Q2 2022 Hologic Inc Earnings Call
Please standby.
Good afternoon.
Afternoon, and welcome to the whole logic.
Two Q '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.
Thank you Lauren good afternoon, and thank you for joining <unk> second quarter fiscal 2022 earnings call with me today are Steve Macmillan, The company's chairman, President and Chief Executive Officer, and Carlene Overton, our Chief Financial Officer.
Our second quarter 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 of this call will be available through May 27.
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.
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.
These non-GAAP measures are one organic revenue, which we define as constant currency revenue, excluding the divested blood screening business and revenue from acquired businesses owned by Hologic for less than one year and two organic revenue excluding COVID-19.
Which exclude COVID-19 assay revenue revenue related to COVID-19, and discontinued product sales in diagnostics.
Finally, any percentage changes, we discussed 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 . Thank.
Thank you Ryan and good afternoon, everyone. We're pleased to discuss our financial results for the second quarter of fiscal 2022.
We posted solid results overall and continued our excellent performance.
Total revenue was 144 billion and non-GAAP earnings per share were $2 seven exceeding.
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 continued to deliver in an uncertain business environment.
For example in January we saw Covid cases, spike once again, putting pressure on health care utilization and certain elective procedures.
February and 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 whole logic 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 three areas.
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.
Second provide progress on acquisitions, turning organic in our third quarter.
And third 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 second quarter, both our diagnostics and surgical divisions delivered organic growth, excluding COVID-19 , 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.
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 gyn surgical procedures are often postponed and as COVID-19 testing declines, we see the opposite and our base business returns.
We believe with 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 confidence in our people and excited about our positioning heading into the third quarter.
For example in diagnostics, we placed an additional 123 Panthers in the second quarter, surpassing first 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 3100 instruments worldwide with over 45% placed internationally.
Also in diagnostics, our vaginitis panel BV <unk> TV continues its growth trajectory.
In our Q2 of 2021, this assay generated about $7 million for the quarter.
One year later, the panel contributed almost $14 million in worldwide sales.
Nearly double the year before and.
<unk> TV is now on pace to become a top three women's health assay and our molecular diagnostics portfolio.
Now lets provide an update on chip supply in 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 is slightly less than estimated driven by favorable availability and precise management of chips in circulation within our service inventory.
While our teams continue to do a great job navigating the unpredictable supply challenges on chips, the ongoing volatility of supply makes it possible that up to $50 million 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 Colleen 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 'twenty two will prove to be the low watermark in terms of available gantries.
Moving on to an update on acquisitions turning organic.
In our fiscal third quarter contributions from both bioterror and optics and <unk> node will be included in the organic growth of our diagnostics Division.
We will provide an update on both today.
First biotherapeutics.
As a reminder, we completed this acquisition in February of 2021.
The goal of this acquisition was to enter the high growth lab based oncology market.
And adjacent long time area of interest and bring our resources and expertise to create an even stronger business.
Based on breast cancer indexes earlier than anticipated inclusion in NCC and guidelines in January of 2021. The deal is off to a great start.
Last year in its first full quarter post acquisition Bioterror, gnostics posted $13 million of revenue.
Which was more than 30% higher than their best quarter prior to the pandemic.
Fast forward to our most recent quarter.
<unk> generated $16 $4 million in revenue.
This early success comes as a result of outstanding engagement and a successful cross functional cross enterprise integration.
As planned we deployed Hologic resources and expertise and paired this with legacy <unk> capabilities to refine operational efficiency and most importantly set a solid foundation for scalable growth.
To accelerate <unk> already strong growth as an example, we are streamlining the businesses 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.
We are also excited to share that we are in the process of transferring <unk> operations to our diagnostics headquarters in San Diego.
While maintaining required division between clear and IBD activities. We believe the move will lead to an even more unified culture stronger relationships between counterpart and more collaborative efforts.
Finally, and even more encouraging just last week. The Bios Aeronautics PCI test was included in the American Society of clinical oncology guidelines.
Another major step towards increasing utilization and recognition of Dci as the standard of care.
<unk> is now the only genomic test in both end CCN and <unk> guidelines for predicting benefit of extended endocrine therapy.
Moving on shortly after we closed the bioterror and optics transaction, we acquired <unk> based in Belgium.
The goal of the acquisition was to accelerate PCR based assay development for our Panther fusion.
And leverage additional R&D capabilities in Europe .
So far we have checks both boxes.
Since the close of the acquisition as planned we have integrated the <unk> the organization to optimize the speed and efficiency of our global R&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 defined a robust product development pipeline.
