Good afternoon, and welcome to the Hologic Fourth Quarter Fiscal 2023 Earnings Conference Call. My name is Cynthia 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 to begin the call. Please go ahead, sir.

Thank you, Cynthia. Good afternoon, and thank you for joining Hologic's fourth quarter fiscal 2023 earnings call. With me Today is Steve MacMillan, the company's Chairman, President, and Chief Executive Pfficer; Karleen Oberton, our Chief Financial Officer, is currently on bereavement and will not be joining us today. Karleen is with family and I will be covering for her on our call. Please join me in wishing Karleen and her family well. 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 on our website for the next 30 days. Before we begin, we would like to inform you that certain statements we make today will be forward-looking. These statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied. Such factors include those referenced in the Safe Harbor Statement included in our earnings release and SEC filing. Also during this call, we will discuss certain non-GAAP financial measures. A reconciliation to GAAP can be found in our earnings release. Two of these non-GAAP measures are: one, organic revenue, which we define as revenue excluding divested businesses and revenue from acquired businesses owned by Hologic for less than one year; and two, organic revenue excluding COVID-19, which excludes COVID-19 assay revenue, revenue related to COVID-19, and sales from discontinued products in diagnostics. Finally, any percentage changes we discuss will be on a year-over-year basis and revenue growth rates will be in constant currency unless otherwise noted. Now, I'd like to turn the call over to Steve MacMillan, Hologic CEO.

Thank you, Ryan, and good afternoon, everyone. And before I get started, I just want to do a quick shout out to Karleen and her family and let everybody know our thoughts and prayers are with her today. We are pleased to discuss Hologic's financial results for the fourth quarter of fiscal 2023. Total revenue was $945.3 million and non-GAAP earnings per share was $0.89. It was another strong quarter overall with revenue finishing at the high end of our range and EPS exceeding our guidance. Our fourth quarter capped off a tremendous year where we continued our track record of success, strengthened our business, and delivered on our commitments. For the full year, we posted $4.03 billion in revenue and non-GAAP EPS of $3.96. In 2023, quite frankly, we delivered some pretty exceptional organic growth rates, which were far above our longer-term targets. At the start of the year, we committed to deliver low double-digit growth across each division. In the end, we delivered more, growing annual organic revenue ex-COVID in the mid-teens at 15.6%, with every division growing north of 13% and international growth just above 20%. Despite various macro challenges, like clockwork, we continued to deliver, raising our financial guidance throughout the year and living up to our commitments. At the same time, our balance sheet remains incredibly strong and we have the financial flexibility to grow our business for the long term. For fiscal 2024, we are confident in our ability to deliver against our 5% to 7% ex-COVID long-term organic growth target, even against significant comps, one less selling week, and a challenging macro environment. In fact, if we look at 2024 on an adjusted daily sales basis, our annual organic revenue growth rate, excluding COVID, is projected to be in the 6% to 8%…

Thank you, Steve. And again, good afternoon, everyone. In my remarks today, I will touch on our fourth quarter financial results, recap our annual performance for certain items, and end with our fiscal 2024 guidance for Q1 and the full year. We are pleased to close out fiscal 2023 with yet another strong quarter of growth and profitability. In our fourth quarter, total revenue was $945.3 million, and again, we delivered double-digit organic revenue growth, growing 16.7% excluding the impact of COVID. In addition, our Q4 non-GAAP earnings per share were $0.89, growing 8.5% compared to the prior year despite significantly less COVID testing revenue. For the full year 2023, total revenue was $4.03 billion. Organic ex-COVID revenue grew 15.6% and non-GAAP earnings per share were $3.96. These are exceptional results in what has been an unpredictable operating environment. Now moving to a brief discussion of our divisional revenue. In diagnostics, global revenue of $416.4 million declined 20.6%. However, excluding COVID assay and COVID-related revenues, the division grew 10.2% in the quarter. Performance was again led by molecular diagnostics, growing 15% in the period ex-COVID. For the year, molecular posted very strong global growth of 18.9% ex-COVID. As Steve highlighted, growth continues to be driven by increasing Panther utilization, turbocharged by a much larger install base, and strong performance from biotherapeutics. Moving next to our COVID results, which exceeded our previous guidance. COVID assay revenue in our fourth quarter was $21 million, and COVID-related revenue, inclusive of a small amount of revenue from discontinued products and diagnostics, was $24 million. Staying in diagnostics, our cytology and perinatal business increased 1.3% in our fourth quarter, a solid result following outsized growth in our preceding third quarter due to the timing of certain larger orders. Moving to breast health, total fourth quarter…

