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

All right. Great. Perfect. Thanks, everybody. So welcome to the Wells Fargo 2023 Healthcare Conference here in Boston. We're delighted to have Hologic here. We've got CFO, Karleen Oberton, with myself on stage, and we are going to dive into questions. And I think if we have some time at the end, I'll open it up to the audience, if anybody has any -- they want to ask, but we got plenty. So don't feel pressured or anything.

But -- so just to kick it off, you guys updated in early July with the earnings call, the 5% to 7% 2025 midterm guidance. So I just wanted to kind of get an update on that, given the current macro environment, all the things moving around different markets. Just how confident do you feel with that given we've got another month, 2 months, 3 months in the past, anything moving the needle?

Well, Tim, first of all, thanks for having us here. It's a pleasure to be here with all of you today. And let me frame it in that Hologic is certainly a stronger, more diversified company coming out of the pandemic than prior. And when we kind of reiterated the 5% to 7% back on the last call, it was with confidence in actually feeling being more impressed by that 5% to 7% then when we put it out there back in 2021 because it's off of much higher base than we would have anticipated several years ago. And really, that is, again, the diversification, multiple growth drivers in all of the divisions and really pleased that we can see on a worldwide basis, all of our businesses are growing at 5% to 7%, think about Diagnostics and Surgical probably towards that higher end, but Breast Health at the lower end of that range. But again, all the divisions there, all with multiple growth drivers.

Great. And you did touch on something I did want to dig into. So within that, you're saying Diagnostics and Surgical higher-end, Breast lower end of 5% to 7%, all within the range. Is that what's embedded into the 2025 guide? Or is that -- I guess, how does that compare current environment versus what is embedded in the expectations?

Yes. So we haven't guided to '24 or '25 at this point officially yet. But yes, I would say that if I look to '24, I think the differences in that would be '24 probably still has an outsized growth rate for Breast Health that's recovering still from the supply chain issue that originated in the '22-time frame. So think about Q1 as in '23 is a lower comp as we go into '24. Think about potentially in '23, we had a few extra selling days than we'll have in '24. But absent the Breast Health outsized growth rate, I think that algorithm still works '24 and likely into '25.

Okay. Great. You did mention breast obviously has some idiosyncratic factors going on in it. And it was actually interesting before the talk, I looked up how many times recently the numbers have beaten because Hologic continues to outperform expectations on a quarter-in, quarter-out basis, both on core growth as well idiosyncratic growth. If I wipe out COVID, even wipe out Diagnostics all in. So Surgical has -- of 16 of the last 20 quarters, it beat expectations by over 150 basis points of growth. Can you dig into that a bit. And then, I guess, first, since we were talking about Breast, 11 of the past 20 quarters, it's beat by 150 bps. Obviously, we had the chip headwinds that were going on. But -- just if you could help us understand the gantry backlog dynamics first, how that will play out in the coming quarters? Like how long it will take to work through that backlog. How big that backlog is relative to normal and then we could jump into Surgical?

Yes. So you had, I think, 3 different questions. I'll only start with the last one, and you might have to remind me along the way. So from a Breast Health perspective, the supply chain issue started in 2022, over the course of '22, we didn't decrease our quotas for our sales force. So we set them the booking quotas at unconstrained levels. So what -- as a result, we saw the backlog continue to grow even through today. We feel really good about that backlog. It's healthy. We haven't seen any significant cancellation rates and really view us as working through that backlog over the course of '24 and into '25. Certainly, we saw improvement over the course of '23 as we secured supply and felt confident in that supply. And that's where we are looking at '24, while supply still has a level of allocation to it, it's not unconstrained. We feel good about the supply that we have and that we'll be able to deliver increasing gantries over the course of '24 working through that backlog, great relationships with our customers, and again, no cancellations or competitive disadvantage at this point in time.

Okay. So the supply, obviously, headlines abated. I know you guys had a bit of a lag because of the regulatory nature of the product sales. Does that kind of now figure itself out that the chips that are coming in are now [indiscernible], properly validated properly.

