Hologic, Inc.

Q3 2024 Earnings Conference Call

7/29/2024

spk14: Good afternoon and welcome to the Hologic's third quarter fiscal 2024 earnings conference call. My name is Cynthia and I am your operator for today's call. Today's conference is being recorded. All lines have been placed on mute. I would now like to introduce Ryan Simon, Vice President Investor Relations to begin the call. Please go ahead.
spk18: Thank you, Cynthia. Good afternoon and thank you for joining Hologic's third quarter fiscal 2024 earnings call. With me today are Steve McMillan, the company's chairman, president, and chief executive officer, Carleen Overton, our chief financial officer, and Essex Mitchell, our chief operating officer. Our third 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 on our website for the next 30 days. Before we begin, we would like to inform you that certain statements we make today will be forward-looking. These statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied. Such factors include those referenced in the Safe Harbor Statement included in our earnings release and SEC filing. Also during this call, we will discuss certain non-GAAP financial measures. A reconciliation to GAAP can be found in our earnings release. Two of these non-GAAP measures are, one, organic revenue, which we define as revenue excluding divested businesses and revenue from acquired businesses owned by Hologic for less than one year. And two, organic revenue excluding COVID-19, which further excludes COVID-19 assay revenue, other revenue related to COVID-19, and sales from discontinued products and diagnostics. Finally, any percentage changes we discuss will be on a -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, Hologic's CEO.
spk04: Thank you, Ryan, and good afternoon, everyone. We are pleased to discuss our financial results for the third quarter of fiscal 2024. Total revenue for Q3 was $1.01 billion, and non-GAAP earnings per share was $1.06, both again above the high end of our guidance. Importantly, we are excited that with COVID now mostly in the rearview mirror, our reported revenue has returned to growth. Our strong performance goes beyond the top line and shines throughout the P&L. For the quarter, we delivered a solid .2% operating margin and deployed $100 million during the quarter to repurchase 1.4 million shares. All in, the $1.06 in EPS translates to 14% growth on the bottom line, a very strong result, and also very encouraging as we flip the script now to reported revenue and EPS growth again. Looking back to the start of our fiscal year, we knew there were still certain questions on some investors' minds about the true strength and durability of our underlying business. These were questions that surfaced as we exited a period of uncertainty created by the pandemic followed by the global chip shortage. While we and many long-term investors understood the power and potential of our transformed, much stronger business, we acknowledged that these unanswered questions created barriers for some of those newer to whole logic. As usual, rather than rely on words, we knew it would be our performance that would emphatically answer these questions and clearly demonstrate that we are indeed a bigger, faster, stronger company than before the pandemic. Our third quarter performance should make this very clear. In Q3, we bent the top line curve to green after 11 quarters of COVID-driven declines. Our top line reported revenue returned to growth at .1% versus last year. Organic ex-COVID, we delivered healthy .8% growth. And we achieved these strong results on top of exceptionally strong .4% organic ex-COVID growth last year. Turning to our themes for today. First, we would like to recap our performance since the start of the fiscal year by answering five key questions which were on many investors' minds. Second, we'll pass the call over to Essex who will highlight certain overlooked elements of our broad-based international growth as well as provide an update on M&A activities. On to our first theme, the top five questions which have been out there. One, will Panther utilization continue to grow? Two, will breast health return to full strength and maintain market leadership? Three, will Hologic return to delivering industry-leading 30% plus operating margins? Four, with a $2.4 billion cash position, will Hologic be successful in deploying capital? And finally, five, can Hologic maintain its cervical cancer screening leadership if USPSTF issues an adverse cervical cancer screening guideline? The short answer to all five is, without a doubt, yes. We will continue to thrive. From here, we'll take each question in order. First, our molecular diagnostics business continues to deliver and is so much bigger and stronger than it was prior to the pandemic. Our global installed base of Panthers now exceeds 3,300 and is rock solid. More importantly, our customers continue to praise and utilize our platform. Panthers' superior workflow, automation, ease of use, and constantly expanding menu continues to drive demand and differentiate us in a competitive environment. In quite simple terms, revenue per Panther and number of assays run per Panther continue to grow, with the simple metric being our molecular diagnostics growth rate. In Q3, our molecular business excluding COVID grew .5% on top of .9% growth in the prior year period. We've now delivered high single to double digit performance in 13 of the last 15 quarters. Quarter after quarter, year over year, we continue to deliver by expanding utilization and our outlook remains bright. Second, our breast health results continue to demonstrate a profound strength in breast cancer screening. Our gantry business is well on pace to fully recover from the chip shortage and we continue to maintain our leadership position. Our supply chain is much improved and now fortified from successfully navigating the chip shortage experience. Over a decade from the initial launch of our breakthrough 3D mammography, customers still view WholeLogic as leaders in performance, including image quality and scan time, leaders in service, and leaders in customer satisfaction. Letting the numbers speak for themselves, in Q3 we delivered .1% growth in breast health on top of .5% growth in the prior