Thank you. [Operator Instructions] We will take our first question from Puneet Souda with Leerink Partners. Please go ahead.

Hi, Steve. Thanks for taking the questions. And thanks, Ryan, for the details there on financials. If I could ask two of my questions together. We've been getting a number of questions around USPSTF, it's right around the corner. Could you update us on your thoughts for co-testing versus primary at this point. Any change in how it could turn out to be grade A versus grade B? And if you're wondering -- if you're incorporating any of that impact in your 2024 guide. And then second part, Steve, is just with the FDA LDT regulation, do you think it changes the competitive landscape for Panther or for your approved diagnostic platforms? Thank you.

Sure, Puneet, let me take those first. USPSTF, we continue to think there's so much focus on this that's quite frankly a very little impact to our business. I'd remind you back in 2018 when the first guidelines were being updated at that point in time. They came out, they were against co-testing. By the time ultimately they came out as official, co-testing was put back in. We continue to feel very good about our business regardless of how they go. They also, obviously people have been focused on them for months and months, thinking they're coming every other day. We think it's a big do about nothing, to be quite candid. I feel great about our business, feel great about the data on co-testing, and feel great that regardless of how they go, the clinicians are going to stick with our business and there's going to be no change to our forecasts. So regarding the LBT thing, I think again, great question. It's part of where I view the strength of our business. First off, I think again that there's so much focus on what I call headline risks. To be clear, the LBT stuff won't come into effect probably until at least 2028. And there's going be issues that are going be battled between now and then, legislatively, everything else, so nothing that's going to impact the business over the next three years, probably the next five. At a bare minimum, however, we love where we're positioned in that most of us with our kidding and as you well know, from a Panther standpoint, it could create more opportunities. So the LBT thing probably creates more opportunity for us than it does risk. Having said that, we really just don't think much is going to happen on that over the next few years. So thanks. We know you probably have another call you want to get to too, Puneet.

Right.

All right.

We will take our next question from Jack Meehan with Nephron. Please go ahead.

Thank you. Good afternoon. And first, I hope Karleen and family are doing all right. And also Steve, appreciate the commitment to the capital return here to shareholders. I think that's great. I was wondering if you just on the business. [Multiple Speakers] I appreciate it. Okay can we talk about Panther, now that we're at the end of the year, are there any updated utilization stats you can share for the system? And second, the recent placement rates have slowed. I know there was some pull forward on placements that during the pandemic. I was just curious like how long you think this kind of lasts before hospitals and labs start expanding their fleets again. Thanks.

Yeah, great. I think the simplest thing on utilization is that our molecular business grew 18.9% last year, which is virtually all increased utilization on the Panthers. And we just love what we've done there. Clearly, as we said even at the start of last year, Panther placements for the next few years may be very small and frankly are almost immaterial to us growing the business, because at this point there were so many machines put out there as you know from everybody, but I think especially from us. Now it's really ramping up the menu with our existing customers. And an increased focus on expanding the Fusion. So I think the magic for us is now that we have so many Panthers installed, we're increasingly going back and getting the fusion sidecar put on, which opens up the PCR assays. And I think we continue to see years and years of growth, just even from the existing installed base, as we're expanding the menu and putting more fusions out there. So, Ryan, did you have anything you wanted to add?

