Hologic, Inc. (NASDAQ:HOLX) Q1 2024 Earnings Call Transcript

Hologic, Inc. (NASDAQ:HOLX) Q1 2024 Earnings Call Transcript February 1, 2024

Hologic, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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.

Ryan Simon: Thank you, Synthia. Good afternoon, and thank you for joining Hologic’s First Quarter Fiscal 2024 Earnings Call. With me today are Steve MacMillan, the company’s Chairman, President and Chief Executive Officer; Karleen Oberton, our Chief Financial Officer and Essex Mitchell, our Chief Operating Officer. Our first quarter press release is available now on the Investors section of our website. We will also post our prepared remarks to our website shortly after we deliver them as well as an updated corporate presentation. And a replay of this call will be available on our website for the next 30 days. Before we begin, we would like to inform you that certain statements we make today will be forward-looking. These statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied.

Such factors include those referenced in the safe harbor statement included in our earnings release and SEC filings. Also, during this call, we will discuss certain non-GAAP financial measures. A reconciliation to GAAP can be found in our earnings release. Two of these non-GAAP measures are, one, organic revenue, which we define as revenue excluding the divested businesses and revenue from acquired businesses owned by Hologic for less than one year; and two, organic revenue, excluding COVID-19, which excludes COVID-19 assay revenue, revenue related to COVID-19 and sales from discontinued products in Diagnostics; finally, any percentage changes we discuss will be on a year-over-year basis, and revenue growth rates will be in constant currency unless otherwise noted.

Now I’d like to turn the call over to Steve MacMillan, Hologic’s CEO.

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.

Essex Mitchell: Thank you, Steve, and good afternoon, everyone. As we’ve commented over the past several quarters, we have dramatically transformed our business since 2019 through the challenges of the pandemic. More recently, as we move further away from the peaks of COVID testing and prevalence, we have posted exceptional ex-COVID results. These results back up our claim that we are much more than a COVID story, and without doubt build for the long term. At the same time, as Steve mentioned, there is a lot to unpack to fully understand our business. Many recognize that we are a new Hologic compared to where we were in fiscal 2018. Since then, we’ve grown our Molecular Diagnostics business approximately 80%, our Breast business nearly 10% and our Surgical business nearly 40%.

Yet there are still some on the fence and uncertain of our future growth potential. As some of our peers have also performed well over this time period, it’s not easy to see the throughway. The underlying assumption is that winner must be exclusively taking share. In reality, there was much more to it. In addition to competing and taking share, Hologic growth is centered on innovation, and making sure. We then drive this innovation to commercial execution by leveraging our world class sales teams. As we are positioned today, our future growth is much less about hand to hand combat in the trenches of the markets where we operate. Instead, our growth is derived from growing and expanding market through education, awareness, innovative new products, and tapping into under penetrated markets.

As an example, our three largest revenue product lines launched in 2019, excluding COVID are BV, CV/TV, Biotheranostics and Fluent. These three lines alone collectively delivered over 300 million in revenue in 2023. That was essentially nonexistent to start 2019. Moreover, each product line falls into one or more of our market creating strategies, and each is still in their earlier stages of growth. Similarly, outside of the top three, we have a number of other product lines and new since 2019 which could each individually represent $100 million revenue opportunities over time. And these lines are also still in their early innings of growth. To highlight a few are respiratory assays, GYN scopes, and laparoscopic surgical portfolio, each delivered to double digit growth rates for fiscal ‘23.

On top of our market expansion activity, we continue to drive further growth by leveraging our large installs in user bases of core products in each division. Through the Panther, our gantry and our hysteroscopic surgical portfolio, we have incredibly deep customer relationships in each of our unique channels. Post COVID, our call points around the world are stronger than ever. Customers associate Hologic with industry leading differentiated technologies, ongoing innovation, best-in-class workflow and automation solutions. Moreover, our strong reputation as leaders and champions for Women’s Health continues to open doors. Earning this advantage provide us a unique opportunity to supercharge growth from products introduced into our channel. While there are many out there that claim to be winners, even in categories, we continue to lead year-over-year, we are extremely confident in our ability to carve out a great opportunity for growth.

Similarly, we are equally confident in our demonstrated ability to gain and maintain market share across our core product lines. With our core businesses, incredibly healthy, and many of our growth driving products still in early innings. All-in, we believe we are well positioned for the future and well positioned to maintain our strong performance for the years to come. Steve?

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.

