Q1 2023 Hologic Inc Earnings Call

Please standby.

Good afternoon, and welcome to <unk> first quarter fiscal 2023 earnings Conference call. My name is Justin 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 find it Vice President Investor Relations to begin the call.

Thank you Justin good afternoon, and thank you for joining <unk> first quarter fiscal 2023 earnings call with me today are Steve Macmillan, The company's chairman, President and Chief Executive Officer, and Carlene Overton, Our Chief Financial Officer are.

Our first 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 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 filings.

During this call. We will also 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 sales from discontinued products and 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 <unk> CEO .

Thank you Ryan and good afternoon, everyone. We're pleased to discuss our financial results for the first quarter of fiscal 2023.

Our results highlight the strength of our three divisions.

Power of our commercial channels and the increasing impact of our transformative growth drivers from R&D and acquisitions.

For the quarter total revenue was $1.07 billion and non-GAAP earnings per share was $1 seven.

Both above the high end of our guidance.

We also repurchased one 5 million shares of our stock for $100 million in the quarter.

To recap our prerelease, while we did have the benefit of three extra selling days. Our top line performance was strong diagnostics grew 15.8% powered by molecular diagnostics, which grew 24 point to 5%.

Both figures are organic and exclude COVID-19.

Surgical also delivered an impressive quarter growing 14, 7% organically.

In breast health finished the quarter down only five 2% a signal that our recovery from chip related supply chain headwinds is indeed underway.

Well the extra days contributed approximately 250 basis points of growth.

Net even without the extra days diagnostics and surgical both grew double digits and breast health exceeded prior guidance.

All in we are well positioned to achieve our full year guidance.

Low double digit organic growth ex COVID-19.

All three of our franchises.

Well above our 5% to 7% long term growth rates are.

Our balance sheet and cash flow are exceptionally strong and we continue to create value for our stakeholders.

Today, we'd like to cover two main topics.

First we'll build on the thesis from our J P. Morgan presentation, three weeks ago, a theme that encapsulates, how we improve women's health globally drive our commercial success and elevate hologic is reputation at the same time.

Second we will highlight the transformation of our business and showcase the growth we are driving in each division, which we hope is now becoming much more evident in recent quarters.

We are incredibly excited about today and confident about our future.

Jumping right in.

Purpose driven results driven.

These four words comprised the theme of our JP Morgan presentation. This year.

And these four words underpin the success of our entire business.

That's the logic, we have an unparalleled commitment to women's health.

When we speak purpose driven results driven.

Nothing symbolizes these words better than our virtuous circle, which we feature in our corporate presentation.

It is simple and powerful at the same time.

Most importantly, it unifies and inspires our thousands of employees around the world and points our talented work force in one singular direction to elevate women's health, where we have leadership positions in each segment in which we operate.

Our business starts with innovative clinically differentiated life changing lifesaving technologies.

Whether through R&D or by M&A. It all starts with innovation.

As we bring these new innovative products to market they grow our sales and profits.

And here is the key to our success, what we believe sets us apart and allows us to thrive.

We then invest these profits into championing women's health on a global scale.

We are expanding policy and access, which then allows our products to reach more women and have an even greater impact on the world.

And as our business grows the cycle continues.

Simple and powerful.

Two weeks ago for the second straight year, we had the opportunity to engage with global leaders at the World Economic Forum in Davos, Switzerland.

This is an incredible platform that was not available to us just three years ago.

We've earned our access through our leadership in women's health.

Our pioneering hologic global Womens Health index.

And our outstanding response to Covid that continues today.

As we've grown our business, we have significantly elevated the hologic brand around the world.

With our engagement at Davos, making powerful connections and building strong relationships.

Bind with recognition from our global partnership with the Women's Tennis Association.

Well logic and what we stand for is more recognized globally than ever before.

Which in turn helps us attract the best and the brightest to the Hologic team an important advantage in today's labor market.

Quite frankly, the best thing, we can do for the World and also for our business is to raise awareness and opportunities for women's health globally.

For a sense of scale there are approximately 170 million women in the U S. Our largest market.

This is only a fraction of the nearly 4 billion women in the world. We have a long way to go and as the importance of women's health is elevated in these markets grow hologic will be there at each step along the way.

Shifting gears to our second topic understanding the growth that is driving our business.

With our strong performance for the quarter. The number one question. We are asked is how are we growing our topline.

To answer this question, we will first reflect on our business transformation.

Our full mix of organic innovation and strategic tuck in acquisitions.

Second we will discuss each division and highlight examples of our growth engines and the multitude of market strategies deployed across each division.

Reflecting on our transformation it really started well before COVID-19.

Three years ago, we were ready to show the world, how we are diligently and thoughtfully strengthened our business for growth.

Then the pandemic hit.

And when it did we established three goals.

Take care of our employees, which we have done.

To meet the world's needs for highly accurate molecular diagnostic COVID-19 testing, which we continue today.

