Earnings Call Transcript - GEHC Q1 2026

Operator, Operator

Good day, and thank you for standing by. Welcome to the GE HealthCare First Quarter 2026 Earnings Conference Call. Please be advised that today's conference is being recorded. Now it's my pleasure to hand the conference over to Carolynne Borders. Please proceed.

Carolynne Borders, Head of Investor Relations

Thanks, operator. Good morning, and welcome to GE HealthCare's First Quarter 2026 Earnings Call. I'm joined by our President and CEO, Peter Arduini; and Vice President and CFO, Jay Saccaro. 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 turn the call over to Peter.

Peter Arduini, President and CEO

Thanks, Carolynne. Good morning, and thank you for joining us. Let me start with our performance in the first quarter of 2026. We were pleased with the top line growth that came in at the high end of our expectations driven by our pharmaceutical diagnostics, advanced visualization solutions and imaging businesses. We also had strong services growth in the quarter. This all reflects disciplined commercial execution and accelerated customer adoption of new products designed to help clinicians enhance diagnostic accuracy and guide more precision treatment decisions across disease states. As we think about the capital equipment backdrop, we're seeing healthy customer demand globally with resilient procedure growth. Aligned to this, we saw solid performance in orders, book-to-bill and backlog. We delivered double-digit reported growth in EMEA and Rest of World, mid-single-digit growth in U.S. and China sales were in line with our expectations. However, we were disappointed by profit performance in the first quarter, which was impacted by a recall associated with a PDx supplier that has since been resolved. Later in the quarter, we began to see more significant increases in material costs, which we expect will continue for the remainder of the year. We remain confident in our ability to procure supply to meet customer demand. But given the inflationary environment, we're taking a prudent view and reducing our profit and free cash flow guidance for 2026. Slide 4 shows the inflation impacts to our profit guidance and the offsetting measures we've identified to mitigate. For background, the magnitude of specific input costs changed significantly as we moved through the first quarter, primarily related to two dynamics, an approximate $100 million increase in the price of memory chips, which are critical components utilized in many of our products as well as an increase in oil and freight costs of approximately $100 million. Other inflation impacts are expected to total approximately $50 million with metals, such as tungsten as an example. Prior to any mitigation, the gross impact of these costs is approximately $250 million or $0.43 per share. We expect to offset more than half of the inflation impact in 2026 with price and cost actions. Taking a prudent view for the year, we are reducing our full year adjusted EPS guidance by $0.15 associated with the remaining inflation impact. Including this impact, we will still deliver mid- to high single-digit adjusted EPS growth. Now I'd like to highlight strategic accomplishments that we're advancing our growth strategy. In the first quarter in Precision Care, we advanced our pipeline of innovation with key milestones in CT and MR, our two largest revenue-generating modalities. Regulatory clearances in both the U.S. and Japan market inflection point for Photonova Spectra, our differentiated Photon Counting CT platform. Customer feedback about the image quality has been extremely positive, including the ultra-high resolution and soft tissue clarity in all modes of scanning. We're actively working with customers on site readiness, and building a strong pipeline for future sales. In MR, we received multiple FDA clearances for next-generation technologies, including a new 3T and reduced Helium platform and state-of-the-art AI-powered workflow solution. Aligned to typical imaging order conversion timelines, we expect revenue contribution from our key imaging NPIs to begin in the first half of 2027. In PDx, we saw growth across contrast media and radiopharmaceuticals, along with growth in our molecular imaging equipment. This is driven by an aging population, increased chronic diseases and demand for precision care globally. We're pleased to see Flyrcado continuing to ramp with a nearly 80% increase in doses since late January. We delivered over 390 doses for the week ended April 17. We're onboarding new customers, including high-volume sites, and we've seen an acceleration in the average number of doses that customers are ordering each week. We remain focused on delivering high-quality customer experience; while there will always be some week-to-week variability, we're encouraged by our trajectory. And this reinforces our confidence in our medium-term target of $500 million or more in annual revenue by 2028. Growth is also accelerating, supported by the expanding use of disease-modifying Alzheimer's therapies that are driving increased demand for amyloid beta imaging. Looking to the future, one of the most significant research areas we've been focused on is developing our novel gadolinium-free MRI contrast agents. If successful, this manganese-based agent would provide a differentiated alternative to gadolinium by addressing retention concerns and reducing reliance on rare elements. We see this as a significant opportunity to expand our role in the current $1.2 billion contrast MR market by overcoming key challenges for both patients and clinicians. We recently reached a meaningful clinical milestone with the first patient dosed in our Phase II and Phase III study. This innovation is under FDA Fast Track designation granted to drugs that address serious conditions and unmet needs and can accelerate regulatory review. If successful, both the combination trial and Fast Track designation would speed up the time to market. This milestone underscores both the urgency and the promise of our approach and reinforces our conviction that our innovation can significantly advance the MRI contrast agents landscape. In the area of growth acceleration, we delivered growth across PDx, ABS and imaging business with strong commercial execution. Our high-margin services business, the large driver of our recurring revenue also did well in the quarter. We also completed the acquisition of Intelerad in the first quarter. This advances our strategy to deliver a fully connected cloud-first enterprise imaging ecosystem that spans hospitals and outpatient settings. We're excited about the opportunity to grow our AI, cloud and software capabilities, leveraging our Intelerad platform. As we focus on continued business optimization, price and cost programs are a top priority as well as executing on our new wave of innovation that will not only drive revenue but also margin growth. Today, we announced that we're combining imaging and ABS to create a new segment, Advanced Imaging Solutions led by Phil Rocklin. This change now moves us from four distinct segments to three: AIS, PDx, and PCS, which will allow us to more effectively capitalize on our new wave of innovation, sharpen our disease state focus and accelerate growth. As health care becomes more precise, the need for advanced imaging to confidently diagnose and deliver therapy is increasingly important. There's also a growing demand for connected clinical workflows that drive real-time decisions and outcomes. Structural Heart and cardiology is a clear example. It's one of the fastest-growing areas in health care with a shift to less invasive image-guided therapies. At every stage of the patient journey, procedures depend on advanced imaging, spanning CT, ultrasound and real-time guidance in the cath lab. Having vertical ownership from investment decisions to integrated supply chain in the segment will better enable us to deliver differentiated technologies while streamlining our business and reducing costs, and we're excited about this next step on our growth path. And Phil has the right focus and expertise to drive this business forward. We also announced a new global markets region led by Katrina Trump that we believe will strengthen how commercial teams build and scale expertise across markets and bring the full portfolio to customers globally to maximize growth in enterprise accounts. Now I'll turn the call over to Jay to discuss financial results. Jay?

