Hologic Q2 2022 Earnings Call Transcript

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Provided by Quartr
April 27, 2022

There are 14 speakers on the call.

Operator

Good afternoon, and welcome to the Hologic 2Q 'twenty two Earnings Conference Call. My name is Lauren, 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.

Speaker 1

Thank you, Lauren. Good afternoon, and thank you for joining Hologic's 2nd quarter fiscal 2022 earnings call. With me today are Steve McMillan, The company's Chairman, President and Chief Executive Officer and Karleen Overton, our Chief Financial Officer. Our Q2 press release is available now on the Investors section of our website, along with an updated corporate presentation. We will also post our prepared remarks to our website shortly after we deliver them, and a replay This call will be available through May 27.

Speaker 1

Before we begin, we would like to inform you that certain materially from those expressed or implied. Such factors include those referenced in the Safe Harbor statement included in our earnings release and SEC filings. Also during this call, we will discuss certain non GAAP financial measures. A reconciliation to GAAP can be found in our earnings release. 2 of these non GAAP measures are 1, 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 1 year And 2, organic revenue excluding COVID-nineteen, which excludes COVID-nineteen assay revenue, Revenue related to COVID-nineteen and discontinued product sales in diagnostics.

Speaker 1

Finally, Any percentage changes 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, Hologic's CEO. Thank you, Ryan, and good afternoon, everyone.

Speaker 2

We are pleased to discuss our financial results for the Q2 of fiscal 2022. We posted solid results overall and continued our excellent performance. Total revenue was $1,440,000,000 And non GAAP earnings per share were $2.07 exceeding the midpoint of our guidance by over 12% on the top line and over 33% on the bottom. As we stated last quarter, we continue to deliver in an uncertain business environment. For example, in January, we saw COVID cases spike once again, putting pressure on healthcare utilization and certain elective procedures.

Speaker 2

Through February March, the ripple effects of the war in Ukraine added additional uncertainty to a world already facing headwinds from COVID, Rising inflation and interest rates as well as ongoing global supply chain disruptions. In these challenging times, We continue to deliver. Our performance is a direct result of the planning and investments we made Throughout the pandemic to strategically strengthen our business. We are a stronger Hologic Through portfolio diversification, the addition of multiple growth drivers into our franchises and continued growth in our international businesses. Today, we'd like to provide additional color in 3 areas.

Speaker 2

First, we'll discuss Q2 growth in light of the macro environment, including updates on the Breast Health Chip shortage we spoke to in Q1. 2nd, provide progress on acquisitions turning organic in our Q3. And 3rd, highlight our additional efforts to lean into ESG and how our purpose, passion and promise are elevating women's health around the world. In our Q2, both our Diagnostics and Surgical divisions delivered organic growth excluding COVID, while as expected, our Breast and Skeletal Health division declined. In breast, as we discussed in our last call, The semiconductor chip shortage was the primary driver of the division's temporary decline.

Speaker 2

Encouragingly, Underlying demand remains strong as measured by healthy orders and a growing backlog. As we've seen during the last two years, as COVID testing rises, elective annual exams, Screenings and Guine surgical procedures are often postponed. And as COVID testing declines, we see the opposite and our base business returns. We believe what the latest rebound also makes clear is that demand for our products remains strong despite the unpredictability of COVID surges. We are confident in our business, confident in our people and excited about our positioning heading into the Q3.

Speaker 2

For example, in diagnostics, we placed an additional 123 Panthers in the second quarter, Surpassing 1st quarter placements of 119, only halfway through the year, We have again exceeded our pre pandemic average of roughly 225 Panther placements per year. This is a phenomenal result given the rapid global expansion of our Panther installed base during the pandemic. Our Panther installed base is now over 3,100 instruments worldwide with over 45% placed internationally. Also in diagnostics, our vaginitis panel, BVCV TV continues its growth trajectory. In our Q2 of 2021, this assay generated about $7,000,000 for the quarter.

Speaker 2

1 year later, the panel contributed almost $14,000,000 in worldwide sales, nearly double the year before. And BVCV TV is now on pace to become a top 3 women's health assay in our molecular diagnostics portfolio. Now let's provide an update on Chip Supply and Breast Health. Our supply chain service and commercial organizations have been working hard to gain greater visibility and mitigate the impact of the shortage. In Q2, the impact was slightly less than estimated, driven by favorable availability and precise management of chips in circulation within our service inventory.

Speaker 2

While our teams continue to do a great job navigating the unpredictable supply challenges on ships, the ongoing volatility of supply Makes it possible that up to $50,000,000 in additional headwind could surface in the back half of the year. Despite this, we are still materially increasing guidance for the full company, which Karleen will speak to later on. To finish the chip discussion on an upbeat note, we recently received notice of an increased allocation of chips for late in fiscal 2022. While this is very encouraging, given production and delivery timing, the benefit from this increase is unlikely to help revenue until early 2023. Said another way, we are optimistic the back half of our fiscal 2022 will prove to be the low watermark in terms of available gantries.

