Q4 2024 Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the GE HealthCare Fourth Quarter and Full Year 2024 Earnings Conference Call. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Carolynne Borders. Please go ahead.

Thanks, operator. Good morning, and welcome to GE HealthCare's fourth quarter 2024 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.

And with that, I'll hand the call over to Peter.

Thanks, Carolynne, and thanks to all those joining us today. At our Investor Day, we shared progress that we've made in executing on our precision care strategy since becoming an independent company. Now, two years into our journey, I'm pleased to say that we're continuing on the path of strong execution with our fourth quarter results. In the quarter, we saw orders growth in every segment.

We also saw robust backlog and book to bill the strongest since we became a public company. We continue to see strength in the U.S. market. For example, in a recent survey of U.S. customers, half of those surveyed indicated they expected incremental imaging investment, particularly in the outpatient setting driven by expansion plans. In China, we're beginning to see a slight improvement in the market evidenced by orders growth.

This market is evolving in line with our previous commentary. We continue to deliver revenue growth driven by demand in our Advanced Visualization Solutions and Pharmaceutical Diagnostics businesses with overall strength in the U.S. The total company, both sales volume and price were positive. In addition, sales and orders grew mid-single-digits excluding China in the fourth quarter.

We also continue to deliver robust margin expansion and earnings per share growth while investing in R&D. Our progress has been driven by our lean culture, creating better value for our patients and customers while delivering efficiencies across the business. We believe our commercial strategy which is focused on securing highly strategic long-term enterprise deals that help our customers deliver on their goals, differentiates GE HealthCare. What sets us apart is the way we bring together our holistic offering which includes a comprehensive and integrated portfolio of AI-powered equipment, proprietary retail, pharmaceuticals and services enabled by our digital capabilities.

In 2024, we closed 50 enterprise deals globally, laying a solid foundation for the future growth. And last month we announced a Care Alliance with Sutter Health valued at $1 billion over seven years, bringing the total value to date of large deals closed since spin to over $5 billion. I'll talk more about this partnership and the impact of our enterprise strategy later on the call. Our commercial strategy supports our evolution from an imaging company to a healthcare solutions provider by working together with our customers to solve their greatest challenges.

I'd like to share a few examples that illustrate this transformation. In 2024, we introduced approximately 40 innovations. Additionally, products launched within the last three years contributed to a strong new product introduction vitality of approximately 50% for the year. These high-margin NPIs reflect the impact of our increased R&D commitment and also help us drive recurring revenue.

For example, our cath lab Allia IGS Pulse is outperforming our expectations and we're on track to launch Flyrcado in the near term. We continue to advance our leadership position in AI. In one year we've gone from 58 to 85 AI-enabled FDA authorizations, one of the most in healthcare. To date, we've upgraded approximately 30% of our MR base with AIR Recon DL and expanded Sonic DL to move beyond cardiac into other areas like brain and orthopedics.

We're also making strides with the development of cloud-based solutions like CareIntellect to accelerate bringing clinical and operational applications to market. And we're executing on our disciplined M&A strategy complementing our existing technologies and solutions. Last year we closed two acquisitions MIM Software with AI-enabled image analysis and workflow tools and Intelligent Ultrasound, adding innovative real-time recognition technology. We also announced a planned acquisition of NMP to deepen our radiopharmaceutical distribution capabilities in Japan and other Asian markets.

Turning to our outlook for 2025, we introduced guidance for the year which reflects healthy demand for our products and services in most of our markets globally which is reflected in our orders growth. This guide is in line with our current view of the China market and the U.S. tariffs on products from China. With that, I'll turn the call over to Jay to walk through our financial results for the fourth quarter and to provide more details on 2025 guidance.

Thanks, Pete. Let's start with our financial performance on Slide 4. For the fourth quarter of 2024, we reported revenues of $5.3 billion with organic revenue growth of 2% in line with our expectations. Global sales growth excluding an approximate 200 basis point impact from China was up 4% for the fourth quarter. On a reported basis, service revenue grew 6% and product revenue was up 1%.

Organic orders growth was 6% year-over-year, driven by continued strength in the United States and across all segments. Order dollars continued to outpace sales, helping us deliver strong total company book-to-bill of 1.09 times, our highest since the spin. We exited the fourth quarter with a record backlog of $19.8 billion, up $700 million year-over-year and up $200 million sequentially. We continue to make excellent progress on margin, delivering an adjusted EBIT margin of 18.7%, up 260 basis points year-over-year due to productivity and volume.

As a result, fourth quarter adjusted EPS was $1.45, up 23% year-over-year. Free cash flow of $811 million was down $145 million from last year. Turning to our full year results on Slide 5. For 2024, revenues of $19.7 billion grew 1% organically versus last year in line with our guidance. On a reported basis, product revenue was flat and service revenue grew 3%.

