Hologic, Inc. (NASDAQ:HOLX) Q4 2023 Earnings Call Transcript

Hologic, Inc. (NASDAQ:HOLX) Q4 2023 Earnings Call Transcript November 9, 2023

Hologic, Inc. beats earnings expectations. Reported EPS is $0.89, expectations were $0.85.

Operator: Good afternoon, and welcome to the Hologic Fourth Quarter Fiscal 2023 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, sir.

Ryan Simon: Thank you, Cynthia. Good afternoon, and thank you for joining Hologic’s fourth quarter fiscal 2023 earnings call. With me Today is Steve MacMillan, the company’s Chairman, President, and Chief Executive Pfficer; Karleen Oberton, our Chief Financial Officer, is currently on bereavement and will not be joining us today. Karleen is with family and I will be covering for her on our call. Please join me in wishing Karleen and her family well. Our fourth quarter press release is available now on the Investors 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 excludes COVID-19 assay revenue, revenue related to COVID-19, and sales from discontinued products in diagnostics.

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 MacMillan, Hologic CEO.

Stephen MacMillan: Thank you, Ryan, and good afternoon, everyone. And before I get started, I just want to do a quick shout out to Karleen and her family and let everybody know our thoughts and prayers are with her today. We are pleased to discuss Hologic’s financial results for the fourth quarter of fiscal 2023. Total revenue was $945.3 million and non-GAAP earnings per share was $0.89. It was another strong quarter overall with revenue finishing at the high end of our range and EPS exceeding our guidance. Our fourth quarter capped off a tremendous year where we continued our track record of success, strengthened our business, and delivered on our commitments. For the full year, we posted $4.03 billion in revenue and non-GAAP EPS of $3.96.

In 2023, quite frankly, we delivered some pretty exceptional organic growth rates, which were far above our longer-term targets. At the start of the year, we committed to deliver low double-digit growth across each division. In the end, we delivered more, growing annual organic revenue ex-COVID in the mid-teens at 15.6%, with every division growing north of 13% and international growth just above 20%. Despite various macro challenges, like clockwork, we continued to deliver, raising our financial guidance throughout the year and living up to our commitments. At the same time, our balance sheet remains incredibly strong and we have the financial flexibility to grow our business for the long term. For fiscal 2024, we are confident in our ability to deliver against our 5% to 7% ex-COVID long-term organic growth target, even against significant comps, one less selling week, and a challenging macro environment.

In fact, if we look at 2024 on an adjusted daily sales basis, our annual organic revenue growth rate, excluding COVID, is projected to be in the 6% to 8% range. Whether adjusting for selling days or not, we believe our results will truly stand out from the crowd as we progress throughout fiscal 2024, particularly following a year of almost 16% growth ex-COVID in 2023. Before sharing more of our excitement for 2024, we will first reflect on our Q4 results. In Q4, we grew total organic revenue, excluding COVID, 16.7%, with double-digit growth in every division. We again delivered on our promises. At the division level, breast health grew 27.4%, driven primarily by the recovery in our gantry business. Interventional breast also posted a strong quarter, growing in the low double digits.

We are pleased the division’s gantry recovery is tracking to our expectations, following the industry’s chip supply challenges. Moving on to diagnostics. Organic growth ex-COVID was 10.2%, again driven by our strong molecular business. Organic molecular diagnostics ex-COVID grew 15% for the quarter. Driven once again by strong contributions from BV, CV/TV, Amgen, and Biotheranostics. With fiscal 2023 revenue ex-COVID at $1.48 billion, our diagnostics business is over 40% larger than it was in 2019. Even more impressive, our base molecular business is now nearly 80%, eight zero percent larger than it was pre-pandemic. Molecular has grown through a combination of more than doubling our Panther installed base, adding new menu, gaining new customers, as well as acquisitions into adjacent markets.