The team is already making meaningful progress towards approval of two viral load assays, which will expand our virology portfolio in the transplant testing space.
Overall for both <unk> and our hedge note. We are pleased with the integration and progress of these two businesses.
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 two very meaningful on an opportunistic marketing efforts from our second quarter. 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 TV commercial titled her health as her wealth featured Mary J Blige.
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-19 pandemic.
In January the inaugural results of our Hologic Global Womens 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 durable prognosis.
After two 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 as our landmark title sponsorship of the WTO 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 we will emphasize the importance of preventative care through well woman visits.
We are proud to stand with the WTO 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 Colleen, 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.
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 Colleen.
Thank you, Steve and good afternoon, everyone. We.
We are very pleased to share our second quarter results that significantly exceeded our guidance for both revenue and EPS.
Our second quarter performance once again highlights the strength of our diverse business.
While the omicron very negatively impacted our base businesses early in the quarter.
<unk> testing upside more than offset this headwind.
It's also important to understand that our balance sheet is stronger than ever providing key strategic flexibility in this uncertain macro environment.
Further we continue to generate very healthy free cash flow funding our debt capital deployment priorities.
In the second quarter, we generated significant operating cash flow and executed $200 million of share repurchase.
Both of which I'll touch on in more detail shortly.
Before we do that we will provide color on our consolidated in divisional results for the second quarter.
As a reminder, revenue in our fiscal second quarter is typically seasonally lower compared to our first quarter, which benefits from increased patient activity before calendar year end.
In the quarter total revenue of over $1 4 billion was very strong and came in more than a $150 million higher than the midpoint of our previous guidance.
In addition, EPS of $2 seven in the second quarter far exceeded our guidance range of $1 50 to $1 60.
Turning to our divisional results.
Diagnostics global revenue of $987 1 million declined five 6% compared to the prior year. However, excluding COVID-19 worldwide organic diagnostics revenue increased 4%.
As discussed the division's results early in Q2 were negatively impacted by the Omicron COVID-19 variant.
Based diagnostics business is inversely correlated to spikes in the pandemic as women tend to postpone office visits when Covid cases surge.
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 based molecular revenue grew about 7% organically in the second quarter.
This growth was driven by strong uptake of newer assays, such as our vaginitis panel and menu with an overall product line.
As it relates to our Covid results, we generated $584 million of Covid assay revenue.
Far exceeding our guidance of $400 million.
We shipped about $28 5 million tests to customers as asp's 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 essentially flat compared to the prior year. As these segments were also impacted by COVID-19 influence on womens wellness visits.
In breast health global revenue of $310 4 million was down approximately 7% as expected primarily driven by the chip shortages that we have discussed.
In our interventional business incremental supply chain pressure on a few million dollars surface during the quarter.
Pacific to our disposable biopsy needles.
As a result, our interventional business was down slightly less than 1% in the period.
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 second quarter revenue of $117 3 million grew three 5%.
As we foreshadowed during our first quarter call. The Omicron bank caused it pulled back 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 bolded KOL field devices.
Lastly, in our skeletal business revenue of $20 9 million decreased 6% compared to the prior year period.
Yeah.
Now, let's move on to the rest of the non-GAAP P&L for the second quarter.
Gross margin of 71% was well ahead of our forecast driven by higher than expected COVID-19 testing volumes in the period.
Total operating expenses of $338 2 million increased 22% in the second quarter.
As we have done throughout the pandemic given the benefit from COVID-19 profitability, 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.
For example, <unk>.
Quarter operating expenses included our Super Bowl and Olympics to Marshalls as well as expenses associated with our W. T a partnership.
The combined total of these initiatives contributed slightly more than $25 million to operating expenses in the quarter.
In addition, within operating expenses recent acquisitions added slightly less than $35 million in the quarter about $25 million higher than the prior year period.
Finally, our tax rate in Q2 was 25% marginally lower than our expectations given the higher COVID-19 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%.
non-GAAP net income finished at $524 2 million and non-GAAP earnings per share was $2 seven.
Nearly 35% above the midpoint of our prior guidance.
Moving on from the P&L and cash flow from operations was 1.06 billion in the second quarter.
<unk> about tax refunds totaling approximately $418 million.
Related to the sale of our previously held medical aesthetics business in 2020.
When normalizing for these refunds cash.
<unk> 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 two 9 million shares of our stock for $200 million in the quarter.
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&A opportunities in each one of our divisions.