Recall that we grew 8% organically in 2023. Importantly, recurring revenue, which is more predictable and has attractive margins, represented more than 45% of total revenues for the year. Organic orders grew 3% year-over-year and book-to-bill was 1.05 times. 2024 adjusted EBIT margin of 16.3%, expanded 120 basis points year-over-year ahead of our guidance, driven by productivity and price. Adjusted EPS of $4.49 also exceeded our guidance for the year, growing 14% year-over-year. In 2024, our adjusted EPS benefited by approximately $0.08 from one-time tax favorability related to completing our prior year global tax filings.

Free cash flow of $1.6 billion was down $161 million year-over-year, which I'll cover later. On Slide 6, let's take a closer look at the strong progress we made on our margins in the fourth quarter and for the full year. Adjusted gross margin expanded 150 basis points versus the fourth quarter last year and 140 basis points versus the full year 2023. The increase in adjusted gross margin was a result of productivity improvements, including partnering with suppliers on material cost, design change improvements in our products, and factory and service productivity. We also benefited from higher margin new products.

As an example, in PDx, we held a multi-team Kaizen focused on improving the capacity on two of our critical manufacturing lines by shortening changeover times, reducing wasted motion and prep time and implementing environmental health and safety actions, we added over 1 million annual patient doses of capacity. We also recognized productivity improvements of more than 20%. For the fourth quarter, R&D investment was 6.5% of sales, up 9% year-over-year. For the full year, we invested $1.3 billion in R&D, equating to roughly 6.7% of sales, up from $1.2 billion in 2023. We remain committed to investing in innovation and developing unique technologies.

We're also cultivating research collaborations that strengthen our leadership position in fast-growing areas such as Theranostics, Interventional Cardiology among other growth opportunities. On G&A, we've exited substantially all of our TSAs with GE, further enabling us to optimize our cost structure today and into the future. I'm really proud of all the teams, who supported our transition to a standalone enterprise. Because of the actions I just mentioned, we delivered excellent improvement in adjusted EBIT margin, up 260 basis points in the fourth quarter and 120 basis points for the full year.

These results, combined with our ongoing focus on execution and operational improvement give us confidence in our ability to deliver margin expansion into the future. Now, I'll turn to our segments, starting with imaging on Slide 7. Organic revenue in the quarter was flat versus the prior year. Strength in the U.S. and Rest of World was offset by headwinds in the China market. Segment EBIT margin was up 200 basis points year-over-year, driven by favorable price and product mix.

The fourth quarter results cap a strong year of margin expansion for imaging with an improvement of 170 basis points on a total year basis due to progress with both productivity and price. We continue to see robust growth in the U.S. as customers invest in innovation. Turning to AVS on Slide 8. Organic revenue was up 4% year-over-year with increased sales volume in the U.S., partially offset by a decrease in China. Segment EBIT margin increased by 240 basis points year-over-year, driven by continued productivity through standardization and volume, as well as new product introductions.

Sequentially, the strong improvement in margin versus the rest of 2024, was primarily due to volume leverage in the quarter. Customer demand for our AVS products remained robust, particularly in interventional cardiology and surgery like our OEC 3D platform. Moving to Patient Care Solutions on Slide 9, organic revenue growth was flat versus prior year with services growth and improved fulfillment offset by a difficult comparison in Monitoring Solutions. Segment EBIT margin declined 50 basis points due to inflation and portfolio mix, partially offset by productivity actions.

Sequentially, EBIT improved 220 basis points due to volume leverage. As our portfolio mix normalizes and with continued productivity initiatives, we expect to drive improved margin performance. Strong global customer partnerships, particularly in the U.S., position us well for future growth. Moving to Pharmaceutical Diagnostics on Slide 10. We delivered another strong quarter, generating 9% year-over-year organic growth and EBIT margin of approximately 33%.

We're pleased with this continued growth and margin expansion both year-over-year and sequentially. I would note, that the year-over-year EBIT comparison was favorably impacted by one-time items, including an investment related to in-licensing PET radiotracers in the fourth quarter of last year. I also wanted to highlight that we recently announced a $138 million investment to expand our Contrast Media manufacturing facility in Cork, Ireland. This will create additional capacity to meet growing demand for Contrast Media while offering increased flexibility and supply resiliency.

Turning to cash flow on Slide 11. In the fourth quarter, we delivered healthy free cash flow of $811 million. This was down $145 million year-over-year due to inventory builds in 2024 that we expect to work down in the first half of 2025. Looking at the year, we're pleased with the execution on our capital allocation initiatives. To strengthen our balance sheet, we paid down $400 million of debt in 2024, and an additional $250 million in the first quarter of 2025. We also executed on strategic M&A, including our purchase of MIM and Intelligent Ultrasound as well as our planned acquisition of NMP.

Let's turn to our outlook on Slide 12. For 2025, we expect revenue growth in the range of 2% to 3%, which reflects continued demand for our products and services as well as our current view of market conditions in China. We're taking a measured approach that assumes China's sales performance will be negative in the first half of 2025, with a sequential improvement in the second half of the year versus the first half, leading to a low single-digit decline for the year. In addition, we expect a foreign exchange headwind to revenue to be approximately 1.5%. While the U.S. tariff dynamic is fluid, we have incorporated the new China tariffs, which are in place today into our 2025 guidance.

