Operator:

Good afternoon, and welcome to the Hologic's Third Quarter Fiscal 2024 Earnings Conference Call. My name is Cynthia, and I am your operator for today's call. Today's conference is being recorded. All lines have been placed on mute. I would now like to introduce Ryan Simon, Vice President, Investor Relations to begin the call. Please go ahead.

Stephen MacMillan:

Thank you, Ryan, and good afternoon, everyone. We are pleased to discuss our financial results for the third quarter of fiscal 2024. Total revenue for Q3 was $1.01 billion and non-GAAP earnings per share was $1.06, both again above the high-end of our guidance. Importantly, we are excited that with COVID now mostly in the rear view mirror, our reported revenue has returned to growth. Our strong performance goes beyond the top line and shines throughout the P&L. For the quarter, we delivered a solid 31.2% operating margin and deployed $100 million during the quarter to repurchase 1.4 million shares. All-in, the $1.06 in EPS translates to 14% growth on the bottom-line, a very strong result and also very encouraging as we flip the script now to reported revenue and EPS growth again. Looking back to the start of our fiscal year, we knew there were still certain questions on some investors’ minds about the true strength and durability of our underlying business. These were questions that surfaced as we exited a period of uncertainty created by the pandemic, followed by the global chip shortage. While we and many long-term investors understood the power and potential of our transformed, much stronger business, we acknowledged that these unanswered questions created barriers for some of those newer to Hologic. As usual, rather than rely on words, we knew it would be our performance that would emphatically answer these questions and clearly demonstrate that we are indeed a bigger, faster, stronger company than before the pandemic. Our third quarter performance should make this very clear. In Q3, we bent the top-line curve to green after eleven quarters of COVID driven declines. Our top line reported revenue returned to growth at 3.1% versus last year. Organic ex-COVID we delivered healthy 5.8% growth and we achieved these strong results on top of exceptionally strong 18.4% organic ex-COVID growth last year. Turning to our themes for today. First, we would like to recap our performance since the start of the fiscal year by answering five key questions which were on many investors’ minds. Second, we’ll pass the call over to Essex, who will highlight certain overlooked elements of our broad-based international growth, as well as provide an update on M&A activities. On to our first theme. The top five questions which have been out there

Karleen Oberton :

Thank you Essex, and good afternoon, everyone. In my statements today, I will provide an overview of our revenue results, walk down our income statement showcasing strong performance, touch on certain key financial metrics, and finish with our guidance for the fourth quarter and full fiscal 2024. Our third quarter financial results were robust, once again exceeding our expectations on revenue and profitability, building on the momentum from the first half of the year. To recap high level results, total revenue came in at $1.11 billion, beating the midpoint of our prior guidance by $11 million. We delivered 3.1% revenue growth and organic growth of 5.8%, excluding COVID. In addition, non-GAAP earnings per share were $1.06, growing 14.0% and exceeding the high end of our prior guidance by $0.001. Before moving on to our franchise results, we want to highlight the continued strength of our balance sheet. In Q3, we generated over $400 million in cash from operating activities, ending the quarter with $2.4 billion on the balance sheet, deployed $100 million on share repurchases, and announced the acquisition of Endomagnetics. We continue to demonstrate that our strong cash balance, leverage ratio well below our target range, and ability to generate cash consistently provide us the flexibility to fund innovation and pull both levers of our capital allocation strategy, tuck-in M&A and share repurchases, at the same time. Moving forward, we still have significant firepower to continue to deploy capital diligently, as opportunities arise. Turning to our franchise results. In Diagnostics, third quarter revenue of $440.8 million grew 0.7%. Excluding COVID assay and related revenue, worldwide Diagnostics grew by 6.0%. Within Diagnostics, Molecular Diagnostics continues to contribute significantly, growing 10.5% excluding COVID. We continue to see underlying strength in BV CV/TV, which continues its outstanding growth trajectory and has become our second-largest assay globally. Additionally, as expected, non-COVID respiratory assay sales declined sequentially from Q2, in line with the flu season. However, year-over-year growth remains strong, highlighting the continued adoption of our four plex COVID, Flu A, Flu B, and RSV assay. And finally, Biotheranostics continues to be accretive to growth for our Molecular business. Rounding out Diagnostics, Cytology and Perinatal declined 2.9% globally, with U.S. declines partially offset by solid international growth, as Essex highlighted earlier. As a reminder, in fiscal Q3’23, customers built up cytology inventory levels in the U.S. due to third-party shipping constraints in Q2’23, leading to elevated sales in the prior year period. While the cytology business has largely returned to normal, year-over-year growth rates were impacted. Looking ahead, we expect flat to modest growth from the cytology business. Moving on to Breast Health. Total third quarter revenue of $385 million increased by 7.1%, or 8.2%, when excluding SSI. Within Breast Health, growth was primarily driven by Breast Imaging, with solid domestic and international results, contributing 7.2% and 12.1% growth, respectively, excluding SSI. Third quarter performance was driven largely by increased gantry shipments and robust Service revenue growth that continues to contribute meaningfully. Continuing next to Surgical. Third quarter revenue of $166.6 million increased 6.2%. Surgical growth continues to be fueled by MyoSure and the related Fluent Fluid Management System. Our Laparoscopy business, while smaller in dollars, grew significantly in the quarter and continues to progress nicely. Additionally, International continues to be a bright spot, growing just under 20% in the quarter. Finally, in our Skeletal business, third quarter revenue of $19 million declined 29.7% due to lower Horizon DXA shipments resulting from a temporary stop ship related to a non-conformance issue. We are working with our suppliers to resolve this situation and expect to resume shipments during the first quarter of fiscal 2025. Now, let’s move on to the rest of the non-GAAP P&L for the third quarter. Gross margin was 61.1% for the quarter, a 30 basis point improvement from the prior year period, even though COVID assay revenue declines continue to be a headwind. Additionally, gross margin expanded 40 basis points sequentially from fiscal Q2 primarily driven by favorable product mix. Total operating expense of $302.8 million in the third quarter decreased by 3.5%. This decrease was driven primarily by elimination of expenses related to the divested SSI business. Operating margin was 31.2% for the third quarter. The year-over-year increase of 230 basis points was driven by top line growth, expanding gross margins, and lower operating expenses. Sequentially, as expected, operating margins expanded 80 basis points from Q2, largely from lower operating expenses and higher gross margin in Q3. Below operating income, other income, net, represented an expense of nearly $3 million in our fiscal third quarter. Interest income is lower due to lower cash balances from the significant share repurchases we have completed throughout the fiscal year. Additionally, interest expense is up due to higher interest rates. Finally, our tax rate in Q3 was 19.75% as expected. Now let’s move on to our Non-GAAP financial guidance for the fourth quarter and full year fiscal 2024. For Q4 2024, we are expecting total revenue in the range of $970 million to $985 million, and EPS of $0.97 to $1.04. For the full year 2024, our guidance assumes revenue of $4.012 billion to $4.027 billion and EPS of $4.04 to $4.11. Unpacking this guidance, we lowered the midpoint of our prior revenue guidance by $5 million, which represents about a $20 million headwind related to the temporary Skeletal Health stop ship previously mentioned, partially offset by our strong performance in Q3 and the inclusion of an estimated $4 million to $5 million of revenue from Endomagnetics, now that we have closed the acquisition. With respect to foreign exchange, we are assuming Q4 will have a headwind of about $3 million. For the full year, we now expect a slight tailwind of about $3 million. Turning to our franchises. We expect Diagnostics, Breast Health, and Surgical to grow mid-single digits in Q4 and full year fiscal 2024, excluding the impact of COVID. As a reminder, fiscal ‘24 has four fewer selling days compared to fiscal ‘23, which we estimate to be a headwind of more than 100 basis points for the full year. Starting with Diagnostics. In Q4, we expect our Molecular Diagnostics business to drive high-single digit growth, excluding COVID, as customers continue to adopt and drive utilization of our broad Panther menu. In Cytology and Perinatal, we expect growth in the mid-single digits for the fourth quarter. Sequentially, however, we expect the business to perform flat to Q3. In Q4 of last year, sales dropped below typical ordering patterns due to inventory buildup in Q3’23. We expect Cytology and Perinatal comps to stabilize in fiscal year ’25. Closing out on non-COVID Diagnostics, we expect blood revenue of approximately $6 million in Q4 and $20 million (ph) for the year. In terms of COVID revenue, we expect COVID assay sales to be about $7 million in Q4 ‘24, and about $70 million for the full year. COVID-related items are expected to be about $25 million in the fourth quarter and approximately $105 million for the full year. Moving on to Breast Health. We remain on pace to grow the business mid-single digits for the fourth quarter. We expect to see solid gantry placements in Q4, continuing the steady performance we have delivered year-to-date. The demand for our portfolio of products and services remains strong, and we have solid visibility into gantry orders. Further, our confidence in delivering more gantries than last year remains high. We are successfully managing resource availability among both our install teams and our customers, as customers balance the need to meet elevated demand for screening and staffing constraints. Finally, in Surgical, we anticipate Q4 revenue to grow mid-single digits. We expect the growth to continue to come from MyoSure, Fluent, and laparoscopy division – business. Moving next to margins. Our guidance continues to assume a cadence of improvement moving into Q4, for both gross margin and operating margin, we remain on pace to exit the fiscal year in the low 60s for gross margin. Our guidance also assumes Q4 operating margins in the low 30s, and we are on pace to finish fiscal ’24 between 30 to 31%, which includes the stub period of Endomagnetics. Below operating income, we estimate fiscal ‘24 other income, net, to be an expense of approximately $8 million in Q4 and $11 million for the full year. Our guidance is based on an annual effective tax rate of approximately 19.75% and diluted shares outstanding are expected to be approximately 238 million for the full year. To conclude, Q3 was another strong quarter for Hologic. We continue to deliver robust growth and quality earnings. As we approach the end of fiscal year 2024 and look ahead to 2025, we are excited by the performance across all our franchises and the additional strength provided by a pristine balance sheet. As always, our stakeholders can count on us to deliver while also advancing the state of women’s health around the world. With that, we ask the operator to open the call for questions.

Patrick Donnelly:

Hey, guys. Thank you for taking the questions. Steve, probably the biggest inbound is just on the 4Q guide, obviously, Karleen talked a little bit there. It seems like a lot of it is around the skeletal piece. I guess just when you think about the core business going into 4Q. Has anything changed relative to a few months ago? Has anything gotten worse? It seems like it's all skeletal, but I just want to talk through the core business and how you're feeling about it into 4Q here?

Karleen Oberton:

Yeah. And just, Patrick, just to add a finer point to it. Of the $20 million headwind, about $16 million is related to the fourth quarter specifically.

Karleen Oberton:

Yeah. I think we'd like to ground people in the pre-pandemic operating margins at 31.5%. And I think as you see, as we exit Q4, we'll be right in that range and really thinking about that we've added a lot of revenue growth drivers that have a lower operating margin profile than the legacy business. So feel really good about achieving that as we exit 24. For the full year, '24, we'll be a little bit below that, as we said in our prepared remarks, between 30 to 31. But I have good confidence as we look to '25, we will be squarely for the full year at those pre-pandemic levels. And just to walk through some of the components, again, as I mentioned, the recent acquisitions will have lower margin profiles. The international business has a lower margin profile, and we're still working through some of the higher supply chain costs, primarily related to chips, as well as we integrate certain facilities, we have double costs. We’ll see those primarily work through over the course of ‘25.

Tejas Savant:

Hey, guys. Thanks for the time here. Karleen, I just want to follow up on Patrick's line of questioning there on the second question. Can you just help us think through sort of underlying algorithm for EPS growth, 5% to 7% for the top line, presumably, it stays intact for next year as well. As you think through the different buckets here, right, between the margin expansion piece, which you said it sounds like you're on track to achieve, but then you've also got repos. And then you've got a little bit of dilution from potential tuck-ins, including ones you might do in the next 12 months or so. So as we think about those multiple pieces in the context of EPS growth next year, is sort of high-single digit essentially a fair way to think about it or could it be a little bit better than that?

Tejas Savant:

Got it. Fair enough. And then a quick follow-up on some of the recent tuck-ins here. I'll start with Boulder actually, perhaps for you, Steve. Could you just give us an update on where things stand and expanding from the pediatric setting there to the OB/GYN channel. Obviously, you flagged a lot more lap procedures there in the OB/GYN side. And then a similar sort of question, early days on Endomag but how should we be thinking about status quo in that market that Endomag can really help displace particularly in the U.S. where it's underpenetrated? And what's the feedback been like from physicians from any early conversations ahead of due course (ph)?

Essex Mitchell:

Great. Yeah. So I'll start with Boulder. And so we're seeing great success expanding outside of the pediatric channel. I would say our fastest-growing area is actually in thoracic with the reveal product. So we're seeing nice, it's an open product. We're getting to new customers, really honing in and focusing similar to our strategies that we've utilized with gynecology, where we focus on the specialty, really understand our differentiated position with the product and expand from there. So we feel really good about the success thus far with Boulder and still quite a bit of meat on the bone left, I would say, with pediatrics as we look to focus there moving forward. With regard to Endomag, very early days. I would say, we just closed, I feel really great about that team, excited to have them as part of the Hologic family and know that we'll do great things together. As far as feedback from customers don't have anything to comment on that right now, but feel really good about the prospects of this business, especially with the strong channel and relationships that we have today.

Jack Meehan:

Thank you. Good afternoon. Wanted to focus on the diagnostic business here, starting with Panther. So I think I heard over 3,300 in the field now. So it feels like that stepped up a little bit. Pre-COVID, you were placing about 50 a quarter. I was wondering, if you felt like are you seeing any signs you might be getting back to those levels or still a bit of a COVID hangover on placements?

Jack Meehan:

Got it. Okay. And then on BV CV/TV, I think I also heard second largest assay globally. Would that put it in the quarter kind of a floor $40 million or so? And would you care to wager where this could land in terms of overall size at some point? What's driving the growth?

Stephen MacMillan:

Okay. Operator, next question.

Vijay Kumar:

Hi, Steve. Good afternoon. Congrats on the nice sprint and thanks for taking my question. I guess my first one on the skeletal ship home (ph) ratio. How -- is that in the backlog, Steve. So is this -- could this now be a tailwind for fiscal '25 or are those more like a lost revenues?

Vijay Kumar:

That's helpful, Steve. And Karleen, maybe one for you on the margins here for Q4. Did that expectations change versus prior and mostly because of the deal and perhaps revenue push out? If so, what is the underlying jump-off point and is that a relevant number to be thinking of to be modeling the company?

Operator:

We will take our next question from Anthony Petrone with Mizuho Group. Please go ahead.

Stephen MacMillan:

Let me take the first part of that. The first part is, we are not seeing any shift in the market in terms of cytology usage, Anthony. It is -- really it's more because we changed a third-party vendor last year, it kind of made a little bit of lumpiness between the Q2 to Q3 last year comparisons, but the underlying is very consistent. And the initial stages on our digital cytology, which is further ahead in Europe, are looking very good, and we're in the early stages of some very positive consumer -- or I'm sorry, customer acceptance of that in the United States. So I think we continue to feel good about our cytology business. I’ll pass it On the Panther utilization, we'll take...

Anthony Petrone:

Thank you.

Operator:

We will take our next question from Mike Matson with Needham & Company. Please go ahead.

Stephen MacMillan:

Yeah. We're seeing some nice acceptance to our digital cytology. One of the challenges outside the United States is not as many cytologists around. And so the ability to help on the workflow is a big win and so rolling out our digital cytology, the genius cytology there is good. And we continue to work with guidelines. I think the hidden piece that's been missed for everything that we did in the pandemic to provide the COVID test, is we establish much stronger relationships across the world with ministries of health and everything else. And we're having more dialogues really that's going to benefit so many of our businesses, including our surgical businesses, our breast interventional business and really just shifting guidelines. And so there's more discussions. Germany has gone to a co-testing model in cytology and HPV over the last few years that we're benefiting from and working those angles really country by country.

Karleen Oberton:

Yeah. I think as we look at our operations and supply chain and even more specifically, continue to leverage Costa Rica for manufacturing, especially as we acquire new companies and optimize their supply chain, we try to leverage those points to contribute to favorability on the tax rate.

Casey Woodring:

Great. Thank you for taking my questions. So I wanted to talk about the strong molecular growth in the quarter here, that 10.5% number. One of the larger players in the molecular space that sits more in the point of care market has been seeing strong growth rates on the non-respiratory side as well now for several quarters in a row. This competitors called out sexual health and virology specifically as areas of growth. Just given your menu overlap, can you help frame up how the Panther is coexisting in the market now with some of these growing point-of-care platforms? And just your latest thoughts around any potential share shifts one way or the other in that market? And then I have a follow-up. Thanks.

Casey Woodring:

That's helpful. And then just my follow-up here quickly, on that 5% to 7% top line algorithm, you previously talked about surgical is probably at the higher end of that range, rest on the lower and diagnostic somewhere in the middle when including cytology. So just -- is that the right way to think about 2025 on an ex-COVID basis? Maybe just walk through the moving parts there as you see them for next year. Thank you.

Operator:

We will take our next question from Michael Ryskin with Bank of America. Please go ahead.

Stephen MacMillan:

We do have good line of sight. We're not expect it to go out far into Q1 of '25. So you should be able to count on it again. We'll guide by that point, but we fully expect to be back in the market by then.

Karleen Oberton:

Yeah. Certainly, as we look at our cash flow generation with a very strong balance sheet and very competitive credit agreement. Our focus is on deploying that free cash flow as well as the cash that we’ve built on the balance sheet at this point in time. The priority continues to be tuck-in M&A, acquisitions that give us confidence in our ability to grow our revenue, hopefully accretive to our current growth rate. And then it would be share repurchase. As we’ve stated in our remarks at a minimum to manage dilution from our equity plans and then opportunistic as we see disconnects and valuation in the market.

Navann Ty:

Hi. Thanks for taking my question. I wanted to ask about the M&A pipeline with your $2.5 billion cash available for acquisition? What are you seeing at the moment? And then also if you could discuss the innovation, including the next-generation gantry system in Breast Health and AI? Thank you.

Karleen Oberton:

Yeah. In regards to innovation, certainly, we've talked about a next-generation gantry that really continues to focus on workflow, patient experience and image quality. Those are the key drivers of innovation in that space and certainly layer on AI. How can we help the radiologist in assessing risk within those images and again, assessing or helping improve workflow is the use of AI, not only in breast but also in genius digital cytology.

Ryan Zimmerman:

Thanks for taking the question. Maybe Karleen, just to follow up on your next-gen gantry. I mean you made the comment today that you're on pace to grow gantries this year. And I don't know if you'll be comfortable answering this yet, but do you expect to grow gantries in '25? And coincidentally, can you just give any color on kind of timing of a next-gen gantry?

Ryan Zimmerman:

Okay. Just a follow-up, two quick questions. One, what's the status or impact that you're seeing from the BioZorb recall dynamics? How does that impact with Endo-Magnetic, if at all? And then the second thing that I wanted to just ask about, unrelated, was you've had a number of these deals. And to go back to kind of the earlier margin question, is there an opportunity in any way for some facility integration or manufacturing integration that hasn't been kind of contemplated or discussed yet? Because it would seem like with the number of deals you've done over the past years, there could be some low-hanging fruit there. And I just don't recall you guys really talking too much about that thus far. Thanks for taking the questions.

Karleen Oberton:

Yes. Sure. So as we’ve highlighted, we’re doing some facility integration in our Breast Health business right now. From each of the acquisitions, they all have different profiles. Some makes sense to stand alone as they are and others do make sense to integrate and they’re in various stages of integration. And as we always do, we always look at our supply chain, look at our network and continue to focus on opportunities for optimization. And I would say, over the next five years, I think we’ll continue to realize those opportunities.