Speaker 2

Moving on to an update on acquisitions turning organic. In our fiscal Q3, contributions from both BioTheranostics and Diagenode will be included in the organic growth of our diagnostics division. We will provide an update on both today. 1st, BioTheranostics. As a reminder, we completed this acquisition in February of 2021.

Speaker 2

The goal of this acquisition was to enter the high growth lab based oncology market, an adjacent long time area of interest and bring our resources and expertise to create an even stronger business. Based on breast cancer index Earlier than anticipated inclusion in NCCM guidelines in January of 2021, the deal is off to a great start. Last year in its 1st full quarter post acquisition, BioTheranostics posted $13,000,000 of revenue, which was more than 30% higher than their best quarter prior to the pandemic. Fast

Speaker 3

forward to

Speaker 2

our most recent quarter, MyoTheranostics generated $16,400,000 in revenue. This early success comes as a result of outstanding engagement in a Successful cross functional, cross enterprise integration. As planned, we deployed Hologic resources and expertise and paired this with legacy biotheranostics capabilities to refine operational efficiency and most importantly, Set a solid foundation for scalable growth. To accelerate BioTheranostics' already strong growth, As an example, we are streamlining the business' ordering process, which we believe will simplify things for the customer. We expect this enhancement will greatly improve the customer experience and ultimately result in more orders.

Speaker 2

We are also excited to share that we are in the process of transferring BioTheranostics operations to our diagnostics headquarters in San Diego. While maintaining required division between CLIA and IVD activities, we believe the move will lead to an even more unified culture, Stronger relationships between counterparts and more collaborative efforts. Finally, and even more encouraging, Just last week, the Biotheranostics BCI test was included in the American Society of Clinical Oncology guidelines, Another major step towards increasing utilization and recognition of BCI as the standard of care. BCI is now the only genomic test in both NCCN and ASCO guidelines for predicting benefit of extended endocrine therapy. Moving on, Shortly after we closed the Biotheranostics transaction, we acquired Diagenode based in Belgium.

Speaker 2

The goal of the acquisition was to So far, we have checked both boxes. Since the close of the acquisition, as planned, we have integrated the Diagenote organization to optimize the speed and efficiency of our global R and D organization, enabling more effective and more efficient cross border innovation. To date, teams from San Diego and Belgium have worked together closely to improve processes and clearly define a robust Product development pipeline. The team is already making meaningful progress towards approval of 2 viral load assays, which will expand our virology portfolio in the transplant testing space. Overall, For both BioTheranostics and diagenote, we are pleased with the integration and progress of these two businesses.

Speaker 2

As we look forward, we are excited by the opportunity to unlock more synergies from both and in turn create more value for our shareholders. Shifting gears, I'd like to close by highlighting 2 very meaningful and opportunistic marketing efforts from our Q2. The first being our Super Bowl commercial, which also ran during the Winter Olympics and the second, our title sponsorship of the Women's Tennis Association Tour. As many of you may have seen, Our television commercial titled Her Health is Her Wealth featured Mary J. Blige.

Speaker 2

The commercial highlighted that despite her busy life, She makes time in her schedule for her annual health exams. The campaign came at a critical time as an alarming number of women missed annual breast and cervical cancer screenings during the COVID-nineteen pandemic. In January, The inaugural results of our Hologic Global Women's Health Index found that nearly 50% of women ages 16 to 54 had not seen a medical professional in the prior year. The purpose of our message was to encourage women to schedule their annual exams and prioritize their health. Detecting cancer early is critical and can often make the difference between a curable and non curable prognosis.

Speaker 2

After 2 years of the pandemic, with too many women not being screened and our unique relationship with Mary J. Blige, there was no better time and no better stage for us to encourage more women to see their doctors. Our second effort is our landmark title sponsorship of the WTA tour announced in early March. This alliance was forced to make significant progress on our shared vision of greater wellness and equality for women. The partnership has global reach and will emphasize the importance of preventive care through well woman visits.

Speaker 2

We are proud to stand with the WTA as we work together to jointly raise the profile of women and share the importance of early detection and treatment. Before turning the call over to Karleen, Let me conclude by saying that the results of this quarter demonstrate our business is both durable and resilient And the demand for our products is exceptionally strong. Despite multiple macro headwinds, We continue to deliver strong results. We are both excited and confident in our business and see great opportunity to be even stronger in the years ahead. With that, let me turn the call over to Karleen.

Speaker 4

Thank you, Steve, and good afternoon, everyone. We are very pleased to share 2nd quarter results that significantly exceeded our guidance for both revenue and EPS. Our 2nd quarter performance once again highlights the strength of our diverse business. While the Omicron variant negatively our base businesses early in the quarter, our COVID testing upside more than offset this headwind. It is also important to understand that our balance sheet is stronger than ever, providing key strategic flexibility in this uncertain macro environment.