James Saccaro, Vice President and CFO

Thanks, Pete. Let's start with a high-level look at our financial performance for the first quarter on Slide 6. We delivered revenue of $5.1 billion, representing 2.9% organic growth year-over-year, coming in at the high end of our expectations. Healthy global demand drove double-digit reported revenue growth in EMEA and the Rest of World and mid-single-digit growth in the U.S. China revenue declined year-over-year, which was in line with our expectations and improved sequentially. On a reported basis, we had strong performance in product and service revenues at 7.3% and 7.5% growth, respectively. Our service business continues to be a key differentiator with growth driven by a healthy capture rate. Orders grew 1.1% following 10.3% growth in the year ago period. We delivered a solid book-to-bill at 1.07x, and we exited the quarter with a record backlog of $21.8 billion, up $1.2 billion year-over-year. We were disappointed with the adjusted EBIT margin of 13.5% and adjusted EPS of $0.99. Of note, adjusted EPS included approximately $0.16 of tariff impact. Lastly, our free cash flow was $112 million in the quarter. Looking more closely at margin performance on Slide 7. Adjusted EBIT margin was 13.5%, down approximately 150 basis points year-over-year. Recall that we expected to see the largest tariff impact for 2026 in the first quarter, given the timing of the 2025 policy changes. Year-over-year margin performance was also impacted by declines in PCS and the PDx supplier issue. Commercial execution driving increased volume, strategic pricing and contract settlements were tailwinds to margin in the quarter. Moving to segment performance, starting with Imaging on Slide 8. Organic revenue grew 3.8% year-over-year, with robust growth in the U.S. and EMEA, particularly in CT and X-ray. We're seeing strong customer demand for our CT product line, particularly with our Revolution Vibe that is focused on the growing cardiac exam segment. EBIT performance benefited primarily from volume, but declined year-over-year due to tariff expenses. Excluding tariffs, margins would have been accretive year-over-year. Overall, we're well positioned to capture market demand with the introduction of differentiated new products, including Photonova Spectra. Turning to Advanced Visualization Solutions, on Slide 9, we delivered organic revenue growth of 4.4% year-over-year, with continued strong performance in the U.S. and EMEA, driven by new product adoption across the portfolio. EBIT margin increased by 120 basis points year-over-year, driven by volume and contract settlements, partially offset by tariffs. As we look ahead, we expect continued demand driven by current and future new products across cardiovascular surgery and ultrasound. Moving to Patient Care Solutions on Slide 10. Organic revenue declined 8.1% year-over-year, primarily attributed to select large monitoring installations more concentrated in the second half of the year. Total segment orders grew in the quarter, and we're expecting U.S. clearance for our new premium anesthesia product in the third quarter of this year. Segment EBIT margin declined 500 basis points year-over-year, primarily reflecting the decline in volume as well as tariff impacts. We're taking specific actions to improve PCS performance, focus on improving backlog conversion, increasing price and optimizing segment cost structure. Moving to Pharmaceutical Diagnostics on Slide 11. We delivered another strong quarter of organic revenue growth at 9.7%, driven by global strength in contrast media, continued price execution, and robust growth in our radiopharmaceutical portfolio. EBIT margin declined year-over-year primarily due to the discrete supplier issue, planned investments in our radiopharmaceutical pipeline and the Nihon Medi-Physics acquisition. Radiopharmaceutical adoption, including Flyrcado, is progressing well as evidenced by the dose acceleration from late January. Turning to our cash performance on Slide 12. We delivered free cash flow of $112 million, up $13 million year-over-year, supported by working capital improvements. We continue to execute on our capital allocation strategy, including the completion of the