This transformation and durable performance speaks to the ongoing success of our growth strategy. Rounding out the divisions, surgical revenue at over $600 million in fiscal 2023 is now nearly 40% larger than what it was in 2019. In Q4, surgical grew 10.6%, driven primarily by MyoSure and Fluent, both growing double digits. In addition, our laparoscopic portfolio also grew double digits, albeit smaller in dollars compared to MyoSure and Fluent. More importantly, we are pleased our laparoscopic portfolio continues to gain traction. To close the overview of our quarterly results and fiscal 2023 highlights, our international business continue to be accretive to overall growth rates, growing north of 28% on an organic ex-COVID basis in Q4. We expect international to continue to be a key part of our growth story.

Before moving on, I’d like to revisit and reinforce our capital allocation strategy. In short, our capital allocation strategy remains the same. We continue to prioritize M&A opportunities; and second, we consistently look to utilize cash towards share repurchases. And we continue to be patient. Having said that, we have recently seen the opportunity to deploy our cash balance more significantly, taking the following four actions. One, in Q4 2023 we deployed $238 million of capital to buy back 3.2 million shares. Second, in our current fiscal Q1 2024, we have already repurchased another 2.2 million shares for $150 million. Three, today we announced an additional $500 million accelerated share repurchase program. And four, we recently paid down $250 million of higher variable interest rate debt.

Ryan will expand on both the ASR and debt repayment in his remarks. Looking back four plus years since the start of the pandemic, the biggest acquisition we have made is of ourselves. During this period, we deployed over $1.4 billion on M&A opportunities and nearly $2.3 billion on share repurchases, including our recent repurchases in Q1 2024. And today’s ASR announcement will make that $2.8 billion. As you can see, we are very confident in our position for the years ahead. Rounding out our capital allocation discussion. To ensure we are optimized for the future, we carefully evaluate our portfolio on an ongoing basis. As a result, as mentioned in our release, we have recently divested our small SSI ultrasound business. Shifting gears, as we have shared on prior calls, we have broadly transformed our business and strengthened our fundamentals.

Quarter-by-quarter, year-by-year, with macro hurdles ever present, we continue to prove our strength. Today, we are effectively a new Hologic, retooled and recapitalized with strong brands, wide modes, industry-leading margins, and the strongest, deepest leadership team we’ve ever had. Hologic is a differentiated and more competitive company than at any time in our 38-year history. At our core, we are fundamentally guided by our purpose, passion, and promise. Our purpose, to enable healthier lives everywhere, every day. Our passion, to champion women’s health globally. And our promise, the science of sure, to provide health care professionals with clinically differentiated, high quality products. Across each division, we have distinct advantages created by our unique focus on elevating women’s health through innovative products and trailblazing social initiatives like the Hologic Global Women’s Health Index.

We ultimately develop our leading positions by leaning into our purpose and proactively meeting our customers’ and patients’ needs. We will highlight three examples today. First, we are not only leaders in women’s health, but we are also sector leaders in workflow automation. Our customers continue to deal with challenges, sourcing technicians, and the persistent pressure to efficiently manage costs. As a result, user-friendly systems and efficient workflow solutions are at the top of our customers’ expectations. From our Panther instrument to our Brevera breast biopsy and Fluent systems, to name only a few, each product is designed to transform manual, labor-intensive, cumbersome processes into easy to use, dependable, and efficient workflows.

Second, the massive footprint and sheer size of our installed bases in diagnostics and breast health provide a strong foundation in today’s world. With more than 3,260 Panther instruments installed worldwide and over 10,000 mammography systems installed across the US, we have the opportunity to be integral partners with the laboratories, hospitals, and screening centers we support. For Panther, as customers add more menu and drive incremental volume, our molecular diagnostics business continues to grow, while also becoming more valuable to our customers and more deeply rooted in their operations. The same can be said for our breast health business. Hologic is unique in our ability to support our customers and their patients at each step along the breast care continuum.

