have a decent understanding of what the implications and impacts of that are on our business.
And then we talk about things like VBP, and there was an announcement from the Anhui Province. And what it really was was a sort of limitation in terms of the central procurement procedures to focus specifically for us on two areas, PET/CT and PET/MR. So really a very small overall component. It actually limited the scope of prior efforts. So, you know, I don't really view it as impacting our business at all in any meaningful way. But of course, you know, the words VBP are very sensitive, so there was a lot of discussion around that. But, you know, we don't really view that as a huge factor in terms of a performance driver in 2024, this Anhui Province element.
So, you know, in short, you know, we'll look at this year, and the first half will have a decline in sales growth, really primarily driven by the tough comp. And then in the second half, we'll expect to see growth because of an easier comp, and also because of the, hopefully, the end of some of the anti-corruption activity, which was targeted to conclude within a year from the launch. But again, it's really important to take a step back. If we have a decline in the first half of the year, and we compare it to 20% growth, you're still looking at compounded growth in China. That's excellent. And so for us, you know, there's a lot of discussion and a lot of things to pay attention to in the short term.
No doubt, we're intensely focused on that. Our team in China has done a wonderful job, and incredibly focused on the compliance environment there. But long term, I mean, the line is up and to the right, and we see that continuing. So it's a market we're optimistic about, but, you know, we respect that, you know, in any given year, there's work that you have to do to navigate, the volatility.
Jay, would I summarize this fairly, that the relative China impact for GE HealthCare, I shouldn't say de minimis, but it is relatively muted as compared to others in the field? Would I be fair in characterizing it that way?
You know, I don't wanna sort of get into how others have fared versus us. It's hard, it's hard for me to see that level of detail from our competitors. You know, I don't wanna get into that. I will say that we were really proud of what our team did in 2023 at large. Really nice work supporting hospitals as they look to spend stimulus money. Tremendous work navigating a complicated environment in the second half of the year, so really good stuff, and I prefer to keep my comments limited to our own performance, which was pretty good. First half of this year, we'll see a decline.
Second half, we expect to see growth, and on balance, you know, China will continue to be a really important market for us. By the way, we announced this JV with Sinopharm, and we're working on finalizing that, and that is another vehicle for us to grow in China long term. Because today, a lot of our business is geared towards more academic or, you know, more tier one-type institutions. And we forgo a lot of opportunity in smaller places because of lack of access and perhaps having the right product set geared to those markets. This Sinopharm partnership will help us access that area, which has really been off limits for us, you know, or limited for us over the past several years.
So it's just another example of a lower-cost way to expand in China and capitalize on aspects in what is a crucially important market.
Jay, one of the things that you and, and Peter have repeatedly mentioned on the earnings calls is NPI. And if memory serves me right, you know, NPI was almost, I would say, 35%, 30, 35%, at least that ratio, was talked about at one point. Help us understand, again, you know, because investors keep the outlook of next 12-18 months, so within that horizon, what are the key NPIs that we should... I know photon counting is one, but what are the key NPIs, and how are you all thinking through the NPI flow-through, you know, and, and cadence, should I say?
Yeah, so Suraj, we're incredibly excited about the R&D pipeline. And by the way, a lot of it pays off in 12-18 months. A lot of it will be a little bit longer term, and there are investors very interested in that aspect because I... If you think about what the mission of this company is, it's to create a world where healthcare has no limits, okay? And what that means is walking into your doctor's office and having them with an, with a portable ultrasound device enabled by artificial intelligence, taking ultrasound exams as part of a physical exam. That's not a two-year thing, but do I believe that that could happen in the future? It certainly could, and we want to be there. We want to invest and support that. And so we're incredibly excited about short-term, midterm, and long-term investments that we're making.
Let's talk a little bit about it. What do we have? So first of all, it starts with investment, and what I would say is, maybe, from like 2015 to 2019, perhaps we underinvested it a little bit in R&D. And one of the things that I'm most proud of that our company was able to do last year is we grew R&D, I think, nearly 20%, and yet we expanded margins. So we did it in the face of that increased investment. That's exactly what we want to do, from an overall financial profile of our company. We did it last year, did it the year before. We'll expand R&D again. This year, R&D will once again grow faster than sales, and, we'll expand margin 50-80 basis points.
So, you know, when you talk about things like capital allocation, our first port of call is R&D, because what happens is the ROIs on those programs are really high, and if we can have a predictable apparatus in place to deliver, it starts to get really exciting. And so, you know, we have a number of really exciting pipeline products that we've talked about. In imaging, we have the SIGNA Champion product, which is a brand-new 1.5 Tesla MRI, wide bore format. Benefits from all of the artificial intelligence, by the way, which we continue to advance in the form of AIR Recon DL. We think it's a great offering to add to the market. We think it will be well-received, very excited about the impact that will have.