Karleen Oberton: Thank you, Steve. And good afternoon, everyone. And congratulations again to our Diagnostics team. In my statements, today, I will provide an overview of our divisional revenue results, and walk down our income statement that highlights the broad based strong performance across our business. I will also touch on a few additional key financial metrics and finish with our guidance for the second quarter of fiscal ‘24 in the full year. Jumping right in, we are pleased to share that our first quarter financial performance was strong. We exceeded our expectations on both the top and bottom line. Total revenue came in at $1.013 billion, beating the midpoint of our guidance by about $40 million. As Steve mentioned, despite four fewer selling days in the quarter, we delivered organic revenue growth of 5.2% excluding the impact of COVID in line with our long term revenue growth target of 5% to 7%.

In addition, non-GAAP earnings per share was $0.98, exceeding the high end of our guidance. Overall, we continue to deliver robust performance on both the top and bottom lines. Before moving to our divisional results, we again want to emphasize that our balance sheet and willingness to deploy capital remain a core strength of our business in a macroenvironment that remains dynamic. As an example, in our first quarter, we initiated a $500 million accelerated share repurchase program, we purchased an additional $150 million of our stock and also pay down $250 million of floating rate debt with a cash balance of $1.9 billion, a leverage ratio well below our target range, and roughly $350 million remaining on our current share repurchase authorization.

We have significant firepower and flexibility to deploy further capital should the opportunity arise. Turning to our divisional results. In Diagnostics, first quarter revenue of $447.8 million declined 20.6%. Excluding COVID assay and related ancillary revenue, Diagnostics revenue declined 0.9%. Yet adjusted for selling days we estimate we grew mid-single digits compared to the prior year. As a reminder, Q1 ‘23 was a very strong quarter for Diagnostics, boasting 15.8% growth ex- COVID and Molecular Diagnostics 24.5% growth ex-COVID. And without a doubt, our Q1 ‘24 results were impacted by four fewer selling days compared to the prior year. Within Diagnostics, our molecular business continues to drive the divisions results, it will bring growth of 1.9% ex-COVID or mid to high single digits when adjusted for the impact of fewer selling days.

We continue to see underlying strength and BV, CV/TV which grew more than 20% in the quarter, and it’s still in its early innings of adoption by our customers. More than 95% of our BV, CV/TV revenue is derived in the US, representing incredible longer term opportunity internationally. In addition, non-COVID respiratory revenue delivered ahead of our expectations. As we experienced stronger than anticipated demand for our flu, RSV, and 4-Plex assays. Our responding with published CDC data on respiratory virus positivity. Sales ramped up and in the final weeks of the quarter. Finally Biotheranostics remains a positive driver of growth for our molecular business, and delivered accretive revenue performance in the period. Now moving to Breast Health, total first quarter revenue of $377.7 million increased 12.2% showcasing solid double digit growth.

Demand for our gantries remains robust and our interventional business also delivered a strong quarter. In our gantry business, we continue to benefit from a strong cadence of orders. And our elevated backlog continues to give us high confidence in the performance of this business going forward. Finally, as a reminder, Q1 ‘23 results were impacted by constrained supply. In interventional, we continue to see strong performance from our Brevera needles, as well as from our 2-Mark markers used for marking biopsy sites in suspicious lesions and pressed tissue. Leveraging strong performance in the quarter, we believe our Breast health franchise remains well positioned to deliver on its financial targets in fiscal ‘24. Continuing next to Surgical, our first quarter revenue of $162.2 million increased 4.6% or high single digits when adjusted for selling days.

The divisions growth continues to be fueled by MyoSure and the Related fluid system, with an increasing contribution from our laparoscopic portfolio. As anticipated, NovaSure declined in Q1 as we lapped the selling price contribution from the products V5 extension introduced just before fiscal ‘23. And finally, in our Skeletal business, first quarter revenue of $25.4 million declined 5.6% from lower capital placement and upgrades. Now let’s move on to the rest of the non-GAAP P&L for the first quarter. Gross margin of 60.8% was driven primarily by strong performance in our base business and higher than expected COVID revenues, which carries a favorable impact to our margin. However, as anticipated, our gross margin result remains temporarily depressed due to the ongoing amortization of semiconductor chips purchased at higher costs during the chip supply headwind.

