My name is Craig Bijou. I'm one of the research analysts here, MedTech research analysts at B of A. It's a pleasure to have GE HealthCare Technologies. From the company, I have Jay Saccaro, the Chief Financial Officer, and Carolynne Borders, the Chief Investor Relations Officer. Thank you for participating.
Thank you.
So Jay, I want to start with Q1 results. We're a couple of weeks removed from you guys giving those results. And I wanted kind of your impression of the quarter. And organic growth was slightly below Street expectations. And I know there were a couple of issues: PCS fulfillment and some softer ordering from China. And so basically, I want to start there and get your impression of the quarter. And maybe if you could quantify the impact of some of those issues, that'd be great.
Sure. Thanks to those that are tuning into the webcast. Thank you, Craig, for hosting us here. Then to those of us that are joining us in person, thank you all for joining us. As we reflect on the first quarter of the year, I think there's a lot to like as far as building blocks for the rest of the year go. Then there were a couple of what I would characterize as short-term challenges. First, as it relates to bright spots, we really made great progress on our innovation pipelines or really setting up our ultrasound business for success for the rest of the year. We also did a really nice job in terms of margin expansion. We were able to expand operating margin 50 basis points, gross margin 120 basis points, against what was essentially flat sales.
To your point, there were a couple of items that did impact our sales growth for the quarter. But as I say, these are really short-term in nature. And we expect to correct in the second half of the year. The first of these related to some supply chain issues, in particular in our PCS business. The most notable issue is we were lacking critical cable for some of our products. And as we looked to ship product at the end of the quarter, we're unable to do so. So that was one of the drivers. The second driver was China. And as we expected, the anti-corruption environment was a difficult backdrop. So that was tough. And then in addition to that, this idea of a stimulus package, which we think will long-term benefit the market, was another catalyst to kind of slow down performance in China in the quarter.
Those two items roughly impacted us around 200 basis points in the quarter, maybe split roughly evenly. Now, is it an illustration of the long-term growth prospect of the business? It's really not. We feel quite good about what we've been able to do around the supply chain and PCS and other areas. We feel really a nice setup going into the second half of the year. And then in China, we do expect we haven't heard clarity on the stimulus package. We haven't heard that yet. But we do expect to have a constructive environment set up, certainly in the second half of the year in China. That will benefit, should benefit 2024, but will also benefit 2025. We think all of these things are good things. But certainly, they did impact sales growth in the quarter.
Okay. Thanks, Jay. I just wanted to touch a little bit more on those issues. It sounds like the PCS fulfillment issues, it's a cable. I think you said it on the call that you should have that resolved by the second half. That's not one we would expect to be a lingering issue. Actually, there might just be a shift of those sales from the first half to the second half. So is that fair?
Yeah. The good news is the backlog is intact. It's not like those are lost sales. Those sales will come. The other piece of good news is, as we've looked at the situation, this is no systemic supply chain problem or anything like that. It is more of a one-off isolated incident. And we have pathway to resolution in the second half. So sort of as I think about our second half growth, that becomes additive to that.
Got it. I do want to talk about the second half ramp implied by your guidance. If we could just spend a minute on or a couple of minutes on China and the stimulus that you called out. I guess maybe just what you saw from hospitals and their ordering patterns that kind of led to a little bit of a softer order growth in the quarter. I believe you said that that continued into Q2. Maybe just so everyone understands kind of what you saw and what you think the driver of maybe those softer orders might be.
Yeah. So we saw, I mean, we saw, the tough anti-corruption environment. And then towards the end of the quarter, there was good news, which was a stimulus package was announced. So clearly, a lot of excitement around what the implications are for the market over the short, mid, and long term. But the result of that is, in the last few weeks of the quarter and as we expected in the beginning of Q2, until there's clarity provided at a national level around what are the exact contours of the stimulus package, how can hospitals and provinces apply it in the best way, folks are going to be reticent to place orders. And so that's kind of what we expected.
