Hologic Inc (HOLX) 2013 Q4 法說會逐字稿

Ladies and gentlemen, good afternoon, and welcome to the Hologic Incorporated fourth-quarter 2013 earnings conference call. My name is Joyce, and I am your operator for today's call. Today's conference call is being recorded. All lines have been placed on mute, and I would now like to introduce Deborah Gordon, Vice President of Investor Relations to begin the call.

Thank you and good afternoon, and thank you for joining us for Hologic's fourth-quarter fiscal 2013 earnings call. The replay of this call will be archived on our website through Friday, November 29, and a copy of our press release discussing our fourth-quarter results, as well as our first-quarter and fiscal 2014 guidance is available on the overview section of the investor relations section of our website. Also in that section is a PowerPoint presentation related to the comments that will be made during today's opening remarks.

Before we begin I would like to inform you that certain statements made by Hologic during the course of this call may constitute forward-looking statements. These statements involve known and unknown risks and uncertainties, that may cause actual results to be materially different from any future results implied by such statements. Such factors include those referenced in our Safe Harbor statement, in our fourth-quarter earnings release, and in the Company's filings with the Securities and Exchange Commission.

Also, during this call, we will be discussing certain financial measures not prepared in accordance with Generally Accepted Accounting Principles, or GAAP. A reconciliation of these non-GAAP financial measures to the related GAAP financial measures can also be found in our fourth-quarter earnings release, including the financial tables in the release.

Please note, today's call will consist of opening remarks from management, followed by a 30-minute Q&A session. Please feel free to go back into queue, and if time permits, we will be more than happy to take your follow-up questions at that time. With that I would now like to turn the call over to Jack Cumming, President and Chief Executive Officer.

Thank you, Deb, and thank you all for joining us on this Veterans Day today, where we are all thankful and appreciative of the men and women who have served our country over these many years to defend our freedoms.

Today, I will first review our fourth-quarter highlights, then update you on the headway we have made on the initiatives we outlined in our last call. Next, I will share our key operating priorities for 2014, and the dynamics driving our business in this fiscal year and beyond. I will then turn the call over to Glenn, for a detailed financial discussion.

Fiscal 2013 was a year of significant change at Hologic. While there were many positives to report, we had to confront challenges in some of our businesses, and therefore have taken the necessary steps to align our resources and position ourselves for the future. Organizational change doesn't happen overnight, and fiscal 2014 will be a year of transition for the Company.

The good news is our core products are the technological and market share leaders in their respective segments, which will help us power through a number of secular headwinds in FY14. It is our objective to leverage our core franchises to drive organic growth, and position us for the future. I'm excited about our prospects, as revenue growth will return in FY15, and continue on an upward trend.

To set the stage for where we stand today, let's take a look at some of the operational highlights for the fourth quarter. In our diagnostics group, we continued to make strides in our molecular franchise.

During the quarter, we made substantial progress laying the groundwork to capitalize on our agreement with Quest. To date, we have installed almost all the instrumentation required to support conversion to our women's health assays. Our agreement with Quest represents an important example of the strategic fit of Gen-Probe with our legacy psychology business.

In addition to Quest new business, we added a significant number of new medium and high-volume molecular customers in the US. Aptima HPV has been an important driver of new account wins, and this trend should continue following our recent FDA approvals for use on Panther, including last week's announcement of approval of the Aptima HPV 16 18/45 genotype assay. Based on the strength of our molecular franchise, we are confident about our prospects for additional large laboratory business, which we believe will be a mix of new contract wins and growth in existing accounts.

Our Panther launch continues to roll out successfully, and in Q4, was a driver of new customer wins reflecting our focus on account conversions. For the fiscal year we more than tripled our installed base of Panthers in the US. With our most prolific quarters coming in Q3 and Q4, we now have placed almost 500 Panthers globally, and remain on track to achieve our stated goal of installing 1,000 Panthers by the end of 2015.

