Hologic, Inc.

Good afternoon, and welcome to the Hologic's fourth quarter fiscal 2022 earnings conference call. My name is Jenny, 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.

Thank you, Jenny. Good afternoon, and thank you for joining Hologic's fourth quarter fiscal 2022 earnings call. With me today are Steve McMillan, the company's chairman, president, and chief executive officer, and Carlene Overton, our chief financial officer. Our fourth quarter press release is available now on the investor section of our website. We will also post our prepared remarks to our website shortly after we deliver them, as well as an updated corporate presentation. And a replay of this call will be available through November 30th. Before we begin, We would like to inform you that certain statements we make today will be forward-looking. These statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied. Such factors include those referenced in the Safe Harbor Statement included in our earnings release and SEC filing. Also during this call, we will discuss certain non-GAAP financial measures. a reconciliation to GAAP can be found in our earnings relief. Two of these non-GAAP measures are, one, organic revenue, which we define as constant currency revenue, excluding the divested blood screening business, and revenue from acquired businesses owned by Hologic for less than one year. And two, organic revenue, excluding COVID-19, which excludes COVID-19 assay revenue, revenue related to COVID-19, and discontinued product sales and diagnostics. Finally, any percentage change we discuss will be on a year-over-year basis, and revenue growth rates will be in constant currency unless otherwise noted. Now, I'd like to turn the call over to Steve McMillan, Zoologic's CEO.

