Hologic, Inc. (NASDAQ:HOLX) Q2 2023 Earnings Call Transcript

Hologic, Inc. (NASDAQ:HOLX) Q2 2023 Earnings Call Transcript May 1, 2023

Hologic, Inc. beats earnings expectations. Reported EPS is $1.06, expectations were $0.88.

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.

Ryan Simon: Thank you, Rachel. Good afternoon, and thank you for joining Hologic’s Second Quarter Fiscal 2023 Earnings Call. With me today are Steve MacMillan, the company’s Chairman, President and Chief Executive Officer; and Karleen Oberton, our Chief Financial Officer. Our second 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 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 blood screening business 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.

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.

Karleen Oberton: Thank you, Steve, and good afternoon, everyone. In my statements today, I’m going to recap our divisional revenue results, provide a walk-through of our income statement, touch on a few other key financial metrics and finish with our guidance for the full year and third quarter of fiscal 2023. As Steve said, our second quarter financial results were very strong and well ahead of our expectations for both revenue and profitability. Total revenue came in at $1.03 billion beating the midpoint of our guidance by over $70 million. And our non-GAAP earnings per share were $1.06, 25% higher than the midpoint of our guide. . We also continue to repurchase our shares. In Q2, we repurchased approximately 600,000 shares for $50 million.

And year-to-date, we have repurchased 2.2 million shares for $150 million. Before moving to our divisional results, we want to emphasize again that our balance sheet is a bedrock of strength in an uncertain macro landscape. With nearly $2.6 billion of cash and a leverage ratio well below our target range, we have tremendous amount of firepower should opportunities for capital deployment arise. However, while we are very active, our philosophy remains to be patient, which we will discuss in more substance shortly. Before we do that, let me recap our divisional revenue results. In Diagnostics, global revenue of $464.7 million declined 52.2%. However, it is important to recognize that COVID testing revenue in the prior year period was inflated because of Omicron.

Specifically, we generated $584 million of COVID assay revenue in Q2 2022, more than 8x higher than our COVID assay revenue for Q2 2023. Therefore, a more accurate depiction of the long-term health of the Diagnostics business is to exclude COVID assay and related ancillary revenues. By making this adjustment, we see that organic diagnostics revenue increased 14.9% in the quarter. The Diagnostics division continues to be led by molecular, which grew nearly 24% in the period, excluding COVID. As Steve highlighted, Power in Q2 performance within Molecular Diagnostics was our increasingly diverse portfolio of assets as the newer assays contributed alongside our legacy women’s health portfolio. Rounding out Diagnostics, our cytology and perinatal businesses declined 0.7% compared to the prior year.

Moving to Breast Health. Our fiscal second quarter results were terrific. Total revenue of $385.4 million increased 25.7%, and while this performance was aided by soft comps due to supply chain headwinds in the prior year, the outcome still exceeded our estimates. Moving next to Surgical. Second quarter revenue of $144.8 million increased approximately 25% compared to the prior year. And finally, in our Skeletal business, revenue of $31.6 million increased slightly more than 53%. It is important to point out that growth rates in our Skeletal business can change based on the timing of just a few orders, therefore, we would caution when modeling not to extrapolate this level of growth going forward. Now let’s move on to the rest of the non-GAAP P&L for the second quarter.

Gross margin of 62.1% was driven by strong performance in our base business and higher-than-expected COVID-19 testing revenues. Total operating expenses of $317 million in the second quarter decreased 6.3%. The decrease was driven by less marketing spend as our Super Bowl ad in the initial portion of the expense from our partnership with the WTA were incurred in the prior year period. When normalizing for these marketing initiatives, total operating expenses would have been relatively flat compared to the prior year, partially offsetting lower marketing spend in the quarter was higher R&D and sales expense as we continue to invest in internal programs to drive top line growth. Below operating income, other expense represented a gain in our fiscal second quarter.