We differentiate ourselves with our ecosystem of technologies that integrate across a patient’s journey, creating a more comfortable patient experience, greater clinical confidence for practitioners, and increased operational efficiencies for our customers. Moving on to our third example, our longstanding brand leadership across multiple product lines in each division, which yields strong, stable margins and steady cash flow generation. We are innovators and leaders in breast and cervical cancer screening, STI testing, abnormal uterine bleeding treatment, and fibroid removal. This is a significant statement given the strong competitors we face in each respective business. Our diversified leadership and scale across our business lines support industry leading margins and cash flow and in turn, we have the ability to further invest and grow our business.

Altogether, we are emerging as a premier growth company, differentiated and more competitive, delivering strong growth across each division and international. As the new much stronger Hologic we are today, we consistently deliver and aim to continue to do so. Turning our attention to 2024, I will touch on some of the high-level growth drivers in each business, and Ryan will finish the call with further detail related to next year’s guidance. First, in breast health, we expect 2024 to be another strong year of growth. With our gantry backlog remaining elevated compared to historic levels, we have greater visibility into our pipeline, translating to higher confidence in future gantry sales, creating another exciting year for breast health. In diagnostics, as in recent years, molecular will continue to drive growth for the division.

We expect our large global Panther install base to continue to add new menu, while also increasing volume for existing assays. In addition, our Biotheranostics business, which we acquired in 2021, is expected to continue delivering double-digit growth, being accretive even to our molecular growth rate. In 2023, Biotheraenostics grew over 30%, and we are still in early innings growing the breast cancer index test. BCI is still the only test recognized by NCCN guidelines and the American Society of Clinical Oncology to predict which patients are likely to benefit from extended adjuvant therapy beyond five years, yet another example of an innovative and differentiated product. In surgical, MyoSure, our Fluent system, and our newer laparoscopic products that we acquired via Boulder and Acessa are projected to continue to drive growth.

Internationally, surgical also continues to shine. In 2023, our international surgical growth rate was more than double the US growth rate. Surgical is clearly emerging as a strong and profitable growth driver. To conclude, entering 2024, we are a new and differentiated Hologic. We are bigger, stronger, and more competitive than ever. Our leadership brands, growth drivers across all three divisions, durable margin profile, and strong balance sheet will continue to power us forward. As we look ahead to 2024, we are poised to continue to grow and make an even bigger impact on women’s health around the world. With that, let me hand the call over to Ryan.

Ryan Simon: Thank you, Steve. And again, good afternoon, everyone. In my remarks today, I will touch on our fourth quarter financial results, recap our annual performance for certain items, and end with our fiscal 2024 guidance for Q1 and the full year. We are pleased to close out fiscal 2023 with yet another strong quarter of growth and profitability. In our fourth quarter, total revenue was $945.3 million, and again, we delivered double-digit organic revenue growth, growing 16.7% excluding the impact of COVID. In addition, our Q4 non-GAAP earnings per share were $0.89, growing 8.5% compared to the prior year despite significantly less COVID testing revenue. For the full year 2023, total revenue was $4.03 billion. Organic ex-COVID revenue grew 15.6% and non-GAAP earnings per share were $3.96.

These are exceptional results in what has been an unpredictable operating environment. Now moving to a brief discussion of our divisional revenue. In diagnostics, global revenue of $416.4 million declined 20.6%. However, excluding COVID assay and COVID-related revenues, the division grew 10.2% in the quarter. Performance was again led by molecular diagnostics, growing 15% in the period ex-COVID. For the year, molecular posted very strong global growth of 18.9% ex-COVID. As Steve highlighted, growth continues to be driven by increasing Panther utilization, turbocharged by a much larger install base, and strong performance from biotherapeutics. Moving next to our COVID results, which exceeded our previous guidance. COVID assay revenue in our fourth quarter was $21 million, and COVID-related revenue, inclusive of a small amount of revenue from discontinued products and diagnostics, was $24 million.