When we talked about second quarter growth in the low single digits, it was reflective of this idea that we do expect the market to continue to be challenged until this clarity is given by the government. It will come at some point in Q2, is our expectation. But that's kind of, it's going to be an important catalyst when we start to see that and start to see orders come in.
Craig, maybe just a quick clarification on that. So what we sell in China is mostly imaging and ultrasound. And so ultrasound is more of a sell-and-install business so that an order comes in in a quarter. And depending on when it comes in in the quarter, it is possible to convert to sales, whereas imaging takes a little bit longer. So once that clarity is provided and customers start to put those orders in that were on hold, we should start to see potentially excuse me, ultrasound coming in maybe a little bit faster than imaging.
Thank you. And you guys from the call and even now, Jay, you sound pretty confident that you're going to have some resolution on or some clarity on the China stimulus in Q2. So maybe just talk about what gives you that confidence. And what is the risk that clarity maybe doesn't come until the second half or later in the year?
Sure. I mean, there's always risk. Our teams on the ground are pretty sort of close to governmental proceedings, what expectations are. And so like I said, our expectation is we get clarity in the second quarter. If it's delayed, it's not the end of the world. It will be more of a benefit to 2025 than 2024. As long as the stimulus comes out in line with our expectations and we're able to take advantage and support growth through it, I think it'll be a great vehicle for the business long term.
Got it. OK. That's helpful. And if we can go back to the second half ramp, obviously, the Q1 growth flat-ish, modest sequential improvement expected in Q2. I think the Street has you maybe 2%. I think you guys said low single digits. So one, I guess, is that is 2% kind of what you meant by low single digits? Or is that I guess, has the Street heard the message appropriately? And then maybe we can get into the second half where the implied ramp is 7% growth, I believe. So maybe talk about the drivers of that second half ramp as well.
Sure. First, remember, these are all organic numbers. There's about 1%, 100 basis points of FX that's impacting our numbers. So I think people should be mindful of that. But these are all organic growth. Let's take a step back. So when we originally gave guidance for the year, we said second half greater than first half, second quarter greater than first quarter. We don't really see a change to that overall dynamic except it's a little more pronounced as a result of some of the deferrals from Q1 to the second half of the year and a little bit of Q2 to the second half of the year related to stimulus, which is why we've talked about low single in the second quarter. But let's talk about the original plan for a second.
The original plan had roughly 5% or 6% growth in the second half and so much faster than the first half, even in the original guide. Part of that comes down to ease in comps. In the first quarter of the year, we grew 12% last year. Second quarter, double digits as well. And then in the second half, the growth rate was much lower. So our comparison eases in the second half. But there's more to it than that. When we think about the growth drivers in the second half, there are really three. First, volumes. And when we think about market volumes, we're going to see market volumes for products increase in the second half off of that easing comp. But we're also going to see service volumes increase. Why will service volumes increase?
In the first quarter of last year, second quarter of last year, fourth quarter of the prior, we sold a lot of equipment. That equipment, after 12 months, starts to generate service revenue for us. So we'll attach service contracts because in many instances, the first year of service is free and included with the equipment. We have a natural tailwind that's going to accelerate service growth in the second half of the year. From a product standpoint, on the unit side, it's just normalization of market volumes. Now, the second key driver is new products. We have tremendous excitement around some of the things we've talked about with respect to ultrasound. I was just talking today to our international leadership team, so our international region, the leadership team there. I was talking to the ultrasound leader. We have tremendous products.
But a lot of our products are designed specifically towards the top-end segments, higher-end segments. We've announced a new product. We've launched. Our LOGIQ portfolio now is also targeting the mid-tier, which will be a great catalyst for a number of markets that we didn't operate in previously. The other thing that we did with some of these innovations is we've added artificial intelligence to improve analytic capabilities in the device and also to enhance workflow. Finally, we added in many instances now, we can have a wireless probe supporting our ultrasound device. Previously, it was a wired probe, which tends to be clunky. And that's the way the standard of care has been driven in the past. But now, we're attaching Vscan Air to many of our ultrasound devices. So it's real excitement.