Speaker 4

Further, we continue to generate very healthy free cash flow, funding our capital deployment priorities. In the Q2, we generated significant operating cash flow and executed $200,000,000 of share repurchase, both of which I'll touch on in more detail shortly. Before we do that, we will provide color on our And divisional results for the Q2. As a reminder, revenue in our fiscal second quarter is typically seasonally lower compared to our Q1, which benefits from increased patient activity before calendar year end. In the quarter, total revenue of over $1,400,000,000 was very strong and came in more than $150,000,000 higher than the midpoint of our previous guidance.

Speaker 4

In addition, EPS of $2.07 in the 2nd quarter Far exceeded our guidance range of $1.50 to $1.60 Turning to our divisional results. In Diagnostics, global revenue of $987,100,000 declined 5.6% compared to the prior year. However, excluding COVID, worldwide organic diagnostics revenue increased 4%. As discussed, the division's results early in Q2 were negatively impacted by the omicron COVID-nineteen variant. Our base diagnostics business is inversely correlated to spikes in the pandemic, as women tend to postpone office visits when COVID cases surge.

Speaker 4

However, we were encouraged by improving trends throughout March as COVID cases declined. This gives us great confidence in the underlying health of our base diagnostics franchise. Moving specifically to our Molecular Diagnostics business, we will again exclude the impact of COVID. Making these adjustments, base molecular revenue grew about 7% organically in the 2nd quarter. This growth was driven by Strong uptake in newer assays such as our vaginitis panel and menu within our virology product line.

Speaker 4

As it relates to our COVID results, we generated $584,000,000 of COVID assay revenue, far exceeding our guidance of $400,000,000 We shipped about 28,500,000 tests to customers as ASPs held steady around $20 per test globally. The United States represented about 60% of total COVID assay revenue. However, testing demand was strong in international markets as well. Rounding out diagnostics, our cytology and perinatal businesses were In Breast Health, global revenue of $310,400,000 was down approximately 7% as expected, primarily driven by the chip shortages that we have discussed. In our Interventional business, incremental supply chain Our unconventional business was down slightly less than 1% in the period.

Speaker 4

While supply chain challenges persist, Demand for our best in class breast health products remains strong. And as Steve commented, we expect to see improvement in 2023. In Surgical, 2nd quarter revenue of $117,300,000 grew 3.5%. As we foreshadowed during our Q1 call, the Omicron variant caused a pullback in elective procedures in the first half of the quarter, but this trend improved later in the period as COVID cases declined. Furthermore, we saw nice resilience from several of our newer products such as the Fluent Fluid Management System and solid contributions from Boldus CoolSeal Devices.

Speaker 4

Lastly, in our skeletal business, revenue of $20,900,000 decreased 6% compared to the prior year period. Now let's move on to the rest of the non GAAP P and L for the Q2. Gross margin of 71% was well ahead of our forecast, driven by higher than expected COVID-nineteen testing volumes in the period. Total operating expenses of 3 We took the opportunity to reinvest in our base businesses. We also allocated spend to Key marketing initiatives to help drive awareness for women's health.

Speaker 4

For example, 2nd quarter operating expenses included our Super Bowl and Olympic commercials as well as expenses associated with our WTA partnership. The combined total of these initiatives contributed slightly more than $25,000,000 to operating expenses in the quarter. In addition, within operating expenses, recent acquisitions added slightly less than $35,000,000 in the quarter, about $25,000,000 higher than the prior year period. Finally, our tax rate in Q2 was 20.5%, marginally lower than our expectations given the higher COVID-nineteen revenue outside the United States. Putting these pieces together, operating margin for Q2 came in well above our forecast at 47.4% and net margin was very strong at 36.5 percent.

Speaker 4

Non GAAP net income finished at 524,200,000 And non GAAP earnings per share was $2.07 nearly 35% above the midpoint of our prior guidance. Moving on from the P and L, cash flow from operations was $1,060,000,000 in the 2nd quarter, inclusive of tax refunds totaling approximately $418,000,000 related to sale of our previously held Medical Aesthetics business in 2020. When normalizing for these refunds, cash generation for the quarter was still exceptional. These robust cash flows continue to provide tremendous financial and strategic flexibility. For example, As referred to earlier, we repurchased 2,900,000 shares of our stock for $200,000,000 in the quarter.

Speaker 4

We continue to view our ongoing share repurchase program as a lever to drive value for our shareholders. Further, we continue to diligently pursue M and A We had $2,300,000,000 of cash on our balance sheet at the end of the second quarter and our leverage ratio was 0.3 times. Our capital structure is fortified. And while we ended the quarter with an elevated cash balance, we continue to be thorough and exercise discipline as we evaluate opportunities. Given the macro environment, we have comfort with our elevated cash balance and the ability to be patient as we identify high quality opportunities.

Speaker 4

Now let's move on to our updated guidance for the Q3 and full year fiscal 2022. In the Q3, we expect to continue our track record of delivering strong financial results with total revenue in the range of $875,000,000 to $915,000,000 For the full year fiscal 2022, We expect total revenue in the range of $4,600,000,000 to $4,700,000,000 significantly exceeding our prior full year guidance $175,000,000 at the midpoint. We are raising guidance once again in the face of an uncertain macro backdrop, highlighting our confidence in our business. Given the continued strength of the U. S.