As we continue to deploy gantries, we are moving farther away from this high priced inventory. And as a result, we expect margins to continue to benefit from this inventory cycling as we progress through the year. Shifting to operating expenses, total operating expenses of $327.3 million in the first quarter decreased by 3.6%. This decrease in the period was driven by lower marketing spend, lower cost from fewer days and less expense due to the recently divested SSI business. For Q1 ’23, this translates to a 28.5% operating margin in line with our expectations. While we continue to deliver a peer group leading operating margins, we continue to exercise operational discipline and continuously seek to improve where it makes sense for our business.

Below operating income, other income net represented a gain in our fiscal first quarter. As expected, we benefited from elevated cash balance and high interest rates, even though we deployed significant cash in the quarter. Finally, our tax rate in Q1 was 19.75% as expected. Moving on from the P&L, cash flow from operations was $220 million in the first quarter. In addition, as previously mentioned, during Q1 we repurchased 2.2 million shares for $150 million. This activity was above and beyond initiating a $500 million ASR showcasing our high confidence in our business and willingness to bet on ourselves, as well as our ongoing strategy to deploy capital. Now let’s move on to our non-GAAP financial guidance for the second quarter and full year fiscal ‘24.

For our fiscal Q2 ‘24, we are expecting total revenue in the range of %990 million to $1.01 billion and EPS of $0.95 to $1. For the full year ’24, our guidance assumes revenue of $3.99 billion to $4.065 billion and EPS of $3.97 to $4.12. With respect to foreign exchange, we are assuming an FX tailwind of $2 million for Q2 and $12 million for fiscal ‘24. Much of this tailwind was realized in Q1 and therefore we estimate that foreign exchange will remain neutral to marginally favorable throughout the remainder of the year. Turning to our divisions, we want to reiterate that we expect each business to grow at least 5% to 7% for the full fiscal ‘24, excluding the impact of COVID. Starting with Diagnostics, we expect the business to grow within our 5% to 7% long term framework for the remainder of fiscal ‘24.

While performance was below this level on Q1, primarily due to the impact of fewer selling days compared to the prior year period, we expect the division to return to more normal growth in Q2, and for the remainder of our fiscal year. We expect improving utilization and menu expansion on the Panther coupled with ongoing contributions from Biotheranostics to continue to drive molecular growth, losing out on non-COVID Diagnostics, we expect blood revenue of approximately $7 million in Q2, and $30 million for the year. In terms of COVID revenue, we expect COVID assay sales to be approximately $20 million in the second quarter of ‘24 and $60 million for the full year. COVID related items are expected to be slightly less than $30 million in the second quarter, and approximately $105 million for the full year fiscal ‘24.

Moving to Breast health, we continue to expect fiscal ‘24 to showcase strong demand for our portfolio products and services. While moving on it’s important to understand the top dynamics that will impact the Breast business through fiscal ‘24. As previously noted, Q1 ‘23 with a softer comp due to shift supply constraints. As a reminder in Q2 ‘23, we delivered a strong quarter gantry placement to meet pent-up customer demand during these earlier days of chip supply recovery. And deliveries in Q3 and Q4 of ’23 were both lower than Q2. We expect this dynamic to result in a lower Breast health year-over-year growth rate in Q2 that will improve in the back half of fiscal ’24. For the full year, we continue to expect to deliver more gantries in fiscal ‘24 than in ’23 as we move further from the chip supply headwinds, while maintaining excellent demand visibility.

Finally, in Surgical, we anticipate our full year fiscal ‘24 revenue growth to be at the high end of our 5% to 7% long term target. Although impacted by fewer selling days, Q1 started the year strong and we expect the business to perform well in Q2 in the remainder of the fiscal year. Moving next to margins, our guidance assumes a cadence of improvement throughout fiscal ’24 for both gross margin and operating margin. For gross margin, we anticipate Q2 levels similar to Q1 exiting the fiscal year in the low 60s. As well, our guidance assumes Q2 operating margins approaching 30% with the Q4 ‘24 exit rate around 31%. Continuing down the P&L, we expect Q2 operating expenses to step down from Q1. As a reminder, Q1 is typically our highest spend quarter seasonally.

As we kickoff the fiscal year with our internal global sales meetings, and major trade show events such as RSNA. For the balance of the year, we anticipate quarterly operating expenses to be about $300 million to $310 million. Although operating income, we estimate fiscal ‘24 other income net to be an expense of approximately $10 million in Q2 and an expense between $30 million to $50 million for the full year. Our current guidance assumes an increase in interest income relative to our previous guide, as we expect to have a higher cash balance throughout the remainder of the fiscal year. Our guidance is based on an annual effective tax rate of approximately 19.75%. And diluted shares outstanding are expected to be approximately 239 million for the full year.