Based on our strong operational performance, we had $2 3 billion of cash on our balance sheet at the end of the second quarter.
And our leverage ratio was <unk> three 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.
Now, let's move on to our updated guidance for the third quarter and full year fiscal 2022.
In the third quarter, we expect to continue our track record of delivering strong financial results.
With total revenue in the range of $875 million to $915 million.
For the full year fiscal 2022.
We expect total revenue in the range of $4 six.
$4 7 billion.
Significantly exceeding our prior full year guidance by $175 million at the midpoint.
We are raising guidance once again in the face of an uncertain macro backdrop, highlighting our confidence in our business.
Yes.
Given the continued strength of the U S dollar into aid with constant currency modeling, we are assuming foreign exchange headwinds of approximately $20 million in the third quarter of 2022 and $65 million 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 and based on our Panther installed base of over 3100 instruments globally.
But 80% larger than the start of the pandemic.
We are all are also seeing encouraging uptake of our newer assays like our 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 million in the third quarter of 2022.
And approximately 1.25 billion for the full year.
Covid related items inclusive of small amount of discontinued product revenue are expected to be approximately $35 million in the third quarter and $215 million 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 for Vera had another great result, growing mid teens in the last quarter and.
In addition, recurring service revenue represented more than 40% of total sales in Q2.
In terms of the breast health chip shortage announced last quarter, given the significant uncertainty still exists in the chip market.
Possibility of an incremental $50 million headwind in the back half of 2022 exists.
And we have incorporated this into our guidance.
While we are seeing early signs of improvement and 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-19 trends improve.
<unk> and related organic products, such as fluent continue to drive near term growth and.
And we expect meaningful contribution from both assessor in Boulder over the next several years.
As a reminder, our organic guidance backs out of revenue from acquisitions until the first full quarter after a deal annualize.
As well as revenue from our divested blood screening business.
In terms of the deal Bioterror, Gnostics and <unk> will become part of our organic revenue in Q3 22.
Therefore, the organic revenue adjustments for Q3 include <unk>, and bolder and more acute for Boulder only.
Moving down the P&L for the full year, we forecast our non-GAAP gross margin percentage to be in the mid to high <unk>.
And our non-GAAP operating margin percentage to be in the high Thirty's.
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.
In addition, we have again incorporate inflationary supply chain cost into our guidance as it relates to electronics plastics and logistics.
Fight these headwinds for the full year, we expect both gross and operating margins to be above pre pandemic levels.
In terms of operating expenses, we expect spending to be up compared to 2021, but the lower in the second half of 2022 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 million a quarter for the remainder of the year.
Our guidance is based on effective tax rate of 21% and diluted shares outstanding of around $255 million for the full year.
All this nets out to expected EPS of <unk> 67 to 72 cents in the third 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 range at which incorporates both potential upsides and downsides.
Let me wrap up by saying that for logic posted very strong second quarter results that far exceeded expectations and guidance.
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.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. We ask that you. Please limit yourself to one question plus one follow up again that is star one to ask a question.
And we'll take our first question from Jack Meehan with Nephron research.
Thank you and good afternoon.
Hey, Jack My My first question is on breast health in the semiconductors.
Last quarter would be up to $200 million you talked about I thought it was fully derisking began <unk> exposure and then the quarter actually came in a little better than you were thinking so I'm just trying to square the commentary with the additional $60 million you're building in from here 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.
Yeah. So Jack is currently and I'll start off on kind of the evolution of the number so firstly, 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.
But the additional possibility of an additional $50 million. It has a little more to do with timing and so we are pleased that we got a higher allocation of chips than we had thought.
Then we had originally expected, but the timing of that is such that it won't come in until 2023, I think we thought if there was an initial allocation we might get that benefit in 'twenty, two but it's looking like it's 2023.
And I think just on the second part of your question on demand.
Again, we see our backlog growing in our breast health business.
Strong, we're working really strategically with customers to make sure that we're not losing any business because of this and that you know I think our intelligence would be that you know our competitors are probably and likely the same position as us.
And I think the reps field that is.
Okay, Yeah 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.
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.
Yes, Jack and by the way. It also clarify that we're not going to use the cash on the balance sheet to buy the Eagles.
Yeah.
But.
Hopefully that makes some good pics tomorrow.
Yeah, exactly so hey in terms of our relationship with the National Labs, I, probably couldnt 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 two big major labs in the United States, but even.
A number of the other big ones right below the top two.
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 eight day turnaround times for PCR tests.