year period. The business is more diverse than ever and continuing to add in even more recurring revenue with our endomagnetic acquisition. Third, operating margins. As Carlene will share in more detail later, we delivered a .2% operating margin in our Q3, a 230 basis point improvement from the prior year period, and an 80 basis point improvement sequentially. At the highest level, we are now back to delivering pre-COVID margins, even with our international business being over 40% larger than it was in 2019. Consistent with our expectations, we recaptured our strong sector margin profile by maintaining focus on operational efficiency and moving past the amortization of higher-priced chips purchased during the chip shortage. Fourth, on capital deployment, our balance sheet and cash flow remain incredibly robust. As announced last week, we recently closed the endomagnetics acquisition, a transaction that we view as straight down the fairway in terms of execution within our broader M&A strategy. Overall, the deal is a prudent investment of capital that we expect to add revenue, margin and EPS accretion over time. Together we have an incredible opportunity to improve interventional breast care for women. On top of closing the endomag deal, we continue to demonstrate that we are willing to bet on ourselves and repurchase shares. As a baseline, we are looking to offset dilution from our internal share plans, and from there, with our strong cash position, we look to layer on additional share repurchases. Fiscal year to date, we have repurchased 10.5 million shares for $750 million. We plan to continue on our capital allocation path and fully intend for our deployment strategy to include both M&A and share repurchases. And finally, before turning the call over to Essex, USPSTF. As we've done for nearly 30 years in cervical cancer screening, no matter the direction the USPSTF may take for its cervical cancer guidelines, we will navigate the landscape and remain strong. Overall, we achieved our strong results by maintaining our long-term focus and commitment to women's health. As we shared on our Q2 call, the strength of whole logic lies in the sum of our parts. We expect our results to continue to answer the call and speak for themselves while we continue to demonstrate our durable strength quarter after quarter, year over year. With that, I'll turn the call over to Essex to share insight on international growth drivers and more on endomagnetics. Thank
spk16: you, Steve. Overall, our third quarter performance speaks to the successful implementation of our growth strategy, building multiple durable growth drivers into our franchises around the world. Today, we'd like to quickly highlight three specific growth drivers from international diagnostics and surgicals. These drivers are sometimes overlooked because of their strong market shares in the US. However, we still have a great growth opportunity outside of the United States. That said, internationally, molecular STI testing, cytology, and mileshore all delivered nice growth in the quarter. This underscores the power of the sum of our parts and reinforces our opportunity and ability to grow by expanding markets. Let's start with STI testing. The largest category in our global molecular diagnostics business. In the US, STI testing is our largest category and we have earned and maintained leadership for years. Internationally, we are still in the early days of leveraging our expanded Panther install base. We have a sizable opportunity to increase our share not only in STI testing but across all the categories where we offer testing. We have a long runway ahead of us as we continue to build the new markets we've entered. With several irons in the fire, we expect to layer in more contribution over time driven by more assays and more volume on our Panther systems. The same can be said for cytology and cervical cancer screening. In some regions of the world, we are bringing liquid-based PET tests to the market for the first time and subsequently growing the market. While overshadowed by the US revenue, international cytology like STI testing has meaningful revenue that moves the needle over time. Shifting to surgical and mileshore. While mileshore is still growing strong in the US, the mileshore international growth rate is even higher. This is possible because international markets are vastly under-penetrated and demand remains high for our minimally invasive option for treating uterine polyps and fibroids. In many regions, we are the first and only minimally invasive alternative to a complete hysterectomy and it's our belief that all women should have access to this minimally invasive option. All in, while it is clear that certain products across our portfolio more established in the US, what is not as obvious is that there are meaningful market expansion opportunities for these same products internationally. As leaders in these areas and champions for women's health, we are well positioned to capitalize on this global growth opportunity. And finally, before turning the call over to Carlene, I'd like to provide more detail on endomagnetics. As Steve mentioned, we are pleased to welcome the endomag team to Hologic. With 150 employees strong and with seasoned management and R&D capabilities, the company has done an incredible job growing the business to what it has become today. That includes 500,000 plus women treated and adoption by over 1,300 hospitals in over 45 countries. Endomag products include MagSeed markers for wireless lesion localization, MagTrace for lymphatic tracing, and Centimag, a simple, easy to use handheld device to visualize both. The endomag portfolio enables us to provide robust and differentiated offerings to meet demand in the growing interventional breast surgery market. From an investment perspective, the business directly aligns with our breast health franchise and has proven on-market products that are well accepted into clinical workflow. With our established deep-rooted sales channel, we expect to amplify revenue growth well above our corporate average and also expect both margin and earnings accretion over time. Overall, we are excited to join forces and determined to go even further together. Now, I'll turn the call over to Carleen.
