Hologic, Inc. (HOLX) Earnings Call Transcript & Summary

Great. Thanks, everyone, for joining us this afternoon. A pleasure to have with us the team from Hologic this afternoon. We have CFO, Karleen Oberton; and from Investor Relations, we have Francis Pruell. So with that, out of the way, Karleen, thanks for joining us this afternoon.

It's a pleasure to be here, thanks for having us.

So for me, it's always easier to have these firesides when the guidance is out of the way. You guys had a phenomenal '22, despite the macro being challenging, I think the team came across. And I think the '23 guidance certainly surprised us to the upside, right? So when I look at that guidance, Karleen, can we just go through what the guidance is assuming for -- I know you gave some COVID numbers, FX. What is it assuming for mammography, guaranteed revenues? Just remind us the level there and what the guidance is assuming.

Sure, absolutely. So certainly, from a Breast Health division, the guidance seems low double-digit growth for the full year. So that assumes a recovery on the supply chain side. We do expect Q1 to be down low double-digits because Q1, that is a tougher comp as there was no supply chain challenge in Q1 of the prior year. So expecting again, recovery over the course of the year on that supply chain. Surgical, we expect to grow double digits over the course of the year as well, driven by both MyoSure as well as the acquisitions. And of course, Molecular Diagnostics in total, I'm sorry, we expect to grow double digits with really led by Molecular double-digit -- strong double-digit growth.

And these are all numbers excluding COVID headwinds, correct?

Yes. That is excluding COVID. So we've guided that COVID assay revenue would be roughly $150 million for the full year and COVID-related, about $130 million for the full year. Again, both of those excluded from those growth numbers.

I see. Okay. And then just maybe starting with the -- on the mammography side. I think last year, the chip shortage was a $250 million headwind. What is the guide assuming -- how much of that $250 million is recoup here in fiscal '23?

Yes. So as I said, we expect it to grow double low double-digit. Think about Q1 as really the decline. That's, again, a decline of double digits. And certainly, what that math would likely gets you to is a decline, something less than the headwind we had in Q4 to remind folks that it's about $100 million in Q4.

Got you. So in a simple math, if I assume that last year, it was $250 million of headwind. And for this year, maybe half of those headwinds go over and it's versus like the pre-chip shortage. I think I've learned new terms, pre-pandemic, pre-supply chain sort of versus that baseline, maybe we're down $125 million?

Again, we haven't really framed it as a headwind. We've kind of framed the growth. And what I would tell you, Vijay, as I look at exiting Q4, where I think we'll be at that normalized supply-demand level. We're probably referencing back to, I think it's Q1 of '22, that was roughly $350 million quarter to put it in perspective. Again, I don't think any quarter will ever be a blow out quarter even if the supply kind of comes back more rapidly than we expect given that our field service engineers that maintain the installed base is also the ones that do the installs, and those installs take several days and not several hours. So again, back half strong recovery.

Understood. And I think that one of the things that was confusing for us is the double-digit growth across the segments, right? Like GYN, let's start with GYN since you brought it up. I don't think -- is the market growing double digits, Karleen? Or are you assuming some new product launch or perhaps share gains? What is driving Surgical?

Yes. So let's look at the major franchises. So first, the NovaSure, obviously, we expect it to be roughly flat, right, in a market that is declining. So probably flat with some coverage right from pandemic. MyoSure, we expect to grow probably high single digits as that -- we continue to grow that market and promote more procedures to be used with that, obviously, maybe a little recovery as well. I think what's underappreciated is our Fluent Fluid management product, which has a disposable element to it. And so as that installed base continues to grow, we see the pull-through on disposable. And then finally, we have the acquisitions that are certainly off a small base but with significant growth. Bolder will become organic in Q2 of '23 and really just starting to really get that in the hands of our sales force and think about when we bought that. That was focused on the pediatric and now we're going to sell them to the OB/GYN, which is 5x the procedures that we have for pediatric and Acessa continuing to get covered lives, continuing to work with physicians to educate them on. This is a new procedure but also a procedure that complements our MyoSure product. Think about MyoSure treating smaller fibroids, and Acessa treating larger fibroids or it's a more difficult one to treat that might be a uterine mole.

Got you. And maybe perhaps just to simplify, I think the LRP ,5% to 7% outlook, I assume Surgical perhaps will be at the higher end of that range. And double digit for fiscal '23. The delta between the 7 and perhaps double digit, is that all incremental contribution from we're seeing from Fluent product launch and the deals annualizing?

Yes, yes. That's where the growth is coming, certainly from the acquisitions and again, the MyoSure fibroids.

Okay. Okay. And [indiscernible]

Accelerated growth has certainly been fluent in the acquisition, yes.