Speaker 4

Dollar And to aid with constant currency modeling, we are assuming foreign exchange headwinds of approximately $20,000,000 in the Q3 of 2022 and $65,000,000 for the full year. This FX and favorability to revenue is higher than our guidance from last quarter. In Diagnostics, we expect Molecular to continue to drive growth based on our Panther installed base of over 3,100 instruments globally, over 80% larger than the start of the pandemic. We are also seeing encouraging uptake of our newer assays like Vaginitis Panel, Virals and Amgen, as well as the tremendous international expansion opportunities. In terms of COVID sales, we expect COVID assay sales to be at least $100,000,000 in the Q3 of 2022 and approximately $1,250,000,000 for the full year.

Speaker 4

COVID related items, inclusive of small amount of discontinued product revenue, are are expected to be approximately $35,000,000 in the 3rd quarter $215,000,000 for the full year. In Breast Health, our organic and inorganic investments continue to perform well and highlight the diversity of the division's revenue stream. For example, Vovera had another great result, growing mid teens in the last quarter. In addition, recurring service revenue represented more than 40% Total sales in Q2. In terms of the breast health chip shortage announced last quarter, given significant uncertainty still exists in the chip market, The possibility of an incremental $50,000,000 headwind in the back half of twenty twenty two exists and we have incorporated this into our guidance.

Speaker 4

While we are seeing early signs of improvement in chip supply, we are forecasting conservatively. To reemphasize, this headwind is purely a supply issue and not one of underlying demand, which remains strong. Finally, in Surgical, we feel great about the trajectory of our business as COVID trends improve. MyoShore and related organic products such as Fluent continue to drive near term growth and we expect meaningful contribution from both Assessa and Boulder over the next several years. As a reminder, our organic guidance backs out of revenue from acquisitions until the 1st full quarter after a deal annualizes, as well as revenue from our divested blood screening business.

Speaker 4

In terms of the deal, BioTheranostics and Diagenote will become part of our organic revenue in Q3 2022. Therefore, the organic revenue adjustments for Q3 include Mobidiag and Boulder and for Q4, Boulder only. Moving down the P and L, for the full year, we forecast our non GAAP Both estimates are higher than our guidance last quarter. Further, our second half guidance incorporates the margin impact from our Breast Health supply chain Revenue shortfall. As a reminder, Gantry gross margin is accretive to the consolidated averages and we have maintained operating spend in order to be in a position to move quickly once we receive chips.

Speaker 4

In addition, we have again incorporated supply chain cost into our guidance as it relates to electronics, plastics and logistics. Despite these headwinds, For the full year, we expect both growth and operating margins to be above pre pandemic levels. In terms of operating expenses, we expect spending to be up compared to 2021, but be lower in the second half of twenty twenty two compared to the first half. As we have continued to highlight, in quarters with higher COVID testing revenue, we will take the opportunity to invest for future growth. Below operating income, we expect other expenses net to be a little less than $25,000,000 a quarter for the remainder of the year.

Speaker 4

Our guidance is based on effective tax rate of 21% and diluted shares outstanding of around 255,000,000 for the full year. All this nets out to expected EPS of $0.67 to $0.72 in the 3rd quarter and $5.45 to $5.65 for the full year, 10% above our prior guidance at the midpoint. As you update your forecast, let me remind you that macro uncertainty due to the pandemic, related supply chain challenges and geopolitical conflicts remain high. We would therefore encourage you to model at the middle of our ranges, which incorporates both potential upsides and downsides. Let me wrap up by saying that Hologic posted very strong second quarter results that far exceeded our expectations and guidance.

Speaker 4

We are also raising our financial guidance for the year, even as we are increasing anticipated supply chain headwinds, highlighting the multiple growth drivers we have added to each of our franchises and benefits from COVID testing. With a strong balance sheet and best in class cash flow generation, we are well positioned. With that, we ask the operator to open the call for questions.

Operator

Thank And we'll take our first question from Jack Meehan with Nephron Research.

Speaker 5

Thank you and good afternoon.

Speaker 2

Hey,

Speaker 5

Jack. My first question is on Breast Health and the semiconductors. So last quarter, the Up to $200,000,000 you talked about, I thought it was fully derisking the gantry exposure. And then the quarter actually Came a little better than you were thinking. So I'm just trying to square this commentary with the additional $50,000,000 you're building in from here.

Speaker 5

Can you just maybe help me through that? And kind of second off that, just can you give us a little bit more color on the order book and just your confidence that You're not losing share given some of the supply chain shortages there?

Speaker 4

Yes. So Jack, it's Karleen. I'll start off on and the evolution of the number. So first, let's recognize in this quarter, we did a little better and that was really a lot of efforts between our service and supply chain folks really prioritizing and remanufacturing chips for the service needs, which allowed us to sell more new gantry, so great effort there. I think when we think about the additional possibility of additional $50,000,000 it has a little more to do with timing.