spk15: Thank you, Essex, and good afternoon, everyone. In my statements today, I will provide an overview of our revenue results, walk down our income statement showcasing strong performance, touch on certain key financial metrics, and finish with our guidance for the fourth quarter in full fiscal 2024. Our third quarter financial results were robust, once again exceeding our expectations on revenue and profitability, building on the momentum from the first half of the year. To recap high-level results, total revenue came in at $1.11 billion, beating the midpoint of our prior guidance by $11 million. We delivered .1% revenue growth and organic revenue growth of .8% excluding COVID. In addition, non-GAAP earnings per share were $1.06, growing 14% and exceeding the high end of our prior guidance by 1 cent. Before moving on to our franchise results, we want to highlight the continued strength of our balance sheet. In Q3, we generated over $400 million in cash from operating activities, ending the quarter with $2.4 billion on the balance sheet, deployed $100 million on share repurchases, and announced the acquisition of endomagnetics. We continue to demonstrate that our strong cash balance, leverage ratio well below our target range, and the ability to generate cash consistently provided us flexibility to fund innovation and pull both levers of our capital allocation strategy, tuck in M&A and share repurchases at the same time. Moving forward, we still have significant firepower to continue to deploy capital diligently as opportunities arise. Turning to our franchise results, in diagnostics, third quarter revenue of $440.8 million grew 0.7%, excluding COVID assay and related revenue, worldwide diagnostics grew by 6%. Within diagnostics, molecular diagnostics continues to contribute significantly, growing by 10.5%, excluding COVID. We continue to see underlying strength in BVCV-TV, which continues its outstanding growth trajectory and has become our second largest assay globally. Additionally, as expected, non-COVID respiratory assay sales declined sequentially from Q2 in line with the flu season. However, year over year growth remains strong, highlighting the continued adoption of our four-plex COVID, Flu A, Flu B, and RSB assay. And finally, biotherapeutics continues to be a credence growth for our molecular business. Rounding out diagnostics, psychology and perinatal declined .9% globally, with U.S. decline partially offset by solid international growth, as Essex highlighted earlier. As a reminder, in fiscal 3-23, customers built up psychology inventory levels in the U.S. due to third-party shipping constraints in Q2-23, leading to elevated sales in the prior year period. While the psychology business has largely returned to normal, year over year growth rates were impacted. Looking ahead, we expect flat to modest growth in the psychology business. Moving on to breast health, total third-quarter revenue of $385 million increased by .1% or .2% when excluding SSI. Within breast health, growth was primarily driven by breast imaging, with solid domestic and international results, contributing .2% and .1% growth, respectively, excluding SSI. Third-quarter performance was driven largely by increased gantry shipments and robust service revenue growth that continues to contribute meaningfully. Continuing next to surgical, third-quarter revenue of $166.6 million increased 6.2%. Surgical growth continues to be fueled by Myoshore and their related Fluent Fluid Management System. A laparoscopy business, which swathed smaller in dollars, grew significantly in the quarter and continues to progress nicely. Additionally, international continues to be a bright spot, growing just under 20% in the quarter. Finally, in our skeletal business, third-quarter revenue of $19 million declined .7% due to lower horizon decks of shipments resulting from a temporary stop ship related to a non-conformance issue. We are working with our suppliers to resolve this situation and expect to resume shipments during the first quarter of fiscal 2025. Now let's move on to the rest of the non-GAAP P&L for the third quarter. Growth margin was .1% for the quarter, a 30 basis points improvement from the prior year period, even though COVID assay revenue declines continue to be a headwind. Additionally, growth margin expanded 40 basis points sequentially from fiscal Q2, primarily driven by favorable product mix. Total operating expenses of $302.8 million in the third quarter decreased by 3.5%. This decrease was driven primarily by elimination of expenses related to the divested SSI businesses. Operating margin was .2% for the third quarter. The -over-year increase of 230 basis points was driven by top-line growth, expanding gross margins and lower operating expenses. Sequentially, as expected, operating margins expanded 80 basis points from Q2, largely from lower operating expenses and higher gross margin in Q3. For low operating income, other income net represented an expense of nearly $3 million in our fiscal third quarter. Interest income is lower due to lower cash balances from the significant share repurchases that have completed throughout the fiscal year. Additionally, interest expense is up due to higher interest rates. Finally, our tax rate in Q3 was 19.75%, as expected. Now let's move on to our non-GAAP financial guidance for the fourth quarter and full year fiscal 2024. For Q4 2024, we are expecting total revenue in the range of $970 to $985 million, an EPS of 97 cents to $1.04. For the full year fiscal 2024, our guidance assumes revenue of $4.012 to $4.027 billion, an EPS of $4.04 to $4.11. Unpacking this guidance, we lowered the midpoint of our prior