So we haven't changed the chips. They've all been the same. It's been about securing them from different markets, gray markets at higher costs if you will. I think the comments on chips moving forward is that what -- through this supply constraint, if we look to a silver lining is that we realized that we were procuring kind of older technology chips. And working more closely with our suppliers, we now realized and can identify chips that are newer chips that are going to have more supply for the longer term and even potentially lower cost. And so that is forming our design on our next-gen gantries as we move forward.

Okay. And then just to clarify. So you guys probably could be working through the backlog quicker but you may not effectively adding incremental capacity or incremental costs through.

Right. Yes. So think about that, the field service engineers that install the gantries also maintain our installed base. So we haven't leveled up field service engineers to install a bunch of gantries. We're going to use the same workforce. We're going to work with our customers. The install is something that takes almost 3 to 4 days. So it's not a plug and play. So there's high level of scheduling and coordination. And so we wouldn't expect an outsized quarter in '24 but again, a continued improvement in the gantry availability.

Okay. Now that's helpful. And then before I jumble multiple questions in the one. I started with the thought around Surgical. So Surgical has been beating consistently for the vast majority of quarters recently by a pretty sizable magnitude. Obviously, there's a lot of kind of moving parts there with instrument replacements, V5. So could you help us understand the actual impact of V5, how volume versus price plays out in that? And how long should this cycle that we're in right now [ will ] last?

So I think Surgical is a great example of both our organic and inorganic investments coming to play. Certainly, organic investments is V5, a line extension of NovaSure that actually commanded a higher ASP. And that's really been the growth driver over the course of '23, and we'll lap that here in the first half of '24. Volumes were actually probably down '22 versus '23, but it's been a higher pricing that's been driving that growth. From an -- as well as organic has been our Fluent Fluid Management Device that has a disposable element, the flow pack that continues to have nice uptake with customers multiple procedures that it can be used for driving growth. And then on the inorganic side, it's been our recent acquisitions of Acessa and Bolder into laparoscopic that are also driving growth for that division. So really nice multiple growth drivers. And then on top of that is our international surgical business is really starting to take off, albeit from a slow base, but we're seeing nice improvement in performance there.

Okay. Great. Yes, you've mentioned a lot of things that I want to dig into. So I guess I'll just start on Bolder since you did identify that. I think Bolder initially was $10 million revenue acquisition, what was that contribution in '23?

We stopped disclosing specifically the contributions of the acquisitions as they lapsed and became part of the organic growth rate. But I would say is that Bolder is certainly growing in the double digits, very accretive to the division.

Okay. No, that's helpful. And I guess, Acessa same thing, growing accretive for the division as well. Okay. Great. And then I guess, more recent updates within Surgical, USPSTF guiding update within cervical cancer screening. So can you help us, I guess, size that for us? Like how big is that in order of magnitude? And like what is the range of outcomes?

Yes. So let me step back for a second and say that the cervical cancer screening guidelines related to our Diagnostics business, and specifically the cytology line within our P&L. And let me start with that co-testing is the right science, co-testing is the best result, co-testing detects 95% of cervical cancer in women. And so that is the best health and treatment for women. And we believe that firmly, there's a number of studies that support that in many of the societies that we look to support that. As well as that we believe -- or not we believe, we know that about less than 1% of physicians in the U.S. practice HPV primary today. The substantial majority is co-testing or Pap alone. So that is the gold standard of practice, physicians know that is the best outcome for women. So the USPSTF, we anticipate will put out draft guidelines at some point. They haven't put them out at this point. Once those draft guidelines come out, there's usually a 6- to 12-month comment period before they're finalized. There is a number of outcomes that could happen as far as co-testing and Pap alone, whether it's intervals, whether it's age bands, whether it's an A or B coverage or not covered at all. I think we are hopeful and we're working to make sure that it is covered. If it's not in the draft, we'll certainly go into action and partner again with different societies to try to change that final guideline like we did back in 2018, again, as this is the best medicine for women. If we are unsuccessful, this is a flip a switch in terms of revenue. Again, if 99% of physicians today are practicing, co-testing or Pap only, it's going to take a long time to change that practice as well as we look at that revenue line, 60% of the U.S., 40% is OUS. So again, we believe that right science and the right medical outcome for women will prevail but we're monitoring and we're going to action if we need to.

