Good afternoon and welcome to the Hologic's Fourth Quarter 2021 Earnings Conference Call. My name is Sara and I am your operator for today's call. This conference is being recorded. I would now like to introduce Mike Watts, Vice President, Investor Relations and Corporate Communications, to begin the call. Please go ahead sir.

Thank you, Sara. Good afternoon and thanks for joining us for Hologic's fourth quarter fiscal 2021 earnings call. With me today are Steve MacMillan, the company's Chairman, President and Chief Executive Officer; Karleen Oberton, our Chief Financial Officer; and Ryan Simon, our new Vice President of Investor Relations. Our fourth 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 today. A replay of this call will be archived through December 3rd. Before we begin, I'd 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 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. One of these non-GAAP measures is organic revenue, which we define as constant currency revenue excluding the divested Blood Screening business and revenue from acquired businesses owned by [indiscernible]. 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.

Thank you, Mike, and good afternoon, everyone. We're pleased to discuss our strong financial results for the fourth quarter of fiscal 2021. Revenue was $1.32 billion and non-GAAP earnings per share was $1.61, both figures significantly exceeded our guidance. Since this quarter marks the end of our fiscal year, we want to highlight some annual numbers and themes today. First, the numbers. For the year, total revenue was $5.63 billion, up 47% versus 2020. Non-GAAP EPS was $8.41, more than double the prior year. Some really big numbers and a truly impressive performance that was driven by our COVID test sales, as well as the recovery of our core women's health businesses. Along these lines, if you back out COVID test sales as well as revenue from COVID-related products, such as instruments and collection kits, we grew about 12% in the quarter, a very nice start versus the long-term guidance of 5% to 7% that we introduced in our last call. We believe we are well positioned for success regardless of the future direction of the pandemic. If it drags on, we have shown that we can respond aggressively and generate financial upside. For example, since the beginning of the pandemic, we have provided more than 130 million highly accurate COVID tests to our customers in more than 50 countries. And when the pandemic subsides, we can rely on a base business that has never been stronger or more diversified than it is today. Now let's turn to those annual themes. We want to focus on the strengthening of our major businesses over the last 12 months, as well as 2 very important social initiatives that help improve health access and equality. We're so proud of everything that Hologic has done to help fight the COVID pandemic. And the resulting…

Thank you, Steve, and good afternoon, everyone. We are very pleased to share our fourth quarter results that significantly exceeded our guidance. In our last earnings call, we said that while we were forecasting conservatively, we were well prepared to generate upside if COVID testing demand increased due to the Delta variant. And that's exactly what happened. Increased COVID test sales in the fourth quarter more than compensated for macro headwinds that have affected many med tech companies recently. Our fourth quarter performance demonstrates that we are in a strong position regardless of how COVID evolves. We benefit from our invaluable testing contributions as the pandemic drags on or from a strong base business when it wanes. In the fourth quarter, revenue and EPS were down compared to the prior year, when COVID-19 testing volumes will be near their peak. Total revenue of $1.32 billion declined almost 3% and 6% organically. But these figures mask the solid recovery of our base businesses. As Steve said, if you back out COVID assay revenue as well as collection kits, instruments and ancillaries that are shared by our COVID and other tests, revenue grew by 12% organically. This growth, which compares favorably to the 5% to 7% long-term guidance we provided last quarter, was driven by resilience across all of our divisions despite utilization pressures from the Delta variant and customer staffing shortages. EPS of $1.61 in the fourth quarter was down 22% compared to the prior year as expected, but earnings exceeded the midpoint of our guidance by about 68%. Underlying this, our cash flow conversion remains tremendous, allowing us to continue pursuing tuck-in M&A and share repurchase, which I'll touch on in a moment. Before I do that, let me provide some detail on our divisional revenue results. To provide a…

[Operator Instructions] And we will take our first question from Brian Weinstein with William Blair.

Thanks for taking the question. I don't usually believe in public accolades for management team members on these calls. I don't think I've done this very often, but I just want to thank Mike for his work and his friendship over the last 14 or so years that we've worked together, going back to GenPro. Lots of history there. Enjoy your retirement. You've certainly heard it, Mike.

Thanks Brian.

Yes, of course. So, just to think about 2022 for a second, then I also want to ask a bigger macro question. But on 2022, Karleen for you, just want to kind of understand the core operating margin. I wasn't sure if you mentioned it right there at the end. I might have missed it. But if we were to sort of back out COVID-19 from both, let's say, 2021 and 2022, how is that core operating margin expanding? And what does that look like relative to pre-pandemic? Because it looked like on our method, operating margin may actually be coming down on the core a little bit. And I wasn't sure if that was acquisitions or other things that were there. So, can you just address kind of the trend in the quarter?