And three emerge as a fundamentally stronger company.

Which is happening now.

Under the cloud of Covid, while successfully deploying Panthers in producing our COVID-19 assays.

We strengthened the whole logic for the long term.

To a level higher than even we had imagined prior to the pandemic.

We achieved this through the combination of innovative internal R&D efforts plus a series of tuck in acquisitions.

As a result, we've had continuous new product releases that have fundamentally transformed our business and boosted our growth profile.

Now as the Covid cloud begins to clear it is increasingly more evident that we are geared for success geared for growth and geared to sustained performance over the long term.

Next to fully appreciate our growth potential is to understand the transformation and diversification of our portfolio and growth strategies.

Across all divisions, we are innovating acquiring and building new markets.

Enter in underdeveloped markets and penetrating existing segments, all while continuing to defend and even grow share in the markets we lead.

Our growth in each division is grounded in strong and durable core products.

These resilient core franchises are backed by long established clinical needs and commercial relationships.

Which provide a rock solid foundation to leverage into our newer growth drivers.

We leverage our installed bases and customer relationships to advance our newer products, which we expect to both diversify the portfolio.

And accelerate growth.

Moving on to the divisions in diagnostics, we have leading positions in core women's health product lines, such as stis and cervical cancer.

Our women's health molecular diagnostics and cytology base drive steady growth and supports positive relationships with top laboratories, and key opinion leaders, which opens the door for additional new products.

Today diagnostics has grown from primarily a U S women's health business to a global diagnostics franchise with many more growth drivers.

For example, we now have over 3200 50 Panthers worldwide a.

A number beyond what we had even imagined along with 19 assets.

And the fusion system that enables even further menu expansion.

We also have a vastly expanded footprint with three acquisitions.

<unk> <unk> and <unk> that are contributing today and will even more so in the future.

More specifically driving future growth for diagnostics means leveraging our expanded Panther installed base. These.

These customers are adopters of our newer assays, including BV CV television.

And Amgen.

We add menu promote guidelines and drive adoption through our women's health clinical channel.

Likewise, we also leverage our Panther installed base to enter established categories, such as virology and respiratory testing.

Focusing on our diagnostics acquisitions with <unk>, we are already seeing solid contributions as we build a new market that is currently minimally penetrated.

And with Moby Diane de Novo diet platform allows for significant future contributions as we prepare to enter the large and emerging syndromic panel market that is adjacent to our core molecular diagnostics franchise.

In breast health revenue from our three D mammography equipment and related service represents the core revenue Foundation of the division.

While our fiscal 'twenty three growth is primarily driven by the return of chip supply gantry availability.

The division is primed for future growth via further portfolio expansion.

The breast health business now spans the breast continuum of care with more recurring growth drivers than ever before.

We have expanded from what was once a capital intensive business by growing service revenue and adding more recurring disposable revenue.

In doing so we are creating new markets as with our <unk> breast biopsy system.

While also entering existing markets, where we compete with clinically differentiated products.

And while we are leaders in the screening space. Our R&D teams are poised to keep US ahead of the pack.

In surgical the business has changed dramatically.

Vulvic from essentially a two product division to one which is now much more robust and diverse.

Last quarter revenue outside of <unk> and core <unk> represented approximately 25% of the divisions' total <unk>.

Compared to only approximately 10% in fiscal 2019.

While <unk> still formed a strong durable base of the division.

The business is far more dynamic than pre pandemic.

We now have meaningful growth drivers outside of these two core product lines from acquisitions.

<unk> new enhanced products.

And also improvements to existing products.

Going a level deeper the growth in surgical is driven by products like fluid.

As well as <unk>, both from our internal R&D efforts.

With fluent we created an elegant solution to history, a scopic fluid management that stands alone.

And with our <unk> <unk> line extension, we have proven that even the best can get better and that we are never satisfied and never done innovating.

By acquisition, the assessor procedure in the Boulder advanced vessel sealing portfolio.

Also diversify and elevate the division's growth trajectory.

These are both laparoscopic tools that we have moved swiftly to acquire during Covid times and have added to our prior history Scopic only offering.

Assessor is a unique radiofrequency fibroid removal solution.

Where we are building, a new market and improving payer coverage.

In Boulder, we are entering an underdeveloped market by deploying our large surgical sales force to introduce our advanced ceiling portfolio to the Ob Gyn market.

Finally, our international business is so much stronger and poised for exceptional future growth post pandemic.

Bolstering the individual product growth drivers in each division, we continue to penetrate our markets internationally.

For example, in the quarter, our diagnostics business ex Covid and surgical businesses each grew more than 20%.

As we've stated before we expect international growth rates to be accretive to our overall growth rate for years to come.

In summary, our commitment to our purpose has paved the way for our success during the pandemic.

And as a beacon for our future.

We are now a transformed much stronger hologic with more diverse growth drivers across each business and a much larger more capable international presence.