Speaker 4

And so we are pleased that we got a higher allocation of than we had thought than we had originally expected, but the timing of that is such that it won't come in until 20,203. I think we thought If there was an initial allocation, we might get that benefit in 2022, but it's looking like it's 2023. And I think I just On the second part of your question on demand, again, we see our backlog growing in our Breast Health business. It's strong. We're working really strategically with Customers to make sure that we're not losing any business because of this and that I think our intelligence would be that our competitors are probably in likely the same position as us.

Speaker 6

And I think the reps feel good.

Speaker 5

Okay. Yes, that makes sense on the timing. Very helpful. As an unrelated follow-up, obviously in molecular, big focus on kind of share shifts in the diagnostics industry with COVID. I was wondering if you could talk about your relationship with the National Labs and just with the larger customers, whether You think you're gaining or losing share as we transition eventually into an endemic environment?

Speaker 2

Yes, Jack. And by the way, I'd also clarify that we're not going to use the cash on the balance sheet to buy the Eagles.

Speaker 5

Hopefully, they make some good picks tomorrow.

Speaker 2

Yes, exactly. So, in terms of our relationship with the National Labs, probably couldn't be more proud of our teams and even we've always had good relationships, but when you think about the way we responded And particularly if you look at the 2 big major labs in the United States, but even a number of the other big ones right below the top When they were really under the gun and you think back to the April, May, June timeframe of 2020, When the evening news around the world around the country was always about the 8 day turnaround times for PCR tests and All of the problems with molecular testing. And that's when we dispatched and our teams went round the clock to Panthers in all over the place. And we really worked so well to help those both of those customers Dramatically reduce the turnaround times. And I think we've used both the relationship In coming to their aid during that time as well as frankly, I think they increasingly understand that we're building markets.

Speaker 2

When it comes to how we approach the women's health market, we're also working the reimbursements. We're working the physician recommendations. We're working The guideline developments. And all of that is helping to grow the market, which by definition is growing them. I would tell you, I feel like it's more of a partnership that is valued than just a traditional vendor Vendee relationship.

Speaker 2

And I think our teams have worked so hard to have many good relationships throughout All levels both operationally within the marketing teams and we like where we're positioned. We really do. Thank you, Steve. Great. Thanks.

Operator

Our next question comes from Vijay Kumar with Evercore ISI.

Speaker 7

Hey guys, thanks for taking my question. Steve, maybe one big picture for you. I'm looking at the base business here at the segments. It looks like it was light across the board. Breast imaging perhaps it's understandable given the chip shortage.

Speaker 7

It looks like underlying diagnostics came in below street models, GYNs, a similar trend. How much of this was The utilization impact due to Omicron. And the reason I ask is, we're seeing other device companies coming up with Improved procedure trends. I'm curious, was there any one off items that impacted Hologic in the

Speaker 2

I think, Vijay, part of it on the surgical business is probably as some of the hospitals Came back up post Omicron, they tended to prioritize some of the cardiovascular procedures and some of the more Immediate procedures, whereas our guidance surge is viewed as a little more elective. So I think there was a little bit of that probably in the quarter That we think shakes out completely over time as women's health issues come back. And I think our base molecular diagnostics business was up 7 Not too shabby in a period where a lot of our machines ended up running A lot of additional COVID tests. So nothing that we are concerned about. And I think as we continue to look all of these quarters, there's variability and there's puts and takes.

Speaker 2

And we keep managing Overall, there is one part goes up. The reality is we do see trade offs. We did sell $584,000,000 of COVID in the quarter. There is a bit of a trade off on our base business with that. So as that goes back, I think we're very optimistic about where the base business comes here As that COVID testing really does probably really subside here.

Speaker 7

That's helpful perspective, Steve. And maybe one related, there's been a lot of debate on the street on what is the underlying base margins, base earnings power for Hologic? Now I know what the suite is trying to do. We're trying to do a COVID P and L and a base business P and L and in reality that may not be how Corporates think about their businesses. How much of reinvestment is going on in the business, Steve?

Speaker 7

And the reason I ask is, if I look at the implied Q4 EPS guide, I think it's $0.60 to $0.65 So that's annualizing at $2.50 I'm assuming Q4 has very minimal COVID testing, but also it has some impact from breast imaging, the chip shortage, right? So what is the underlying Earnings power here for Hologic that we should be thinking about.

Speaker 4

Yes. Vijay, it's Karleen. So I'll take you through it. So if we look at the second half twenty You're right. That is the worst impact of the Breast Health chip shortage.

Speaker 4

And so Don't think of the back half earnings power and the math you just did on the Q4 as what we would call our base business earnings power. There's definitely an impact there, Significant impact with pretty minimal COVID revenue in the Q4. The other thing I would point to is that if we look at the back half, We have higher operating expenses and simply dilutive operating margins from our acquisitions, which So be a tailwind as we move forward into 2023 and beyond. And we do have some incremental investments In both Q3 and Q4, those investments will either not occur in 2023 or be significantly lower. So To reiterate the back half earnings power is not reflective of the base business because of the one time items I'll call them that we have there.

