Hologic, Inc.

Good afternoon and welcome to Hologic's second quarter fiscal 2020 earnings conference call. My name is Bryce and I'm 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 Mike Watts, Vice President, Investor Relations and Corporate Communications to begin the call. Please go ahead.

Thank you, Bryce. Good afternoon and thanks for joining us for Hologic's second quarter fiscal 2020 earnings call. With me today are Steve McMillan, the company's chairman, president, and chief executive officer, and Carlene Oberton, our chief financial officer. Steve and Carlene both have some prepared remarks, then we'll have a question and answer session. Our second quarter press release is available now on the investor section of our website. We also will post our prepared remarks to our website shortly after we deliver them. Finally, a replay of this call will be archived through May 22nd. Before we begin, I'd like to inform you that certain statements we make during this call 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 our safe harbor statement that's included in our earnings release and in our filings with the SEC. Also during this call, we will be discussing certain non-GAAP financial measures. A reconciliation to GAAP can be found in our earnings release. One of these non-GAAP measures is organic revenue. As a reminder, we're defining organic revenue as constant currency revenue, less the divested blood screening and sinusure businesses, as well as the acquired supersonic imagined business. Finally, any percentage changes that we discuss will be on a year-over-year basis, and revenue growth rates will be expressed in constant currency and less otherwise noted. Now I'd like to turn the call over to Steve McMillan, Hologic CEO.