Thank you, Ryan, and good afternoon, everyone. Happy Halloween. We're pleased to discuss our financial results for the fourth quarter of fiscal 2022. and provide guidance for fiscal 23. It was another dynamic year for Hologic, delivering strong performance while navigating macro headwinds. And we closed 2022, once again posting outstanding results for the quarter. Total revenue was $953.3 million, and non-GAAP earnings per share was 82 cents. exceeding both our base business and COVID guidance. We also deployed $175 million of capital to buy back 2.5 million shares in the quarter. For those of you keeping score, for the full year, we utilized $542 million of our exceptional cash flow to repurchase 7.7 million shares, reflecting great confidence in our future. For today's call, we'll first provide a high-level overview of our fourth quarter performance and then reflect on our full-year results. In doing so, we'll also share insights into our future outlook as we look forward to 2023. Overall, make no mistake, our consistent, strong performance in these turbulent times is no coincidence. We are a fundamentally different company today than when we entered the COVID pandemic. We also understand that some of you are still trying to ascertain the strength of our core businesses. As we look ahead, each of our core franchises, listen closely here, diagnostics, breast, and surgical, are expected to produce low double-digit top-line growth for fiscal 2023. As we set out to do just over two and a half years ago, we are emerging from the pandemic a much stronger company. We thoughtfully and strategically reinvested our upside earnings into both our business and into our passion to be champions for women's health. Our ability to step up to the plate during the pandemic and address the global demand for COVID testing was an incredible achievement. But our real home run was the transformation of a logic that cannot be ignored. Through organic and inorganic additions, we now have more growth drivers across our business, in each of our divisions than ever before. These growth drivers, layered on top of our market-leading core franchises, form a solid foundation that anchors our business in these volatile and pivotal times. Under the intense pressures of the macroeconomic landscape we live in today, all companies will face adversity, That said, because Hologic is a much stronger company today, we will thrive. As we've said before, you can count on us to deliver on our commitments, even in the face of volatility and uncertainty. It's equally important to recognize that our revenue is the least capital sensitive it has ever been in our 36-year history. For fiscal 22, given COVID and the impact from chip shortages, only 12% of our revenue was from capital, a percentage we expect will settle well below pre-pandemic levels. A truly astounding change from where we were just a few years ago, and a transformation that makes Hologic a more durable company in the face of a potential recessionary environment. Our confidence and conviction in our business is underpinned by our unwavering commitment to our purpose-driven business strategy, a strategy that is centered around our purpose to enable healthier lives everywhere, every day, our passion to become global champions for women's health, and our promise, the science of SURE. We don't see our commitment to mission and ESG as a trend or fad. Instead, we know that in order to continue to achieve our strong financial results, we must continue on our path to elevate and improve women's health and well-being around the world. Now let's turn to the quarter results. As expected, our strong performance was driven primarily by both our molecular diagnostics and surgical businesses. To answer the question we're sure many of you are wondering, core Panther utilization is strong. Our molecular diagnostics business grew north of 17% in Q4, excluding COVID, driven primarily by more assays being run through our expanded Panther installed base. This exceptional growth was once again broad-based and fueled by a combination of legacy and newer assays in our robust molecular portfolio. Our legacy STI business contributed growth dollars, while our newer assays, including our vaginitis panel, MGEN, and our virology portfolio, lifted the growth rate. As for Panther placements, we now have nearly 3,250 Panthers placed around the world. A remarkable achievement considering we exited fiscal 2019 slightly north of 1,700 Panthers in the field. In surgical, our business grew nearly 9% organically and over 11%, including the Boulder acquisition. As anticipated, The COVID pressure on our surgical business abated in the quarter, and we saw procedural volumes return, as well as acceleration from our new business lines. Powering the strong performance in surgical were the same growth drivers as in Q3, myosure, fluent, and solid contributions from Boulder and Assessa. In breast health, as expected, The business was down 16%, driven primarily by the chip shortage adversely impacting our gantry business. Having said that, we have confidence that the worst of the shortage is behind us and that the business will return and accelerate throughout 2023. We will go into more depth on breast health later in the call. Shifting gears. we will now reflect on our full year results and outlook for fiscal 2023. For 2022, diagnostics grew 10.2%, surgical grew 6.3%, and breast and skeletal health declined 7.7%, driven primarily by constrained gantry sales as a result of CHIP shortages. net without the chip shortage, it is very clear that each of our businesses would have been solidly at or above our long-term guidance. As a reminder, each of these figures are in constant currency. Exclude acquisitions until