This impacts adjusted EBIT by approximately 10 basis points, assuming 11 months of impact. Therefore, we expect full year adjusted EBIT margin to be in the range of 16.7% to 16.8%, representing year-over-year expansion of 40 basis points to 50 basis points. Operationally, we remain committed to driving productivity initiatives and expanding margins. We're assuming an adjusted effective tax rate in the range of 22% to 23% for the full year.

On adjusted EPS, we expect to deliver between $4.61 and $4.75 for the full year, representing 3% to 6% growth year-over-year. This includes approximately a point of impact from recently announced tariffs on products from China. Lastly, we expect to deliver free cash flow of at least $1.75 billion for the full year. For the first quarter of 2025, we expect organic revenue growth year-over-year to be in the range of 1% to 2% and adjusted EBIT margin and adjusted EPS to be approximately flat year-over-year.

When looking at the first half of 2025 versus the second half of the year, we expect organic revenue growth to be stronger in the second half of the year as we move through the year, adjusted EBIT margin rate and adjusted EPS are expected to increase sequentially. Overall, we're very proud of the work our teams contributed in 2024 to deliver on innovation and financial progress and we feel good about our guidance for 2025, especially with strong backlog and orders momentum. Now I'll turn the call back to Pete. Pete?

Thanks, Jay. As you've heard today and see on Slide 14, our NPIs launched in the last few years have appealed to customers which translated into orders and revenue growth in 2024. This is another example of how we've made progress on our precision care strategy. We expect this to continue in 2025 and beyond. We continue to evolve the way we think about innovation which has always been a cornerstone for GE HealthCare.

Innovation is so much more than the technology we create. It's about having a deep understanding of diseases and acting as a strategic partner for our customers rather than a transactional equipment vendor. By understanding the unique needs of each customer, we co-create a holistic offering inclusive of technology, services and solutions and bring it all together in a cohesive way to drive transformation for the customer. We began our long-term enterprise partnership strategy to deliver precision care when we became an independent company.

A best-in-class example is of how it's taking hold in our recent announcement with Sutter Health, one of the largest integrated delivery networks in the U.S. Building on a 20-year relationship, Sutter Health chose us to help them transform the way they deliver care to their 3.5 million patients and create capacity to serve tens of thousands more across their network. Another example is our long-term agreement with Nuffield Health in the U.K. to provide our latest advanced imaging and ultrasound equipment technology upgrades and services over the next two decades. As the partner of choice, these agreements bring us the security of a multi-year commitment while increasing capacity and access of quality care for patients.

We believe our ability to bring together a holistic offering of smart devices, drugs, digital solutions and services is differentiating and will result in more of these long-term partnerships accelerating recurring revenue growth. In summary on Slide 15, I'm proud of how our teams delivered in 2024 and what they do for patients every day. We continue to deliver solid results in revenue, margin, earnings and cash and we're executing on our precision care strategy through commercial enterprise partnerships and investments in R&D to deliver innovation that solves the most pressing healthcare challenges for our patients and customers.

We're starting 2025 with strong momentum in orders, record backlog and book to bill, and we're also on track to launch a number of exciting NPIs including our proprietary radiopharmaceutical Flyrcado. We've laid the groundwork for stronger sales conversion from orders, which positions us well for future growth. All of that said, we're taking a measured approach to guidance as we start the year and see how the market dynamics, including China improvement and tariffs evolve. As a global company with a diversified supply chain and a significant U.S. manufacturing base, we will continue to proactively work on potential mitigation plans.

Meanwhile, we're making good progress towards our total company medium-term financial targets. I'd also note that we are humbled to be recognized by Fortune as one of its World's Most Admired Companies for 2025 and this is really a testament to the dedication of our 53,000 global colleagues to deliver every day for patients and customers. Before we open up the call for questions, I'd like to take a few moments to share an organizational announcement. After more than 20 years with the company, Tom Westrick, President and CEO of Patient Care Solutions, has decided to retire from GE HealthCare.

We expect to announce his replacement in the near future. Tom will remain with us to support a smooth transition and I'd like to thank Tom for his contributions through the years and wish him all the best in his retirement. And with that, let's open up the call for questions.

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 Instructions] Our first question comes from Anthony Petrone with Mizuho Financial Group. Your line is open.

Well, thank you very much and good morning. Good morning, everybody. Congratulations on a very strong overall print record bookings, backlog and margin. And I think, Jay, I'm going to start off on the latter there on margin.

And so maybe walk us through a little bit on the 18.7%, about 120 basis points above our model. But in particular, your LRP calls for high teens to low 20s. You're already in that range exiting 2024. That outlook was through 2028. So maybe just a little bit on the margin dynamics coming in ahead of expectations and how we should be thinking about that through the LRP. And I'll have one quick follow-up.

Thanks.

