GEHC - NASDAQ

Good day, and thank you for standing by. Welcome to the GE HealthCare Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to turn the conference over to your speaker today, Carolynne Borders. Please go ahead.

Thanks, operator. Good morning, and welcome to GE HealthCare's Second Quarter 2025 Earnings Call. I'm joined by our President and CEO, Peter Arduini; and Vice President and CFO, Jay Saccaro. Our conference call remarks will include both GAAP and non-GAAP financial results. Reconciliations between GAAP and non- GAAP measures can be found in today's press release and in the presentation slides available on our website. During this call, we'll make forward-looking statements about our performance. These statements are based on how we see things today. As described in our SEC filings, actual results may differ materially due to risks and uncertainties. With that, I'll hand the call over to Peter.

Thanks, Carolynne. Good morning, and thank you all for joining today. I'm pleased to report that we delivered another solid quarter marked by continued business execution, healthy customer demand and ongoing progress with our precision care strategy. In the second quarter, we saw orders growth across all segments. Backlog remains at record levels, and strong book-to-bill reflects continued customer investment in capital equipment. For example, we're seeing this in Imaging and Advanced Visualization Solutions for outpatient cardiac and orthopedic settings. We're also observing healthy procedure volumes globally. Revenue growth in the period was driven by strength in the U.S. and EMEA regions. Looking at commercial execution, I'd like to highlight significant wins and long-term enterprise deals that demonstrate our continued momentum. During the second quarter, in the U.S., we secured our largest order ever of Omni Legend PET/CT systems. We also entered a strategic collaboration with Ascension, valued up to $90 million in the first year. We broadened our long-term relationship with one of the largest providers in Mexico, and secured a $250 million 5-year collaboration in Europe. These strategic collaborations leverage our D3 strategy, which is about bringing to market world-class solutions with smart devices and drugs, enabling disease state solutions with digital and AI. Success in our global strategy is evidenced by the adoption of new product introductions, which generated over 50% of our sales. This demonstrates the success of our R&D investments. Our commercial teams go to market with a solutions mindset, clinical expertise and deep product domain. All of this enables us to better serve patient needs and help our customers create sustainable long-term growth. In the quarter, we delivered strong EPS despite a mixed macroeconomic landscape. Overall, we're optimistic given customer investment, our operational execution and increasing clarity in the global trade landscape. Now I'll turn the call over to Jay to provide more details on the quarter. Jay?