Speaker 2

And Vijay, back to even building on the comment on the base business, I'd remind you in a couple of simple things here. We've not only passed through the full beat on top line and bottom line through the balance of the year. The second half is every bit as intact as what it was prior despite more headwinds, all of which Should underscore the confidence that we have in our base business. And to Karleen's point, that is the 4th quarter is not The ongoing run rate.

Operator

We'll take our next question from Patrick Donnelly with Citi.

Speaker 3

Hey guys, thanks for taking the questions. Maybe a similar follow-up on that. I mean just on in terms of the Breast Health Ramp back up as we get into the beginning of 2023, what's the visibility into the supply chain normalizing there? I mean, the confidence level that Correct itself. As we get into 2023, should we think of it as more kind of slowly ramping back up and being a bit of a drag on revenue margins to start 2023 as the Expenses, I mean to Karleen's point, those are intact, growth is going

Speaker 2

to catch up. What's the right way

Speaker 8

to think about that as we look out to

Speaker 3

the start of 2023?

Speaker 4

Yes. I would say that I would expect it not to be compared to as we will see benefits from increased supply early in 2023, But I think we'll see a point of normalization throughout the year is what I would think would happen because even though we have building backlog, It's going to take multiple quarters to work through it. These installs of this equipment is highly scheduled with the hospitals and breast centers because typically have to take rooms down, it's construction as well as the install takes almost a week. So It's going to take several quarters to work through that. So I would say a normalization over the course of the year.

Speaker 3

Okay, that's helpful. And then Steve, on the capital allocation side, what's the right way to think about? Obviously, you guys have done some share repos, you've done some deals. How do you balance the priorities there? Obviously, the market is volatile and presents opportunities here and there.

Speaker 3

But what's the internal thinking? How large will you go on the deal side? What's Pipeline look like just an update there would be helpful.

Speaker 2

Yes. I think the biggest thought we should leave you with is we're comfortable being patient Right now. Just because we have a very strong amount of cash on the balance sheet doesn't mean we feel pressure to go do it In the next quarter or 2. We know that deals will present themselves in the quarters or years ahead. And I was showing Karleen an old headline from the late 'eight timeframe at Stryker where we were sitting on a pile of cash.

Speaker 2

And at the time I was being criticized for being too conservative and opportunities presented themselves Over the next few years. And I think we feel very confident and frankly should feel great in an uncertain world To be sitting with the balance sheet that we have relative to what we had 8 or 10 years ago in this company. And it just gives us the ability to be patient and therefore make great deals and continue to do a combination Some buybacks, but we still ultimately are looking and think there will be some good deals that will present themselves. And we're not going to get into the specific size, But obviously we've got a fair amount on the balance sheet right now and it doesn't mean we're ready to go blow it all at once or anything else. I think we've Shown over the last 5 years or so, we're being very disciplined and rigorous.

Operator

We'll take our next question from Puneet Souda with SVB Securities.

Speaker 9

Yes. Hi, Steve, Carly. Thanks for taking the question. So maybe just the first one on

Speaker 7

Some of

Speaker 9

the Panthers that you highlighted, the recent sales, are those still going into a demand for COVID or was that still a function of demand pull through in January from COVID or are customers now looking at the broader menu and And saying, looking at Panther purchases from a broader menu perspective. And could you update us on Any utilization trends? I know this is a major question in terms of the utilization of COVID conversion into other Teth, maybe just walk us through sort of what's happening as we somewhat emerge out of pandemic into this endemic situation?

Speaker 2

Yes. The placements are really going for both COVID and new business. I think the magic for us is We've been able to expose Panther to so many new customers around the world and they've seen the benefits both in COVID and it's also given us the chance Talk about the menu and the expanded menu. So we're really getting them in on both fronts. And I think every time we start to see customers getting ready to port some of the newer assays onto their machines, we have yet another spike.

Speaker 2

And candidly, we would have expected more base business growth this quarter. And then, lo and behold, we did another 28.5 $1,000,000 COVID test. As a reminder, that's as much as we were doing practically globally, More than what we were doing globally pre pandemic on all of our businesses combined. So it's I think people become dulled to the numbers, but that has an impact in terms of Our customers being able to adopt the other parts of the menu when again they just got thrown back into huge testing. Now I think as it plays out here in the coming quarters, we're assuming much stronger and Prolonged ramp down here in the COVID testing, that's going to really, we believe, allow the underlying strength of our core menu to start to shine And you'll start to see in these quarters.

Speaker 9

Okay, that's helpful. And then just one off question that we've been getting from investors given the China shutdowns. Anything that you're baking from that side into the guide? And maybe just could you if you could remind us your exposure there, Both in terms of the revenue and impact to the supply chain? Thank you.

Speaker 4

Yes. It's Carlene. So I'll answer that. So less than 3% of our revenue comes from China. So we have pretty minimal exposure.

Speaker 4

We do think there is some impact that is factored into our guide. And we really don't have any manufacturing presence within China. I think what we're dealing with is the kind of global supply chain chips Issue related to China. But from a revenue perspective, it's pretty immaterial.