Yeah, Jack, I'll add to that that our growth as we look forward is not predicated so much on placing additional panthers. This is really what Steve mentioned is, placing more assays on the system, expanding the Fusion footprint, as well as growing the volumes of the assays adopted so far.

And go Eagles.

We will take our next question from Derik De Bruin with Bank of America. Please go ahead.

Hey, Derik.

Hi, thanks for taking the call. Appreciate it. Just some, you commented on the pricing environment. Can you thought to what your sort of expectations are for pricing this year? And Ryan, just I know you said negative $40 million and negative $60 million expense for other all-in, But what's the interest expense on that, just to help preempt the model?

I'll take the first part and then kick it over to Ryan. In terms of pricing, overall, we're assuming very modest pricing. Most of our gains really are volume, given that a lot of our contracts are already set with very little pricing increase. And I think it's where we're very proud of the fiscal discipline that we've been able to exert. And then getting opportunistic pricing or pricing really as much mix as we launch new products, Derik, but very little of our growth is based on pricing at this point.

Yeah, and on that second piece, Derik, it's approximately $50 million in expense in that number. When you're looking at it from a high level, like looking at 2023 compared to 2024, the biggest difference there is, we're assuming less cash on the balance sheet going forward. And -- but to answer your question, it's going to be $50 million on that interest expense.

Great. I just want to clarify, if I can, the full ASR is embedded into the current guide for EPS?

Correct. Correct. Correct.

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

Hey guys, thanks for taking the questions. Steve, maybe one on the breast health side. Obviously, you guys -- you had a bit of a backlog with the supply chain issues last year. Can you just talk about how you're working that down, what goes into the guide this year there? And then a second one, just on the margin piece. Yeah, I know we don't have Karlene, but maybe Ryan, just in terms of the moving pieces, as you think about the 2024 margin build, obviously COVID coming down, some high margin stuff, can you just talk about what you guys are doing to offset that and keep margins moving in the right direction? Thank you, guys.

Great, thanks. First in terms of the breast health business, I think we see clearly placing at least a double-digit increase in gantries this year, both domestically and internationally. We really got going more in our second fiscal quarter last year. So especially this first quarter we'll show much bigger growth for the breast health business. But I think we feel great about being able to continue to place the gantries and just based on the backlog alone, let alone the additional customers were winning. Quick first crack at the margin piece. The way I think about it is before Ryan comes in is, I think they will basically be lower in our first fiscal quarter and then growing through the year as we continue to bleed through the higher cost, especially chips in gantries. And we're also in the midst of relocating some of our manufacturing -- basically our manufacturing for our breast health business from Connecticut down to Delaware. So at the current time, we've got double costs as we do that. And I think we've got great visibility that those gross and operating margins will be improving throughout the year. I don’t know if you want to add more to that.

Yeah, sure, Steve. So as we previously called out Q3, Q4, our expectation is that would be the trough with respect to operating margins. And as Steve mentioned, our expectation is to work up from there to the low 30s as an exit rate in 2024. Steve pointed to the fact that we're working past and farther away from the highest cost chips. Our breast business is also recovering, which is going to be a tailwind to margins as well. We did mention that we divested the SSI business, and that will also be a tailwind to margins as we go into 2024.

Our next question comes from Tejas Savant with Morgan Stanley. Please go ahead.

Hi, team. This is Madison on for Tejas. Thanks for taking the question. Maybe just firstly, I was wondering if you could elaborate on how you're thinking about international growth for 2024? I know you flagged the under-indexation to China as an advantage in the near term, but what's your combined exposure to China and the Middle East. And should any of that ongoing conflict weigh on the demand throughout the latter part of the Middle East region?

Sure, we have very little in the Middle East, and China is 2%. So between the two, it's call it 2% to 3%, really. So I think we love that from the current environment. And as it relates to international overall, I think we've continued to see our international business as being clearly accretive to the growth rates of the company. And really over the last number of years, it's been a double-digit grower and wouldn't count out that it couldn't do that again this year. So we've strengthened our international businesses significantly over time. Our breast health business getting stronger. Diagnostics has benefited hugely from all the additional Panther placements. So that's been growing tremendously internationally. And our surgical business after years of trying to work on reimbursement and getting products approved is really also starting to take off internationally as we said, a real nice grower here over last year. So I think we see all three franchises being in very good shape to grow here in 2024.