All right. No, that's helpful. And again, even my confusion is that it does show the power of the vertical integration in women's health, you guys have. And on that front within Diagnostics since we're there now. A lot of Molecular Diagnostic players have been talking bold numbers and growth expectations and penetration of the women's health market. How do you guys see your position, your defensibility of that today, as we said, given a lot of capital and installed bases out there chasing the same markets that you are just [indiscernible] with the incumbents in?

Yes. So we feel really great about our position. We think Panther is 1 of the best instruments certainly for Molecular Diagnostics. We have a great instrument, along with a breadth of menu, over 20 assays approved in the U.S. So I think that puts us at a competitive advantage for sure. And I think we've placed a lot of instruments just like a lot of people have placed instruments over the course of pandemic but some of the metrics that will certainly look at our growth rate over the past year. First 2 quarters of fiscal '23 had over 20% growth again, probably easier comps given the Omicron variant in '22. But even Q3, almost 13% growth going against a tough comp in the prior year. So the growth rate show that we're continuing to perform. We also talk about utilization. So over 90% of our customers use more than COVID, have at least 1 other assay. And if you look at new customers acquired during the pandemic, so April 2020 and on, over 85% of them are running at least 1 other assay and over 55% are running at least 2 other assays. So we're seeing that uptake in menu utilization even on the newer customers. And if I step back even further and I look at U.S. customers, if I go back to '19, about 20% were running 4 or more assays. And I think as we end '23, that will be over 30% running 4 more assays. And that's really what drives the business is that continued utilization menu on the Panther as we move forward, and we've seen that come out -- prove out in the growth rate. And I think I'll kind of talk about our secret sauce to Tim, is our physician sales force. So in our Molecular business, we have the lab sales force that works with the lab and the physician sales force that goes out and works with physicians and talks about guidelines and testing, and we actually partner with our labs to get physician-level data to understand who's doing what testing and allows us to go and work with physicians to promote guidelines and the best standard of care for women with really grow both the labs business and our business.

All right. No, that's great. And we only appreciate those numbers and the updates around the utilization of multiple I guess, sort of expanded menu. But how much of your installed base is currently running a respiratory and nonrespiratory.

Well, I think vast majority of [indiscernible] running COVID, so I think a majority of running a respiratory assay. I would say that our respiratory menu is fairly new, and we saw a nice performance in the first half of this '23 with strong prevalence of respiratory illness circulating. We believe that our respiratory business will continue to grow but it will also be seasonal and with the prevalence of flu and other respiratory illnesses.

Okay. And I got to ask new wave or is there upside the numbers? Or like how do you think about incremental? Is it all going now towards the more benchtop oriented point of care or...

Yes. And I know there's been a lot of headlines in COVID testing or COVID prevalence. We haven't seen a meaningful uptick in our testing demand. And I think that goes to probably more comfort of in general population with antigen testing people not needing to rush to the doctor to get a PCR or TMA tests that we offer. So a slight uptick but nothing that would indicate a meaningful outperformance for the quarter.

Okay. No, that's helpful. I had to ask. And then as we're just touching on point of care, Molecular Diagnostics, Mobidiag, recently, those expectations kind of walked back a bit. Just what are the ambitions for Hologic within true benchtop point of care in Molecular Diagnostics.

Yes. We feel that this point of care closer to the patient is certainly a place where we want to play. And we believe that Mobi is the right asset that the opportunity to do both low plex and multiplex in 1 box. So while we're disappointed some of the challenges that we've had really related to early-stage scale up some supply issues and performance of some of the legacy products that have resulted in us pushing out the U.S. approval. And really from an accounting perspective, therefore, generated the impairment charge. But at this point, I still believe over the longer term in that asset and that we'll have success once we do get the U.S. approval.

Okay. So the U.S. approval is, I think, previously it was second half calendar '24.

