Good afternoon and welcome to the Hologic’s Fourth Quarter Fiscal 2022 Earnings Conference Call. My name is Jennie, and I am your operator for today’s call. Today’s conference is being recorded. All lines have been placed on mute. I would now like to introduce Ryan Simon, Vice President, Investor Relations. Please go ahead.

Thank you, Jennie. Good afternoon and thank you for joining Hologic’s fourth 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 fourth 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 through November 30th. 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 one 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 change 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. Happy Halloween. We're pleased to discuss our financial results for the fourth quarter of fiscal 2022 and provide guidance for fiscal 2023. It was another dynamic year for Hologic, delivering strong performance while navigating macro headwinds and we closed 2022 once again posting outstanding results for the quarter. Total revenue was $953.3 million and non-GAAP earnings per share was $0.82, exceeding both our base business and COVID guidance. We also deployed $175 million of capital to buy back 2.5 million shares in the quarter. For those of you keeping score, for the full year, we utilized $542 million of our exceptional cash flow to repurchase 7.7 million shares, reflecting great confidence in our future. For today's call, we'll first provide a high-level overview of our fourth quarter performance and then reflect on our full year results. In doing so, we'll also share insights into our future outlook as we look forward to 2023. Overall, make no mistake, our consistent strong performance in these turbulent times is no coincidence. We are a fundamentally different company today than when we entered the COVID pandemic. We also understand that some of you are still trying to ascertain the strength of our core businesses. As we look ahead, each of our core franchises, listen closely here, diagnostics, breast and surgical are expected to produce low double-digit top line growth for fiscal 2023. As we set out to do just over two and half years ago, we are emerging from the pandemic a much stronger company we thoughtfully and strategically reinvested our upside earnings into both our business and into our passion to be champions for women's health. Our ability to step-up to the plate during the pandemic and address the global demand for COVID testing was an…

Thank you, Steve, and good afternoon, everyone. We are very pleased to share our fourth quarter financial performance, capping off the end to an excellent fiscal year. These results highlight our current position of strength as well as tremendous opportunities that lie ahead. Growth in the period was powered by our core diagnostics and surgical businesses, as both franchises posted strong growth to close 2022. For a second quarter in a row, these businesses each showcased multiple growth catalysts. And as we look towards our fiscal 2023, we are excited to drive this momentum forward. In Breast Health, we are proud of the resilience of our teams. Although our chip allocations are still constrained, we believe that the worst of the vision supply chain problems are in the rare view. As I will highlight in more detail when discussing our guidance for next year, we should see continuous improvement in our chip supply and thus gantry revenue throughout fiscal 2023. Finally, before moving on to our divisional results, it is important to reiterate that our balance sheet is a key point of strength as we head into fiscal 2023. Our leverage rate remains far below our target range and our capital structure is pristine, providing our business incredible confidence and flexibility, given the increasingly uncertain macro environment. Moving on, I will now provide more color on our financial results. In the fourth quarter, revenue and profitability once again significantly exceeded our estimates, as total revenue came in at $953.3 million. This result was nearly $100 million higher than the midpoint of our guidance, despite a greater-than-expected FX headwind of approximately $27 million in the quarter. And non-GAAP EPS was $0.82, roughly $0.20 higher than the midpoint of our prior guide. Turning to our businesses results. In Diagnostics, global revenue of…

Thank you. [Operator Instructions] And we will go to our first question from Patrick Donnelly with Citi.

Hey, guys. Thank you for taking the questions.

Hey, Patrick.

Steve, maybe one -- hey Steve, how are you? May one for you on the Breast Health side, it sounds like the gantry backlog continues to build, good order pace. Can you just talk, I guess, about the visibility into that chip improvement? Obviously, again, the guidance kind of implies as the year goes. You guys -- you talked about the exit rate. I think improvement kind of mid-year. But, yeah, maybe just talk about the visibility there, again, on the order side. Are you seeing any share shift or kind of customers staying with you guys through this? And then similarly, just on kind of sound on the gantries you mentioned even in a recession, we feel pretty good about what the order growth would look like. I guess, what gives you that confidence, a lot of questions about hospital CapEx, obviously. So maybe just focus on the gantries for the first one, I would appreciate.