Intelerad acquisition, which we expect to strengthen our imaging portfolio and drive total company recurring revenue. In the first quarter, Intelerad's business performance was in line with the expectations we previously shared. We've repaid $500 million of debt in the first quarter. We also returned capital to shareholders through our dividend and the repurchase of approximately $100 million of our shares. Now turning to our outlook on Slide 13. We're maintaining our top line guidance of 3% to 4% organic sales growth, in line with the healthy customer demand globally and a good start to the year. We continue to factor in a cautious outlook on China and expect limited impact to revenue from the conflict in the Middle East. To note, the Middle East represents approximately 3% of total company revenue. Regarding foreign exchange impacts, while rates have been volatile, we currently anticipate an approximate 100 basis point benefit to revenues this year. Related to adjusted EBIT, as noted earlier, we expect approximately $250 million of gross inflation impact for the full year. We're taking price and cost actions that are expected to offset more than half of the impact, which will partially benefit this year with larger benefits in 2027. Given these dynamics, we are prudently reducing our profit outlook for 2026. We now expect adjusted EBIT margin to be in the range of 15.4% to 15.7%, reflecting expansion of 10 to 40 basis points year-over-year. We continue to expect tariff impact in 2026 to be lower than '25. Note that we do not expect a material benefit following the tariff policy changes announced earlier this year. We're also reducing our adjusted EPS guidance to a range of $4.80 to $5 per share, which represents approximately 5% to 9% growth year-over-year. In the wake of the current inflationary environment, we believe this is the right thing to do. With the change in profit outlook, we now expect free cash flow of approximately $1.6 billion in 2026. Intelerad acquisition is expected to have a minimal impact to adjusted EBIT margin and adjusted EPS in 2026. For the second quarter, we expect year-over-year organic revenue growth to be in the range of 3% to 4% and adjusted EPS performance to decline in the low single digits year-over-year. Note that we will provide recasted financials for the new AIS segment with our second quarter 2026 reporting. With that, I'll turn the call back over to Pete. Pete?

Peter Arduini, President and CEO

Thanks, Jay. Turning to Slide 14. This chart demonstrates the clear progress we're making to deliver on our new wave of innovation. The majority of our latest NPIs have moved from regulatory clearance to early commercial orders, which is an important step towards enabling more meaningful revenue beginning in 2027. You may recall, all of these innovations are differentiated because of a unique design or AI capabilities and have higher margins than our predicate products. Several of these timelines are earlier than expected, and we feel good about the team's high CD ratio and how we're tracking to deliver on our pipeline. In summary, we continue to view 2026 as a pivotal year with the strongest innovation cycle we've had in the past decade that we believe will accelerate revenue and margin growth. At the same time, we're working to manage through a dynamic macro environment with operational rigor. The fundamentals of the business remain strong. We're making meaningful progress advancing our precision care strategy and unlocking value for customers, patients and shareholders. With that, we'll open up the call for Q&A.

Carolynne Borders, Head of Investor Relations

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

Operator, Operator

Our first question is from the line of Vijay Kumar with Evercore ISI. As we manage through a dynamic macro environment with operational rigor, the fundamentals of the business remain strong. We're making meaningful progress advancing our precision care strategy and unlocking value for customers, patients, and shareholders. With that, we'll open up the call for Q&A. Thank you, Peter. I'd like to ask participants to please limit yourself to one question and one follow-up. Operator, can you please open the line?