So that second component in terms of growth in the second half is this idea of innovation. And then the third piece relates to pricing. We've seen good pricing performance in our portfolio. And as we look at our order book, we see this continued 1%-2% growth in pricing. So the three catalysts that we originally modeled were volumes from an overall market and a GE HealthCare specific standpoint, new products, and pricing. And when you think about the 5% or 6%, each of them was roughly a third of that contribution. So we had a really nice setup in the plan. The only thing that has changed is some of the stuff that we anticipated in the first quarter has shifted to the third and fourth and a bit out of the second into the third or fourth.
So I think the overall story and the context that we've laid out at the beginning of the year is very much intact. I take a lot of great excitement around the ultrasound portfolio of launches. I think that's going to be a great catalyst, but also the volumes that we're seeing. The only other thing I would say is we're seeing a bit better performance in our PDx business than we anticipated at the start of the year. And same with our service business. So those two things are doing a little bit better than we expected. And so hopefully, I'm hopeful that not only do those buttress the second half of the year, but actually even broader than that, those continue to be tailwinds for us.
But overall, it's a decent setup as we look at what we're trying to achieve for the full year basis, which is that 4% growth, 50-80 basis points of margin expansion, a really good free cash flow conversion. I think all of the conditions are set up for success. Of course, we have a lot of work to do between now and then. But the signs are pointing in the right direction.
Yeah. Maybe two quick follow-ups on that. One, on China. Obviously, the shift of some of the China revenue from the first half to the second half. And I know you also said on the call that China could be a tailwind in Q4. So I guess I just want to clarify. Are you assuming any stimulus benefit in Q4? Or is it simply just the shifting of China sales from the first half to the second half?
It's hard to discern between the two. We've seen first half will be below the original expectations. And I do expect second half to be a little bit above. But a lot of that is related to deferral of order from first half to second half versus, oh, is this a new order that is a result of stimulus? It's really hard to discern between the two of those. We are expecting some of the sales that we've not seen to come in the second half because there's listen, procedure volumes continue. There's a real need for the equipment that we have. And so then the question is, above and beyond that, that will be what we'll have to see as we go into the fourth quarter.
OK. Maybe shifting gears to margins. You talked about it in your response to the first question. You saw really nice margin expansion in Q1 despite revenue growth that was flat-ish. So maybe just talk about kind of what drove that margin, what has been driving that margin expansion since you guys have spun out, and how to think about margins for the rest of 2024 given that revenue is going to be ramping throughout the year. So is there potential to see some margin expansion beyond what we saw in Q1?
We feel good about the margin performance. I think particularly noteworthy is we're able to expand margin 50 basis points while, at the same time, we grew R&D 20%. We had a very significant increase in R&D, probably outsized relative to the rest of the year in the first quarter. We still grew margins 50 basis points, which I think was something that we were quite happy with and pleased with. I think from our standpoint, in 2024, gross margin will be the critical driver of our performance. Now, that's not to say it won't be in the future. It's just to say that I believe in future years, we'll see some incremental performance coming from SG&A leverage. As we come off TSAs, there's an opportunity for us to rethink the tools that we use, the systems that we have, how we organize.
All of those things are unlocked as we come off TSAs. We can really optimize the back office. But at this point, our primary focus on the SG&A line is effectively coming off TSAs by the end of 2024 to get to stand alone. Then rationalization of things like business intelligence tools is a discussion we can have in earnest. But our first priority is, like, make sure everybody's computer works and that we're hosting it. Those kinds of things I think are the critical focus in the short term. So in 2024, it's going to be more about gross margin improvement. And we were really heartened by the performance that we saw in the first quarter. And there were a number of contributing factors. First, the price was clear. We expected 1%-2% price. We delivered that. And that was a key catalyst.
The second thing, though, was we really did see a lot of what we call variable cost productivity initiatives. And we refer to this as variable cost productivity initiatives. We also refer to this as our lean programs at the company. But the impact of this in the first quarter was substantial, things like, how can we reduce waste in our plants? How can we simplify design? How can we use 3D printing? We used an example in our earnings call. And it was a small one. It was a $1 million example. But the reason we used that is because it's an illustration of the hundreds of programs we have undertaken to drive cost improvements at the company. And we have a very good line of sight to the activity necessary for this year to deliver on our variable cost productivity initiatives.