Operator

We'll take our next question from Brian Weinstein with William Blair.

Speaker 10

Good afternoon. This is Griffin on for Brian. Thanks for the questions. Just starting to continue to talk about that OUS Strength, I guess, specifically in diagnostics, historically those markets have had some less favorable reimbursement and just lower testing volumes with Less screenings and are you seeing any change in either of those dynamics as you think about the OUS outlook?

Speaker 2

I think we see opportunities again over time to more directly influence The size of those markets and everything else. So I think what we do see in the near term is the ability with a lot of the additional Panthers we've placed To have more menu running through them. And then the second piece will be really helping to grow those markets more significantly over time. So I think we feel Very encouraged short term small placements and longer term because of the strength that we've put in our teams. And frankly, the additional access we've gotten to a lot of the health ministers of the world through both COVID time as well as the Hologic Global Women's Health Index To I think start to get women's health moved up the priority list where we will be able to get more Greening guidelines and things put in place in the coming years, particularly in Western Europe.

Speaker 10

Okay. And then on the CTNG, you noted we're back to pre pandemic levels. Any notable changes in how you think about the basis from competition here pre pandemic versus endemic state or post pandemic, particularly with some of the Point of Care Molecular entrants in the STI market?

Speaker 2

Yes. We'll see where that all plays out. We're always very, very cognizant, but I think as we continue to think about how Women are going to get these tests and the doctors and the reimbursements and everything else. I think we continue to feel very good about our

Speaker 4

Yes. I would just emphasize that most of the CTNG testing is asymptomatic. So when you think about At home testing would be generated by a symptom. Most vast majority of the testing is asymptomatic and again part of that well women's visit.

Operator

We'll take our next question from Tejas Savant with Morgan Stanley.

Speaker 11

Hey, guys. Good evening. Just a follow-up on some of your earlier comments on the chip shortages on the Breast Health side, Steve and Karleen. You spoke about that new allocation that you're expecting to see come through at the end of the Q2 year. How can you quantify that relative to that 20% number that you had spoken off earlier?

Speaker 11

And in terms of seeing the benefit in fiscal 2023, Is this largely sort of outside your control or are there things you can do to accelerate those timelines, perhaps looking into different suppliers, etcetera?

Speaker 4

So in rough numbers, I think the increased allocation increased our expected unit production by about 20 25% in 2023. And I think from that initial, hopefully, we'll get We just don't know. We don't have that visibility to if that allocation gets any higher, but that's what we're planning on right now.

Speaker 11

Got it. And any comments, Karleen, on the possibility of new suppliers coming in here? Or is that All incorporated into your fiscal 2023 recovery commentary?

Speaker 4

Yes. What we know is kind of incorporated into the guide in our commentary. I think To try to bring on new suppliers would take multiple quarters and I think the issue the Supply issue is not just our suppliers, it's all the suppliers. So it doesn't really solve the problem.

Operator

Our next question comes from Casey Woodring with JPMorgan.

Speaker 8

Hi guys. Thanks for taking my question. Can you talk a little bit about breast service and if there's maybe any kind of pull forward you could do there to offset some of the near term

Speaker 4

Yes. So breast service, we love our breast service revenue. It's I think the It was about 40% of the breast revenue in the quarter, but that most of that revenue, the majority is tied to long term service contracts. So it's Contracts that are over multiple years where the revenue is basically amortized over the contract period and really it's tied to our installed base. So if we're not putting out more gantries, it's hard to do more service contracts.

Speaker 4

So that's really That's more of a stabilizing fact in that division versus the limited ability to pull forward.

Speaker 12

Yes. Nor would we want

Speaker 2

to pull it forward to be Quite honestly, I think what we love about that business is it's stable and candidly we've got all the additional COVID revenue this year. What we're really looking forward to is People will start to see the underlying strength of our base businesses in 2023. And the last thing we'd want to do is mortgage some of that.

Speaker 8

Got you. And then just how should we think about the Panther competitive environment in the hospital setting as it relates to some of these smaller bench top platforms you think about Cepheid and some of the other instruments out there with overlapping menu, do hospital customers have both a Panther and a bench top instrument? And Sort of how should we think about this dynamic moving forward given all the COVID placements?

Speaker 2

Yes, many do, but they're Still largely used differently. A lot of the bench top stuff is really for symptomatic, and especially respiratory or other symptomatic Whereas ours is largely asymptomatic and ongoing screening. So I think this is going to be a question of and Not or. And there's going to be meaningful opportunities on all fronts. I do think We're very well positioned and feel great about where we are with the Panther placement.

Speaker 2

So I think we're very confident you're going to continue to see that And that will unfold even more as the COVID revenue goes away.

Operator

Our next question comes from Mike Matson with Needham.

Speaker 13

Hi, guys. This is Joseph on for Mike. I guess maybe one around gross margin. I guess given the capacity expansion To really meet COVID testing during the surges and as we start seeing that decline as we see the volumes decline, Should we expect some type of gross margin headwind in these next couple of quarters?