And through our innovative R&D and effective tuck in acquisition strategy, we are well positioned to continue to drive strong sustainable growth for years to come.

With that let me turn the call over to Colleen.

Thank you, Steve and good afternoon, everyone. We.

We are pleased to share our first quarter results that exceeded our guidance on both the topline and bottomline.

Our strong performance was once again, driven by our diagnostics and surgical businesses.

With each growing mid teens organically in the period, excluding COVID-19 revenue.

In breast health, we earn.

Courage by results that show the chip supply is moving in the right direction and that our mammography business is recovering.

Before moving into our divisional results. It is important to highlight our balance sheet.

Our leverage ratio of two times.

The capital structure that is as strong as it has ever been providing.

Providing our business a tremendous amount of flexibility for internal investment and capital deployment opportunities.

Moving on I'll now provide more color on our financial results.

In the first quarter revenue and profitability once again meaningfully surpassed our estimates.

The balance be split between our base business and Covid.

Total revenue came in at 1.074 billion.

A result, more than $100 million higher than the midpoint of our guidance.

And non-GAAP EPS was $1 seven more than 20 higher than the midpoint of our prior guide.

Turning to our business results.

Diagnostics global revenue of $559 $3 million declined 41, 2% compared to the prior year.

It is important to remember the Covid testing revenue was elevated not fiscal first quarter of 2022, given the surge in infections from the <unk>.

That's a more accurate representation of the diagnostics business is to exclude COVID-19 assay revenue related ancillary and a small amount of revenue from discontinued products.

When making this normalization, we see that organic diagnostics revenue increased 15, 8% in the quarter.

Within diagnostics, we continue to see momentum in molecular but the third quarter in a row, we delivered healthy double digit growth.

Specifically molecular diagnostics grew nearly 25% in the first quarter, excluding the impact of Covid.

This outstanding result demonstrates strong utilization across a significantly larger panther installed base.

Performance was driven by a mix of our legacy portfolio and newer assays for.

For example, the collective revenue of our core STI menu was well above pre pandemic levels in the quarter.

In addition, BBC television had another strong quarter more than doubling compared to the prior year as our progress continues growing the IBD vaginitis market.

Further our non COVID-19 respiratory portfolio delivered revenue ahead of expectations in the period.

As Lisa uptake in testing for flu and RSV, given heightened prevalence and public awareness of these pathogens.

Finally, the bioterror gnostic contribution to our base molecular performance continues to increase.

With accretive revenue growth in the quarter.

Moving to our covered result.

We generated $127 million of Covid assay revenue in the quarter.

Exceeding our previous guidance of $75 million.

In terms of the Covid assay revenue split by geography.

Domestic sales led most of our upside and represented nearly 80% of Covid assay revenue in the period.

The demand for a COVID-19 assay remains primarily COVID-19 only however, we did see above trend demand for a COVID-19 flu multiplex test.

Rounding out diagnostics, our cytology and perinatal business has increased one 6% compared to the prior year.

In breast health total revenue of $334 2 million was down five 2%.

Better than expected.

These results were driven by strong demand for our mammography equipment and improving semiconductor chip supply.

We remain cautiously optimistic that Q1 revenue performance in our breast imaging segment being down only four 5%.

Delighted that the worst of the chip supply headwinds are likely behind us.

We would remind everyone. We are still on allocation and that the macro backdrop could change quickly.

As it relates to our intervention business revenue was down 8% in the period driven by lingering supply chain issues outside of chip availability.

We expect these headwinds to subside for the balance of the year and the segment to resume a cadence of strong growth starting in fiscal Q2.

In surgical first quarter revenue of $154 1 million grew more than 17%.

And excluding the Boulder acquisition the business grew nearly 15%.

These results underscore and more diverse surgical business with more growth drivers than in the past.

In addition to strong performance from my ashore and better than expected results from Nova sure the quarter showcased increasing contributions from fluent and our laparoscopic portfolio of assessor in Boulder.

Lastly, in our skeletal business revenue of $26 6 million increased slightly less than 1% compared to the prior year period.

Now, let's move on to the rest of the non-GAAP P&L for the first quarter.

Gross margin of 62, 7% was driven by higher than expected COVID-19 testing revenues and strong performance in our base business in the period.

Total operating expenses of $339 4 million in the first quarter increased one 6%.

But were up less than 1% when excluding expenses from Boulder, which closed at the end of November 2021.

The increase was led by higher marketing spend given the timing of certain initiatives.

We expect marketing expense to move lower starting in our fiscal second quarter of 2023.

Although operating income other expense was less than anticipated primarily due to higher interest income from investing our elevated cash balances at higher interest rates.

Finally, our tax rate in Q1 was 19% as expected.

Putting these pieces together operating margin for Q1 came in at 31, 1% and net margin was 24, 9%.

Both ahead of our previous estimates.

non-GAAP net income finished at $267 9 million and non-GAAP EPS was $1 seven.

Moving on from the P&L cash flow from operation was $253 4 million in the first quarter.