Sure. Thanks for the question, Anthony. We're very pleased with the progress that we're making on margin expansion. To your point, the margin in the fourth quarter was ahead of our expectations, but I think notably it was 260 basis points of expansion versus the prior year. 18.7% was a record for us.

And as we look at the lines of the P&L, great performance on gross margin, 150 basis points or so. And then we also had declines in SG&A. We've talked about some of the work that we're doing to optimize this category and we were able to deliver on that in the fourth quarter. As we think about specific drivers of the result, we saw benefit from volume, mix and price all contributing.

It was approximately 150 basis points of EBIT margin expansion from those categories. And then interestingly from a variable cost productivity program and savings initiatives, all of that good work that we're doing fully offset any inflation or inefficiencies that we saw. So all of the price, volume, mix was able to flow through unimpacted. Now I will tell you we had about 100 basis points of one-time items, some of which we had anticipated.

Some of it relates to spend from last year that was not repeated this year. Some of it was related to foreign exchange. And so in combination, that was about 100 basis points. But really this was just an overall, really solid performance.

We talk extensively about the lean culture and what we're trying to do. And there's a lot of elements to that like safety, quality and delivery. But this idea of lean's impact on cost, I think, was very solid in the fourth quarter. Now, as we look to the mid-term, it's important not to extrapolate off of fourth quarter because seasonally, fourth quarter is always by far the highest margin of the year.

And so we'll see a return to normalcy in the first quarter as we look to have a nice solid margin expansion in 2025. But I do think it's safe to say we're increasingly confident in our ability to deliver margin from the business. So no change to mid-term guidance. We did on the Investor Day, we said we think there's an opportunity to deliver 20% plus over time. And that plus was an important addition for us.

I think this fourth quarter print gives us more confidence in that plus.

That's very helpful. The quick follow-up would just be, you're facing -- I'll stick to margin, let others jump in. You're facing the pressures in China. You have some FX. You mentioned inflation. Let's assume inflation stays there. But if we have normalization in China, is it fair to say that this could be an upside case to the mid-20s on the margin side over time? Thanks again. Congratulations.

I think we'll start with resetting the mid-term guidance. But I think it's safe to say if you look at last year's full result, 120 basis points, despite very low sales growth and despite some unplanned market volatility, then we fast forward to this year. We're talking about sales growth that's below the mid-term expectations. And despite that, we're delivering another 40 basis points to 50 basis points of margin expansion.

So we feel really good about our opportunities to drive this going forward. And I think some of the excitement around innovation and all those products coming to market, those should only bolster performance. Pete, what would you add?

I think you covered it, Jay. But Anthony, to your question, I think just as we went through the Investor Day and we talked about 20% plus, part of that is, as we're right on track to where we had expected to be. When you take a look at the growth rate, where we're expecting to be here for this year. And then if you recall, a lot of our launches come out in '26 and a big focus on having those at higher value prices than the segments that they're in and also higher gross margins.

And again, that's been a critical part of our strategy from the beginning, platforming and such. And so, it's good to see that coming through.

Thank you very much.

One moment for our next question. Our next question comes from Craig Bijou with BofA Securities. Your line is open.

Good morning, guys. Thanks for taking the questions. I want to start with China and maybe just see if you could elaborate on some of your comments on the order environment in China in Q4. And then, you Pete, you've been helpful in the past talking about some of the work that you guys have done province by province to understand where each province is in the stimulus process. So just wanted to see, if you can maybe provide some updated insight at the various stages for each province.

And then I'll have a follow-up. Thanks.

Yes, Craig. Thanks for the question. I mean, I would start out just at a high level and say fundamentally, what we said at Investor Day and what we've been communicating in between is on track to what our expectations are. We expected to see some improvement of orders.

Again, it's off of a challenging base the previous year, but that actually took place. And so again, from the standpoint of anti-corruption and then stimulus and the movement going forward on that, we've looked at this across all the provinces and we've talked in the past about the different steps in the process. And again, I would say at this point in time, it is on track to what we had laid out before, which is start seeing more orders improvement in the first half, starting at later Q1, starting to see some of that in Q2, maybe having some benefits in the latter part of Q2, but the majority of the sales translation of orders would be more in the second half.

I don’t know if Jay can comment a little bit more as well about it from what we said on the guide. But from what we see things right now, they're on track to line up to exactly to that. Jay, what would you add to the China question?

No, I think that's right. We were encouraged to see order growth in the fourth quarter. But as we kind of look forward, we're anticipating negative growth in the first half of 2025 and then, we'll see some sequential improvement in the second half versus the first half. So overall, in our numbers, we're anticipating a low single-digit revenue decline for the year.

We'll watch this very carefully. As we've said previously, we think China is an attractive long-term market, but clearly, there's been some volatility. So we've reflected that thinking in the guidance that we've shared here.

And I've in the past used a simple kind of process step about province was announce that they have the money, they'll announce a tender, they'll grant the order and then you'll ship it. I mean, we're pretty much aligned to that kind of in step two, the tenders are starting to take place. And again, I think our guidance is very much aligned to how we think this is going to roll-out for the year.