Mason Carrico:

Hey, thanks for taking the questions. On the molecular business, could you provide some color on how adoption is trending for the fusion sidecar recently. You doubled the Panther installed base during COVID. How has adoption really been among those new customers? And then as a follow-up, what are your expectations for where that fusion attach rate can move longer term?

Operator:

We will take our next question from Andrew Cooper with Raymond James. Please go ahead.

Karleen Oberton:

Yeah. So I would say, it's more geared towards the stop ship on the skeletal versus the Endomag. Think about Endomag as very small revenue for only two months, but certainly stop ship on even a noncore franchise is going to have an impact on margins.

Andrew Cooper:

No, agreed. And then just one more again kind of on margins. But Karleen, I just want to make sure I caught something you said correct. I think you said something about working through chip costs and integrating facilities -- or the elevated chip costs, I should say, and integrating facilities through fiscal '25. Just wanted to get a sense, has anything changed in terms of how quickly you're working through those higher-cost chips and when you expect to be at kind of more normal levels in terms of the chip cost themselves?

Andrew Cooper:

Okay. Great. I’ll stop here. Thank you so much.

Operator:

We will take our next question from Lou Lee with UBS. Please go ahead.

Karleen Oberton:

Yeah. I don't think we've given specific numbers on gantries. Again, we've grown -- we have real confidence that the total gantries are going to grow year-over-year. We're not quite back to pre-pandemic levels, but we'll be at those levels in 2025.

Karleen Oberton:

I'm sorry, can you repeat that?

Karleen Oberton:

No, not specifically.

Puneet Souda:

Hey. Thanks, Steve. Thanks for squeezing me in here. I'll just round it out I'll round it out with one question. On the skeletal, I just wanted to confirm -- when you look at the market for bone density measurement and fracture assessment, has anything changed there competitively in your view? Just wanted to confirm that and get a view about [indiscernible] pushouts that you're seeing in the quarter?

Puneet Souda:

Okay. Super. Okay. Thank you.

Operator:

This does conclude today's question-and-answer session. And this now concludes Hologic's third quarter fiscal 2024 earnings conference call. Have a good evening.

Operator:

Good afternoon, and welcome to the Hologic Second Quarter Fiscal 2024 Earnings Conference Call. My name is Justin, and I am your operator for today's call. Today's conference is being recorded. [Operator Instructions] I would now like to introduce Ryan Simon, Vice President, Investor Relations, to begin the call.

Stephen MacMillan:

Thank you, Ryan, and good afternoon, everyone. We are pleased to discuss our financial results for the second quarter of fiscal 2024. For the quarter, total revenue was $1.02 billion and non-GAAP earnings per share was $1.03. Both revenue and EPS came in above the high end of our guidance, reflecting another strong quarter.

Karleen Oberton:

Thank you, Essex, and good afternoon, everyone. In my statements today, I will provide an overview of our revenue results, walk down our income statement showcasing strong performance, touch on a few other key financial metrics and finish with our guidance for the third quarter and full fiscal 2024.

Patrick Donnelly:

Steve, maybe one on the Diagnostics, particularly the molecular DXP continues to put up pretty good numbers in spite of obviously some tough comps, pretty competitive environment, too. Can you just to back that a little bit and just talk about what you're seeing in the market? Again, you called out obviously a few assays that are doing well. But just curious the key drivers of the strength there and the durability as you look forward and how you think about that franchise over the next few quarters?

Stephen MacMillan:

Yes, Pat, let's try to put this into context. We were talking as a team about this the other day and said, if we can line up the perfect world, we'd love to do like one Endomag every quarter. right? $300 million deal, bring in some additional revenue products that drop in that we know what to do and just kind of keep phasing those along and then maybe a little bit of a buyback here or there. The real world doesn't work nearly as linear. But that's what we would like to be doing is those size deals on a fairly regular basis.

Operator:

And our next question will come from Jack Meehan with Nephron Research.

Karleen Oberton:

Yes. Well, I think we think it fits really nicely with our existing interventional portfolio. And I think that's 1 of the values that we'll bring is that currently Endomag uses a mix of direct and distributors, and we obviously have a significant direct sales force in the U.S. that I think will be a differentiator for us with that asset in our hands.

Karleen Oberton:

Yes. I would just say, Jack, we would expect it to be accretive certainly to the division's growth rate.

Operator:

Oh, I'm sorry. I was just going to say our next question is from Tejas Savant with Morgan Stanley.

Stephen MacMillan:

Yes. As you saw, they're really kind of still in the biannual world and we don't think the USPSTF guidelines changed much. Recall that our Breast Health is really a screening business where it's a capital sale and less volume dependent. But we really don't see much of an impact either way, just as when the guidelines shifted "negatively" a few years back, I didn't see a downturn there and don't see a big shift now.

Unknown Analyst:

Got it. That was helpful. And then another question on USPSTF. If they were to move to an HPV primary what would a potential trial design look like to establish primary HPV delay claim on your existing optima test? And what would the time line be to run such trial? Is there a possibility of using real-world data? Or would you need a prospective trial?

Operator:

And our next question comes from Vijay Kumar with Evercore.

Karleen Oberton:

Yes. I would just say the impact on the full year guidance is primarily related to currency, if you actually look at the midpoint of this guide versus our prior guide on a constant currency basis, it's up slightly. So we really view the performance in this quarter a lot of to tighten the range as you indicated really hone in and delivering within that range.

Operator:

We'll take a question from Puneet Souda with Leerink Partners.

Karleen Oberton:

Yes. Let me kick off in that. Yes, it was just recently approved in the U.S., and I would say that we're really partnering with our lab customers on implementing and integrating into the workflow, so that's what we're focused on really more of a successful integration into the lab workflow at this point.

Puneet Souda:

Got it. And a broader question maybe for Steve. I mean when you look at the overall competitive landscape, Steve, there's another larger peer who's in the point-of-care testing side, but they pointed out 40% growth in [Strep A] and women's health -- and I know sort of their positioning is different in the market, but just wondering sort of how you're seeing the share shift. We're also seeing that one of the larger peers that's in the reference lab side, they still don't have RSV in the market for their product. So just trying to understand sort of where the opportunity set for Hologic continues to be the most strongest and where you think the share opportunities will be -- will continue to be the sort of the strongest going forward?

Casey Woodring:

Great. So just now that we're halfway through the fiscal year, looking at the top line guidance above the LRP range on an ex COVID and ex selling day basis after the strong quarter, particularly in Diagnostics and Surgical. I'm curious on how you guys are thinking about your fiscal '25 and if growth could fall on potentially the higher end of the LRP range or even above the range? How should we think about the different moving parts there given the outperformance here so far?

Casey Woodring:

All right. And then maybe if I could just follow up here. How do you assess the international opportunity for BV/CV/TV, you mentioned in the prepared that the strong growth you've seen in that assay really hasn't included any international contribution. So maybe help us frame how much growth runway you have on that assay just based on phasing in the international piece.

Operator:

And we have a question from Andrew Brackmann with William Blair.

Karleen Oberton:

Yes. Certainly, that is one of the strategies to improve margins as we go direct and we find that as we go direct, we have better outcomes in those markets with our market development and market access capabilities, which -- that is something we have invested in over the last 5 years. So that strength that commercial investment at the point of leverage as we move forward as well as we continue to grow the portfolio, specifically surgical -- it's early days, but certainly, the surgical portfolio is an accretive product to the overall margin profile for that business. So I think there'll be multiple drivers as we move forward.

Andrew Cooper:

Maybe just first sticking with international. One thing jumps out, just looking at the table at the bottom of the release. The region that seems to have the most outsized growth has really been kind of all other. I think part of that might just be COVID unwinding a little bit, but maybe any thoughts there? And then as you think about the international opportunity, can you highlight maybe if it's a particular product in a particular region or a particular region in general? What areas are you most excited about in terms of that geographic expansion opportunity as we sit here in the start of May '24.

Unknown Analyst:

This is Brad Davis on for Anthony. -- not another Andrew, but -- talk on the Breast Health business. I figure -- whenever we see you guys make a move in Breast Health, obviously, core competency at which you're paying attention. The one to kind of hear your strategic rationale on the Endomag acquisition, why you see now as kind of a time to get bigger on the procedural side of the business and if we should expect kind of further moves to cover the swap and the continuum, if there's any other assets that you think that you'd like to have in that portfolio?

Unknown Analyst:

Got it. That's helpful. And then just to stay on the breast business, you recently called out some of the life cycle in the boxes 2014 launch time frame. So maybe getting to the 9-, 10-year time frame. Can you just remind us, I guess, the life span on these devices and how Hologic plans to kind of best monetize the upgrade replacement opportunity and also if this is part of the rationale on timing of any new systems software and product enhancements.

Operator:

Absolutely. That question will come from [Michael Ryskin] with Bank of America.

Karleen Oberton:

Yes. So I think if we go back to 2019, we would say that less than or about 20% of our customers were running about 4 more assays at the end of that into '22, that was probably approaching high 30%, maybe 40%. But I think that's the entire installed base. But I think the other metric I'd look to -- point to is the newer Panthers that were placed since April of 2020. So new customers acquired since the pandemic over 90% of those customers are running at least one other assay and over 55% of running at least 2 other assays.

Operator:

And this now concludes Hologic's First Quarter Fiscal 2024 Earnings Conference Call. Have a good evening.

Operator:

Good afternoon, and welcome to the Hologic First Quarter Fiscal 2024 Earnings Conference Call. My name is Synthia, and I'm your operator for today's call. Today's conference is being recorded. I would now like to introduce Ryan Simon, Vice President, Investor Relations, to begin the call. Please go ahead.

Steve MacMillan:

Thank you, Ryan. And good afternoon, everyone. We are pleased to discuss our financial results for the first quarter of fiscal 2024. For the quarter, total revenue was $1.01 billion and non-GAAP earnings per share was $0.98. Both revenue and EPS came in above the high end of our guidance. Before diving into our results, it is important to view our Q1 growth performance in proper perspective. Simply put, our first two quarters of fiscal ‘24 face incredibly difficult comps. Despite Q1 ‘24 having four fewer selling days compared to the prior year, and even against a prior year Molecular Diagnostics ex-COVID revenue growth of 24 .5%, and a Surgical revenue growth rate of nearly 15%, we grew total organic revenue, ex-COVID, a solid 5.2%. Even more impressive, when adjusting four fewer selling days, our Q1 results stand taller. On an adjusted basis, we estimate the total company organic revenue growth ex-COVID was in the high single digits for the period. These are incredibly strong results against challenging comps as we continue to perform exceptionally well against our 5% to 7% percent ex-COVID long-term target. We continue to showcase our durability and broad strength across our divisions, both delivering on our short-term guidance and maintaining our long-term targets. Keep in mind that our long-term revenue targets are more impressive today, given we are growing off a much larger base than we originally contemplated. As we've said before, you can count on us to deliver. During our call today, we will focus on building upon our messaging from the JPMorgan conference three weeks ago. During our presentation, we highlighted that we are a new Hologic bigger, faster, stronger, and poised for continued success. As part of our discussion, Essex will share more insights about our high confidence in our future success. He will also shed light on what we view as underappreciated elements of our growth strategy that are helpful to fully recognize the potential of our business. Before then turning the call over to Karleen to discuss our detailed financial results, we will share reflections from our participation at the World Economic Forum in Davos. While we continue to make progress elevating women's health, it is clear we still have a long way to go. Starting with our meetings at JPMorgan, we realize there are two camps of investors. There is one camp that understands our transformation and recognizes the drivers powering our current results and future growth potential. At the same time, there is another camp that, quite frankly, does not. That said, we certainly appreciate the complexity. Over the past three years, there have been many moving pieces clouding the narrative of the force we've become. From revenue still normalizing following the ups and downs of COVID, to moving past semiconductor chip supply challenges, to selling days dynamics, only naming a few, each has contributed to irregular comps that may be difficult to interpret, and also challenging tomorrow. We appreciate that each represents a layer of complexity that must be pulled back to fully appreciate the underlying strength of our business. Looking beyond the quarterly nuances, our steady performance over time really shines. Above all, we are bigger, faster, stronger, and poised for further growth. We are a durable and diversified growth company with disciplined operations, peer group leading margins, an exceptionally strong balance sheet, and above all, a talented and engaged employee workforce. We are poised to continue to drive top-line growth while growing the bottom line even faster. To shed more light on what gives us high confidence in our future, I'll pass it over to Essex.

Steve MacMillan:

Thank you, Essex. To close out the discussion of our growth prospects. While we continue to make significant progress outside of the US, we still have tremendous opportunity to grow and build a much greater presence internationally. Shifting gears before turning the call over to Karleen, we'd like to share reflections from our time at the World Economic Forum in Davos. For a third year in a row we had the opportunity to participate at the forum, where we presented the results of our third annual Hologic Global Women's Health Index. The Index, which is the largest study of its kind, examining the overall state of women's health and wellbeing continues to generate tremendous support from major organizations dedicated to improving women's health. As we've said before, over time, we believe the Index may be the single greatest contribution to the world that we make at Hologic. This year's results show that we all need to stand behind women more than ever. The harsh reality is that women's health globally has not only stagnated over the past year, but is sadly moving in the wrong direction. The data shows that only 11% of women were screened for cancer and only 10% for STIs. Billions of women are not being screened, this must change. And we have a tremendous opportunity to lead the way with our women's health portfolio. The key takeaway here is that in many ways, our markets are still in the early innings of reaching their potential. As we look ahead, we are even more inspired to live into our purpose, passion, and promise. We continue to believe and we have proven that we can drive results through our unwavering commitment to women's health. Our strong results come from our strong purpose. And finally, in late breaking news, we are incredibly proud to announce that just last night, our new Genius Digital Diagnostic system, with the Genius Cervical AI algorithm received clearance from the US Food and Drug Administration. This accomplishment is only made possible by the creativity, focus and dedication of our outstanding Diagnostics team. Continuing to trailblaze our path. Our system is the first and only FDA cleared digital cytology system that combines deep learning based AI with advanced imaging technology. It can help more accurately detect cervical cancer, improve psychology workflow, and ultimately enhance patient care. We continue to deliver and at a time when women need it most. With that, let me hand the call over to Karleen.

Operator:

[Operator Instructions] We will take our first question from Tejas Savant with Morgan Stanley.

Steve MacMillan:

I think regardless of what happens with the guidelines, we see co-testing is being well entrenched. And if anything, it's going to probably get stronger with the approval we just got last night of our digital cytology business, which I think is probably not as fully appreciated. But as we bring that to market, it's going to dramatically improve the workflow for our customers. It's going to improve the efficacy it just -- it's probably the biggest improvement step forward in cytology in 40 years. So, we remain very committed and believing incredibly strongly, by the way as a reminder to single collection device that is used both for our Aptima HPV, as well as cytology. So it's no additional work for the doctor or the patient, and you get the results. So we continue to be very excited. And if anything, probably more excited about our cytology business combined with our HPV business going forward.

Karleen Oberton:

Yes, so let me take it into part two on the gross margin line. The chips in the network optimization efforts are probably about a 50 to 75 point basis headwinds to gross margins. And again, we see have line of sight to that improving over the course of the year, as we mentioned in our prepared remarks on operating expenses. If you looked at just Q1, if you took out the impact of kind of the seasonally high Q1, operating expenses, operating margins would been close to that 30%. So just moving through the year as we see those dynamics of the gross margin. In the normal step down and operating expenses, we see line of sight to extend year 31%. I do think that is a good jumping off point, I think I would caution from significant improvement over the course of ’25 from there, given those are really, as we said, peer leading operating expenses. And we always want to continue to make sure that we are investing the right amount back into R&D and innovation and see the benefits like we saw last night with the approval of digital cytology.

Patrick Donnelly:

Hey, guys, how are you? Thanks for taking the question. Steve, maybe one for you on the Diagnostics business. It sounds like the rest of the year going to kind of hang around that 5% to 7% framework inside there. I think one of the reasons for the uptick was improve utilization. Obviously, that utilization piece has been a big focus as we come out of COVID. Now that we're in a relatively, hopefully relatively stable environment on the testing side without COVID. Can you just talk about utilization metrics that you're seeing? What gives you guys the confidence on that trajectory? Any metrics will be helpful there.

Karleen Oberton:

I'll just add two points to that, Patrick, while we haven't given up our Panther utilization, I would say that we are seeing that our Panther utilization grow year-over-year. And the other metric I would give you that we went back to 2019, around 20% of our customers were running four more assays, that's probably close to doubled here at the end of ‘23. So those are things that should give us confidence of the stickiness of the Panther and the customers are adding menu.

Jack Meehan:

Thanks. Good afternoon, Steve. There's always next season, soon enough.

Jack Meehan:

Oh, man. Yes, the payment frame. Well, wanted to get your thoughts on the Diagnostics business at Biotheranostics. Could you just give us an update? Talk about the growth runway for the breast cancer index test? And I think Karleen, you mentioned growth was accretive, but did it slow a little bit? Was that related to selling days or just any color would be great?

Jack Meehan:

All right, and then, the cash on the balance sheet, continue to get a lot of questions around M&A priorities for Hologic. The recent questions we've gotten had been around, interest in doing things in the med tech world, was wondering if you could just comment on that. And then, kind of on the Biotheranostics team, just like the world of specialty labs, kind of using that as a foray into that world. Just any color on M&A strategy would be great.

Operator:

We'll take our next question from John Sourbeer with UBS,

Karleen Oberton:

Yes, I think we certainly have several quarters of backlog probably going into early ’25 at what I'll call elevated levels. We traditionally have but backlog for this business, given the capital nature of it, but we see it being elevated for probably the next three to five quarters, as we work through that backlog and supply, the gantries to our customers.

Karleen Oberton:

So what I would say is that the respiratory menu is on the Fusion sidecar. So that's where we see the most upside coming through in that respiratory menu. But certainly, as we've talked about BV, CVs is really leading the growth in the Molecular Diagnostics business at this point primarily in the US longer term. That's a great opportunity internationally. But also seeing customers take on some of our legacy women's health assays as well. So feel good about that the whole menu is driving the growth but led by BV, CV at this point.

Vijay Kumar:

Hey, guys, congrats on the [inaudible]. Thanks for taking my question. Hi, Steve. And maybe my first one for you here on, it was helpful for you to talk about those growth drivers. I'm curious what percentage of revenues do you think are growing high single sustainably? What percentage should be growing mid-single-ish? And what percentage of revenues are low singles? Have you looked at that analysis? I'm just curious on when you say 5% or 7%. How investors could get comfortable when they do the sum of the cost between with -- on the business segments?

Vijay Kumar:

Understood. And Karleen, maybe one view on the guidance like Q1 came in mid singles, despite the day's headwinds 2Q guidance is for about 3.5. Why, when I just think about the 3.5 five versus the five you did in Q1, is it just the comps, what’s driving 2Q and when you think about the back half step up from first half to hit the annual guide, is that just the days normalization and back half or any other drivers we should be looking at the back half?

Operator:

We will take our next question from Anthony Petrone with Mizuho Group.

Steve MacMillan:

Yes, I think the big piece that affected molecular in the quarter, the single biggest was the four fewer selling days. It's a disposable run rate business. And if you think about that, that knocked, between 400 and 600 basis points off the quarterly growth rate, frankly, depending on exactly how the days fall. And both that quarter and this quarter that we're in now, the second quarter are going against these ridiculously strong comps of over 20-ish percent molecular growth from a year ago. But I think the overall run rate, and the sheer size of the businesses now we feel very good about.

