Good afternoon and welcome to the Hologic 2Q ‘22 Earnings Conference Call. My name is Lauren and I am your operator for today’s call. Today’s conference is being recorded. [Operator Instructions] I would now like to introduce Ryan Simon, Vice President, Investor Relations to begin the call.

Thank you, Lauren. Good afternoon and thank you for joining Hologic’s second quarter fiscal 2022 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, along with an updated corporate presentation. We will also post our prepared remarks to our website shortly after we delivered them. And a replay of this call will be available through May 27. 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 constant currency revenue, excluding the divested blood screening business and revenue from acquired businesses owned by Hologic for less than 1 year; and two, organic revenue, excluding COVID-19, which excludes COVID-19 assay revenue, revenue related to COVID-19 and discontinued product sales 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.

Thank you, Ryan and good afternoon everyone. We are pleased to discuss our financial results for the second quarter of fiscal 2022. We posted solid results overall and continued our excellent performance. Total revenue was $1.44 billion, and non-GAAP earnings per share were $2.07, exceeding the midpoint of our guidance by over 12% on the top line and over 33% on the bottom. As we stated last quarter, we continued to deliver in an uncertain business environment. For example, in January, we saw COVID cases spike once again, putting pressure on healthcare utilization and certain elective procedures. Through February and March, the ripple effects of the war in Ukraine added additional uncertainty to a world already facing headwinds from COVID, rising inflation and interest rates as well as ongoing global supply chain disruptions. In these challenging times, we continue to deliver. Our performance is a direct result of the planning and investments we made throughout the pandemic to strategically strengthen our business. We are a stronger Hologic through portfolio diversification, the addition of multiple growth drivers into our franchises and continued growth in our international businesses. Today, we would like to provide additional color in three areas. First, we will discuss Q2 growth in light of the macro environment, including updates on the breast health chip shortage we spoke to in Q1; second, provide progress on acquisitions turning organic in our third quarter; and third, highlight our additional efforts to lean into ESG and how our purpose, passion and promise are elevating women’s health around the world. In our second quarter, both our diagnostics and surgical divisions delivered organic growth, excluding COVID, while as expected, our breast and skeletal health division declined. In breast, as we discussed in our last call, the semiconductor chip shortage was the primary driver of…

Thank you, Steve and good afternoon everyone. We are very pleased to share second quarter results that significantly exceeded our guidance for both revenue and EPS. Our second quarter performance once again highlights the strength of our diverse business. While the Omicron variant negatively impacted our base businesses early in the quarter, our COVID testing upside more than offset this headwind. It’s also important to understand that our balance sheet is stronger than ever, providing key strategic flexibility in this uncertain macro environment. Further, we continue to generate very healthy free cash flow, funding our capital deployment priorities. In the second quarter, we generated significant operating cash flow and executed $200 million of share repurchase, both of which I will touch on in more detail shortly. Before we do that, we will provide color on our consolidated and divisional results for the second quarter. As a reminder, revenue in our fiscal second quarter is typically seasonally lower compared to our first quarter, which benefits from increased patient activity before calendar year end. In the quarter, total revenue of over $1.4 billion was very strong and came in more than $150 million higher than the midpoint of our previous guidance. In addition, EPS of $2.07 in the second quarter far exceeded our guidance range of $1.50 to $1.60. Turning to our divisional results. In Diagnostics, global revenue of $987.1 million declined 5.6% compared to the prior year. However, excluding COVID, worldwide organic diagnostics revenue increased 4%. As discussed, the division’s results early in Q2 were negatively impacted by the Omicron COVID-19 variant. Our base diagnostics business is inversely correlated to spikes in the pandemic as women tend to postpone office visits when COVID cases surge. However, we were encouraged by improving trends throughout March as COVID cases declined. This gives us…

Thank you. [Operator Instructions] And we will take our first question from Jack Meehan with Nephron Research.

Thank you and good afternoon.

Hi, Jack.