Got it. That's helpful. And just thinking about the hospital CapEx environment in the U.S. and around the world, it sounds like, you guys see a pretty solid market or environment. So I guess, I wanted to ask if that is true.

And then maybe just touch on some of the competitive dynamics in the markets. I know one of your competitors recently talked about competitive wins. So would love to hear what you're seeing on the competitive front as well as the overall market environment.

Yes. I would say, Craig, look, from a CapEx standpoint, ex the China discussions we just made, we see improvements pretty much around the world. I would say, I'd start with Europe and say, Europe was a more challenging year last year. I think we had mentioned in some previous comments about government changes that people put pauses on and took a look at things.

We would expect to start seeing that moving in a more positive direction here in '25. In the United States, it was a strong year. And again, as hospital systems retool probably one of the oldest installed bases around different countries around the world, we're seeing again that upgrade taking place. And what underpins that, which is happening around the world, but more so in the U.S. is just strong growth of procedures, which I know you guys all see in some of the device companies, interventional procedure is up strong double-digits, surgical procedures moving to outpatient centers requiring ultrasound and C-arms.

Those are a lot of the things that we're seeing the benefit and we believe are going to continue. The need against for cath labs to handle many of the growth in structured heart and orthopedic procedures as an example. So from that standpoint, that's kind of the marketplace. You asked about the competitive environment.

Obviously, from a China standpoint, it's obviously been a very strong competitive market with local players as well as multinationals, but we feel quite confident in how we've laid out our ability to win. And I would say, when you take a look at the markets around the world, we tend to be a little bit stronger in the U.S., than maybe we are in Europe, just based on us being the U.S. - largest U.S. imaging company. But we believe we're doing quite well in each of the segments. I would kind of hearken back to our Investor Day to say, look, we have a new product coming out in CT, that we'll be on track to launch and discuss next year.

We have an evolution in our molecular imaging pipeline with a full body PET that will be coming out. And so in certain areas there, I think some of our players are actually converting some of their own installed base, which is helping some of their growth. But we feel very confident that across our installed base and in many cases exemplified in some of the larger wins, we're doing quite well. You add in those new products in the coming years, those are, again, as I mentioned at Investor Day, it's worth one to two points of additional growth from the new products that are going to be coming out.

Thanks, guys.

One moment for our next question.

Thanks, Craig.

Our next question comes from Vijay Kumar with Evercore ISI. Your line is open.

Hi, guys. Good morning. Thank you for taking my question. Maybe Jay one on the guidance question here.

The 2% to 3% organic, I think ex-China, it's around something like 2.5% to 3.5%. If I look at your capital book-to-bill, it was close to 1.1x in fiscal '24. I think you ended the year at 1.16x. Why is 2.5% to 3.5% like ex-China the right number, when Q4 -- we exited Q4 at 4% organic. What is the guide assuming for volume versus price in Flyrcado?

Sure. Thanks for the question. So overall, as you say, we have China down low single digit on a full-year basis and so excluding China, you get close to the mid-single-digit mid-term aspiration. And I will tell you, we were very encouraged with the order performance in the fourth quarter. 6% with a very attractive book-to-bill is exactly where we hope to end the year and we were able to deliver on that.

A lot of that has to do with a buoyant capital environment, as Pete described and a lot of it has to do with great performance from the team. As we think about though the sales guidance, a lot of those orders have delivery dates either in the second half of this year or into next year. And so from our standpoint, while that's a very, very encouraging sign, it's not something that impacts Q1 or Q2 revenues, so important for us to be very thoughtful about when those deliveries take place and how things work as it relates to guidance for the year. So what I would say is from a fourth quarter standpoint, the record backlog that we put in place, the high book-to-bill along with the orders growth gives us increasing confidence as we look at the health of the business and I think we reflected that with a reasonable guidance for this year.

Pete, anything to add?

I think you covered it, Jay. I think you covered it. I mean, you mentioned -- you raised the question about Flyrcado, Vijay. Yes, we feel really good about where we are.

Just to be clear, we're on track to our launch. I think, we've referenced before first dosing here within first quarter and then ultimately, launch the beginning of April, we're well on track to that. And at this point in time, we're assuming in our plans roughly around $30 million of revenue for the year.

That's helpful, guys. And maybe one more guidance related question, Jay. Q1, I think I heard you say flat margins. Is there anything one-off in Q1 and is that sort of a gross margin impact or is this an OpEx line item which would drive the flat margins?

In the first quarter, we're going to -- we'll expect to see a little bit of gross margin improvement and a little of OpEx investment. The interesting thing that's happening is we have a lot of exciting launches coming. So we have to make sure from an R&D standpoint we're funding those for success, some crucial programs with crucial milestones coming this year. So that investment's coming to bear in the first quarter.