Sure, Patrick. I think what we feel great about is over time, and we haven't built the market share in the installed base in the United States, and really around the world, but especially in the US without people really buying into the superiority of our products, from a labeling, from a workflow standpoint, from a clinical efficacy published data, everything else that we're doing to both detect earlier-stage cancers sooner, also reducing the false positives and avoiding needless callbacks. People have really seen that. So when it comes down to it of a hospital system, is looking to need a few new gantries for their system. They're not going to want to go away from us because they've made that decision to come into us. So they're much more willing to wait until we're back in business, plus the other reality is this is an across-the-board industry issue. So it's not like we are short and others can provide. So we really have two things going for us, which is call it, the micro, our products and the incredible products we're offering and the macro that what we're dealing with -- with the chip issue is being felt by everybody else. So I think our customers understand that. I think anybody who's in purchasing or works for a hospital, they all understand the supply chains and their own personalized, right? You need a dishwasher fixed and the parts taking months to get those kinds of things that are playing out in everybody's life. And I think everybody understands, okay, it's just going to be a little while. So we feel great about customers continuing to want our products and feeling better and better about our visibility into as we've been working with all the chip vendors right down to every single SKU and how many chips go into every one of our machines feeling better and better about where we'll go.

Okay. That's helpful. And then, Karleen, maybe on the back of that, you mentioned in terms of the op margins, COVID going to be heavier in the first half, which is margin accretive. But at the same time, as we just talked through there with Steve, the Breast Health recovery is going to be more second half. That's been a drag on margins. So how should we think about the op margin cadence throughout the year? I know you talked about 30% for the year. But maybe just talk about how that rolls through given the moving pieces between COVID, Breast Health and some other things there? Thank you, guys.

Yes. I mean, I would think, the 30% is probably pretty consistent throughout the course of the year. As you said, the dynamics kind of change first half versus back half. So I think that 30%, if you're plus or minus in any quarter, a point or two, I think you're right on.

And so we'll go to our next question from Tejas Savant with Morgan Stanley.

Hey, guys. Good afternoon. Karleen, just following up on that margin question here a little bit. Can you just call out specifically in terms of the COVID contribution assumptions you're baking in here? Remind us of what the gross and operating margin assumptions are for that piece versus the rest of the business?

Yes, Tejas, why don't I just say that what we've noted in the prepared remarks is that COVID is accretive to the corporate averages, but we haven't disclosed it specifically. And I'd also add on that when you think about in this macro environment in our initial guide for the full year to say that our margins -- operating margins are going to be at 30%, which are pretty rich compared to the industry is pretty strong results, and we're really proud of that. And actually, even if you look at our net margins prior to pre-pandemic levels, which were around 20%, our guide would imply that they're roughly 22% to 23%, really reinforcing our earnings power.

Got it. That's helpful. And then just a quick follow-up there in terms of the ranges you've baked into the guide, Karleen. Can you just walk us through what's assumed for the Breast Health recovery? At the high end of the guide, are you assuming essentially a return to normalcy by the fourth quarter or is there still some possibility of the recovery taking a little bit longer?

Yes. I think the guide would imply that we're approaching normalized levels as we exit the year. I would also say that part of the recovery, even if we did get incremental gantry chips than anticipated with the resource limitations as our field service engineers, who maintains the installed base also do the actual installs in any quarter. So, there will be a balance through this recovery, but I would, in general, think about a gradual sequential recovery throughout the course of the year and exiting close to normal levels.

Got it Thank you.

Welcome.

And we'll go to our next question from Anthony Petrone with Mizuho Group.

Thanks and congratulations on a strong finish to the year here and good to see at least some visibility into calendar 2023, just given the headwinds. I guess I'm going to start on COVID testing and just the guidance that was issued here and then a follow-up on broader diagnostics. The understanding that it's still tough to forecast pandemic ebbs and flows, but maybe perhaps one of the things that is sort of becoming evident here is the tender patterns whether it be from large lab entities or even governmental contracts. And so when you think into 2023, is there any incremental visibility that you can point to as it relates to just larger tenders, whether it be US, OUS at the hospital level or at the government level? And then I'll have a follow-up on broader diagnostics. Thank you.