I'm pleased with our increase in the system placements in FY13. Our strategy of locking up sockets will not only contribute incremental revenues in 2014, but also set the stage for even greater volumes in the long-term, as we continue to expand our menu of tests, and share of laboratory real estate with our space-saving Panther footprint.

Before moving on to breast health, I'd like to comment on the announcement earlier today of Grifols' acquisition of the Novartis diagnostic business, and how it relates to our blood screening business. We have been aware of the pending transaction, and have had productive conversations with Novartis and Grifols.

We have a long-standing direct relationship with Grifols, who has been a respected customer, as part of our collaboration with Novartis. We believe Grifols' acquisition has a strong strategic rationale, and will make it a powerful and focused player in the blood products and blood safety market.

We are confident Grifols will continue to be successful commercial execution of our products, as well as provide new opportunities for growth based on their industry experience. This business represents 20% of Grifols' total sales, and therefore we believe there focus and resources on growing this business will improve the long-term prospects.

Turning to our breast health group, 3D tomosynthesis continued to gain ground. We were able to build on the third-quarter results and grow the business on both a sequential and year-over-year basis. In fact, we placed a record number of 3D systems worldwide and in the US, and posted our highest tomo bookings quarter ever.

Clearly, we are seeing the positive impact of recent peer-reviewed publications, which are helping to build both awareness and demand for the technology. We ended the year with the domestic installed base of just over 750 systems, more than achieving our stated goal of doubling our installed base during the fiscal year.

As you know, our success to date has been accomplished despite the absence of a formal reimbursement code. Notwithstanding this, we are focused on securing a code, and concurrently are working to secure reimbursement from private payers.

We continue to have success obtaining private payer coverage, and are highly engaged in encouraging dialogue to numerous commercial health plans, and we will look forward to reporting further progress on this, in the quarters ahead. In our surgical segment, MyoSure remains a strong performer, with high double-digit growth over last fiscal year, and ample opportunity to maintain an attractive growth trajectory.

Moving forward, I will now review the progress we have made on the key strategic initiatives outlined during our last quarterly call. On August 5, I highlighted four initiatives that would represent my initial focus as President and CEO. First, conduct a thorough strategic business review. Second, bolster our senior leadership team.

Third, develop a capital allocation strategy to articulate to the street, and fourth, work with our Board to implement new executive compensation policies.

We have made significant progress with our strategic business review, but we still have work to do. As I said on our third-quarter call, our initial emphasis has been on positioning the organization to leverage our leading product platforms.

Organizationally, we took steps to implement immediate short-term changes to gain manufacturing and other operating efficiencies. In correlation with this, we are beginning a multi-year program working with an outside firm specializing in lean manufacturing and service delivery initiatives, which we believe will result in millions of dollars of savings, driven by state-of-the-art techniques and program efficiencies.

We have reprioritized R&D projects across the organization to ensure capital is directed to those projects with the highest potential returns. While most of these programs have been in place, we believe our reprioritization of critical programs will accelerate their commercialization, and ensure disciplined execution that will drive shareholder return.

Furthermore, in conjunction with outside advisors, we are well into a methodical process of evaluating each of our businesses. Our goal has determined, among other things, the overall strategic fit of the business, and whether each is performing at a level that justifies its associated cost of capital.

This approach is also influenced by a range of financial considerations, including the valuations that could be secured for a given asset, and the potential tax impact from pursuing a given path. Obviously, this takes time, and requires thoughtful analysis. I can report to you we have made headway and have sold or are in the midst of selling some minor assays in our product portfolio.

Please appreciate for a variety of reasons, including competitive impact, confidentiality requirements, and employee communications, it is premature to discuss any specifics. We will provide updates when this process results in any significant reportable developments.

With regard to bolstering senior leadership, we have started by restructuring the organization on all levels. As a result, we have made a number of leadership changes in key areas.

We've streamlined our reporting structure, and have placed proven managers into critical roles, particularly within our sales and international organization. I am working closely with the Board to ensure a strong succession plan is in place for all key management positions, that will include further development of internal team members, as well as consideration of highly qualified external candidates.