Vijay Kumar, Analyst, Evercore ISI

I guess my first one is on maybe when you look at the organic cadence. Back half does imply a step up. And when I look at your order growth and book-to-bill, it looks like your capital book-to-bill was well north of 1.1. Just talk about this back half revenue acceleration, just given you had some noise around PCS, would your orders are coming in well above what gets back half to be close to that mid-single range given we're starting the year at 3%? Understood. And maybe, Jay, my second one on the inflation assumptions around EPS. Talk about the $250 million number that you quoted. What does it assume? Is it assuming current inflation trends? Does it have some cushion if things worsen? And how should we think about the cadence of that inflation impact rate? Obviously, you noted second quarter EPS would be down. Does it assume an outsized inflation impact and then it gets better in the back half?

Peter Arduini, President and CEO

Vijay, thanks for the question. You're right that book-to-bill came in at 1.07 all in, and so if you strip things out, I think the equipment obviously doing better. As I said in my prepared remarks, the overall capital equipment market is healthy. That's super critical, and we're doing well. We're winning at a higher rate. The U.S. market, particularly, has strong procedures growth. And I've mentioned on the call that EMEA and the Rest of World is actually doing quite well. It was actually up double digits, which is very good to see. So mid-single U.S. and Rest of World at double digit as well as China kind of aligning to where we are. I think that, coupled with the products that we have that I just went through on the last page, the structural piece, which actually, in some ways, will help us be even more focused. It gives us much more technical and clinical focus specifically on these new products, like how do you differentiate our photon counting versus the other guys. So we feel quite good about that. And we're well positioned with this to continue to accelerate both orders and sales here as we go through the year. Jay, I don't know if you want to add anything else to do that?

James Saccaro, Vice President and CFO

Sure. Vijay, remember 1% orders growth in the first quarter against the 10% comp, really, really good start to the year, an illustrative of a healthy capital environment. The backlog sits at a record level. So we think from a plan standpoint, the year has shaped up on the top line consistent with what we originally expected. The other thing I would add is the key NPIs, some of the ones that we've seen in our ABS business, like Vivid Pioneer are performing very well. And we're also seeing some benefit in our area of imaging, too. So really good start on those. Those will support acceleration in the second half. And then the other thing is we are expecting some improvement in PCS in the second half attributable to some monitoring deals that are earmarked for delivery in the second half along with the new product. So really, that's the story as we look at the second half of the year. As it relates to your inflation question, just maybe taking a second on the overall guidance. No change to sales guidance, which we feel good about, as I mentioned earlier. The issue for us really relates to some dramatic changes to certain input costs that we saw during the first quarter of the year. And what it really comes down to is memory chips and then the geopolitical events impacting things like oil, freight and certain other commodity costs. What we have assumed for the rest of the year is that these commodity costs remain at elevated levels, the elevated levels they're at today, and we haven't included some level of cushion against that. And so we've included that as the working assumption in this guidance. We have offset measures in place. We talked about implementing price changes, but that's really primarily on new orders. We've talked about evaluating modes of transportation to impact freight exposure, and we are taking some measured cost actions. But the things like price will have a more prominent impact on the second half of this year and into next year than they do in the second quarter because a lot of our sales that are represented in the second quarter, as an example, are in the backlog today. I think we've taken a prudent approach here. We obviously are disappointed that we had to lower guidance. We don't like that at all, but it's the right thing to do under the circumstances. And I think the actions that we're putting in place will benefit more in the second half of the year, but then into next year as well.

Operator, Operator

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

Joanne Wuensch, Analyst, Citi

Can you hear me okay?

Peter Arduini, President and CEO

We can, Joan.

Joanne Wuensch, Analyst, Citi

Wonderful. I'm just trying to sort of pull apart the first quarter a little bit more, particularly in the Miss and PCS. And I'm just curious if you can detail that a little bit better? And how do you think about this on a go-forward basis?

James Saccaro, Vice President and CFO

Sure. So, as we think about the first quarter relative to our expectations, the impact was really about a supplier quality issue we encountered in our PDx business. It was roughly $0.05 of impact. It came about late in the first quarter. It led to a write-off of some product, but also a sales shortfall; without this issue, we would have achieved the quarter. So obviously, not pleased with the performance in the first quarter, but it was really isolated to this PDx supplier issue. PCS declined, but that was generally speaking in line with our expectations. Pete, maybe you talk about PCS performance.