Yes. I think we haven't updated that, and I think we will as we get closer to that performance approval time line.

Got it. Actuaries. Okay. So -- and just before we move on from Diagnostics. A lot of conversations I have with investors around the Panther installed base and the reagent rental mix there. Again, we're coming up on 3-year, 4-year closed anniversaries when a lot of these placements happened. What -- I guess, what share of your Panther installed base is on reagent rentals or reagent rentals specifically that are expiring in the next 12 months?

Yes. I think the vast majority of our installed base is a reagent rental model. I think there was an anomaly that during the pandemic that some customers chose to buy the Panther, but even regardless as they put new menu on, that is contracted business typically over a 3- to 5-year period, and we don't disclose any kind of renewal rates and any percentages in the given year.

All right. No problem.

And Tim, I'd just point back to the -- some of the metrics I gave and the recent growth rates tend to think that the Panthers are solidly placed and we'll continue to grow menu on all of them.

Yes. No that's definitely something that I know a lot of people digging into. So I appreciate that color. And if we were to think about -- I know you touched on international versus U.S. If we were to take a step back and think about within the 5% to 7% growth rate, is international expected to grow above 7% across the board of all segments?

Yes. International would be expected to grow in the double-digit range for sure. It has over many quarters now. I think it's only about 30% of our business right now, and it will continue to grow as a piece of the pie. But I think the good news is that the U.S. business continues to perform really well. And so we haven't made a significant traction on the authority, but we'll see improvement over the next 5 years.

Okay. And if we were to think about the U.S. of each of the segments within the 5% to 7%, are there any that are below 5%, obviously, more mature markets. This is part of a larger strategy but just from a modeling perspective.

Yes. I think if we got into the sub franchises, if you look at cytology in the U.S., I would think that would be flat to maybe declining over that 5% to 7% -- over the planning horizon. I think breast gantries, breast screening in a normalized and unconstrained supply issue will might be below that 5% to 7%. And certainly, NovaSure and the Surgical business is probably more flattish in the U.S.

Okay. No, that's helpful.

I think the good news is all those are great cash generators for us.

Yes. Definitely, for sure, the more mature markets. And so -- okay, so that's helpful. So just looking at the overall 70% Molecular Diagnostics, I think 80% of mix -- side out 60%, the rest Breast and Surgical 80%. Like what are the ambitions? Are you thinking -- again, thinking about the 2025 range, we can do that math. But like longer term, where is the kind of governor, if you will, in terms of the international versus U.S. mix or any kind of high-level thoughts.

Yes. I mean I think our ambition would certainly be 50-50 U.S., OUS. I think one of the reasons that we are under-indexed internationally is because we're a primary women's health care company and women outside the U.S. don't have access to the gold standard of the care that we have here and think about some of the emerging markets of whether it's China, whether it's India, and that there's some structural limitations to lack of radiologists, lack of cytologists that really impede putting in robust screening programs. But I think, Tim, over the longer term, this is where AI can really have a nice role and in newer technologies that are cheaper, faster and really assist and limit the workflow of cytologists and radiologists to drive screening programs in other markets outside the U.S.

No that's yes [indiscernible]. Is there any -- again, you guys have touched on AI in the past, obviously, more frequently, more recently, I guess. But if we were to think of material changes to the model -- the care model today. Is there anything near term that is being deployed or at a larger sale...

I would say, at this stage, AI is a small revenue contributor. I think we think of AI in terms of assisting the clinician improving workflow. So think about AI on our digital cytology platform approved in the EU that really assists the cytologists, the pathologist in focusing on unique cells that require attention and improving that workflow in breast imaging, our genius AI, again, helping the radiologist limit the amount of time reviewing an individual image and able to focus on different areas of concern. And even in our service business, we are exploring the opportunities for predictive analytics and predicting burnouts of tubes or detectors and so that we can reduce unscheduled visits, even promote remote fix and really that's only win for us from a cost perspective, but it's certainly a win for our customers with less downtime for their machines.