revenue guidance by $5 million. This represents about a $20 million headwind related to the temporary skeletal health stop shift previously mentioned. We are partially offset by our strong performance in Q3 and the inclusion of an estimated $4 to $5 million of revenue from endomagnetics now that we have closed the acquisition. With respect to foreign exchange, we are assuming Q4 will have a headwind of about $3 million. For the full year, we are now expecting a slight tailwind of about $3 million. Turning to our franchises, we expect diagnostics, breast health, and surgicals to grow mid-single digits in Q4 and full year fiscal 2024, excluding the impact of COVID. As a reminder, fiscal 2024 has four fewer selling days compared to fiscal 2023, which we estimated to be a headwind of more than 100 basis points for the full year. Starting with diagnostics, in Q4 we expect molecular diagnostics business to drive high single digit growth, excluding COVID, as customers continue to adopt and drive utilization of our broad panther menu. In cytology and perinatal, we expect growth in the mid-single digits for the fourth quarter. Sequentially, however, we expect the business to perform flat to Q3. In Q4 last year, sales dropped below typical ordering patterns due to the inventory buildup in Q3 of 2023. We expect cytology and perinatal comps to stabilize in fiscal year 2025. Closing out on non-COVID diagnostics, we expect blood revenue of approximately $6 million in Q4 and $20 million for the year. In terms of COVID revenue, we expect COVID assay sales to be about $7 million in Q4-24 and about $70 million for the full year. COVID-related items are expected to be about $25 million in the fourth quarter and approximately $105 million for the full year. Moving on to breast health, we remain on pace to grow the business mid-single digits for the fourth quarter. We expect to see solid gantry placements in Q4, continuing the steady performance we have delivered year to date. The demand for our portfolio products and services remains strong, and we have solid visibility into gantry orders. Further, our confidence in delivering more gantries than last year remains high. We are successfully managing resource availability among both our install teams and our customer as customers balance the need to meet elevated demand for screening and staffing constraints. Finally, in surgical, we anticipate Q4 revenue to grow mid-single digits. We expect the growth to continue to come from myoshore affluent in our laparoscopy division business. Moving next to margins, our guidance continues to assume a cadence of improvements moving into Q4. For both gross margin and operating margin, we remain on pace to exit the fiscal year in the low 60s for gross margin. Our guidance also assumes Q4 operating margins in the low 30s, and we are on pace to finish fiscal 24 between 30 to 31%, which includes the stub period of endomagnetics. For low operating income, we estimate fiscal 24 other income net to be at the expense of approximately $8 million in Q4 and $11 million for the full year. Our guidance is based on an annual effective tax rate of approximately .75% and diluted shares outstanding are expected to be approximately $238 million for the full year. To conclude, Q3 was another strong quarter for Hologic. We continue to deliver robust growth and quality earnings. As we approach the end of fiscal year 2024 and look ahead to 2025, we are excited by the performance across all our franchises and the additional strength provided by a pristine balance sheet. As always, our stakeholders can count on us to deliver while also advancing the state of women's health around the world. With that, we ask the operator to open the call for questions.
spk14: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow the signal to reach our equipment. We ask that you please limit yourself to one question and one follow-up question. Again, press star 1 to ask a question, and we'll pause for just a moment to assemble the queue. We will take our first question from Patrick Donnelly with Citi. Please go ahead.
spk03: Hey, guys. Thank you for taking the questions.
spk06: Steve, probably the biggest inbound is just on the 4Q guide. I'm sure Karleen talked a little bit there. It seems like a lot of it is around the skeletal piece. I guess just when you think about the core business going into 4Q, has anything changed relative to a few months ago? Has anything gotten worse? It seems like it's all skeletal, but I just want to talk through the core business and how you're feeling about it in 4Q here.
spk04: You nailed it, Patrick. It is. It's probably a little alarming because of the skeletal piece, but the three core businesses are all going great, and it is completely a reflection of that. We just had a little hiccup with a supplier issue in our skeletal business. It is our non-core, but for diagnostics, breast health, surgical, we are feeling really, really good.
spk15: Patrick, just to add a final point to it. Of the $20 million headwind, about $15 million is related to the fourth quarter specifically.
spk06: Okay. Then, Karleen, maybe one of the questions that we get broadly is on the margin profiles. We work our way forward here. I think there's some fear that you guys could be a little more heading toward the peak margin. Can you talk about, I guess, the 4Q piece, the moving pieces? We talked a little bit about the exit right there and just how you think about the build going forward when you think about the algorithm, the keys to getting that margin continuing to expand as we go forward and just broadly how to think about the jumping off point as we look for 2025. Thanks so much.