Peter Arduini, President and CEO

Yes. I think, Joan, to your question, and I think Jay delineated. We had built in some cushion relative to what we expected PCS to do, and it was relative to that area. And at that point, we weren't happy with how the results were. But just to reinforce the points we made on the call, the two areas where a lot of the larger monitoring deals, which fundamentally that revenue carries a vast majority of the margin, are more second-half loaded. And so that puts more pressure on the first half from the margins on that. The second area is the new anesthesia product. It's really our first new premium anesthesia product in many, many years. I think it's going to be a very good product. Some customers are obviously waiting to kind of see that come out. We feel pretty good that the clearances will be on track for Q3. Those are both orders and sales drivers. The backlog piece on the monitoring are deals that we have with well-established customers and they'll get executed. Having said that, I'm not pleased with the decline in this magnitude, and we're heavily focused on mitigation actions. Jay mentioned some of them for the business, but backlog conversion, pricing in this business in particular, and we're looking at the overall structure. With PCS being more of a stand-alone segment in the future, we have the opportunity to do more of a strategic assessment of the portfolio. Ultimately, we'll address the underperformance.

Operator, Operator

Our next question is from Travis Steed with Bank of America Securities.

Travis Steed, Analyst, Bank of America Securities

First, I'd like to start out on Flyrcado progress — almost double the run rate in April versus January. But so far from the $500 million target. So just curious how that trended over the last kind of three months and kind of where you see that business going forward? Great. And maybe a follow-up question on China. You mentioned a cautious outlook on China kind of baked into the guidance. Curious what you're seeing there? If you're seeing any green shoots or things changing on the margin? And what all is kind of baked in from a market standpoint and from a competition standpoint?

Peter Arduini, President and CEO

Yes, Travis, thanks for the question. Step by step here, I would say. It was a great quarter for the radiopharmaceutical team in general, but particularly for the molecule — to your point, we're pleased with the acceleration. The ramp has gone pretty much in line with what we have thought. I think if you think about some of our previous discussions, the weekly volumes have continued to increase throughout the quarter. Really, as we thought, I think, reflecting the customer demand that's out there and just the way we see new customers versus existing customers adding on. We're also hearing more positive commentary from users, which is a really important part. This becomes kind of a network of users talking to other users. And so that buzz is out there. As we stated, the week ending April 17, we had 390 doses. We have about 31 now active CMOs. You may recall in the first quarter, we talked about the performance of those needed to improve. All of those are performing well, which sets us up for continued growth. And we're also expanding the customer base. I think that's — the base has grown probably close to the same amount as the molecule growth during that same time period. So we're on track. Price is obviously holding as well. Clinically, the integration of the workflows is progressing. I think the workflow relative to cardiology and such are on track. So again, all in all, I feel quite good about where it's at. We've got still a lot of work in front of us. But as we mentioned, this gives us confidence in what we've talked about, about $0.5 billion sales for the molecule by 2028. On China, China performance was in line with our expectations for Q1 and it improved sequentially, which is important because, obviously, in the previous quarters, it's been more challenged. We were intentional in setting a conscious outlook for 2026 and still expect the China sales to be down year-over-year. But it's also important that we are seeing some level of green shoots here in the marketplace. I think, we aren't satisfied where the China performance is at this point in time. But under our leadership and the market, we're starting to see some more promising commentary. And I'd say things like improving market predictability is super important. A few of our operational changes that the team has put in place have enabled us to be more clear and accountable, strengthening our commercial organization. We've done some things to optimize that with our distributor network, and we're seeing the benefit of that. Being more clinical, particularly in certain geographic areas, has helped us outwin at a higher rate and just be more nimble. So I think those are important aspects as well as we're getting better traction with our JV that we have. Phil and I literally just came back from China where we met with customers and leaders and our team and had an opportunity to spend some time in the marketplace and talking. And I think relative to the acceptance of our products, the excitement about the pipeline coming and the changes that we're making — again, it's still going to be a more challenged year, but I think we're starting to get more stabilization in the China market.

Operator, Operator

And our next question is from Robbie Marcus with JPMorgan.

Robert Marcus, Analyst, JPMorgan

Great. Two for me. Maybe the first one, just to circle back on guidance, Jay. We've seen some negative revisions over the past few years. A lot of it has been from unintended global events. But how are you thinking about the amount of cushion you've put in here, especially given you've been offsetting a lot of these costs the past few years. How much is legitimate offsets versus perhaps underinvestment? And how much cushion is there?