In our ultrasound area, you know, the whole Venue family, we're incorporating into that the Caption technology. And I mentioned this earlier. Caption was an acquisition that we did, and remember, think about R&D, not just about the internal R&D, but what you acquire. In the case of Caption, we acquired a tremendous technology. It's an artificial intelligence technology that allows untrained sonographers to take an ultrasound image. If you or I tried to take an ultrasound today, it wouldn't work. But at our RSNA booth, I was able to take an ultrasound with the help of Caption. It was extremely simple. Red or green, did you get a good image or not? That type of software does a couple of things. One, it opens up ultrasound to people who don't do it today.
But two, even for people who are trained, it does simplify and expedite the process. So we're very excited about our point-of-care ultrasound offering. Venue's tremendous, and when you add it with add to it, some of this work that we're doing with Caption, it gets extremely exciting. From a PDx standpoint. This is an area that, for me, is potentially transformative to our company. Okay? The whole notion of advanced tracers to really identify specific issues faced by specific patients in ways historically we could not, I believe is, in part, the future of medicine. So it starts with Vizamyl, right? Vizamyl is a, an, it's an amyloid tracer- amyloid plaque-identifying tracer that we offer today, used in conjunction with Alzheimer's therapies, that are on the market or coming to the market.
At the beginning, you use a PET scan with Vizamyl. At the end, you can... At the conclusion of treatment, you can do a second. We believe Vizamyl is the best tracer on the market. It's the only one that's allowed or approved for color, so you can see a color image. And I think it's gonna go hand-in-hand with the support of this life-changing therapy that is becoming available. So really excited about PDx and things like Vizamyl. We are also looking to—we're seeking approval for something called flurpiridaz, which is used for cardiac patients in terms of a new and better way to identify cardiac issues. We're also—we also talked about in-licensing. Again, I'll remind you, R&D is not simply about what we spend, it's about smart acquisitions.
We in-license something called FAPI, which is a specific tracer used to identify certain forms of cancer, and it just does a better job than the current tracers on the market. Again, another example of an in-license acquisition and R&D investment. Now, Vizamyl this year, probably second half, we start to see benefit. I'm hopeful that we get the approval in a reasonable timeframe. For flurpiridaz, that's probably more of a 2025, 2026 impact. FAPI, same. But you build the flywheel around some of these great innovations, durable products, and it gets incredibly exciting. I would conclude my comments with one of the areas that we've invested substantially in is the whole area of digital. And we'll talk more about what we're doing with artificial intelligence and digital technologies at our upcoming investor day later this year.
But it's safe to say, you know, we're making big investments and looking to support clinicians as they look to more effectively and more expediently diagnose patients through the use of digital technologies. I believe we've got a great platform already, but also a lot more opportunity in the future, and so that team is hard at work. And again, a lot of the increase that we saw this year went to some of those digital initiatives. So those would be a few things that I would share with you. I've definitely gone on, but this is a real area of excitement for us, to say the least.
So, Jay, you talked about AI. If I could just briefly tee off on AI. Obviously, if you look at the statistics, GE is far ahead in terms of AI-enabled technologies or platforms and approvals, you know, whether it's ultrasound, MRI, so on and so forth. You mentioned AIR Recon DL and what. So, Jay, help us understand, you know, in terms of how do you see this, quote-unquote, "competitive advantage" translating for GE over the years in terms of price and in terms of share? You guys are already the market leader, but obviously, if you just pick up AIR Recon DL, right, you can reduce scan times by more than half. That's a real thing in an MR. So just kinda set the stage for us in terms of AI.
You know, what's the next envelope in terms of pricing, competitive advantage? How do y'all think through where to invest, and how is it gonna position you guys?
It's definitely an exciting area for us. To your point, we're really proud that we topped the list of AI-enabled device authorizations by the FDA. I think we had 58 last year. That's a testament to the tremendous work by our engineering teams around the world. Very proud of those efforts. And the reality is, the way they're rolled out to customers kind of depends on the situation. In some instances, it's incorporating AI into a product, like Caption Health, for example. In some instances, it's an improvement upon an existing product, like AIR Recon DL. In some instances, it gets a little bit more complicated. But AIR Recon DL, you know, we have versions for lots of, you know, our different MR machines, and it's been incredibly well-received.
Frankly, as I think about areas where artificial intelligence has impacted companies today, visibly, tangibly, you have to look at AIR Recon DL as probably one of the most prominent examples. It basically takes an old MR machine, or a new one, and uses artificial intelligence to enhance the signal-to-noise ratio. The result of that is higher, higher-quality imaging done in much less time. And if you've ever had an MRI, you spend a lot of time in that machine. That's not great from a patient standpoint, but if you think from an institutional standpoint, it chews up capacity. If you can radically reduce that time, you're enhancing institutional capacity while providing better imaging, exactly what we wanna do as a company. Now, you might say, "Well, Jay, what if...