Thanks, Pete. Let's start with our financial performance on Slide 4. We reported revenues of $5 billion in the quarter with organic growth of 2% at the high end of our expected range. On a reported basis, service revenue grew 7%, driven by global growth in new and existing customer agreements, including enterprise deals. Product revenue was up 2%. We delivered healthy organic orders growth up 3% year-over-year with first half order growth of 7%. Book-to-bill for the quarter was strong at 1.07x, and we exited the quarter with a record backlog of $21.3 billion. Backlog was up $2.2 billion year-over-year and was up $700 million sequentially. Adjusted EBIT margin in the quarter was 14.6%, down 80 basis points year-over-year due to tariff impacts. This was partially offset by lean actions and volume. We continued to execute on our optimization initiatives in line with our medium-term profitability goals. We delivered strong adjusted EPS in the quarter of $1.06 per share, up 6% year-over-year. This included approximately $0.08 of impact from tariffs. And improved tax rate contributed $0.07 of benefit year-over-year. And we also saw lower interest expense. Lastly, free cash flow of $7 million in the quarter was up $189 million versus the prior year. Taking a closer look at margin performance in the second quarter on Slide 5. Adjusted gross margin declined 180 basis points year- over-year. This was primarily due to tariff expenses and new product investments. Given the tariff dynamics, we thought it would be helpful to also look at performance in the first half of 2025. Adjusted gross margin for the first half of the year decreased 50 basis points, and adjusted EBIT margin decreased 20 basis points, including the impact of tariffs. This was partially offset by productivity and increased volume. We remain focused on what's in our control, including driving productivity initiatives and implementing tariff mitigation actions. Let's move on to segment performance, starting with Imaging on Slide 6. Organic revenue in the quarter was up 1% versus the prior year. This was driven by strong execution in EMEA and the U.S., largely offset by China headwinds. Segment EBIT margin declined 110 basis points year-over-year, driven by tariff pressure. This was partially offset by productivity improvements. Excluding tariffs, imaging margin would have increased year-over-year and sequentially. Overall capital equipment demand and procedure growth remained healthy as customers invest in imaging innovation. Turning to Advanced Visualization Solutions on Slide 7. Organic revenue was up 2% year-over-year with continued strong performance in the U.S. as customers invest in AI-enhanced ultrasound solutions across multiple care settings. Segment EBIT margin increased 20 basis points year-over-year, driven by productivity and volume. As we look ahead, we expect continued strength in growth markets driven by product launches across the portfolio to accelerate growth and recurring revenue. Turning to Patient Care Solutions on Slide 8. Organic revenue was flat year-over-year. Growth in monitoring solutions was offset by life support solutions, which faced a difficult year-over-year comparison. This was largely due to the strong backlog conversion in the second quarter of last year. Segment EBIT margin declined 240 basis points, primarily driven by inflation and unfavorable portfolio mix. This was partially offset by productivity actions. We remain focused on new product introductions including monitoring, anesthesia and labor delivery solutions, which we expect to drive growth and improve margin over time. Moving to Pharmaceutical Diagnostics on Slide 9. We delivered another quarter of solid growth at 5% organically. This was versus a difficult comparison in the second quarter of 2024 when organic sales grew 14%. EBIT margin declined 200 basis points year-over-year due to planned U.S. radiopharmaceutical investments, Nihon Medi-Physics and FX headwinds, which were partially offset by price. We remain confident in our growth outlook for PDx, given continued strength in global imaging procedures that drive the need for imaging agents and the consistent growth of radiopharmaceuticals. Let's look at cash performance on Slide 10. We delivered free cash flow of $7 million, up $189 million year-over-year primarily due to timing. The prior year period reflects our annual employee compensation payments that were paid in the second quarter, but now they are paid in the first quarter. We continue to strategically manage our working capital and monitor inventory cycle times. Turning to capital allocation. Our priorities remain intact. In April, we announced a board-authorized share repurchase program of $1 billion. In the second quarter, we repurchased approximately $100 million of our shares, reflecting our view of strong long-term growth opportunities. We also issued $1.5 billion in bonds to refinance our November 2025 debt maturity. Additionally, we're focused on investing in organic growth, maintaining our dividend and pursuing strategic M&A that aligns with our portfolio strategy. Turning to Slide 11 on tariffs. As Pete mentioned, we're pleased that the global tariff environment has become clearer since the time of our last earnings call. Today, we're providing an updated adjusted EPS walk that reflects our best view of the gross and net tariff impact versus our prior guidance. We've made significant progress with mitigating actions and continue to implement these initiatives across the globe. As outlined on the slide, we've continued to make prudent assumptions regarding the bilateral U.S. and China tariffs, as well as announced tariffs for the EU, Mexico, Canada and Japan. In essence, as we did last quarter, we're only assuming the current agreed upon tariffs. In April, we guided to an adjusted EPS range of $3.90 to $4.10, which reflected $0.85 of total net tariff impact post the significant remediation work performed by our teams. With the easing of tariffs, we expect to realize an improvement of approximately $0.40 from the prior full year adjusted EPS guidance. We also expect a $0.13 improvement due to commercial execution, tax and interest. The total net tariff impact in our adjusted EPS guidance for 2025 is now $0.45. In the second quarter, the impact from tariffs was less than $50 million. We will continue to drive mitigation actions into 2026 and beyond. As a result, in 2026, we expect less than $0.45 of adjusted EPS impacts from tariffs. Now let's turn to our full outlook on Slide 12. For the full year 2025 reflective of continued positive customer sentiment in many of the global markets we serve and continued business momentum, we're raising our organic revenue growth guidance to approximately 3%. Based on where rates are today, we expect FX to be a 50 basis point tailwind to revenue. For adjusted EBIT margin, we are now forecasting a range of 15.2% to 15.4% for the full year, compared to our previous guidance of 14.2% to 14.4%. Our adjusted effective tax rate is expected to be in the range of 20% to 21% for the full year compared to a range of 21% to 22% in our prior guidance. This compares favorably to 2024 by 80 to 180 basis points, primarily due to the utilization of tax attributes post spin. For adjusted EPS, we now expect between $4.43 and $4.63 for the full year. This is up versus our prior estimate of $3.90 to $4.10 per share. We now expect to deliver free cash flow of at least $1.4 billion for the full year versus our prior expectation of at least $1.2 billion. 2025 will be impacted by tariff payments as previously discussed. To provide additional insight. For the third quarter of 2025, we currently anticipate year-over-year organic revenue growth for the quarter to be in the range of 2% to 3%. And we expect adjusted EBITDA to decline high single digits year-over-year due to tariff impacts. With that, I'll turn the call back over to Pete. Pete?

