Good afternoon and welcome to the Hologic Incorporated Third Quarter Fiscal 2019 Earnings Conference Call. My name is Eduardo and I am your operator for today's call. Today's conference call is being recorded. All lines have been placed on mute. I would like now to introduce Mr. Mike Watts, Vice President Investor Relations and Corporate Communications to begin the call. Thank you.

Thank you, Eduardo. Good afternoon and thanks for joining us for Hologic's third quarter fiscal 2019 earnings call. With me today are Steve MacMillan, the company's President Chairman and CEO; and Karleen Oberton, our Chief Financial Officer. Steve and Karleen both have some prepared remarks, then we'll have a question-and-answer session. Our third quarter press release is available now on the Investors section of our website. We also will post our prepared remarks to our website shortly after we deliver them. Finally, a replay of this call will be archived through October -- through August, excuse me, 23rd. Before we begin, I'd like to inform you that certain statements we make during this call 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 that's included in our earnings release and in our filings with the SEC. Also during this call we will be discussing certain non-GAAP financial measures. A reconciliation to GAAP can be found in our earnings release. Finally, any percentage changes we discuss will be on a year-over-year basis and revenue growth rates will be expressed in constant currency unless otherwise noted. Now, I'd like to turn the call over to Steve MacMillan, Hologic's CEO.

Thank you, Mike, and good afternoon, everyone. We're pleased to discuss Hologic's financial results for the third quarter of fiscal 2019, our fifth consecutive quarter of strong consistent overall results. Total revenue of $852.4 million and non-GAAP earnings per share of $0.63 were both above our guidance. Similar to recent periods, revenue growth was driven by our largest businesses Molecular Diagnostics and Breast Health and we're also happy that the performance of our Surgical division continues to strengthen. These strong results continue the positive momentum that started to build in our core businesses throughout 2018. During this time, each of our divisions has made progress to varying degrees on the four strategic levers we can pull to drive growth. Let me touch on each of these to illustrate both the progress we have made and the opportunities ahead. First, commercial execution in the United States has been our strong suit, enabled by our excellent sales teams and best-in-class products such as our Genius 3D Mammography systems, our Panther molecular diagnostics instrument, our ThinPrep liquid pap test and our MyoSure and NovaSure surgical devices. Across these core brands, we are executing effectively as we build on our number one market shares, maintain premium pricing, and partner with our customers to drive demand. These products are the foundation for our strategy and overall financial success. But since we already have high domestic market shares in some lower growth end markets, we need to do more to drive attractive growth. That's where the other three strategic levers come in. To start, we have worked hard over the last several years to expand into international markets where we have much more headroom to grow shares than we do domestically. Not long ago some of you may recall that I described our business outside the…

Thank you, Steve, and good afternoon, everyone. In my remarks today, I'm going to walk through the rest of our third quarter income statement, touch on a few other key financial metrics then finish with our updated financial guidance for 2019 as well as the fourth quarter. Unless otherwise noted my remarks will focus on non-GAAP results and percentage changes will be on a year-over-year basis in constant currency. As Steve described, we are pleased with our third quarter results as revenue of $852.4 million and EPS of $0.63 exceeded our guidance. We benefited from strong performance by our largest businesses Breast Health and Molecular Diagnostics, as well as improved results in our Surgical division. Both operating and net margins improved, reversing recent trends. We also deployed capital in accordance with our strategic priorities by agreeing to acquire SuperSonic and by repurchasing $50 million of stock. Our overall performance has been very solid through three quarters of the fiscal year and as a result, we are tweaking our financial guidance upward despite an incremental foreign exchange headwind. With that introduction, let me start by reviewing our P&L for the third quarter. Gross margins of 61.6% decreased 100 basis points compared to the prior year period. This was primarily due to the strong U.S. dollar, trade tariffs in China, product sales mix especially related to Cynosure's performance and increased service costs. Compared to the second quarter of 2019, however, gross margins did improve sequentially by about 60 basis points as some of the one-time headwinds we mentioned last quarter dissipated, but the FX headwind got worse. Looking ahead, we expect better margins in the fourth quarter due to improved product mix, absorption benefits, the ramp of new product sales and our ongoing cost reduction efforts. Moving on. Total operating expenses of…

All right. We'll take our first question from Vijay Kumar from Evercore ISI. Please go ahead.