Yes. I wouldn't say we've got any more visibility. We've been very close to our customers all along, Anthony, in terms of both international from the Ministries of Health, deciding things right down to the regional parties within various countries and the same within every one of our customers in the US, both the main labs as well as the hospital. So, I think we continue to stay close and feel very good about our position and the way we continue to think about COVID is we're going to deliver whatever the marketplace needs, we're not going to get out of our skis in terms of forecasting it financially.

And then in terms of just a quick follow-up on COVID. I mean as we think of it as a consistent cash flow driver, if we even look ahead maybe beyond 2023, at what point do testing providers really look at this as a relatively consistent cash flow business that reliably again, is going to be a contributor going forward. So, just kind of the broader views on the consistency of COVID? And then lastly, diagnostics, when you think of testing intensity, a lot of new Panther users are -- how do you think that plays out just beyond the point we are here at the end of this fiscal year? Thanks again.

Thanks Andy. We didn't fully hear the second part of that question because you were cutting in and out on the first part as it relates to the first part of the follow-up in terms of consistency on COVID, I think the way we've approached this all along has been you can't predict this has never been consistent. It has been volatile by region and by timeframe. And any eight-week period, people have been way off probably trying to predict what was about to happen. So again, what we have said at the beginning, however, was we thought that this long term would create a new assay for us that would be far more enduring then, I think anybody ever thought it would be back in 2020 back to what people thought when everybody thought this was going to go away in a hurry or it was going to go away as soon as vaccines arrived or molecular testing was going to go away as soon as antigen tests came along, right? What we've learned is this thing is going to be around. And frankly, as long as countries like China are still trying the zero COVID approach, and everything else and the fact that this thing we always said in the beginning, this is a respiratory virus that will mutate. Herd immunity was never going to be achieved. And we thought we would end up with an enduring business. Whether that enduring business ends up being $50 million, $100 million, $150 million, $200 million, we really don't know, but we feel really good that we're in that business. So thank you.

Thank you. I’ll hop back in.

And we'll go next to Jack Meehan of Nephron Research.

Thank you. Good afternoon. Well, I have a couple of questions on molecular testing before I go trick or treating. The first is on the COVID sales. So I think based on your disclosures, it sounds like the US assay sales were about $105 million, which was pretty stable sequentially. And I look at the government PCR data, volumes were down 27% quarter-over-quarter. So I was just curious on the COVID side, if you could talk about either share dynamics? Or was there any end of quarter ordering into the respiratory season? Any color on that would be great.

Yeah. It's hard for us to fully know on the share stuff because of the various pieces. I would say there were no unusual ordering patterns at quarter end, so none of this was a stocking up for fourth quarter. We generally -- our business is very diversified. And I think one of the things we did, as you well know, early in the pandemic is we went out to a very broad customer base. And I think that has helped insulate and provide a little more enduring nature to our business. It's also helped our pricing hold up reasonably well. And so I think we feel pretty good. But we -- it just continues to go and regions and spikes and this and it does feel like US testing is settling in for the first time to a more normalized pattern and we're still -- we're starting to see that certainly in our own business, but no unusual spikes.

Excellent. And then as my second question, so I appreciate the commentary about the new customers, the 85% running more than 1%, 55% more than 2%. Is there anything you can share on what are they running? Is this beyond respiratory testing? And I don't know if you have these stats handy, but how large is the virology business? If I look at the full year, how large is the vaginitis business? Any updates on those would be great.

Yeah. I think we stopped disclosing the actual number on that, but very strong growth year-over-year and that business continues to have a nice trajectory. I would say that it's diverse on the other assays, but probably leaning towards the core women's health assays primarily.

Thank you, Karleen.

Enjoy trick or treat.

Appreciate it.

And we'll move to our next question from Puneet Souda of SVB Securities.

Yeah. Hi, Steve, Karleen. Thanks for taking the question. So just a bit on the longer term. I mean, you've talked about 5% to 7%. You're saying low double digits here. Obviously, businesses are recovering low capital expense, but more of recurring revenue that your customers are spending your way. So, just talk to us about how should we think about that? And is that now more of a conservative number? And just talk to us about how you're thinking about the 5% to 7% longer term?

Yeah. I think long-term, we're sticking with the 5% to 7%. But as we've said all along, what, sometimes you're going to be above, sometimes it will be a little bit below. I think for where we are right now, we feel very good about delivering certainly above that for next year, but we don't want to get caught up way ahead of ourselves either and saying, we're moving that guidance up by any stretch. It's just as that reminder. There might be some periods of time where we're a little bit below that. There'll be periods we're above it. But I think we feel solidly about every one of our businesses.