Net, we benefited from higher interest rates in the period as interest income from our nearly $2.6 billion cash balance more than offset elevated interest expense on our floating rate debt instruments. Finally, our tax rate in Q2 was 19%, as expected. Putting these pieces together, operating margin for Q2 came in at 31.3% and net margin was 25.9%. Non-GAAP net income finished at $265.7 million and non-GAAP EPS was $1.06. Moving on from the P&L. Cash flow from operations was $206.3 million in the second quarter. We had nearly $2.6 billion of cash on our balance sheet and our leverage ratio remained at 0.2x. As it relates to our broader capital allocation strategy, our philosophy remains unchanged. We continue to be very active and selective in screening potential targets, while also exercising discipline and patience.

We are operating from a position of strength as we explore opportunities. Now let’s move on to our updated non-GAAP financial guidance for the third quarter and full year fiscal 2023. In the third quarter of fiscal 2023, we expect strong financial results with total revenue in the range of $930 million to $980 million, representing another quarter of double-digit growth when you exclude COVID. For the full year fiscal 2023, we are again increasing our guidance and expect total revenue in the range of $3.925 billion to $4.025 billion. To help with constant currency modeling, we are assuming minimal foreign exchange headwinds in the third quarter at less than $5 million. And for the full year, we are expecting approximately $40 million in foreign exchange headwinds.

These headwinds have improved compared to our previous guidance as the relative strength of the U.S. dollar has abated over the past several months. Turning to our divisions. Each business maintains its own unique growth drivers for the remainder of our fiscal 2023 and beyond. In Diagnostics, we expect continued strong performance out of molecular, aided by steady support from cytology. Within molecular, we are excited to go after additional greenfield opportunities with newer assays such as BV/CVTV and Amgen, while also reinforcing our leadership position in core women’s health screening. Closing out non-COVID diagnostics, we expect blood revenue of slightly more than $30 million for the year. In terms of COVID revenue, we expect COVID assay sales to be approximately $25 million in the third quarter of 2023 and $245 million for the full year.

COVID-related items, inclusive of a small amount of discontinued product revenue are expected to be slightly less than $30 million in the third quarter and approximately $120 million for the full year. Moving to Breast Health. As mentioned, we capitalized on improved chip availability and moved a number of gantries allocated for the back half of the year into Q2. As a result, we are assuming total Breast Health revenue above Q1 2023 levels for each quarter in the back half of this fiscal year, but below Q2. These results are still expected to deliver healthy double-digit revenue growth compared to the prior year in Q3 and Q4. Finally, in Surgical, we expect strong low double-digit growth in fiscal Q3 and for the full year. Starting with our legacy portfolio, we are pleased by the performance of NovaSure and MyoSure.

In NovaSure, customers continue to see the benefits of our innovative V5 line extension. And with MyoSure, we continue to grow the myomectomy total addressable market. However, the beauty of our surgical business today is that the franchise is more than just NovaSure, MyoSure, and our guidance contemplates fluent, Bolder and Acessa adding accretive growth to the division’s top line. Moving down the P&Listen-only mode, for the full year, we continue to expect our non-GAAP gross margin percentage to be in the low 60s, and our non-GAAP operating margin percentage to be approximately 30%. Within this operating margin profile, we have again incorporated elevated inflationary pressures into our guidance of approximately 200 to 250 basis points, which we expect to persist throughout fiscal 2023 and likely into fiscal 2024.

In terms of operating expenses, we expect spending to move lower sequentially in Q3 and remain relatively flat in Q4. As Steve shared, we are proud of how we have managed expenses over the last several years. Our level of operating expense is expected to decline not because of reduction in head count but rather due to our efficient management of larger marketing initiatives coinciding with periods of elevated COVA testing revenue. Below operating income, we expect other income net to be an expense of slightly more than $20 million for the full year. Our guidance is based on an annual effective tax rate of approximately 19% and diluted shares outstanding are expected to be approximately $250 million for the full year. All this nets out to expected non-GAAP EPS of $0.83 to $0.93 in the third quarter and $3.75 to $3.95 for the year.

To conclude, our strong second quarter results exceeded our guidance, and we are once again raising our full year estimates despite larger macro uncertainties. Our growth in the quarter was broad-based with each business growing double digits organically, excluding COVID. Our results reinforce the fact that Hologic is a much stronger company than just a few years ago. We are larger and more durable than prior to the pandemic and balance sheet is as strong as it’s ever been. As we move to the back half of our fiscal 2020 , we are excited to continue to advance women’s health, while also delivering strong financial results and creating value for all of our stakeholders. With that, we ask the operator to open the call for questions.