We will take our next question from Vijay Kumar with Evercore. Please go ahead.

Hey, this is Kevin on for Vijay. Just a clarifying question on the 4% to 7% base organic guidance for the full year. Does this include or exclude the four selling days impact, meaning excluding the impact would guide the 5% to 8%?

You got it exactly. Yes, we factored that in. So that's why it's actually -- yes, it's 5% to a little north of 8%.

And just a reminder that is ex-COVID.

Got it. So just to follow up, if the guide excludes day's impact, why is the lower end of –

No, it includes the day. The 4 to 7 is including, just to clarify.

Okay, got it. And just to follow up then, you also highlighted new share repurchasing in fiscal first quarter and an accelerated repurchase program. Is this a change in your capital allocation priorities? It seems like M&A was a focus in previous quarters.

Yeah, as we reiterated, we continue to focus on M&A. Right now we're just having to think that one of the great acquisition opportunities is our own stock where it's priced and we're trying to send that signal very strongly, but we're continuing to look for external M&A as well. But we just love the position we're in. So it's not a change. It's just an extra opportunistic based on where the valuation of ourselves sits right now. Thanks, Kevin.

We'll take our next question from Tim Daley with Wells Fargo. Please go ahead.

Great, thanks. So, Steve, following up on the Fusion comments you made to Jack’s question. Could you update us on the percent of the Panther install base currently Fusion enabled at the end of fiscal year 2023? And I guess, or similarly, what were the Fusion sidecar placements in 2023?

What I'll comment on is the current attachment rate and it's about 20% to the Panther install base.

Yes, and which is growing, but the way we look at it, it doesn't have to be a 100% because the key is we think about it per customer and so that each customer needs enough fusions to be able to deliver what they need for their products, so we've seen very nice growth We're not necessarily disclosing the exact numbers, but I really like the growth there. Okay, got it. Then, breast, just talk about healthy bookings, elevated backlog, great visibility in the 2024. Just, if you're going to help us, how much of the 2024 breast revenue expectations are currently covered in your backlog? Or direct visibility via hard orders? Just curious on the coverage rate for the year versus [Multiple Speakers].

Think about all of it, actually. If you look at it -- as you'll see in the 10-K, that basically we've got the orders in place for the year. Now we're going to continue to add orders to that for further out periods, but we're in great shape coming into the year.

We'll take our next question from Anthony Petrone with Mizuho Group. Please go ahead.

Thanks. Good afternoon. I also send condolences to Karleen and her family. Maybe the first one on Biotheranostics, just up 30% for the full year, and obviously still in the early days, as you mentioned, Steve, in your prepared comments, I'm just wondering when you think about, I guess, the synergy to the breast health business, you have 10,000 gantries out there, and I think there's two call points really for Biotheranostics, OBGYN and then possibly a little bit in radiology specifically. But how should we be thinking about how many of your breast health install base users are currently using biotherapeutics and how long will it take to sort of extract that entire synergy. And then specifically on margins for Ryan, just when we -- that trajectory from high 20s in the first quarter to low 30s, is that linear? Are there certain inflection points throughout the year? If so, what are they? Is it operating leverage or more in pricing at the gross margin line? Thanks.

Sure, Anthony. On the first one, it's a great question and I don't have the specifics. I think our Biotheranostics sales team has been out there really focusing on a number of key docs. And so as they're building it up, I do think we back to the early innings, still lots of opportunity to more broaden it with both our breast health as well as even our diagnostics, OBGYN salesforce. So still a lot of opportunity ahead to your point.

Yes, and Anthony, on the margins as we've stated in the commentary, looking to work up from the high 20s to the low 30s through the course of the year, it should be a relatively consistent trajectory up to that range. As I mentioned on the prior question, breast health recovery is a tailwind to the margins. The farther we get away from the higher-cost chips that are in our gantries as we progress throughout the year, that should be helpful as well. And again, the savings from SSI should be felt in the back half of the year as well.