Thanks, Jay. As you know, our innovation pipeline is focused on delivering solutions that provide productivity, efficiency and improved outcomes along the patient journey and across the enterprise. A great example of this is the fast-growing sector of nuclear medicine where we play a significant role enabling better care for multiple diseases. In the first half of the year, orders grew strong double digits across our proprietary diagnostic imaging agents and leading molecular imaging solutions made up of AI-enabled equipment and digital tools. PET imaging is a core component of nuclear medicine and a cornerstone to precision care. Recently, one of the largest GPOs reported that PET is expected to outpace other modalities in the coming years in part due to an aging population and the rise of novel therapeutics. As a result, our customers are looking to GE HealthCare as the partner to help them increase capacity and build infrastructure to better manage their patient flow. We believe our comprehensive offering of nuclear medicine solutions across multiple care areas puts us at an advantage. So let me explain why. In Alzheimer's, momentum began 2 years ago with the FDA approval of the first amyloid-targeting therapies. Since then, we acquired MIM Software and have integrated differentiating amyloid assessment and therapy monitoring tools into our devices. We continue to see demand for Vizamyl, our diagnostic PET amyloid agent. And just last month, the FDA updated Vizamyl's label to allow for quantification of amyloid and patient selection for treatment. It also removes limitations for use for monitoring therapy response and predicting development of dementia. In oncology, updated guidelines are driving increased use of Cerianna scans for certain patients with metastatic breast cancer. Cerianna revenues have increased significantly year-over-year. And meanwhile, MIM continues to be a differentiator for us to drive efficiencies and complex workflows like theranostics, one of the fastest-growing areas of nuclear medicine. We're continuing to advance the commercial ramp-up for Flyrcado. It's now covered by all 7 Medicare administrative contractors and included on cardiac PET policies and more than half of the nation's commercially insured population. At the 2025 Society of Nuclear Medicine and Molecular Imaging Annual Meeting, a clinical abstract featuring data from flurpiridaz, the active agent in Flyrcado, received the Cardiology Abstract of the Year award. As the world looks to address these devastating diseases, we're confident that our investments thus far and in the future will pay off in the form of real patient impact and customer interest to grow their service lines. Our nuclear medicine approach with smart devices and a portfolio of drugs enabled by digital and AI is a great example of D3 in action. As a partner, we're not only helping customers define the future, but delivering solutions at a time when they're ready to embrace it. As we conclude the call, we're pleased with the orders and revenue performance in the second quarter and in the first half of the year, which has been supported by strong customer demand. We continue leading in AI in health care, topping the FDA's AI-enabled medical device list for the fourth year running with 100 authorizations. We help drive clinical confidence, improve productivity for customers and fuel our growth. We're also on track to deliver progress on our innovation pipeline with many of our higher-margin product launches planned in the second half of this year and into 2026. Our capital allocation strategy primarily focused on organic and inorganic investment while also returning cash to shareholders through dividend and share repurchases demonstrates our financial flexibility. We continue to drive long-term value through our strategic priorities. With healthy end markets, solid operating execution and a global trade environment that's becoming more clear, we're pleased to be in a position to raise our 2025 guidance today. I want to thank our teams for another strong quarter of execution and for their relentless focus to deliver for patients and customers globally. Now let's open up the call for questions.

Thank you, Peter. [Operator Instructions] Operator, can you please open the line?

[Operator Instructions] Our first question comes from Vijay Kumar with Evercore ISI.

Congrats on a nice execution here. Maybe my first question here on the capital environment. Our math suggests capital book-to-bill was 1.13, another double-digit print here, really strong trends in that first half. Maybe can you talk about capital environment across different regions, U.S., Europe and whether China has bottomed?

Vijay, thanks for the question. Yes, I mean, our orders, obviously, in the first half were about 7% when you take a look across the two. And when we take a look at the different markets around the world, I'll kind of go around the horn. And I'd say U.S., one of the things we've talked about has an aging installed base, particularly in imaging, probably older than many around the world, some of that with the pauses that took place during COVID. So there is a robust replacement cycle that's going on. I think that's one aspect of the U.S. The other aspect is many of the new clinical products that are coming out, either on the drug or the device side, I mean, if you think of electrophysiology and what's happening in that boom driving the need for advanced cath labs as an example. Or what's happening relative to certain pharmaceuticals and the need for more MR follow-up imaging. I mean, those are just examples that are driving, and we see those trends to be robust. The other, which is a big obvious one, is the need for productivity. It's difficult for U.S. hospitals to get staffed. And so equipment that moves the patient swiftly through the institution with a high-quality diagnosis is a very important asset. And hence, when we look at some of the surveys that come out, our most recent capital survey still has a rather a bullish view on spending and committing money towards our equipment. We haven't seen any significant pullbacks, I'd say, in any of the data at this point in time, even from some of the most recent bills that were passed in Washington. So stay tuned on that. Obviously, some of those won't come into effect until maybe '26, but we aren't seeing anything at this point in time. Europe, we're actually seeing some good growth. I would say last year, I had mentioned that with some government changes, there were positives, most notably like in the U.K. and France. We're actually seeing recovery in geographies there from a capital decision standpoint, U.K., Germany. So I think that plays out. Obviously, we'll have to see how the final negotiations take place with some of the tariff bills, does that affect things. But at this point, we're not seeing a lot. I think emerging markets, countries like Indonesia, there's a lot of activity going on in a positive way for us. I know as well as other players. In Latin America, we're seeing strong. I'd say China, we're seeing activity pick up, but the market recovery is taking a little bit longer. And so our focus there is, is that it's probably still going to take a little bit more time to evolve. We think the longer-term outlook will be positive just based on the size of the country. But we have, I'd still say, a paced view of how that market will recover. I don't know, Jay, anything you'd add to that?

Yes, sure. Vijay, just as it relates to your specific comment on equipment book-to-bill, we reported 1.07x. By the way, this was after 1.09x in the first quarter and the same number in the fourth quarter. So we're really pleased with this book-to-bill performance, the strength of the markets that we're experiencing right now. As we look at the -- as you know, with that calculation, we incorporate PDx and service revenue at 1:1. So to your point, equipment book-to-bill in all three of those quarters was well above 1.1. So I think it's really a good backdrop as we look to accelerate the business over the midterm.