Got you. And you're not assuming any from a utilization perspective, I guess the guidance assumed is comparable similar to fiscal '22 trends?

Yes. We're not assuming -- obviously, it's assuming normalized trends is assuming -- not assuming any COVID surge at this point. Certainly, if we had something that impacted access to the OR, that would impact that outlook. But again, if that was the case, we have the natural hedge with our COVID test.

Got you. No, that's helpful. What drives diagnostics, switching gears, Karleen. Because in my mind, the base business, right, the molecular piece, I think it's easier to understand and you've given enough data points there in the installed base, traction in some of these tests with other parts, I think they are slower growing. So what offsets that slower growth?

Yes. So certainly, Cytology & Perinatal are part of the total molecular and those are flattish to maybe some low growth rate, and that's consistent with historical trends. Clearly, from the diagnostics, it is the molecular, the core molecular that is driving the growth. That's from all the installs, the expanded menu that we've developed over the last several years, but with the new assays, BV/CV and Amgen, virology. It's obviously international as we continue to place Panthers internationally and have some substantial same menu approved in the EU is a driver of growth. And then finally, it's the acquisitions and primarily Biotheranostics off to a great start contributing to that growth.

Got you. The molecular piece, can you just remind us, Karleen, what are the key assets out there? Like how many customers are using 2 or 3 assays? I think you gave some color on, I think we're all trying to figure out the expanded installed base because of pandemic and what percentage of those customers will start becoming a core Hologic customers?

Yes. Yes. So we -- I'll remind you what we disclosed on our last call is that we looked at our new customers, customers that we acquired during the pandemic, 85% of those globally are running at least 1 other assay and 55% of them are running at least 2 or more other assays. So that tells us that we're going to have utilization in all of those Panthers, and that's really a great opportunity for us to continue to deliver our content on those Panthers. It's really our loss to stock strategy coming into play.

What is -- when you say 85% of this newly acquired customers who are running at least one test, what tests are they running out of curiosity?

Yes. I mean, it's broad-based. It depends on the customer, Vijay, but certainly our coal women's health assays, our new BV/CV assay and then the virology probably the 3 primarily of what the customer would add on.

Got you. Got you. Based on the conversations -- I'm assuming the sales has had some conversations in a user base, there's no reason why they can adopt and start running 2 or 3 tests.

Yes. There is no reason why they put it. I think as you probably know, Vijay, as we add a new assay, it takes time to validate several months. So it's probably a long sales and adoption time, right, as we could sell more assays to the new customers.

Got you. Within the molecular piece, Karleen, what are your top 3 assays in -- what percentage of your Molecular revenue has come from your top 3 assays at this point in time?

Yes. So our top 3 assays would be our women's health assays led by CT/NG, HPV and Trich. They are probably approximately half of our Molecular revenue. But what's really exciting is that we believe that BV/CV and our Virology menu will be at those levels equivalent to the #3 in those top 3. So excited about the uptake of those newer assays.

And Biotheranostics, I think, is something that you sounded positive about. What test is Biotheranostics offering? Is -- are there some guidelines of reimbursement, which is differentiated for this test, which is driving growth here?

So yes, the primary test is the breast cancer index test which is a test alone will take 5 years post diagnosis of breast cancer. It's really a test to tell whether or not she will benefit from continued endocrine therapy. And obviously, she's not going to benefit. There's a cost savings, the health care system to stop that treatment as well as pretty nasty side effects. So it's -- again, if there's no benefit, then it's a benefit to the well-being, to stop that -- taking that treatment. That test has been included in both the NCCN guidelines, which physicians look to as well as ASCO from a reimbursement perspective. So it's a great test and having those 2 guidelines and strong reimbursement really what makes us excited about that test.

How large is this test right on this BCI test revenue-wise currently?

Yes, we stopped disclosing it specifically, Vijay, once it became organic. But to put it in perspective, before it became organic, it was roughly $15 million a quarter, which compares to prior to the 12 months prior to acquisition, it was about $30 million for the prior 12 months. So significant growth.

Got you. That's helpful context. And I'm assuming the market opportunity is several hundred million dollars?

Yes, even potentially larger.

Okay. Would you say north of $500 million, Karleen, for this thing?

Well, the market potentially could be there, but we'll -- we like the growth rates that we have now, and we're not going to put out really long-term specifics at this point in time.

Understood. Understood. And then a related question, I think, when you look at the macro, right, there is some chatter about hospital CapEx. But I don't think you guys are exposed to CapEx, right? Just give us a sense on what's your exposure or sense related to your CapEx budgets are.