they annualize and also exclude COVID assays as well as COVID-related and discontinued products revenues. We are extremely proud of where we landed in both diagnostics and surgical, and we have high confidence that the concentrated impact on breast health will rebound strongly in 2023. Looking forward by division, as mentioned at the onset of this call, each of our businesses, including international, is expected to achieve low double-digit growth in fiscal 2023. in diagnostics. Powered by our vastly expanded Panther installed base, we expect low double-digit growth from the division in 2023. Bolstering growth for the division, we expect continued strong sequential growth from biotheranostics, as well as incremental contribution from MobiDiag internationally. Focusing on molecular diagnostics, Our growth thesis centers on more customers running more volume and more menu on our Panther systems. While we are still in the early days of ramping utilization, we are already seeing positive signs today. With our broad menu, we are well positioned to continue double-digit growth in our core molecular Panther business in 2023. To provide additional color, and shed more light on non-COVID Panther utilization. Pre-COVID, at the end of our fiscal 2019, about 20% of US customers were running at least four assays on their Panther systems. Fast forward to the close of Q4, now over 33% of US customers are running at least four assays. Nice improvement. and still future opportunity ahead. Moreover, last quarter we spoke to the fact that over 90% of all COVID customers were running at least one other non-COVID assay. Many of you asked, what about new customers acquired during COVID? As of the Q4 close, over 85% of new customers worldwide are running at least one other assay on their Panthers in addition to COVID. More impressive is that over 55% of these new Toho Logic customers are running at least two non-COVID assays on their Panthers, a strong signal of future utilization at new customer sites. While still early, We expect these positive utilization trends to continue in the quarters and years to come. Now, turning to surgical. We also expect surgical to deliver low double-digit growth in 2023. Consistent with the last two quarters of 2022, we believe MyoSure and Fluent plus Assessa and Boulder will lead the way. We expect the division's revenue to accelerate as we continue to integrate our acquired laparoscopic assets into the business and into the bags of our strong surgical sales force. Increased physician access and payer coverage for our laparoscopic portfolio should continue to improve over time and be a tailwind for growth. Longer term, our goal is to build both Assessa and Boulder into $100 million-plus surgical brands that will complement our market-leading NovoSure and MyoSure products. In breast health, we fully expect to exit 2023, achieving low double-digit top-line growth from the supply-constrained 2022 comps. We have confidence the worst of the chip shortage is behind us, As chip supply normalizes, as it should over the course of 2023, we expect our gantry business to return to strength. Frankly, as we work down the backlog, we have the opportunity to perform slightly above the historical gantry placement run rate as we exit the fiscal year. Even with the shortage of gantries we faced in 2022, we maintained our market-leading position in the U.S., grew our presence internationally, and have no reason to believe we are giving any ground to the competition. In fact, the backlog for our best-in-class gantries continues to grow, and we continue to receive orders at a healthy rate. We also understand capital budgets may face increased pressure given the macro environment. Despite this challenge, we remain confident in our ability to place gantries even if we enter a recession. The reality is that gantries tend to be at the lower price point of hospital capital spend. Gantries also represent both a value-driving opportunity for our customers and, more importantly, essential capital equipment for world-class patient care. Finally, our international business will continue to be a tailwind and a powerful lever of growth for each division. In 2022, our international business grew just north of 6% organically, excluding COVID, posting strong growth even with the chip headwind and constrained gantry supply. International is now nearly 30% of total revenue and poised to continue its growth trajectory. Looking forward to 2023, we are confident our international business, excluding the impact of COVID, will return to double-digit top-line growth and sustain the momentum created by our strong response to COVID and from our groundbreaking initiatives like the Hologic Global Women's Health Index and our Global Access Initiative. To conclude, at Hologic, we know we must center on our purpose to achieve our strong financial results. From our strong results, we will continue to drive patient education and access initiatives and continue to invest in our business. From our strategic investments, we will continue to deliver innovative, life-changing technologies. These technologies will power our perpetual cycle of reaching and helping more patients, all while delivering value and strong financial results for our shareholders. Before turning the call over to Carlene, let me close by saying that we are incredibly excited about where we have been and even more excited about where we're headed. And finally, from me personally and the rest of our global leadership team, we would like to thank and congratulate each and every one of our nearly 7,000 employees around the world for their dedication to our purpose and another incredible year at Whole Lodge. With that, let me hand the call over to Carlene.