That's helpful comments here. And maybe one follow-up, if I may. Your tariff assumptions, you're mitigating half the impact here in fiscal '25. Noted that fiscal '26 impact to be lesser than '25. Maybe elaborate on the actions the company is taking or any of these actions or things that you would call as causing regret if rates were to change, come down. And based on all that you know right now, do we have visibility into high singles EPS for fiscal '26?

Great. Thanks, Vijay. Overall, we're very pleased with the work that the organization is undertaking on tariffs. It's been daily work across the board and a lot of progress over the last several months. As we think about the actions, I would bucket them in two pieces. The first set are no-regrets moves that we immediately implemented. And then the second are longer lead time items where we waited a bit. So let's talk about each piece. In the first bucket, there's things like USMCA exemptions, bonded logistics, simple supplier changes where we have dual sourcing in place. And so all of those activities are things that we benefited from immediately and we will likely leave in place for the foreseeable future. The second piece, though, relates to the broader restructuring of the supply chain. And so as we gain clarity on how the final tariff deals look, we're starting to invest in some more substantive changes. For example, shifting manufacturing to more local for local or working with our supply base to move capacity within their network to more tariff-friendly geographies. Those items are longer lead time items. They do require some investment. But from our standpoint, you don't want to do those kinds of moves until you have clarity on final trade deals. And so as we've seen these trade deals shape up, we're now in a position to begin to execute on some of these, which we'll do in the second half of the year and then those will benefit 2026. To your point, it's really important that we have 2026 below 2025 impact. That's a clear area of focus for us as we look to mitigate these things. As far as EPS growth for next year, no comment at this stage. We'll work through that in the coming months as we put together our plans for 2026. Pete, anything to add?

Yes. I would just say, Vijay, I mean, we've been really all over this one. I think it's going to set us up well going into '26, but also into '27. Sometimes these events also cause you to really take a deep look at your businesses. And so we're doing a lot of housecleaning as well, configurations, things of that nature. I'll give you an example, our [ vascular ] business. We had a product that's used in orthopedics that was only made in China. We have the capability to make it in Utah. We'll make them in both locations. And so we can better serve the customers and probably the turnaround time when a customer wants one, we've cut the lead time probably in half with that change. Ultrasound probes, we make them in 4 different places around the world. Sometimes that was led by one sole decision, maybe cost or something. As we see where these rates are, we can actually titrate where we want to make specific ones. So I would say our customer service out of this as well as resolving this, both of those are going to improve as we just get smarter, as we think about the geo landscape of where we want to make and how we provide customer service and support, but also what the costs are associated with them.

Our next question comes from Joanne Wuensch with Citi.

I wanted to spend a minute or two talking about the order book. It looks like the order growth decelerated versus the first quarter. Can you help us understand the drivers? Were there any pull forwards in the first quarter? Or is this a better way to look at this more on a year-over-year book-to-bill type of order book?

Sure. As Pete mentioned earlier, Joanne, we're really pleased with the health of the customer capital environment. We think it's a robust backdrop. Surveys confirm that, and our performance confirms it as well. Second quarter order growth of 3% was certainly below Q1, but we knew that was going to happen. Book-to-bill was healthy, as I mentioned moments ago, and we had a record backlog over $21 billion, which really sets us up well heading into next year. We did expect some moderation, as I said. And it's important to look at this not on a quarter basis, but on a period a little bit more extended than that. If you look at the first half orders growth, we're at 7%. I think if you look at the last 9 months of orders, we're at 7% or 6%. If you look at the last year, we're at mid-single-digit growth. So when we talk about this midterm aspiration of driving mid-single-digit growth, certainly, the performance that we've seen on a 3, 6, 9, 12 basis all supports that. We're seeing strength in U.S., EMEA emerging markets. Customers are committed to CapEx. So I wouldn't overanalyze the deceleration from Q1 to Q2. We did have a large customer order in the first quarter that did help the order growth a little bit. But overall, we're encouraged by the environment.

Yes. And just the only thing I would add, Joanne, is that with capital equipment, it's always going to be a little bit lumpy by quarter. And the more that we are successful with enterprise deals where you get a large commitment, we have POs cut in a given quarter for the next 18, 24 months of deliveries, we're going to put those in right then. We're obviously not going to spread them out or such and so that's going to create lumpiness. And so as Jay said, the retrospective look is super important there. But we feel very good about the position where we're in, and obviously, with new products coming after 2, 3 years of investment that we would expect that to accelerate here in future quarters.

Our next question comes from Larry Biegelsen with Wells Fargo.

Pete, I wanted to ask about the progress with Flyrcado. What feedback are you hearing from customers? What are some of the barriers to adoption that you're addressing? And how are you feeling about the $30 million in guidance for 2025? And I did have one follow-up.