spk15: Yeah, I think we'd like to ground people in the pre-pandemic operating margins of 31.5%. I think as you see, as we exit Q4, we'll be right in that range and really thinking about the fact that we've added a lot of revenue growth drivers that have a lower operating margin profile than the legacy business, so feel really good about achieving that as we exit 24. For the full year, 24 will be a little bit below that, as we said in our prepared remarks between 30 to 31, but I have good confidence that as we look to 25, we will be squarely for the full year at those pre-pandemic levels. Just to walk through some of the components, again, as I mentioned, the recent acquisitions will have lower margin profiles, the international business has a lower margin profile, and we're still working through some of the higher supply chain costs primarily related to chips as well as we integrate certain facilities, we have double costs. We'll see those primarily work through over the course of 25.
spk14: We will take our next question from Tejas Savant with Morgan Stanley. Please go ahead.
spk17: Hey guys, thanks for the time here. Karleen, I just want to follow up on Patrick's line of questioning there and a second question. Can you just help us think through sort of underlying algorithm for EPS growth, 5 to 7 for the top line, presumably it stays intact for next year as well. As you think through the different buckets here between the margin expansion piece, which you said it sounds like you're on track to achieve, but then you've also got repos, and then you've got a little bit of dilution from potential tuck-ins, including ones you might do in the next 12 months or so. So as we think about those multiple pieces in the context of EPS growth next year, is sort of high single digit essentially a fair way to think about it, or could it be a little bit better than that?
spk15: Yeah, so first of all, Tejas, I would say that we're not giving guidance for 2025 at this point. We're still working through our budget cycle and we'll be doing that totality in the November call. What I would say is at a high level when we think about earnings, yes, we want to grow earnings faster than revenue, so again that 5 to 7 would lead you to the high single digit, low double digit earnings growth. And we do think about that as balance using the whole P&L, not just margin expansion, but share repurchase and potentially some favorability on the tax line as well. But again, we will be giving that full guidance on the November call.
spk17: Got it, fair enough. And then a quick follow-up on some of the recent tuck-ins here. I'll start with Boulder, actually, perhaps for you, Steve. Could you just give us an update on where things stand on expanding from the pediatric setting there to the OB-GYN channel? Obviously, you've flagged a lot more lab procedures there on the OB-GYN side. And then similar sort of question, you know, early days on Endomag, but how should we be thinking about the status quo in that market that Endomag can really help this place, particularly in the U.S. where it's under-penetrated? And what's the feedback been like from physicians from any early conversations ahead of DOCOS?
spk16: Great, we'll kick that right to ASICS to handle. Great, yeah, so I'll start with Boulder. So we're seeing great success expanding outside of the pediatric channel. I would say our fastest growing area is actually in thoracic with the Reveal product. So we're seeing nice. It's an open product. We're getting to new customers, really honing in and focusing similar to our strategies that we've utilized with gynecology where we focus on a specialty, really understand our differentiated position with the product, and expand from there. So feel really good about success thus far with Boulder. And still quite a bit of meat on the bone left, I would say, with pediatrics as we look to focus there moving forward. With regard to Endomag, very early days, I would say we just closed. I feel really great about that team, excited to have them as part of the Hologic family and know that we'll do great things together. As far as feedback from customers, don't have anything to comment on that right now, but feel really good about the prospect of this business, especially with the strong channel and relationships that we have today.
spk14: We will take our next question from Jack Meehan with Neffron Research. Please go ahead.
spk07: Thank you. Good afternoon. I wanted to focus on the diagnostic business here, starting with Panthers. So I think I heard over 3,300 in the field now. So it feels like that stepped up a little bit. You know, pre-COVID, you were placing about 50 a quarter. I was wondering if you felt like, or you see any signs you might be getting back to those levels, or still a bit of a COVID hangover on placement?
spk04: Yeah, still lower on the placements. You know, clearly this chapter of our growth, Jack, is expanding the utilization for Panther, but we are still seeing them modestly moving up, which we consider to be good. But yeah, not back at that pre-COVID level.
spk07: Got it. Okay. And then on BVCV-TV, I think I also heard second largest assay globally, would that put it in the quarter, kind of a floor, $40 million or so? And would you care to wager where this could land in terms of overall size at some point? What's driving the growth?
spk15: Yeah, I think that's a fair estimate of where it is, and I think we would, I would be uncomfortable saying that it could be our largest assay someday. So to put it in perspective, there's still room for growth there.
spk03: Great. Okay, operator, next question.
spk14: We will take our next question from Vijay Kumar with Evercore. Please go ahead.
spk11: Hi, Steve. Good afternoon. Congratulations, my friend, and thanks for taking my question. I guess my first one on this skeletal, you know, ship hold issue, how, is that in the backlog, Steve? So could this now be a tailwind for fiscal 25 or are those more like a lost revenues?
spk04: It could potentially be a little bit of a, it won't be lost revenue. I think we feel pretty good. There'll be, you know, a couple of tiny ones, but overall, I think we feel pretty good. So it might be a modest tailwind for next year, but we don't want to get too far ahead of ourselves. But we're fixing it and feel very good. We'll be back in place by the beginning
spk20: of 25.