Hey, guys. Congratulations on a nice quarter here. Congratulations, Steve. And just two quick ones, Steve. Maybe one on – maybe I'll start with the Breast Health, right? This really was strong. I'm just curious on what drove this. CapEx environment seems to be really strong. So was this more of the strong CapEx environment that you're seeing, or you had some FDA regulation on dense breasts. Are you seeing some uplift from there? And maybe could you also comment on how the order book is shaping up on the Breast Health side?

Sure, Vijay. I think the capital – certainly capital spending looks pretty good in hospitals right now. We continue to feel good about that. I do think that 3D, it's hard to put an exact number on what the breast density legislation is, but we are certainly able to have conversations that nobody else can, with the customers as they're gearing up to make purchases. And just as a reminder for people, we are the only 3D that has an FDA indication approved for dense breasts. And as there's more and more legislation driving towards disclosing dense breasts – breast density, it clearly plays to our advantage. So I think we feel like we've been certainly winning and we're on the leading edge of the technology there. So it's just a good place to be and our team is continuing to get better and better, at really selling the overall value proposition that comes with the best product in the market. To your second piece on the order trends, we don't get too far ahead, but I would say orders continue to look good for us.

Yes. And I would just add kind of beyond the gantry activity in the capital environment, I think our teams are continuing to come up building that capability and selling the portfolio of products as well as continuing growth in our service revenue.

Just to add onto that Steve. If you piece in all the different elements execution has gotten better. It was good to see some of the laggards Aesthetics and GYN turn the corner. And you're layering on this up, tuck-in deals that you've done which will annualize next year. Are we now at a place where Hologic can lay claim to being a mid-single growth asset? Thank you.

Sure, Vijay. I think we feel really good. When you consider – Pete Valenti we are with him. Obviously, he's been running our Breast Health business for five years right now. He's reminding us that the first strategic plan inherited it showed the traditional old days of growth curve and it would have been a decelerating, or really a declining business in 2018, 2019. I want to get – we want to be careful not to get too far ahead of ourselves on exactly where we are. We want to just keep putting numbers on the board. I think candidly, we were trying to chase some numbers a few years ago, and I think we got a little ahead of ourselves trying to proclaim where we are. I think at the end of the day, let the numbers keep speaking for themselves, and getting back to strong execution in our markets, and I think we'll show where we fit there. So thank you.

Thanks, guys.

[Operator Instructions] We'll now take our next question from Doug Schenkel from Cowen. Please go ahead.

Hey, good afternoon. This is Chris on for Doug today. Thanks for taking my questions. Steve in your prepared remarks you mentioned that customers are consolidating molecular diagnostics assays onto Panther and that it has been a driver of growth. Could you just elaborate a bit more on that comment? Specifically, are customers consolidating women's health and virology assays onto Panther?

Sure. It's bits of both. What – primarily, it's just continuing to expand our growing women's health assays. As we mentioned, we got 11 straight quarters of FDA clearances in the United States. And I'd say truthfully, it's probably a little bit more of still getting more women's health stuff as the women's health line is expanded and to some degree certainly the virology kicking-in. But yeah, I think the way to think about our Panthers and the assays it's sort of this wonderful gift that keeps giving every quarter. We keep placing more Panthers in the labs. And every quarter each Panther that we have is generally doing more revenue. So we have sort of a force multiplier here of more of an installed base and then more menu coming through. And it's a combination of more of the women's health plus some virals, and just really continuing to build. And that's what's driving – you got nine – almost 9.5% growth in the United States, where its strong market shares already.

Yeah. And I would just add to what Steve said the elements that he talked about the ability to add menu on the Panther, it's also the value proposition for our customers that as we expand our menu, they get more leverage out of the Panther. And I think that's – a lot of what we're seeing is the value that customers see in the Panther.

Okay. And can I just go back to revenue guidance? You beat fiscal Q3 revenue guidance by about $20 million, but you only increased full year guidance by about $7 million to $8 million. Looks like FX is an incremental $5 million headwind. So this would imply that you reduced underlying full year guidance by about $5 million to $10 million. So could you just help us bridge the revenue guidance a bit more? Thank you.

Yeah. And so I might just look at it a little different way. If you looked at our second half of the year guidance from our last guide, we're at the midpoint to where we are now. It has increased overall for the second half of the year, while absorbing the incremental FX. So, again, I think the original guidance at Q3 that we gave in prior quarter would have indicated extremely high fourth quarter. We're pleased with how Q3 went and pleased that overall we've raised the second half of the year revenue guide.

Okay. Thank you.

We'll now take our next question from Raj Denhoy from Jefferies. Please go ahead.