Q&A Session

Operator: . Our first question comes from Patrick Donnelly with Citi.

Patrick Donnelly: Karleen, maybe just 1 on the margin profile. You guys have done 31%, I think, both this quarter and last quarter. That guidance still for 30% op margins, obviously implies a bit of a step down here in the second half. Can you just talk about, I guess, the moving pieces in the second half? And then just thinking forward about what the right exit rate would be? Because, obviously, again, the second half will be a little lower as we work our way towards ’24, just thinking about the margin profile. I know during COVID, you guys always talked about kind of that landing rate margin numbers. So if we could just revisit that and the second half and then also does that move forward right ballpark to think about the out margin would be helpful?

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.

Patrick Donnelly: Okay. Understood. M&A commentary, Steve, that’s something that’s come up a lot more this quarter with investors. I know Karleen, I think you had a tremendous amount of firepower there during the call. Can you just talk about the pipeline, the appetite here? I know you guys want to be patient, but what the right sizing is, whether it’s a leverage ratio? Is — are you looking only in core areas, Steve, I believe you said in the past, you don’t want to add another leg to the stool, but would love to just talk through the M&A side, given it’s become a bit more of a focus here since last quarter?

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.

Operator: We’ll take our next question from the line of Tim Daley with Wells Fargo.

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?

Karleen Oberton: Yes, the contribution really wasn’t that significant, probably less than 200 basis points in the quarter. I think when we compare it to Q1, we had that full calendar week, which drives the service revenue which really didn’t have any minimal impact in this quarter. And as we look at the balance of the year, I think it’s a pretty negligible effect of extra days.

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

Casey Woodring: So you talked about Breast Health pull forward on ship allocations, which sort of drove the non-COVID beat here. Is there further upside to chip allocations this year because we see another surprise pump in the back half, I would be interested to hear what you’re hearing from suppliers on that front?

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.

Casey Woodring: Great. And then just longer term, have you changed your expectations at all within molecular diagnostics as it relates to the 5% to 7% total diagnostic growth guide? Just looking at non-COVID side has been strong for a number of quarters. So just trying to think through your expectations on that business, have they changed at all since you gave that initial guidance now back in July of 2021?

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.

Karleen Oberton: Yes, Casey, I would just add that we’ve always said that we’d expect molecular to be at that high end of that 5% to 7%, if not slightly over, but overall, Dx would be within the 5% to 7%.

Operator: The next question comes from the line of Anthony Petrone with Mizuho Group.

Anthony Petrone: And congrats on another strong quarter here. The first 1 will be on surgical the 25% organic. Just trying to get an understanding of how much of that is underlying procedures within women’s health just coming back versus, let’s say, synergies with Bolder Surgical? And then I’ll have 1 quick follow-up on molecular.

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.

Karleen Oberton: Yes, we’re just — we’re getting some really nice traction internationally with our surgical business, a smaller base, but like I said, some really nice traction that’s helping that growth rate for sure. .

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?

Karleen Oberton: Yes, Anthony, we haven’t really — we haven’t disclosed that utilization number, but what we have said is that of the new Panthers placed since April 2020, over 85% customers globally are driving at least 1 other assay beyond COVID. And I think 55% have at least 2 other assays that are driving that utilization. So feel good about the stickiness of those Panthers, the new Panthers that have been placed.

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

Elizabeth Garcia: Congrats on another strong quarter. I guess on a maybe Biotheranostics. So you guys — maybe if you could dive in there and thinking about that one. So I know you said strong contribution there, but I know you recently opened up the lab and you’ve been working on initiatives to help that improving the customer ordering flow. But how do we think about the run rate of the business there and where that can go and kind of thinking about that in the diagnostics platform?

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.