Karleen Oberton:

I think, as we've talked about, we think of COVID as upside. So as the guide would indicate as a continued step down each quarter. I mean, it's hard to really tell if there's another flu season next year that drives a little elevated COVID. But, again, we were looking at his upside. And so, maybe even think about something less than what we're anticipating for ‘24 and ‘25.

Puneet Souda:

Yes, hi, Steve, Karleen, thanks for taking the questions. Yes, hey, Steve. So first one on Genius Digital DX system, can you just remind me in a positive if I miss this, any changes to pricing or margins as a result? And maybe just I know, ThinPrep remains the same. But, can you just talk a little bit about, how do you see the adoption of this in a market that's fairly established already? And then I have a follow up for Karleen.

Puneet Souda:

Got it. That's super helpful. And then the Karleen on, I wanted to ask about the tax rate. How are you thinking about the net result of the 15% global tax rate, if that was implemented, and then R&D tax credit that just sort of came through with the tax bill passing in the house, netting those effects, how should we think about the tax rate longer term for Hologic?

Operator:

We'll take our next question from Ryan Zimmerman with BTIG.

Steve MacMillan:

You're right, I wouldn't underestimate that there's still going to be continued gantry placement. So a lot of the core is actually still the gantry placements. And then it's the service and the revenue and the additional AI and other things that we sell underneath it. But I think we continue to feel very good about the gantry placements, really from a couple of standpoints. First off, there's still kind of the tail end of going from 2D to 3D. But we're really into the mode now of also the early adopters of 3D. Their machines are now need to be upgraded. And with all the additional enhancements we've made to the system, we continue to place those gantries, so I think it's and we've turned it into certainly a much more diversified business. But at the core the gantries are still a very key foundational component of the strength of our business.

Steve MacMillan:

Yes, I think we continue to feel pretty good from, most of our customers around the CapEx side, I think when people were more fearful year, year and a half ago, we kind of felt like it was still okay, if there's little bits that dribble back in that's fine, too. But I think overall, we think we're in reasonable position and not seeing any dramatic changes one way or the other, least affecting our business. And again, we're not the biggest capital component for the hospitals, as are the ERP systems or the certainly the big iron pieces, we continue to feel like, regardless, we're in a good position.

Casey Woodring:

Great, thank you for taking my questions. Maybe one for Karleen on the other income line, can you please be specific on what you're assuming for non-GAAP interest income, interest expense and other income for 2Q and the full year, by my math, I'm getting the $6 million of net interest and other income for 1Q and you're getting to $30 million to $50 million of other expense for the year. So just trying to bridge 1Q through the rest of the year?

Casey Woodring:

Got it, that's helpful. And then maybe just if I can sneak one more in on the international piece saw very strong growth there above the fleet average, I think 33%, constant currency in breast. I know, international revenues inherently lower margin. You've talked about that before. But curious if you're doing anything there to drive that contribution margin higher, and investments you're making outside the US and how should we think about international margin expansion versus the fleet average kind of moving forward? Thank you.

Karleen Oberton:

Yes, and I think there's opportunities as we go direct in key markets, not only do we see better revenue performance, but that is usually typically accretive to the margin line as well.

Derik Bruin:

Hi, good evening. Hey, sorry, I don't do -- I typically don't do sports references. So I'm, I won’t make one. But just out of, so I know you say that the markets not trench warfare, but I mean, you do have, I mean, you do have really strong competitors in viral load testing and STI testing. How should we sort of think about what your market shares are? And what's around? Because I mean, clear, I mean, there's, is it the market? Is the market to the testing or expanding for these? Or are they stagnating? I'm just curious about sort of like market growth? And then can you talk a little bit about what's your pipeline beyond BV, CV/TV and just, what other sort of like diet, what other sort of like molecular assays can be sort of be added? So it's question on like, what's the market expansion opportunities in some of these markets that are more, I would say competitive and hadn't historically grown a lot? And versus what's the new pipeline? Thanks.

Operator:

We'll take our next question from Mike Matson with Needham and Company.

Steve MacMillan:

Yes, completely. So first as a reminder, recall that we did launch our 3D performance and then our 3D. And what we've been doing is gradually improving, and working in better imaging, better detection all through. So it's not like we're selling a 10 year old product, even though we'd be up at it's now 10 years, a little 11 years since we got the 3D approved, but we've been selling newer products along the way. And having said that, we are working on additional hardware and gantry changes as well, that will evolve here, over the next few years.

Steve MacMillan:

Yes, I think, we would consider something in that range. If it brings significant revenue, and frankly, EBITDA. So, we're not going to embark on something of that size for a science project or something early stage or something that's losing money, I would say, you would only expect us to do something like that we have the capacity. But it would have to be a pretty special asset. There's not a lot of things, but there are a few things we're looking at in that range. And we continue to be incredibly disciplined, but it will be established businesses that we think, we can improve upon in terms of their ability to contribute to us. So thank you.

Operator:

And we'll go next to Navann Ty with BNP.

Steve MacMillan:

Yes, I think, relative to the AI front, as it relates to Breast health, we've been, on the leading edge for quite some time between our CAD programs and A, the Genius AI Detection program. So we continue to feel very good, particularly as it relates to the workflow advantages, and the linkage to our workstations and our products. And on the second question of international, I think, again, we've been generating, frankly, double digit growth for our international business for the better part, yes, excluding COVID-ish for last five or six years, and continue to see international being accretive to our overall growth rate here for years to come. So thank you very much.

Operator:

Good afternoon, and welcome to the Hologic Fourth Quarter Fiscal 2023 Earnings Conference Call. My name is Cynthia and I am your operator for today's call. Today's conference is being recorded. All lines have been placed on mute. I would now like to introduce Ryan Simon, Vice President, Investor Relations to begin the call. Please go ahead, sir.

Stephen MacMillan:

Thank you, Ryan, and good afternoon, everyone. And before I get started, I just want to do a quick shout out to Karleen and her family and let everybody know our thoughts and prayers are with her today. We are pleased to discuss Hologic's financial results for the fourth quarter of fiscal 2023. Total revenue was $945.3 million and non-GAAP earnings per share was $0.89. It was another strong quarter overall with revenue finishing at the high end of our range and EPS exceeding our guidance. Our fourth quarter capped off a tremendous year where we continued our track record of success, strengthened our business, and delivered on our commitments. For the full year, we posted $4.03 billion in revenue and non-GAAP EPS of $3.96. In 2023, quite frankly, we delivered some pretty exceptional organic growth rates, which were far above our longer-term targets. At the start of the year, we committed to deliver low double-digit growth across each division. In the end, we delivered more, growing annual organic revenue ex-COVID in the mid-teens at 15.6%, with every division growing north of 13% and international growth just above 20%. Despite various macro challenges, like clockwork, we continued to deliver, raising our financial guidance throughout the year and living up to our commitments. At the same time, our balance sheet remains incredibly strong and we have the financial flexibility to grow our business for the long term. For fiscal 2024, we are confident in our ability to deliver against our 5% to 7% ex-COVID long-term organic growth target, even against significant comps, one less selling week, and a challenging macro environment. In fact, if we look at 2024 on an adjusted daily sales basis, our annual organic revenue growth rate, excluding COVID, is projected to be in the 6% to 8% range. Whether adjusting for selling days or not, we believe our results will truly stand out from the crowd as we progress throughout fiscal 2024, particularly following a year of almost 16% growth ex-COVID in 2023. Before sharing more of our excitement for 2024, we will first reflect on our Q4 results. In Q4, we grew total organic revenue, excluding COVID, 16.7%, with double-digit growth in every division. We again delivered on our promises. At the division level, breast health grew 27.4%, driven primarily by the recovery in our gantry business. Interventional breast also posted a strong quarter, growing in the low double digits. We are pleased the division's gantry recovery is tracking to our expectations, following the industry's chip supply challenges. Moving on to diagnostics. Organic growth ex-COVID was 10.2%, again driven by our strong molecular business. Organic molecular diagnostics ex-COVID grew 15% for the quarter. Driven once again by strong contributions from BV, CV/TV, Amgen, and Biotheranostics. With fiscal 2023 revenue ex-COVID at $1.48 billion, our diagnostics business is over 40% larger than it was in 2019. Even more impressive, our base molecular business is now nearly 80%, eight zero percent larger than it was pre-pandemic. Molecular has grown through a combination of more than doubling our Panther installed base, adding new menu, gaining new customers, as well as acquisitions into adjacent markets. This transformation and durable performance speaks to the ongoing success of our growth strategy. Rounding out the divisions, surgical revenue at over $600 million in fiscal 2023 is now nearly 40% larger than what it was in 2019. In Q4, surgical grew 10.6%, driven primarily by MyoSure and Fluent, both growing double digits. In addition, our laparoscopic portfolio also grew double digits, albeit smaller in dollars compared to MyoSure and Fluent. More importantly, we are pleased our laparoscopic portfolio continues to gain traction. To close the overview of our quarterly results and fiscal 2023 highlights, our international business continue to be accretive to overall growth rates, growing north of 28% on an organic ex-COVID basis in Q4. We expect international to continue to be a key part of our growth story. Before moving on, I'd like to revisit and reinforce our capital allocation strategy. In short, our capital allocation strategy remains the same. We continue to prioritize M&A opportunities; and second, we consistently look to utilize cash towards share repurchases. And we continue to be patient. Having said that, we have recently seen the opportunity to deploy our cash balance more significantly, taking the following four actions. One, in Q4 2023 we deployed $238 million of capital to buy back 3.2 million shares. Second, in our current fiscal Q1 2024, we have already repurchased another 2.2 million shares for $150 million. Three, today we announced an additional $500 million accelerated share repurchase program. And four, we recently paid down $250 million of higher variable interest rate debt. Ryan will expand on both the ASR and debt repayment in his remarks. Looking back four plus years since the start of the pandemic, the biggest acquisition we have made is of ourselves. During this period, we deployed over $1.4 billion on M&A opportunities and nearly $2.3 billion on share repurchases, including our recent repurchases in Q1 2024. And today's ASR announcement will make that $2.8 billion. As you can see, we are very confident in our position for the years ahead. Rounding out our capital allocation discussion. To ensure we are optimized for the future, we carefully evaluate our portfolio on an ongoing basis. As a result, as mentioned in our release, we have recently divested our small SSI ultrasound business. Shifting gears, as we have shared on prior calls, we have broadly transformed our business and strengthened our fundamentals. Quarter-by-quarter, year-by-year, with macro hurdles ever present, we continue to prove our strength. Today, we are effectively a new Hologic, retooled and recapitalized with strong brands, wide modes, industry-leading margins, and the strongest, deepest leadership team we've ever had. Hologic is a differentiated and more competitive company than at any time in our 38-year history. At our core, we are fundamentally guided by our purpose, passion, and promise. Our purpose, to enable healthier lives everywhere, every day. Our passion, to champion women's health globally. And our promise, the science of sure, to provide health care professionals with clinically differentiated, high quality products. Across each division, we have distinct advantages created by our unique focus on elevating women's health through innovative products and trailblazing social initiatives like the Hologic Global Women's Health Index. We ultimately develop our leading positions by leaning into our purpose and proactively meeting our customers' and patients' needs. We will highlight three examples today. First, we are not only leaders in women's health, but we are also sector leaders in workflow automation. Our customers continue to deal with challenges, sourcing technicians, and the persistent pressure to efficiently manage costs. As a result, user-friendly systems and efficient workflow solutions are at the top of our customers' expectations. From our Panther instrument to our Brevera breast biopsy and Fluent systems, to name only a few, each product is designed to transform manual, labor-intensive, cumbersome processes into easy to use, dependable, and efficient workflows. Second, the massive footprint and sheer size of our installed bases in diagnostics and breast health provide a strong foundation in today's world. With more than 3,260 Panther instruments installed worldwide and over 10,000 mammography systems installed across the US, we have the opportunity to be integral partners with the laboratories, hospitals, and screening centers we support. For Panther, as customers add more menu and drive incremental volume, our molecular diagnostics business continues to grow, while also becoming more valuable to our customers and more deeply rooted in their operations. The same can be said for our breast health business. Hologic is unique in our ability to support our customers and their patients at each step along the breast care continuum. We differentiate ourselves with our ecosystem of technologies that integrate across a patient's journey, creating a more comfortable patient experience, greater clinical confidence for practitioners, and increased operational efficiencies for our customers. Moving on to our third example, our longstanding brand leadership across multiple product lines in each division, which yields strong, stable margins and steady cash flow generation. We are innovators and leaders in breast and cervical cancer screening, STI testing, abnormal uterine bleeding treatment, and fibroid removal. This is a significant statement given the strong competitors we face in each respective business. Our diversified leadership and scale across our business lines support industry leading margins and cash flow and in turn, we have the ability to further invest and grow our business. Altogether, we are emerging as a premier growth company, differentiated and more competitive, delivering strong growth across each division and international. As the new much stronger Hologic we are today, we consistently deliver and aim to continue to do so. Turning our attention to 2024, I will touch on some of the high-level growth drivers in each business, and Ryan will finish the call with further detail related to next year's guidance. First, in breast health, we expect 2024 to be another strong year of growth. With our gantry backlog remaining elevated compared to historic levels, we have greater visibility into our pipeline, translating to higher confidence in future gantry sales, creating another exciting year for breast health. In diagnostics, as in recent years, molecular will continue to drive growth for the division. We expect our large global Panther install base to continue to add new menu, while also increasing volume for existing assays. In addition, our Biotheranostics business, which we acquired in 2021, is expected to continue delivering double-digit growth, being accretive even to our molecular growth rate. In 2023, Biotheraenostics grew over 30%, and we are still in early innings growing the breast cancer index test. BCI is still the only test recognized by NCCN guidelines and the American Society of Clinical Oncology to predict which patients are likely to benefit from extended adjuvant therapy beyond five years, yet another example of an innovative and differentiated product. In surgical, MyoSure, our Fluent system, and our newer laparoscopic products that we acquired via Boulder and Acessa are projected to continue to drive growth. Internationally, surgical also continues to shine. In 2023, our international surgical growth rate was more than double the US growth rate. Surgical is clearly emerging as a strong and profitable growth driver. To conclude, entering 2024, we are a new and differentiated Hologic. We are bigger, stronger, and more competitive than ever. Our leadership brands, growth drivers across all three divisions, durable margin profile, and strong balance sheet will continue to power us forward. As we look ahead to 2024, we are poised to continue to grow and make an even bigger impact on women's health around the world. With that, let me hand the call over to Ryan.

Operator:

Thank you. [Operator Instructions] We will take our first question from Puneet Souda with Leerink Partners. Please go ahead.

Stephen MacMillan:

Sure, Puneet, let me take those first. USPSTF, we continue to think there's so much focus on this that's quite frankly a very little impact to our business. I'd remind you back in 2018 when the first guidelines were being updated at that point in time. They came out, they were against co-testing. By the time ultimately they came out as official, co-testing was put back in. We continue to feel very good about our business regardless of how they go. They also, obviously people have been focused on them for months and months, thinking they're coming every other day. We think it's a big do about nothing, to be quite candid. I feel great about our business, feel great about the data on co-testing, and feel great that regardless of how they go, the clinicians are going to stick with our business and there's going to be no change to our forecasts. So regarding the LBT thing, I think again, great question. It's part of where I view the strength of our business. First off, I think again that there's so much focus on what I call headline risks. To be clear, the LBT stuff won't come into effect probably until at least 2028. And there's going be issues that are going be battled between now and then, legislatively, everything else, so nothing that's going to impact the business over the next three years, probably the next five. At a bare minimum, however, we love where we're positioned in that most of us with our kidding and as you well know, from a Panther standpoint, it could create more opportunities. So the LBT thing probably creates more opportunity for us than it does risk. Having said that, we really just don't think much is going to happen on that over the next few years. So thanks. We know you probably have another call you want to get to too, Puneet.

Stephen MacMillan:

All right.

Jack Meehan:

Thank you. Good afternoon. And first, I hope Karleen and family are doing all right. And also Steve, appreciate the commitment to the capital return here to shareholders. I think that's great. I was wondering if you just on the business. [Multiple Speakers] I appreciate it. Okay can we talk about Panther, now that we're at the end of the year, are there any updated utilization stats you can share for the system? And second, the recent placement rates have slowed. I know there was some pull forward on placements that during the pandemic. I was just curious like how long you think this kind of lasts before hospitals and labs start expanding their fleets again. Thanks.

Ryan Simon:

Yeah, Jack, I'll add to that that our growth as we look forward is not predicated so much on placing additional panthers. This is really what Steve mentioned is, placing more assays on the system, expanding the Fusion footprint, as well as growing the volumes of the assays adopted so far.

Operator:

We will take our next question from Derik De Bruin with Bank of America. Please go ahead.

Derik De Bruin:

Hi, thanks for taking the call. Appreciate it. Just some, you commented on the pricing environment. Can you thought to what your sort of expectations are for pricing this year? And Ryan, just I know you said negative $40 million and negative $60 million expense for other all-in, But what's the interest expense on that, just to help preempt the model?

Ryan Simon:

Yeah, and on that second piece, Derik, it's approximately $50 million in expense in that number. When you're looking at it from a high level, like looking at 2023 compared to 2024, the biggest difference there is, we're assuming less cash on the balance sheet going forward. And -- but to answer your question, it's going to be $50 million on that interest expense.

Ryan Simon:

Correct. Correct. Correct.

Patrick Donnelly:

Hey guys, thanks for taking the questions. Steve, maybe one on the breast health side. Obviously, you guys -- you had a bit of a backlog with the supply chain issues last year. Can you just talk about how you're working that down, what goes into the guide this year there? And then a second one, just on the margin piece. Yeah, I know we don't have Karlene, but maybe Ryan, just in terms of the moving pieces, as you think about the 2024 margin build, obviously COVID coming down, some high margin stuff, can you just talk about what you guys are doing to offset that and keep margins moving in the right direction? Thank you, guys.

Ryan Simon:

Yeah, sure, Steve. So as we previously called out Q3, Q4, our expectation is that would be the trough with respect to operating margins. And as Steve mentioned, our expectation is to work up from there to the low 30s as an exit rate in 2024. Steve pointed to the fact that we're working past and farther away from the highest cost chips. Our breast business is also recovering, which is going to be a tailwind to margins as well. We did mention that we divested the SSI business, and that will also be a tailwind to margins as we go into 2024.

Unidentified Analyst:

Hi, team. This is Madison on for Tejas. Thanks for taking the question. Maybe just firstly, I was wondering if you could elaborate on how you're thinking about international growth for 2024? I know you flagged the under-indexation to China as an advantage in the near term, but what's your combined exposure to China and the Middle East. And should any of that ongoing conflict weigh on the demand throughout the latter part of the Middle East region?

Operator:

We will take our next question from Vijay Kumar with Evercore. Please go ahead.

Stephen MacMillan:

You got it exactly. Yes, we factored that in. So that's why it's actually -- yes, it's 5% to a little north of 8%.

Unidentified Analyst:

Got it. So just to follow up, if the guide excludes day's impact, why is the lower end of –

Unidentified Analyst:

Okay, got it. And just to follow up then, you also highlighted new share repurchasing in fiscal first quarter and an accelerated repurchase program. Is this a change in your capital allocation priorities? It seems like M&A was a focus in previous quarters.

Operator:

We'll take our next question from Tim Daley with Wells Fargo. Please go ahead.

Stephen MacMillan:

What I'll comment on is the current attachment rate and it's about 20% to the Panther install base.

Stephen MacMillan :

Think about all of it, actually. If you look at it -- as you'll see in the 10-K, that basically we've got the orders in place for the year. Now we're going to continue to add orders to that for further out periods, but we're in great shape coming into the year.