Staying in diagnostics, our cytology and perinatal business increased 1.3% in our fourth quarter, a solid result following outsized growth in our preceding third quarter due to the timing of certain larger orders. Moving to breast health, total fourth quarter breast health revenue of $352.8 million increased 27.4%. The division’s healthy bookings and elevated backlogs provides us excellent visibility to meet customer needs and financial targets in fiscal 2024 and beyond. Continuing next to surgical, fourth quarter revenue of $148 million increased 10.6% compared to the prior year. Surgical’s fourth quarter closes out a year in which the business grew a tremendous 15.8% organically, excluding the impact of Boulder in Q1. And finally, in our skeletal business, fourth quarter revenue of $28 million was also strong, increasing 15.9%.

Now let’s move on to the rest of the non-GAAP P&L for the fourth quarter. Gross margin of 60.4% was driven by strong performance in our base business. However, this result was partially depressed by certain elevated costs, including higher cost inventory from previously procured semiconductor chips. Moving down the P&L, fourth quarter operating expenses of $303.7 million decreased approximately 8%. This decrease was driven by lower marketing spend in the period compared to the prior year, primarily due to the timing of expenses associated with our WTA partnership. The low operating income, other income represented a gain in our fiscal fourth quarter. We benefited from higher interest rates on our cash balance, driving elevated levels of interest income.

In addition, we realized gains on our interest rate hedge, helping to lower interest expense for our floating rate debt. Finally, our tax rate in Q4 was 19.75% as expected. Putting these pieces together, operating margin for Q4 came in at 28.3% and net margin was 23.2%. As we have previously discussed, we expect operating margin to improve from this level throughout fiscal 2024. Finally, non-GAAP net income finished at $219.3 million, and non-GAAP EPS was $0.89 cents. Moving on from the P&L, cash flow from operations was $258.7 million in the fourth quarter, capping off a year in which we generated over $1 billion in operating cash flow. As Steve outlined, we were actively repurchasing our shares in Q4 2023, as well as the start of Q1 2024.

For the full year 2023, we spent $500 million to repurchase 6.8 million shares. Even so, we ended the fourth quarter with $2.7 billion of cash on our balance sheet and a net leverage ratio of 0.1 times. Lastly, after the end of our fiscal fourth quarter, we completed one important capital market transaction and intend to enter into another. First, we repaid $250 million of floating rate debt associated with our credit agreement. This debt pay down helps to further protect our balance sheet against the risk of rising interest rates. And second, as Steve mentioned, we continue to bet on ourselves and announce a $500 million ASR, showcasing our resolute belief in the value of our business as we look to benefit from the stock market’s underappreciation of our intrinsic value.

Now let’s move on to our non-GAAP financial guidance for the first quarter and full fiscal year. For our Q1, we are expecting total revenue in the range of $960 million to $985 million and EPS of $0.92 to $0.97. For the full year 2024, our guidance assumes revenue of $3.92 to $4.02 billion and EPS of $3.90 to $4.10. As you reconcile our guidance to your models, we would like to call out three specific items pertaining to full-year total revenue. One, the headwind of four less selling days in fiscal 2024 compared to fiscal 2023, which is about $40 million. Two, the divestiture of the SSI ultrasound business, about a $20 million headwind. And three, the impact of FX, also about a $20 million headwind. First, with respect to selling days, our fiscal 2023 was a 53 week year.

In fiscal 2024, we have four less selling days compared to 2023, specifically within Q1. We estimate the impact of the four less selling days to be a headwind of about 400 basis points to our Q1 results and more than 100 basis points for the full year. Second, regarding the divestiture of the SSI ultrasound business, in the same way we treat revenue from our divested blood screening business, we will be removing ultrasound revenue from both the current and prior year when calculating our organic growth rates in fiscal 2024. This ultrasound revenue was approximately $4.5 million in Q1 2023 and about $20 million for the full fiscal year. For fiscal 2024, we expect immaterial remaining ultrasound revenue of less than $1 million per quarter. And third, in terms of foreign exchange, we are assuming an FX tailwind of approximately $3 million for Q1 and a headwind of about $20 million for the full year.