Elizabeth Garcia: Great. That’s helpful. And then just circling back to kind of guidance surge. I know that there was some weakness last quarter, but even kind of when you do the two-year stack, I’m still getting to some low double digits kind of growth there. And I think you’ve called out just kind of the performance of NovaSure and V5 kind if you could just dig in a little bit on kind of — it seems like it’s been surprising you to the upside there. And obviously, I know that you got Fluent and Acessa as well. Just kind of where that portfolio can go and how you think about that and the growth levels there?

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.

Operator: Next question comes from the line of Andrew Cooper with Raymond James.

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?

Karleen Oberton: Yes. What hasn’t changed is the chip availability. And with that increased confidence we allowed to accelerate into Q2 from the back half. So the total production outlook hasn’t changed. And I think as we’ve always as Steve mentioned, to accelerate even here in the quarter is an uptake on our service, our field service engineers to do those installs. So like we’ve said all along, we don’t think we’ll have any outsized quarters as we move through this recovery. And certainly, cancellations are at a minimal level and that backlog is still really strong.

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?

Karleen Oberton: Yes. I mean really strong performance. If we think about growth year-over-year, that non-COVID respiratory more than doubled versus prior year in the quarter. But what we are planning conservatively is a significant step down in Q3 and Q4, given the seasonal nature of the respiratory infections. But this continues as the flu seasons in the flu season, we’re seeing really nice uptake in growth in that business.

Operator: Our next question comes from Puneet Souda with SVB Securities.

Puneet Souda: Steve, congrats on another solid quarter here. So first one, at a high level, given the macro uncertainty which businesses — I mean, if things — obviously, recessionary talk is here and ongoing and expectations are sort of lower for the second half across overall in the economy. So where do you think the businesses can hold up better versus others where the team is continuing to watch sort of more closely for the demand term versus where you think the demand will continue to outpace the macro uncertainties?

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.

Puneet Souda: Got it. And then a question on HPV stand-alone versus co-testing that’s come up again in our investor conversations. So just wondering any updated thoughts on the potential for it to go stand-alone versus co-testing? And do you think the USPSTF guidelines could get revised potentially with updated information from ACC? And do you see any risk for COVID testing from sort of primary testing with the new emerging competitors in the space?

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.

Operator: Our next question comes from Jack Meehan with Nephron Research.

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?

Stephen MacMillan: Yes, Jack, I think the fundamental reality on COVID is none of us have been able to predict more than a quarter out going. I think, if anything, our expectations for next year might be a little bit less I think we’re certainly starting to see it start to ramp off a bit. And yet, what we feel really good about is those that are still going to do it, we’ll be using us. I think there’ll still be usage at the hospital levels for admissions, for staff, those kind of pieces. So I think we’re still going to have some ongoing business, but we’re still having it this quarter. But I think clearly, you see it coming down to just a few percentage points of the total business at this point. And it’s hard to fully predict certainly by the time a guidance next year will be more up to date.

But it certainly looks like it’s falling off pretty sharply at this point, which keep down for our company and getting on with it and letting people look at the true transformation of the business, we kind of like but a little bit of that profit flowing through isn’t bad either.

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?

Karleen Oberton: Yes. We’re really pleased with the performance in that uptake and our full year outlook would be that, that would be over a $100 million business. Clearly, 1 of our top women’s health assays and think there’s still room to grow there. So really excited about that uptake and what we can do there with our customers.

Stephen MacMillan: It’s been a really nice surprise for us how big that’s getting held quickly, Jack.

Operator: Our next question comes from Tejas Savant with Morgan Stanley.

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?

Stephen MacMillan: Yes. That business has been a great business. When I arrived here 10 years ago. The — that was the big part of this division. That was most of it, and Myosure was this little thing. And it’s been fun to see MyoSure come up. But I think our team has done a great job of really trying to maintain NovaSure in the midst of all kinds of both market issues from the ACA Act and everything else and just continue to bring innovation, and it’s still a great procedure. So I think the overall procedural numbers, that marketplace probably continues to be a low single-digit decliner. But I think we do — we’re doing well within that from a share and an innovation standpoint.

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?