Anthony Petrone:

Thanks. Good afternoon. I also send condolences to Karleen and her family. Maybe the first one on Biotheranostics, just up 30% for the full year, and obviously still in the early days, as you mentioned, Steve, in your prepared comments, I'm just wondering when you think about, I guess, the synergy to the breast health business, you have 10,000 gantries out there, and I think there's two call points really for Biotheranostics, OBGYN and then possibly a little bit in radiology specifically. But how should we be thinking about how many of your breast health install base users are currently using biotherapeutics and how long will it take to sort of extract that entire synergy. And then specifically on margins for Ryan, just when we -- that trajectory from high 20s in the first quarter to low 30s, is that linear? Are there certain inflection points throughout the year? If so, what are they? Is it operating leverage or more in pricing at the gross margin line? Thanks.

Ryan Simon:

Yes, and Anthony, on the margins as we've stated in the commentary, looking to work up from the high 20s to the low 30s through the course of the year, it should be a relatively consistent trajectory up to that range. As I mentioned on the prior question, breast health recovery is a tailwind to the margins. The farther we get away from the higher-cost chips that are in our gantries as we progress throughout the year, that should be helpful as well. And again, the savings from SSI should be felt in the back half of the year as well.

Casey Woodring:

Great. Thank you for taking our questions and my condolences to Karleen and her family. So I just wanted to talk about the surgical business. So growth this year is going to be within the LRP range coming off of 16% organic comp in 2023. Can you just talk about some of the growth drivers there? It sounds like international is a big piece of it. It sounds like pricing drove out performance this year as well. So can you just talk about how that business performed this year and the sustainability into next year? And then just one more quickly on the margins. So I think in 2023 you have baked in something around 200 basis points to 250 basis points of inflationary headwinds outside of that higher semi-chip costs. How should we think about that dynamic here in 2024? Thank you.

Ryan Simon:

Yeah, so I do want to clarify one comment that we made to Derik's question earlier. It is actually $50 million in income and $130 million in expense. So I had flip-flopped that in the prior question. And again, with respect to margins, kind of just reiterating the comments that we've made here, it is an expectation that we are going from, again, the high 20s to the low 30s. The biggest impacting driver, again, is the breast recovery and moving, again, farther away from the higher price chips.

Operator:

We will take our next question from Navann Ty with BNP Paribas. Please go ahead.

Stephen MacMillan:

Thanks, Navann. We continue to scour the landscape. You know, the bankers have been all over the place with lots of ideas. We frankly are in that great position where we can be patient. You know, if I still look at the landscape today, you've got a whole bunch of very smaller companies that went public in COVID time that are hemorrhaging cash and in bad shape. And a lot of those still don't fit our criteria. So then we're looking at other things that may be a little bit more established but the magic that we have for us right now is given our growth rates, given our profitability, we've got a pretty tight hurdle rate that not a lot of things are making it to the top. So I wouldn't expect anything super imminent as we continue to look at the landscape.

Operator:

We'll take our next question from Mike Matson with Needham & Company. Please go ahead.

Stephen MacMillan:

Yeah, we continue to feel good about it. You know, having been in this chair in a different company in the 2008, 2009 downturn. I'm always particularly attuned to trying to pay attention to concerns about capital freezes or capital tightening. I think we just feel great about where we are both in terms of the products we've already got the orders in, as well as continuing to get new orders. So we're booking candidly out beyond the current year at this stage, and just a lot of excitement still in our breast health business. I think what's hard for people to grasp is how much we've dramatically expanded our installed base to where we're so strong in the US and so many people just still coming to us. So really feeling very good about it.

Stephen MacMillan:

Yeah, I'm glad you asked it. I think the magic for us is it is all of the above. It's this incredible diverse growth that in very simple terms, if we actually do look almost country by country and franchise by franchise, and we were just with literally that the sales leaders of each country for each franchise in Dubai a couple of weeks ago. So I'm coming fresh off looking at all the plans. If I look at the UK, we have growth plans for diagnostics, not just diagnostics, but psychology as well as molecular in the UK. We've got plans for the breast health business and we have plans for surgical. And it is, it's bringing -- in the case of surgical, it's bringing those products into these markets. It's getting the reimbursement. And it's just been a lot of nothing sexy and no one big driver, which I actually think creates the excitement. And even as places like China have gotten a lot wonkier for most companies because we're small there, we're not counting on that for our growth. We're getting it everywhere else. But it's not sexy, But it's incredibly effective that it's literally every -- almost every franchise in every geography. And these hundreds of thousands here and there, as you keep adding them up, they become millions and millions and then tens of millions all through it. And I think it's creating this inexorable growth as we're bringing on new customers in each franchise. Thank you, Mike.

Andrew Brackmann:

Hi, guys. Good afternoon. Thanks for taking the questions and certainly sending condolences to Karleen here. I'll just stick to one on the innovation engine here. You guys have obviously done well sort of advancing the platforms through R&D and new launches, but how should we be thinking about major upgrades within the core franchises here over the next couple of years. Anything to call out there? So we'd be expecting, I guess, more singles and doubles moving forward. Thanks.

Andrew Brackmann:

Okay. Thanks, guys.

Ryan Simon:

We have time for one more question.

Andrew Cooper:

Hey, thanks guys for squeezing me in. A lot's already been asked. So maybe just one, you mentioned booking out already into next year on the gantry business. Just what is the typical kind of visibility you have at this point looking into the year relative to maybe where you sit now with this big backlog? In other words, how much bigger is that backlog than it typically would be?

Operator:

That concludes today's question and answer session. And this now concludes the Hologic fourth quarter fiscal 2023 earnings conference call. Have a good evening.

Operator:

Good afternoon, and welcome to the Hologic's Third Quarter Fiscal 2023 Earnings Conference Call. My name is Cynthia, and I am your operator for today's call. Today's conference is being recorded. All lines have been placed on mute. I would now like to introduce Ryan Simon, Vice President, Investor Relations, to begin the call. Please go ahead.

Stephen MacMillan:

Thank you, Ryan, and good afternoon, everyone. We're pleased to discuss our financial results for the third quarter of fiscal 2023. Our results were solid. Total revenue was $984 million, and non-GAAP earnings per share were $0.93. Revenue exceeded our prior guidance and EPS finished at the high end of our range. These results showcase the power of our transformed business and demonstrate that Hologic is built for the long-term with the broadest, strongest foundation we've ever had. On top of this transformation, with our strong cash flow and outstanding balance sheet, we continue to operate from a position of strength, with strong operational discipline as we forge ahead. Once again, the proof is in the numbers. Total company organic growth, excluding COVID was rather remarkable at 18.4%. By division, we posted 11.8% organic diagnostics growth ex-COVID and 14.5% growth in Surgical. Standing alone, these growth rates are impressive. Given a wider context, we view these performances as exceptionally strong, because we delivered these results on top of 15% growth in Diagnostics and 9.7% growth in Surgical in Q3 of 2022, both very high bars from a year ago. And in Breast Health, as expected, we delivered another strong quarter of 27.5% growth as chip supply and gantry availability continue to improve and track to our expectations. For this fiscal year, we remain on pace to achieve or exceed our 2023 low double-digit organic growth targets, excluding COVID. In fact, our expected growth rate for fiscal '23 is now more than double our 5% to 7% long-term growth target. Based on our strong performance for a number of quarters now, combined with our continued confidence in our growth ahead, we've recently given serious consideration to raising our long-term target. But given the uncertain macro environment we face, 5% to 7% is still very much a solid long-term outlook. Put simply, there are two reasons why. First, as you all well know, growing 5% to 7% on top of double-digit growth is clearly more challenging than growing 5% to 7% against single-digit comps. For example, in fiscal 2024, we will lap several prior periods of double-digit growth throughout the year. Net, we'll be entering 2024 already much bigger and stronger than when we first set the goal. And second, there are macro business and geopolitical challenges that persist today, which did not exist back in 2021 when we first set our guide. We will expand on this aspect later in today's call. Taken together, overcoming this combination of challenges, while maintaining 5% to 7% growth is in some ways an even last year goal than when we first established it. On that note, let's move on to our focus for today. First, we will highlight the strengths of our business that underpin our strong Q3 results. Our strengths are diverse and durable. And second, with a discussion of the unique advantages we provide our customers, we hope you'll share our confidence that Hologic is built for the long-term. Moving forward to our Q3 growth drivers. As mentioned, excluding COVID, each division posted double-digit organic growth for the quarter. Equally impressive is the year-over-year consistency of our growth drivers, a direct result of execution against our business strategy. In Diagnostics, the division's overall 11.8% organic growth rate, excluding COVID, was again driven by strong performance in molecular. For the quarter, Molecular Diagnostics posted approximately 13% growth ex-COVID, on top of growing over 20% a year ago. Growth in molecular was driven by a combination of both newer assays like BV, CV/TV and contributions from Amgen and HSV, each growing well into the double digits as well as strong growth from our longstanding women's health menu. Rounding out Molecular Diagnostics, our Biotheranostics acquisition continues to shine, being both accretive to our top and bottom lines. Cytology and Perinatal led by cytology, also contributed strong growth this quarter, growing nearly 10%. Cytology's elevated growth for Q3 was driven by the timing of a few large orders placed in the last week of the quarter before the extended July 4 holiday. We view this as a one-time lift as opposed to a shift in the trajectory of the business. That said, co-testing, which includes the Pap+HPV continues to be the preferred cervical cancer screening method for medical practitioners. These are the same practitioners who are on the front lines who know the science and who have seen the overwhelmingly positive impact of the Pap and co-testing firsthand. By our estimates, nearly 99% of cervical cancer screening today in the United States is performed using a combination of the Pap alone or co-testing. Why? The reason is clear. The Pap test has been the most successful cancer screening test in history. Since the Pap was introduced over 80 years ago, the rate of cervical cancer, which was the leading cause of death among women, has fallen by more than 70%. As an advocate of women's health for over 35 years, we continue to support best-in-class care for women, and for cervical cancer screening, the gold standard is co-testing with ThinPrep, the Pap+HPV. Shifting to Breast Health. As expected, we posted another exceptional quarter, growing revenue 27.5%. This strong performance was driven primarily by the ongoing return of our Mammography business as well as solid contributions from service. In Mammography, as we guided in May, we delivered more gantries in Q3 than Q1 and slightly less than in Q2. Demand for our clinically differentiated gantries remains high. In addition, our backlog is still at historically elevated levels. We are in great shape to work down this backlog to more normal levels throughout our fiscal 2024 and possibly beyond. In breast service, our business continues to grow and is becoming an even larger part of the division's mix. Our strong service performance represents stable contracted recurring revenue and demonstrates deepening relationships with our customers. Now moving on to Surgical and our International business. The newer pillars of growth for our company that may not be fully appreciated. In Surgical, the business continues to grow stronger for longer, growing 14.5% in Q3. Revenue growth was again driven by MyoSure and the Fluent Fluid Management System. With contributions from NovaSure V5 and our newer laparoscopic portfolio. Specifically, while still early days in smaller dollars, Bolder continues its strong growth as we leverage our relationships with our GYN customers and explore adjacent surgical channels. The transformation of our Surgical business over recent years has been phenomenal. It underscores the value of both internal innovation plus product line additions through M&A, a winning formula across Hologic. In Surgical, the sum of both strategies has injected new life into the business and transformed it into a meaningful growth driver for the company. Our international business also continues to impress, growing 20.9% in the quarter, excluding COVID. In May, our global leadership team traveled to our Brussels office as part of our annual strategic planning process, spending a week in Brussels reinforced a sense of pride within our leadership team. We are proud of the strides we've made expanding our global footprint and even more important, we are proud of the energy and culture we've built around the world. Coupled with a strong base of talent we have developed over the past few years. We firmly believe our highly engaged workforce and purpose-driven culture truly set us apart. As we've said before, the revenue growth rate for our international business is accretive to our overall growth rate. We expect this trend to continue throughout our long-term horizon. Related, earlier in today's call, we referenced persistent macro challenges in the context of our long-term guide. When we first announced our 5% to 7% guide, we were expecting tailwinds in places like China and Russia, rather than the headwinds they have become. Despite these challenges, we remain committed to our targets and with strong performance in other geographies where we operate, our international growth remains on track. This is a testament to the commitment, grit, and determination of all our employees that support and drive our efforts around the world. Now shifting gears to discuss the advantage we provide to our customers and how we are poised for long-term success. To fully appreciate where we're going, we must reflect on where we've been. From there, we will shed light on our unwavering patient and customer focus, which sets the stage for our bright future. Our transformation has been years in the making. It started even before COVID and as we know, accelerated during the pandemic. In the early days of COVID, when fear and uncertainty led to closures and shutdowns, we delivered our highly accurate COVID molecular diagnostic tests around the globe, playing a pivotal role in helping get the world back on its feet. With COVID surges and high testing volumes now further in the rearview mirror, our ongoing performance shows that we are much more than a great pandemic story. Without a doubt, we are a bigger, stronger company with more durable and diverse growth drivers and positioned well for the long haul. On top of this transformation, with our strong cash flow and exceptional balance sheet, we operate today from a position of strength and continue to exercise operational discipline. As we look ahead, we are laser focused on our purpose, passion and promise and never lose sight of the needs of our patients and our customers. This is the magic within our business. Today, our customers face the challenge of navigating this new operating environment. They seek vendors who can help them operate as efficiently as possible. For labs and hospitals, pressures from inflation and labor shortages remain despite recent improvement. With efficiency a priority, when our customers think of Hologic, they see opportunity. The opportunity to consolidate around our portfolio of products in Diagnostics, Breast Health and Surgical that offer innovative solutions to dramatically improve their operational efficiency. Seconds can turn to minutes and days of time and labor savings throughout the course of a year. In each of our businesses, we feature products that streamline workflows and create real advantages that our customers not only love, but need. From our sophisticated automation with Panther and advances in AI with digital cytology and Diagnostics to our industry-leading gantry scan speed, and streamlined biopsy process with Brevera in Breast Health. And finally, our efficient fluid management approach with Fluent in Surgical. Workflow efficiency is in the DNA of our entire portfolio. In addition, the fact that we have specialized service teams to focus on the unique needs of our customers adds to our competitive advantage. Our customers know that when they choose Hologic, they not only receive world-class products but also world-class service. Between our robust portfolio of industry-leading products and specialized service capabilities, we create a very attractive opportunity for our customers. We offer real and measurable efficiencies that improve their bottom lines. And more importantly, improve the standard of care for patients. This combination sets us up well to meet our customers' needs, both today and into the future. and creates an incredible pathway for Hologic's success. In closing, there are many companies that can sell products. There are fewer who can consistently deliver so many leadership brands and sector-leading margins over the long-term and there are even fewer who can succeed financially, while also helping the world. At Hologic, we do all three. We are tremendously proud to continue our journey, delivering outstanding top-line growth and profitability. Driving value for all our stakeholders and further enabling our ability to make a profound impact on patients' lives and women's health around the world. With that, I will now turn the call over to Karleen.

Operator:

Thank you. [Operator Instructions] And we will take our first question from Patrick Donnelly with Citi. Please go ahead.

Stephen MacMillan:

Yes. I think the big piece. We've got, obviously the core women's health menu continues to do well. And I think what keeps getting not fully appreciated, Patrick, is all those additional Panthers we placed during COVID. We kept saying many of those are going to be adopting our new menu, and that's exactly what we're seeing playing out. So the core women's health menu, frankly, some of the virals especially outside the United States, and then the new products, the organic growth of BV/CV, which has really just been off to a tremendous start. And while that's not going to exactly replace COVID, certainly not at its peak, it rapidly will become one of the largest assays we've ever developed organically. So I think we just keep seeing tremendous growth for really years to come as they keep ramping up. Karleen?

Stephen MacMillan:

Yes. [indiscernible].

Karleen Oberton:

Yes. So a couple of comments. First, we haven't provided guidance for fiscal '24, and we're not doing that on this call. I would say that what we're seeing here in Q3 and Q4 for operating margins in that 29% range are probably the trough of the low, and we do expect margins to improve over the course of '24. Again, we haven't given that exact percentage, but would expect them to improve from here as some of the inflationary pressures do abate over time.

Michael Matson:

Yes. Thanks. Let's see here. So I guess just starting with the comments on China and Russia, maybe you can provide a little more detail there. Can you talk about, I guess Russia exposure? How much is that? Is that going to zero because of the latest sanctions? And then China, do you think there's kind of a longer-term slowdown in your business there?

Michael Matson:

Okay. And just in terms of your operating margin, I have to go back pretty far because of the Aesthetics deal, but I think it was like '20 -- fiscal 2016, it was kind of in the 33% to 34% range. Is there any reason in the longer term that you can't get back to those levels and that decline from the kind of low 30s to the high 20s that you're at now. Obviously, we have COVID in between, but I mean, is that decline for the kind of non-COVID business really all due to inflation? Or are there other factors? Because the business mix didn't really look that different back then.

Operator:

We will take our next question from Jack Meehan with Nephron Research. Please go ahead.

Stephen MacMillan:

Hi, Jack.

Stephen MacMillan:

Yes, sure. Let's be really clear. I'm at Hologic through the end of my useful life in terms of what I've worked for, built for. And as a reminder to everybody, I am personally a top 15 shareholder in Hologic. So this is my day job. This is my passion. This is my love. What I have to see is the company five minutes away, that's troubled that I thought, frankly, I could also help out in a different role, which is as Chairman of the Board. And I'm very proud that I think I can do both. If I didn't have the great team around me at Hologic wouldn't be able to. Frankly, over there, it's going to be about also just getting a great CEO in place. And we're making a couple of key decisions there, which are probably pretty obvious. And then it's going to be a normal Chairmanship from there. So this is my love and my passion and frankly, where I'm fully engaged sometimes more than my teams would like.

Stephen MacMillan:

I want to add…

Stephen MacMillan:

Yes, Jack, I think the interesting stuff on the USPSTF guidelines, as they relook at cervical cancer screening, is we don't have an exact time line. It could be months from now. It could be any time, could be late this year, early next. You're never quite sure where that plays out. I think the biggest piece, the way I look at all of this is there's the headline the day any of those guidelines, whether it's breast cancer or cervical cancer screening guidelines get tweaked. And then there's the reality of how it plays out in the marketplace with the physicians. And I think just as when USPSTF raised the age of Mammography years ago and said, women should really wait until they're 50 instead of 40 and you have those kind of shifts, medical practice didn't change that much. And now when they reversed it and came back to 40 just like that, it's not going to dramatically change because it never changed that much in the first place. We think that is very true as well in cervical cancer. The Pap test has truly been one of the gold standards, as we've said, probably has had more impact on women's health and changing cervical cancer from one of the number one killers of women to going way down the food chain in terms of that because of how well it's been -- how well it's performed over time. And so while not necessarily the greatest procedure for somebody to have to have. It has worked out incredibly well over time, and we think it's going to continue to be strong. So it will be a little headline stuff. We still hope that, frankly, patient groups and the medical community's opinions will properly be listened to. And then frankly, the guideline shouldn't change much. But even if they do, I think very little impact to our business over certainly a several year period. Thank you.

Vijay Kumar:

Hi, Steve, thanks for taking my questions. Steve, so maybe my first one on -- just so I understand this fiscal '24 commentary, what you're saying is the base business, ex-COVID should be 5% to 7%, inclusive of headwinds. Are Russia and China headwinds to fiscal '24, if they are, could you perhaps give some color on how much of a headwind there are. And when you give that 5% to 7%, should we be perhaps thinking about the bottom half just given some of the macro commentaries you made?

Vijay Kumar:

Sorry, is China a headwind, Steve, for next year?

Vijay Kumar:

Understood. Understood.