We had $2 4 billion of cash on our balance sheet and our leverage ratio remained at two two times.

Although it may appear to the outside I that we are letting our cash balance build rest assured our M&A teams at each division are incredibly active.

Our capital allocation strategy remains unchanged.

Our priority remains pursuing growth accretive tuck in deals that align with our division and leverage our core strengths and strong commercial channel.

More recently, given the stability of our balance sheet and the strength of our business. We have widen our aperture to consider slightly larger EBITDA generating deals.

That said it is important to make clear that we expect any transaction, we pursue will be complementary to our core strength and not represent a completely new are unrelated vertical.

Our second priority will continue to be share repurchases and as Steve highlighted in the first quarter, we repurchased one 5 million shares for $100 million.

Now, let's move on to our updated non-GAAP financial guidance for the second quarter and full year fiscal 2023.

As a reminder, our organic guidance excludes acquisition revenue until each deal annualize it.

Therefore, all deals are part of our organic base starting in Q2 2023.

In the second quarter of fiscal 2023, we again expect strong financial results with total revenue in the range of $930 million to $980 million.

For all of fiscal 2023, we are increasing our full year guidance and expect total revenue in the range of $3 $85 billion to $4 billion.

Reflecting low double digit organic growth ex COVID-19 across each of our divisions.

Help with constant currency modeling, we are assuming foreign currency exchange headwinds of slightly less than $20 million in the second quarter of 2023 <unk>.

And approximately $50 million for the full year.

These headwinds have improved compared to our previous guidance as the U S. Dollar has depreciated over the past several months.

Turning to our divisions, we are thrilled with the outlook for each business as we continue to anticipate that core diagnostics, excluding COVID-19 breast health and surgical organically grow low double digits for our fiscal 2023.

In diagnostics molecular should continue to lead the way, we expect our assets to drive growth as non COVID-19 utilization improves and customers add additional menu to their Panther system.

As a reminder.

Nokia diagnostics growth is not predicated on placing more panther instruments.

Rather, helping our existing customers grow their business.

As we have said consistently.

Even though panther placements are likely to slow in the near term given the huge pull forward during the pandemic additional placements do not influence the trajectory of our molecular outlook.

Closing out on diagnostics, we expect expect led revenue slightly less than $25 million for the year.

Moving to breast health, we see an improving environment for chip supply and our position is unchanged from last quarter.

Our expectation is that for a gradual improvement in our breast imaging business throughout 2023.

We maintain our view that the business should exit fiscal 2023 at or near normal levels.

However, we'd like to make clear that you should not expect an outsized revenue catch up in any particular quarter. Instead, our plan is to incrementally worked down our backlog over time as we look to efficiently manage the resources of our outstanding field service team.

Finally in surgical as evidenced by our first quarters results. The business has quietly transformed into a dynamic franchise moving beyond what was once a two product division.

Low double digit organic growth for fiscal 2023 will be driven by a combination of my ashore.

Related fluent fluid management system, and a laparoscopic portfolio of assessor in Boulder.

In terms of cobot sales, we expect Covid assay sales to be approximately $50 million in the second quarter of 2023 and $225 million for the full year.

Covid related items inclusive of a small amount of discontinued product revenue.

Are expected to be approximately $35 million in the second quarter and $130 million for the full year.

Moving down the P&L for the full year, we continue to expect our non-GAAP gross margin percentage to be in the low sixty's.

In our non-GAAP operating margin percentage to be approximately 30%.

Within this operating margin profile be have again incorporated elevated inflationary pressures into our guidance of approximately 200 to 250 basis points, which we anticipate will persist throughout our fiscal 2023.

In terms of operating expenses, we expect spending to step down starting in our second quarter, given the timing of marketing expenses primarily.

Associated with our Wth partnership.

Further we foresee operating expense dollars as fairly flat sequentially from Q2 through Q4.

Below operating income we expect other income net to be an expense of around $50 million for the rest of the year.

Our guidance is based on an annual effective tax rate of approximately 19%.

And diluted shares outstanding are expected to be approximately $251 million for the full year.

All this nets out to expected non-GAAP EPS of <unk> 80 to 90 in the second quarter.

And $3 55 to $3 85 for the year.

To conclude let me wrap up by repeating that our strong first quarter results exceeded our guidance in spite of persistent macro uncertain uncertainty.

Performance was driven by tremendous growth in our molecular diagnostics and surgical businesses.

Bind with the better than expected progress in breast health.

As we look forward to the remainder of our fiscal 2023, we are excited to showcase our transformed business.

With our updated guidance reinforcing our expectations of low double digit growth in each division for the remainder of the year.

The logic is a much stronger company than prior to the pandemic and we believe our 2023 performance will further prove this out.

With that we ask the operator to open the call for questions.

Thank you if you would like to signal with questions. Please press star one on your Touchtone telephone.

Joining us today, you say speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment again that.

That is star one if you would like to signal one question Star one.