Karleen Oberton: Yes. So just on the chip issue itself, I don’t — increasing availability was not the direct result of demand dropping other sectors. It is more of our partnerships with our suppliers and having them understand what we’re using the chips for and how important they are and really working closely with them versus other sectors, demand declining. And sorry, you had a second part of that question.

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.

Operator: Our next question comes from the line of Andrew Brackmann with William Blair.

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?

Stephen MacMillan: Yes. I think the first part, Andrew, really is — I think it’s the given gem of our company that doesn’t always get as much attention, but is that dedicated physician sales force that we have within our Diagnostics business, that’s really unique. It’s an extra investment from our end, but it is having our reps that call on the physicians and really help educate them, both about the guidelines and including the changing guidelines where we’ve gone to effectively the need to opt out. So you’re getting more screening earlier. And we’re — it allows us to partner with a lot of the major labs and even hospital systems where they value that education that we do. And it helps us both shape but also build markets.

When you look at really what Hologic has done, and I think we’ve been pretty good about it across our businesses, we’ve helped create a lot of markets through physician education. I mean, if you go back to the original Pap test and thin prep and what we did there, what NovaSure and MyoSure have done, and we’re doing it a lot in diagnostics, certainly through the STIs. And to the second part of your question on international, I think, again, by placing so many Panthers internationally, it’s allowed us to have more of those discussions and start to get some of that menu in around the world as well and then hopefully able to help educate and shift guidelines in those countries over the years ahead as well.

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.

Operator: Our next question comes from Derik De Bruin with Bank of America.

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?

Stephen MacMillan: No. I mean, there’s been so many various court cases between state, federal, all kinds of, frankly, goofiness going on in the political and court systems right now. we tend to think here, things will prevail and be fine over time. So we’re not going to react any 1 thing that could easily get overturned again.

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

Vijay Kumar: Steve, congrats on a really strong quarter here.

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

Vijay Kumar: No. No, all good. You guys made it up with the print. I guess on some of the numbers we’re seeing here, Steve. I’m this is almost.

Stephen MacMillan: Personality come on.

Vijay Kumar: You made it up with some pretty impressive numbers. This is almost also kind of numbers 20%. Now and from an perspective, there’s backlog. So I was just curious, when you look at numbers like 25% GYN, and 15% overall diagnostics to you. What do you think is driving this? Is this a catch-up of backlog? Or is this perhaps a pull forward of demand? And related to that, Steve, first half, I think the organic now was almost teens, mid-teens. I think the prior guidance here for all segments, double digits. Is the implication now for the back half 6% to 7% in line with the longer-term shafts? So just talk about what drove first half and what the implication is for the second half?

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.

Vijay Kumar: That’s helpful, Steve. And Karleen, one for you here. I know you called out the data, any days impact here in back half are days never a headwind here in the back half? And — sorry, on capital allocation, is this — Steve, sorry, I missed your comments. Are you saying like the pipeline is looking healthier? Maybe just put some context around the M&A commentary here on perhaps we’re getting closer to something here in the near term versus how we should interpret your commentary around the pipeline looking good across all segments?

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.

Operator: Our next question comes from Navann Ty with BNP Paribas Exane.

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.

Karleen Oberton: Yes. So our vaginosis panel, as we said, we really like the performance that we’re seeing. The outlook would be that, that’s greater than $100 million for 2023 and really put that as 1 of our top assay. Women’s health was still market leaders in protecting that market leadership. And as Steve said, one of the kind of the secret sauce that’s underappreciated in how we do that is our physician sales force that’s out there educating physicians on guidelines, promoting testing, and certainly where we saw a change in guidelines about two years ago where it’s more universal screening. We’re helping grow our business as well as our customers’ business with acquisition sales force.

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?

Karleen Oberton: From an M&A perspective, certainly, some of the recent deals we did — we acquired companies that were based overseas, but Mobidiag, the biggest 1 would have potential revenue from the U.S. and OUS over time. And then we do have our GoDirect strategy, primarily in our breast health and we’ve done a little in surgical, where we’ve, in the past, leverage dealers. And what we find is when we go direct, those businesses perform better as part of Hologic than on a stand-alone basis. But certainly, as a global organization, we look at acquisitions around the globe, not just in the U.S.

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