Thanks. Anthony in for Raj. So maybe just a couple on the SuperS deal and maybe just a little bit more detail on expected revenue contribution next year and maybe a little bit on the growth profile of that asset and just the underlying margin profile of that business as we move into fiscal 2020? And then I'll have a quick follow-up on Diagnostics. Thanks.

Sure Anthony. Until we close that deal, we're going to avoid getting too far into the details. But we think, generally they did about in the high $20-ish million in revenue in 2018 and it's growing at what looks to be a low double-digit rate. So as we consolidate that and ultimately once we close on the deal, we'll give a little more information. But I think as we're thinking about at the highest level, it'll drop in $30-ish plus million of revenue at some point. We don't have it -- we won't have it probably fully closed until our first quarter as we talked about, but feel really good about its underlying growth rate and frankly the technology itself. And as a big reminder most of their revenue right now is outside the United States. So it brings us nice revenue there and our U.S. sales force is chomping a bit to get their hands on it. So we think it'll be a clear double-digit grower of an exciting new product for us.

That's very helpful. And just on Diagnostics. Maybe just a little bit on the share front. So certainly sounds that volumes are doing well on the Molecular side. But anything on share just when you consider a number of recent launches around competitors out there whether it be in Europe in the U.S.?

Yes. I think the way we think about share is our international molecular business grew 22%. Our U.S. business grew over 9%. I think we'll stack that up with pretty much anybody. And ergo I think we're probably growing faster than the market without knowing specific shares.

Yes. It's Mike, Anthony. I think despite those very high shares in most of the key categories, I think what the team has done a really good job of doing is working with our customers to drive underlying demand and drive testing to guidelines and those kind of things. So that's helped us grow the business even though the shares are already pretty high.

Thanks.

Thanks Anthony.

We'll now take the next question from Tycho Peterson from JPMorgan. Please go ahead.

Hey, thanks. Steve GYN Surg you commented steady progress in U.S. Can you just touch on NovaSure and MyoSure? I didn't hear you break those out.

Sure Tycho. I think MyoSure continued to be really strong and I think we stopped giving the Invader piece. I think the way I think about it is MyoSure was still a clearly double-digit grower, feeling great about it. NovaSure is still declining in that probably high singles level. We'd like to be a little bit better. But overall love the trajectory of the business.

And as a reminder we've introduced some new products there as well between our new fluid management system which is called Fluent and the new Omni Hysteroscope. And those are clearly -- those are related to MyoSure and are clearly helping drive growth as well.

And then on SSI, a couple of things. You got the Clarius deal that you had before for distribution. Curious how those fit together? And then obviously their cart-based system gets used in a lot of markets vascular, gastroenterology other areas. So I'm curious about how you're thinking about some of those kind of nonmammography-based areas?

Sure. Our focus is clearly going to be just in the mammography space. So if there's opportunities beyond that we could always partner that or whatever with the technology, but our clear focus will be in the breast area. And I think it's compatible with Viera. So we'll now have both a portable as well as a cart-based option. And frankly, I think to a large degree the cart-based option is going to be the bigger drivers of revenue here. So I think we've been learning more and more about the space and excited to have the chance to really get a cart-based offering that we haven't had. Thanks Tycho.

Okay, thanks.

We'll now take your next question from Jack Meehan from Barclays. Please go ahead.

Thank you. Good afternoon. Want to go back to the Breast Health segment, just one modeling. How much was the contribution from Focal and Faxitron in the quarter? Do you break that out? And was also curious the international commentary around Latin America. Just a little bit more color on that and whether do you think that's resolved going in the fourth quarter? Does the fourth quarter guidance assume that stays pressured?

Jack, it's Karleen. So I think from Focal and Faxitron I think we indicated they contributed just over $13 million of revenue in the quarter. When you think about international LatAm is clearly the smallest piece of the Breast Health business but it was down almost 50%. And while we've guided – well, our guidance assumes a little bit of improvement in Q4 for that business. That will be down as well year-over-year. And I think just in general international Breast Health, we did see some movement of orders from Q3 to Q4 as well as, again, in the prior year period we'd had some large tenders that obviously didn't repeat this year.

Great. And then one more follow-up on Breast Health. If I look at the service revenue in the quarter just from the Q the $117 million it looks like that was up about 1% year-over-year. So that slowed down. Just curious if there was anything to call out related to that. And maybe just give us an update in terms of some of the software upgrades and service and just where you think you are in the cycle.