Now, turning to our capital allocation strategy. Glenn will provide specifics, but I'd like to be clear going forward. We will not commit capital to large transformational acquisitions.

Rather, we intend to allocate our excess cash flow to deleveraging the balance sheet as rapidly as feasible, through both mandatory and discretionary debt repayments, as well as returning capital to shareholders, beginning with the stock repurchase program announced today. As part of this effort, we are focused on return on invested capital as a metric, to make more informed strategic and capital allocation decisions. As evidence of this, our Board has approved new executive compensation policies that are tightly aligned with short and long-term performance, utilizing return on invested capital as one of the key guiding metrics.

I'd like to now share our key financial and operating priorities for FY14. Since assuming the role of CEO a few months ago, I have spent a considerable amount of time traveling with our new senior leadership team to many of our domestic and international offices. During these visits, we conducted town hall meetings, and held intensive strategic and financial review sessions with team leaders.

In addition, we have held national sales meetings globally to gather first-hand market data, customer, economic and government reimbursement trends, and exchange thoughts on future product requirements to meet local market needs. We also visited with clinical opinion leaders, corporate and national healthcare accounts, and laboratory business partners. The input from these meetings, coupled with analysis performed in conjunction with the initiatives described above, has formed a framework to develop a comprehensive financial, operational and capital deployment plan for fiscal 2014 and beyond.

Our operating priorities going forward are quite simple. We will focus on deleveraging our balance sheet, and returning capital to shareholders as prudent business sense allows.

We will drive profitable organic rough through disciplined and focused investments in projects with the highest commercial return. We will seek constant improvement in expense reduction, to maintain and grow the excess cash available, to achieve our objectives of deleveraging and returning capital to shareholders.

We will concentrate on improving ROIC, and have linked our executive compensation to achieve this goal. We believe we have structured executive compensation to emphasize and incentivize shareholder returns, with ROIC as an integral component, and incorporating a performance element in the vesting of equity rewards.

And we will continue this strategic review of our businesses to determine if there are any non-strategic assets that can be disposed of at an attractive valuation. And finally, we are going to continue to build our leadership team, and put the right systems and the metrics in place to maximize operating efficiencies.

Now, a word on fiscal 2014 guidance and a longer-term outlook. As I noted in the beginning of my talk, FY14 is a transitional year for Hologic.

However, we have products in each of our businesses that are gaining traction, and demonstrate continual revenue growth. Our Panther system is increasing our market position in the molecular diagnostics market, and we'll capture substantial downstream recurring revenues, as we continue to expand market share with our family of Aptima tests across all platforms.

3D tomo is establishing itself as the future standard of care in breast cancer screening, and just posted record results, despite a challenging capital equipment and reimbursement environment. And our MyoSure system for removal of uterine fibroids continue to enjoy high double-digit growth.

Counterbalancing growth from these products, there are headwinds that include cervical cancer screening interval expansion, lower cost alternative therapies in surgical, shrinking demand for the blood volumes in the US, and modest price erosion among molecular diagnostics products. And of course, the macro challenges within the healthcare industry like reimbursement pressures, capital budget uncertainty, also continue to exist.

But it is critically important to note, many of these same forces that we face in 2014 will also impact our competitors. However, I truly think we are significantly better positioned to navigate these challenges, and emerge even stronger, with increased market share in our key segments.

As we look toward FY15, we believe a number of these headwinds will begin to subside, allowing us to return to top and bottom line growth. Specifically, we expect a stabilization of our ThinPrep business, as the interval expansion dynamic plays out, and sets a new baseline for growth driven by international volumes.

We expect stabilizations of blood donation volumes, allowing our blood screening business to resume growth, based on opportunities in emerging markets. We expect stabilization in our surgical business, as sales force realignment, product enhancements, and international growth increases revenues. And while we cannot predict the course of any macro environment, any improvement obviously represents an upside for us, both domestically and abroad.

In FY15, we expect tailwinds. We'll drive top line growth and increase our earnings trajectory. Hologic's number-one market share position in all its key product categories is a distinct competitive advantage, which will help leverage our strong relationships and global infrastructure.