Thank you, Steve, and good afternoon, everyone. We are very pleased to share our fourth quarter financial performance, capping off the end to an excellent fiscal year. These results highlight our current position of strength as well as tremendous opportunities that lie ahead. Growth in the period was powered by poor diagnostics and surgical businesses. as both franchises posted strong growth to close 2022. For a second quarter in a row, these businesses each showcased multiple growth catalysts. And as we look towards our fiscal 2023, we are excited to drive this momentum forward. In breast health, we are proud of the resilience of our teams. Although our CHIP allocations are still constrained, we believe that the worst of the division supply chain problems are in the rear view. As I will highlight in more detail when discussing our guidance for next year, we should see continuous improvement in our CHIP supply and thus gantry revenue throughout fiscal 2023. Finally, before moving on to our divisional results, it is important to reiterate that our balance sheet is a key point of strength as we head into fiscal 2023. our leverage rate remains far below our target range and our capital structure is pristine, providing our business incredible confidence and flexibility given the increasingly uncertain macro environment. Moving on, I will now provide more color on our financial results. In the fourth quarter, revenue and profitability once again significantly exceeded our estimates. As total revenue came in at $953.3 million, This result was nearly $100 million higher than the midpoint of our guidance, despite a greater-than-expected FX headwind of approximately $27 million in the quarter. And non-GAAP EPS was 82 cents, roughly 20 cents higher than the midpoint of our prior guide. Turning to our business's results, in diagnostics, global revenue of $520.9 million declined 35.6%, compared to the prior year. However, it is important to note that COVID testing revenue was elevated in our fiscal fourth quarter of 2021 due to the onset of the Delta variant. Therefore, a more accurate depiction of the state of the diagnostics business is to exclude COVID assay revenue, related ancillaries, and a small amount of revenue from discontinued products. When making these adjustments, we see that worldwide organic diagnostics revenue increased 11% in the quarter, a fantastic result. Within diagnostics, our molecular business was again extremely strong, growing more than 17% in the fourth quarter when excluding the impact of COVID-19. Growth in molecular was broad-based, driven by solid performance in our legacy STI portfolio, as well as continued success of both our vaginitis panel and our virology menu. These results, in conjunction with the exceptional performance of our molecular business last quarter, highlight strong traction in our base Panther business. As it relates to our COVID results, we generated $151 million of COVID assay revenue in the quarter, well exceeding our previous guidance. In terms of COVID assay revenue split by geography, domestic demand outpaced our expectations, with U.S. COVID assay revenue representing nearly 70% of total COVID testing revenue in the period. As expected, international demand continued to moderate. Rounding out diagnostics, our cytology and perinatal businesses increased 1.5% compared to the prior year. In breast health, global revenue of $271.1 million was down 16% as expected, primarily driven by chip supply shortages. For Q4, the impact to revenue from the chip supply shortage was in line with our prior guidance. In surgical, fourth quarter revenue of $133.3 million grew more than 11%. In excluding the Boulder acquisition, the business grew nearly 9%. We are very encouraged by another strong quarter from our surgical franchise, as the momentum we saw in our fiscal third quarter continued into our fiscal fourth quarter. The division's results were, again, led by Myoshore, Influent, with contributions from recent acquisitions. Lastly, in our skeletal business, revenue of $24 million increased approximately 4% compared to the prior year period. Now let's move on to the rest of the non-GAAP P&L for the fourth quarter. Gross margin of 62.5% was ahead of our forecast, driven by higher than expected COVID-19 testing volume and strong results in our base business in the period. Total operating expenses of $329.9 million in the fourth quarter decreased 6.6% compared to the prior year period. This decrease was driven by less spend within G&A and sales, partially offset by higher marketing and R&D expense. Below operating income, other income was an expense of $3.1 million, less than anticipated, primarily due to gains associated with our foreign exchange hedging activities. Finally, our tax rate in Q4 was 21% as expected. Putting these pieces together, Operating margin for Q4 came in at 27.9%, and net margin was 21.8%, both ahead of our previous estimates. Non-GAAP net income finished at $207.5 million, and non-GAAP EPS was 82 cents. Moving on from the P&L, cash flow from operations was $168.7 million in the fourth quarter. Based on a strong cash conversion, we had $2.3 billion of cash on our balance sheet, and our leverage ratio was 0.2 times. Our cash generation continues to be excellent, and our balance sheet remains a pillar of strength. Both positive attributes in any environment, but are especially valuable in periods of macro instability like we face today. And although we have continued to build cash, Our M&A teams in each division remain active, and our funnel of potential tuck-in opportunities is robust. As it relates to share repurchases, they remain an integral part of our capital deployment strategy moving forward. In the fourth quarter, we repurchased 2.5 million shares for $175 million. Further, on September 22nd, our