We'll take our next question from Casey Woodring with JP Morgan. Please go ahead.

Great. Thank you for taking our questions and my condolences to Karleen and her family. So I just wanted to talk about the surgical business. So growth this year is going to be within the LRP range coming off of 16% organic comp in 2023. Can you just talk about some of the growth drivers there? It sounds like international is a big piece of it. It sounds like pricing drove out performance this year as well. So can you just talk about how that business performed this year and the sustainability into next year? And then just one more quickly on the margins. So I think in 2023 you have baked in something around 200 basis points to 250 basis points of inflationary headwinds outside of that higher semi-chip costs. How should we think about that dynamic here in 2024? Thank you.

Sure. On the [indiscernible] business, I'd say we had everything working for us in 2023, including the NovaSure V5 launch that did have some pricing associated, really. It showed up more as mixed, but it was a higher priced product. And then I think, frankly, procedures were pretty good. But we fired across all cylinders. NovaSure, MyoSure, Fluent, and then also Boulder and Acessa, and did it both domestically and internationally. I think as we go into next year, MyoSure, Fluent and Boulder and Acessa all continue to look as very good growth. NovaSure will probably be back to flatish to possibly down a touch, but internationally, I think again, we see international being a solid double-digit grower in the year so feeling very good about our positions. I would tell you one of the biggest surprises to me probably over my almost decade now at Hologic has been the continued growth and the sheer scale of MyoSure as it continues to really grow the category. If we think about TAMs, the total available markets, never realized how big it would be and I think we're continuing to expand that market. So feeling very, very good about that. I'll let Ryan take the second part of that. Everybody's decided I can't handle margin questions. So I'll go ahead and let Ryan go ahead and take them.

Yeah, so I do want to clarify one comment that we made to Derik's question earlier. It is actually $50 million in income and $130 million in expense. So I had flip-flopped that in the prior question. And again, with respect to margins, kind of just reiterating the comments that we've made here, it is an expectation that we are going from, again, the high 20s to the low 30s. The biggest impacting driver, again, is the breast recovery and moving, again, farther away from the higher price chips.

Yeah, I think that's what gives us such confidence in the gross margin expansion to clarify that is, it is looking at the current inventory that's sitting on our balance sheet that is just going to flow through here on a effectively a first in first out basis so we can see those super high-priced chips that we got early and mid in the chip crisis bleeding through the product lines here in the first quarter. Really, by the first two quarters, most of that will be done. And it gives us great confidence as we continue to work through the year.

We will take our next question from Navann Ty with BNP Paribas. Please go ahead.

Hi, good afternoon. I just had a follow up on the M&A. Curious to know whether Hologic came across interesting deals since August, and do you see a healthy amount of sub-1 billion deals? Thank you.

Thanks, Navann. We continue to scour the landscape. You know, the bankers have been all over the place with lots of ideas. We frankly are in that great position where we can be patient. You know, if I still look at the landscape today, you've got a whole bunch of very smaller companies that went public in COVID time that are hemorrhaging cash and in bad shape. And a lot of those still don't fit our criteria. So then we're looking at other things that may be a little bit more established but the magic that we have for us right now is given our growth rates, given our profitability, we've got a pretty tight hurdle rate that not a lot of things are making it to the top. So I wouldn't expect anything super imminent as we continue to look at the landscape.

Helpful. Thank you.

We'll take our next question from Mike Matson with Needham & Company. Please go ahead.

Yeah, thanks. So I want to ask one about the breast business, specifically the gantries. I guess, during -- when you had all the kind of supply chain issues, you talked about the orders were coming in and remaining strong. And so, and I know you've got a backlog now, but I guess what I'm wondering is, what is the ordering looking like? Because we have seen some kind of mixed signals out there about capital spending at the hospital level.