We only gave that range about 15 months ago. So, I feel like we're not -- don't need to change it at this point.

Okay, got it. And then Steve, a broader question for you. Now, in the sort of the post-pandemic era, and again, you might have a long tail to it, but do you see heightened utilization for flu, RSV, other respiratory just continuing on because of the awareness of just overall these viruses and overall, the significance of just overall diagnostics in routine primary care settings is such that it's going to be sustained. Just help us understand, do you see higher utilization just sustaining here for the respiratory businesses for a long time?

Yes, it's a great question, Puneet, because I think we do see probably higher levels of testing going forth, right? The diagnostics industry has been elevated and people desire to know with more certainty what they have, even think about something as simple as RSV that we're talking about here in the last few weeks. I'd argue that 99.9% of the public have never heard of RSV even a month ago, right? So, now we're getting into these levels of granularity that people want to know more about and what they have. And we think that will be a positive. It's also both what we're able to offer on our Fusion platform, also a big piece that Mobidiag will bring to us in the future. And certainly, we're seeing that in our European business right now. So I think we're well poised also for the future.

And we will move on to our next question from Liza Garcia of UBS.

Hi guys. Thanks for squeezing me in. Appreciate it. Maybe to start off on Gyno Surgical and kind of expectations there with MyoSure kind of leading the growth for fiscal 2023. Can you kind of talk about what kind of gives you confidence. It seems like you have a little bit more optimism about kind of growth expectations for MyoSure, in particular. So I'd love to hear kind of what's driving the optimism and also kind of -- well, let's start there.

Yes. I think with MyoSure, we just -- first off, we're biased because we just came back from our US sales meeting last week with that sales team. And it's hard not to be excited when you've been with them. But I think on a more serious and deeper basis, MyoSure has been an outsized grower now for seven or eight years, long beyond what anybody thought it could be. And I think what we continue to see is there's still significant opportunities in the fibroid space. There's still, to some degree, markets that are underdeveloped and MyoSure procedure is an amazingly positive procedure with great outcomes. And so, I think we just continue to -- we're not quite sure what the end market truly is there.

Yes. International continues to be a bigger piece of that performance as well, what gives us confidence in that outlook.

Great. And then, can you just update us where you stand with the Biotheranostics CLIA lab going to San Diego headquarters and your automation and initiatives that you have underway and how we should think about time lines for those and maybe potential impact there?

Yes, sure. The build-out of the lab in our building here in San Diego has gone well, that will be happening in the next couple of quarters, and we're adding more automation that will really be kicking in, in terms of particularly the ordering system really early next calendar year. So that team just continues to crush it since they've been part of the Hologic team. We were just with all of their salespeople last week and they're feeling so supportive and excited to be a part of Hologic. And its part of that classic thing of what we're trying to do is we bring these technologies in and are then able to put additional investment in them to accelerate the growth rates. What we've done with Bolder, what we're doing with Acessa, what we're doing with the Biotheranostics team and just feeling great about these opportunities.

And we hear next from Max Masucci with Cowen and Company.

Hey, good afternoon. Congrats on a very strong year. First one, if we just think about the Panther install base, nearly doubling since pre-pandemic times, we have an expanding adoption of non-COVID menu items. Is there a logical range or a level where the non-COVID tamper asset gross margins have settled? Or maybe even in broader terms, how the go-forward Molecular Diagnostics gross margins have evolved since prepaid out at times?

Yes, I mean the gross margins for -- on the molecular business, we've said all along are accretive to the corporate average. But the dynamics of this business is, as we add more of the newer assays, we typically get those at a higher price, higher margin, but we give some pricing on the legacy assays. So, we'll get -- as we produce more in our San Diego facility, we'll obviously naturally gain more absorption. But I think about those holding at higher than corporate averages, but I wouldn't see a significant upward trend anytime in those.

Okay, got it. And then final one. A $2.3 billion in cash, historically low net leverage ratio, we're seeing recalibrating valuations in the public arena. So could you just give us a peek into the Hologic capital allocation playbook, should we assume that buybacks will remain the priority in a choppy market environment with opportunistic M&A sort of sitting in that number two slot in terms of prioritization?