Okay. Larry, thanks for the question. Look, I'll start with the $30 million. I mean, we feel good about it. Let me tell you a little bit. It's probably less about the $30 million and more of the composition of it that positions us for the next 2, 3, 4 years in the ramp. But look, we're pleased with the progress. And some of the first things are is expanding the manufacturing footprint. Keep in mind, this is a product that we make the API, we make the chemistry labs. But the real actual manufacturing happens at CMOs, contract manufacturing organizations, close to the site of delivery. We set a goal that we need to have about 25 this year to meet those numbers. We're roughly at about 18. So we're actually on track or slightly ahead of where we need to be. I think that will help us reach over 90% of the PET imaging sites that we've targeted here by the end of the year. So that's an important characteristic. The other one is can you pay for it? I'd mentioned earlier, the MACs, all 7 in the U.S. the Medicare administrators are covering, and now we have over 65% of the commercially insured beneficiaries covering it. I think we'll pick up the other substantial covered lives here in the not-too-distant future. So from a reimbursement standpoint, feel good that we're on track to that. Building the partnerships and the structures we've always talked about is probably one of the most critical things. It's this training program with the physicians, the techs, clinical applications. Even the feedback on reimbursement and billing as this ramps up, that cycle time, honestly, is one of the most critical things. And today, kind of from when we engage a customer until they get reimbursement and they get the cycle working to pay, takes about 90 days. The reality of it is we need to work on it, and we have our lean processes we're looking through with customers how we get that down to 40 or 30 days? When you get to that level of you engage a customer and 30 days later they can be up and running and billing, that's when the real velocity takes us. We don't need to reach that velocity to get to the targets we have for this year, but we need that velocity to grow these things into 100-plus millions of dollars of growth down the road. So that's the work. The feedback has been fantastic. Hands down when someone sees the image quality on a product like this versus any of the predicate products out there, particularly on obese patients or older patients, it's really second to none. So that's been great feedback that we've been receiving on it overall.

Super helpful. Jay, the gross margin came in, in line with our expectations, but it was still down about 180 basis points year-over-year. It looks like tariffs were about an 80 to 90 basis point headwind in the quarter. What are the other factors that impacted the gross margin in the quarter? And how should we think about the gross margin for the rest of the year?

Sure. In the second quarter, our gross margin did decline 180 basis points year-over-year, as you say. And I'd point to a few drivers on that. The tariffs are about half of the impact. Tariffs came in a little less than $50 million in the quarter, and that was clearly an impact to gross margin. And then there's a couple of other elements in play. And one of them is a bit of reclassification -- I shouldn't say reclassification, but good news. We had $25 million shift from R&D to cost of goods sold. If we look at our total engineering and product spending at the company, about 70% of it sits within R&D and about 30% sits within cost of goods sold. Of the 30%, it's made up of sustaining engineering, but also programs that pass technical feasibility and are close to launch. And what happened in the second quarter is we had about 50 basis points of impact from programs that shifted from pre-technical feasibility to technical feasibility as they approach the launch date. It's a really nice dynamic. Now overall, total program and product spending was basically flat in the quarter. So R&D was down 8%, but this dynamic really explains that reduction. We kind of look at this as a very good piece of news from our standpoint. As we think about the continued performance on the pipeline and driving that forward, it was just -- it was a great performance in the quarter. And so that did, in fact, negatively impact gross margin by about 50 basis points. The other thing I would say is we had about 50 basis points of impact from -- in our service business. What happened here is we had some negative mix, given the start-up costs for new multi-vendor service contracts as part of large enterprise wins that we have in place. When you take on the service on day 1, the margin is a little bit lower. And as you convert some of those accounts to more GE HealthCare products, which is really the design, the service margin improves. So in the second quarter, that was a bit of a headwind. But again, as I look at the long-term contours of the business, I think it is really good news. Pete, I don't know if you'd add anything to this?

No, I think you covered it, Jay. I think the main thing is when you look at engineering-based type programs in R&D, we're spending a significant amount of funds. We're making good progress with them. The advancements of some of the key programs we spoke about in MR and CT and MI are the reasons that this conversion moving forward. We'll be talking about some of these and launches in future months and quarters. So that's all great, great, exciting news. And I think to Jay's point on the service side, the two sides of this. As these enterprise deals evolve, the actual margins increase with them over time because of this phenomena. And also as we add some of these new products into the contracts that have more AI, have more digital capabilities to capture rate on service, the price to serve actually goes up. And so from a standpoint of total margin dollars contributing, that also has a pretty significant effect. The vitality of the products we're selling with the service contracts. So feel good about gross margin. As you guys know, it's a huge focus for us and something we're going to continue to drive.

Our next question comes from Robbie Marcus with JPMorgan.

Two for me. Wanted to start off with China, what you saw in the quarter, what the environment is like, how you're thinking about it for the rest of the year? And if there's an ex-China growth rate you're willing to give on the rest of the business?

Robbie, let me start and then maybe I'll turn it over to Jay to give a little bit more details as well. Look, in China, I'd say we're seeing activity pick up. That being said, the velocity, obviously, the activity is picking up. But the pace of the recovery itself, meaning actual POs and people buying is taking a little bit longer. So seeing some uptick in activity, but things are taking a little longer. Tender cycles, in particular, at the provincial level have kind of extended and just taking a little bit longer to get done. And so I think as we look at the back half of the year, our expectations is that's going to continue. That idea of bid to award is still going to be a little bit longer. So we've reflected a slightly more conservative back half for China to our total company guidance. Obviously, if that does better, we'll do better, but that's kind of how we've taken it. I'd also say, we're really excited about we brought in a new leader into our China team, Will Song, who has significant multinational experience, local experience, a lot of deep clinical channel work and is bringing some really interesting ideas for us that I think are going to obviously pay off for the future. And so we've got a lot of new launches that are going to be coming around the world, but they're really going to be consequential as well in China in the next 18, 24 months as well. Some of these higher-end products that won't be part of different tenders, they'll stand alone. So we're excited about those as well. Jay, what would you add here?