Speaker 4

Well, certainly as COVID revenue comes down, the gross margins will come down from where they have been. But From an absorption perspective, our manufacturing of COVID is fungible with all of our molecular diagnostics Manufacturing is not a separate COVID line where we'll have to mothball, if you will. I think the other piece of what has Happened over the last 2 years is we have expanded our manufacturing, but that's been substantially funded by the Department of Defense and our contracts with them. So There's really no big hit, if you will, for idle capacity. That was the question.

Speaker 13

Yes, yes, absolutely. That's very helpful. And then I guess maybe one more around The Panther systems, I know you guys have touched on that a lot. But as we're kind of looking towards that capacity utilization and non COVID assays really going into these systems. I guess maybe there's been a lot of surges up and down.

Speaker 13

Obviously, hospitals are I guess what are you guys looking forward to really push these forward, whether it be trainings that you guys have to schedule Or whether it's just kind of waiting for total COVID cases to really reach a manageable level?

Speaker 2

Yes. In terms of the base business, if that's the or Jay, it's really around having the Time to get the new assays up and running on the Panther within each hospital and each lab. But I will tell you just from having We're in our strategic plan process right now where we've been sitting down both with the U. S. Diagnostics team, but also our international teams.

Speaker 2

And as we look at the optimism that they have for the underlying growth rates of our molecular business for the next Few years, it gets pretty exciting. So we're not ready to give guidance or anything on that front. But I think there's Just the additional placements and the additional opportunities. And don't underestimate in a world where labor Constraints and labor costs have become a huge issue. I think people are forgetting one of the massive benefits of the Panther Is the workflow automation, the random batch access.

Speaker 2

This is the pen caps that we have. This is a remarkably efficient System that we think is only and that's part of what the customers are seeing and looking forward to the future. So I think it's going to bode very well for us.

Operator

We'll take our next question from Derik De Bruin with Bank of America.

Speaker 12

Hey, good afternoon. Thanks for taking my question. Hey, Steve, how do you feel about the long term guide You put out that 5% to 7% core growth CAGR through 25% on the 3Q 2021 call. And I'm just wondering, given the ship shortages, given how that is, I mean, how do you how is your confidence in that? I mean, looking at the results this quarter, I

Speaker 9

think some people are a

Speaker 12

little bit nervous. Are you still comfortable with that 5% to 7% number?

Speaker 2

Very. It's a long term thing. Obviously, we did not anticipate the chip George, and having said that, you know what, think about what those growth rates are going to be when we index against these quarters next year. But even on a long term basis, think we feel very, very good about what the growth rates of our base businesses will probably be doing over the next couple of years. We've got a couple of punky quarters here right ahead of us to finish a year that's already a very strong year.

Speaker 2

And It's growth rates as we start to look into 2023, probably looking pretty good.

Speaker 12

Okay. And as a placeholder for COVID for next year, that 4th quarter number, that $40,000,000 to $50,000,000 implied for COVID testing in Q4, is that a good way to sort of think about it just for now?

Speaker 2

Yes. I almost don't even want to go there, Derek, because The quarterly swing, who knows where it all goes and I think we're poised either way. But I would put in a de minimis number for 2020 And yet, I think we'll certainly expect some volume just to continue to be there. So probably not a horrible You know estimate, but we're nowhere near being able to give guidance.

Operator

And we'll take our final question from Ryan Zimmerman with BTIG.

Speaker 6

Thanks for squeezing me in. I'll just keep it to 1 in the interest of time. So on the Breast Health business, Steve or Karleen, we've seen from some of your peers on the equipment side, certainly commentary around softer demand, Cost of debt is rising. You had alluded to the fact that the order book is pretty healthy or the backlog is healthy on the breast side. What do you attribute that to in terms of your capital equipment?

Speaker 6

Is it a site of service? Is it price points relative to maybe Some of the $1,000,000 plus robots that are out there. I'd just be curious to understand kind of how you think about the capital equipment demand market at the hospital level?

Speaker 2

Yes. I think it starts with always having a superior product. And we have not gotten where we've gotten from a market share standpoint, particularly Especially in 3 d without having a superior product. And I think and also superior workflow Throughout the whole throughout the whole gamut. And I think hospitals are seeing what we bring to them In a critically important area.

Speaker 2

To your second point, I will say, we're not of the high ticket items. In a grand scheme, a hospital recapitalizing a few rooms in mammography or even several suites Is nowhere near the magnitude of some of the bigger iron, the massive, whether it's robots or MRIs and those So I think it does allow us to kind of be in a sweet spot where even if there's a little bit of capital contraction That we think we'll be fine there. And I think our team is feeling very, very good.

Speaker 6

Thank you.

Speaker 1

All right.

Speaker 2

Thank you. That sounds like it. Operator, Lauren.

Operator

Yes, sir. That concludes today's question and answer session. This now concludes Hologic's 2Q 2020 to earnings conference call. Have a good evening.

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Earnings Conference Call
Hologic Q2 2022
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