Okay, great. Thanks, everybody, for joining. I'm Matt Taylor, the U.S. Medical Supplies and Devices analyst here at Jefferies, and I'm really pleased to be joined by management from GE HealthCare, including Jay Saccaro, the CFO, and Carolynne Borders, who runs the investor relations function. So we're gonna have 24.5 minutes here for some fireside chat Q&A. We might have a chance for a couple questions here at the end as well. So Jay, maybe we can get started. Would love for you to sort of give people a little bit of a high-level overview of where GE HealthCare is post the spins. It's important to talk about how things have transitioned since you've spun off from the parent, and maybe give us a review of how you think the company's done, and what's changed since the spin? How is that allowing you to operate differently?
Great. Matt, thank you very much for the invitation to your conference here. It's great to be here in New York City. Thanks to those joining us today in the room. It's great to see all of you, and thanks for the interest in our company. But yeah, it's been a wonderful year and a half as an independent company. I joined just a little over a year ago, and I have to say, the progress towards our midterm objectives and the progress towards our company's mission to create a world where healthcare has no limits has been remarkable.
You know, a lot of times, spin-offs, you unlock certain things that allow a company to do extremely well independently, and I have to say, I'm so pleased with, you know, our progress as a standalone company in a number of different dimensions. I think it starts with, first, how are you doing becoming an independent entity? And at its simplest, you know, we've retired 330 TSAs of the 500 or so that we expect to retire. We've got some more work to do there. But, really good progress in terms of establishing our own operational systems so that we can succeed as a standalone company.
And by the way, once we come off all of those TSAs, there are optimization opportunities that will present themselves in the coming years as we think about how we more efficiently organize and support the business. So really good progress there. But I think perhaps what's most noteworthy is really the innovation, focus, and progress. One of the things that I think our company does extremely well is what we call the Worldwide Product Planning Process. It's a very rigorous approach to R&D development. Takes customer input, and then it drives all the way to a series of initiatives that are funded at the end of the process. We did this for the first time a year ago as an independent company.
It's something that Pete had done, and I had done when he was at Baxter, and even before when he was at GE, had started it. But it's something that, you know, the company hadn't done in a number of years. So we started this innovation process, and we backed it up with robust funding. So if you look at our R&D growth rate over the last couple of years, we're talking about teens R&D growth. The first quarter this year, I think, was around 20% R&D growth. So really remarkable performance, both from a ideation process and a how can we commercialize new products process, but also supported by tremendous funding. So I would say the innovation has been a great story, and it's, y ou know, you see it in the, in the launches that we have.
We launched 6 products in our ultrasound business, really refreshing a number of our different portfolios there, in the first part of this year, and that's gonna pay dividends, meaningful dividends, in the second half of the year. So really good work on the R&D front. I would say also, one of the interesting areas for us, and you saw this in the first quarter results, in the first quarter results, we had flat sales growth, and yet we expanded gross margin 120 basis points. The reason we were able to do that is certainly because of some pricing, but remember, we did have inflation to offset, so there was some inflation offset to that pricing benefit.
The real reason we're able to do that is because of lean improvement initiatives that we are pursuing across the company, in our manufacturing facilities, in how we design our products, in how we distribute our product. All of those efforts had a very substantial impact in the first quarter of the year. All of those efforts had impact last year, and as we look forward, I feel very good about our line of sight to continued gross margin improvements through the rest of the year and into next year, as we see some of these programs come to fruition. By the way, on the earnings call, we referenced a 3D printing initiative that we were doing in a couple of our plants, and it's a small impact in and of itself.
It was perhaps around $1 million, but it's an illustration of the hundreds of initiatives that we are managing as a team to collectively drive the impact that we've laid out. So, those are a few things. I mean, I think the energy around our commitment and our mission is clear, but those are a couple areas that I would highlight as really unique benefits, of being an independent company, this idea of innovation and adopting a lean mindset across the entire company.
Maybe one quick add to that. This is a good cash-generating business. It helps us fund our future innovation, and we were also able to pay down approximately $1 billion in debt last year, which strengthens our financial flexibility.
Great, and Jay, since you started to talk about margins, maybe I'll go there first and do this a little bit backwards from what I would normally do, but I'd love to hear more about how margins could progress over time. So just to review, you're expanding margins this year. You're gonna be kind of in the mid-15s on EBIT margins, but you've talked about the ability to get to high teens to 20% over the next few years. So we'd just love for you to talk about the key margin drivers, some of which you already touched on, and how investors should think about those different levers, and kind of what the cadence of margin expansion could be through that period.