Well, the first half in China did come in better than our expectations, and I think really what it came down to in the second quarter, we had better-than-expected backlog conversion. We are expecting and modeling some softness in the second half versus the first half. Really, this is an unpredictable market as we've seen and we're sort of reflecting a cautious view as we watch continued progress in tenders and awards. Our 3% outlook for the total company has a range of outcomes for China. So we're not counting on any meaningful step-up at this point, and we're kind of having that muted outlook for China as we consider the second half of the year. But as we look at this overall, the market is still large and we still believe it will be an important growth driver going forward.

Great. Jay, that's a perfect segue into my follow-up question. You had a fairly in-line second quarter versus the Street on organic sales growth. You raised the 2025 forecast a bit. How should we think about the cadence for the rest of the year? China is going down a little bit in that guide? What gives you the confidence in moving it higher and what's driving it?

Yes. I think, Robbie, we feel very good about the second half and full year guidance for a couple of reasons. And a lot of this relates to the strong performance that we've seen in the last several quarters on order growth, on book-to-bill and on backlog. All of these things are at, in some cases, record levels but we've seen really robust performance overall. And so as we think about the cadence, first half organic revenue about 3%. The third quarter guidance, we've guided to 2% to 3%. The fourth quarter is typically our seasonally strongest quarter. We're expecting a little bit faster than the 2% to 3% in the 3% to 4% range as we look at it. And so overall, I think it's a really nice story. And it sets up well as we look for really building on that acceleration into next year. The one thing I will say is we do a lot of work in terms of looking at when deals are going to be delivered. And so a lot of our work in terms of secured rate revenue analysis, allows us to forecast reasonably well the future quarters. And so I would say that we're increasingly confident and it sits on the back of this robust capital environment that we've seen, and that we've been able to capitalize on over the last several months. I'll remind you, some of those deals from the first quarter, some of the orders related to imaging and other equipment, they take 6, 9, 12 or even longer in terms of delivery dates. So that supports this acceleration that we're seeing in the second half.

Our next question comes from David Roman with Goldman Sachs.

Maybe we could start with the PDx business. And Pete, I think in your prepared remarks within Imaging, you talked about increased orders for Omni Legend. Can you maybe help us understand how the expectations around Flyrcado may be impacting your ability to see benefits across the entirety of the PET/CT and nuclear imaging continuum? And to what extent that's kind of factored into your thinking, both for the balance of this year as well as the targets you set out last fall?

Yes, Dave, thanks for the question. Yes, in the prepared remarks, I talked about this double-digit growth we're seeing in all the products that are associated with nuclear medicine, which are radiopharmaceuticals, the digital tools and the equipment themselves, both SPECT and PET systems. So we're seeing a good amount of pull. How much we delineate it? Is it tied to a new tracer or such is not that easy to delineate. But in general, the energy that I'd say our customers are demonstrating as they look at this is pretty strong. I think it starts with -- if you look at the therapeutic pipeline beyond PSMA into other types of tumors, into cardiology capabilities like we're going to address with Flyrcado what's happening in neuro, it's hard to not take a look at and say nuclear medicine, particularly PET. The right types of systems are going to continue to grow significantly. I mean, we had some bigger orders within the quarter. For the most part, we'll probably play a significant role in cardiac PET imaging in the future. But I think all of these platforms that customers are looking at, because of this widespread approach, is there. Relative to the guidance we gave last year, I don't think we've really contemplated a lot of that in there what the uptake could be. But obviously, as we get into later in the year and we start taking a look at -- as we get closer to giving our '26 guidance in the beginning of next year, that's going to be a critical part for us. But I'm quite bullish about not just what the tracers can do, but the need for added equipment. In today's world, there's enough PET systems to do the imaging that's out there. In tomorrow's world with the growth trajectories of some of the therapeutics and the diagnostics needed, obviously there will be needed more equipment in the marketplace. And so our timing of a new full-body PET, a next-generation, multi-head camera for SPECT, which we really are the only one in the industry that has all of those capabilities, we're super excited about what that can mean.

And then, Jay, I appreciate your comments in response to Robbie's question on the 6 to 9 months to see revenue impact. But if you look at the totality of leading indicators here, book-to-bill, I think your remaining performance obligations grew for the first time in several quarters. You're talking about record backlog. Obviously, that's a good underlying barometer for the business. But help us think about an algorithm when the book-to-bill turns into bill and how we should think -- how we should contextualize the back half revenue guidance against that algorithm?