We anticipate the impact of the recently stronger US dollar to be more acutely felt in the back half of our fiscal 2024. Now turning to our divisional guidance. We expect that each base business will grow within our 5% to 7% framework for the full fiscal year at the midpoint. However, this may not be every division, every quarter, due to strong 2023 comps for certain businesses. Starting with core diagnostics, we expect the business to grow within our 5% to 7% long-term targets for the full fiscal year 2024, but likely below this level in Q1. Our first quarter growth rates will be impacted not only by the four extra selling days in the prior year period, but also strong non-COVID respiratory comps. As we plan for fiscal 2024, we are forecasting conservatively for menu items related to flu and RSV.

At this point, we do not foresee a respiratory season in the first half of fiscal 2024 that mirrors last year. Closing out our non-COVID diagnostics business, we expect blood revenue of about $8 million in Q1 and about $30 million for the full year. In terms of COVID revenue, we expect COVID assay sales to be about $15 million in the first quarter of 2024 and about $40 million for the full year. COVID-related items are expected to be about $30 million in the first quarter and about $105 million for the full year. Moving to breast health, we expect fiscal 2024 to showcase strong demand for our product portfolio as supply chain challenges abate. As a reminder, due to supply chain challenges in the prior year, our growth rate in fiscal Q1 will likely be above trend.

Therefore, as we move throughout the year and comps normalize, growth rates may recede. However, total revenue should increase as we begin to work through our elevated backlog. Finally, in surgical, we expect growth rates within our long-term target of 5% to 7% for the full year, but below this level for Q1. In our first quarter of fiscal 2024, surgical will be impacted by the four less selling days as well as the fact that we are lapping a pricing benefit from NovaSure’s V5 product line extension. Moving next to margins, we expect a cadence of improvement throughout fiscal 2024 for both gross margin and operating margin as we work through higher costs during the year. For gross margin, we anticipate Q1 levels at approximately 60%, exiting the fiscal year in the low 60s.

Similarly, our guidance assumes Q1 operating margins in the high 20s with a Q4 2024 exit rate in the low 30s. Continuing to work down the P&L, we expect Q1 to represent our highest quarter of operating expense in fiscal 2024. This is due to normal seasonal expenses associated with internal global sales meetings to kick off our fiscal year. For the balance of the year, we anticipate quarterly operating expense to be in line with the back half of our fiscal 2023. Below operating income, we estimate fiscal 2024 other income net to be approximately neutral in Q1 and an expense of between $40 million to $60 million for the full year. Our guidance is based on an annual effective tax rate of approximately 19.75% and diluted shares outstanding are expected to be approximately $239 million for the full year.

To conclude, our strong fourth quarter wrapped up a remarkable year for Hologic. As we move to our fiscal 2024, we remain focused on advancing women’s health around the world while delivering on our promises and commitments to shareholders, employees, customers, and patients. With that, we ask the operator to open the call for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] We will take our first question from Puneet Souda with Leerink Partners. Please go ahead.

Puneet Souda: Hi, Steve. Thanks for taking the questions. And thanks, Ryan, for the details there on financials. If I could ask two of my questions together. We’ve been getting a number of questions around USPSTF, it’s right around the corner. Could you update us on your thoughts for co-testing versus primary at this point. Any change in how it could turn out to be grade A versus grade B? And if you’re wondering — if you’re incorporating any of that impact in your 2024 guide. And then second part, Steve, is just with the FDA LDT regulation, do you think it changes the competitive landscape for Panther or for your approved diagnostic platforms? Thank you.

Stephen MacMillan: Sure, Puneet, let me take those first. USPSTF, we continue to think there’s so much focus on this that’s quite frankly a very little impact to our business. I’d remind you back in 2018 when the first guidelines were being updated at that point in time. They came out, they were against co-testing. By the time ultimately they came out as official, co-testing was put back in. We continue to feel very good about our business regardless of how they go. They also, obviously people have been focused on them for months and months, thinking they’re coming every other day. We think it’s a big do about nothing, to be quite candid. I feel great about our business, feel great about the data on co-testing, and feel great that regardless of how they go, the clinicians are going to stick with our business and there’s going to be no change to our forecasts.

