Dive Brief:
- GE’s healthcare unit reported that first-quarter revenues of $4.4 billion increased 2% organically, with growth impacted by continued industry-wide supply chain constraints and inflationary pressures.
- GE CEO Larry Culp told investors on the Tuesday earnings call that supply chain shortages hit the conglomerate’s healthcare division particularly hard. While healthcare systems orders were up 9% in the quarter, segment margins contracted from 16.2% last year to 12.3% in 2022, due to increased material and logistics inflation.
- Inflationary pressures in the quarter were "greater than expected, especially in our shorter cycle businesses like healthcare," GE CFO Carolina Dybeck Happe said. Despite the difficult macroeconomic environment, company management contends the $18 billion healthcare unit is well-positioned to achieve high-teens to 20% margins over time as supply chain constraints ease. However, when that will occur remains an open question. Medtech rival Philips on Monday warned of persistent supply chain challenges and said inflation pressures could remain for years.
Dive Insight:
GE Healthcare is the latest medical device company this earnings season to warn about ongoing macroeconomic challenges, including inflation and supply chain constraints, that are impacting financial performance.
"We're operating in a challenging macro-environment," Culp told investors, while also noting that COVID-19 lockdowns in China and lower sales volumes in Russia and Ukraine have impacted first-quarter financial results. However, Culp hastened to point out that healthcare demand is strong.
Despite the ongoing supply chain disruption and inflationary pressures, GE Healthcare reported orders of $4.8 billion in the first quarter, an 8% increase year-over-year.
"Elective procedure volumes recovered from January. COVID cases subsided in February and March, with volumes improving sequentially, though hospital staffing shortages continue," CFO Dybeck Happe said.
Last week, Johnson & Johnson and Intuitive Surgical both reported that procedure volumes continued the recovery trend that began in the second half of 2021, with certain businesses inching closer to or eclipsing 2019 levels.
While GE reported a procedure recovery in the first quarter, the company did not speculate as to when supply chain and inflation issues would improve.
"Growth was impacted by the continued supply chain constraints, primarily in electronics, COVID impact in certain China regions, further limiting what we can buy and ship and affecting revenue toward quarter end," Dybeck Happe said. "Looking ahead, our current view in healthcare is that supply and inflationary challenges will proceed at some level through 2022. Sequential improvement depends on supply chain constraints easing, especially in China, and our ability to leverage lean to improve output and strengthen our pricing discipline."
Driven by increased material and logistics inflation, the CFO said the net of the healthcare unit's sourcing actions resulted in "a headwind of about four points."
While GE experienced lower volume in Russia and Ukraine in the first quarter, Dybeck Happe added that those two countries only represent approximately 2% of healthcare's annual sales.
During last month’s annual investor day, GE said it expects the healthcare business to generate about $3.2 billion in operating profit this year and approximately $3.5 billion in 2023, which is in line with Wall Street estimates. The company forecasts mid-single-digit growth for each year and a profit margin ranging in the high teens to 20%.
GE’s plans to spin off its healthcare operations in early 2023, announced in November, remain on track. To get ready for the spinoff, the company said more than 1,000 employees are organized in cross-functional teams to ensure "operational readiness and progressing carve-out audits," while announcing that it has finalized information technology infrastructure and legal entity separation plans.
"A lot of work has been completed. More to come, but we're on our way," Culp said.