James Saccaro, Vice President and CFO

Sure. Robbie, with this reduction, we've tried to provide adequate cushion in the guidance that we have and also adequate offsets in terms of pricing and cost measures. I think importantly for us, you see about $0.23 of offsets that we're reflecting in our guidance. Now importantly, much of that is in Q3 and Q4 versus Q2, which is why you see a decline in earnings in Q2 before you start to see some acceleration in the back half of the year. But that's really related to when the mitigation actions were able to kick in. Now as it relates to underinvestment in the business, one thing we've been intensely focused on is ensuring that we have adequate R&D spending in place and also adequate commercial investments in place to support all of the great progress that we're making on the pipeline. So we've done all of that. But as far as discretionary spending areas outside of that, we're intensely focused on mitigating those and managing those areas. So I think the answer is, I believe we have adequate contingency and I believe that we're continuing to invest in the right way in the business.

Peter Arduini, President and CEO

Yes. I think, Robbie, as we've said, our growth is set up well for the rest of the year. We've taken this hard decision with some of these hyperinflation items, but now it's up from here. We're not counting on hope on these plans. We've got strong operational plans to make sure that we can do the reset and be able to actually move from here upward.

Robert Marcus, Analyst, JPMorgan

Great. Maybe a quick follow-up. There are coming generics in the pharmaceutical diagnostics business. It seems more like a 2027 issue than a '26 issue. How are you positioning and thinking about generic impact into the end of the year and into 2027? Are there any measures you could do to help mute any competitive impact and anything else we should be thinking about there?

Peter Arduini, President and CEO

Robbie, we haven't seen any impact from any of the entrants at this point in time. We take all competitors very seriously. The reality of it is the market today already has multiple players. Customers look for a full SKU lineup. The more you mix SKUs, the more the probability of mistakes, resiliency in the supply chain, that product breadth and convenience, different sizes that integrate into injectors, things of that nature. Those are all the different pieces that are out there. We have contracting options about how we integrate products to fully offer the wide spectrum that an IDN needs and all of those things that we're constantly looking at. But just to be clear, at this point in time, we're not really seeing any impact from any new entrants into the marketplace.

Robert Marcus, Analyst, JPMorgan

Peter, maybe if I could just ask a little clarification. I believe these are able to be switched at the pharmacy level versus branded generics. So does that change the strategy at all?

Peter Arduini, President and CEO

No. There are some different contracting positioning, but it also means that any of the folks making products, if they're challenged on delivery, those products can be reasonably substituted. We deal with that today; if one supplier is short, another can step in. That dynamic we're dealing with today would be similar if new entrants appear.

Operator, Operator

Our next question is from David Roman with Goldman Sachs.

David Roman, Analyst, Goldman Sachs

Maybe I'll start just on Photon Counting CT. Could you just elaborate a little bit further on the commercial strategy here? And maybe help us think through market segmentation especially in the context of your primary competitor here, I believe, having kind of a two-tiered product and pricing structure? And then a follow-up on input cost dynamics: could you help us understand the phasing and impact of some of these considerations? I would have expected you to have some amount of raw material on hand given your inventory turns that would enable you to buffer the impact in the immediate term and then potentially see the impact build throughout the year. Help us break down a little the timing of some of the cost headwinds, what gets realized now and what's deferred given the natural dynamics from acquisition of raw material through finished goods and sale.

Peter Arduini, President and CEO

Dave, thanks for the question. I'd first say we're doing quite well in the CT market globally even without Photon Counting on the marketplace. There's a growing need for CT of different types throughout the world. The product we introduced about a year ago is dedicated to cardiology and it's taken off tremendously; it's one of the biggest drivers in Europe and international markets. We've allocated more dedicated resources and focus in the field into CT. Some of the changes we announced are about having more specialized reps who can have detailed clinical, technical and productivity discussions with customers. We also believe AI breakthroughs will change traditional CT. We have a list of different updates that will increase resolution and capabilities in our traditional CT range that will be significantly more cost-effective for someone who wants more resolution and may not move to Photon Counting. All that said, we're excited about our Photon Counting approach. When customers look at our resolution and contrast capabilities in spectral imaging, they're seeing a system that doesn't have trade-offs compared to other options. You get ultra-high resolution and broad capability upfront without trade-offs. We'll come in at the ultra-high end. Many customers have been waiting for us. Typically, after approval it takes customers 4 to 6 months to assess and for the funnel to build, then 5 to 8 months for room readiness and delivery. We feel good about approvals, the funnel, and timing to sales conversion. Most important is that we chose well on our technology approach.