Sure. I think our business has both flow- and project-based sales, okay? The purest of flow is PDx or our service business, that's sort of straight flow-through. But then we have other flow products like ultrasound. And so for orders related to ultrasound, they typically convert 1 to 2 quarters after the order is booked, turns into sales. But the biggest part of the equipment portfolio really is more project-based and that's our Imaging business. And think about this like, for example, if you have an imaging project in California, there are all sorts of regulations and licenses required to get that approved, earthquake code and so on. And so our Imaging business has typically a 9- to 12-month lead time from order to sale. And so for project-based, it's probably better to use 12-month trailing as you look at orders to get a sense of future sales growth. And so what I would say is orders can be lumpy, but I think over time the sales can be smooth as those things emerge into the backlog and then come out of the backlog. And so what's happening in our second half is you see that 2% to 3% in the third quarter with a little bit of an uptick in the fourth quarter. That uptick is generated by some of the orders that we saw in Q4 '24 and Q1 '25 as they start to convert into sales from the backlog. So again, to your point, very robust backdrop. Record backlog, tremendous performance on a 3-quarter basis as we look at both book- to-bill and order growth. So we feel like we're well positioned, and that's why we were able to raise guidance for the full year.

And very high-quality backlog as well as we've really taken a hard look at this. I mean, I think that's the other aspect of it is real high- quality backlog.

Our next question comes from Matt Taylor with Jefferies.

Jay, you teased a couple of times on the call with some elevation to the innovation pipeline and higher-value, higher-margin products that are coming end of this year and in next year. I was wondering if you could kind of double-click on that and highlight some of the key products that you're expecting to launch and the kind of impact that we could expect from them in '26?

Yes, Matt, thanks. I mean, I'll give an overview. I mean, look, this has been a key feature of what we've talked about of our strategy for how do we evolve the company to be a consistent mid-single-digit grower and even playing to the higher end of that range at certain windows of time -- mid-single-digit grower and how we can move to the higher end of that range. A big part of this is obviously making sure that we cover any product gaps, but also be able to deliver on differentiated products. And we've been forthright to say we've had gaps within our portfolio versus certain competitors in the marketplace. And what I'm super excited about is that in the next 18 months we really fill all of those holes, and in some cases, I think we outperform what's in the marketplace. That would be a first for us really in the last decade. And that's really a catalyst moment for this company in many cases. Jay talked about the transition that's going on in the innovation work, meaning milestones are being hit. I think the teams are doing a very good job and have been doing a good job, both regulatory, R&D, manufacturing to move things along. But if you think about AVS, we have a full refresh in our ultrasound platform that's coming out, work that's going on in cardiovascular and women's health care. And with artificial intelligence, the integration on one of these devices now that allows a lower capable user to do things they couldn't do in the past or automate so many steps in the use of the system and puts out image quality on ultrasound that rivals in some cases modalities like CT in the past, things like that are going to be significant breakthroughs across the board, in handheld as well. Vascular, look, we've been somewhat of a laggard in this space. I think we have a really competent cath lab that's out there now. We're winning share soon to be a vascular room, soon to actually have neurovascular, all of that is business that we don't really even play in today. And so more to come on that. In our Imaging business, next-generation MR, the sealed products that we're working on, significant work on the UI and productivity for customers. And also, those changes also changed the profitability of many of those modalities. And again, that's been an important message that we've delivered. CT, obviously, Photon Counting. We're super excited about our advancements, team has done a tremendous job there. And I would say, look, in all due respect to the Photon Counting systems that are out there, they have advanced science and capability but they haven't transformed it. We think we have a platform that brings things to clinical outcomes that the current products don't have. We'll see how that ultimately plays out, but that's the reason that we're focused on our silicon-based system. Full body PET. We haven't had a system. We're going to be talking more about that in the near future. That's going to be critical on the oncology care. And having a system that can change the amount of dose a patient receives, that can ultimately play into maybe different approaches to screening and evaluation. We're going to be a company that can play into that. PCS and monitoring. And then a ton of AI. I mean, I mentioned relative to what we're communicating in the marketplace the most FDA-approved products. We have this product base called CareIntellect. You're going to hear us bring it out in different care areas, oncology, different areas around what we've traditionally called Command Center. So a lot of good progress there. And then obviously, PDx, we talk about Flyrcado a lot. All of those molecules as well, remind you, now have reimbursement in the United States where they fundamentally didn't before. So I went on a little long, but I wanted to state this, I'm super excited about this portfolio. I didn't even mention mammography, which we have not invested heavily in the past. We are now, and I think we're going to have some differentiated products. So you take that and then you say, you gain share, hold share, expand your market growth of those, they all need service contracts as well. Most of those service contracts will be at higher value, higher margin than older products. So that mix of things are what we're super excited about. As we launch those, then our opportunity to how to bring those together and bring this D3 strategy together really come alive. So more to come. I think it's going to be an exciting RSNA for us this year and some of the other clinical shows that we have in the fall and into the beginning of '26.

Great. Maybe I could sneak in just a follow-up on capital allocation. And just wanted any updated views on organic and especially inorganic investments.

Jay, do you want to take that?