Yes. So the capital exposure is primarily in our Breast Health business. Primarily the gantry that is dealing with the supply chain challenge right now. We say in total, our capital exposure is less than 25% of our total revenue. So majority of our revenue is recurring in nature. And when we think about the gantry and the capital business in our Breast Health division, from a price take perspective, very much on the lower end of a price tag of equipment that a hospital would be evaluating from a capital perspective. So we think ours will come under less pressure. And once the gantry is in, certainly in the hospital, it's running on a regular basis and generating cash flow for that hospital.

I see. I see. And then should we assume, like I know -- we know what the headwind last year was, right, from the ship shortage that's $250 million. Is all of that coming back? Or have you lost certain customers or the course of the pandemic?

No, our backlog continues to grow, and it's growing higher than the shortfall. And think about Vijay, we set our sales quotas prior to the chip shortfall materializing in '22, and we hit those sales quotas. So the business is still there. We also believe we're not at a competitive disadvantage that we believe our competitors in the same situation as us. And we were intentional when this materialized in Q2 '22 to slow down so that we can have the entries for our competitive situations in specific customer needs that we're pressing and more urgent. So cancellation rates have not increased they're at a normalized level, and our teams are at RSNA this week in Chicago, talking to our customers, and hopefully, we can get everyone the gantry they need as soon as possible.

I see. Okay. That's helpful. On -- when you said backlog continues to grow, how does Hologic define backlog? Is that a committed order that needs to be delivered in a certain amount of time?

Yes, it's a firm order. We don't limit the time on it, but this certainly specific criteria that needs to be met to achieve to be counted as an order.

I see. Okay. Okay. And then switching gears to margins here, Karleen. The guide was for low 60s gross margins and 30% operating margin. But again, with this COVID dynamics, right, it's -- and you have the supply chain impact. I know it's been a margin drag. It's hard for us to get a sense on what is the base business, underlying gross margins and operating margins, excluding COVID.

Yes. Think about the dynamics of FY '23, what we kind of forecast and assumed is that COVID is heavily weighted to the first half. In Breast Health recovery is heavily weighted to the back half. So think about those essentially offsetting and so we're exiting FY '23 at that low 30% with minimal COVID contribution.

I see .

And now Vijay, what we've called out of the 200 to 250 basis points of headwinds to operating margins related to supply chain costs.

And that 250 basis points of supply chain cost, is that mostly a gross margin impact, Karleen? Or is some of that going to OpEx?

That's well, it's primarily operating margin and gross margin. It's less on the OpEx.

Okay, okay. So mostly gross margin impact, which is...

Mostly cost, it's mostly higher cost of raw materials and freight and things like that.

Understood. Understood. Do we know what the impact to margins from supply chain was in fiscal '22?

I'm sorry, can you say that again?

What the supply chain impact was in fiscal '22?

The cost?

Supply chain impact on margins.

So the revenue supply -- so if we looked at Q4, the revenue headwinds was about 400 to 450 basis points in operating margins and then the cost of the 200 to 250 basis points impact on operating margin.

Got you. And you're assuming the 250 basis points continuously into fiscal '23. That's what the guidance assuming the 30%.

Yes. If we think about the higher cost are on the balance sheet, it will take time to turn through. Even if we start to procure at a lower cost, we will really see that benefit to '24. But I'm certain as we go through the year, we'll update teams on what we're seeing.

Got you. I'm sorry, on the last one on fiscal '24, you're saying some of these costs have been capitalized and may still have impact in fiscal '24.

So what I'm saying is, certainly for '23 they will persist in '23. What I said is if we start to procure at a lower cost, we won't realize that benefit until '24.

I see. I see. So we will see benefit in '24. Okay. Assuming costs come down.

Yes, exactly. Exactly.

And then maybe my last question here, Karleen, you guys are in a pretty enviable position here, right? When it comes to the balance sheet. With the cash you have on a hand, net leverage almost, it's close to 0 at this point, right? And the deals you've done, it's actually been played out -- worked out pretty well. So when you look at the share repo versus M&A and leverage levels for it, maybe give us some thoughts on capital deployment priorities.

Sure. So I totally agree, we are in an absolute position of strength between our cash position, our balance sheet overall and our credit facility and access to capital. So I feel really great about entering into a very uncertain macro environment. I think, Vijay, our priorities from a capital allocation perspective have not changed. The priority is M&A, tuck-in M&A, division-led acquisitions and will supplement with cash share repurchase. As you know, we've deployed a significant amount of share repurchase, probably a bit more volatility in the markets over the last couple of years. And we just -- the Board just reauthorized the $1 billion share repurchase program. So we feel we're in a great position to do both. But again, a priority would be that tuck-in M&A division-led acquisitions.

Got you. I think with that, we're at the end of the time ,Karleen, Francis. Thanks for spending the time with us. This is helpful.

Great. Thank you, Vijay.