And then secondly from an SG&A standpoint, we're excited about this Flyrcado launch and a number of other launches that are taking place across the company. But that does require having adequate investment. We don't want to underclub the investments in any of these crucial new product launches. So you're going to see a little bit of offsets from an OpEx standpoint to gross margin expansion leading to the margin that we've described in the first quarter.

So Vijay, just a simple example is obviously we're expanding our cardiology PET call points so we're adding sales force marketing to be prepared for the launch. That would be an investment in the first half that's part of built into that profit number.

That's helpful, Pete. Thank you.

Thank you, Vijay.

One moment for one moment for our next question. Our next question comes from Matt Taylor with Jefferies. Your line is open.

Hi. Good morning. Thank you for taking the question. I noticed you talked about the order growth being up across the segments. And I guess I was wondering if you could help us a little bit more with any segment color in terms of the growth expectations for 2025 and particularly on PDx given the Flyrcado commentary you just gave.

Yes, I think we were definitely pleased to see the order strength across the board. It was one of a rare quarter when every single business saw -- it was consistent orders growth. So that was really great. And on a full year basis, I think robust.

As we look at 2025 guidance, I guess what I would say is we'll expect PDx growth broadly speaking in line with the growth of 2024 and then the rest of the business will expect to see growth broadly speaking in line with the corporate average. So those are a couple of the dynamics. Pete mentioned the Flyrcado assumption embedded in PDx. But beyond that, I think a nice environment overall contributes to the growth profile that we'll lay out for next year.

Can I just ask one follow-up on Flyrcado. You talked about the $30 million. Can you just talk about the gating factors and how you expect reimbursement to evolve and then the steps through actually getting on contract or is the need for hospitals to sort of rejigger referral patterns and where their capital is placed? Is that a gating factor?

Maybe just talk about how you think that evolves throughout the year.

Yes, thanks. Thanks, Matt. So again, as we spoke a little bit about this at Investor Day, the mid-term opportunity again we believe on this is $0.5 billion type of product drug. And so that hasn't changed at all from that standpoint.

As I mentioned just in the previous question, our launch preparations are well on track which is a combination of sales force, it is reimbursement, it's also manufacturing scale up and all of those are on track. Keep in mind that with a radiopharmaceutical which has a half-life, the typical way that we work our manufacturing structure is in partnerships with contract manufacturing organizations. Why would that be? Because you need to have them closer to the cluster of where the products are.

So we actually have a selection of CMOs already set up that will be ready to produce right in the beginning. And we also then target our sales operations within those geographical areas. Why? Because you need to be able to deliver it within a half-life window within there.

So that manages how fast you ramp, you go a little bit more methodically. We're also targeting centers that have cardiovascular PET capabilities already. Why? Because they're already doing these patients in some cases with Rubidium.

This would give them better options as far as how they can actually implement it. And then we'll be working on adding additional capacity into other areas. But other -- unlike other drugs where you can ship something, put it on the shelf and convert over time, remember this is just-in-time delivery so there's a little bit more orchestration to it. But this is what we do in other molecules day in and day out.

So we feel good about it. But again, it's why we have a more measured approach as we roll that out. To your point on coding and things, we're well down on the road on that. I'd say from a coding and HCPCS codes and stuff, we're on track here to have approvals and fundamentally the code in effect in April.

We've also filed through pass-through, we would expect to have that not too far off of that date, but we'll see when that comes in. But we feel really good about how this is playing out. And as I mentioned, our first commercial doses are going to be here, not in the too-far-distant future.

Great. Thanks, Pete. Thanks, Jay.

Thank you.

One moment for our next question. Our next question comes from Joanne Wuensch with Citi. Your line is open.

Good morning and thank you for taking the questions. I'll just put them both out there at once. Could you just spend a moment on the first quarter, please? I'm trying to just piece through some of the year-over-year commentary and how to think about maybe some of the headwinds.

I get the revenue headwinds, but I want to make sure I appreciate the Op margin headwinds and what you're implying for year-over-year Op margin expansion. And then second all, if you could just sort of broadly and this probably could take up the rest of the call, talk about the competitive landscape and what you're really seeing versus some of the other competitors that you participate in globally. Thank you.

Sure. So as we think about the first quarter, obviously we're going to have a decline and from a sales standpoint we'll have a decline in China and then we'll have growth in the rest of the world. But I think from a P&L standpoint, really the noteworthy items relate to this investment that we've described. From both an R&D and SG&A standpoint, we will see a bit of growth in the first quarter in those categories and so it will offset some of the expansion that we'll see from a gross margin standpoint, landing us to a flat number.

But as we go forward in -- through the rest of the year, you start to get the benefit of some sales attached to the new products that we're launching and some of the R&D investment moderates over time. And so really it's not specific one-timers per se, but it's this imbalance between -- we want -- really want to make sure that we're investing for success on our way to driving the sales growth for the year. We want to make sure we're investing for success as we look to support the mid-term with some of these new products. And so that's leading to the first quarter margin that you'll see.