When you couple this with the anticipated organic growth from the continued investment of recent R&D initiatives, and the steady gains we are making in international markets, the result will be a continual increase in revenue. In diagnostics, we plan to expand our menu of molecular assays to further establish the value and revenue potential of our instrument platforms, especially Panther.

After 2015, we plan to launch our viral load assays, accessing a large new market opportunity, that will leverage our current efforts to lock up sockets among key lab customers. We are also very excited about our internal development project to expand Panther's technological capabilities, by adding the ability to perform PCR-based tests.

This will greatly increase Panther's utility, and will be a catalyst for further menu expansion. We will also continue to register Panther and related Aptima assays in key new international markets, including China.

In breast health, we anticipate securing additional reimbursement for tomo from private insurers and health systems, which will increase traction for adoption of 3D, as the gold standard for digital screening. On the development front, we are working on our next-generation tomo system, as well as new line extensions for our biopsy family of products, that will make the technology more accessible in emerging markets.

To quantify this, what this means from a financial perspective, we expect to generate organic revenue and earnings growth in the low single digits in FY15, and in the years following, we expect to return to mid single digit revenue growth, with earnings growth outpacing this. We anticipate continued strength in our cash flow generation, which we plan to allocate towards high return R&D projects, deleveraging our balance sheet, and returning capital to our shareholders.

With that, I would now like to turn the call over to Glenn for a detailed review of our performance and our outlook. Glenn?

Thank you, Jack. I will begin by reviewing our fourth-quarter financial results, including key segments, balance sheet, and cash flow details. I will then provide an update on the plan we have developed to deleverage the balance sheet and the return of cash to shareholders, as well as the executive compensation plan recently approved by our Board.

Lastly, I will discuss our first-quarter and full fiscal year 2014 financial guidance. Unless otherwise noted, all of my commentary on changes will be on a year-over-year basis.

Fourth-quarter revenues totaled $622 million, an increase of 5.7%, compared to reported revenues of $588 million, and 3.7%, compared to non-GAAP revenues of $600 million, which reflect the addition of an $11.6 million purchase accounting adjustment recorded in the prior year. On a pro forma basis, revenues declined 2%, representing a full quarter of Gen-Probe in the prior year, and adjusted to exclude divested businesses, such as Lifecodes.

While we experienced significant increases in sales of our 3D tomo and MyoSure product lines, as well as a nice increase in service revenues, these increases were offset by lower ThinPrep and NovaSure sales, and as expected, fewer 2D mammography system sales, due to the mix shift to 3D. Foreign currencies had a negligible impact on revenues.

I will now review revenue results by segment, beginning with our largest segment. Diagnostics increased over 14% to $290 million on a reported basis, and over 9% on a non-GAAP basis.

This increase is due to the addition of Gen-Probe for a full quarter. On a pro forma basis, representing a full quarter of Gen-Probe and excluding divested businesses in the prior year, diagnostics declined 2.6%. This is driven primarily by the combination of an 11% increase in legacy Gen-Probe sales, offset by a 13% decline in legacy diagnostics.

I would like to note that starting in the first quarter, we will be speaking to diagnostic revenues and growth rates on an organic basis, and will no longer refer to legacy diagnostics and Gen-Probe separately, as we have passed this anniversary, and fully integrated the acquisition. Within our legacy diagnostics business, worldwide, ThinPrep volumes were flat year-over-year. However, ThinPrep revenues declined over 13%, driven by continued volume pressure domestically, due to extended intervals and lower international pricing.

Gen-Probe revenues of $148 million increased 65% and 46% on a reported and a non-GAAP basis respectively. On a pro forma basis, revenues increased almost 11%.

In an effort to best reflect the ongoing profile of the Gen-Probe business, the following discussion is on a pro forma basis. Clinical diagnostics revenues within Gen-Probe, which are primarily comprised of our Aptima family of assays for CTGC, HPV, and trich, grew almost 17%. The largest contributor to this increase was from the significant instrument sales to Quest as part of our new agreement.