All of the problems with molecular testing and.
That's when we dispatched and our teams went round the clock to put Panthers in all over the place and we really worked so well too.
To help those 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.
When it comes to how we approach the women's health market. We are also working the reimbursements were 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. So I would I.
I would tell you I feel like it's more of a partnership that is valued than just a traditional vendor.
Wendy relationship and.
I think our teams have worked so hard to have many good relationships throughout all levels, both operationally within their marketing teams.
And we like where we're positioned we really do.
Thank you Steve.
Ray Thanks, Joe.
Our next question comes from Vijay Kumar with Evercore ISI.
Yeah.
Hey, guys. Thanks for taking my question, Steve maybe one big picture for you.
Looking at the base business here the segments it looks like.
With light across the board breast imaging, perhaps that's understandable given the chip shortage.
It looks like underlying diagnostics came in below Street models.
<unk> similar trend how much of this was.
Our utilization impacted 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 and hologic in the queue.
And 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.
Seizures in 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.
Lately over time is as the women's health issues come back and I think you know.
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 you know.
A lot of additional COVID-19 .
Covid test so nothing that we are concerned about and.
I think as we continue to look all of these quarters Theres variability and Theres puts and takes and we keep managing our business overall that is one part goes up the <unk>.
Reality is we do see tradeoffs.
Did shelf $584 million 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.
That's helpful perspective, Steve and maybe one related there's been a lot of debate on the squeeze on.
What is the underlying base margins base earnings power for Hologic.
No what the suite is trying to do.
We're trying to do a code P&L or in our base business P&L and reality that may not be hub.
<unk> think about their businesses, how much reinvestment is going on in the business.
And the reason I ask is if I look at the implied Q4 EPS Guide I think it's $60 65, so that's annualized.
I'm assuming.
Q4 has very minimal.
Co testing, but also it has some impact from breast.
Imaging the chip shortage right. So what is the underlying earnings power here for <unk> that we should be thinking about.
Yeah, Vijay it's currently and so I will take you through it. So if we look at the second half of 2022, you're right.
That is the worst impact of the breast health chip shortage.
And so don't think of the back half earnings power and the math you just did on the Q4 as what we call our base business earnings power. There is definitely an impact there significant impact with pretty minimal COVID-19 revenue in the fourth quarter.
The other thing I would point to is that if we look at the back half we have a higher operating expenses and essentially dilutive operating margins from our acquisitions, which actually 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 of the significantly lower so to reiterate the back half earnings power is not reflective of the base business.
Because because of the onetime items I'll call them that we have there.
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 topline and bottom line through the balance of the year. So 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 <unk> point that is.
The fourth quarter is not the ongoing run rate.
We will take our next question from Patrick Donnelly with Citi.
Hey, guys. Thanks for taking the questions maybe.
Maybe a similar follow up on that I mean, just in terms of the breast health.
Ramp back up as we get into the beginning of 'twenty three what's the visibility into the supply chain normalizing there I mean, the confidence level that kind of correct itself as we get into 'twenty. Three so we think of it as more slowly ramping back up and being a bit of a drag on revenue and margins to start 23 is the expenses come to Collins points those are in play.
<unk> growth is going to catch up.
Think about that as we look out to the start of 'twenty correct.
Yeah, I would say that as expected not to be.
Compared to as we will see benefits from increased supply early in 'twenty, three but I think we will see to your point a normalization throughout the year is what I would think it would happen because even though we have we have building backlog, it's going to take multiple quarters to work through it as these installs of this equipment is highly.
Scheduled with hospitals in breast centers together, let's take the rooms down as construction as well as the install takes you know.
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.
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 priority. There obviously the market is volatile presents opportunities here and there, but what's the internal thinking how large would you go on the deal side, what's the pipeline look like.
There would be helpful.
Yeah, I think the biggest.
Thought we should leave you with is were comfortable being patient right now.
Just because we have a very strong.
Cash on the balance sheet doesn't mean, we feel a pressure to go do it in the next quarter or two we know that deals will present themselves in the quarters or years ahead.
And I was showing currently enrolled headline from.
The late <unk> timeframe at Stryker, where we were sitting on a pile of cash and at the time was being criticized for being too Conservative and you know 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 a balance sheet that we have relative to what we had eight 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 we're looking at and think there will be some good deals that 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 been.
As shown over the last five years or so we're being very disciplined and rigorous.
We'll take our next question from Puneet <unk> with SVP VP Securities.
Yeah, Hi, Steve Thanks for taking the question so.