And then, Joanne, to your question on competitive nature and things, I would say, look, as you know, I would say there's similarities between many of the companies that we compete with. But there's no compositions between any of us that are the same as you would know. I mean, we're not in radiation treatment, some others aren't in monitoring. No one else really is in radiopharmaceutical drug development similar to we are.

So there's a lot of mix changes that play through there. But I would say in the core imaging area where there is some commonality and things, we've done well across the globe. I think we've probably done a little bit better in the U.S. than maybe we've done in say, Europe. Maybe some others have had some better experiences one spot or the other in those areas.

I think that we've been able to take some share from certain players in the marketplace. I think that may be true for others as well. There's a mix that obviously always takes place. But I would say one of the interesting things in a capital business where you have a large installed base and you talk about sales growth in a given window, and I'll just refer back to us, like with AIR Recon DL, we've made really good progress there and we've actually taken some share, meaning new sockets that we didn't have.

But the vast majority of that is converting our own installed base, which shows up in growth and share expansion by bringing new capabilities to those areas. And I think for all of us, there's always windows of time where you're converting your own installed base faster. And if you're converting it with a product that costs twice or three times as much as what you have, you obviously have a higher sales growth during that period of time. And we know when we introduce some of our products such as full-body PET and some of the premium things in the area like photon counting, those ASPs will be significantly higher than what we're shipping today.

And you'll see some of that growth in dollars come through. When it comes to socket share, like what you're holding on to in growth, we know we're doing well just from the reported share numbers and things in the marketplace. So hopefully, that helps a little bit with some added color.

It does. Thank you.

One moment for our next question. Our next question comes from Larry Biegelsen with Wells Fargo. Your line is open.

Good morning.

Good morning, Larry.

Thanks for taking the questions. Good morning. Hi, Pete, maybe talk about the Sutter deal, $1 billion over seven years. Is that linear or almost $150 million a year? And what are you assuming for 2025? And do you see similar opportunities elsewhere? And I had one follow-up.

Yes. Larry, I'll start with the end of your question. We see lots of opportunity down the road, as you can imagine, even when you announce things like this, you get calls from other folks and things and we're really kind of getting our values tried together. And again, some of these structures in the past were more about if you buy a lot, you get a lower price, a big part of what we offer is if you work with us on this, we help you actually drive better productivity, better outcomes, better patient experience.

And ultimately, then it's a win-win on both sides. And so we feel really good about it. I think the Nuffield Health in the U.K. is a good example as well, so expect to see more. With Sutter, like most of these, it's not always linear.

And so, it's not always just back-ended based on the account. I would say, in a case like Sutter, which is all California-based and with the earthquake regs that exist, site renovations and changes are probably the longest lead item. So, we'll see more of those things taking place in the mid-window time of the years. But I would also go to say that the orders for Sutter, those will be coming into our order book here in the first half of the year, we'll put some of those in and then each year thereafter.

So that's to come, but we feel really good about that opportunity and again, the partnership that we can have with them to improve patient lives in Northern California.

That's helpful. One more for you, Pete. It sounded like at JP Morgan that you expect to be more active on the M&A front in 2025. Is that fair? Are you still focused on tuck-in M&A? And any update on the areas of interest? Thank you.

Yes. Larry, I think for us, we believe that tuck-in M&A is super important. I think tuck-in M&A can be of various sizes, right? They can be larger, they can be smaller.

The key is that they have a very strong strategic fit and they fit into our financial returns framework. And I think we've -- Jay and I have a cadence weekly. We have a strategic cadence that happens multiple times a month with our business teams looking at what we're solving for with organic investments and what makes the most sense with inorganic. And as we change our lens again to be more than just an imaging company, be much more healthcare solutions company, you start looking longitudinally at things you can plug in to bring more value.

And again, as we meet with customers like Sutter, they're looking for how do you not just solve point solutions, how does this all connect together? And so M&A will play an important part of that and we're optimistic here in 2025, and honestly into 2026 with a strong balance sheet, the cash flow generation that we have that M&A can be a more healthy participation into our play. The NMP deal that we announced in the fall, which really gives us a beachhead for radiopharmaceutical manufacturing and capabilities in Japan and also outside of Japan into Southeast Asia, that's another great example of taking a capability now with the new molecules coming and kind of having in each region of the world, Europe, U.S. and Asia having a radiopharmaceutical capability.

So again, examples like that plug in to our strategy that makes sense, expect to see more.

Thank you.

One moment for our next question. Our next question comes from David Roman with Goldman Sachs. Your line is open.

Thank you and good morning, everybody. I wanted just to start on the AVS business here for a second. Pete, you made a reference in your prepared remarks to some of the benefits you're seeing in that category tied to select procedure volume growth. But can you maybe help us understand sort of the inflection point that you saw in that business this quarter with respect to growth and how we should think about the underlying drivers there on a go-forward basis?

Yes, David. So on AVS, again, just to remind everybody, the biggest chunks of that are large ultrasound business and then also interventional labs, so cath labs, surgical and stuff. And so we saw ultrasound actually have a very good quarter overall. Some of that is tied to our new platforms that were launched early last year, that we're getting traction and again, still with a pressured China market.