We have a line of sight to future years as well. We feel really good about the progress we've made on our lean program. This will continue into the future. The other thing is you'll start to see mix and platforming and new products all benefit us. This concept of innovation, which is you'll have new products, higher margins when we launch a new product, our expectation is it has a higher margin than the predicate device. In many cases, it will have a lower cost because we've simplified design or we've used a more platform approach at the company. All of these design things will come to bear and be another catalyst. They were somewhat of a catalyst in the first quarter. But I think the benefits of this will be bigger in the future.
And so really, really solid performance so far in the first quarter and a lot more to do. But we feel good about the 50-80 basis points for the year. And I think even more important than that, as we look forward to the coming years, we were able to make positive statements affirming how we feel about the mid-term guidance. And included in it is a lot of margin expansion.
Got it. And you mentioned the mid-term guidance and the high teens-20% operating margin. I think the Street has you roughly that getting linear over the next couple of years. And I don't know if you're going to be willing to talk about it. But it sounds like there's a lot of opportunities where you may be able to see some incremental or expansion or accelerating in that margin expansion in 2025 and beyond. And I know you're not going to give guidance. But I mean, is the opportunity to see accelerating margin expansion there?
So it's hard to give 2025 guidance. And there's lots of puts and takes to guidance in a particular year. What I will say is we've been impressed with the capability of the organization to drive margin in the short term, had nice margin expansion last year, backed it up this year. We'll have some more SG&A opportunity, leverage opportunity next year, continued gross margin. So the overall gross margin story is one we feel very good about. And the overall operating margin, one, is one where we feel very good about. The only thing I will say is we're not going to see R&D reduced as a % of sales. I think we'll still see some continued investment there. But that pays off over the long term. So I think the margin story is one of the exciting aspects of the overall mid-term guidance that we've given.
At this point, we feel comfortable with what we've put together.
On the technology front, some of the things that are small today but have a lot of opportunity going forward are digital, artificial intelligence, machine learning, quite small today but big opportunity as we roll that across the capital equipment base, and also in molecular imaging, which is inside of the PDx business. That's maybe 25%-ish of those sales in PDx today, but big opportunities. Those are the very specialized radiopharmaceutical solutions that are designed for Alzheimer's and theranostics.
Maybe shifting gears a little bit, just the overall hospital CapEx environment. I believe on the call, you said it was pretty stable. I wanted to ask specifically if you could parse that out, the U.S. versus some of the international markets. What is it about the hospitals that are, I guess, the characteristics of the hospitals or what they're seeing that makes the environment stable?
Yeah. So we do a number of things. I mean, for us to assess orders and the capital environment, we do our own survey with our customers. We look at your survey and all the externally available work that's done. And there's a lot of quite good work. And then we look at our order volumes. And what I will say is in many of our markets, the CapEx environment is constructive. The reason for that, I believe, is there's good procedure volume growth. Hospitals are seeing decent profitability levels. We've seen staffing shortages ease. So all of these things contribute to this positive environment that we're seeing. And we see it in the U.S. We see it in a lot of other markets. China is a little bit of a different story. We've discussed that earlier in this presentation here.
I think the market is set up for decent growth from a capital standpoint. As long as procedure volumes continue, I do think that that's an important driver in how hospitals think about the capital that they want to deploy.
Got it. I also want to ask specifically on order growth. I know we've talked a lot about revenue growth. You guys don't guide to order growth. But it's been low single digits for the last couple of quarters. I believe I asked on the call also. The assumption is that it gets better, kind of gets to that mid-single digit level that more coincides with the longer-term revenue expectations. So I guess and I think you touched on it. But what drives that acceleration or gets you back to that mid-single digits? It sounds like it's some of the new products. China probably has a factor in it. But maybe just a little bit more color on kind of how you see the progression of order growth, getting back to something that's more in line with your longer-term revenue growth perspective.