Yes. So, certainly, acquisitions are dilutive. I think we've talked about at least $0.10 in 2022. I think when we look at the core, we would expect that the operating margin would be at or slightly above where we - prior to the pandemic. I think we've referenced that 31.5% right at Q2 2020 as what to think about on the base business. But certainly, as we move forward, the acquisitions are dilutive. And while we're really pleased about the international growth, that is also dilutive to the operating margin profile. But certainly, our job is to continue to look for opportunities to drive efficiencies.

And then the inflationary pressures there, they are being offset or are those flowing through as well?

To some extent, offset, but some of it's dropping to the bottom-line as well. As we always have initiatives to improve cost, but then certainly, those initiatives are at the pace of these headwinds that we're experiencing.

Brian, the other piece to keep in mind is what we kind of called out as well, with additional charitable contributions, extra employee bonuses. It was our - as you can tell, it was our fiscal year-end. It was a tremendous year, dropping an extra $0.01 or $0.02 to Wall Street at this point on an 8 41 number. It was probably not our top priority versus investing for the future. And you look in total, our R&D spending up significantly over 20% for the year. We really used it to make additional investments for the future.

And our next question will come from Vijay Kumar with Evercore ISI.

Thanks for taking my question. Steve, maybe on the Q1 on the guidance. Maybe I'll start with the queue. Breast Health, can you just talk about the CapEx environment? It looks like imaging was down Q-on-Q. I'm just curious if there was anything in the queue, whether it was the pandemic impact that had some disruption.

Yes. Overall, we feel really good. There were clearly some impacts on installations here and there as hospitals hunkered back down a little bit in that August-September period. We continue to feel good about the backlog and feel good about the overall trends within that Breast Health business.

One on the fiscal 2022 guidance, the underlying base is expected to grow 5 to 7, and I want to make sure I have these numbers correct. The total COVID contribution for the year, I think the guidance is contemplating about 420, including 300 of testing and 120 of others. Did I get those numbers right? And Boulder, I'm curious what the contribution from Boulder is, what the revenue run rate is and margin is?

Yes. So you have the 420 is correct, Vijay. There's no contribution from Boulder in the guidance as the deal hasn't closed.

Our next question will come from Tycho Peterson with JPMorgan.

First question, I'll stick with the guidance, Steve. Just as we think about Panther placements, do you think about being back to kind of pre-pandemic levels, call it, 190, 200 systems next year? And then, any rough guidance you can give us on pull-through versus the historical 240,000?

Sure, Tycho. I think we continue to feel really good that we will not see a drop-off relative to historical placements on Panther's. And if anything, we'll probably do a little bit better than the number you just mentioned and therefore, probably a little bit better than even we've been doing the previous years going into it as global demand continues to be great. The average dollars per Panther, it's all over the place right now because, obviously, we have COVID running through a bunch of them. I think the logical expectation is we'd probably be a little bit lower than that 240 number, given the incredible number we've placed. Also, a huge amount of them are outside - if you basically look at it on a base business basis. I think what - with COVID, those numbers are going to continue to be good, but it's hard to predict for the full year, obviously, given where COVID will go. But I think what we love is they're out there, they're placed. We probably take a slight short-term dip on revenue per Panther in the short-term, while that continues to go up as they port our base assays onto those Panthers. So I do think as you're getting to the overall number of Panthers we have placed has got to bode very well. And the other reality is, we're all seeing about labor constraints. Do not underestimate - again, I know you know it, Tycho. But the fact that Panther is such an automated system. And I know there's ongoing questions of, okay, what's going to happen with all these Panthers once COVID runs down? Most of our customers are dying to get our base business on to these and for those labor savings opportunities.

Okay. And then a follow-up on China. There's kind of two dynamics in the market there. There's China 2025, encouraging local competition. And then there's kind of the near-term dynamic around volume-based tenders. Can you maybe just touch on either both of those, and whether you're seeing any impact?

Yes, I hate to say it, but I think we're a little fortunate in that we're pretty small in China and therefore, are not seeing big impact in the volume-based tenders, probably not coming quite after our categories at this stage in time. But I would tell you truthfully, it's a time I'm glad we're smaller there. We see opportunities to grow there, but we probably have more upside than downside as we look at that part of the world.

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

I wanted to continue on with Panther. It looks like just based on the disclosures, incremental Panthers in the quarter were placed internationally. Then just looking at some of Karleen's commentary around the U.S. versus international mix of the COVID sales. Most of the incremental sales actually came in the U.S., which kind of makes sense, I guess, because of the Delta. I was just curious maybe more broadly, you got thoughts around the international adoption of these Panthers. How much is getting used now for COVID and versus broadening the footprint for other things internationally?