Yes. So, I think we -- I think the expectation on service growth is in line with what we see. I think one of the nuances here is as we place new gantries, we have the cycle with customers will go under warranties for a year period and we have a lapse in the service contract revenue until they re-up. So that low single-digit growth is kind of what we expect.

We will now take our next question from Dan Leonard from Deutsche Bank. Please go ahead.

Thank you. A couple of -- for Karleen. Karleen, on gross margin was there any downside variance in the quarter besides foreign currency? And if so what was the driver?

Yes. I would say beyond the foreign currency and the tariffs, the other was mix and specifically in Cynosure. So if you think about Q3 last year was what I'd call the height of the women's health product from a comp perspective which those products had a higher gross margin portfolio profile than the rest of the Cynosure business. So I would say that was the second biggest driver and then obviously we mentioned some higher service costs.

Okay. And I was specifically trying to focus on downside versus plan as opposed to year-over-year. Is it still the objective? I mean, you've previously thought gross margins would have been only slightly down year-on-year in 2019 and that looks like they'll be down well more than that. Could you address that variance and also talk about being able to defend the gross margin line going forward?

Yes. So, I think from our original guide and what we had talked about for margins, I think that one of the biggest drivers is the increasing strengthening U.S. dollar which has impacted the gross margin line I think coupled with what I've mentioned last quarter. So last quarter we had talked about a number of onetime items, but what is continuing here as well is some higher service costs that we do have teams focused on to improve. But I think what's also equally important is that when you look at our operating income margin and net margin have both improved despite the headwinds we're facing with gross margin which leads to our ability to have strong discipline in our operating expense to still drive results.

Okay. Thank you.

We'll now take our next question from Bill Quirk from Piper Jaffray. Please go ahead.

Great. Thanks. This is Dan on for Bill. I appreciate your comments on utilization within Panther instruments. It sounds like you're working well with customers to drive that figure. How are you thinking about that going forward in terms of utilization? It sounds like it's a growing figure. Thanks.

Dan, it's Mike. Yes, we try to update that number formerly at the end of our fiscal year. So probably we won't give you a specific number. But I mean your intuition is right. I mean that's generally been growing kind of in the high single-digit range year-over-year that being Panther utilization per box. So there's some good progress there.

Okay. Great. Thanks. And then just another one on Molecular to follow up. That's another double-digit quarter. And then, how are you guys thinking about that growth rate heading into the fourth quarter and then maybe over the longer term? I know you've said high single digits, but it's been pretty consistently outperforming. So if you could just touch on that. Thanks you.

Yes. I think we continue to think about it as a high singles probably lower end of high singles and plan for that and try to deliver a little bit better certainly helps. But we wouldn't be ready to call it a long-term double-digit growth, especially with the competitive environment and everything else. But we feel like we're doing very well there.

Okay. Great. Thanks.

Great. Thanks.

We'll now take our next question from Derik De Bruin from Bank of America Merrill Lynch. Thank you.

Hi, this is Ivy Ma on for Derik today. Thank you for taking my question. So I have one on SSI and have a follow-up on Cynosure. So, I know SSI is targeting EBITDA breakeven for the year. Understand that you wanted to be more conservative and guided to slight dilutive for next year, so just wanted to see if there's any additional color or consideration there? Thanks.

When we bring it into us, we reported net income, not EBITDA. So on a -- while they may be breakeven on the EBITDA basis, they're losing money on an operating basis. So that's the difference there. And obviously in our hands...

Yes. I don't think we've changed strategically kind of investments or kind of spend habits that they had. It's just as Steve pointed out a different profitability metric.

I think Ivy, just to remind you, I think what we said in our original press release there that -- was the expectation would be I think less than 1% dilutive for next year or so. We think that's very manageable in the context of the overall P&L.

Yes. And we'll probably in a position when we give guidance for next year to be able to incorporate that in on the next call.

And for Cynosure congrats on the launch for the new contouring product recently. Any updated thoughts on outlook for the segment for the rest of the year and next year? Thanks. A – Steve MacMillan: Go ahead, Karleen.

I was just going to say that, I think as we looked -- we're happy with the stabilization. Really pleased that we're able to launch the new products, although, I don't think they're going to be big meaningful drivers of growth that currently create some excitement with the sales force. I think as we exit the year, we expect the division to return to growth, but albeit on a much weaker comp. So feel good about where we're at right now.

Great. Thank you.

And I'll take your next question from David Lewis from Morgan Stanley. Please go ahead.