Max, I would actually reverse that. So our capital allocation has consistently been to deploy our free cash flow, which, as you've noted, has grown over the last couple of years. But the priority is the M&A and share repurchase is more of an ongoing activity at a minimum to manage dilution from our equity plans as we see opportunities, disconnects to jump in and we'll get a little more. But priority will be M&A, but we'll be disciplined in that strategy.

Yes, because Max, if I could build on that. Obviously, if you're looking in the last year, we didn't do as much on the M&A front. The previous year, we did a whole bunch. So sometimes the doctors don't look at any given couple of quarters to say that we've changed our strategy. It's really about the overlying opportunity. The other piece I would reiterate is, when you have a healthy base business, it's also given us the enormous ability to be very patient in doing deals. And I think that's the best part of it all is when your core business is healthy. There's no need to do deals and we can do the ones that make sense for us. So clearly, to reiterate, as Karleen said, number one is still on the acquisition front. Thank you.

Thank you. And we'll go to our next question from Tim Daley with Wells Fargo.

Great. Thanks for the time here. So, my first one is around the kind of broader macro environment. So, thinking about the guidance range here, is there any specific non-COVID drivers that you did layout for us that maybe put you guys at the high end of the guidance range or the low end? Or is COVID that kind of the big delta there?

COVID is not. This is -- we're really talking about our base businesses being strong, all three of them.

Great. And then following up to that, are there any concerns that you have around the European geographical footprint, particularly relating to some of your third-party OEM partners? Just is that contemplated in guidance? Any additional details around that would be helpful.

We certainly worry about the geopolitical and particularly the economic scenarios in Europe, and I think particularly as this winter comes in energy and everything else. I think having said that, that's all the macro. The micro is our teams and our businesses are just in great shape. And I think are poised regardless of the environment, to be able to power and deliver through that. Thank you.

Thank you We'll move next to Derik de Bruin with Bank of America.

Good evening. Hope you're doing well. Hey, how are you? So, two questions. First of all, the tax rate is going from 21% to 19%. So can you tell us what's driving that? And the second question is going to be, what are you assuming in pricing? I mean, how much of your sort of like double-digit organic revenue growth when you're looking at some of the targets or some of the businesses is sort of being driven by price? And are you diagnostic customers, in particular, starting to potentially push back on pricing as COVID reimbursement is likely to go away next year, the higher -- as a public health emergency goes away? Thanks.

Yes. So, certainly, on the tax rate, we continue to look for opportunities to more effectively leverage our supply chain and our operational footprint looking for our low-cost areas. And so a lot of that work has been happening over the last 24 months, which is driving that lower tax rate down to 19% for 2023. And I think from one aspect of COVID pricing, I think when the public health margin does go away, I do think the pricing will be certainly much more of a discussion with our customers than it has been.

Yes. So, net Derik, we have very little pricing baked into the numbers. We have puts and takes, frankly, across franchises across geographies. And just to give a plug for Karleen because she's too modest. Everybody's always admired our operating margin piece, but she have been very focused on the net side, and our tax team has been working very hard over the last few years. So I think do a great, great job to really kind of show up this year with another opportunity for us to continue to drive that net margin.

And would you use 19% of the go-forward rate?

Yes. At this point, I would muster a change in the federal statutory rate, I think 19% is good to use.

Thank you, Derik.

And we'll go next to Casey Woodring with JPMorgan.

Hi guys. Thanks for chipping me in. I guess just -- so last time we spoke; I think you guys were pointing to a pre-COVID operating margin of 31.5% from 2Q 2020. That is just a good place to start to 2023 as COVID would maybe balance out some of the supply chain headwinds in breast. So, curious just on the 30% number here, can you maybe quantify what the basis point headwind is from the supply chain dynamics on the year? And then maybe could you also quantify how much lower the international business operating margin is in relation to the total company's number? Thank you.

Yeah. So I think from the supply chain from the higher cost, it's roughly 200 to 250 basis points on the operating margin that we have forecast would persist through 2023. We have talked about international margins being lower than the US, but we have not disclosed the difference. But I think certainly, there is discussions, our teams are focused on improving their leverage as we move forward.

And thank you, everyone. That concludes today's question-and-answer session. And this now concludes Hologic's Fourth Quarter Fiscal 2022 Earnings Conference Call. Have a good evening.