spk11: That's helpful, Steve. And Carlene, maybe one for you on that margins here for Q4. Did that expectations change versus prior and mostly because of the deal and perhaps revenue pushout? If so, what is the underlying jump off point? And, you know, is that a relevant number to be thinking of for to be modeling the company?
spk15: Yes, I think as I talked about, you know, we'll end the full year between 30 to 31, which would give you something higher than 31 in the fourth quarter. I would say I wouldn't, you know, from an annualized basis, I'd jump off the midpoint of the 30 to 31 and think that we're going to get back to probably that 31 and a half range. But there is some seasonality to margins and typically Q1 is our lowest operating margin quarter. So I wouldn't like spring off a Q4 to a higher number in Q1.
spk14: We will take our next question from Anthony Patrone with Mizzouho Group. Please go ahead.
spk19: Thanks and congrats on the quarter here. Maybe I'll just throw two out there quick. Just on cytology testing, I know the comps were a little bit bifurcated the last two quarters, but the business itself just generally has been a little bit lumpy. So maybe just what you're seeing there, do you think there's any changing patterns ahead of the preventative task force rule? You also have the upgrade cycle with the digital platform. So just a little bit on the lumpiness in cytology. And then the second one on panther utilization, can you actually provide the range of assays used in the post pandemic systems? I know the average is two. But where does that range sit? What is the upper end of that range and what is the lower end of that range? Where could it trend over time? Thanks.
spk04: If we take the first part of that, the first part is we are not seeing any shift in the market in terms of cytology usage, Anthony. It is really it's more because we changed a third party vendor last year. It kind of made a little bit of lumpiness between the Q2, the Q3 last year comparisons, but the underlying is very consistent. And the initial stages are digital cytology, which is further ahead in Europe, are looking very good. And we're in the early stages of some very positive consumer or I'm sorry, customer acceptance of that in the United States. So I think we continue to feel good about our cytology business on the panther utilization. Yeah,
spk15: so Anthony, on the panther utilization on the new clusters we talked about, over 55 percent are running two or more assays. But when we look at U.S. in total, that we look at over a third of our customers are running four or more assays. So I would kind of anchor into that four, four to six is the likely target range. That's over a third at the end of 23 compared to just under 20 percent at the end of 19. So you can see that growth that we're able to achieve as we drive utilization on the panthers that are out there.
spk03: Thank you. Great, thanks.
spk14: We will take our next question from Mike Mattson with Needham and Company. Please go ahead.
spk08: Yeah, thanks. So I want to ask one on the psychology business, OUS. Sounds like that is a growth driver for you guys. But just want to kind of understand what's happening in those markets and what's driving the growth and kind of what you're seeing there with PAP versus primary HPV testing in the different regions of the world.
spk04: Yeah, we're seeing some nice acceptance to our digital psychology. One of the challenges outside the United States is not as many psychologists around. And so the ability to help on the workflow is a big win. And so rolling out our digital, our digital psychology, the genius psychology there is good. And we continue to work with guidelines. You know, I think the hidden piece that's been missed for everything that we did in the pandemic to provide the COVID tests is we establish much stronger relationships across the world with ministries of health and everything else. And we're having more dialogues really that's going to benefit so many of our businesses, including our surgical businesses, our breast interventional business, and really just shifting guidelines. And so there's more discussions. You know, Germany's gone to a co-testing model in cytology and HPV over the last few years that we're benefiting from and working those those angles really country by country.
spk08: Okay, thanks. And then I think I heard Carlene call out tax rate as a kind of opportunity over the next few years. So, you know, your tax rate is a little bit on the higher side relative to some larger companies. So can you maybe elaborate on that?
spk15: Yeah, I think as we look at our operations and supply chain and even more specifically continue to leverage, leverage Costa Rica for manufacturing, especially as we acquire new companies and optimize their supply chain, we try to leverage those points to contribute to favorability on the tax rate.
spk14: We will take our next question from Casey Woodring with JP Morgan. Please go ahead.
spk17: Great. Thank you for taking my questions.
spk20: So I want to talk about the strong molecular growth in the quarter here. That's 10 and a half percent number. You know, one of the larger players in the molecular space that fits more in the point of care market has been seeing strong growth rates on the non respiratory side as well now for several quarters in a row. You know, this competitors caught up sexual health and virology specifically as areas of growth. You know, just given your menu overlap, can you help frame up how the panthers coexisting in the market now with some of these growing point of care platforms and just your way to thoughts around any potential share shifts one way or the other in that market? And then I will follow up. Thanks.
spk05: Yeah, I think we continue to feel really, really good that
spk04: most of the screening is asymptomatic. It's standard testing that the economics are still going to work very well for the labs. And so I think we love our position and, you know, there's always going to be people punching around on the edges that will help expand the market probably as well. But we feel really good about where we're going.