Board of Directors approved a new five-year share repurchase authorization for up to $1 billion. Now let's move on to our updated non-GAAP financial guidance for the first quarter and full year fiscal 2023. As a reminder, our organic guidance excludes acquisition revenue until each deal annualizes. Therefore, our first quarter guidance only excludes Boulder revenues from our organic base. Boulder becomes organic in our fiscal second quarter of 2023. In the first quarter of fiscal 2023, we expect strong financial results again, with total revenue in the range of $940 to $990 million. For all of fiscal 2023, we expect total revenue in the range of $3.7 to $3.9 billion, significantly exceeding our pre-pandemic levels. This guidance assumes low double-digit organic revenue growth, excluding COVID, in each division for the full year fiscal 2023. To help with your constant currency modeling, we are assuming significant foreign exchange headwinds of slightly more than $30 million in the first quarter of 2023 and approximately $90 million for the full year. Please note that while we have taken a conservative view when considering the strength of the U.S. dollar, currency markets continue to be very unpredictable. In terms of our divisions, we expect breast health, surgical, and core diagnostics, excluding the impact of COVID, to grow low double digits for 2023. In diagnostics, we expect our molecular business to continue to drive growth. Our Panther continues to deliver incredible benefits for our customers through assay consolidation, scalability, and automation. In this environment where labor remains a scarce resource, our highly automated Panther is a tremendous value proposition. With nearly 20 assays on the menu, we are eager to capitalize on this great opportunity to increase utilization on our expanded install base. Finally, as Steve mentioned, we now have approximately 3,250 Panthers placed globally, placing more than 350 Panthers in fiscal 2022 and 49 units in Q4. Going forward, we will return to reporting panther placements on an annual cadence. Moving to breast health, we are excited for the year ahead. Our customer base is hungry for our best-in-class mammography instrumentation. We continue to expect chip supply to gradually improve throughout 2023, and therefore the division's revenue should increase throughout the year. And while we only have line-of-sight to allocations impacting revenue about two-quarters out, we remain optimistic that the gantry business will exit fiscal 2023 at or near normalized levels. As it relates to our guidance, we expect breast health revenue to be down low double digits in our first fiscal quarter of 2023, given that the prior year was not yet impacted by supply chain shortages. However, for the full year, our guidance assumes the breast health will grow low double digits, reflecting supply recovery as the year progresses. Finally, in surgical, we expect more broad-based growth than ever before. We anticipate MyoSure will continue to drive growth, but also expect notable lift from our fluent fluid management system, as well as our laparoscopic portfolio of Assessa and Boldor. In terms of COVID sales, consistent with prior messaging, we believe COVID could be one of our largest molecular assays over the long term. Having said that, Given how quickly we've seen the pandemic change course, we believe it is still too early to accurately forecast an endemic state. As a result, we expect COVID assay sales to be $75 million in the first quarter of 2023 and $150 million for the full year. COVID-related items, inclusive of a small amount of discontinued product revenue, are expected to be approximately $35 million in the first quarter and $130 million for the full year. Moving down the P&L, for the full year, we forecast our non-GAAP gross margin percentage in the low 60s and our non-GAAP operating margin percentage to be approximately 30%. Please note that we anticipate our COVID revenue, which is margin accretive, will be front-end loaded to the first half of 2023 to coincide with the fall and winter seasons in the U.S. In addition, we have again incorporated elevated inflationary pressures into our guidance as it relates to input costs We foresee these higher costs persisting throughout 2023. In terms of operating expenses, we expect spending to be down compared to the prior year. While we will continue to invest in our business, marketing spend will be lower in fiscal 2023 as our fiscal 2022 had several large one-time expense items, such as our Super Bowl commercial and higher spending for initiatives such as our WTA partnership. Below operating income, we expect other expenses net to be around $20 million a quarter. Our guidance is based on an effective tax rate of approximately 19%, and diluted shares outstanding are expected to be approximately $252 million for the full year. All this nets out to expected non-GAAP EPS of $0.80 to $0.90 in the first quarter, and $3.30 to $3.60 for the year. To conclude, let me wrap up by saying that our strong fourth quarter results once again exceeded our guidance despite the various macro headwinds. Performance was driven by exceptional growth in our molecular diagnostics and surgical businesses, which we expect to continue. And while the future macro outlook remains uncertain, with a natural hedge to future COVID uncertainties and a fortress balance sheet, we are well positioned to continue strong results in our fiscal 2023. With that, We ask the operator to open the call for questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. And if you're using speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We ask that you please limit yourself to one question with one follow-up question. Again, star 1 for questions. And we will go to our first question from Patrick Donnelly with Citi.