My first question is on Breast Health and the semiconductors. So last quarter, the – up to $200 million you talked about, I thought it was fully de-risking the gantry exposure. And then the quarter actually came in a little better than you were thinking. So I’m just trying to square this commentary with the additional $50 million you’re building in from here. Can you just maybe help me through that? And kind of second off that, just can you give us a little bit more color on the order book and just your confidence that you’re not losing share given some of the supply chain shortages there?

Yes. So Jack, it’s Karleen. I’ll start off on kind of the evolution of the numbers. So first, let’s recognize in this quarter, we did a little better, and that was really a lot of efforts between our service and supply chain folks really prioritizing in remanufacturing chips for the service needs, which allowed us to sell more new gantries. So great effort there. I think when we think about the additional possibility of an additional $50 million, it has a little more to do with timing. And so we are pleased that we got a higher allocation of chips than we had thought than we had originally expected, but the timing of that is such that it won’t come in until 2023. I think we thought if there was an additional allocation, we might get that benefit in ‘22, but it’s looking like it’s 2023. And I think just on the second part of your question on demand, again, we see our backlog growing in our Breast Health business. It’s strong. We’re working really strategically with customers to make sure that we’re not losing any business because of this. And I think our intelligence would be that our competitors are probably in likely the same position as us.

And I think the reps feel that.

It is. Okay. Yes, that makes sense on the timing, very helpful. As an unrelated follow-up, obviously, in molecular, big focus on kind of share shifts in the diagnostics industry with COVID I was wondering if you could talk about your relationship with the National Labs and just with the larger customers, whether you think you’re gaining or losing share as we transition eventually into an endemic environment?

Yes, Jack. And by the way, I’d also clarify that we’re not going to use the cash on the balance sheet to buy the Eagles. I know you, but…

Hopefully, they make some good picks tomorrow.

Yes, exactly. So in terms of our relationship with the National Labs, I probably couldn’t be more proud of our teams. And even we’ve always had good relationships, but when you think about the way we responded. And particularly, if you look at the two big major labs in the United States, but even a number of the other big ones right below the top two. When they were really under the gun and you think back to the April, May, June time frame of 2020, when the evening news around the world – around the country was always about the 8-day turnaround times for PCR tests and all of the problems with molecular testing. And that’s when we dispatched and our team went around the clock to put Panthers in all over the place. And we really worked so well to help those – both of those customers dramatically reduce the turnaround times. And I think we’ve used both the relationship in coming to their aid during that time as well as, frankly, I think they increasingly understand that we’re building markets. When it comes to how we approach the women’s health market, we’re also working the reimbursements. We’re working the physician recommendations. We’re working the guideline developments. And all of that is helping to grow the market, which, by definition, is growing them. So I would tell you, I feel like it’s more of a partnership that is valued than just a traditional vendor/vendee relationship. And I think our teams have worked so hard to have many good relationships throughout all levels, both operationally within the marketing teams, and we like where we’re positioned. We really do.

Thank you, Steve.

Great. Thanks, Jack.

Our next question comes from Vijay Kumar with Evercore ISI.

Hey, guys. Thanks for taking my question. Steve, maybe one big picture for you. I’m looking at the base business here, the segments, it looks like was light across the board. Breast imaging, perhaps it’s understandable given the chip shortage. It looks like underlying diagnostics came in below Street models. GYN, a similar trend. How much of this was a utilization impact due to Omicron? And the reason I asked is we’re seeing other device companies coming up with improved procedure trends. I’m curious, was there any one-off items that impacted the Hologic in the Q?

I think, Vijay, part of it on the Surgical business is probably as some of the hospitals came back up post Omicron. They tended to prioritize some of the cardiovascular procedures and some of the more immediate procedures, whereas our GYN surge is viewed as a little more elective. So I think there was a little bit of that probably in the quarter that we think shakes out completely over time as the women’s health issues come back. And I think our base molecular diagnostics business was up 7%, not too shabby in a period where a lot of our machines ended up running a lot of additional COVID tests, so nothing that we are concerned about. And I think as we continue to look all of these quarters, there is variability in the puts and takes, and we keep managing our business overall that as one part goes up. The reality is we do see trade-offs we did sell $584 million of COVID in the quarter. There is a bit of a trade-off on our base business with that. So as that goes back, I think we’re very optimistic about where the base business comes here as that COVID testing really does probably really some side here.

