General Electric Co.’s healthcare division plans to cut debt, bring down costs and pursue tuck-in acquisitions after its spinoff in early January, finance chief Helmut Zodl said Thursday at an investor event in New York.
Healthcare, whose stock will trade on the Nasdaq, intends to pursue organic revenue growth in the mid-single digits, an adjusted earnings before interest and tax margin in the high teens to 20% and free cash flow conversion of more than 85% in the coming three years, executives said Thursday.
The financial goals come after GE’s board of directors last month approved the planned transaction, which was first unveiled in November 2021. Industrial conglomerate GE will split into three separate public companies by 2024. The spinoff of the healthcare unit, which will result in about $200 million in operating costs, will put it in more direct competition with
Siemens Healthineers AG
Fujifilm Holdings Corp.
, according to analysts.
GE Healthcare will work on reducing the number of SKUs, or stock keeping units—code numbers assigned to each piece of inventory—and configurations to streamline product lines and reduce costs, Mr. Zodl said. He declined to give specific SKU targets, apart from stating the company has “thousands” of them.
As a stand-alone company, GE Healthcare will also look to improve its working capital and lower logistics costs, Mr. Zodl said. The company plans to achieve this partly by relying less on airfreight and shipping more products by sea, truck or rail. GE Healthcare will also take a look at its real estate holdings and target over 100 sites, executives said.
Mr. Zodl became divisional CFO at GE in early 2021. In recent months, together with GE CFO
and other executives, he created a debt and capital structure for the new company, set up a new treasury department and agreed with the parent company on how to separate systems. In certain cases, GE Healthcare will continue to use GE’s corporate functions until it has struck its own agreements, analysts said.
The division, which manufactures MRI machines and other medical equipment, has about $18 billion in annual revenue, compared with GE’s total revenue of $74.2 billion in 2021. “Spinning off an $18 billion company doesn’t happen overnight,” Mr. Zodl said.
Mr. Zodl, who has about 5,000 people working for him, recruited a new head of tax, a treasurer, a head of investor relations and a leader for the internal audit team.
As part of the financial separation, GE Healthcare had to provide three years of historical financial performance alongside other documents, file various forms to securities regulators and create a tax structure for the new company. In late January, GE will for the last time release financials for the healthcare unit, Mr. Zodl said.
The healthcare business in recent weeks sold $8.25 billion in bonds and agreed to an additional $2.5 billion credit facility. With a ratio between net debt and earnings before interest, tax, depreciation and amortization of roughly 2.5 times, GE Healthcare will have slightly higher debt ratios than some of its peers in the medical technology industry, according to analysts.
Still, 2.5 times is a comfortable ratio for the business, which has about 50% recurring revenue and generates significant amounts of cash, said Nigel Coe, a managing director at research firm Wolfe Research LLC. Mr. Zodl declined to comment on how much debt GE Healthcare will have going forward, adding the company will communicate additional targets in 2023.
Ratings firms S&P Global Ratings, Fitch Ratings and
Investors Service have all given GE Healthcare an investment-grade rating.
Apart from reducing debt and costs, GE Healthcare will scout for potential tuck-in acquisition targets, Chief Executive
said. The company is in the process of searching for second source-suppliers for thousands of parts, which should allow it to get better pricing on them, he said, adding that higher-margin products and a simplified product lineup will boost profit.
Mr. Zodl, who is originally from Austria and previously served as group CFO for
Midea Group Co.
, a manufacturer of electric appliances based in China, said he is applying lessons from his prior roles at companies including
Advance Auto Parts Inc.
International Business Machines Corp.
“How you plan differently and how you operate in a lower margin business, that can help you optimize a higher margin business,” he said.
GE’s Healthcare business will target a shorter forecasting and budgeting period—of 60 to 90 days—than its parent, where that process can take several months, according to Mr. Zodl.
GE retains a 19.9% stake in GE Healthcare.
Write to Nina Trentmann at [email protected]
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