If you're delaying repurchases, is that a challenge?" And my response back is, "Listen, this is a high-margin, very high-priced software sale..." And so we make that trade-off all day long. And so that Caption Health integrated to ultrasound, those are examples of specific to product today. But our ambitions are broader than that. Our ambitions are, how can we use artificial intelligence, our expertise in visualization, our expertise in imaging, our install base, to help solve problems in a more comprehensive way? And so listen, it's early stages on this. We have a number of crucial projects that we're undertaking that are broader than simply make this image better, for a specific patient. It's much broader than that, but we'll have more to share when...
This is a nice incentive for you to join us at our. Have we announced the date of this, Carolynne, yet?
We haven't. We've only said it'll be later this year.
Later this year. So please, please join us in person. We're going to talk more about-
Agree
... this artificial intelligence and digital journey, because to your point, we've done a really good job enhancing our existing products with artificial intelligence. And the reality is, the first uses of artificial intelligence were like, identify a cat, right? Imaging was the first stuff, so you understand why that's our first port of call. But, like, what if we can start to compare, support comparisons amongst different images to drive outcome?
Yep.
Now we start to get really interesting in terms of where we can go. So more to come. Investments are being made. We don't have any of this built into our 12-18-month outlook. Nobody should pencil that in, but it starts to get really exciting as we look at this on a longer-term basis.
Yeah, it's a fascinating attribute, especially in radiology, when you layer on some of the deep learning algos. Jay, early in January, when we had that group meeting in San Francisco, one of the things that you had articulated, and I'd love some additional thoughts on it, in terms of TSA, you know, improvements, and you had talked about IT and finance, and, you know, everyone is in a business structure of its own. You're consolidating. Walk us through some more specifics in terms of how you're thinking through what incremental gross margin improvements should be, you know, gets pulled through as the year progresses and into next year.
Yeah. So this year, we have limited benefit from coming off of TSAs and stuff like that. Really, if you think about the gross margin or the margin that we're going to deliver this year, it's predominantly due to gross margin improvements in the form of pricing, in the form of some new products, but also in the form of an enterprise-wide initiative on productivity. We've done a lot of good work. Our leader in this area, an individual named Ken Stachurski, has done just a great job helping organize all of our businesses to pursue gross margin in a holistic way through things like waste reduction, automation, et cetera. And that's bankable. I like it. It's consistent, and we've had a great impact on that.
But that's really what the benefit is this year, because remember, R&D is going up as a percent of sales this year. SG&A comes down a little bit, but the lion's share of our growth will come from gross margin. Now, in the future, it's going to be a little bit different. We'll benefit more from SG&A reductions for the very reasons that you mentioned. And so we've done a really good job exiting TSAs, and maybe we're two-thirds of the way through, with perhaps one-third left of the 400 or so TSAs that we have. But the issue for us is, our focus in the short term, it's kind of like Maslow's hierarchy, like food, shelter, clothing. Like, at the base level is the IT systems need to work. The email address needs to work.
We moved over 50,000 email addresses from GE to GE HealthCare and moved all of that, in that Microsoft back office, we shifted over to our own instance. And so you don't generate a huge savings by that initiative in and of itself. But what that allows you to do is, as we get to independence, we can start to ask ourselves questions like: Where should our servers be hosted? How should we organize our support of application service providers, because we have 300+ applications today? How do we rationalize and then centralize support with one vendor to save $tens of millions? But you can't really answer that question until you're supporting yourself. And in the case of finance, we still have a lot of support provided by GE, although that's reducing.
And so we can't get after the question of, what is the optimal structure that we're going to put in place for finance? Because our job number one is close the books. Got to close the books effectively on our own, and we're now at that point, so it allows us to start to address those questions. So from my vantage point, you're going to see more of those benefits in 2025 than you do in 2024. Also 2026, than you do in 2024.
Certainly, there are some things that we can do in the short term, on SG&A, but, you know, as we think about optimizing this structure for the long term, to support the digital environment. And by the way, I'm not, I'm speaking nothing about using AI in the back office, which, you know, we haven't really scratched the surface of, but represents an opportunity. So all of that is on the come. In the meantime, gross margin carries the day in 2024. Priority number two, effectively get to standalone. Intensely focused on that. And then once we have those pieces in place, we can start to move on to cost optimization on the back end.