That’s helpful perspective, Steve. And maybe one related. There is been a lot of debate on the Street on what is the underlying base margins, base earnings power for Hologic. Not what the Street is trying to do. We’re trying to do a cohort P&L and a base business P&L. And in reality, that may not be have corporates think about their businesses. How much of reinvestment is going on in the business? Do you – and the reason I ask is, if I look at the implied Q4 EPS guide, I think it’s $0.60, $0.65. So that’s annualizing at $250 million, I’m assuming Q4 has very minimal COVID testing, but also it has some impact from breast imaging, the chip shortage, right? So what is the underlying earnings power here for Hologic that we should be thinking about?

Yes. Vijay, it’s Karleen. I’ll take you through it. So if we look at the second half of 2022, you’re right. That is the worst impact of the breast health chip shortage. And so don’t think of the back half earnings power and the math you just did on the Q4 as what we call our base business earnings power. There is definitely an impact there, significant impact with pretty minimal COVID revenue in the fourth quarter. The other thing I would point to is that if we look at the back half, we have a higher operating expenses and simply dilutive operating margins from our acquisitions, which actually be a tailwind as we move forward into 2023 and beyond. And we do have some incremental investments in both Q3 and Q4. Those investments will either not occur in 2023 or be significantly lower. So to reiterate, the back half earnings power is not reflective of the base business because of the one-time items, I’ll call them, that we have there.

And Vijay, back to even building on the comment on the base business, I’d remind you in a couple of simple things here. We’ve not only passed through the full beat on top line and bottom line through the balance of the year. So the second half is every bit as intact as what it was prior, despite more headwinds. All of which should underscore the confidence that we have in our base business. And to Karleen’s point, that is – the fourth quarter is not the ongoing run rate.

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

Hi, guys. Thanks for taking the questions. Maybe a similar follow-up on that, I mean, just in terms of the Breast Health ramp back up as we get into the beginning of ‘23, what’s the visibility into the supply chain normalizing there? I mean the confidence level that kind of corrects itself as we get into ‘23. Should we think of it as more kind of slowly ramping back up and being a bit of a drag on revenue margins to start ‘23%? Is the expenses kind of to Karleen’s point, those are untapped? Growth is going to catch up. What’s the right way to think about that as we look out to start of ‘23?

Yes. I would say that I would expect it not to be compared to – as we will see benefits from increased supply early in ‘23. But I think we will see, to your point, a normalization throughout the year is what I would think would happen because, even though we have a building backlog, it’s going to take multiple quarters to work through it. As these installs of this equipment is highly scheduled with the hospitals and breast centers because typically have to take rooms down, its construction as well as the install takes almost a week. So, it’s going to take several quarters to work through that. So, I would say, a normalization over the course of the year.

Okay. That’s helpful. And then Steve, on the capital allocation side, what’s the right way to think about? Obviously, you guys have done some share repos, you have done some deals. How do you balance the priority there? Obviously, the market is volatile and presents opportunities here and there. But what’s the internal thinking? How large will you go on the deal side? What’s the pipeline look like? Just an update there would be helpful.

Yes. I think the biggest thought we should leave you with is we are comfortable being patient right now. Just because we have a very strong amount of cash on the balance sheet doesn’t mean we feel pressure to go do it in the next quarter or two quarters. We know that deals will present themselves in the quarters or years ahead. And I was showing Karleen our old headline from the late ‘08 timeframe at Stryker, where we were sitting on a pile of cash. And at the time, I was being criticized for being too conservative, and opportunities presented themselves over the next few years. And I think we feel very confident and frankly, should feel great in an uncertain world to be sitting with the balance sheet that we have relative to what we had 8 years or 10 years ago in this company. And it just gives us the ability to be patient and therefore, make great deals and continue to do a combination, some buybacks, but we still ultimately are looking and think there will be some good deals that will present themselves. And we are not going to get into the specific size. But obviously, we have got a fair amount on the balance sheet right now, and it doesn’t mean we are ready to go below it all at once or anything else. I think we have been showing over the last 5 years or so, we are being very disciplined in and rigorous.