Sure. I think a lot of it in the near term has still been COVID. And even – there are a lot of hospitals and a lot of labs that even as they saw - started to see some declines pre-Delta, they were starting to ramp up our base assays and then decided we better stay loose. And so, I would tell you there's probably some Panthers being a little bit underutilized right now internationally because they don't want to start to ramp them up with our tests and then have to stop. So we feel great about that as basically on deck and ready to go as soon as they have the ability. It's one reason why the Panther placements internationally have continued to be very strong because they've gotten the exposure and they want to build up with our tests. So, I think feeling great that there has been - we've even had a number of customers in the United States as well that we're just starting in kind of July to start to ramp down the COVID, ramp up our women's health stuff. And then all of a sudden, time out, we want to keep this capacity for right now on COVID.

That makes sense. Then on the Breast Health and the GYN Surgical businesses, they both came in a little below what I was expecting. I was curious if you could call out just what impact you think Delta might have had on the results in the quarter. And as you were thinking about the 2022 guidance, do you just – do you assume that was the baseline just when you were thinking about the 5% to 7% to grow off of?

Yes. We did kind of view that in the baseline. They were a touch - obviously, as we saw the August, especially September, they had a little bit of an impact. Again, I think there's been way too much overall focus on the short-term ups and downs of COVID and what it does to the base. But I think overall, we feel very, very good about that core and about where we're headed as we come into 2022 on both of those businesses. And as Karleen and I both mentioned, those businesses are more diversified than ever, both product-wise as well as geography-wise. And I think that sets us up well here for 2022 and for the longer term.

And next, we'll take a question from Anthony Petrone with Jefferies.

And I want to congratulate the team on a strong execution for the whole year. And congratulations as well to Mike Watts on your retirement. Good luck on the next phase of the transition. A couple of questions. One on actually the acquisitions, the $34 million of total deal contribution. How much of that was actually Mobidiag? And when we think about a quarterly run rate, I think the timing of Mobidiag was not a full quarter. So, should we be expecting a number perhaps in the $40 million to $45 million range for total quarterly contribution from recently closed deals? And then I'll have one quick follow-up on COVID testing.

Yes. So Mobidiag was roughly $7 million in the quarter. And so I think as we look to 2022, I think we talked about $150 million plus from all the acquisitions and about half of that is organic.

Okay, great. And then just on the newly placed Panthers throughout the pandemic, I mean how many of those systems are actually only doing COVID testing exclusively? And at what point do you think they will transition to just broader diagnostic contracts? Thanks again.

Thank you, Anthony. The reality is we don’t exactly know and track at that level of the Panthers. But what we do know is they've clearly been running, in many cases, not quite flat out, but close to it during the pandemic that all of which creates the opportunity as COVID ramps down for us to really shift over our base business. So, I think that's what makes us so excited about the future of Diagnostics. We had good growth rates going in. Particularly internationally, you've been seeing - we'd had double-digit almost 20% growth in our molecular diagnostics business for the last few years and numbers of quarters as we come out of the pandemic or even as things slow down to a more manageable level, which looks to be hopefully on the horizon here. That creates meaningful opportunity for more and more of our base businesses to really get ramped up there.

And Derik De Bruin with Bank of America has our next question.

Hi, good afternoon and Mike, happy trail. It's been a pleasure. So, just on - just once again, another Panther question, but how much is greenfield versus people just adding on additional molecular testing capabilities versus replacements of - or swap-outs from competitors?

So you're talking to new customers, completely new customers?

Completely new customers to - yes, completely new customers to testing that you've not been in the lab before versus people who have been doing molecular tests, who are adding systems or ones just beating out some competitor that's installed?

Yes, the vast, vast majority, Derik, are customers that we've already been doing business with. When you consider our - just our market shares, as you well know in women's health, we're pretty much in most customers. There are very few customers, certainly in the United States that we're not in. So, it's really expanding their capacities. A few more greenfield outside the United States, which is new customers coming prospecting. But the vast, vast majority across the board really is our core business. Mike, you wanted to add something?

Derik, the only thing I might add is we are seeing a lot of customers add on new assays, of course, right? So, customers for our, say, women's health panel today, call it, chlamydia, gonorrhea, HPV, but we're seeing a lot of excitement, in particular, around our vaginosis sale, which we the script as well as Amgen. So that's an existing customer, but they're bringing on a new assay or assays.

And then just one follow-up. What are you assuming for breast imaging growth in 2022? And on the services component at 40%, is there additional upside to that number?