spk20: That's helpful and then just, you know, my follow up here quickly on that 5 to 7% top line algorithm. You previously talked about surgical is probably at the higher end of that range breast on the lower and diagnostic somewhere in the middle when including cytology. So, just is that the right way to think about 2025 on a next code basis? Maybe just walk through the moving parts there as you see him for next year. Thank you.
spk04: Yeah, probably
spk05: not
spk04: quite ready to give individual line forecast for 2025, but I think we feel good overall as to, you know, any given year, any given quarter, any given business, maybe, you know, slightly above slightly below. But I think we like where we're headed, so we'll give you more of that detail, Casey, when we guide in November. Thank you.
spk14: We'll take our next question from Michael Riskin with Bank of America. Please go ahead.
spk09: Thanks for taking the question, guys. Just a couple kind of some loose ends for me going back to the skeletal. The stop ship, I think you talked about confidence that that's getting resolved and fiscal one queue. I think you talk about 15 million in the fourth quarter. Just any sense of timing when in the quarter you're going to have it resolved and just sort of if you could frame the range of outcomes there, you know, could this extend a little bit longer? Do you really have good line of sight on the resolution?
spk04: We do have good line of sight. Would not expect it to go out, you know, far into Q1 of 25. So you should be able to count on it again. We'll guide by that point, but we fully expect to be back in the market by then.
spk09: Okay. Okay. And on the capital deployment side, you talked about balance sheet, strong free cash flow year to date. And then obviously you've got both share buybacks and M&A kind of going on at the same time. Just remind us sort of how you frame those two options right now. Obviously, just got a couple deals under your belt recently, but still in a good position. Just going forward, priorities between the two and how you see that trading off.
spk15: Yeah, certainly, you know, as we look at our cash flow generation with a very strong balance sheet and a, you know, very competitive credit agreement, our focus is on deploying that free cash flow as well as the cash that we've built on the balance sheet at this point in time. The priority continues to be tuck in M&A, you know, acquisitions that give us confidence in our ability to grow our revenue, hopefully, to be aggritive to our current growth rate. And then it would be share repurchase, as we've stated in our remarks at a minimum, to manage dilution from our equity plans and then opportunistic as we seek disconnect and valuation in the market.
spk14: We'll take our next question from Navantai with BMP Peribah. Please go ahead.
spk01: Hi, thanks for taking my question. I wanted to ask about the M&A pipeline with your two and a half billion cash available for acquisition. What are you seeing at the moment? And then also, if you could discuss the innovation, including the next generation gantry system in breast health and AI. Thank you.
spk05: I think on the M&A front, we obviously were very pleased we closed the
spk04: endomag deal last week. We continue to look at other deals in that size, a little bit bigger or whatever. But, you know, again, you can only make them when they're available. As we said last quarter, we'd love to do kind of one endomag every quarter. It doesn't always work out that way. So we're in this great position of being able to be disciplined buyers as we continue to watch things shake out and also being able to redeploy onto our own cash by buying back our own shares along the way. So it's not an either or given the incredible cash position we have. So we like where we are on that.
spk15: Yeah. In regards to innovation, certainly, we've talked about a next generation gantry that really continues to focus on workflow, patient experience and image quality. Those are the key drivers of innovation in that space. And certainly layer on AI. How can we help the radiologist in assessing risk within those images? And again, assessing or helping improve workflow is the use of AI not only in breast, but also in genius digital psychology.
spk14: We'll take our next question from Ryan Zimmern with BTIG. Please go ahead.
spk10: Thanks for taking the question. Maybe, Carlene, just to follow up on your next gen gantry. I mean, you made the comment today that, you know, you're on pace to grow gantry this year. And I don't know if you'll be comfortable answering this yet, but do you expect to grow gantries in 2025? And, you know, coincidentally, can you just give any color on kind of timing of a next gen gantry?
spk15: Yeah, I don't think we're going to give any specifics on timing. I think likely as we look towards RSNA would be a time that we would highlight that for certain of our customers and probably give a little more specifics on what we're expecting for 2025 and beyond.
spk10: Okay. Just to follow up, two quick questions. One, what's the status or impact that you're seeing from the biosorb recall dynamics? How does that impact, you know, with endomagnetic if at all? And then the second thing that I wanted to just ask about unrelated was you've had, you know, a number of these deals and to go back to kind of the earlier margin question, is there an opportunity in any way for some facility integration or manufacturing integration that hasn't, you know, been kind of contemplated or discussed yet? Because it would seem like with the number of deals you've done over the past few years, you know, there could be some low hanging fruit there. And I just don't recall you guys really talking too much about that thus far. Thanks for taking the questions.