James Saccaro, Vice President and CFO

Good comment on inventory dynamics. As we think about the impact of these incremental inflationary costs, there was limited impact in the first quarter, if any, because of FIFO rolling out future quarters the impact of higher-priced raw materials. We saw very little impact in Q1. The second quarter is really the first quarter where we see a real impact from inflation. Some logistics attaches to our product occur at the end in many cases, so we see more immediate impacts there. With our faster flow items and faster turn businesses, we're starting to see an impact in Q2. The largest impact will be in Q3 and Q4. The good news is much of the offsets we have in place start to benefit the second half of the year. So the $0.23 of mitigation largely benefits the second half; we aren't able to impact Q2 much, which is why EPS is down in Q2 before acceleration in the back half.

Operator, Operator

Our next question comes from Larry Biegelsen with Wells Fargo.

Larry Biegelsen, Analyst, Wells Fargo

Jay, I wanted to start with Intelerad, and how that's impacting the guidance in 2026, particularly margins and interest expense? And I imagine the interest expense goes up starting in the second quarter. And I thought this was a relatively high-margin business. Do you expect the deal to be accretive to both sales — organic sales growth and EPS next year? And I have one follow-up.

James Saccaro, Vice President and CFO

First, as a reminder, Intelerad extends our cloud capabilities and outpatient networks and the efficiency of care teams and helps us deliver precision care globally. We're excited about the transaction and pleased to have closed in Q1. It came in in line with expectations, perhaps a little better. We previously said double-digit sales growth is what we expect and expect to accelerate that over time. We talked about margin accretion and an EBITDA margin north of 30%. All of that is holding true. Of course, there are integration costs. In the first year, we expect the deal to be slightly dilutive after including incremental interest expense. We've covered that in the forecast. As we move to 2027, we'll see a positive contribution on the bottom line and an accelerant to sales growth. The strategic logic and financial profile remain intact.

Larry Biegelsen, Analyst, Wells Fargo

One follow-up on cadence. You suggested margins and EPS should be up significantly in the second half of the year. Do you now expect gross margin to be down year-over-year because of inflation?

James Saccaro, Vice President and CFO

We do expect margins to improve in the second half of the year. That benefits from acceleration in sales in the second half, new product contribution, and the self-help initiatives which benefit the second half. So we'll see a margin step up second half versus first half. From a gross margin standpoint, it will be relatively neutral year-over-year. A lot of the activities we're putting in place will offset the inflation.

Operator, Operator

Our next question comes from Matthew Taylor with Jefferies.

Matthew Taylor, Analyst, Jefferies

I wanted to double-click on some of the commentary you made on PDx, which had a good quarter. So good to see the progress of Flyrcado. I guess, could you help us understand what the gating factors are there to drive more production because it does seem like there's demand in the market? And I also wanted to ask about the MRI contrast agent. You mentioned some progress on that program. Could you talk about when that could actually launch? What's the timeline to get through Phase II, Phase III?

James Saccaro, Vice President and CFO

I'll start on Flyrcado. We were really pleased with the progress. The run rate annualized went from roughly $25 million to $46 million in April, and we're continuing to accelerate. Historically, it's an equation of supply and our customers' ability to modify workflow to incorporate and deliver doses at higher levels. We're incorporating new customers but also want them to ramp from low levels to higher utilization. It comes down to continuing to manage the CMO network. We're intensely focused on very high delivery rates — over 95% is our target. We'll continue to migrate and add new CMOs, ensure the right delivery rates, and add new customers and ensure they ramp utilization. We were very pleased with the progress and the positive feedback we're getting about the product benefits.

Peter Arduini, President and CEO

I'll comment on the MRI agent. The modality is moving strongly toward MRI because it's radiation-free and more friendly for broad populations. The limitations historically have been contrast agents, primarily gadolinium, which has retention concerns and supply concentration. We believe we've got a promising manganese-based agent. We've completed a successful Phase I, which is where many candidates fail due to toxicity or adverse events, and we've done well. We're now in a combined Phase II/Phase III study focused on dose optimization and image quality; a notable earlier study at Mayo Clinic provides encouraging data. Our formulation is proprietary and designed to provide high-quality imaging comparable to gadolinium while being eliminated effectively from the body. If successful, being first-to-market with such a product would be a large opportunity, changing how vascular imaging is performed across populations. With Phase II/III combined and the Fast Track designation, if everything goes well, this could potentially come to market around 2029; without Fast Track or combined studies it could have been much later into the next decade.