To date, we have installed almost all the instrumentation that will be required to support conversion to our women's health assays. While these equipment sales had below average diagnostics margins, they demonstrate Quest's commitment to our leading technologies, and lay the groundwork for substantial downstream assay revenues. Capturing these incremental volumes well be an important element of our growth in molecular diagnostics during fiscal 2014 and beyond.

Panther assay revenues continued ramping up nicely, and we look forward to a continuation of this trend, as the launch of HPV on Panther is still relatively early. We have now installed almost 500 Panthers worldwide. Also, blood screening revenues were up 1%.

Overall, we remained pleased with the integration and performance of Gen-Probe, though the pace of incremental revenue growth is slower than our initial projections at the time of the acquisition. We remain excited about the long-term outlook for this business, especially as the Panther rollout progresses, and as we further expand our test menu.

Breast Health increased to $234 million, or approximately 2%. Primarily driving this increase was service revenue growth of 4.3%. Product sales were up slightly, with strong global adoption of 3D tomo, largely offset by fewer 2D digital system sales, as expected.

Our Dimensions product line, which includes both our 2D and 3D systems, represented 82% of worldwide digital mammography product revenues, and 72% of units sold this quarter. Overall growth in 3D tomo revenues for Q4 2013 versus the same period last year was just over 50%, and grew almost 9% sequentially, off of strong tomo sales in Q3.

Due to the continued shift to tomo, overall 2D sales are down high-teens, and 5% sequentially. The increase in 3D sales outpaced the decline in 2D sales for that second quarter and to row.

With a significant and growing body of peer-reviewed publications and increasing coverage from private payers, the growth prospects for tomo are robust. As evidence of this, our revenue backlog for all tomo systems is up 15% sequentially.

Our 3D domestic installed base was just over 750 units at year-end. Going forward, we intend to provide our 3D installed base annually, with qualitative commentary on the rollout during the year. During fiscal 2014, we expect to ship over 500 3D Dimensions systems in the US. As a reminder, there are 13,000 MQSA mammography systems in the US, of which 12,000 are digital, some dating back to 2002, and of which 60% are Hologic.

Overall, we are very pleased with our progress in commercializing tomo, and we continue to have high expectations for this best in class technology. We remain confident tomo will become the standard of care.

Now turning to GYN surgical, revenues were $77 million, declining approximately 4%. MyoSure continued its strong growth with a (technical issue) almost a 6% increase in revenues. This product is still in the early stages of its commercial cycle, and we believe with our planned product extensions, and the opportunities for geographic expansion, MyoSure is in a position to help drive growth in GYN surgical in the future.

NovaSure continues to pressure segment results, driven by a combination of lower-cost treatment options and lower utilization. We remain focused on programs designed to mitigate these effects domestically as well as on international expansion. In fact, NovaSure experienced a record quarter outside of the US in the fourth quarter.

I will now review fourth-quarter non-GAAP performance for the rest of the P &L. Gross margins of 61.5% were down 70 basis points year-over-year, and 90 basis points sequentially.

This was below our guidance range of 62% to 62.5%, driven primarily by the initial equipment orders from Quest being filled sooner than anticipated, as Quest was interested in accelerated equipment placements in order to begin using our assays. There was also a greater than expected mix shift away from higher-margin products, such as ThinPrep.

Operating expenses of $175 million declined almost $12 million or 6%, and represented 28% of sales. Sequentially, operating expenses were down 5%, and at the low end of the guidance range we provided last quarter. Operating expenses this quarter included $3.8 million for the medical device tax.

In fiscal 2013, one year post the Gen-Probe acquisition, we achieved $70 million in cost synergies, above our initial target of $40 million. We have now realized just about all of the expected three-year $75 million cost synergies, and are squarely focused on driving revenue synergies from the combination. As a result of quarterly revenue results at the high end of our guidance range, coupled with our strong expense management and reduced interest expense, net income was $108 million, with EPS of $0.39, which was above our guidance range of $0.36 to $0.37.