Vijay Kumar:

Understood. Karleen, one for you. Gross margin here sequentially came down. You're talking about inventories flowing through the P&L. So it looks like this could flow through to the first half of next year. Are we -- just given the P&L dynamics, is there some cost controls, any offsets to this at the OpEx line item? Or how should we think about margins? Should we be expecting any expansion next year?

Operator:

We will take our next question from Tim Daley with Wells Fargo. Please go ahead.

Karleen Oberton:

Yes. I would say it's not an unreasonable number. It's probably still a little low from historical levels. I think prior to the chip supply headwind, we would, in each quarter do roughly 1,100 to 1,200 gantries a quarter. This is below that level seemed in Q3 and Q4. I think as we look into '24, I think we're still having recovery in the breast business as we believe our backlog will be worked through over the course of '24.

Stephen MacMillan:

Yes. I think overall, as you know, we did about six acquisitions in COVID time, feeling really good that certainly five of them are delivering good growth for us right now. Mobi is just a little more work, frankly, to get it to the U.S. market. As we dug in deeper, a little more redesign is required of both the cartridge and the machine and what we got. We still like the technology. But as we dug in, it's just going to be further out, and that just affected the cash flows, combined with the interest rates and all of that. But we still are very excited about what that will bring. And frankly, the positive is in a weird way, it's going to hit a little later in our strat plan horizon, and the growth for the next few years looks so good anyway, but it will come in at a really good time for us.

Tejas Savant:

Hey guys. Good evening and thanks for the time. So Steve, Jack stole my question on your side hustles becoming your full-time hustles. And I'm glad to hear you stay at the Hologic. My question is maybe one on M&A. I know you guys sort of mentioned being open to deals of all sizes in your prepared remarks. And I think Karleen called out the tuck-in pipeline also being pretty active here. But any color you can share on the pipeline for those larger needle-moving assets and on a related note, you've called out the success you've had in Biotheranostics, a bunch over the last few quarters. Could that be a precursor for us seeing you making a bigger push in cancer testing, perhaps not sort of the NGS-based testing that people often think about, but like PCR-based approaches?

Tejas Savant:

Got it. Makes sense. And then a quick follow-up on GYN Surg. Any updates there on the hospital staffing situation just on a quarter-over-quarter basis. And you talked about sort of that low double-digit growth moderating here in fiscal '24. I mean outside of tough comps, is there anything else to be thinking about? I think, Steve, in the past, you've talked about I think it was almost a quarter of that portfolio is now outside of MyoSure and NovaSure. And presumably, that's growing better than 7% for you guys. So just curious as to any color you can share there.

Karleen Oberton:

Yes. I would just add on the Surgical business. We've really seen probably over the last four or five, six quarters, international turbocharge for the Surgical business, a small base, but really starting to take traction.

Puneet Souda:

Steve. Thanks for taking the questions.

Puneet Souda:

Hey, great. Thanks. So first on Panther utilization. It's talked about quite a bit, and I know you've given percentages for customers that are using two tests versus three tests. But wondering what you're seeing today versus a year ago in terms of customers? Are they -- are certain customers that are using it more aggressively versus those that are not? Maybe just help us sort of understand the landscape out there in reference labs versus hospital labs. Where are you seeing some of the more utilization? Because I totally understand some of those percentage numbers that you provided in the past, those are average. But -- just trying to get a bit more color on where you stand today because this is more of a cleaner picture for utilization at this point in time past COVID.

Puneet Souda:

Okay. Thanks. Good to hear. And if one -- if I may ask a bit of a broader question, this is regarding AI, you talked a little bit about it. Just given the some momentum that we're seeing in MedTech essentially for AI technologies. Just trying to understand how do you expect to utilize AI, where does AI augment Hologic's product. Maybe just walk us through a bit. Obviously, there's quite a bit of discussion out there on AI. So I just want to get a sense of how Hologic is looking at that?

Karleen Oberton:

Yes. I would just add that we're also, even in our field service organization, using predictive analytics to predict certain part failures that allow us to coordinate with our customers to prevent unscheduled downtime, unscheduled visits, which is great for the customers and creates operational efficiency for us.

Operator:

We will take our next question from Anthony Petrone with the Mizuho Group. Please go ahead.

Stephen MacMillan:

Yes. Anthony, I'd like to correct you. There was no reference at all of an aspirational number. We feel really good about the 5% to 7%. This year, we are delivering double that, is what we said, but we feel great about the 5% to 7% in this environment to be a company and people can count on for that.

Karleen Oberton:

Yes. So we haven't given specifics on backlog recapture. I think what we have said is that the backlog continues to be high. It's something that will work through over several quarters to come. I think we're always looking at operational efficiencies to drive earnings results. As I think about '24, I think we'll kind of hit the whole P&L between higher revenue growth, probably some improvement at gross margins and always looking at how do we best manage our operating expenses to deliver that earnings growth.

Ryan Zimmerman:

Hey, thanks for squeezing me in on the questions here. I'll try and keep it as tight as I can. Just a quick point of clarification. If you look at next year's revenue growth, I think the Street is looking at about 4.1%. And it's like 3.7% organic. So is it unreasonable to think that we would be below your long-term guidance in capacity. Again, I appreciate what you said about the 5% to 7%, but I just want to make sure the Street is clear that at the low end, 5% to 7% or 5%, excuse me, is the right number relative to kind of where the Street is at today?

Ryan Zimmerman:

Okay. All right. I appreciate that, Steve. And then one last one for me. Talked about M&A, we're mostly focused on diagnostics, but I'm a simple MedTech analyst. You're doing well in Bolder, you're doing well in laparoscopic. But help us understand, I mean, with all the shift to robotic surgery, particularly in women's health, I mean is your aperture beyond, say a laparoscopic tuck-in in that arena? I mean, is it unreasonable to think that there are robotic technologies that could one day make it into Hologic's portfolio on the GYN Surgical side?

Operator:

We will take our next question from Andrew Cooper with Raymond James. Please go ahead.

Stephen MacMillan:

Yes, we're incredibly comfortable with where we stand right now on the chip supply. So feel really good.

Andrew Cooper:

Is that safe to assume that, that translates to getting the allocations that you are looking for?

Andrew Cooper:

Okay, thank you.

Stephen MacMillan:

Yes. So we'll take this question and one more to close out the call for today.

Stephen MacMillan:

Yes. I think all of these changes create headline -- much more headline noise that I know investors look at. I go back to even recently, was it in May when the new Breast Health guidelines came out. And our stock moves like 7% in 20 minutes. At the end of the day, these things have very little impact one way or the other over the short-term and are really much more -- the way -- I've been in health care now for about, 30-plus years, moves happen glacially. And even as any of these guidelines change, they get the headlines, but the reality in practice is very minimal slow changes. Final question.

Operator:

We'll take our final question from Liza Garcia with UBS. Please go ahead.

Stephen MacMillan:

It is pleasure.

Stephen MacMillan:

Yes, I think the big picture question on the backlog is, I think we'll -- as we currently look we've got pretty much a years-plus worth of backlog, and we'll continue to get more orders in the meantime. So that will keep pushing that backlog well out. So that's the highest level piece. And I'll hand the harder part of that question over to Karleen.

Elizabeth Garcia:

Great. Thanks.

Operator:

Good afternoon, and welcome to the Hologic Second Quarter Fiscal 2023 Earnings Conference Call. My name is Rachel, and I'm your operator for today's call. Today's conference is being recorded. I would now like to introduce Ryan Simon, Vice President, Investor Relations, to begin the call.

Stephen MacMillan:

Thank you, Ryan, and good afternoon, everyone. Thank you for joining us today to discuss our financial results for the second quarter of fiscal 2023. Our exceptional results confirmed that Hologic is now a much bigger, stronger company with more diverse and durable growth than pre-pandemic. On top of this transformation, with our strong cash flow and exceptional balance sheet, we are operating from a position of strength and are poised to carry our positive momentum forward. We've also said throughout the pandemic that we've dramatically strengthened the company. We recognize that this transformation was harder to see and fully appreciate against a backdrop of COVID spikes and supply chain anomalies. As these clouds continue to clear the result of our robust transformation really shines. For the quarter, total revenue was $1.03 billion and non-GAAP earnings per share was $1.06, both results were above the high end of our guidance. Before providing the highlights for the quarter, which admittedly did have two more selling days, and we were going against softer comps from last year due to the Omicron surge, make no mistake about it, we are very proud of these results. First and most notable, our organic revenue, excluding COVID, grew 21.9% and with two out of three divisions growing north of 25%. By division, excluding COVID, Diagnostics were 14.9%, and again, powered by molecular diagnostics, which grew nearly 24%. Surgical also continued to deliver growing 25.2%. And Breast Health returned to growth, posting a very strong performance of 25.7% growth. Our outstanding results are a testament to the commitment of our many colleagues around the world to our purpose, passion and promise to elevate women's health. Without the discipline and incredible execution of our teams who have shown up every day throughout the pandemic. This strong performance would not be possible. Turning to our themes for today. First, we'll provide insight into the growth drivers in each division to showcase and to reinforce the diversity and durability of our transformed business. Second, we'll review our strong performance against our 2023 guidance and longer-term growth targets, helping to frame the outlook for the remainder of the fiscal year and longer term. And to close, we'll reflect on where we stand with COVID today, our progress through the pandemic and our excitement as we look ahead. With that brief introduction, let's now focus on our second quarter performance and specifically, the growth drivers powering our strong results. At the highest level, we continue to demonstrate and appreciate that many of you have come to realize our business is dramatically different compared to where we were pre-pandemic. We are more balanced, more diverse and more durable. Through the pandemic, we strategically added growth drivers across the company that are contributing to our top line growth today and will do so for years ahead. These innovative products and services are also accretive to our overall strength within the markets we participate in, deepening our strong relationships with the customers we serve. While the macro environment continues to present a multitude of challenges, you can count on us to deliver. In Diagnostics, Molecular Diagnostics continues to lead the way. Our expanded global installed base of Panthers, over 3,250 strong represents the catalyst for the division's sustained growth. The superior workflow of the Panther combined with our broad menu of nearly 20 FDA-approved assays across the Panther and Panther Fusion systems, creates tremendous value for our customers. and differentiates us from our competition. As we exit the pandemic, we are placing more menu with more throughput on more Panthers and adding more Panther Fusion systems, positioning labs to unlock our full breadth of menu over time. Hologic and our Panther systems are well positioned to continue our strong performance. Consistent with prior quarters, the pillars of Molecular Diagnostics growth were diverse in the period. Growth was driven by our BVCVTV vaginitis panel and aided by our core STI menu, including Clemidiagonrhia, HPV and Trich. We also once again had strong contributions from Biotheranostics and our respiratory menu on the Panther Fusion, where we expect the latter of the two to be more seasonal in nature. In Breast Health, after four quarters of decline, primarily due to semiconductor chip supply headwinds, the division emphatically returned to growth, posting 25.7% growth for the quarter. Comp considerations aside, the strong growth in Breast Health resulted from a combination of four positive factors. First, semiconductor chip availability continues to improve, allowing for the delivery of more gantries in the quarter than planned. This included moving a number of gantries originally allocated for the back half of the year into the second quarter. As a result, for the balance of the year, we anticipate Q3 and Q4 gantry delivery levels to each register modestly below Q2, though still well ahead of last year as our visibility and chip availability continues to strengthen. Second, exceptional demand for our clinically differentiated mammography instruments remains high. And despite the duration of the chip headwind, our backlog remains strong, and we are seeing no increase in order cancellations. Third, in Q2, we again delivered strong service revenue service being the largest source of revenue for the division as we consistently demonstrate our value proposition and strengthen our relationships with customers. And fourth, the interventional side of the Breast Health business returned to form, growing 13.9% for the quarter, driven by our disposable portfolio such as Brevera biopsy needles and Somatex Tumark markers. This strong interventional result also serves as an indication of our success navigating some of the non-chip related supply chain headwinds we faced in prior quarters. To close out Breast Health, we'd like to take this opportunity to thank our chip supply partners who have aligned with our purpose and have prioritized women's health. As a result, we had the ability and confidence to deliver more gantries than projected this quarter, and our customers are better positioned to screen more women sooner rather than later. We are thankful for these strengthened partnerships, which have also undeniably influenced our innovation and design efforts, making Hologic even stronger for the future. While much attention has been given to Diagnostics and Breast Health, our surgical business has also remarkably transformed during the last few years and is emerging as a meaningful driver of growth for us globally, a completely different business than three to four years ago. It's much bigger, stronger and faster growing. In Q2, Surgical grew more than 25% and was driven by strong contributions from our hysteroscopic portfolio of MyoSure the Fluent fluid management system and NovaSure. On the latter, we are encouraged by yet another strong quarter for our latest NovaSure iteration, the NovaSure V5. In addition, our laparoscopic portfolio continues to build momentum and is growing into a larger driver for the division. Now we'll move on from the division growth drivers to reflect on our performance against our guidance for the year. At the beginning of the fiscal year, we said that each division would deliver low double-digit organic growth for 2023, excluding COVID. As the Q2 close marks the halfway point of the fiscal year, we are pleased to share our progress towards achieving our 2023 goal. Through the first half of our fiscal year, the total company has delivered organic growth of nearly 14%, excluding COVID. And by division, Diagnostics, Surgical and Health have grown 15.4%, 19.6% and 9.1%, respectively. This puts us in great shape to achieve or exceed our initial low double-digit 2023 targets. Looking ahead, Diagnostics and Surgical, we will have much tougher comps going forward. By the close of Q3 last year, both divisions were posting solid numbers, resulting in a healthier, stronger comps will now be facing. And for Breast Health going forward, due to the phasing of the chip headwind, the opposite is true. Our Breast Health comps in the back half of fiscal '23 will be softer than in Q2. Now, focusing on our longer-term growth projections with recent very strong results, we understand that some may question whether our 5% to 7% excluding COVID, organic revenue growth rate through 2025 is still appropriate. In short, we believe that it is because we see fiscal '23 as a unique year. Taking a step back, we view our long-term revenue goal as more impressive today due to our expectation for double-digit growth in 2023 on top of our already strong performance since we announced the target. Shifting gears to our final topic today, COVID. In Q2, we generated $71 million in COVID assay revenue, exceeding our prior guidance of $50 million. We are excited for the opportunity to turn the corner and further concentrate our energy and resources to continue to drive our dynamic business forward. Since the start of the pandemic in early 2020, we maximize the opportunities presented. We rose to the occasion, delivering high-quality, highly accurate molecular tests to meet the world's thing needs. For this, we are extremely proud. And should COVID Wave's return leaning on a massive expansion of our manufacturing capacity and operational flexibility, we are even more capable of weathering future storms. We are also extremely proud of the larger and stronger business Hologic is today. We've accelerated years of Panther placements across the globe. And as a byproduct, we expanded our largely domestic business into a much more formidable global enterprise. Today, Hologic is a more recognized and respected worldwide brand which is immensely more influence to advance women's health around the world. With the benefits from our response to the pandemic.We diligently and thoughtfully invested in our business, adding growth driving products through organic R&D innovation and completing strategic acquisitions. And equally important, through it all, even during the strongest quarters of COVID revenue, we maintained expense discipline. We managed our business with precision and never got ahead of ourselves with headcount. And when the world needed it most, we made opportunistic and carefully timed to marketing investments with our Super Bowl ad and WTA sponsorship, each encouraging women to prioritize their health and to return to well woman exams that were put off during the pandemic, maintaining our operational discipline and opportunistic investment approach, affords us the ability to continue to support R&D, marketing and sales initiatives today, all while keeping expenses relatively flat versus a year ago, after adjusting for the Super Bowl and WTA initiatives. All in, our Q2 results demonstrate that we are realizing the benefits of our transformed bigger, stronger business that is fueled by our purpose-driven culture. We've built our culture from the ground up over many years, and it has powered our success through the challenges of pandemic, where we maximized our opportunity. As a result, Hologic has transformed into the strong force we are today and at the same time, transformed our future. We have strengthened our durable growth path, and our future is bright. With that, let me turn the call over to Karleen.

Operator:

[Operator Instructions]. Our first question comes from Patrick Donnelly with Citi.

Karleen Oberton:

Yes, sure. So I think when you look at the second half compared to the first two quarters, certainly, the low COVID revenue are putting pressure on that operating margin compared to the first half. And I think prior to pandemic, Patrick, what is also putting pressure on those operating margins are the higher inflationary costs that we've quantified it. 200 to 250 basis points for the full year. So I think moving forward to think about low 30s is probably the right way to think about it as we move forward, like you said.

Stephen MacMillan:

Yes. I think overall, Patrick, our strategy remains the same, which is being patient, diligent and active. And I think our focus continues to be leveraging the capabilities and strengths that we have and leveraging the existing sales channels. So bulking up the businesses that we have makes sense. We are considering widening the aperture to consider larger deals, but frankly, those would be things with more mature earnings profiles and still be accretive to growth. So each of the divisions has some pretty nice pipelines. We've also because the core business is doing so well, again, I think it gives us that ability to be patient because we don't have to do anything. And so it's this magical combination of we can afford to be patient. We've got a lot going on, but we'll continue to see where it goes.

Timothy Daley:

So just curious about the growth performance driven by the selling days. I think you guys called out two extra selling days in the quarter. What was the contribution of that towards growth? And then how should we think about that for the year? And then as well, any potential offsets or not once we start thinking about modeling 2024?

Operator:

Our next question comes from the line of Casey Woodring with JPMorgan.

Stephen MacMillan:

Yes, Casey, I think it was kind of more of a onetime bump here as it now gets very steady. I think we feel really good about our visibility frankly, not just through '23 but into '24, and we continue to manage this for the long haul. We had to run a little extra over time for some of our service people with the extra installs, and I think we'll be at a really good rate here going forward.

Stephen MacMillan:

Longer term, not necessarily. We always just want to be careful not to get ahead of ourselves. I think clearly, in the short term, and what we aspire to be is certainly better. And clearly, what we're putting up right now is great. Now it's going to be much tougher clearly when we start bumping up against 24% comparable levels, then growing that in that 5% to 7% on top of those numbers. cumulative is going to be a lot better off than frankly, when we gave the guidance. So in fact, in some ways, it actually is much higher, but we don't want to get too far ahead of ourselves on that number.

Operator:

[Operator Instructions] The next question comes from the line of Anthony Petrone with Mizuho Group.

Stephen MacMillan:

Sure, Anthony. I think it's probably more the market coming back. And combined with Surgical was weaker in this quarter a year ago because of the Onton surge. And I think the I go back to a year ago where people were kind of picking at gee, surgical might not be as strong or whatever else, and it was back to. That was a market dynamic, and I think now there's probably some catch-up going on procedure-wise as you're hearing really across the med tech space. And having said that, I think we feel really good about how we're performing among that, both with our existing businesses and frankly, having the broader portfolio that you referenced.

Anthony Petrone:

And then on molecular, just excluding COVID, another strong quarter. And just wondering if you could provide an update on where utilization on the Panther systems that were placed during the pandemic, those new systems where you had some demand pull, just where utilization on those systems is today? And where do you think it can go over the next 12 to 18 months?

Operator:

Next question comes from the line of Liza Garcia with UBS.

Stephen MacMillan:

Yes. I think we are as excited, if not more excited about the growth potential, probably more excited even, I would say, Liza today than when we acquired the business. The team that we have there is great. As you mentioned, we've now brought the lab over from nearby we've consolidated into our San Diego facility. And I think we're realizing that the penetration of this opportunity relative to the full market is still in the very low single digits. So there's potentially a lot of runway. We've been putting in more automation, frankly, just to make the ordering systems easier and other stuff. And I think we're really excited. It's clearly growing very accretive to the growth rate of the division, and we think will be for -- that's 1 of those for years to come.