We will take our next question from Puneet Souda with SVB Securities.

Yes. Hi Steve, Karleen. Thanks for taking the question. So, maybe just the first one on the – some of the Panthers that you highlighted, the recent sales. Are those still going into a demand for COVID, or was that still a function of demand pull-through in January from COVID, or are customers now looking at the broader menu and saying – looking at Panther purchases from a broader menu perspective. And could you update us on any utilization trends? I know this is a major question in terms of the utilization of COVID conversion into other test. Maybe just walk us through sort of what’s happening as we somewhat emerge out of pandemic into this and the mix situation?

Yes. The placements are really going for both COVID and new business. I think the magic for us is we have been able to expose Panther to so many new customers around the world. And they have seen the benefits both in COVID and it’s also given us the chance to talk about the menu and the expanded menu. So, we are really getting them on both fronts. And I think every time we start to see customers getting ready to port some of the newer assays onto their machines, we have yet another spike. And candidly, we would have expected more base business growth this quarter. And then low and behold, we did another 28.5 million COVID tests. As a reminder, that’s as much as we were doing practically globally, more than what we were doing globally pre-pandemic on all of our businesses combined. So, it’s – I think people have become old to the numbers, but that has an impact in terms of our customers being able to adopt the other parts of the menu when again, they just got thrown back into huge testing. Now, I think as it plays out here in the coming quarters, we are assuming a much stronger and prolonged ramp down here in the COVID testing. That’s going to really, we believe, allow the underlying strength of our core menu to start to shine through, and you will start to see it in these quarters.

Okay. That’s helpful. And then just a one-off question that we have been getting from investors given the China shutdowns, anything that you are baking from that side into the guide? And maybe just could you – if you could remind us your exposure there, both in terms of the revenue and impact to the supply chain? Thank you.

Yes. It’s Karleen. I will tell onto that. So, less than 3% of our revenue comes from China. So, we have pretty minimal exposure. We do think there is some impact that is factored into our guide and we really don’t have any manufacturing presence within China. I think what we are dealing with is the kind of global supply chain chip issue related to China. But from a revenue perspective, it’s pretty immaterial.

We will take our next question from Brian Weinstein with William Blair.

Good afternoon. This is Griffin on for Brian. Thanks for the questions. Just continuing to talk about that OUS strength, I guess specifically in diagnostics, historically, those markets have had some less favorable reimbursement and just lower testing volumes with less screenings. And are you seeing any change in either of those dynamics as you think about the OUS outlook?

I think we see opportunities again over time to more directly influence the size of those markets and everything else. So, I think what we do see in the near-term is the ability with a lot of the additional Panthers we have placed to have more menu running through them. And then the second piece would be really helping to grow those markets more significantly over time. So, I think we feel very encouraged short-term from all the placements and longer term because of the strength that we have put in our teams. And frankly, the additional access we have gotten to a lot of the health ministers of the world through both COVID time as well as the Hologic Global Women’s Health Index to, I think start to get women’s health moved up the priority list, where we will be able to get more screening guidelines and things to put in place in the coming years, particularly in Western Europe.

Okay. And then on the CT/NG, you noted we are back to pre-pandemic levels. Any notable changes in how you think about the basis of competition here, pre-pandemic versus endemic state or post-pandemic, particularly with some of the point-of-care molecular entrants in the STI market?

Yes. We will see where that all plays out. We are always very, very cognizant. But I think as we continue to think about how women are going to get these tests and the doctors and the reimbursements and everything else, I think we continue to feel very good about our position.