So regarding the LBT thing, I think again, great question. It’s part of where I view the strength of our business. First off, I think again that there’s so much focus on what I call headline risks. To be clear, the LBT stuff won’t come into effect probably until at least 2028. And there’s going be issues that are going be battled between now and then, legislatively, everything else, so nothing that’s going to impact the business over the next three years, probably the next five. At a bare minimum, however, we love where we’re positioned in that most of us with our kidding and as you well know, from a Panther standpoint, it could create more opportunities. So the LBT thing probably creates more opportunity for us than it does risk. Having said that, we really just don’t think much is going to happen on that over the next few years.

So thanks. We know you probably have another call you want to get to too, Puneet.

Puneet Souda: Right.

Stephen MacMillan: All right.

Operator: We will take our next question from Jack Meehan with Nephron. Please go ahead.

Jack Meehan: Thank you. Good afternoon. And first, I hope Karleen and family are doing all right. And also Steve, appreciate the commitment to the capital return here to shareholders. I think that’s great. I was wondering if you just on the business. [Multiple Speakers] I appreciate it. Okay can we talk about Panther, now that we’re at the end of the year, are there any updated utilization stats you can share for the system? And second, the recent placement rates have slowed. I know there was some pull forward on placements that during the pandemic. I was just curious like how long you think this kind of lasts before hospitals and labs start expanding their fleets again. Thanks.

Stephen MacMillan: Yeah, great. I think the simplest thing on utilization is that our molecular business grew 18.9% last year, which is virtually all increased utilization on the Panthers. And we just love what we’ve done there. Clearly, as we said even at the start of last year, Panther placements for the next few years may be very small and frankly are almost immaterial to us growing the business, because at this point there were so many machines put out there as you know from everybody, but I think especially from us. Now it’s really ramping up the menu with our existing customers. And an increased focus on expanding the Fusion. So I think the magic for us is now that we have so many Panthers installed, we’re increasingly going back and getting the fusion sidecar put on, which opens up the PCR assays.

And I think we continue to see years and years of growth, just even from the existing installed base, as we’re expanding the menu and putting more fusions out there. So, Ryan, did you have anything you wanted to add?

Ryan Simon: Yeah, Jack, I’ll add to that that our growth as we look forward is not predicated so much on placing additional panthers. This is really what Steve mentioned is, placing more assays on the system, expanding the Fusion footprint, as well as growing the volumes of the assays adopted so far.

Stephen MacMillan: And go Eagles.

Operator: We will take our next question from Derik De Bruin with Bank of America. Please go ahead.

Stephen MacMillan: Hey, Derik.

Derik De Bruin: Hi, thanks for taking the call. Appreciate it. Just some, you commented on the pricing environment. Can you thought to what your sort of expectations are for pricing this year? And Ryan, just I know you said negative $40 million and negative $60 million expense for other all-in, But what’s the interest expense on that, just to help preempt the model?

Stephen MacMillan: I’ll take the first part and then kick it over to Ryan. In terms of pricing, overall, we’re assuming very modest pricing. Most of our gains really are volume, given that a lot of our contracts are already set with very little pricing increase. And I think it’s where we’re very proud of the fiscal discipline that we’ve been able to exert. And then getting opportunistic pricing or pricing really as much mix as we launch new products, Derik, but very little of our growth is based on pricing at this point.

Ryan Simon: Yeah, and on that second piece, Derik, it’s approximately $50 million in expense in that number. When you’re looking at it from a high level, like looking at 2023 compared to 2024, the biggest difference there is, we’re assuming less cash on the balance sheet going forward. And — but to answer your question, it’s going to be $50 million on that interest expense.

Derik De Bruin: Great. I just want to clarify, if I can, the full ASR is embedded into the current guide for EPS?

Ryan Simon: Correct. Correct. Correct.

Operator: We will take our next question from Patrick Donnelly with Citi. Please go ahead.