Yes. I mean, I think the thing about that service is tied to our installed base in that as we even place new gantries. Now sometimes the replacements, they kind of come off a service for you, they have warranty. So, I would expect that the service would probably be a lower end of growth when I think about that division. But certainly, as I said in the prepared remarks, the overall division should be in that 5% to 7%.

Next, we'll take a question from Mike Matson with Needham & Company.

Thanks for taking my question. I guess I want to ask one about the COVID flu combined test that you've launched. So, do you see a scenario where if COVID, maybe we don't have another big wave, but we have kind of a worse flu season that you could still see kind of a benefit from that to that combined test?

Yes. Mike, we're prepared - and when we said we launched it, we've had it cleared now, and it's ready to go for customers. We're still basically hearing from most of our customers. They want straight COVID test. As the months evolve here, do we start to get a bigger spike in that - the flu season? Clearly, I do think that we believe as you go forward this year, and let's face it, probably even next year, most people that are going to get tested for flu are probably going to end up getting tested for COVID as well. So, we will see how it plays out. We're assuming relatively small volumes as it relates to our multiplex test at this point in time until it starts to materialize.

Okay. Thanks. That's helpful. And then, I just want to ask about Breast Health outside - can you just maybe give us an update on where things stand with 3D penetration? And because from what I remember, there was a much bigger opportunity there to upgrade customers to 3D and some of the other newer software and things that you've offered - or introduced, sorry.

Yes. 3D is still very low penetration rates in much of the international markets. And frankly, it's something that we hope the Hologic Global Women's Health Index will actually be able to start to highlight a little bit more, which is many countries outside the U.S. are still only reserving 3D more for diagnostic mammograms as opposed to screening. And frankly, many still don't have great screening programs in general. So we're able, ultimately through the Global Women's Health Index, I think to start to have more discussions about better screening programs, about the need for 3D. And the fact that 3D in many cases is economically advantageous over the longer term, particularly in single-payer systems, where the ability to detect earlier, treat earlier, avoiding all the false positives, the false call - the unneeded callbacks and all of that. So I think we remain very bullish over the longer term. It continues to be something that's going to play out over years, not quarters.

Next, we'll take a question from Tejas Savant with Morgan Stanley.

Just a two-part around COVID to start with. Karleen, can you give us a sense of the impact on how we should think about pricing from the combo test launch? And the OUS mix here seems to have dipped sequentially in favor of the States? And what that means for margins?

Yes. So certainly, from Q3 to Q4 with the Delta variant, we saw an uptick in U.S. testing. About 2/3 were from the U.S. versus last quarter, it was 2/3 OUS. So obviously, that's a little bit more favorable on pricing, so a little more benefit on the margin profile. And then what was the other part of the question?

It was on the combo test and - yes.

So certainly, that pricing would be favorable from the single test. But we've, to Steve's comments, really haven't assumed much related to that at this point given it seems like customers still just want COVID only.

And then just a couple of quick ones on the recent deals. On Mobidiag, I mean, given the broader launch in Europe for Novodiag, Steve, how are you thinking about that installed base of 200 units expanding over the next 12 months or so? And then on Boulder, I think you called out sort of 5x higher LAP procedures versus the pediatric setting. So over what time frame do you think you can capture that opportunity?

Sure. I think we're probably not ready to give exact numbers on Novo, but the initial sale is off to a good start. And we're just loving that acquisition so far. As it relates to Boulder, I think that will be a - clearly a multiyear journey to build up the market of that size. But I think the magic for us with both Acessa and Boulder is, as you know, we've long targeted surgical as an opportunity to put more into those sales force's bags. And I'm really proud of the team, Sean Doherty and Dan Essex more recently running that division and finally starting to make some good deals happen for that business. And the sales forces are excited. And I think it will create a great runway for years to come here in the surgical business.

And our next question will come from Patrick Donnelly with Citi.

Thanks for taking the question guys. Steve, maybe just on kind of some of the macro uncertainty you talked about. Can you just talk about the different businesses? I know you guys have kind of that internal red light, green light for each segment, each region. Any segments that are maybe coming back a little slower than you expected? It certainly sounds like you're pretty confident on breast. But I just wanted to talk through the different segment recovery time lines and how you thought about those going into '22?

Yes. I think the magic, Patrick, for the first time that I've been with the company, as we look at all 3 franchises and we look both domestically and international. So, if you just play that out in 6 buckets or 9 if you count U.S., international and then worldwide, they're all looking good in that 5% to 7% range, and there's not any major hiccups that are out there. So, I think we feel really, really as good across the board. There will always be a country here or there or a little business and those kinds of things. But overall, it's probably been as solid across the board as we've seen. I think that's part of what really gave us the confidence, frankly, on the last call, we put out the 5% to 7% guidance because there's always been – there was a little more red lurking in the – on the horizon there than – it wasn't as green across the board as it looks now.