Maybe just the first one.
On the some of the Panthers that you highlighted the recent sales are those are still going into a.
Demand for Covid or was that still a function of demand pull through in January from from Covid or are customers now looking at the broader menu and saying.
Looking at Panther purchases from a broader menu perspective could you update us on any.
Utilization trends I know this is a major question in terms of the utilization of <unk>.
Covid conversion into other test, maybe just walk us through sort of what's happening as we somewhat emerge out of pandemic into this and the mixed situation.
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 have seen the benefits both in Covid and it's also given us the chance to 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 the machines, we have yet another spike.
And candidly, we would have expected more base business growth this quarter, and then Lo and Behold, we did another 28 and a half million.
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 will become dull do 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 much stronger and prolong.
Long ramped 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 through and you'll start to see it in these quarters.
Okay. That's helpful. And then just a one off question, but we've been getting from investors given the China shutdowns.
Anything that you are baking from that.
Right into the guide and maybe just could you if you could remind us your exposure there both in terms of the revenue impact of the supply chain.
Thank you.
Yes, it's currently Italian so that so you know less than 3% of our revenue comes from China. So we have pretty minimal exposure. We do think there is some impact of 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.
We'll take our next question from Brian Weinstein with William Blair.
Good afternoon. This is <unk>.
I'm on for Brian Thanks for the questions.
Just starting on continuing to talk about that.
<unk> strength I guess, specifically in diagnostics.
Historically those markets.
Favorable reimbursement and just lower testing volumes with less screenings.
Are you seeing any change in either of those dynamics.
As you think about the O U S outlook.
I think we are 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 that 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 would be really helping to grow those markets more significantly over time. So I think we feel very encourage short term from all of the placements and longer term because of the strength that we've put in our teams and frankly the additional access we've got into a lot of the health ministers of the world through both Covid.
<unk> as well as the Hologic Global Womens Health index to I think start to get women's health.
<unk> moved up the priority list, where we will be able to get more screening guidelines and things put in place in the coming years, particularly in the in Western Europe .
Okay.
And then on the CTG.
We've got to pre pandemic levels any notable changes in how you think about the basis from competition here pre pandemic versus endemic standard post pandemic, particularly with some of the.
Point of care molecular entrants in the STI market.
Yes, we will 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 position, yes, I would just emphasize that most of the <unk> 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.
We will take our next question from Tejas Savant with Morgan Stanley .
Hey, guys good evening.
Just a follow up on some of your earlier comments on the chip shortages in the breast health side Steven Carlin.
You spoke about you know.
The new allocation that youre expecting to see come through at the end of the second part of your.
How can you quantify that relative to that 20% number that you had spoken of earlier and in terms of seeing the benefit in fiscal 'twenty three.
Is this largely sort of outside your control or are there things you can do to accelerate those timelines, perhaps looking into different suppliers et cetera.
In rough numbers I think the increased allocation increased our expected unit production by about 20% to 25% in 2023.
And I think from that initial hopefully we will get.
We just don't know, we don't have that visibility to it with that allocation gets any higher but that's that's what we're planning on right now.
Got it.
And any comments Colleen on the possibility of new suppliers coming in here or is that sort of all incorporated into your fiscal 'twenty three recovery commentary.
Yeah, what we know is kind of incorporated into the guide and not commentary I think you know <unk> to <unk>.
They bring on new suppliers would take multiple quarters and I think the issue. The supply issue is not just our supply is it's all of the supplier. So it doesn't really solve the problem.
Our next question comes from Casey Woodring with J P. Morgan.
Hi, guys. Thanks for taking my question.
Can you talk a little about breast service and if there's maybe any kind of pull forward you could do there to offset some of the near term gantry sales headwind.
Yeah.
So Brett service, we love our breast service revenue its you know I think.
But the comment was about 40% of the breast are 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.
It's tied to our installed base so.
We're not putting out more gantries, it's hard to.
Do more service contracts. So that's really that's more of a stabilizing factor in that division versus limited ability to pull forward.
Yes, nor would we want to pull it forward to be quite honest I think what we love about that business is it stable and candidly we've got all of 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 would want to do is mortgage.
Some of that.
Okay.
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. When you think about cepheid and some of the other instruments out there with overlapping menu.
Two hospital customers have both a panther in a bench top instrument and sort of how should we think about this dynamic moving forward.
All of the cobot placements.
Yes, many do but they are still largely used differently you know a lot of the bench top stuff is really for symptomatic.