HI. This is Mason on for David today. Thanks for taking the question. I just want to touch on Surgical. You have a new competitor coming to the market with Cerene. I was just wondering if you could talk about how you think about the competitive dynamics with the segment moving forward with NovaSure and in the next fiscal year. Thanks. A – Steve MacMillan: Sure, Mason. Yes. I think we continue to feel good about the direction and the results that we're generating. We've looked at the clinical package for Cerene. As you may know, there's a lot of questions around that company and business and a lot of stuff going on over there. So we just keep focusing on our customers on our innovation and feel good about where we're going.

Thanks. And on the Brevera supply constraints you referenced this as a weighing on interventional results into the quarter. I was just wondering if you could potentially break that out and potentially provide an update as to when you expect to be back to full supply. Thanks very much. A – Steve MacMillan: Yes. We're not going to get into -- the level of impact is fairly small in the grand scheme. But I think, as we've said, we probably really won't be back in the full supply until later on into 2021 -- or fiscal 2020 rather, end of our next fiscal year.

All right. Thanks very much. A – Steve MacMillan: Great.

And I'll take your next question from Richard Newitter from SVB Leerink. Please go ahead.

This is Jaime on for Rich. A quick question. So I didn't think I heard you break out any of the subsegment directional commentary on growth within Medical Aesthetics. So I was wondering if you could provide any sort of commentary on the different trends between skin, body and women's health. A – Steve MacMillan: At the end of the day, we're not providing the breakouts per se, given the size of the business. But, overall, I'll tell you, skin was up nicely. Women's health was down significantly over last year, because that was little like 12 months ago, almost to the day when the FDA letter came out. So we were doing very well with the women's health line last year at this time and the body segment is down a bit.

Okay, great. And then, just within the U.S. you're saying that you saw some sequential improvement there. So just curious. You guys had mentioned some marketing initiatives that were launched at the beginning of last quarter. Just wondering if some of that is coming from the strength of those marketing initiatives. Thanks for talking my questions. A – Steve MacMillan: Yes. I think, it's coming from two things. We feel really good, particularly about the Brooke Shields campaign that we have on SculpSure. There's been a lot of positives on that. And the sales force has really hit a good spot now, where we've got a combination of some great seasoned veterans and frankly most of the leadership of the sales organization, are the long-term veterans of the company the Cynosure, pre before we acquired it supplemented out with a lot of great teams on the ground. So it's a combination really of the marketing and the teams in place and then really focused on bringing a pipeline of new products that'll start to kick in over next year.

We will now take our last question from Dan Brennan from UBS. Please go ahead.

Great. Thanks. Thanks Steve, Karleen and Mike. I guess, I wanted to ask the first question on breast. If you don’t mind, can you just walk us through a little bit about the strength that you're seeing there and kind of segment out kind of the contribution or how we should think about Genius versus the newer gantries' dimensions and profile? Just wondering what the runway is on each of those to sustain this type of growth rate. A – Steve MacMillan: Sure. I think, overall, really the 3Dimensions and 3D performance have by far become the bulk of the sale now. So the old days of dimensions 3,000 6,000 9,000, largely given way to the 3D Performance and the 3Dimensions still under the Genius banner. But I think the new products, both high end and a slightly more performance is slightly defeatured on the 3DPerformance, both providing us really good opportunities to both go high end and also the lower end with our customers.

And I would just add from a runaway perspective, I think, we've talked about the overall market penetration from 2D to 3D, as well as our own installed base would give us roughly 3,000 to 6,000 more gantries to convert to 3D and I'd say steady cadence of gantry placements since 2015 about 1,000 per year that gives us nice runway.

Thanks for that. And then just one final one. Just on the M&A front. Sounds like tuck-ins are the kind of focus going forward. But just wondering Steve, just remind us to the extent like you were to see something bigger like what's your appetite in terms of size? And maybe any color on the pipeline as it stands today. Thanks a lot. A – Steve MacMillan: Sure Dan. I think we're -- while not a stated policy, we're generally thinking, okay, we're generating $600 million to $700 million of free cash a year. Probably not thinking about spending more than that in any given year on acquisition. I think it's kind of a good disciplinary. So that's not a formal policy never to be deviated from, but I think it should frame in kind of the thinking. And I think we're certainly hunting much more in a 100, a couple of hundred million kind of range versus anything that starts with a B. So thank you.

Thank you. That is all the time we have for questions today. This is now -- this now concludes the Hologic's Third Quarter Fiscal 2019 Earnings Call. Have a good evening.