To conclude Q1 was a strong quarter across each of our businesses and sets us up nicely for the rest of the year. As we close Q1, we move forward to Q2 in fiscal ‘24 with good momentum and as always remain focused on advancing women’s health around the world while delivering on our promises and commitments to our shareholders, employees, customers and patients around the world. With that, we ask the operator to open the call for questions.

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Q&A Session

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

Tejas Savant: Hey, guys, good morning. Sorry. Good evening, and congrats on the solid performance here. Steve, I want to start with the Molecular Diagnostics franchise. I want to ask you a little bit about Aptima there. You’ve talked in the past about the benefits of co-testing the time it will take for physicians to embrace any change. That said, if guidelines move to HPV testing alone, how do you think about the upside on Aptima? And what if any, should be the gating factors to transitioning those volumes? Is there any sort of differences in competitive dynamics for ThinPrep versus the HPV franchise?

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.

Tejas Savant: Got it. That’s helpful. And then Karleen, one for you on margin. So you talked about sort of exiting the [inaudible] at about 31%. Can you just help us parse out the dynamics from the gantry chips for the higher cost coming through the backlog here versus your network optimization plans? What are the relative impacts of those two drivers? And as we look to fiscal ‘25, should we be thinking of that 31% as a good jumping off point off of which you expect to see quarter-over- quarter expansion?

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.

Operator: We will take our next question from Patrick Donnelly with Citi.

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.

Steve MacMillan: Yes, sure. Patrick, I think the biggest metric obviously we track over time is just purely revenue. And I think we continue to feel good but the internals on that are, if you go customer by customer, we continue to grow our portfolio with a lot of our customers and not to be overlooked are our largest customers in the US, as they shift from Tigris to Panther, it is opening up additional menu opportunities for them to be adopting things like BV, CV and some of our other products. So we see really good growth with our largest customers in the US, we’re also continuing to see, and what we’re still in the early-ish innings is the international expansion and all those Panthers we placed internationally during COVID, as those are coming online.

And I think what I love about these businesses, frankly, is they bring on one or two assays at a time, they get more experience, and then they bring more. And so it’s not like a one off pop. That frankly might be better in the short term, but the harder to laugh. And so what we really have going on around the world, our customers all over the place, just gradually bringing on either additional assays or as we come out with new menu, being able to build that and that installed base of Panthers that we’re able to just drive more throughput through is what really makes us feel very good about the future.

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.

Operator: We’ll take our next question from Jack Meehan with Nephron Research.

Jack Meehan: Thanks. Good afternoon, Steve. There’s always next season, soon enough.

Steve MacMillan: That’s right. Asterix is also a big Eagles fan. So we got covered.

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?

Steve MacMillan: Yes, I think Jack, the more we look at the BCI test and the opportunities ahead of us, I think we’re still in the earlier innings on what that business can become. And there’s, since we’ve owned it, and watching the team operate, I think we just feel incredibly good about the long term potential. So it was still well accretive and still growing nicely here. We just don’t want to be breaking it out down to the level given the size of it, but feel really, really good about the opportunity.

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.

Steve MacMillan: Yes, I think Jack, I think that the magic that because we are both Diagnostics and med tech, to your first part of that question. It does open up the opportunity for additional things, and we’re seeing some interesting things that would allow us to build on our Surgical platform or our breast cancer, the breast surgery business areas. So we continue to look in those areas. And frankly, I think some of the valuations in those areas might be a little bit better than say, for example, some of the Diagnostics one. So I think we certainly can shop in that aisle. And coming back to the second part of your question and the other aisle, we can shop in the specialty labs. I think one of the things we’re really proud of with Biotheranostics is it actually makes money which you very well know that a lot of the specialty labs there’s a lot of great top line revenue, but a lot of expense and not much profit.

And so I think we continue to want to be thinking about things that can be generating bottom line. As Karleen is staring at me hard right now. I’m making part of that up, but I’ve worked with her long enough to know her discipline so we’re being very mindful and careful in that space and continuing to feel like, what we know we’re good at is taking existing assets that are on the market and operating them pretty well. We don’t want to take on, wildly diluted things, just because we have the cash. And we’ve continued to, I think, be patient and the underlying performance of our businesses continues to give us that ability to be patient. So hopefully, that gave you the landscape here, Jack. Thank you.