Yes. I would just emphasize that most of the CTMG testing is asymptomatic. So, when you think about at-home testing, it would be generated by a symptom, most – vast majority of the testing is asymptomatic and again, part of that well women’s visit.

We will take our next question from Tejas Savant with Morgan Stanley.

Hey guys. Good evening. Just a follow-up on some of your earlier comments on the chip shortages on the breast health side. Steve and Karleen, you spoke about that new allocation that you are expecting to see come through at the end of the second quarter, how – can you quantify that relative to that 20% number that you had spoken of earlier. And in terms of seeing the benefit in fiscal ‘23, is this largely sort of outside your control, or are there things you can do to accelerate those timelines, perhaps looking into different suppliers, etcetera?

So, in rough numbers, I think the increased allocation increased our expected unit production by about 20% to 25% in 2023. And I think from that initial, hopefully, we will get – we just don’t know. We don’t have that visibility to – with that allocation gets any higher, but that’s what we are planning on right now.

Got it. And any comments Karleen, on the possibility of new suppliers coming in here, or is that sort of all incorporated into your fiscal ‘23 recovery commentary?

Yes. What we know is kind of incorporated into the guide in our commentary, I think to try to bring on new suppliers would take multiple quarters. And I think the issue, the supply issue is not just our supplies, it’s all the suppliers. So, it doesn’t really solve the problem.

Next question comes from Casey Woodring with JPMorgan.

Hi guys. Thanks for taking my question. Can you talk a little bit about breast service? And if there is maybe any kind of pull forward you could do there to offset some of the near-term gantry cell headwinds?

Yes. No. So, breast service, we love our breast service revenue. It’s – I think the comment was about 40% of the breast revenue in the quarter. But that – most of that revenue, the majority is tied to long-term service contracts. So, it’s contracts that are over multiple years where the revenue is basically amortized over the contract period. And really it’s tied to our installed base. So, we are not putting up more gantries, it’s hard to do more service contracts. So, that’s really – that’s more of a stabilizing fact in that division versus the limited to pull forward.

Yes. Nor would we want to pull it forward quite harshly. I think what we love about that business is, it’s stable and candidly we have got all the additional COVID revenue this year. What we are really looking forward to is, people will start to see the underlying strength of our base businesses in 2023. And the last thing we would want to do is mortgage some of that.

Got it. And then just how should we think about the Panther competitive environment in the hospital setting as it relates to some of the smaller bench-top platforms when you think about and some of the other instruments out there with menu. Do hospital customers have both the Panther and the bench-top instrument and sort of how should we think about this dynamic moving forward given all the COVID placements?

Yes. Many do, but they are still largely used differently. A lot of the bench-top stuff is really for symptomatic and especially respiratory or other symptomatic stuff, whereas ours is largely asymptomatic and ongoing screening. So, I think this is going to be a question of and not or. And there is going to be meaningful opportunities on all fronts. I do think we are very well positioned and feel great about where we are with the Panther placements. So, I think we are very confident you are going to continue to see that, and that will unfold even more as the COVID revenue goes away.

Our next question comes from Mike Matson with Needham.

Hi guys. This is Joseph on for Mike. I guess maybe one around gross margin. I guess given the capacity expansion to really meet COVID testing during the surges. And as we start seeing that declines, we see the volumes decline, should we expect some type of gross margin headwind in these next couple of quarters?

Well, certainly, as COVID revenue comes down, the gross margins will come down from where they have been. But from an absorption perspective, our manufacturing of COVID is fungible with all of our molecular diagnostics manufacturing. It’s not a separate COVID line where we will have to mothball, if you will. I think the other piece of what has happened over the last 2 years is we have expanded our manufacturing, but that’s been substantially funded by the Department of Defense and our contracts with them. So, there is really no big hit, if you will, for idle capacity. That was the question.