Sure. Maybe I'll start with the categories and then talk about initiatives. As it relates to categories of margin, really pleased with the gross margin performance, as I referenced earlier. That will be the biggest driver this year. In the first quarter, we saw 100 basis points of improvement against 40 basis points or so of SG&A leverage improvement. And R&D actually grew as a percent of sales, and so that construct will continue throughout the rest of the year. You'll see very solid gross margin performance. You'll see some level of SG&A leverage, but then you'll see R&D consume some of that. Now, for our investors, we're not asking you to wait for margin expansion as we build up this R&D spend. We're delivering margin expansion despite R&D spending that's significantly in excess of sales.
So that's one of the elements of the model that personally, I'm most excited about. What happens next year, and this is to my comments from the start of this presentation, as we come off the TSAs, we start to have more optimization opportunity in areas like G&A. So in IT spending as a percent of sales, we expect that to decline in the coming years, and more so than we did kind of in this year timeframe. As we come to stand alone, we have the opportunity to optimize some of these spend categories, be it finance, IT, or other back office functions. Now, we're also very diligent about protecting commercial investments. Really important for us to win when we go to market.
So we're protecting those investments, but very thoughtful about how we can be more efficient with some of these back office functional areas. So next year, what will happen is you will see more benefit from SG&A and perhaps a little bit less from a gross margin standpoint. So the benefit mix will shift a little bit for the coming years as we start to see this story approach that high teens to 20%. I have to say, you know, when we think about what's going to drive it, we've seen really good progress on pricing. The environment is good, but actually, one of the benefits of being a standalone company is you can identify what are the most important levers to your success and how will you focus on them?
In our case, pricing became a crucial area. We wanted to ensure that we were capturing the value for the services and products that we provide, and so we started to price that way. And what we saw last year, north of 3% price in sales, this year, we expect to see 1%-2%, and we expect to sustain that. That's an important driver of our continued margin expansion. The second thing I would say is, you know, innovation's gonna have a very positive impact. As we launch new products, typically, they come with a higher price and a lower cost than the predicate, and so the result of that is a multifaceted margin benefit.
So as we look at new product launches, and then as we look at these optimization initiatives, be they Lean on manufacturing or G&A opportunities, that's a third bucket, that's going to contribute to this goal of getting to high teens to 20% in the midterm. We're racing to get there. And I have to say, as I've come on board, I've spent a lot of time testing the margin plan, assessing the margin plan, identifying new areas, identifying risk areas, and I have to say, I feel very good about the long-term margin potential of this business and our, our goal to quickly get there. And what that means is you should see EBIT growth in excess of sales growth for a number of years.
Great, Jay. Thanks for that comprehensive answer. But I'm gonna get you to be more comprehensive with a couple follow-ups, I guess. I wanted to ask about your price sustainability comment. So you talked about 1%-2% going forward, potentially. Maybe help us understand how you're driving that. So you mentioned new products, you talked about focusing on it. Is the pricing really coming from the new product mix, or is that more of kind of a pricing discipline muscle that's helping to drive price?
Well, certainly, there's some benefit from new product, and their impact on price. I think that's just a kind of a general, general buoyancy, as you innovate. But I would say the, the interesting thing for me is, we really, as a leadership team and as an organization, have emphasized the importance of price as a lever for us to drive an improved P&L picture, as a lever for us to allow us to invest in R&D in accelerated manner. Everybody on the team has embraced and embodied this, and y ou know, so we have a monthly pricing council. We have rigorous reporting, which we established over the last couple of years.
For example, if you want to cut price on an existing product as a sales rep, previous to the last couple of years, perhaps you would have the opportunity to do so with limited oversight. Today, to the extent that you intend to price below what the current price on the market is or your price last year was, then you have to seek an approval from, like, the CFO of the region. So it's a very important step that we've added. We have really detailed reporting, a cultural emphasis, and I think at the end of the day, you also have to have the fact that you have really good products with a tremendous service network that people like.
And so if you have all of those conditions in place, if you're adding 1% to a million-dollar device, it's not going to be a make or break as far as decision-making goes, deferral of decisions, and we've seen that. And so I think, you know, from my standpoint, I'm really pleased with the cultural intensity that we've put around this important lever for us, because pricing has allowed us to offset inflation, to invest in R&D, to help expand our operating margin as a company.