spk16: Yep. This is Essex. I'll jump in on the biosorb question. So endomag and biosorb are completely unrelated from each other, number one. But number two, I would say, is that the biosorb recall was more of an administrative recall where we needed to update our PI or our language in our insert. So we are still filling our product, so great about it, and are working through that. With regards to facility integration, I don't know if Carly wants to jump on that?
spk15: Yeah, sure. So as we've highlighted, we're doing some facility integration in our breast health business right now. From each of the acquisitions, they all have different profiles. Some make sense to stand alone as they are, and others do make sense to integrate, and they're in various stages of integration. And as we always do, we always look at our supply chain, look at our network, and continue to focus on opportunities for optimization. And I would say over the next five years, I think we'll continue to realize those opportunities.
spk14: We'll take our next question from Mason Carrico with Stevens. Please go ahead.
spk02: Hey, thanks for taking the questions. On the molecular business, could you provide some color on how adoption is trending for the fusion sidecar recently? You doubled the Panther install base during COVID. How has adoption really been among those new customers? And then as a follow-up, what are your expectations for where that fusion attach rate can move longer term?
spk04: Yeah, we're seeing steady adoption of the fusion sidecar, which is DynWeb, because it really opens up the menu. We're focusing on customer by customer. What we're seeing is quarter over quarter more customers adopting the fusion as we go along. It doesn't necessarily mean every Panther needs a fusion. And in fact, it'll probably end up being, I don't know, maybe even a third of our total Panthers, even if that. What it really comes down to is does each customer have the capability? And so that's been our big focal point. We're seeing good adoption and steady growth.
spk14: We'll take our next question from Andrew Cooper with Raymond James. Please go ahead.
spk21: Hey, everybody. Thanks for the time. Lots been asked, so maybe just one, a little bit nitpicky on margins, but could you give us a little bit more flavor for the pretty modest change for the year? But just how much of a driver is Endomag flowing in versus maybe a little bit of a decremental from the skeletal headwind versus anything in the core in terms of as we think of it? And how do you think about that for Q for Q operating margin and for your operating margin for fiscal 24?
spk15: Yes, so I would say it's more geared toward the stop ship on the skeletal versus the endo magazine. But endomag is very small revenue for only two months, but certainly stop ship on even a non core franchise is going to have an impact on margins.
spk05: The way to think about it, too, is with that, I think margins are still looking really, really good.
spk21: So agreed. And then just one more again, kind of on margins. But, Carlene, I just want to make sure I caught something you said. Correct. I think you said something about working through ship costs and integrating facilities or the elevated chip cost, I should say, and integrating facilities through fiscal 25. Just wanted to get a sense. Has anything changed in terms of how quickly you're working through those higher cost chips and when you expect to be at kind of more normal levels in terms of the chip costs themselves?
spk15: Yeah, I think we're substantially through them as we exit 24 and the other probably a little bit into 25. Yeah, but I think what we're having is as we increase productions overall, getting more favorable absorption than what we had prior when manufacturing was really reduced because of the chip supply.
spk21: Okay, great. I'll stop there. Thank you so much.
spk15: The facility integration in the breast business specifically will go through at least the first half of 25.
spk14: We'll take our next question from Lu Li with UBS. Please go ahead.
spk12: Great. Thank you for taking my question. I think just a quick one on breast. I think you mentioned the placement is pretty strong. The gantry placement is pretty strong in quarter. I wonder if you can get like specific number on the placement and then also is it really back to the one way pre-COVID? Thank you.
spk15: Yeah, I don't think we've given specific numbers on gantries. Again, we've grown. We have real confidence that the total gantry is going to grow year over year. We're not quite back to pre-pandemic levels, but we'll be in at those levels in 2025.
spk03: We have no idea. The placement? Sorry.
spk15: I'm sorry. Can you repeat that?
spk12: I'm sorry. Yeah. Any regional comment that you want to call out in the gantry placement?
spk03: No, not specifically.
spk14: And we will take our last question from Punitsuda with Lirink Partners. Please go ahead.
spk13: Hey, thanks, Steve. Thanks for spitting me in here. I'll just round it out with one question. On the skeletal, I just wanted to confirm when you look at the market for bone density measurement and fracture assessment, it has anything changed there competitively in your view? I just wanted to confirm that and get a view about the skeletal push out that you're seeing in the quarter.
spk05: Yeah, we still feel great about the market and great about our
spk04: products. This is truly a supplier-induced hiccup
spk00: on
spk04: our smallest business, and we'll be through it within another quarter and right back to what we expect. And in the meantime, obviously, the core businesses are all delivering very, very well, so that the total is still very strong. But yeah, nothing different. No concern.
spk13: Got it. Okay. Okay. Super. Okay. Thank you.
spk04: All right. Thank you.
spk14: This does conclude today's question and answer session, and this now concludes Hologic's third quarter fiscal 2024 earnings conference call. Have a good evening.
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