Yes. Yes, absolutely. That’s very helpful. And then I guess maybe one more around the Panther systems. I know you guys have touched on that a lot. But as we are kind of looking towards that capacity utilization and non-COVID assays really going into these systems. I guess maybe there has been a lot of surges up and down. Obviously, hospitals are very flush. But I guess, what are you guys looking for to really push these forward, whether it be trainings that you guys have to schedule or whether it’s just kind of waiting for total COVID cases to really reach a manageable level?

Yes. In terms of the base business, that’s the – Joe, it’s really around having the time to get the new assays up and running on the Panther within each hospital in each lab. But I would tell you, just from having – we are in our strategic plan process right now where we have been sitting down both with the U.S. diagnostics team, but also our international teams. And as we look at the optimism that they have for the underlying growth rates of our molecular business for the next few years, it gets pretty exciting. So, we are not ready to give guidance or anything on that front. But I think there is just the additional placements and the additional opportunities. And don’t underestimate in a world where labor constraints and labor costs have become a huge issue. I think people are forgetting one of the massive benefits of the Panther is the workflow automation, the random batch access. This is the pen caps that we have. This is a remarkably efficient system that we think is only – and that’s part of what the customers are seeing and looking forward to the future. So, I think it’s going to bode very well for us.

We will take our next question from Derik de Bruin with Bank of America.

Hey, good afternoon. Thanks for taking my question. Steve, how do you feel about the long-term guide that you set out? You put out that 5% to 7% core growth CAGR through ‘25 on the 3Q ‘21 call. And I am just wondering, given the ship shortages, given what that is, I mean how do you – how is your confidence in that? I mean looking at the results this quarter I think some people are a little bit nervous. But are you still comfortable with that 5% to 7% number?

Very. It’s a long-term thing. Obviously, we did not anticipate the chip shortage. And having said that, you know what, think about what those growth rates are going to be when we index against these quarters, next year. But even on a long-term basis, I think we feel very, very good about what the growth rates of our base businesses will probably be doing over the next couple of years. We have got a couple of punky quarters here right ahead of us to finish a year that’s already a very strong year. And its growth rates as we start to look into ‘23, probably looking pretty good.

Okay. And as a placeholder for COVID for next year, that fourth quarter number, that $40 million to $50 million implied for COVID testing in Q4, is that a good way to sort of think about it just for now?

Yes. I almost don’t even want to go there, Derik, is the quarterly swing who knows where it all goes, and I think we are poised either way. But I would put in a de minimis number for 2024, and yet I think we will certainly expect some volumes to continue to be there. So, probably not a horrible estimate, but we are nowhere near being able to give guidance.

And we will take our final question from Ryan Zimmerman with BTIG.

Thanks for squeezing me in. And I will just keep it to one in the interest of time. So, on the breast health business, Steve or Kerleen, we have seen from some of your peers on the equipment side, certainly, commentary around softer demand, cost of debt is rising. You had alluded to the fact that the order book is pretty healthy or the backlog is healthy on the breast side. What do you attribute that to in terms of your capital equipment? Is it a site of service? Is it price points relative to maybe some of the $1 million-plus robots that are out there? I would just be curious to understand kind of how you think about the capital equipment demand market at the hospital level.

Yes. I think it starts with always having a superior product. And we have not gotten where we have gotten from a market share standpoint, particularly in mammography and especially in 3D without having a superior product. And I think – and also superior workflow throughout the whole gamut. And I think hospitals are seeing what we bring to them in a critically important area. To your second point, I will say, we are not of the high ticket items in a grand scheme, a hospital recapitalizing a few rooms in mammography or even several suites is nowhere near the magnitude of some of the bigger iron, the massive, whether it’s robots or MRIs and those kinds of things. So, I think it does allow us to kind of be in a sweet spot where even if there is a little bit of capital contraction that we think we will be fine there. And I think our team is feeling very, very good.

Thank you.

Alright. Thank you. It sounds like it, operator. Lauren?

Yes, sir. That concludes today’s question-and-answer session. This now concludes Hologic’s 2Q 2022 earnings conference call. Have a good evening.