No, that's helpful. And you mentioned that it's much more of a supplemental, I guess, driver of the business. And if we were to think about M&A, obviously, lots of diagnostic assets in the market probably right now, I know you guys are probably getting a lot of knocks at your door. Just curious about how you guys are thinking about white spaces in the portfolio across segments. How is the market today? Is it -- I'm sure every month that goes by, it gets better but just general kind of views on areas of the portfolio that you think would be your most near-term [ part of ]?

Yes. Well, I think -- from an M&A perspective, I think our approach right now has been disciplined in patients and really comfortable with cash growing on our balance sheet given the uncertain macro environment at this point in time. We're pleased with the deployment we have done over the past couple of years on assets and we're very active. We have business development teams in each of our divisions looking for assets whether it's kind of white space or is it something that's a little more mature with the revenue and accretive earnings. So our aperture has widened over the past couple of years given our financial position but it is still focused on tuck-in near adjacency, things where we're the rightful owner of the asset, and we believe will perform better as part of Hologic versus on a stand-alone basis. But again, a broad approach, looking at a lot of different things. I think we're not -- what we're not looking at is something transformative, we're not looking at science projects, we're not looking at a fourth leg of the stool.

Okay. That's helpful. And I guess on the flip side of the coin, you guys aren't scared, I guess, given your past to shed some assets. Do you emphasize some, is there anything that may be within the portfolio? Again, we were talking about some of the mature growers, [ granted ] they are cash cows, so they do.

Yes. I would say there's nothing of significance that we're looking at, at this point. We always look at the portfolio with a critical eye, but I don't think there's anything of significance even though some of those mature assets, I think this such a cohesive to other pieces of the business and growth and really platforms and large installed bases that we can leverage.

Okay. Great. Just wanted to potentially open it up to the audience, if anybody had any questions they wanted to ask. So I got plenty more. So -- all right. Great. So I guess I've got a few kind of more nitty gritty questions here that I really would love to bounce off of you. If -- you mentioned the installed base out in the market, lots of I guess, more mature businesses, generating a lot of cash, generating a lot of revenue. If we were to think about within surgical, if you -- breaking down NovaSure classic, advanced V5 of the installed base that's active in the market today, how does that kind of split out? Is it...

I think what we try to do is try to drive conversion to the latest version. There are some legacy folks that don't convert because of the pricing issue but I think there's a fair balance between the version, but we always focused on, let's get to the current version for the majority of the customers. That helps with our lines and manufacturing efficiencies back in our plant in Costa Rica.

Okay. That makes sense. And just -- we were talking about the V5 earlier. How -- I guess, how much is converted? Is it relatively small?

I think we really disclosed that. But again, I think what we've tried to highlight is that the pricing uptick is going to lap here in the first half of '24.

Got it. Okay. And then staying within Surgical. You did call out Fluent as a nice complementary business. Granted, you aren't disclosing the all after the initial year. But if we were to think about how big this could be and how fast it grows. I know you mentioned, I think, the laparoscopic overall, I think, is double digit, if you will, is Fluent in that range?

Yes. So Fluent is organic. That wasn't an acquisition. That was something that we developed internally and continue to focus on organic improvements for performance for that. Again, it addresses the issue of managing fluid during the procedure, mostly tied to our MyoSure procedure. And again, given the workflow that it provides, we find that once we have it in hospitals, the more physicians that get used to it, want to use it. And again, for us, to grow the installed base, but it's also a nice pull-through of reoccurring business. I would say that we'll continue to grow probably above the average that we've talked about. On the laparoscopic side, that's the combination of the Bolder and Acessa. Again, both growing well above the average in the double-digit range and think the combination of that portfolio over the next several years, we'll approach that $100 million-plus range.

That's helpful. All right. And then outside of M&A and capital allocation, could you just kind of frank order how you guys are thinking about it? It always comes up credit rating, things like that? Just curious on kind of ambitions there.