And so throughout other areas within the world, we actually did quite well within that base. We also have some new launches and things coming this year, more so later in the second half within the cardiovascular side, which we're quite excited about and think that's going to continue to drive it. But specifically, our cath lab, the Allia IGS Pulse just has exceeded expectations. I think we're talking to customers that candidly probably wouldn't have a dialogue with us in the past relative to the performance of our lab.

Some of that is the output to do bariatric patients, get views from cardiac procedures that you can't, radiation efficiency for someone who's going to be in the lab for a structured heart for long cases. And they're seeing a premium lab that's really one of the top one or two out in the marketplace. So we're seeing the orders come in from that standpoint. And then on the surgical side, OEC, which has been a very strong brand worldwide, with the growth in surgery centers and the movement of more orthopedic procedures out there, you need to have a high quality surgical C-arm, you need to have ultrasound like our LOGIQ.

All of those are doing very well because of that. And you may recall, we migrated what we call OEC 3D capabilities onto that lab in the outpatient center. And so as more of these sophisticated procedures go there, our OEC C-arm has in many cases procedures that were only tied to fix C-arms in the past. So that's been growing significantly fast as well and we would expect those trends to continue here as we get into '25.

That's very helpful perspective. Thank you. And Jay, maybe I'm trying to piece together some of the moving parts here on the free cash flow side. You referenced in your prepared remarks inventory being a headwind here.

But as I look through the cash flows that you disclosed, it looks like inventory was actually down year-over-year. You saw a benefit in accounts payable year-over-year. So just trying to understand the factors influencing the declines in free cash flow here and why that reverses in 2025.

Yes. I think, David, the miss on 2024 as we looked at our expectations really comes down to an inventory build that occurred in the latter part of the year. Some of that was strategic inventory levels, some of it was -- we have further optimization opportunity in terms of how we manage inventory. It's an opportunity for improvement for us.

We saw some sales volatility in specific categories, which makes it tough for careful inventory planning. And so as I look at the inventory balance as we sit here today, we really do see an opportunity moving into next year. Optimizing inventory, we should see some turns improvement next year. We should see operational working capital overall improve through a lot of the lean measures that we're focused on.

But this is a -- it's an opportunity for us. I would say that some of the performance will benefit next year from the drawdown of inventory levels that are inflated at this point in time.

Got it. Thank you.

One moment for our next question. Our last question comes from Robbie Marcus with JPMorgan. Your line is open.

Oh, great. Thanks for taking the questions. Maybe first on the capital equipment market outlook. Given all the pressures we're seeing with hospitals in the U.S., how are you feeling about the outlook here? And what's the assumption on the capital market including guidance?

Yes, Robbie. As I was mentioning, I think when you take a look at the underlying procedure growth and the ability to execute on the procedure growth, particularly on the interventional products we mentioned, the need to actually leverage, obviously ultrasound and multiple points of care, we feel pretty good about it. And I think as we've done different surveys with customers and such, we think that's out there. I think obviously, there's a lot of open questions about, how certain reimbursement changes, whether it be inpatient or outpatient rates or what plays out with certain drug reimbursement programs that are out there.

But we're not seeing -- at this point in time, I would say people put the brakes on in anticipation of any type of change. I would also say that particularly in our core capabilities, which is the MR and CT and MI world Ultrasound, many of those products, even in worlds where it's a tighter CapEx environment and it's a tighter cost environment, tend to be accelerators to generate profit for the institution. And so we haven't seen a lot of signs of that. But at this point in time, we're still seeing a pretty robust capital market estimates for the U.S. and then as I mentioned for Europe, where it was a little bit slower in the second half of the year last year, where we're expecting to see somewhat of a pickup, but not to the same level we're seeing in the U.S.

Jay, what would you add?

No, I think that's right. And Robbie, we've talked in the past about the survey work that we do on a quarterly basis with our major customers. And everything that we're seeing is pointing to a continued robust environment. We'll watch very carefully how things evolve and how policy initiatives impact this, but as of now, the environment seems solid.

Great. Maybe a quick follow-up. Jay, Free cash flow was down year-over-year. What was the reason for that in '24 and how do we think about that in '25? Thanks.

Yes, the key driver of the reduction in free cash flow relates to inventory. We did have some strategic inventory build as we ended the year, and we also have some optimization opportunities in terms of how we manage that. A lot of this comes down to sales and operations planning and making sure there's an incredibly tight link between sales forecast and what you make and there's opportunity there. And so I expect this will normalize over the course of the year and we will see some improvement in turns through next year, which is the catalyst for the growth in free cash flow year-over-year.

Great. Thanks a lot.

That concludes the question-and-answer session. Please proceed with any closing remarks.

Yes. Thanks everyone for joining us today. Look forward to connecting with you in the coming days at one of our upcoming conferences. That concludes our call. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude today's presentation. You may now disconnect and have a wonderful day.