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

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

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

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

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

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

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

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

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

Got it. Thank you.

And we'll go to our next question from Anthony Petrone with Mizzou's group.

Thanks and congratulations on a strong finish to the year here, and good to see at least some visibility into calendar 23, just given the headwinds. I guess I'm going to start on COVID testing and just the guidance that was issued here, and then a follow-up on broader diagnostics. Understanding that it's still tough to forecast pandemic ebbs and flows, but maybe perhaps one of the things that is sort of becoming evident here is the tender patterns, whether it be from large lab entities or even governmental contracts. And so when you think into 2023, is there any incremental visibility that you can point to as it relates to just larger tenders, whether it be U.S., O.U.S., at the hospital level or at the government level, and then I'll have a follow-up on broader diagnostics. Thanks.

Yeah, I wouldn't say we've got any more visibility. We've been very close to our customers all along, Anthony, in terms of both international, you know, from the, you know, the ministries of health deciding things right down to the regional authorities within various countries, and the same within every one of our customers in the U.S., both you know, the main labs as well as the hospitals. So I think we continue to stay close and, you know, feel very good about our position. And the way we continue to think about COVID is, you know, we're going to deliver whatever the marketplace needs. We're not going to get over our skis in terms of forecasting it financially.

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

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

Thank you. I'll hop back in. Great.

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

Thank you. Good afternoon.

Jack, 8-0.

And the Phillies.

Yeah.

Oh, you're probably not going to do that, though, right?

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

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

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

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

Thank you, Carlene.

Enjoy trick-or-treating.

Appreciate it.

And we'll move to our next question from Juanita Sota of SDP Security.

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

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

And we only gave that range about 15 months ago, so I feel like we don't need to change it at this point.

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

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

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

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

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

Yeah, and international continues to be a bigger piece of that performance as well as what gives us confidence in that outlook.

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

Yeah, sure. The build-out of the lab in our building here in San Diego is going well. That will be happening in the next couple of quarters. And we're adding more automation It'll really be kicking in in terms of particularly the ordering system really early next calendar year. So, you know, that team just continues to crush it since they've been part of the Hologic team. We were just with all of their salespeople last week, and they're feeling so supported and excited to be a part of Hologic. And it's part of that classic thing of what we're trying to do is we bring these technologies in and are then able to put additional investment in them to accelerate the growth rate. It's what we've done with Boulder, what we're doing with Assessa, what we're doing with the biotheranostics team, and just feeling great about these opportunities.

And we'll hear next from Mr. Cheat with Cowan and Company.

Hey, good afternoon. Congrats on a very strong year. First one, if we just think about the panther and sulfate nearly doubling since pre-pandemic times, we have an expanding adoption of non-COVID menu items. Is there a logical range or level where the non-COVID panther acid gross margins have settled, or maybe even in broader terms, how the go-forward molecular diagnostics gross margins have evolved? since pre-pandemic times?

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

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

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

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

And we'll go to our next question from Tim Daly with Wells Fargo.

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

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

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

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

Thank you. We'll move next to Derek, everyone, with Bank of America.

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

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

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

And would you use 19% as a go-forward rate, Colleen?

Yes, at this point I would, unless there's a change in the federal statutory rate. I think 19% is good to use.

Thank you, Derek.

And we'll go next to Casey Woodring with JP Morgan.

Hi, guys. Thanks for fitting me in. I guess just so last time we spoke, I think you guys were pointing to a pre-COVID operating margin of 31.5 from 2Q20 as just a good place to start for 23 as COVID would maybe balance out some of the supply chain headwinds and breaths. So curious just on this 30% number here, can you maybe quantify what the basis point headwind is from the supply chain dynamics?

the year and then maybe could you also quantify how much lower the international businesses operating margin is in relation to the total companies number thank you yeah so i think from the supply chain from the higher cost it's roughly you know 200 to 250 basis points on the operating margin that yes we have forecasted would persist through 2023 you know we have we have talked about international margins being lower than the us but we have not disclosed the difference But I think certainly there is discussions. Our teams are focused on improving their leverage as we move forward.

And thank you, everyone. That concludes today's question and answer session. And this now concludes the LOGIC's fourth quarter fiscal 2022 earnings conference call. Have a good evening.