And our first question will come from Patrick Donnelly with Citi.

Hey, guys. Thank you for taking the questions.

Carl can you maybe just picking up on me on the margin side, they're obviously pretty good performance in the quarter.

Still talking about it obviously some of the headwinds throughout the year can you just talk about the cadence I know previously you were talking kind of 30% ish every quarter can you just walk us through I guess, obviously the tailwind we saw at <unk> and what the rest of the year looks like in terms of headwind or tailwind and how that cadence works.

Yes, sure. So I think the outlook would say that each quarter is roughly 30% operating margin and what you see happening is you.

You have the marketing expenses coming down from Q1, you had lower Covid revenue, which is a headwind, but then you have higher breast health revenue, which is a tailwind so they kind of offset those headwinds the tail is offset over the course of the year.

We maintain at that 30 again at a little lower than pre pandemic, because we have the higher inflationary costs still anticipated.

Okay, Okay understood.

And then Steve maybe just on molecular diagnostics and a really strong core performance. There can you just flesh out a little bit more on the drivers you saw I guess sustainability.

Some pretty big numbers, you guys put up there just just trying to get a sense for the drivers and what we can expect going forward on that front.

Yeah, you probably got it in multiple buckets. Patrick part is just a return of the Panther is being used for the core STI most of our women's health business.

Got it.

Increasing growth in our new product launches, especially bvc V, which is off to a tremendous start and we've said we think will be.

A major driver of growth.

And you really have what we kept saying over the last couple of years and it wasn't as obvious.

As so many of our customers around the world that we're running Covid are now putting the menu onto the Panthers and it's really that simple.

A huge part of it and there is a little bit of Africa, and some viral stuff, but the only thing I would add to that Patrick because we had some nice contribution from our our respiratory assays, which will be seasonal as we move forward.

And our next question will come from Jack Meehan with Nephron research.

While eagle Thank you.

You got to get the formalities out of the way go birds.

Like our euro and I say that every year.

Why do you go Wi Fi Hologic fly Okay go ahead, Jeff.

Excellent.

So I had a couple of 10-Q derive questions that I personally thought we're kind of interesting I want to get your thoughts on the first is.

So you report international molecular sales of $97 million.

Carlene based on your Covid assay disclosures.

Like $25 million of international Covid, So it implies about $72 million of base molecular international.

Prior to the pandemic it was like $30 million a quarter. So I was just wondering like could this be.

An interesting gauge of what the.

The international installed base could look like in terms of the stickiness of Panther, just any thoughts on that would be helpful.

Yeah. So we have as you said that number includes the Covid assay revenues I think you've attempted to take some of that up. We also have the ancillary which are part of that that are elevated because of COVID-19, but I think so.

Certainly you know, we're seeing the uptake again with newer customers in more than Covid as well as our initiatives like in Africa with Steve talked about about viral picking up some nice.

A nice traction there as well I think we as we think about international molecular we would think that that is going to grow a little faster than U S. Given the commercial investments that we've made there and the Panther placements.

Jack just to pick up on that point that you've noticed we've placed a lot of Panthers with so many of them, especially the European countries.

As we responded with Covid in every one of those was coming with trailing shifts over to the STI business. So I think that's a.

A big piece of it.

Interesting. Okay. Then my second question is on breast imaging. So the U S sales in the quarter were $212 million.

I think that's actually like the largest first quarter you've had at least several years international still seeing some pressure, but I'm just trying to juxtapose. This versus your comment about you are still seeing ongoing semiconductor pressure.

What was going on in the U S. In the quarter or was there any flush of some sort as chips came in and just what is <unk> assume.

Yes, there was there was absolutely no flush we can tell you we did get a little bit more supply that we were able to install and candidly Jack.

The extra week, we got a little bit of service revenue in there.

Because of that that extra week in the quarter, so that kind of pushed us into the growth without that extra week that would have been slightly down a bit but we like.

Where we're coming in we were able to kind of refurbished few more chips got a few more chips in and we're able to get a little more product out, but we're feeling really good about.

Where we're headed this quarter and for the rest of the year in breast health.

And our next question will come from Max Masucci with Cowen and company.

Okay great.

Thanks for taking the question.

First one on operating margins.

It looks like the COVID-19 testing and related items.

About 15%.

Organic revenues so just based on your expectations for global Covid testing revenues this year.

As we near the end of the U S government's Phe program.

Does COVID-19 testing and reimbursement remain.

The big needle mover for 2023 operating margins or the operating margin expansion opportunity now more dependent on the breast health rebounds and door.

<unk> strengths and not.

Non COVID-19 molecular Dx.

Yes, I would say that the margin.

Accretion from Covid is less and less dependent on COVID-19 as we move throughout the year and it's going to be more driven by the breast health recovery and certainly Q1 to Q2, lower operating expenses, which will consist persist.

Persist throughout the year.

Okay.

Got it.

Then.

Just in terms of M&A and they give you look at your free cash flow deployment.