Before moving to the balance sheet, I would like to discuss the fourth-quarter impairment charge we announced in today's earnings release. As you know, we have a large goodwill balance resulting from acquisitions.

Accounting rules require an annual review for impairment. In the fourth quarter, we completed this analysis, and based on a combination of factors, including a full re-evaluation of the Company's existing product development efforts and cost structure, as well as is a change in revenue forecast, we determined a portion of goodwill was impaired.

The impairment was within molecular diagnostics, both legacy Gen-Probe and legacy Hologic Third Wave. As a result, we recorded a non-cash goodwill write-down of $1.1 billion.

Importantly, while the tempered growth outlook reduced our current valuation of these assets on an accounting basis, we remain extremely encouraged by the long-term growth opportunities the molecular business provides. We do not expect this charge to result in any future cast expenditures, or otherwise affect the ongoing business or financial performance of this very important business segment.

Now turning to our balance sheet and other key financial metrics, we finished the fiscal year with cash of $829 million, up $263 million year-over-year, and down $135 million sequentially. The lower sequential cash balance was expected, as a result of various planned payments during the quarter, such as debt paydown of $216 million, contingent earn out of $89 million, taxes of $43 million, and interest of $39 million.

We are very fortunate to have a strong cash flow profile, allowing us to generate over $600 million in operating cash flow during fiscal 2013, in line with the guidance we provided. In prior quarters, we have reported operating cash flow, before taking into account the interest on new debt to finance Gen-Probe to illustrate the prefinancing cash generation profile of the combination.

For fiscal 2013, this operating cash flow measurement was $690 million. Going forward, I will focus on the net operating cash flow of the combined entity, including the interest cost.

For fiscal 2013, it was $630 million. Both of these measurements and their calculations can be found in our PowerPoint presentation, available on the investor relations page of our website.

Throughout the fiscal year, we took measures to improve our balance sheet where possible. Toward that end, in August, we announced the repricing of our term loan B, made a $200 million voluntary prepayment on this debt, and amended the restrictive covenants in our credit agreement to increase our capacity for a share repurchase, for dividend. We ended the fiscal year with total debt obligations of $4.9 billion, and our net debt to EBITDA ratio stands at 4.6 times.

Now, I'd like to provide some detail on some of the initiatives that Jack discussed. With regard to capital allocation, as we have stated before, our number-one priority is to continue deleveraging the Company.

Over the next four years, we will have $1.9 billion in mandatory debt payments, beginning with the $405 million we will pay next month, to retire our outstanding 2007 convertible notes. We believe the $1.9 billion mandatory debt payments will get us to our target net debt to EBITDA ratio of 2.5 times, by the end of fiscal 2017. I appreciate this time frame is further out than our initial target of fiscal 2015, however, we have moderated our forecast, which we now believe reflects a more realistic growth profile.

During this four-year period, we expect to generate approximately $400 million in excess cash flow, beyond mandatory debt payments. We intend to do two things with this excess cash over this period.

First, we intend to further deleverage the company beyond the required payments. Subsequent to quarter-end, we took the first step of incremental deleveraging by making an additional $100 million voluntary prepayment, further reducing our outstanding debt and related interest expense.

Second, we plan to use a portion of this cash to buy back shares of our common stock. In furtherance of this objective, we announced today that our Board of Directors has authorized a $250 million three-year stock repurchase program, effective immediately.

This amount is the maximum currently allowed under our debt covenants, which was increased in August as part of our refinancing. We intend to repurchase shares opportunistically going forward, and we'll provide updates on a quarterly basis on our repurchase activities. By the end of fiscal 2015, two years out, we believe this plan will result in a net debt leverage ratio of approximately 3.5 times, and longer-term, after we have achieved our targeted leverage ratio of 2.5 times and have even greater confidence in our cash flow outlook, we will consider the implementation of a dividend program, to begin a regular return of cash to shareholders, in addition to our stock repurchase activity.