And you mentioned before that as you, I guess, stress-tested kind of the margin plans, the pathway there, that you largely liked what you saw, kind of paraphrasing what you said, but you saw some new opportunities and some risks. I was hoping you could maybe expand on that a little bit. Is there anything kind of big and new that you saw in the plan that was an opportunity that you'd like to highlight?
I think generally getting comfort with some of these G&A opportunities, I'll give you one small example. You know, as our travel policy was something that we had not refreshed in a long period of time, and so from a spending standpoint, we were probably comparing unfavorably to other med tech companies, to other peers. By tightening up that policy, you know, is it gonna generate $500 million? No, it's not going to generate $500 million in savings, but it will have some level of meaningful impact on our financial results. That's one small example of many things that we've identified that, you know, we're looking at and really trying to embody and incorporate into our plan, which I think collectively will help de-risk and support our aspiration to get to this high teens to 20%.
Great. Maybe we could switch gears and talk a little about the, the top line. So I guess the way I'll frame it is you, you've outlined a $84 billion TAM growing to a $100 billion in 2025, and your different markets, imaging, PCS, ultrasound, you've outlined kind of a 3%-6% growth rate for those. So, maybe just talk about what drives your markets at a high level, and talk about current market conditions, what you're seeing out there, in terms of underlying trends on, on CapEx and the differential growth rates that are impacting those different, segments.
Sure. So we've talked about this $87 billion addressable market with very favorable tailwinds supporting it. And I think, you know, as we look across the world, we have a global aging population, and that, you know, cannot be underestimated in terms of the constraints and strains that that puts on healthcare systems around the world. We have increases in chronic disease rates. That too, again, strains healthcare systems. And on the other side, you have hospitals which are, you know, in many cases, capacity constrained or with staffing shortages in place. So all of these conditions are natural dynamics that will support growth in our markets. In the case of imaging and ultrasound, you know, again, it comes down to this idea of how can you assist hospitals be more efficient, drive better patient outcomes, help with workflow?
You know, we see real interest in those kinds of product areas, and, you know, that's a crucial driver of continued market growth. In the case of our PCS business, you know, patient monitoring is an interesting one because we are actually still working through backlog from COVID. There was just an enormous increase in demand for some of these products, really monitoring patients carefully, understanding, and so that's been a source of growth for us, and from a revenue standpoint, will continue to be. In the case of PDx, you know, again, favorable dynamics. Our PDx business is largely speaking, driven by volumes, and then some pricing, but procedure volumes is something that has been very robust.
I think you all track this, in lots of different ways, and I get to see it in our financial results when I look at our, our PDx business. It's the nearest term way we see the impact of procedure volumes, in the market, and it's robust. Now, there are other drivers of PDx. As we think about the growth in that particular segment, there are other markets that are early stage and emerging. The whole idea of theranostics, the whole idea of innovative imaging agents to support cardiac perfusion in terms of things like Flurpiridaz, the whole idea of Vizamyl in support of Alzheimer’s, these are very new and nascent markets, which represent, in our view, kind of interesting opportunities to accelerate market growth.
But I would say, in our base case, the core of this, driven by procedure volumes, will continue to be robust. So I think, you know, we feel quite good about the markets that we're seeing. As we sit here today, at this moment in time. The markets, you know, the markets are reasonable. We've seen a positive backdrop in the United States. The market's been, you know, quite robust. We see, you know, so the survey that we do on a regular basis confirms this. In addition to our sales pipeline, our order pipeline looks robust.
In markets outside the U.S., we're seeing good performance. You know, of course, I've talked extensively about the situation in China, which, you know, as a result of anti-corruption, along with a lack of clarity around some stimulus programs, that market has been challenging as we expected. But we do expect that market to resume kinda normal levels of growth, as we approach the back half of the year and into next year. You know, the interesting thing about China is, if you look at our growth there over the last 3, 5, and 10 years, you the line is, you know, outstanding. Now, of course, in any given quarter, there is a lot of wobble around the line associated with various initiatives that are undertaken. But I think the approach that we've had over the last decades has been one that's rewarded us really well.
Maybe backing up for one second, I do wanna touch on China a bit more, but, you talked about mid-single-digit growth in general, and this year, 4%. You know, the first quarter grew a little bit, basically, and so I was hoping you could talk more about cadence through the year of growth and your confidence in hitting 4%, which would require some ramp in the back half.