Jay, really dumb question here. So I know you and Peter have always talked about 1%-2%, you know, price component within the growth outlook. As I look out in the future and AI, you know, becomes a critical piece of the whole engine, right? Competitively, so on and so forth. Is it safe to say that it could be 1%-2% plus a delta because of AI-enabled and it provides a commit- Is that the way we should be thinking about long term, 3-5 years?
Yeah, well, okay, so I don't wanna get ahead of myself and you know, when we talked about 1%-2%, we shared that as kind of midterm guidance, next few years. And really that is simply and that's apples to apples, that's not mixed benefit. That's the discipline and the culture and the tools around pricing your product. To your point, I believe that there's a real opportunity, longer term, to enhance the economic value offered by our company through digital technologies. I fundamentally believe that. But we have to prove that to everybody, including ourselves. We have to get the products to market. We have to accelerate. Digital has to be a much larger component of what we do in artificial intelligence, same.
And yes, I do believe that there's an opportunity, longer term, for mix-up through digital and artificial intelligence offerings. But listen, let's be the humility is important at this stage because we are so early stages. The important thing is: Do you have the right team in place? Are you funding them for success? And do you have the right programs and trackers to deliver? I have to say, I had the privilege of dialing into a session, I wasn't there in person, with our team in Seattle just recently. I was amazed by the caliber of talent. Our Chief Scientific Officer, Taha Kass-Hout, joined us from, most recently from Amazon, where he was the head of artificial intelligence and machine learning.
His background is much more plentiful than that, but he, Taha and his team are the right people to focus on this. I believe they have the right funding, and now it's about delivering on the program. So, longer term, and again, it's not 12-18 months, but that's okay. Because in the meantime, on the 12-18 months, we are intensely focused on execution, grinding, and delivery. Intensely focused. Longer term, I think the opportunities can be extremely interesting.
So, Jay, I know you're, during your time at Baxter also, and I'm sure there's going to be some spillover into GE, how do you think about acquisitions? You know, just given the cash on hand, how you all think about, in terms of a... I know AI is a component, you know, in terms of acquisition, Caption Health and others. You all announced another, pretty important, partnership this morning also. Just kind of, but more specifically, tuck-in acquisitions, how do you think about it? How should investors think about GE's outlook in terms of capital allocation, the 85% that you all have always, referenced, but specifically, I'm more interested in acquisitions?
Yeah, by the way, really proud of the free cash flow conversion of the company, and but if you can deliver at that level, it really does afford you some really interesting discussions from a capital allocation standpoint. From our viewpoint, capital allocation starts with investment in R&D and CapEx, because those are the most bankable. We understand we can drive ROIs, get that flywheel going. We invested over $1 billion in those last year, and we're gonna continue to grow. Then it goes to tuck-in acquisitions. We, we really like the acquisitions we did last year.
We announced MIM, late last year, and what was so interesting about that is a lot of times when we were selling against competitors, people would say: "Hey, I want like, sort of cross-modality, ability to, use images across modality." And our capability in this area was light. So if you had a CT and an MR, we didn't really help you compare those in a very effective way. What MIM did... MIM is a product that we often sold with our products. What MIM does is it allows for that portability amongst modalities to compare images. It's a software technology. It also comes with artificial intelligence capabilities. We hope this is a great deal, and what we know is, it's a real opportunity for us to enhance the offering we have, to drive a great ROI.
It's neutral in year two or creative in year two, so it's a, you know, it's something that helps the economic profile and then very quickly becomes an attractive ROI for us. But more than that, it's a strategically essential offering. Caption was the same. We did an IMACTIS deal, similar. So all of—that's, that's probably our primary hunting ground, and what I'd love to do in the coming years is build this flywheel, where we're consistently allocating capital in a repeatable manner, using repeatable methodology to drive differential returns. That's the primary port of call. Now, we will look at larger stuff.
We sometimes, you know, we look at larger stuff all the time, but we will more likely do smaller things that are tuck-in in nature and build that flywheel of momentum, because it really, you know, as we become expert in business development integration, it becomes a great way to drive incremental returns. And then, of course, little work to do on the balance sheet, look to return excess capital to shareholders in the form of dividend. We'll look at a buyback at some point in the future. And so, but really excited about all of the capital allocation opportunities enabled by the free cash flow generation.
Jay, we are up on time. Any other key thing that we might have missed? Any stress points, macro, micro, how do you think about it? Quickly, if you could.
No, I think we hit on it all. I think that we're excited about the progress that we've made, where we're going in the future, the mission of the company, the midterm aspirations that I've shared with you. So all of that is well in hand. We clearly have a lot of work to do, but our team is engaged and excited to deliver. So, we appreciate, Suraj, all of your time, effort, as you look to study our company and share information about us. We really appreciate that. And to, again, to those that joined, thank you so much for joining us on the call today.
Thank you, Jay. Always a pleasure. Thank you, Carolynne.
Take care.