<unk>.

About 28%.

Over the past five years I think it's been for share buybacks.

And any sense I would just be curious to hear about the potential size of any M&A deal you'd be willing to pursue and ease any recent conversations amongst the biz Dev team in terms of.

What types of companies fit best towards the whole logic of of today.

Just a general update on capital deployment would be great. Thanks.

Sure Max reiterate what <unk> said, our primary goal is still tuck in acquisitions, followed by share buybacks, we certainly have been opportunistic on the on.

On the buybacks, because we generated a whole bunch more cash during.

During that time and thought that made a lot of sense.

Going forward, we're looking across the businesses all being led by the divisions were not going to get into particular scale or targets for obvious reasons, but I think what we will.

Would say is we might go a little bit bigger on scale. If it brought more EBITDA, so that would be a proportionate.

Thought process there.

But I think were the biggest takeaway frankly as well.

We're in a position of strength, where our base businesses are very strong we don't have to go do anything.

And candidly when I think theres a lot of lot of folks around trying to figure out what they want to be when they grow up right now we know exactly where we're going and what we want to be.

And that is championing women's health and having every business going well so it gives us the luxury of.

Being patient and smart on the business development front.

And our next question will come from setup with SBB Securities.

Yeah, Hi, Thanks for taking the question so maybe for you.

Given the low double digit growth rate that you're highlighting here.

Obviously the business all three segments are doing great sort of whats holding you back on the long term guide of 5% to 7%.

Why couldn't that be higher now in your long term outlook.

Because we're running the business for the long term and fundamentally let's look at it.

Still bouncing off of some comps from last year, where things were a little depressed.

From Covid everything else, we are a company that delivers and plans for the long haul and everything we've done to move up to the five to seven has been very smart and we're going to continue to be prudent.

Okay, Great and then just.

On capital deployment, maybe carlin, what's the what's your ability to lever up what ratio are you comfortable with.

Just given the sort of the interest rates that are there right now and.

Potential for those to continue to ramp up a bit higher.

Yes, I mean, I think we have indicated that we'd be comfortable in a two to three times leverage ratio. That's something certainly we talk to and supported by our credit agency, but but to your point, we would continue with value based on the interest rate environment, but certainly at this point, we have plenty of cash and we have a credit line.

Matt Gili can fully deploy so feel like we've got good flexibility.

To do what we want.

Event.

And moving on to Vijay Kumar with Evercore ISI.

Hey, guys congratulations.

Solid Q here and thanks for taking my question.

Steve.

Yeah, I wanted to ask one on the guidance updates here.

It looks like you beat the quarter.

The midpoint of your prior guidance by about 121 Nash.

Annual guide was raised by about 125 looks like most of that's coming from FX.

And change in code assumptions when I look at Q1 printer your underlying organic came in better.

So why wouldn't someone said underlying strength, we saw in Q1 flow through.

Floats with the rest of the year is there any any.

Impact of revenue recognition or is this just a concentrate to them.

It's we continue to deliver I can promise you. It has nothing to do with timing of revenue recognition Vijay the underlying business is very strong we're one quarter and think about where we were a year ago. At this time suddenly Russia, Ukraine, nobody saw that coming I've lived through the downturn of O eight or nine.

We've watched the world would go up and down and where the first quarter over a year. So we're going to continue to be very prudent do not underestimate our confidence in our ability to run the business.

Understood and then maybe.

Another way to ask this question Steve is.

Diagnostics literally was a highlight at 16% organic.

So what is driving this.

Is this.

Is this like reagents, what kind of testing that's driving this or was this easy code comp when I look at Q1 overall underlying organic was six to hit double digits for the year the base has to do.

Phil to the back half.

How should we think about this diagnostics, which was 15% in Q1 ramping up in back half.

Back half being carried by.

Normalization of <unk> breast imaging revenues.

Well look clearly the comps on molecular diagnostics will get harder in the back half the fundamentally what's driving it we sort of answered. This I think earlier, we placed a whole bunch of Panthers at almost 500 Panthers in Covid time over the last three years, we've got more customers adopting our core menu we have.

Our new products being launched doing very well and those are really the main drivers as well as a little bit of flu and a little bit of a.

Viral stuff as we've been penetrating a little more Africa. So yeah.

It is the Panther placements and new customers as well I think we've talked about in our corporate presentation that you know of newly acquired customers.

5% or running at least one other assay in over 55% of running at least two other assays. So I think that is the value of the Panther in the menu that we have.

Driving that growth.

And our next question will come from Tim Daly with Wells Fargo.

Great.

So Steve I'd love to comment some parties are out there trying to figure out who they wanna be thrilled when they grow up and just running with that.

Spent a lot of players.

In molecular diagnostics seem to be adding menu in women's health arena. So given your legacy foothold there.

Howard can you think about the current competitive environment.

Are you worried about any.

Pressures, maybe from new entrants trying to gain share via that lever.