And especially respiratory or other symptomatic stuff, whereas ours is largely asymptomatic and ongoing screening. So yeah. I think this is going to be a question of and not or.
And there's.
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 with the Panther placements. So I think we're very confident youre going to continue to see that and that will unfold, even more as the COVID-19 revenue goes away.
Our next question comes from Mike Matson with Needham.
Hi, guys. This is Joseph on for Mike.
I guess, maybe one around gross margin.
I guess given the capacity expansion.
Do you really mean koby testing during the surge is and as we start seeing that decline will see the volume decline.
Should we expect.
Uh huh.
Some type of gross margin headwind in these next couple of quarters.
Well certainly as Covid revenue comes down the gross margins will come down from where they have been but from an absorption perspective.
You know our manufacturing of Covid is.
Fungible with all of our molecular diagnostics manufacturing there is not a separate COVID-19 line, where we will have yes.
I'll have to mothball, if you will I think the other piece of what has happened over the last two years as we have expanded our manufacturing, but that's been substantially funded by the department of defense and our contacts with them. So there's really no big hit if you will for idle idle capacity that is the question.
Yeah, Yeah absolutely.
That's very helpful.
And then I guess, maybe one more around.
The Panther system thing that you guys had touched on that a lot but.
As we're kind of looking towards that capacity utilization and non COVID-19 assay is really going into these systems.
I guess maybe.
There's been a lot of surges up and down obviously hospitals are very flush, but I guess what are you guys looking forward to really.
These forward whether it would be.
Trainings that you guys could reschedule or whether it's just kind of waiting for.
Total total COVID-19 cases to really reach a manageable level.
Yes in terms of the base business if that's the.
R. J, it's really around having the time to get the new assays up and running on the Panther within each each hospital and each lab, but I would tell you just from having.
We are in our strategic planning process right now, where we've been sitting down both with the U S diagnostics team, but also our international teams.
And as we look at the optimism 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 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. 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 that's going to bode very well for us.
We'll take our next question from Derik de Bruin with Bank of America.
Hey, good afternoon. Thanks for taking my question Hey, Steve.
Steve how do you feel about the long term guide that you set out you put out that 5% to 7% core growth CAGR.
<unk> grew 25 on the <unk> 21 call and I'm, just wondering given the chip shortages and everything like that is I mean, how do you. How is your confidence in that I mean looking at the results. This quarter I think some people were a little bit nervous, but are you still comfortable with that 5% to 7% number.
Barry.
It's a long term thing obviously, we did not anticipate the chip shortage 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 I think we feel very very good.
You know 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.
And you know it's growth rates as we start to look into 'twenty, three probably looking pretty good.
Okay.
It is a placeholder for Covid for next year that fourth quarter number that $40 million to $50 million in black recover testing in Q4 is that a good way to sort of think about it.
Now.
Yes, I almost don't even want to go there Derek.
The quarterly swings you know who knows where it all goes and I think we're poised either way but.
Would put in a de Minimis number for 2024 and yet I think we will we will certainly expect some volumes to continue to be there so probably not a horrible.
Estimate, but we're nowhere near being able to give guidance.
And we will take our final question from Brian Zimmerman with BT IAG.
Thanks for squeezing me in I'll, just keep it to one in the interest of time, so on the breast health business, Steve or Colleen.
We've seen from some of your peers on the on the equipment side, certainly commentary around softer demand cost of debt is rising.
You alluded to the fact that the order book is pretty healthy or the backlog is healthy on the breast side. What do you what do you attribute that to in terms of in terms of your capital equipment. As it is at a site of service as it is at price points relative to maybe some of the million dollar plus robots that are out there I'd just be curious to understand kind of how you're thinking about the capital equipment.
A man market at the hospital level.
Yeah, 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 in mammography and especially in three 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 to your second point I will say, we're not of the high ticket items in a grand scheme of hospital recapitalizing.
A few rooms in mammography or even.
Several suites.
Is nowhere near the magnitude of some of the bigger iron the massive.
It's robots or mris and those kinds of things. So I think it does allow us to kind of.
A sweet spot, where even if there's a little bit of <unk>.
Capital contraction that we think we'll be fine there and I think our team is feeling very very good.
Okay. Thank you.
Alright, thank you.
It sounds like it operator.
Laura.
Yes, Sir that concludes today's question and answer session. Now concludes whole logics <unk> 2022 earnings conference call have a good evening.
Alright.
Yeah.
Yes.
Yes.
[music].
Okay.
Okay.
Yes.
Okay.
Yes.
[music].