Yeah, definitely requires some ramp in the back half. I think the one thing I would say, Matt, is if we were to look at what the compounded growth was over two years, in the first quarter, it was 6%, so high single, high, high, high mid single-digit growth. If you look at throughout the rest of the year, because comps ease, the actual two-year growth rate doesn't really change materially. So the fact of the matter is, we had an outstanding Q1 of last year. We are not normally, yet, I hope one day we may be, a 12% grower, but we grew 12% in the first quarter of last year.
So backing that up with 0% this year, you know, while a challenge from a one-year perspective, as we look at it over a multi-year framework, it's 6% growth. And I think if you look at each of the quarters, the comps ease as we go through the rest of the year. But the other interesting thing, as we think about acceleration to the second half, is, you know, we will have some market normalization, so you'll see some normal volume growths in our markets. You will have the impact of innovation. I talked earlier about launching 6 new products in ultrasound. These are really great products with some very unique enhancements. It's the first time that we've attached a wireless probe to our ultrasound devices.
Previously, all of our ultrasound devices would require a tethered probe, which is clunky to manage. Now we're seeing some real interest, for example, in adding this wireless probe to our ultrasound devices. So, and that's one of many aspects of innovation in the six new launches that we announced. So as I look at the second half, you'll have volume growth, you'll have the impact of innovation positively contributing versus prior year, and you'll also have the impact of pricing. So those, those three things comprise the growth that we expected at the beginning of the year. And then, in addition to that, we now have had a couple of things shift from the first half to the second half. One of those relates to we did have some supply chain issues in our PCS business.
Those have principally been resolved, and we'll expect to pay off those sales in the second half of the year. So that point of growth that we lost in the first quarter, we expect to see that come back into fruition in the second half of the year. And then, in the case of China, we saw, we did see some impact in the first quarter, and then we modeled some conservatism into the second quarter on the back of, you know, the fact that people are still hesitant in the marketplace as they await clarity on some of the stimulus package. That's, largely speaking, playing out as we expected, so we'll see some of that, we expect, come back in the second half of the year as well. And so really, those are the dynamics that lead this first half slower growth to yield a second half acceleration.
Services should also be solid in the back half of the year and growing, given the high growth that we had in equipment in the first half of last year. There's typically a 12-month lag on that, so you should see that coming through in the back half of the year.
Thanks. Thanks, Carol. Maybe just ask one more on China, Jay. You talked about the clarity you're starting to see play out, as expected. What are you hearing from customers? What are they seeing, how, and how is the process of actually getting reimbursed impacting the timing of orders?
Yeah, I think what we saw in the first quarter, towards the end of the quarter, at post-announcement, and what we've seen in the second quarter, is this idea that there is hesitancy among customers to submit orders to run tenders, in advance of clarity around stimulus, which makes complete sense to me. Listen, as a customer, I would not want to run ahead of, you know, potentially some sort of, you know, sort of free money or stimulus money. So I would want to wait until we have clarity.
What we always expected is, in the second quarter, there would be some level of collaboration between national government and provinces to provide clarity to all of the hospital systems that exist in China and allow them to proceed forward with tenders, and all of this, what is real pent-up demand at this point. And so, you know, that process is working itself out. We're seeing conversations taking place between provinces and the national government, and we expect to have more to say on this, with hopeful resolution. When we talk, when we have our earnings call, we will, we'll—we hope to have a resolution at that point.
We're running out of time, but I wanted to ask another high-level China question. So some people frame the new stimulus as a 6% CAGR. That's kind of how it reads. But can you talk about what you think this means for growth in that market for your businesses over the next few years? And maybe give us a review of how China has been growing for you. You talked about that longer term trend line, and then what you think you could achieve going forward, if you can talk about high level or any specific growth rates.
Yeah, I mean, we, the China business has outpaced growth of the company, which has been great. But as we look forward, we don't really give guidance regarding particular markets. What I can say is, China has been a great market, and we expect it to continue to be an outstanding market for us. I think, you know, from our standpoint, it represents around 13-ish percent of our overall portfolio. And it's something that, you know, we've been very proud of our investments that we've made in manufacturing. We've been there 100 years, manufacturing for over 30. So we think long term, we've gained share, you know, and so we think over the long term, it's a very nice business for us.
And, you know, the trends you talked earlier about the demographic trends and the trends that we're seeing. Trends support continued growth. Now, of course, in any given quarter, there has historically been some level of volatility, but that long-term line is something that, you know, we've been very proud to deliver on behalf of our company, and we expect to continue to grow.
Great! Well, I think we have to end there. But Jay, Carolynne , thanks so much for your time.
Thank you.
Thanks for your interest in GE, and let's all go to a room at a more normal temperature.