Operator: We’ll take our next question from John Sourbeer with UBS,

John Sourbeer: Good afternoon, and thanks for taking the question. Just a question on the start off on the Breast health business, any updates on what the backlog looks like there? And how many quarters of backlog that you have? And just how would that compare to a normal backlog in that business?

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.

John Sourbeer: Got it. And then, as a follow up on the Diagnostics business and in the Panther, I appreciate that you’re not providing a full through there and I mean just but just anyway like quantitative or qualitative lead to provide on just what type of improvement on customer spending you’re seeing with the addition of the Fusion sidecar.

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.

Operator: We’ll take our next question from Vijay Kumar with Evercore ISI.

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?

Steve MacMillan: Yes, I think we think about it by business segment. And I think what we’ve really said, Vijay is that each of our businesses this year should be within that 5% to 7%. So I think that has us feel really good. Obviously, within each of the businesses, we’re not going to go down that product line by product line, right. But if you played it out, right, Surgical, you got MyoSure and Fluent growing faster than that you have NovaSure lower than that, right. We’ve got that always across the businesses. But I think the way to think about it is we feel really good about each of our businesses growing in that range. And I will tell you that internationally, each of those businesses is certainly at the higher end of that range, if not slightly beyond.

So we’ve got it across, every business has growth drivers. And like any business, there’s always a few that aren’t growing as fast. And, that’s just the nature of the beast. But overall, I think what we’re, again, magically, every one of our businesses is in that frame.

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?

Karleen Oberton: Yes, the biggest issue here in Q2 is the comps that is driving. So if you looked at Q2 of ‘23 DX ex- COVID grown 15%, molecular within that grown 24%, breast over 25% and surgical over 25%. So I think what we’ve been saying all along is that Q2 was just a standing quarter. Proud of that quarter. As we went into Q3 and Q4, we have more normalized comps that were going against that drive that improved growth rate in the back half.

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

Unidentified Analyst : Hey, guys, this is Dimitri speaking for Anthony. Congratulations on great quarter. I just saw I wanted to ask about like the Molecular Diagnostics, ex-COVID. Seems like might have slowed down this quarter versus like year-over-year, and just a little bit more color on that this quarter. And kind of like your expectations for Q2, do you see like a stronger respiratory virus season. How should we think about that?

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.

Unidentified Analyst : Sounds great. And you guys gave full year guidance for COVID. Should we be thinking about that kind of the new baseline now going forward?

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.

Operator: We’ll take our next question from Puneet Souda with Leerink Partners.

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.

Steve MacMillan: Sure. Thanks, Puneet. Yes, don’t assume a real change in the margin structure. I think the real win here is for is the workflow, I will tell you, our key customers are incredibly excited, as you will know, right? One of the biggest issues right now, running labs, everything else is workers and cytologists especially trying to read these slides. It’s been a very manual and labor intensive process. I can tell you going back to one of my first meetings with Quest, when I got in this role, almost 10 years ago, call that meeting with nine years ago, with discussions around, the workflow of cytology, and it was one of their biggest concerns. So our team has gone out and really addressing that, and I think the magic is going to be unleashing that as we are internationally as well.

It’s been part of what’s starting to drive the growth in our European business has been having that approval already over there. So feeling really good, as well as, frankly, the reduction of the false negatives. So it’s just that much more accurate. And going forward. So I think it’s going to breed, we think it’s going to breed some new life. Particularly, it’s been the excitement from our customers that I think has been the galvanizing part for us.

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?

Karleen Oberton: Yes, so let me first frame that to extent the global minimum tax rate is in fact good for us. It doesn’t impact us till fiscal ‘26. So we’ve got some time before we have to deal with that I would say, given this lack of legislation here in the US, it’s really hard to say what the impact is. But I would tend to think it’d be more on the middle side, given that our tax rate is already over the 15%. In regard to the change in the amortization for R&D expense, probably minimally favorable for us, but really minimal impact given us just a timing issue, really, in any event.

Operator: We’ll take our next question from Ryan Zimmerman with BTIG.

Ryan Zimmerman: Hey, thanks for taking the questions this evening. I want to start with Breast health, had an opportunity to spend some time with Eric and the team at RSNA. And I just curious because you mentioned the increase in gantries and just help us understand kind of where we’re at, in the placement of gantries relative to sockets and just how much of the growth is coming from, new software like Genius AI detection, and things like that. And as we normalize for comps, what the right way to think about the growth of the Breast health businesses, given this mix now that’s moving maybe away from equipment to more software.