Yeah, we continue to feel good about it. You know, having been in this chair in a different company in the 2008, 2009 downturn. I'm always particularly attuned to trying to pay attention to concerns about capital freezes or capital tightening. I think we just feel great about where we are both in terms of the products we've already got the orders in, as well as continuing to get new orders. So we're booking candidly out beyond the current year at this stage, and just a lot of excitement still in our breast health business. I think what's hard for people to grasp is how much we've dramatically expanded our installed base to where we're so strong in the US and so many people just still coming to us. So really feeling very good about it.

Okay, got it. And then just on the international business, I mean, it's good to see that the growth is being so strong there. You sound pretty optimistic about the outlook. But, you know, I was wondering if you could maybe just talk about what's really driving the growth there. Is it expanding into new countries? Is it getting new products approved in your existing markets? Is it gaining share in existing markets? Is it maybe all of the above?

Yeah, I'm glad you asked it. I think the magic for us is it is all of the above. It's this incredible diverse growth that in very simple terms, if we actually do look almost country by country and franchise by franchise, and we were just with literally that the sales leaders of each country for each franchise in Dubai a couple of weeks ago. So I'm coming fresh off looking at all the plans. If I look at the UK, we have growth plans for diagnostics, not just diagnostics, but psychology as well as molecular in the UK. We've got plans for the breast health business and we have plans for surgical. And it is, it's bringing -- in the case of surgical, it's bringing those products into these markets. It's getting the reimbursement. And it's just been a lot of nothing sexy and no one big driver, which I actually think creates the excitement. And even as places like China have gotten a lot wonkier for most companies because we're small there, we're not counting on that for our growth. We're getting it everywhere else. But it's not sexy, But it's incredibly effective that it's literally every -- almost every franchise in every geography. And these hundreds of thousands here and there, as you keep adding them up, they become millions and millions and then tens of millions all through it. And I think it's creating this inexorable growth as we're bringing on new customers in each franchise. Thank you, Mike.

We'll take our next question from Andrew Brackmann with William Blair. Please go ahead.

Hi, guys. Good afternoon. Thanks for taking the questions and certainly sending condolences to Karleen here. I'll just stick to one on the innovation engine here. You guys have obviously done well sort of advancing the platforms through R&D and new launches, but how should we be thinking about major upgrades within the core franchises here over the next couple of years. Anything to call out there? So we'd be expecting, I guess, more singles and doubles moving forward. Thanks.

Sure, Andrew. I think we never want to over-hype anything, but we've got some neat things coming both, particularly organically in the breast health business, you know, diagnostics obviously, BV/CVs off to a tremendous start and, we're excited by that organic thing. And then working it out, but probably more in the continued singles doubles category that, hopefully over time, those singles and doubles turn into triples. I think if you look at Acessa and Boulder, they're growing very nicely, they're still very small. And so over time, I think the magic from where we sit today is we can see those franchises growing at above our company rate for the next five plus years at least. And I think that's the magic of what we have going here. So again, no one kind of back to Mike's question a little bit, no one product driving the growth, it's systematically coming across the product lines. And I think it creates a lot more durability.

Okay. Thanks, guys.

Thanks, Andrew.

We have time for one more question.

And we will take our final question from Andrew Cooper with Raymond James. Please go ahead.

Hey, thanks guys for squeezing me in. A lot's already been asked. So maybe just one, you mentioned booking out already into next year on the gantry business. Just what is the typical kind of visibility you have at this point looking into the year relative to maybe where you sit now with this big backlog? In other words, how much bigger is that backlog than it typically would be?

Yeah, it's clearly peaked. I think we've peaked up here in the last year, and now we will start to bleed that down. But we typically have reasonable visibility. By the way, it doesn't mean that an order can't be placed now, that we wouldn't ship sometime in the next quarter or so. It all depends on how they're scheduled and everything else. But I think we feel really good about where we sit.

That concludes today's question and answer session. And this now concludes the Hologic fourth quarter fiscal 2023 earnings conference call. Have a good evening.