Yes, sure. So our capital allocation approach is really designed to accelerate profitable growth. And it starts with the internal investments and the organic investments that we're making. Pete talked extensively about the pipeline, which we're so excited about. But that's been unlocked by 17% R&D growth in '23, 9% in 2024. So really robust investment internally. And then the next area is M&A. We're really excited about the M&A pipeline. There's a lot of interesting opportunities for us. And what I would say is there are a lot of acquisitions that make a ton of sense for us. The MIM acquisition is going extremely well, and it's a really nice add-on to the portfolio that we have in place. Now as far as other items related to capital allocation, we have paid down $1 billion -- $1.5 billion in debt since the spin-off. So we've done a lot of work there. We have a small dividend, which has been growing. And then in the quarter, we did opportunistically repurchase $100 million in shares. We saw a really big dislocation in the share price relative to our intrinsic value calculations, and we took the opportunity to opportunistically repurchase shares in the quarter. But our priorities remain investment in the business and also this M&A pipeline. Pete, anything to add on M&A?

Just the fact that I think everyone knows we've been pretty forward leaning to say in our capital allocation approach, as you mentioned, organic and inorganic are top of the list. Look, we're seeing probably one of the most robust pipelines of opportunities since I joined the company and ones that would be very strong strategic fits. And accretive top line, accretive bottom line, obviously those are the sweet spot focus areas. In the current environment, we're seeing dislocations. I mean we're seeing some values that probably are too high, but we're also seeing some that are highly attractive and have the capabilities that would fit into it. So this opens up some interesting opportunities for us, and we're building a really strong M&A team and integration capabilities and looking forward to obviously leveraging that if the right deals here come along for us.

Our next question comes from Rick Wise with Stifel.

Let me just quickly follow up on some of your comments earlier, Pete, about Photon Counting CT. We've, for a variety of reasons, talked to a bunch of docs just in the last week or so who saw your system at RSNA. They're excited about it. They're excited about the potential for improved resolution. Can you just update us, at the Investor Day you said that you expected, if I recall correctly, second half '25 filing. Is that on track? Just give us a sense of potential possible approval time lines? And just touch on how quickly this could turn into a big deal for you? Just the reaction from the doctors it feels like it's going to be a big deal.

Rick, thanks for the question. So look, it's obviously a gap right now. There's a competitor in the marketplace that's done a good job getting a product out, getting customers to understand what the broader technology actually is. And I think there's three things about this technology we're excited about. Increased spatial resolution, seeing greater detail. I think you're seeing that from the products that are out in the marketplace. Opportunity for lower radiation dose, which is always good. I think you're seeing that out there. And the third in the marketplace that you're not seeing is this whole broader spectral resolution capability. Being able to see at a tissue level what's actually happening. And we think that third attribute, which our system will bring at greater capabilities than the current technologies that are in the marketplace is why people are excited. And that means that you get into a scenario and a certain type of procedure you can actually alter the case of the therapy. You're not just getting a better picture or maybe a little lower dose or you're doing something, you're actually having more data to make a decision that could change the outcome for a patient, that could save their life. It also could be an economic outcome for the user about do you use this drug or you use that versus something else. That's the difference here that we're super excited about. To your point, regulatory approval, we're on track here for the second half. Stand by. When those things happen, we'll communicate. Our launch intentions are still on track. And fundamentally, all of the communicated that we had laid out back at Investor Day, nothing has changed at this point in time. We do think this is going to be a really important launch for us, obviously. CT tends to be the workforce in so many institutions around the world. And the more this can become even more of a Swiss Army knife meaning it can actually help make broader patient decisions, we think that's going to be super exciting. So anyhow, that's our current update on Photon Counting. Things are coming along well. And I think, again, second half more news to come to the Street.

Got you. And just a quick last one. You announced a new leader for Patient Care Solutions in April. I think they started in May. I mean, clearly, work needs to be done. What gets the revenues growing again? What gets the margin story stabilized? You said improved growth in margins over time in your commentary, help us just better understand what's next?

Rick, thanks for the questions. And maybe I'll start and then Jay can comment. Yes, we're really excited about how Jeannette Bankes has joined us who's an industry veteran, who's had experience in many different industries, long, great career at Boston Scientific. Already having a significant impact in a very short period of time. And I just think her eye looking at the business, the team, building the capabilities to be successful, she's already all over it. I look at this business area and say of any area that can be positively disrupted by artificial intelligence and capabilities that will transform the growth of it, this is the place. So if you look at our anesthesia business, we've just launched a new platform there that will start driving more growth and margin accretion. It's a more profitable platform. We just literally launched it and are in the midst of that. But our monitoring systems capability, updating all of that, that will be really completed here within the next 18 to 24 months. There is a significant amount of AI enhancements to change how those systems actually work. Our diagnostic cardiology business and our MIC business, which is our prenatal and baby business, also heavily influenced and potentially positively disrupted with AI. It's also where we bring to market some of these CareIntellect products. So when you step back from it, it is about a refresh of products in critical care that actually bring higher margins based on a new design and approach. New feature sets brought because of digital. And then I would say this is a really interesting area, too, that we can bring tuck-in products that we string together to bring departmental solutions. And so we'll talk more about that, I'd say, as we get into the fall, but we have some really interesting things there to go. So thanks again for your question.

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

Yes. I'd just like to say, again, thanks, everyone, for your interest in joining us today. We look forward to connecting with many of you on calls or at upcoming conferences in the future. That concludes our call. Thank you.