Stephen MacMillan:

Liza, I think this is 1 we've been incredibly excited under the leadership of Essex Mitchell, who's been running that business now for the last few years. he's dramatically strengthened both the U.S. business as well as we've made a couple of those great acquisitions of Acessa and Bolder. And so we are seeing some really nice growth. I still think this quarter, may have been a little bit of procedural catch-up in the overall market. So we never -- as you know, we never want to get too far ahead of ourselves, but we love the team that we have there now. And as Karleen said, and you can see in the press release, the growth rate internationally now for Surgical is really, really doing well. We're north of 30%. And I think in this quarter, close to 40-ish and that's starting to become meaningful. So I think our -- as we sit here today and think about another growth driver for this company, Surgical is definitely in there.

Andrew Cooper:

Maybe just 1 more on breast and thinking about the commentary for the back half of the year. How much of that pull forward do we think about working the backlog down and that's why maybe a little bit lower quarter-over-quarter into 3Q versus still being a little bit limited by chip supply? Just where are you in terms of kind of the allocations versus what you'd ideally like to have? And just help us think about sort of the cadence as we work through the back half of the year in terms of why a little bit lower or being able to maintain maybe the great level that you saw in this quarter?

Andrew Cooper:

Okay. Super helpful. And then maybe just 1 more. You mentioned the respiratory seasonality in the prepared remarks. So can you maybe just help us think about the sizing of kind of where that business is on a non-COVID basis today? And how you think about what that seasonality really looks like through the course of the year as it continues to kind of stick with us post-COVID?

Operator:

Our next question comes from Puneet Souda with SVB Securities.

Stephen MacMillan:

Yes. Truthfully, I think we feel good about all three of the businesses as we go into the back half of the year. I mean, obviously, it's -- the biggest thing is it's 1 reason we wouldn't get ahead of ourselves and start to raise guidance and long-term expectations when we're going into that exact uncertainty that you're referencing. But the fundamentals of each of the businesses, I think we feel really good about.

Stephen MacMillan:

Yes. Let's start at the highest level. There is no doubt in our minds that more frequent co-testing is still the absolute best health care for women. There are anecdotal increases that we're starting to see upticks in cervical cancer screening since the intervals have gotten longer. And frankly, there's enough data out there that is co-testing is significantly better than HPV primary alone. So while there are those advocating for that and USPSTF could do that. It doesn't make it the best science. And I think where we feel really, really good. And as you know, in our tagline is the science of sure. We feel it's our responsibility to bring the best care to women around the world, and we're going to continue to drive for co-testing as the right way to go. So -- and frankly, I think most of the -- certainly, most of the U.S. doctors are well aware of that. And even if the USPSTF does something to change those guidelines. We think that will be slow to change because of the remarkable success of the PAP test in largely almost eliminating cervical cancer screening over the last generation or two particularly in the U.S. So it's something we feel very strongly about, and we believe time and the science will be on our side. Having said that, there's going to be pressure. There's deep pocket pharmaceutical companies that want to try to drive to HPV primary. But we feel really good about the science on our side and that our business will be more durable.

Jack Meehan:

Wanted to get your latest expectations on COVID-19. So I heard the guidance commentary. We've heard from some of the big labs about volume following off and we have the PHE expiry coming soon. Can you just talk about like the stickiness of this product line and what your latest stab is on when an endemic number or guidepost might be for 2024 here?

Jack Meehan:

Yes, makes sense. Just as a follow-up, I wanted to talk about something that might be a little bit more not that COVID isn't durable, but might be more durable in the eyes of investors, the vaginitis panel. Can you just give any color on the size of that business now? Is it annualizing over $100 million at this point? And just talk about like the penetration in your customer base, how is that going?

Stephen MacMillan:

It's been a really nice surprise for us how big that's getting held quickly, Jack.

Tejas Savant:

One quick cleanup question on guidance. Actually, Steve, if I may. You got the approval in Europe and Canada on V5 for NovaSure. How are you thinking about the revenue implications of that over the medium term here? NovaSure. I mean, it's been a flattish business, doesn't get too much attention from investors, but I think it's still the second largest piece of that segment for you?

Tejas Savant:

Got it. That's helpful. And then one on Imaging. Karleen, I know you talked about sort of the cadence you're normalizing versus F2 2Q levels for the gantries. But did you benefit at all from this very significant correction in demand that some of these semi manufacturers are seeing? I know you've talked about your chips being very distinct from what into consumer products in the past. But just curious as to whether that drove a little bit of the uplift here? And to your point, Steve, around the macro being something you're watching, is this just sort of a little bit of conservatism and wider error bars around sort of the normalization trajectory here that's making you take a relatively conservative stance of the gantry replacements versus the field service engineers in that aspect of it?

Stephen MacMillan:

Yes. And the other part was just -- we're being conservative. I think we're managing for the long haul here, too. We're very much thinking about 2024 and what things look like there. And I think this is already a really, really good year, and let's get ahead of ourselves.

Andrew Brackmann:

I've actually got two questions on Molecular Diagnostics and sexual health specifically. So I'll just ask them both the front. First, CDC had the report out a few weeks ago showing the rise in FTI cases. So maybe can you just sort of remind us on some of the initiatives that you have here with customers and public health services broadly for your testing solutions? And then just secondly, on this platform, can you just sort of talk about what you're seeing internationally with this franchise anything in terms of where wins might be coming from, be that versus competitor tests or even sort of LDTs transitioning here?

Karleen Oberton:

Yes. The only thing I would add internationally for molecular diagnostics is our viral business, specifically in Africa continues to have really nice double-digit growth as we make investments there to help that region.

John Murphy:

This is John on for Derek. I wanted to ask, so recently, a federal judge struck down a key provisions of the Affordable Care Act and that kind of jeopardize the free coverage of wide-ranging preventive services, including mammograms and cervical cancer screening. How do you see this playing out? And I guess, are you worried at all about reimbursement? Or is that -- or do you have any fear of having to pay -- or the patients having to pay out of pocket and that will deter them from screening?

Operator:

Our next question comes from the line of Vijay Kumar with Evercore.

Stephen MacMillan:

Thanks. Sorry, I missed you on the visit out here.

Stephen MacMillan:

Personality come on.

Stephen MacMillan:

Yes. I think the implication for the second half is still much better than the numbers you just mentioned the -- we're still saying double digit here in the third quarter and likely fourth. So I think -- I don't think it was pull forward, Vijay, to be very clear. I do think the GynSurg market probably like some of the ortho markets and some of the other markets, some of the docs may have been doing more, what I would call catch up. So I don't think it's as much pull forward, but they're catching up from the last few years not maybe doing as many procedures as they could have. So I think will that same quarter a year from now, maybe not be quite as active yes, but I don't think it was any kind of pull forward per se. I think it's more catch-up. And I think we just feel great about our surgical business, we have added more growth drivers. I think, again, it's been kind of missed in the COVID spikes. I think it's the business that's been most overlooked because of the way the COVID spikes were happening. And just really proud of what that team is doing and we've added Fluent we got MyoSure and NovaSure doing well, and then we've got Bolder and Acessa. And we've got that business getting stronger internationally.

Karleen Oberton:

Yes. Let me start with the days, Vijay. So we have, I think, 1 less day in the fourth quarter. So really negligible impact in the back half of the year when we talk about selling days. And again, here in the second quarter, a little bit of benefit, but not to the extent that we had in the first quarter given the full calendar week and how that impacts our service line. . And let me try to answer your M&A. I think what I would say is a couple of things, as we said in the prepared remarks, our philosophy and approach hasn't changed. Division-led, very active, probably some rebuilding over the past year in diagnostics of the pipeline, given the level of acquisitions we did in 2021. But we're approaching it from a position of strength. Our aperture is a little wider, given our firepower and that we can look at some things that may be a little bigger than we've done in the past. But certainly, those things we're looking for mature on product -- on market products and accretive to earnings. So not looking for a fourth leg of a stool that just to leverage our strengths and capabilities that we have across our current businesses.

Navann Ty Dietschi:

I just have a few on women's health. So what's the vaginosis assay still the key driver of Q2 performance? And can you discuss the competitive environment in women's health, so competitors far behind, given Hologics, competitive advantage and women's health focus? And does Hologic still benefit from the opt-out guideline for its legacy test? And I have a follow-up on M&A after.

Navann Ty Dietschi:

And then on M&A, so would M&A part of the international expansion? Or is it mostly -- or is international expansion mostly expanding the installed base and menu?

Operator:

Thank you. This now concludes Hologic's Second Quarter Fiscal 2023 Earnings Conference Call. Have a good evening.

Operator:

Good afternoon, and welcome to Hologic's First Quarter Fiscal 2023 Earnings Conference Call. My name is Justin, and I am your operator for today's call. Today's conference is being recorded. All lines have been placed on mute. I would now like introduce Ryan Simon, Vice President, Investor Relations to begin the call.

Stephen MacMillan:

Thank you, Ryan, and good afternoon, everyone. We're pleased to discuss our financial results for the first quarter of fiscal 2023. Our results highlight the strength of our three divisions, the power of our commercial channels and the increasing impact of our transformative growth drivers from R&D and acquisitions. For the quarter, total revenue was $1.07 billion and non-GAAP earnings per share was $1.07, both above the high end of our guidance. We also repurchased 1.5 million shares of our stock for $100 million in the quarter. To recap our pre-release, while we did have the benefit of three extra selling days, our top line performance was strong. Diagnostics grew 15.8%, powered by molecular diagnostics, which grew 24.5%. Both figures are organic and exclude COVID. Surgical also delivered an impressive quarter, growing 14.7% organically. And Breast Health finished the quarter down only 5.2%, a signal that our recovery from chip-related supply chain headwinds is indeed underway. While the extra days contributed approximately 250 basis points of growth net, even without the extra days, Diagnostics and Surgical both grew double digits and Breast Health exceeded prior guidance. All in, we are well positioned to achieve our full year guidance of low double-digit organic growth ex-COVID in all three of our franchises, well above our 5% to 7% long-term growth rate. Our balance sheet and cash flow are exceptionally strong and we continue to create value for our stakeholders. Today, we'd like to cover two main topics. First, we'll build on the thesis from our JPMorgan presentation three weeks ago, a theme that encapsulates how we improve women's health globally, drive our commercial success and elevate Hologic's reputation at the same time. Second, we'll highlight the transformation of our business and showcase the growth we are driving in each division, which we hope is now becoming much more evident in recent quarters. We are incredibly excited about today and confident about our future. Jumping right in, purpose driven, results driven. These four words comprise the theme of our JPMorgan presentation this year and these four words underpin the success of our entire business. At Hologic, we have an unparalleled commitment to women's health. When we speak purpose driven, results driven, nothing symbolizes these words better than our virtuous circle, which we feature in our corporate presentation. It is simple and powerful at the same time. Most importantly, it unifies and inspires our thousands of employees around the world and points our talented workforce in one singular direction, to elevate women's health, where we have leadership positions in each segment in which we operate. Our business starts with innovative, clinically differentiated, life changing, lifesaving technologies. Whether through R&D or by M&A, it all starts with innovation. As we bring these new innovative products to market, they grow our sales and profits. And here is the key to our success. What we believe sets us apart and allows us to thrive, we then invest these profits into championing women's health on a global scale. We are expanding policy and access, which then allows our products to reach more women and have an even greater impact on the world. And as our business grows, this cycle continues, simple and powerful. Two weeks ago for the second straight year, we had the opportunity to engage with global leaders at the World Economic Forum in Davos, Switzerland. This is an incredible platform that was not available to us just three years ago. We've earned our access through our leadership in women's health, our pioneering Hologic Global Women's Health Index and our outstanding response to COVID that continues today. As we've grown our business, we have significantly elevated the Hologic brand around the world. With our engagement at Davos, making powerful connections and building strong relationships, combined with recognition from our global partnership with the Women's Tennis Association. Hologic and what we stand for is more recognized globally than ever before, which in turn helps us attract the best and the brightest to the Hologic team, an important advantage in today's labor market. Quite frankly, the best thing we can do for the world and also for our business is to raise awareness and opportunities for women's health globally. For a sense of scale, there are approximately 170 million women in the U.S., our largest market. This is only a fraction of the nearly 4 billion women in the world. We have a long way to go. And as the importance of women's health is elevated and these markets grow, Hologic will be there at each step along the way. Shifting gears to our second topic, understanding the growth that is driving our business. With our strong performance for the quarter, the number one question we are asked is, how are we growing our top line? To answer this question, we will first reflect on our business transformation, a powerful mix of organic innovation, and strategic tuck-in acquisitions. Second, we will discuss each division and highlight examples of our growth engines and the multitude of market strategies deployed across each division. Reflecting on our transformation, it really started well before COVID. Three years ago, we were ready to show the world how we had diligently and thoughtfully strengthened our business for growth. Then, the pandemic hit. And when it did, we established three goals. One, take care of our employees, which we have done; two, meet the world's needs for highly accurate molecular diagnostic COVID testing, which we continue today; and three, emerge as a fundamentally stronger company, which is happening now. Under the cloud of COVID, while successfully deploying Panthers and producing our COVID assays, we strengthened Hologic for the long-term, to a level higher than even we had imagined prior to the pandemic. We achieved this through the combination of innovative internal R&D efforts, plus a series of tuck-in acquisitions. As a result, we've had continuous new product releases that have fundamentally transformed our business and boosted our growth profile. Now as the COVID cloud begins to clear, it is increasingly more evident that we are geared for success, geared for growth and geared to sustained performance over the long-term. Next, to fully appreciate our growth potential is to understand the transformation and diversification of our portfolio and growth strategies. Across all divisions, we are innovating, acquiring and building new markets, entering underdeveloped markets and penetrating existing segments. All while continuing to defend and even grow share in the markets we lead. Our growth in each division is grounded in strong and durable core products. These resilient core franchises are backed by long established clinical needs and commercial relationships, which provide a rock solid foundation to leverage into our newer growth drivers. We leverage our installed bases and customer relationships to advance our newer products, which we expect to both diversify the portfolio and accelerate growth. Moving on to the divisions. In Diagnostics, we have leading positions in core women's health product lines, such as STIs, and cervical cancer. Our women's health molecular diagnostics and psychology base drives steady growth and supports positive relationships with top laboratories and key opinion leaders, which opens the door for additional new products. Today, Diagnostics has grown from primarily a US women's health business to a global diagnostic franchise with many more growth drivers. For example, we now have over 3,250 Panthers worldwide. A number beyond what we had even imagined, along with 19 assays and the Fusion system that enables even further menu expansion. We also have a vastly expanded footprint with three acquisitions

Operator:

Thank you. [Operator Instructions] And our first question will come from Patrick Donnelly with Citi.

Karleen Oberton:

Yes, sure. So I think the outlook would say that each quarter is roughly 30% operating margin and what you see happening is, you have the marketing expenses coming down from Q1. You have lower COVID revenue, which is a headwind, but then you have higher Breast Health revenue, which is a tailwind. So they kind of offset those headwinds or the tailwinds offset over the course of the year. And we maintain at that 30%, again, a little lower than pre-pandemic, because we have the higher inflationary costs still anticipated.

Stephen MacMillan:

Yes. You probably got it in multiple buckets, Patrick. Part is just a return of the Panther is being used for the core STI, most of our women's health business. You've got increasing growth in our new product launches, especially BV/CV, which is off to a tremendous start and we said we think will be a major driver of growth. And you really have -- what we kept saying over the last couple of years and it wasn't as obvious is so many of our customers around the world that we're running COVID are now putting the menu onto the Panthers. And it's really that simple and a huge part of it. And there's just a little bit of Africa and some viral stuff. But...

Operator:

And our next question will come from Jack Meehan with Nephron Research.

Stephen MacMillan:

Fly Eagle fly, fly Hologic fly. Okay, go ahead, Jack.

Karleen Oberton:

Yes. So we have, as you said, that number includes the COVID assay revenues. So I think you've attempted to take some of that up. We also have the ancillaries, which are part of that, that are elevated because of COVID. But I think certainly, we're seeing the uptake, again, with newer customers in more than COVID. As well as our initiatives like in Africa, what Steve talked about the viral picking up some nice traction there as well. I think we -- as we think about international molecular, we would think that that is going to grow a little faster than U.S. given the commercial investments that we've made there and the Panther placements.

Jack Meehan:

Interesting. Okay. Then my second question is on breast imaging. So the U.S. sales in the quarter were $212 million. I think that's actually like the largest first quarter you've had, at least several years. International still seeing some pressure, but I'm just trying to juxtapose this versus your comment about you're still seeing ongoing semiconductor pressure. What was going on in the U.S. in the quarter? Was there any flush of some sort as chips came in and just what does 2Q assume?

Operator:

And our next question will come from Max Masucci with Cowen & Company.

Karleen Oberton:

Yes, I would say that the margin accretion from COVID is less and less dependent on COVID as we move throughout the year and it's going to be more driven by the Breast Health recovery and certainly Q1 to Q2 lower operating expenses, which will persist throughout the year.

Stephen MacMillan:

Sure, Max. To reiterate what Karleen said, our primary goal is still tuck in acquisitions followed by share buybacks. We certainly have been opportunistic on the buybacks because we generated a whole bunch of more cash during that time and thought that made a lot sense. Going forward, we're looking across the businesses, all being led by the divisions. We're not going to get into particular scale or targets for obvious reasons. But I think what we would say is, we might go a little bit bigger on scale if it brought more EBITDA. So it will be a proportionate thought process there. But I think we're -- the biggest takeaway frankly is, we're in a position of strength where our base businesses are very strong. We don't have to go do anything. And candidly, when I think there's a lot of folks around trying to figure out what they want to be when they grow up right now. We know exactly where we're going and what we want to be and that is championing women's health and having every business going well. So it gives us the luxury of being patient and smart on the business development front.

Puneet Souda:

Yes. Hi, Steve. Thanks for taking the question. So maybe for you, given the low double digit growth rate that you're highlighting here, obviously, the business, all three segments are doing great. So what's holding you back on the long term guide of 5% to 7%? Why couldn't that be higher now in your long term outlook?

Puneet Souda:

Okay, great. And then just on capital deployment, maybe Karleen. What's your ability to lever up? What ratio are you comfortable with, just given the sort of the interest rates that are there right now and potential for those to continue to ramp up a bit higher?

Operator:

And moving on to Vijay Kumar with Evercore ISI.

Stephen MacMillan:

It's -- we continue to deliver, I can promise you, it has nothing to do with timing of revenue recognition, Vijay. The underlying business is very strong, we’re one quarter in. Think about where we were a year ago at this time. Suddenly Russia invaded Ukraine, nobody saw that coming. I've lived through the downturn of 2008-2009. We've watched the world go up and down and over the first quarter of the year. So we're going to continue to be very prudent, do not underestimate our confidence in our ability to run the business.

Stephen MacMillan:

Look, clearly the comps on molecular and diagnostics will get harder in the back half. But fundamentally, what's driving it, we sort of answered this I think earlier. We placed a whole bunch of Panthers, almost 1,500 Panthers in COVID time over the last three years. We've got more customers adopting our core menu. We have our new products being launched doing very well. And those are really the main drivers, as well as a little bit of flu and a little bit of viral stuff as we've been penetrating a little more Africa.

Operator:

And our next question will come from Tim Daley with Wells Fargo.

Stephen MacMillan:

Yes, we worry all the time. But at the end of the day, we've also built an incredible sales force that has partnered both with the labs, but also with the clinicians. And our assays have proven themselves over time as well as do not underestimate the workflow advantages of our Panther system. And so, there's a lot of people that can talk a good game and especially let's face it. There were so many startups that all were working on stuff and then they got money in COVID time and they start talking about all their women's health assays. And it's an interesting little landscape right now. So we never take anybody for granted. We face some very formidable competitors, but we always have and we will continue to and we frankly think we continue to innovate things like BB/CV. We continue to bring new assays and new tests and new education to our customers. And that continues to provide strength for us.