Thank you, Mike, and good afternoon, everyone. Let me start by stating the obvious. This is an unprecedented time for the company, our shareholders, and the entire world. Therefore, we're going to structure our remarks differently today. First, I'm going to discuss three strategic topics related to the COVID-19 pandemic, then hand it over to Carlene, who will cover our results and outlook. Rather than keep you in suspense, here are my key points up front. First, Hologic was performing exceptionally well until late March. continuing the strong momentum that has been building over the last few years. Second, as COVID-19 spread and threatened global economies, we moved quickly to mitigate the risk with a focus on cash so that our healthy fundamentals would be intact on the other side of the pandemic. And third, as one of the world's leading molecular diagnostics firms, this is a unique moment for us to live into our purpose by providing solutions for the most important issue facing the globe today. So while we are scaling back in some areas in the short term, we are simultaneously boosting investments in our diagnostics business to respond to the world's needs, which will make us a much stronger company on the other side of this. Obviously, it's our employees who are making this possible. and we want to take a moment to thank them. I am so unbelievably proud of the engagement and commitment we've seen inside Hologic in the face of these challenging times. Countless employees from all our divisions have volunteered to help with our COVID efforts, offering everything from new business ideas that keep customers safe to their own hands and feet for the packaging line in our San Diego plant. A special thanks goes out to our diagnostics team under the leadership of Kevin Thornall. In so many ways, the work of countless current and former employees over the years has positioned us to have a massive impact when the world needs us most. But I'd like to specifically highlight Marcus Burrell's project managers, Morris Exner's development team, Matt Friedenberg's instrument group, Kathy Chester's regulatory team, Dave Tyler's manufacturing organization, and Keith Gantner's commercial team. Someday you'll look back on this as one of the highlights of your professional careers, mainly because the world has never needed you more. We'll catch up on sleep when we reach the other side, which we will. With that introduction, now let me turn to those three key points. First, We were performing exceptionally well until late March, continuing the strong momentum that's been building over the last few years. This is important because women's health needs are not going away due to COVID-19, and we'll still be a market leader on the other side of the pandemic. Our growth strategies will continue to pay off. We'll keep leveraging our strong U.S. commercial positions in breast health, diagnostics, and surgical. We'll keep growing internationally across all our franchises. We'll keep investing in innovative research and development that drives new product growth. And we'll keep boosting our growth rate through tuck-in acquisitions. As we said in our earnings release, organic revenue growth was 5.2% through the end of February, and we were on pace for another beat and raise quarter. Three areas drove our growth in the second quarter. First, global molecular revenue increased 14.2%, the highest growth rate since 2012. This included only about $3.4 million of assay revenue related to our COVID test. Excluding this, the business still grew more than 12% as we continue to layer additional tests, including now our COVID assays, onto our Panther installed base. Make no mistake about it, our molecular diagnostics business is on a roll on a global basis. Second, sales in our European region grew by a whopping 20.8% for the second quarter, excluding the divested Cynosure business, an outstanding performance by Jan Verstrecken's team. Diagnostics led the way in the quarter, driven by cervical cancer co-testing in Germany and viral load testing in Africa. But breast health and surgical also posted low double-digit growth. Third, U.S. surgical was incredibly strong for most of the quarter, up 14.7% in the first two months, building on recent acceleration and on pace to be an exceptional quarter. For the full quarter, U.S. Surgical still managed to grow 3.1% despite a significant decline in March. Now let me turn to our second key point. As COVID-19 spread and threatened global economies in March, we moved quickly to mitigate the risk with a focus on cash. Our primary goal was to ensure that our healthy fundamentals would still be intact on the other side of the pandemic. I'd like to highlight several actions in this regard. First, our efforts to strengthen our balance sheet over the last several years prepared us well to face the COVID crisis. For example, several years ago, we established a $1.5 billion revolving credit line with a very attractive interest rate and covenants that are usually seen only with investment grade companies. As the pandemic rapidly spread, we moved quickly to borrow $750 million from this line of credit, both to prepare for lower future cash flows and to pay off our $250 million accounts receivable securitization program. We wanted to act early and be at the front of the line with our bank partners. We also suspended our share buyback activities in March. Before then, however, we completed our previously announced ASR, and also repurchased 5.9 million shares for $267.6 million, which we believe will be an excellent investment over the long term. Second, we moved quickly and decisively to reduce operating expenses through a combination of actions, hopefully temporary, that were specific to each division, function, and geography across the company. Based on the needs of each business, we eliminated temporary employees and contractors, furloughed employees, and temporarily shut down or shortened work weeks at several of our manufacturing plants. In other areas, we implemented broad pay reductions. We cut salaries for me and the board by 50%, for our global leadership team by 25%, and for other salaried employees by roughly 10%. At the same time, we made conscious decisions to preserve 401 matches and actually supplement the compensation of those salespeople who would normally receive 100% of their pay through commissions. Our goals were to keep our good people, reduce outright layoffs as much as possible, and be in a position to emerge quickly on the other side of the pandemic. In total, these and other actions should help us temporarily reduce operating expenses compared to the second quarter run rate by almost $40 million in the third quarter. Going forward, we intend to continue managing discretionary spending closely while still taking care of our employees and funding future growth initiatives, such as boosting capital expenditures to ramp up our COVID manufacturing capacity. Which brings us to our third major topic. As one of the world's leading molecular diagnostics firms, this is a special moment in time for us to live into our corporate purpose and become a much stronger company in the process. Building on the success we've had over the last several years in placing Panther instruments around the world, we are in a unique position to help fight the coronavirus by providing the molecular testing that's needed to preserve human health, as well as reopen our economies. And our efforts could provide a significant positive offset to pressures elsewhere in our business. When the genetic sequence of the SARS-CoV-2 virus was published in January, our scientists immediately jumped on it, just as they did when H1N1 influenza and the Zika virus emerged in the past. Our focus then was on speed. We wanted to get a test to market as soon as possible. With support from BARDA, we were able to secure emergency use authorization for our assay in about two months. We chose to develop a PCR-based test for a few reasons. First, it was faster, as we leveraged the open access software that was previously written for the fusion module. Second, we sell PCR-based tests for influenza and other respiratory viruses that run on the fusion side of our instrument. These viruses can cause symptoms that resemble COVID-19 disease, so we wanted to give labs the capability to test a single patient sample for multiple targets. Third, there was a clear regulatory pathway for assays based on PCR, which is the backbone of most existing respiratory tests and the first couple of COVID assays. Today, we have all come to understand that a real key to controlling the disease and getting people back to work is delivering fast, highly accurate test results on a truly unprecedented scale. Let me focus on that word, results. Many investors have asked us why U.S. testing volumes are still limited, even as the diagnostics industry is producing more tests. One reason is is that many of these tests are run on manual or semi-automated systems, putting a tremendous strain on lab technicians who were in short supply to begin with. Some of these systems require reagents from multiple vendors, which have been limited. In addition, while point of care tests have an important role to play against the pandemic, they can't be done in high volumes. In fact, high volume testing has been concentrated in a relatively small number of labs, which can lead to longer turnaround times and backlogs. For all these reasons, we quickly dedicated enormous resources to develop a second COVID test to run on the base Panther system using our proprietary Aptima technologies, including transcription-mediated amplification, which is an alternative to PCR. Our lab customers already use these aptimate technologies to perform tens of millions of molecular tests a year for sexually transmitted infections, cervical cancer screening, and virology. There are two major advantages to this approach, which is again being supported by BARDA, this time with about $13 million. First, because our supply chain has been scaled, to produce massive numbers of Aptima tests for other infectious diseases. We can now redirect these manufacturing resources to produce large quantities of coronavirus assays. Specifically, we expect to provide our lab customers about three million Aptima tests next week. Yes, three million. And are planning to produce at least one million tests a week. starting in late May. Customers using our Aptima assays do not need to perform additional sample preparation steps or buy other commercial reagents for nucleic acid extraction. This should help reduce competition for raw materials and further increase global testing capacity. Finally, to help alleviate shortages of commonly used sample collection swabs and transport media, we have validated our Aptima multi-test swab specimen collection kit, which is used today, mainly for STD testing, for use with both the Aptima and Panther Fusion SARS-CoV-2 assays. Second, our Aptima tests run on the world's largest installed base of high-throughput systems. More than 1,800 Panthers are in use globally, compared to about 200 of the much newer Panther Fusion platform. You can do the simple math. This is almost a tenfold increase in our ability to leverage our industry-leading installed base of high throughput instruments. This means that more hospital, public health, and reference lab customers can apply the power of full automation to coronavirus testing. This automation reduces hands-on time and the potential for manual error and helps reduce the labor bottlenecks that have emerged given the unprecedented volume of COVID tests needed. So our lab customers will be able to deliver more results when and where they are needed. Adding a COVID assay to the Panther menu provides a unique opportunity to turbocharge the strategy we have been pursuing in molecular diagnostics for years. COVID testing will help us place more panthers, both in the United States and overseas, and also drive higher assay utilization on the systems that are already in the field. And it will accelerate the positive change in diagnostics that we've previously discussed as we move from being the leader in STDs to a much stronger position as a broad-based molecular diagnostics leader with strong customer partnerships. Before I turn it over to Carlene, let me conclude by saying that in these unprecedented times, our purpose, passion, and promise remain steadfast. Our purpose is to enable healthier lives everywhere, every day. Never has that been more relevant than today as we battle a global pandemic. Our passion is to become global champions for women's health. Obviously, women are affected by COVID-19, but when the pandemic is under control, demand for our market-leading products and services will come back. Early detection of diseases like breast and cervical cancer will always be important. And our promise is rooted in what we call the science of sure, providing highly accurate differentiated products, which has never been more important than when combating a public health crisis. As difficult as the current environment is, I have never been more energized about our chance to play a major role in the toughest issue facing the world today, while knowing that our efforts today are also strengthening us for the future. Now let me turn the call over to Carlene.