Sure. And you have to remember that there are some dynamics that occurred a couple of years ago with respect to COVID that have distorted order growth for the last several years. And so in things like monitoring or in certain areas of our PCS business, we're still working down backlog that was ordered in an urgent manner. And we're continuing to sort of move through that. And so I think you have to look at order growth. You have to look at book- to- bill. And you have to look at backlog. With respect to book- to- bill, it's important to note that when we report book- to- bill, we include service at 1:1. We include PDx at 1:1, meaning orders and sales are equal. And so the actual equipment book- to- bill is well above whatever the reported number was.
The equipment book- to- bill was meaningfully above that. So I think those are all elements that you have to keep in mind when you look at book- to- bill. And finally, with respect to backlog, our backlog is still $19 billion, $1 billion over pre-COVID levels. And importantly, as we look at backlog last year to this year, it's basically flat year-over-year despite 8% revenue growth. And so the reason that we give things like order growth, book- to- bill, and backlog is because they're all pertinent and need to be looked at in conjunction to get a measure of the health of the business. Now, to your point, over the long term, we'll want to see order growth tick up a little bit. In any given quarter, in any given year, there will be deviations. And that's OK.
But over the long term, we'll want to see it tick up a little bit. Some of it will come down to pricing. Some of it will come down to the new products that I talked about, we talked about on the call, which will be a key catalyst. And then some of it will come down to attaching more service to our equipment. All of those things will contribute to the order growth story. And again, we feel in context, as we look at the health of our business as measured by some of these future metrics, we feel great about it as it sits here today. And then we'll watch it as we go forward. But you will start to see innovation play an important role and a catalyst for us.
Got it. That's helpful. We've roughly three minutes left. Maybe touch on the PDx business. And there's a couple of exciting new products that may contribute at the end of the year or the second half of this year but are more longer-term growth opportunities. I think you guys would agree. So maybe just touch on what you're seeing today, how you expect the contribution in the second half, and then even the longer-term vision for those products.
So PDx had a great performance in the first quarter, high single-digit growth. And that was both volume and price contributing to it. But interestingly, if we think about some of the products that you're talking about, which can be real catalysts for the long-term growth of this business, they didn't feature in our numbers. They simply were not in our numbers yet. And I'll just talk about a few of them. First of all, Vizamyl. Vizamyl is incredibly exciting. We're so excited to be part of helping to mitigate the Alzheimer's crisis. And Vizamyl is a crucial agent in that. And so we haven't seen a meaningful number from this yet. But the growth rate is a growth rate we're not used to seeing. This is not like a traditional med tech device kind of uptake growth rate.
The growth rate that we've seen so far is very substantial. We're not counting on this in our numbers very much at all this year. But could this be a source of upside? It could. It could certainly be a source of upside in 2025 as well, as more and more patients are diagnosed for amyloid plaque in the brain. So we're very interested in this particular area. And as the second drug hopefully gets approved at some point here, it will be a further catalyst. So not large enough to talk about on our earnings calls yet, but building tremendous momentum. So watch that. And then secondarily, we have f lurpiridaz, which is another one we've submitted for FDA. We expect approval at some point. We don't know when.
We're optimistic that we'll start to see sales of this in 2025 but could be another really exciting contributor to growth long term in our Pharmaceutical Diagnostics business. And then finally, we announced a deal last year in licensing of FAPI assets, which are a specific tracer for certain types of cancer where it does a great job. This is another product which could be a wonderful one for us long term. So what I like in particular about this PDx business is you have the core imaging agents, which play a crucial role in health care systems around the world. But what we've been able to do with that expertise is expand into these adjacencies, Vizamyl, flurpiridaz, FAPI, others that we're talking about, either internally or collaborations, that could be further participating in this whole theranostics value chain, which could be very exciting for us long term.
Expect to hear more about that at our November Investor Day because I do believe it's a long-term wonderful growth driver and a way for us to continue to pursue our mission to create a world where health care has no limits. But in the meantime, we're not counting on much for this year. But let's see. It could be a positive surprise.
Great. With that, I think we're out of time. So Jay, Carolynne, thank you again.
Thank you.