Karleen Oberton:

Yes. What I would say is dollar contribution is probably evenly split between the legacy platform and affluent our new innovative and then the acquisitions. But certainly, the percentage growth rate is much higher than the acquisitions building off a smaller base. But at the end of the day, I think the key takeaway is, there's not just one growth driver, there's multiple growth drivers that are driving the success of that business.

Tejas Savant:

Hey, guys. Good evening and thanks for the time here. Maybe I'll start with a couple on some of the recent deals for you, Steve. On Mobidiag, can you just remind us again where things stand in terms of -- I think you had said there's an entry buildup underway ahead of the launch. How big do you think the revenue opportunity could be in fiscal 2023? And then similarly, you highlighted Biotheranostics a couple of times today and obviously, they've got into guidelines. They have the recent data from December as well. How big do you see this opportunity becoming for you, perhaps not this year, but a couple of years out?

Tejas Savant:

Got it. That's helpful. And then a couple of follow-ups here. One on, just the hospital CapEx environment and any sort of change in either sort of decision timelines or perhaps cancellation rates here a month into the new calendar year? And China, I know it's small for you guys. I think it's less than 3% of sales. But is there anything going on there in terms of the COVID case surge that we should be factoring in at least in the fiscal second quarter here?

Operator:

And moving on to Derik de Bruin with Bank of America.

Stephen MacMillan:

Hey, Derek.

Karleen Oberton:

Yes, Derek, it's Karleen. So I'll take this one. So if you think about prior to the pandemic, what I would say is, our normal operating margin was roughly 30%, 31.5%, very rich margins for our industry. I see us probably over time getting back to that level. But what I would say is, think about our 5% to 7% top line long term growth rate. We will grow EPS faster than that, so likely low double digits and that EPS growth comes from more than just operating margin expansion. It comes from higher revenue growth, as well as some things that we can do below the line. So that's how we think about our long term outlook for earnings growing faster than revenue and again anchored on that 5% to 7%.

Derik de Bruin:

Well, thanks for setting me up Steve. That's exactly where I was going next. So I appreciate that. When you think -- you've got Biotheranostics, which is your entry in sort of like the oncology world. I mean there were some dabbling in the past with some things with like -- I think with PCA3 or some of this like stuff. How do you sort of think about oncology market? I mean there's obviously a lot of real estate out there, but I think pointed out that you don't want to do anything that's super dilutive in those areas. Can you just sort of -- but clearly there's a lot that's going on that market and opportunities for Hologic. Can you sort of like flesh out where you sort of think your genomics focus is, where this is going, how it is? Thanks.

Operator:

And we will take a question from Andrew Brackmann with William Blair.

Stephen MacMillan:

Yes. We're clearly entering in Europe right now on a smaller scale. The U.S. clearance will be ultimately the bigger part. And as we said, that's probably at least a 2025-ish event at this point. So we're still a few years away as we prepare for it. And we'll certainly be able to leverage a lot of the strength that we have in the labs, especially the medium sized labs as we go into that point at that point.

Stephen MacMillan:

We're always looking -- at the end of the day, we're thinking about the long term top and bottom line growth. We're very focused on ROIC, a key part of our senior leadership team comp is tied on ROIC, so we look at it on every deal. And we've watched a whole bunch of things that even if come down 80% or 90% and some of them we still don't necessarily like. So again, I think we've got the luxury of time on our side given the strength of underlying business and the strength of our balance sheet, which gives us the chance to be relatively picky around what might be out there.

Navann Ty:

Hi. Thanks for taking my question. On women's health, so I believe vaginitis drove Q1 growth ex-COVID. Should it continue to drive growth for the rest of the year? And longer term, could you discuss your women's health focus being potentially a competitive advantage versus your non focused peers? Thank you.

Navann Ty:

Thanks. And staying at women's health, you mentioned future portfolio expansion in Breast Health. So are you able to tell us more about any Breast Health innovation?

Karleen Oberton:

Yes, I think we focus -- one of the important focus on innovation is patient experience, focus on that as well as machine learning, what we can do to make radiologists more efficient and certainly that's a big issue outside the U.S. where there's much fewer radiologists.

Operator:

Good afternoon and welcome to the Hologic’s Fourth Quarter Fiscal 2022 Earnings Conference Call. My name is Jennie, and I am your operator for today’s call. Today’s conference is being recorded. All lines have been placed on mute. I would now like to introduce Ryan Simon, Vice President, Investor Relations. Please go ahead.

Stephen MacMillan:

Thank you, Ryan, and good afternoon, everyone. Happy Halloween. We're pleased to discuss our financial results for the fourth quarter of fiscal 2022 and provide guidance for fiscal 2023. It was another dynamic year for Hologic, delivering strong performance while navigating macro headwinds and we closed 2022 once again posting outstanding results for the quarter. Total revenue was $953.3 million and non-GAAP earnings per share was $0.82, exceeding both our base business and COVID guidance. We also deployed $175 million of capital to buy back 2.5 million shares in the quarter. For those of you keeping score, for the full year, we utilized $542 million of our exceptional cash flow to repurchase 7.7 million shares, reflecting great confidence in our future. For today's call, we'll first provide a high-level overview of our fourth quarter performance and then reflect on our full year results. In doing so, we'll also share insights into our future outlook as we look forward to 2023. Overall, make no mistake, our consistent strong performance in these turbulent times is no coincidence. We are a fundamentally different company today than when we entered the COVID pandemic. We also understand that some of you are still trying to ascertain the strength of our core businesses. As we look ahead, each of our core franchises, listen closely here, diagnostics, breast and surgical are expected to produce low double-digit top line growth for fiscal 2023. As we set out to do just over two and half years ago, we are emerging from the pandemic a much stronger company we thoughtfully and strategically reinvested our upside earnings into both our business and into our passion to be champions for women's health. Our ability to step-up to the plate during the pandemic and address the global demand for COVID testing was an incredible achievement. But our real home run was the transformation of Hologic that cannot be ignored. Through organic and inorganic additions, we now have more growth drivers across our business in each of our divisions than ever before. These growth drivers layered on top of our market-leading core franchises form a solid foundation that anchors our business in these volatile and pivotal times. Under the intense pressures of the macroeconomic landscape we live in today, all companies will face adversity. That said, because Hologic is a much stronger company today, we will thrive. As we've said before, you can count on us to deliver on our commitments even in the face of volatility and uncertainty. It's equally important to recognize that our revenue is the least capital sensitive it has ever been in our 36-year history. For fiscal 2022, given COVID and the impact from chip shortages, only 12% of our revenue was from capital. A percentage we expect will settle well below pre-pandemic levels. A truly astounding change from where we were just a few years ago, and a transformation that makes Hologic a more durable company in the face of a potential recessionary environment. Our confidence and conviction in our business is underpinned by our unwavering commitment to our purpose-driven business strategy, a strategy that is centered around our purpose to enable healthier lives everywhere, every day. Our passion to become global champions for women's health and our promise the science of sure. We don't see our commitment to mission and ESG as a trend or fad. Instead, we know that in order to continue to achieve our strong financial results, we must continue on our path to elevate and improve women's health and well-being around the world. Now let's turn to the quarter results. As expected, our strong performance was driven primarily by both our molecular diagnostics and surgical businesses. To answer the question, we're sure many of you are wondering. Core Panther utilization is strong. Our Molecular Diagnostics business grew north of 17% in Q4, excluding COVID, driven primarily by more assays being run through our expanded Panther installed base. This exceptional growth was once again broad-based and fueled by a combination of legacy and newer assays in our robust molecular portfolio. Our legacy STI business contributed growth dollars while our newer assays, including our vaginitis panel, MGen and our virology portfolio lifted the growth rate. As for Panther placements, we now have nearly 3,250 Panthers placed around the world. A remarkable achievement considered we exited fiscal 2019 slightly north of 1,700 Panthers in the field. In Surgical, our business grew nearly 9% organically and over 11%, including the Bolder acquisition. As anticipated, the COVID pressure on our surgical business abated in the quarter, and we saw procedural volumes return as well as acceleration from our new business lines. Powering the strong performance in Surgical were the same growth drivers as in Q3, MyoSure, Fluent and solid contributions from Bolder and Acessa. In Breast Health, as expected, the business was down 16%, driven primarily by the chip shortage adversely impacting our gantry business. Having said that, we have confidence that the worst of the shortage is behind us and that the business will return and accelerate throughout 2023. We will go into more depth on Breast Health later in the call. Shifting gears. We will now reflect on our full year results and outlook for fiscal 2023. For 2022, Diagnostics grew 10.2% and Surgical grew 6.3% and Breast and Skeletal Health declined 7.7%, driven primarily by constrained gantry sales as a result of chip shortages. Net without the chip shortage, it is very clear that each of our businesses would have been solidly at or above our long-term guidance. As a reminder, each of these figures are in constant currency, exclude acquisitions until they annualize and also exclude COVID assays and as well as COVID-related and discontinued products revenue. We are extremely proud of where we landed in both Diagnostics and Surgical. And we have high confidence that the concentrated impact on Breast Health will rebound strongly in 2023. Looking forward by division, as mentioned at the onset of this call, each of our businesses, including international, is expected to achieve low double-digit growth in fiscal 2023. In Diagnostics, powered by our vastly expanded Panther installed base, we expect low double-digit growth from the division in 2023, bolstering growth for the division we expect continued strong sequential growth from Biotheranostics as well as incremental contribution from Mobidiag internationally. Focusing on molecular diagnostics, our growth thesis centers on more customers running more volume and more menu on our Panther systems. While we are still in the early days of ramping utilization, we are already seeing positive signs today. With our broad menu, we are well-positioned to continue double-digit growth in our core molecular Panther business in 2023. To provide additional color and shed more light on non-COVID Panther utilization, pre-COVID at the end of our fiscal 2019, about 20% of US customers we're running at least four assays on their Panther systems. Fast forward to the close of Q4, now over 33% of US customers are running at least four assays, nice improvement and still future opportunity ahead. Moreover, last quarter, we spoke to the fact that over 90% of all COVID customers were running at least one other non-COVID assay. Many of you asked, what about new customers acquired during COVID? As of the Q4 close, over 85% of new customers worldwide are running at least one other assay on their Panthers in addition to COVID. More impressive is that over 55% of these new to Hologic customers, are running at least two non-COVID assays on their Panthers, a strong signal of future utilization at new customer sites. While still early, we expect these positive utilization trends to continue in the quarters and years to come. Now turning to Surgical. We also expect Surgical to deliver low double-digit growth in 2023. Consistent with the last two quarters of 2022, we believe MyoSure and Fluent plus Acessa and Boulder will lead the way. We expect the division's revenue to accelerate as we continue to integrate our acquired laparoscopic assets into the business and into the bags of our strong surgical sales force. Increased physician access and payer coverage for our laparoscopic portfolio should continue to improve over time and be a tailwind for growth. Longer term, our goal is to build both Acessa and Boulder into $100 million plus surgical brands that will complement our market-leading NovaSure and MyoSure products. In Breast Health, we fully expect to exit 2023, achieving low double-digit top line growth from the supply constrained 2022 comps. We have confidence the worst of the chip shortage is behind us. As chip supply normalizes, as it should over the course of 2023. We expect our gantry business to return to strength. Frankly, as we work down the backlog, we have the opportunity to perform slightly above the historical gantry placement run rate, as we exit the fiscal year. Even with the shortage of gantries we faced in 2022, we maintained our market-leading position in the US grew our presence internationally and have no reason to believe we are giving any ground to the competition. In fact, the backlog for our best-in-class gantries continues to grow, and we continue to receive orders at a healthy rate. We also understand capital budgets may face increased pressure given the macro environment. Despite this challenge, we remain confident in our ability to place gantries even if we enter a recession. The reality is that gantries tend to be at the lower price point of hospital capital spend. Gantries also represent both a value-driving opportunity for our customers and more importantly, essential capital equipment for world-class patient care. Finally, our international business will continue to be a tailwind and a powerful lever of growth for each division. In 2022, our international business grew just north of 6% organically, excluding COVID, posting strong growth even with the chip headwind and constrained gantry supply. International is now nearly 30% of total revenue and poised to continue its growth trajectory. Looking forward to 2023, we are confident our international business, excluding the impact of COVID, will return to double-digit top line growth and sustain the momentum created by our strong response to COVID and from our groundbreaking initiatives like the Hologic Global Women's Health Index and our global access initiative. To conclude, at Hologic, we know we must center on our purpose to achieve our strong financial results. From our strong results, we will continue to drive patient education and access initiatives, and continue to invest in our business. From our strategic investments, we will continue to deliver innovative, life-changing technologies. These technologies will power our perpetual cycle of reaching and helping more patients, all while delivering value and strong financial results for our shareholders. Before turning the call over to Karleen, let me close by saying that we are incredibly excited about where we have been and even more excited about where we're headed. And finally, from me personally and the rest of our global leadership team, we would like to thank and congratulate each and every one of our nearly 7,000 employees around the world for their dedication to our purpose and another incredible year at Hologic. With that, let me hand the call over to Karleen.

Operator:

Thank you. [Operator Instructions] And we will go to our first question from Patrick Donnelly with Citi.

Stephen MacMillan:

Hey, Patrick.

Stephen MacMillan:

Sure, Patrick. I think what we feel great about is over time, and we haven't built the market share in the installed base in the United States, and really around the world, but especially in the US without people really buying into the superiority of our products, from a labeling, from a workflow standpoint, from a clinical efficacy published data, everything else that we're doing to both detect earlier-stage cancers sooner, also reducing the false positives and avoiding needless callbacks. People have really seen that. So when it comes down to it of a hospital system, is looking to need a few new gantries for their system. They're not going to want to go away from us because they've made that decision to come into us. So they're much more willing to wait until we're back in business, plus the other reality is this is an across-the-board industry issue. So it's not like we are short and others can provide. So we really have two things going for us, which is call it, the micro, our products and the incredible products we're offering and the macro that what we're dealing with -- with the chip issue is being felt by everybody else. So I think our customers understand that. I think anybody who's in purchasing or works for a hospital, they all understand the supply chains and their own personalized, right? You need a dishwasher fixed and the parts taking months to get those kinds of things that are playing out in everybody's life. And I think everybody understands, okay, it's just going to be a little while. So we feel great about customers continuing to want our products and feeling better and better about our visibility into as we've been working with all the chip vendors right down to every single SKU and how many chips go into every one of our machines feeling better and better about where we'll go.

Karleen Oberton:

Yes. I mean, I would think, the 30% is probably pretty consistent throughout the course of the year. As you said, the dynamics kind of change first half versus back half. So I think that 30%, if you're plus or minus in any quarter, a point or two, I think you're right on.

Tejas Savant:

Hey, guys. Good afternoon. Karleen, just following up on that margin question here a little bit. Can you just call out specifically in terms of the COVID contribution assumptions you're baking in here? Remind us of what the gross and operating margin assumptions are for that piece versus the rest of the business?

Tejas Savant:

Got it. That's helpful. And then just a quick follow-up there in terms of the ranges you've baked into the guide, Karleen. Can you just walk us through what's assumed for the Breast Health recovery? At the high end of the guide, are you assuming essentially a return to normalcy by the fourth quarter or is there still some possibility of the recovery taking a little bit longer?

Tejas Savant:

Got it Thank you.

Operator:

And we'll go to our next question from Anthony Petrone with Mizuho Group.

Stephen MacMillan:

Yes. I wouldn't say we've got any more visibility. We've been very close to our customers all along, Anthony, in terms of both international from the Ministries of Health, deciding things right down to the regional parties within various countries and the same within every one of our customers in the US, both the main labs as well as the hospital. So, I think we continue to stay close and feel very good about our position and the way we continue to think about COVID is we're going to deliver whatever the marketplace needs, we're not going to get out of our skis in terms of forecasting it financially.

Stephen MacMillan:

Thanks Andy. We didn't fully hear the second part of that question because you were cutting in and out on the first part as it relates to the first part of the follow-up in terms of consistency on COVID, I think the way we've approached this all along has been you can't predict this has never been consistent. It has been volatile by region and by timeframe. And any eight-week period, people have been way off probably trying to predict what was about to happen. So again, what we have said at the beginning, however, was we thought that this long term would create a new assay for us that would be far more enduring then, I think anybody ever thought it would be back in 2020 back to what people thought when everybody thought this was going to go away in a hurry or it was going to go away as soon as vaccines arrived or molecular testing was going to go away as soon as antigen tests came along, right? What we've learned is this thing is going to be around. And frankly, as long as countries like China are still trying the zero COVID approach, and everything else and the fact that this thing we always said in the beginning, this is a respiratory virus that will mutate. Herd immunity was never going to be achieved. And we thought we would end up with an enduring business. Whether that enduring business ends up being $50 million, $100 million, $150 million, $200 million, we really don't know, but we feel really good that we're in that business. So thank you.

Operator:

And we'll go next to Jack Meehan of Nephron Research.

Stephen MacMillan:

Yeah. It's hard for us to fully know on the share stuff because of the various pieces. I would say there were no unusual ordering patterns at quarter end, so none of this was a stocking up for fourth quarter. We generally -- our business is very diversified. And I think one of the things we did, as you well know, early in the pandemic is we went out to a very broad customer base. And I think that has helped insulate and provide a little more enduring nature to our business. It's also helped our pricing hold up reasonably well. And so I think we feel pretty good. But we -- it just continues to go and regions and spikes and this and it does feel like US testing is settling in for the first time to a more normalized pattern and we're still -- we're starting to see that certainly in our own business, but no unusual spikes.

Karleen Oberton:

Yeah. I think we stopped disclosing the actual number on that, but very strong growth year-over-year and that business continues to have a nice trajectory. I would say that it's diverse on the other assays, but probably leaning towards the core women's health assays primarily.

Stephen MacMillan:

Enjoy trick or treat.

Operator:

And we'll move to our next question from Puneet Souda of SVB Securities.

Stephen MacMillan:

Yeah. I think long-term, we're sticking with the 5% to 7%. But as we've said all along, what, sometimes you're going to be above, sometimes it will be a little bit below. I think for where we are right now, we feel very good about delivering certainly above that for next year, but we don't want to get caught up way ahead of ourselves either and saying, we're moving that guidance up by any stretch. It's just as that reminder. There might be some periods of time where we're a little bit below that. There'll be periods we're above it. But I think we feel solidly about every one of our businesses.

Puneet Souda:

Okay, got it. And then Steve, a broader question for you. Now, in the sort of the post-pandemic era, and again, you might have a long tail to it, but do you see heightened utilization for flu, RSV, other respiratory just continuing on because of the awareness of just overall these viruses and overall, the significance of just overall diagnostics in routine primary care settings is such that it's going to be sustained. Just help us understand, do you see higher utilization just sustaining here for the respiratory businesses for a long time?

Operator:

And we will move on to our next question from Liza Garcia of UBS.

Stephen MacMillan:

Yes. I think with MyoSure, we just -- first off, we're biased because we just came back from our US sales meeting last week with that sales team. And it's hard not to be excited when you've been with them. But I think on a more serious and deeper basis, MyoSure has been an outsized grower now for seven or eight years, long beyond what anybody thought it could be. And I think what we continue to see is there's still significant opportunities in the fibroid space. There's still, to some degree, markets that are underdeveloped and MyoSure procedure is an amazingly positive procedure with great outcomes. And so, I think we just continue to -- we're not quite sure what the end market truly is there.

Liza Garcia:

Great. And then, can you just update us where you stand with the Biotheranostics CLIA lab going to San Diego headquarters and your automation and initiatives that you have underway and how we should think about time lines for those and maybe potential impact there?