Yeah, just kind of defensible.

Stance here and kind of what you would oh.

And so is there any questions around that.

Yes, we worry all the time.

But at the end of the day.

We've also built an incredible sales force that has partnered both with the labs, but also with the clinicians and our assays have proven themselves over time as well as do not underestimate the workflow advantages of our Panther system.

So theres a lot of people that can talk a good game and especially let's face. It there were so many startups that all were working on stuff and then they've got money in Covid time, then they start talking about all their women's health assays.

And.

It's an interesting little landscape right now so we never take anybody for granted we faced some very formidable competitors.

But we always have and we will continue to and we frankly think we continue to innovate things like PVC, we continue to bring new assays and new tests and new education to our customers and that continues to provide strength for us.

Alright, I appreciate that and then one for Collins so.

Surgical great to hear about the performance outside of the legacy products.

The detail on the growth drivers this year, but could you kind of give us a bit more quantified.

Quantified detail about growth ranges here across the various buckets, so kind of the legacy products versus the new in house developed versus kind of the recent acquisitions.

Any additional kind of above below ranges or anything like that you can provide and thank you.

But I would say is dollar contribution is probably evenly split between.

The legacy platform and.

Fluent our new innovative and then the acquisitions, but certainly the percentage growth rate is much higher from the acquisitions building off a smaller base, but at the end of the day I think the key takeaway is there's not just one growth driver. This multiple growth drivers that are driving the success of that business.

And our next question will come from <unk> <unk> with Morgan Stanley .

Hey, guys good evening and thanks for the time here.

I'll start with a couple on some of the recent deals for you Steve.

On <unk> can you just remind us again, where things stand in terms of you know I think you had said president buildup under way ahead of the launch how big do you think the revenue opportunity could be in fiscal 'twenty three and then similarly, you highlighted biopharma gnostics a couple of times today, and obviously they've got got into guidelines.

We have the the recent data from.

December as well.

How big do you see this opportunity.

But coming for you, perhaps not this year, but a couple of years out.

Sure I think on Mobi, mobi, youll still be pretty small this year <unk> will hit its stride ultimately will bring it to the U S, which is still several years away.

But we love the platform, we have there on bioterror gnostics.

Still very small penetration.

So the reality is.

Clearly it's it's.

It's going to be probably potentially a few hundred million, we're not sure at this point.

Never great at when Youre, creating new markets, it's always really hard because you go back eight years ago people asked me could my assure someday be the size of <unk> and at that point in time. It was hard to picture that in today my assure us.

Way bigger than <unk>.

So I think this magic that we have where we really are creating and building markets. It's sometimes hard to fully put a number on it other than to see we think theres a lot of runway here a lot.

Got it that's helpful.

And then a couple of follow ups here, one on just the hospital capex environment, and any sort of change in either sort of decision timelines or perhaps cancellation rates here a month into the new calendar year and in China. I know, it's small for you guys I think it's less than 3% of sales, but is there anything.

Going on there in terms of the Covid case surge that we should be factoring in at least in the fiscal second quarter here.

I think on.

On the first on Capex, we continue to stay really close to our sales teams on it and seeing very tiny.

Nothing outside of historical cancellation rates, which is de minimis.

In China, I think what you will see is probably most of the hospitals in China over the last 60 ish days and probably here for a little period for our probably cutting down on normal procedures as they had been treating COVID-19 patients.

But I think.

For our business again pretty small, but I think that's the kind of macro way I'd be thinking about China right now and my hunch is after the Chinese new year, and everything else, they're going to largely come back online and that will start to pick back up.

Probably later this at full calendar quarter.

I think theyre going to get through it fine.

And moving on to Derik de Bruin with Bank of America.

Hi, good afternoon.

Sure.

A question you are talking about.

30 ish percent.

Adjusted operating margin for this year I'm looking at the consensus for 2024, it's about 35% you are talking about.

200 to 250 basis points of inflationary pressures that are sort of in there. It's like can you walk us through how youre thinking about operating margins.

As you sort of invest in the business.

And some of these inflationary pressures normalize just sort of trying to get a sense of where we go from here.

Yes, Derek it's currently so I'll take this one so if you think about prior to the pandemic.

I would say, it's our normal operating modular roughly 30 31, 5% very rich margins for for our industry, you know I see us probably over time getting back to that that level, but you know what I, what I would say is think about a 5% to 7%.

Top line long term growth rate, we will grow EPS faster than that to likely low double digits and that EPS growth comes from more than just operating margin expansion that comes from higher revenue growth as well as some things that we can do to blow. The line. So that's how we think about our long term outlook for earnings growing faster than revenue and again anchored.

On that 5% to 7%.

Great and Derek.

But a little point on to a spin.

<unk> been around this business long enough to watch either divisions big companies or companies themselves.

To push that operating margin so far that they cut into R&D and you don't see it immediately but over time your innovation falls.