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.

Ryan Zimmerman: Okay, that’s helpful, Steve, and then just piggybacking off that, I mean, I’d love to get your assessment on the CapEx environment we’ve heard from, some of your peers already, we have some 340B money that’s kind of making its way back to hospitals, which may or may not be making its way in the capital equipment demand. But I’d love to get your view of kind of the year ahead on the CapEx demand from a logic perspective.

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.

Operator: We’ll take our next question from Casey Woodring with JPMorgan.

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?

Karleen Oberton: Yes, so 1Q was a little unique in that and two pieces, our interest income was actually higher than our interest expense. Given that we still had a favorable interest rate hedging place which actually expired at the end of December. So moving forward, our interest expense, our weighted average cost of debt will increase about 100 basis points through the balance of the year, which really drives that flip and that interest expense will be higher than interest income, to the tune of roughly that $30 million to $50 million. Also in Q1 is we had about $4 million to $5 million of benefit below the line from our mark-to-market investments which really our EPS mutual they offset mark-to-market liability on deferred compensation.

So we really don’t forecast any benefit or expense related to that because again, this offset and operating expenses so it’s really maintaining a high cash balance and I’m assuming some deployment as we exit the year. But it’s really that exploration of that interest rate hedge contract that drives higher interest expense.

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.

Steve MacMillan: Yes, we’re really proud of what the international team has been doing and looking at selective pricing opportunities. They’ve been very disciplined on the cost side, so that we’re still dilutive. Our international growth is still diluted, certainly to the gross margin, and it touch on the operating margin. But our team’s being very disciplined and try to help lessen that gap over time.

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.

Operator: We’ll take our next question from Derik De Bruin with Bank of America.

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.

Steve MacMillan: Hey, Derik, starting on, there certainly as we face very formidable competitors. And there’s a lot of hand to hand combat. The flip side is, and I think it is the piece that people consistently miss, is how much opportunity there is to expand our markets, right? Let’s go to surgical for a moment. Nobody ever would have imagined that MyoSure would have someday gotten to be as big as NovaSure, when we first launched it. And now it dwarfs NovaSure, and is still growing strongly as we’ve come out with BV, CV, BV, CV may become our largest assay, it’s sometimes it’s hard to fully understand the impact in the end size of the market creation that we’re doing. So we just want people to understand it’s hard to fully identify because we’re growing and building these markets.

And when you look at even some of the data that we got from the Global Women’s Health Index, where women’s health sits, and testing sits globally, is still a fraction of what it should be, right? If you consider that only 10% of all women in the world got tested that should for STIs, that alone would say the market is probably 10x. Now, we’re not going to realize that in the next five years either. So to call the total available market, truly 10x because it’s not quite accessible at that level. It’s we’re in between. So, I think the gist is we continue to pioneer new products, new assays, and grow and create these markets over time.

Operator: We’ll take our next question from Mike Matson with Needham and Company.

Mike Matson: Yes, thanks. Thanks for taking my questions. I want to follow up on the earlier question just on the gantries in the mammography business side. I understand that you’ve made a number of enhancements and so forth, but I believe the platform’s fairly been around for a while now. So, I mean, is there any, and I know you’re not trying to be a capital focus, boom bust and all that stuff, but it seems like every company’s got a kind of launching new platform every once in a while. So I mean, is that something we could see in the near term maybe?

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.

Mike Matson: Okay, thanks. So just in and then just on M&A, I think there was another question kind of about, the areas that you’re looking at. But I guess I wanted to ask about just potential size of the deals, because I feel like you’ve kind of hinted or maybe directly commented in the past that you are potentially open to larger deals if you found the right thing. And by larger, I mean kind billion plus.

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.

Ryan Simon : Hey, Cynthia, this is Ryan, in consideration of time, we’ll take one final question.

Operator: And we’ll go next to Navann Ty with BNP.

Navann Ty: Hi, thank you for taking my question, good evening. Maybe my first question if you can discuss your AI capabilities versus competition, including with breast health versus recent innovation like competitors. And a second question, following up on your comments regarding the [inaudible] international that you’re meeting. Can you discuss the size of the long term opportunity outside of the US and any potential structural differences?

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: This concludes today’s question and answer session. And this now concludes Hologic’s First Quarter Fiscal 2024 Earnings Conference Call. Thank you and have a good evening.