Operator:

And we hear next from Max Masucci with Cowen and Company.

Karleen Oberton:

Yes, I mean the gross margins for -- on the molecular business, we've said all along are accretive to the corporate average. But the dynamics of this business is, as we add more of the newer assays, we typically get those at a higher price, higher margin, but we give some pricing on the legacy assays. So, we'll get -- as we produce more in our San Diego facility, we'll obviously naturally gain more absorption. But I think about those holding at higher than corporate averages, but I wouldn't see a significant upward trend anytime in those.

Karleen Oberton:

Max, I would actually reverse that. So our capital allocation has consistently been to deploy our free cash flow, which, as you've noted, has grown over the last couple of years. But the priority is the M&A and share repurchase is more of an ongoing activity at a minimum to manage dilution from our equity plans as we see opportunities, disconnects to jump in and we'll get a little more. But priority will be M&A, but we'll be disciplined in that strategy.

Operator:

Thank you. And we'll go to our next question from Tim Daley with Wells Fargo.

Stephen MacMillan:

COVID is not. This is -- we're really talking about our base businesses being strong, all three of them.

Stephen MacMillan:

We certainly worry about the geopolitical and particularly the economic scenarios in Europe, and I think particularly as this winter comes in energy and everything else. I think having said that, that's all the macro. The micro is our teams and our businesses are just in great shape. And I think are poised regardless of the environment, to be able to power and deliver through that. Thank you.

Derik de Bruin:

Good evening. Hope you're doing well. Hey, how are you? So, two questions. First of all, the tax rate is going from 21% to 19%. So can you tell us what's driving that? And the second question is going to be, what are you assuming in pricing? I mean, how much of your sort of like double-digit organic revenue growth when you're looking at some of the targets or some of the businesses is sort of being driven by price? And are you diagnostic customers, in particular, starting to potentially push back on pricing as COVID reimbursement is likely to go away next year, the higher -- as a public health emergency goes away? Thanks.

Stephen MacMillan:

Yes. So, net Derik, we have very little pricing baked into the numbers. We have puts and takes, frankly, across franchises across geographies. And just to give a plug for Karleen because she's too modest. Everybody's always admired our operating margin piece, but she have been very focused on the net side, and our tax team has been working very hard over the last few years. So I think do a great, great job to really kind of show up this year with another opportunity for us to continue to drive that net margin.

Karleen Oberton:

Yes. At this point, I would muster a change in the federal statutory rate, I think 19% is good to use.

Operator:

And we'll go next to Casey Woodring with JPMorgan.

Karleen Oberton:

Yeah. So I think from the supply chain from the higher cost, it's roughly 200 to 250 basis points on the operating margin that we have forecast would persist through 2023. We have talked about international margins being lower than the US, but we have not disclosed the difference. But I think certainly, there is discussions, our teams are focused on improving their leverage as we move forward.

Operator:

Good afternoon and welcome to the Hologic Third Quarter Fiscal 2022 Earnings Conference Call. My name is Cody and I am your operator for today's call. Today's conference is being recorded. All lines have been placed on mute. And I would now like to introduce Ryan Simon, Vice President, Investor Relations. Please go ahead.

Stephen MacMillan:

Thank you, Ryan. And good afternoon, everyone. We are pleased to discuss our financial results for the third quarter of fiscal 2022. Our results continue to showcase the strength, durability and diversity of our business. Total revenue was just over $1 billion and non-GAAP earnings per share was $0.95. Both numbers exceeded the midpoint of our guidance on the top and bottom lines – the result of both enduring COVID revenue and also strong performances in our core Diagnostics and Surgical businesses. In this dynamic and ever-changing world, we continue to live our purpose, passion and promise – to enable healthier lives everywhere, every day – and be global champions for women's health. In doing so, our industry-leading products continue to reach even more patients around the world, while our business delivers strong financial performance and value for our shareholders. To put it simply, the durability and diversity of our business enables Hologic to succeed in this challenging macro environment. As we navigate a multitude of headwinds, our confidence in our business remains steady and remains high. Looking longer term, our message is also unchanged. We are confident, despite the current turbulence, that our previously announced 5% to 7% annual organic revenue growth rate through 2025 remains an achievable target, provided the current chip headwind normalizes as we expect. Ahead of turning the call over to Karleen to discuss our financial results in more detail, we'd like to highlight growth drivers and provide updates on each of our businesses – Diagnostics, Breast Health, and Surgical. And to close, we are excited to share our experience from the World Economic Forum Annual Meeting in May, an experience that reaffirms the importance of our place and our voice on the world stage advocating for women's health, especially now. Before jumping into each division, it is important to revisit the impact of COVID on our business. The reality is that whether the demand for COVID testing is high or low, we are poised to succeed either way. We have a natural COVID hedge. As we have seen over the past two years, COVID prevalence affects each of our base businesses. As COVID cases rise, elective well-woman exams, screenings, and surgical procedures are often postponed. Conversely, as COVID declines, our base business strengthens. As we responded with unprecedented speed to answer the world's needs for highly reliable molecular COVID testing, we also dramatically strengthened our company for the future. We also know that many of you are trying to gauge the longer-term impact and durability of our additional Panther placements, as well as the impact of our various acquisitions over the last couple of years in Diagnostics and Surgical. The truth is, the various surges in COVID cases around the world through many of the last quarters have often created wide variability in the comps, as some quarters reflect times of significant non-COVID related hospital and doctor visit slowdowns, while others bounced back stronger in varying geographies in any given quarter. When we last reported in April, for example, our core Diagnostic and Surgical businesses posted year-over-year growth rates of 4% and 3.5%, respectively, amidst the COVID surge at the time. So, for anyone questioning these admittedly lower growth rates, we want to highlight two numbers from this quarter. The first number – 22.4% – that was the growth in our global molecular diagnostic business, and the second number – 9.7% – that was the growth in our Surgical business this quarter. Now we'd encourage two simple takeaways from these results. One, these businesses have strong underlying growth; and two, the true growth rate is somewhere in between last quarter's results and this quarter's, underscoring the need to view how our strength evolves over time, and given the variability of COVID, that no single quarter result is going to match a linear model. Now shifting gears to the businesses. First in Diagnostics, with COVID testing significantly down sequentially, our third quarter provided an opportunity for customers to validate and run more non-COVID assays on their Panther systems. As a result, our Diagnostic business grew 15% excluding COVID year-over-year worldwide, a truly phenomenal result and one that demonstrates the impact of women returning to their wellness exams and procedures. Even more impressive, as mentioned earlier, our global molecular diagnostics business grew over 22% excluding COVID in the period. An early, yet clear sign that our expanded Panther installed base, is, A, being utilized, and, B, will prevail as an instrument of choice as customers consolidate their molecular testing menu to high- throughput, high-automation platforms. For more color on the growth drivers within molecular diagnostics, performance was driven by a combination of both legacy and new assays, namely the BV/CV/TV vaginitis panel, M.gen, CT/NG and our respiratory menu on the Panther Fusion, to name a few. Our vaginitis panel continues to outperform and deliver impressive growth on both a sequential and year-over-year basis. As we have previously stated, the vaginitis panel is well positioned to become a top 3 assay in our molecular diagnostic portfolio over time. International diagnostics was also a bright spot in the quarter. The business grew 16.5% excluding COVID, driven primarily by our virology portfolio. As expected, Panther placements slowed to 59 new systems placed in the quarter, with nearly 70% of these placed internationally. While a decline from the 119 and 123 systems placed in our first two quarters, annualizing Q3's placements lands within our historic run rate of about 225 to 250 placements per year. As a reminder, Panther sales have minimal impact to the molecular diagnostic growth rate, as assays are the primary driver of growth, by far. Further, placements at lower levels going forward is consistent with our expectations, given we have increased our Panther footprint by nearly 85% since the start of the pandemic. We now have roughly 3,200 Panthers installed worldwide. To close out the Diagnostics update, our Biotheranostics business was again a highlight for the quarter, posting $18.9 million in sales, representing outstanding growth of 43%. Moving on to Breast Health. First and foremost, as to chip supply, we reiterate our statement from last quarter – we believe the third and fourth quarters of our fiscal 2022 will prove to be the low water mark in terms of chip availability for our gantries. Working closely with our suppliers, we observed positive trends in Q3. These positive trends include stabilizing lead times, procurement through a combination of channels, and most importantly, narrowing the breadth and depth of tight supply. Although we remain optimistic these positive trends will maintain throughout the remainder of our fiscal year, the situation remains fluid. As for gantries, demand remains strong. Our best-in-class technology, service, and customer satisfaction continues to differentiate and separate us from the competition. In addition, our sales force continues to place orders in line with quotas set prior to the chip headwind surfacing and there has been no meaningful change to the rate of cancelled orders. On the chip supply chain recovery, while we are not providing fiscal 2023 guidance on this call, we do anticipate that chip supply, and thus gantry availability, will be recovering throughout fiscal 2023 and continue into 2024. Next, in Surgical, the business returned to strong performance, posting 9.7% revenue growth in the third quarter. This growth was driven primarily by the combination of MyoSure, our Fluent Fluid Management System, and Bolder. As a reminder, our MyoSure devices are used for fibroid and tissue removal and the Fluent system is complementary to MyoSure, assisting physicians with hysteroscopic procedures. The Fluent system simplifies and streamlines the historically complicated and cumbersome fluid management workflow used in these procedures. While MyoSure and Fluent sales represent the lion's share of Surgical growth in the quarter, we are also very excited by the growth from our laparoscopic portfolio. Both the Acessa procedure and Bolder devices that we acquired to add growth and diversify the franchise performed well. Specifically, we are excited by the incremental progress in sales of the Acessa procedure. Smaller numbers but revenue growth of nearly 50% year-over-year, a meaningful step in increasing the utilization of this novel procedure. Acessa's growth was driven primarily by two factors. First, excellent efforts from our team to increase patient covered lives to 84% compared to 26% when we first acquired the business about two years ago. With this critical mass of covered lives, which is often considered table stakes by many physicians, more doors were opened. Second, growth was also driven by more physician access to conduct monitored cases. Access was both in-person and also via our innovative virtual case monitoring platform. This virtual system was implemented specifically to address physician access challenges created by COVID. As the COVID pandemic moves gradually to an endemic state and physician access improves, we are confident that Acessa will be a meaningful growth contributor going forward. And finally, as many of you know, in May we had the opportunity to participate at the World Economic Forum Annual Meeting held in Davos, Switzerland. At the Forum, we met with world leaders and change makers to further our mission and champion women's health. Our message was clear, putting women's health at the forefront was long overdue. The time to elevate women's health, with the help of science-backed data to guide decisions and policy making, is now. As we have said before, women's health is the cornerstone of families, communities, societies and economies around the world. With insights from our Hologic Global Women's Health Index, Project Health Equality and decades of leadership in women's health, we came to the Forum to make a difference. We left the Forum knowing we had. We understand change does not move in a straight line, and we are committed to supporting women every step of the way. Before we turn the call over to Karleen, to conclude, we want to repeat that our third quarter results give us even more confidence in the strength of our business. This confidence is rooted in our demonstrated ability to absorb and adapt to the pressures and headwinds of this dynamic macroenvironment. As the current pressures and headwinds subside over time, we are in strong position to continue our durable growth trajectory for quarters and years to come. With that, let me turn the call over to Karleen.

Operator:

[Operator Instructions]. We'll take our first question from Jack Meehan with Nephron Research.

Karleen Oberton:

So I think from a – certainly in the US, the majority of our Panthers are running more than COVID, for sure. I think we are really pleased with the vaginitis growth, but I don't think we're going to give the absolute number at this time.

Stephen MacMillan:

I think when we get to that point, Jack, we'll probably continue to be conservative on the COVID side. It's been such a roller coaster for the last 27, 28 months or whatever that – it's almost been hard to predict within a quarter. We've watched a quarter start strong and then it dries up. And conversely, almost like this quarter, last year, it looked like everything was gone in July and August and then Omicron thing hit in – or Delta hit in September and things started to spike up. So we've had so many ups and downs that I think we'll be cautious as we forecast it. Having said that, I think a lot of what we've said at the very beginning continues to play out. And for those who thought the business was going to be dead when vaccines came in, 18, 19 months ago, we continue to say that we always thought this was going to leave a residual business that was probably going to be around for quite some time and might be one of our top three or four assays. And as we sit here today in the world with Japan and a whole bunch of other countries, very high and the US, as you know, is still running fairly rampant, and we said all along, the goal of herd immunity was not going to be achieved in a mutating virus, that this thing would become more endemic and probably create an opportunity for us to have a more ongoing business. I think we would see that and full expectations as we go into next fall and winter. This thing is not burned away from the world. So there will be some business. But I think we'll certainly model it on the lower side as we go in because it's just – we can count on our base businesses. This one truly is, call it, opportunistic or it's subject – we can't put a linear forecast on it.

Tejas Savant:

Steve, one on the CapEx environment here. I know you mentioned demand for gantries is pretty strong. You don't see an elevated cancellation rate, et cetera. What's your sort of line of sight into the order book here? We've had some sort of messaging from some of your medtech peers. Some of them not seeing any impact, others kind of like pointing to a softened CapEx environment here. So just curious as to get your take.

Tejas Savant:

Just a follow-up on your commentary around the slope of the recovery here on the gantry chips. I know in the past, you've talked about sort of having to figure out sort of construction timelines and installation timelines with your customers. Have you started to work on any of that here as you look to fiscal 2023? And your comments around perhaps the full recovery having to wait until FY 2024 here, are we on the margin a little bit more cautious than what you had shared earlier?

Karleen Oberton:

I'd just add that our field service engineers who want to maintain the gantries and the installed base are the ones that also do the install. So there is the balancing of our own resources to that recovery as well as hospital schedules.

Patrick Donnelly:

Steve, maybe one on the 2023 setup. Again, I know you guys aren't going to give guidance. But in terms of the costs, and I know Karleen touched on it a little bit there at the end, what's the right way to think about some of those, whether it's higher input costs, the dollar, obviously, the supply chain on the chips, is the expectation that kind of lingers throughout most of 2023 and it's going to slowly work its way back? Just in terms of thinking about the margin cadence, it seems like most models would have it flipping pretty normal almost day one of 2023. So, I'm just trying to wrap our heads around the right way to think about that cadence and some of that cost pressure lingering into 2023. Again, not surprising that year 2023 obviously starts pretty soon here. But just trying to get a handle on the right way to think about that piece.

Patrick Donnelly:

Just on the molecular growth rates, another question – obviously, the number jumps off the page a little bit. Can you just talk through, Steve, I guess, what goes into that? Again, obviously, the acquisitions rolling into it, they flipped organic. Obviously, Mobidiag. Maybe just talk through kind of the different components where the real drivers of strength were because, again, I think that will be a focus coming out of it. It's obviously a big number.

Karleen Oberton:

Yes. I would say, of the acquisitions, Biotheranostics is probably the most significant component of growth in the quarter, as we would expect that one to be…

Operator:

And we'll take our next question from Derik De Bruin with Bank of America.

Karleen Oberton:

Yes. So what I would say is when we have a normalized chip supply, that is exactly the way to think about them in the low 30s. I'd point to our Q2 of 2020, which was 31.5% operating margin. We believe that is a normalized baseline, if you will. But, again, that recovery on the chip is going to occur over the course of 2023. We're still in that planning stages of how and when. So it won't be kind of Q1 out of the gate likely.

Karleen Oberton:

I think as we said in our prepared remarks, the sales teams are hitting quota that were set prior to the chip shortage. So we haven't seen any deviation in the booking rate. And again, as Steve mentioned, no increase in the cancellation rate. So we think the business is still solid. We're not losing any share, and then it will just be, again, availability of chips in the scheduling of the installs that we'll be working on to manage through the recovery.

Vijay Kumar:

Karleen, I have two on the guidance. One on breast imaging. I think the prior guidance had $250 million of headwind for fiscal 2022. I think that number changed. Looks like 3Q came in better. What is that updated number? And what is the implied breast imaging headwind for Q4? Shouldn't Q4 be improving based on 3Q trends?

Vijay Kumar:

I did have an OpEx question. If we look at the Q4 guidance at the high end, $870 million of revenues, $0.65 EPS, I think the guide implies OpEx on a dollar basis as sequentially flattish. If we annualize that Q4 number, I think the implied OpEx for next year, somewhere north of $1.2 billion. Is that math correct just based on, I think, your commentary on – you'd hold the OpEx line on the assumption that the chip shortage will resolve eventually?

Operator:

We'll move on to our next question from Mike Matson with Needham.

Stephen MacMillan:

On the first part of that, in terms of barriers to STIs, we did see a lot of, call it, intercity clinics and everything that either shut down or got their resources redeployed during COVID time from serving STIs and just serving their community folks really focusing on COVID. So as some of those come back, I think we feel good about hopefully the ability to get back to more screening. And as you say, there's probably been an increase, certainly, we've seen in many pockets of STIs during this time. So, hopefully, the ability to pick those up. On the idea of home testing, there's a lot more complications to women testing themselves at home in terms of administering the test and in terms of shipping it in a proper container and everything else. So, candidly, we were approached by lots of companies in COVID time who all were convinced that they were going to be the next great savior of home testing for COVID as well as home testing for STIs that don't – we're not as sure that market is going to move nearly as quickly to home testing when you actually think about the pragmatic realities of it. And so, I think we continue to feel very good. We continue to broaden out our own portfolios, our partnerships to be able to try to capture them. But I would not expect that market to move nearly as quickly as some companies might be hoping. By the way, I'd also say, if it were, it's where our cash balance puts us in a really good position.

Stephen MacMillan:

I think as it relates to guidelines, we continue to push for the proper guidelines. I think sometimes USPSTF and some other folks have gone too far. But in general, most of the folks, I think, are adhering to pretty sensible guidelines. And candidly, I think there's still a lot of pent-up demand. There's still a lot of women that put off their screenings during COVID time and are running behind. So I think we'll still catch up. In terms of the mobile, we made those available here and there. It's de minimis in terms of any real impact on the business.

Operator:

We'll now take our next question from Puneet Souda with SVB Securities.

Karleen Oberton:

It's pretty de minimis. And if I look at Q3, we did better than the original forecasted $100 million of headwind by roughly $10 million. So it's in the millions of dollars. And again, I wouldn't think that it's going to be the most significant solution to the challenges of supply. It's going to be getting higher allocations.

Stephen MacMillan:

Yes. We like seeing some of the valuations start to truly settle in. The fascinating part always becomes – people are always still looking at the past 52 months – past 52-week high and wanting premiums off of that, even though it's long since history. So the more time that goes by, we believe, puts us in a better position and really puts the potential sellers in a more realistic position. We feel great right now being patient and feel like – we don't see something that's going to snap a lot of these, especially earlier stage or smaller companies back. And we're looking both early stage, and we're also looking at things that bring some legitimate EBITDA in this time, but really like our position. And we're in no urgent need, given the strength of our base business, to act, which I think also just puts us in a much better place while these companies come to grips with their true realities.

Casey Woodring:

I guess the first one, so on the Diagnostics growth rate here, wondering how much of that was pent-up demand from the last quarter or two. So last quarter, you guys made the comment that women's wellness business have softened given COVID impact. So curious to hear if there's a catch-up in visits this quarter and if there's some more pent-up demand to your left in 4Q and maybe even the beginning of fiscal 2023?

Casey Woodring:

Just on the international diagnostics piece, you called out 16.5% ex COVID growth was driven by virology. You did mention women's health there. So I guess can you just sort of remind us how much of that diagnostics business you have is outside the US and if there's material greenfield opportunity on the molecular side with women's health, especially given all the Panthers you've placed?