Yes, we won't -- we're really pleased, obviously, with our balance sheet, our credit agreement. We have great covenants. We feel really good that we have the financial power to do a number of different things. I think, for us, it's an -- and we can do M&A and share repurchase and maybe even some debt repayment if we wanted to. But certainly, the priority is M&A, as we all know, revenue growth really drives the premium expansion, multiple expansion in our space. So that will continue to be the priority. On share repurchase at a minimum, we're going to manage dilution from our equity plans and then be opportunistic as we see disconnects in the market from a valuation perspective. And given the interest rate environment, we are looking at, do we potentially pay a little on the credit agreement, but that would be the least in the priority.

Okay. Got you. That's helpful. All right. And then if we were to move over to just margins, I know we really haven't touched on them today. A lot of kind of moving pieces, obviously, COVID inflated a lot of cost bases that we're actively servicing and helping a lot of people out there and governments out there. So how should we think about the cost base SG&A dollars on an absolute basis or headcount or as we transition away, how much of that is done? How much is left?

Yes. So I think during the pandemic, we were really super disciplined on headcount and didn't get over our skis, if you will. I think we've seen a lot of companies announced layoffs. We don't anticipate anything like that. And really from probably about 18 months ago, have been really tight on headcount as we saw different macroeconomic conditions start to present themselves. From a margin perspective, we ground -- our ground folks in Q2 '20, 31.5% was what I'd say, a normalized base business operating margin, very rich margin for the space. We've talked about in '23, the second half performing closer to 29% as being the trough as we manage through some of the supply chain challenges that we've talked about and see recovery over the course of '24. Now I don't think we'll jump to the 31.5% in Q1. I think we'll get into the low 30s over the course of '24, again, as we manage through those issues and probably see back to that 31% as we entered into '25.

Okay. And I know you guys have gotten this question a lot. If we were to think of the progression back towards the normalized margin here, how much of that will be gross margin versus SG&A?

Yes. I think it's going to be both. I think gross margins as the acquisitions become a bigger piece, they're usually at a lower margin profile than the base business. But I think we've got the appropriate levers within SG&A to get back to those normalized levels. And certainly, from an overall earnings perspective, we talk about earnings if we're growing 5% to 7% on the top line, we're going to grow earnings faster probably close to 10% annually. And that can be both margin expansion as well as some activities below the line, whether it's tax rate, improving our interest profile and share repurchase to drive those earnings.

Got it. And if we were to think of as the acquisitions and, I guess, higher costs, fixed cost platform sort of yet to leverage that overhead. At what point do they hit fleet average, if you will? Like is it a point where all those -- they won't start being accretive to margins on a percent of revenue basis until they grow at company average because they've matured or...

Well, I think all of the acquisitions are performing differently, but I if we looked at '23, certainly, the acquisitions we did in '21, we probably have half accretive, half dilutive to net dilutive. I think we see that dilution improving in '24, and those acquisitions probably getting to neutral and then accretive on a total basis beyond that. But they're all performing at different levels at this time and they'll have different strategies. Certainly, the acquisitions that we did in surgical will likely move manufacturing to our Costa Rica facility, that typically, over time, improves margins with their efficiency programs that they have. So they all have different strategies and programs that I think they don't have to get to the corporate average to be accretive, right? I think they will be accretive as they grow.

Got it. And how much of your -- I guess, your manufacturing base currently sits if you think of dollar output or tons of output whatever, any metric, that would be helpful, sits in kind of OUS/U.S. today and how much of that could eventually be OUS?

Yes. So let me put it in terms of substantially all of our Molecular and Cytology business, our Diagnostics business is in the U.S, specifically our Molecular business, manufacturing is all essentially on San Diego, some in the U.K., but substantially in San Diego. And just from a pure volume, the more volume we put through there, the more leverage we get. When we look at our Surgical business, substantially manufactured in Costa Rica. We look at our Breast business, the gantries are substantially U.S. and the disposable interventional are substantially in Costa Rica.

Okay. Perfect. All right. Right on time here. Perfect. Well, thank you so much, everybody, for attending and Karleen, for being here. And hopefully, everybody has a productive [ rest ] of the conference. Thank you. Appreciate it.

Thank you.