And so we know a lot of folks want to just keep saying to all of those every number go up like that we're thinking very much as Carlin said, but driving the EPS number, but continuing to invest in R&D and not try to drive the operating margin is as high as humanly possible.

Well, thanks for setting me up Steve that's exactly where I was going to ask so I appreciate that.

But when do you think.

<unk> got Biopharma, Asics, which is which is in your entry and sort of like the oncology world.

There were some dabbling in the past with some things with like I think it was <unk> three years something like stuff. How do you sort of think about oncology Mark I mean, there's obviously a lot of real estate out there, but I think he pointed out that you don't want to do anything Thats Super.

Super dilutive in those areas can you just sort of a bit but clearly there's a lot that's going on in that market.

<unk> for.

<unk> can you just sort of like flesh out where you sort of think the genomics focus is where this is going out it is thanks.

Sure Derik, Yeah, you're probably the only person who remembers PCA through so.

I think we're comfortable continuing to be fairly patient.

Look at this overall right. So I'll go back seven or eight years liquid biopsy is going to be the greatest thing ever and everybody thought by 2018 2020.

This mask thing we kept saying look we just don't know that this can be a lot of money made.

So we continue and particularly at our acquisitions everything we look at is thinking about what is the long term value creation from an earnings standpoint, not just a revenue and let's face it as you well know in this industry as well theres a whole bunch of companies that generate a lot of top <unk>.

But no bottom line and they get great valuations when they are standalone as you try to drop those into a healthy company and where suddenly the EPS starts to get looked at you never get that same expansion on the multiple so I also think for all of the promise the promise never comes as quickly.

As everybody thinks it's going to do.

I'm still waiting for gain sharing north of <unk> to take over the whole world.

20 years later and I, just think as we continue to watch the space.

We believe there will be winners that will emerge.

But we're still letting some of those play out.

Candidly and trying to see it's not just a revenue game or a number of boxes sold or in a number of kits sold or whatever else. It really is okay. What's the long term trajectory is how we're trying to think about these things.

Thank you for asking that.

And we will take a question from Andrew Blackman with William Blair.

Hey, lets himself with amo on for Andrew.

Going back to the comment you made earlier on multi die and the entry and Thats grown.

The market can you be more specific timelines and how you plan to leverage your Tampa relationships to drive that forward.

Yes.

We're clearly entering in Europe right now in a smaller scale. The U S clearance will be ultimately the bigger partners. We said, that's probably at least 2025 ish.

You know event at this point so we're still a few years away as we prepare for it and we will certainly be able to leverage.

Lot of the strength that we have in the labs, especially the medium sized.

Labs as we go into that point at that point.

Okay.

I recognize that you've talked about M&A already but wondering if you can be more specific.

Speak to how youre thinking about valuations, both public and private space.

We're always looking at the end of the day, we're thinking about that.

Long term top and bottom line growth, we're very focused on ROIC.

A key part of our senior leadership team.

Comp is tied on ROIC. So we look at it on every deal and we've watched a whole bunch of things that even that have come down 80%, 90%.

Some of them.

We still don't necessarily like so.

Again, I think we've got the luxury of time on our side.

Given the strength of our underlying business and the strength of our balance sheet.

Which gives us a chance to be relatively picky around what might be out there.

And we have a question from Nevada tie with BNP parabolic thing.

Hi, Thanks for taking my question.

The women's health, so I believe such a 19th.

Q1 growth ex Covid.

We continue to drive growth for the rest of the year.

And longer term could you discuss your women's health focus being potentially a competitive advantage versus your non focused peers. Thank you.

Yeah, I think we continue to see growth certainly in our women's health assays Thats been.

And it kind of hit us to your second point about if you think about something like BV CV television that we've launched.

We discovered and realized about that because we're so tapped into the key opinion leaders and starting to realize that there are other tests that may be able to be developed that we can bring to the market to bring greater levels of uncertainty and specificity and I think when we have that knowledge because we surround those customers.

Our focused approach certainly benefits as well and I think helps us on the innovation side. The same in three D mammography and how that has led to better biopsy stuff and then the same in our surgical business, where understanding fibroids, but better than anybody else being able to innovate.

Endometrial ablation, so we can.

Surround these call them large niches.

But it's really the insights that we have working with the Kols that I think does provide us a level of competitive advantage.

Yep.

Thanks, and staying in women's health that you mention future portfolio expansion in breast health. So are you able to tell us more about a penny.

Breast health innovation.

Any breast health innovation I think the way to think about that is we just continue.

To innovate we've always been brought enhanced detectors enhanced.

Workflow solutions and enhanced imaging along the way and we'll continue that yes, I think we are focused they weren't important focus on innovation as patient experience focus on that as well as machine learning, what we can do to make radiologists more efficient and certainly that's.

The big issue outside the U S, where there's not much fewer radiologist.

Thank you.

Now concludes <unk> earnings conference call have a good evening.

Most of your questions.

So.

Yeah.

Okay.

Okay.

Okay.