Operator, Operator

Our next question is from Ryan Zimmerman with BTIG.

Ryan Zimmerman, Analyst, BTIG

Pete, with the changes in the organizational structure with Imaging and AVS, you talked about the rationale for it to some degree. But I'm wondering how you think about the benefits of it? If there is increased business capture, does the growth profile of that business collectively change or move higher from what may have been maybe a mid-single digit to maybe the high end of the mid-single-digit range? I'm just wondering if you could articulate how you think about the downstream implications of those changes from an order standpoint that we may see in this new segment? And a follow-up: cash allocation — free cash flow has ticked up a little bit versus last year. In the face of these inflationary pressures, you guys bought back shares, about $100 million or so. You have dividends. Does your prioritization of capital deployment change in the face of some of these inflationary pressures, meaning more to share repurchases, less M&A? Just take us through your thought process as you think about what you do with that cash in the face of these changing input costs.

Peter Arduini, President and CEO

Ryan, great question. AIS is about driving a higher growth profile. Yes, there will be some cost benefits to margin, but the number-one priority was growth acceleration. ABS historically has combined ultrasound and image-guided solutions and taken them to market; by putting Imaging and ABS together as AIS, we can articulate the technology story to customers more cleanly and win at a higher rate. On R&D, this creates faster decision-making for product development across the full pathway — cardiac, oncology, etc. That means faster allocation of R&D dollars and fewer barriers to bring integrated solutions. We expect to see benefits this year, with more substantial benefits in following years as the pipeline and integrated solutions mature.

James Saccaro, Vice President and CFO

On cash allocation, this business generates a lot of cash, and we will continue to invest organically. We'll do disciplined M&A as illustrated by Intelerad, which we see as a strong ROIC deal strategically and economically accretive over time. We'll evaluate buybacks when shares trade below intrinsic value. We felt good about the buyback last quarter and continue to evaluate repurchases as a supplement to M&A. We'll maintain investment in the business, especially R&D and commercial investments, while managing discretionary spending and pursuing cost mitigation.

Operator, Operator

We'll now take our last question from Anthony Petrone of Mizuho.

Anthony Petrone, Analyst, Mizuho

Maybe one for Jay and then one for Peter and Jay. Jay, on the tariff impact, you're calling out roughly $90 million to $100 million quarterly at the margin; in the presentation material quarterly it seems like that level is holding. So what do you actually have baked in there from a tariff impact for 2026? And if you do get a reimbursement decision later this year, do you get roughly $100 million back at the margin? And second, on AIS and AI, when you think about AI-enabled platforms, you have Intelerad coming in as a SaaS model, and you have a number of embedded AI-enabled assets across the portfolio. Will it all show up as SaaS? What milestones should we look for for AI-enabled capabilities and what does the economic model look like over time?

James Saccaro, Vice President and CFO

We said tariff impact in 2026 will be less than 2025, i.e., less than the roughly $250 million impact we saw previously. Based on mitigation activities, the first quarter will be the biggest impact and that will trail down through the year. We have not seen a windfall as a result of the policy ruling replacing tariffs; we've assumed those tariffs remain in effect for the rest of the year in our guidance. Regarding refunds, we will be submitting for refunds related to tariffs paid last year and are hopeful for recovery, but we haven't determined how we would report any refunds and they are not included in our current forecast.

Peter Arduini, President and CEO

On AI in AIS, it comes in two flavors today. One is AI embedded in the device — for example, Vivid Pioneer has multiple algorithms that make the product superior to competition, allowing higher pricing and margin improvement because of the value it delivers. That's the first piece: embedded AI that differentiates hardware products. The second is SaaS-based capabilities for specific features. Our vision is to sell standardized hardware with a menu of SaaS cloud-enabled applications that customers can add per scanner or fleet. CT and ultrasound lead in that approach. Intelerad is important because it provides the reading interface and an integrated platform for deploying those AI tools across settings. So you'll see both embedded AI value in hardware and SaaS offerings that grow over time, with the SaaS mix increasing as we scale cloud and enterprise imaging capabilities.

Operator, Operator

Thank you. And this concludes our question-and-answer session. Please proceed with any closing remarks.

Peter Arduini, President and CEO

Thanks for your interest in GE HealthCare. And again, we look forward to connecting and chatting with many, if not all of you here in some upcoming conferences. Thanks again.

Operator, Operator

And this concludes our conference. Thank you for participating, and you may now disconnect.