That's encouraging to hear. And then maybe just on the cash flow. You talked about over $2 billion in the year, another nice quarter here - exactly. And obviously, nice to see you guys buy back 1 million shares already this quarter. How should we think about your M&A appetite? Obviously, you've done a bunch of smaller deals, relatively small. But how should we think about your appetite there, continue with these bolt-ons? Any appetite for anything larger? Just wanted to talk through that.

Yes. The appetite and the ability are certainly there financially as we look to continue doing tuck-ins. Just because we're generating a bunch of cash, doesn't mean, okay, we're going to start to go bigger, bigger. I can say the bigger things we're also thinking about right now is we're digesting a lot. So, there's also the organizational bandwidth. And right now, our international teams are incredibly busy. Kevin's Diagnostics team and frankly, the Surgical teams are all very, very deep into a lot of integration activity. So, the other factor that would be in our minds is ease of integration. So, if anything, probably a slower pace this year than last year as we really make sure that we optimize what we did last year. And as Karleen has mentioned, we're comfortable, continue to build a little cash here. We're not just going out and spend it because we have it. Karleen, do you want to build on that?

Yes, certainly. I mean, Patrick, we're going to maintain our discipline as it relates to M&A and make sure that we certainly want to do well on the deals that we've executed so far. So that will be a little bit more of a flux in the focus. But certainly, the division still have their BD teams out there identifying assets and if we find the right opportunity, we'll execute on it.

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

Hi thanks for taking the questions. I want to extend congratulations to Mike. So, on Bolder Surgical estimated $10 million in calendar 2021 revenues are around 2% to 3% of the annualized surgical revenues in fiscal Q4. So, I know it's a small product line today, but given the multiple on the deal, I'd imagine that the growth is already solid with the potential to accelerate as it's cross-sold into the OB/GYN channel. So, with that in mind, is there any way to think about how quickly Bolder's products could penetrate the OB/GYN channel? Or what percentage of your existing OB/GYN customers would be adopters?

Yes. We'll probably give more of that once we close the deal. We're still obviously in the midst of - we'll probably close at the end of the calendar year and probably be in a better position, Max, honestly, to answer it next quarter. But clearly, it is growing pretty nicely. They've gotten some nice products approved over the course of the last 12 months. And we'll be very helpful in terms of the uptick. But it is - it's a new sale. It's going to take a couple of oftentimes one or two visits. And still, frankly, in some of these COVID constrained world, we want to manage our expectations upfront. We feel really good about the opportunity.

Makes sense. And I appreciate the color on Mobidiag. If we just think about the initial pandemic disruption serving as an accelerant for Panther placements globally, are there any parallels to be drawn between what you could see for Novodiag in the decentralized setting in Europe following the launch in early October? And then just curious, the role of the AmpliDiag instrument in the context of also having Panther?

Yes. I think the Novodiag and the launch going on there, I think that's going to be the big opportunity for us as we go into the smaller labs, a broader menu and already feeling really good. Obviously, it's CE marked at this point. It's still a few years away in the United States, but feeling really good to be a nice opportunity to really drive the international business in the nearer term on that and then ultimately a big play in the U.S. over time.

Operator, I think we have time for one more question.

Thank you. And that final question will come from Ryan Zimmerman with BTIG.

Thanks for squeezing me in on the end here. I'll just keep it to one. And so, it's for Karleen. Given the COVID assay sales guidance, $200 million in the first quarter, $300 million for the year, let's just assume that, that's kind of how it goes right now. I understand that, that's a very conservative estimate, but it would suggest somewhat of a drop-off in gross margins quite rapidly, Karleen. And so one - following the first quarter, I mean. And one is that the right way to think about it? But then two, how should we be thinking about the gross margin profile kind of net the assay contribution from COVID when we think about a kind of a post-COVID Hologic? Thanks for taking the questions.

Yes. So certainly, I think we said in our prepared remarks that we would expect margins to come down sequentially throughout the year as the COVID at this point is heavily weighted to the first half of the year. As I look at where we exit the year in 2022, the margins are in the low-60s on the gross margin and low-30s on the operating margin as we had indicated. So - and that assumes a pretty, pretty low COVID contribution as we exit the year as we planned for right now.

Thank you, sir. Thanks, everybody.

Thank you.

Thank you. This now conclude the Hologic fourth quarter 2021 conference call. Have a good evening.