In summary, we remain focused on disciplined investment in our businesses to drive organic growth, and on using our strong cash flow to reduce our debt obligations and return excess cash to shareholders. To that end, the executive management team is highly focused on improving return on invested capital, or ROIC, in generating returns in excess of our cost of capital.

Our ROIC for the fiscal year 2013 was 8.26%. We have provided a summary of our calculation of ROIC in our supplementary PowerPoint presentation. This focus on ROIC is fully supported by our Board, as evidenced by recent changes to the executive team's compensation plan for FY 2014.

Under this new plan, approximately one-half of executive exit compensation and over one-third of their total compensation will be in the form of performance stock units, vesting at the end of the three-year period, and will be tied to ROIC as the key performance metric. Specifically, performance well be assessed by measuring management's ability to drive improving ROIC each year, with minimum hurdle rates, and requiring that the average ROIC over this period exceed the Company's cost of capital. These metrics well be measured on an annual and rolling basis.

Our non-GAAP guidance expectations are fully detailed in the earnings release, and our supplementary PowerPoint presentation. This guidance assumes currency rates consistent with the average during Q4 2013, and does not assume any share repurchases or divestitures.

With regard to guidance, I would like to first put the 2014 outlook in context, by quantifying the impact of the three primary headwinds that we face. Our reduced outlook for ThinPrep, NovaSure, and blood screening presents a revenue headwind of more than $60 million on a pro forma basis. While these products remain highly profitable, their net effect is to offset our positive contributors in fiscal 2014, thereby making overall revenue growth the challenge.

For the fiscal year ending September 27, 2014, we are introducing revenue guidance of $2.425 billion to $2.475 billion. Year-over-year, that represents a decline of 1% to 3%.

The decrease is expected to be driven primarily by the headwinds I just mentioned. On a pro forma basis, adjusting for Lifecodes, total revenues are expected to be flat to down 2%.

As Jack discussed in his opening remarks we have a number of products that we expect to solidly grow in fiscal 2014, however this growth is more than offset by the headwinds discussed above. By segment, we are forecasting low single digit revenue growth in breast health, more than offset by low single-digit declines in GYN surgical and skeletal, and a mid single-digit client in diagnostics. We believe the guidance we set for fiscal 2014 represents a realistic view of this coming year, and we expect a return a low to mid single-digit top and bottom line growth, beginning in fiscal 2015.

Moving onto the remainder of the P&L, we expect gross margins of 61.5% to 62%, resulting from the expected decline in our higher-margin psychology products, and the expected increase in mammography system sales, which have a lower gross margin than our consumable products.

We expect operating expenses of $750 million to $770 million, relatively flat year-over-year. While we project a sizable increase in bonus, merit, and other variable compensation, these costs should be offset by the cost reduction measures we implemented in fiscal 2013.

We expect interest expense to be approximately $190 million, benefiting from recent refinancing activities, coupled with a lower average debt balance, based on recent and planned debt payments. We expect a 34% effective tax rate in fiscal 2014, which is 2 points higher than fiscal 2013. This increase is primarily due to the federal research tax credit expiring in 2014, and a lower domestic manufacturing deduction benefit, as we migrate production to our Costa Rica facility.

We also expect diluted shares of approximately 278 million, and EPS of $1.32 to $1.38. This includes an incremental reduction in EPS from the prior period of $0.04 from the increased tax rate, and $0.02 from the medical device excise tax.

Lastly we expect to continue to generate strong operating cash flow, maintaining a level of $500 million to $525 million. This is down from fiscal 2013, due to the reduction in earnings and an increase in expected tax payments.

For the first quarter of fiscal 2014, we expect revenues in the range of $600 million to $610 million, representing a year over year reported decline of 5% to 7% and pro form decline of 3% to 5%, excluding Lifecodes revenues of $12.6 million. We explain gross margins of approximately 61.5% to 62%, operating expenses of $195 million to $200 million, which is 32% to 33% of revenues, interest expense of approximately $50 million, an effective tax rate of 34%, diluted shares of approximately 275 million, and EPS in the range of $0.30 to $0.31.

In summary, we believe our guidance reflects a realistic outlook for fiscal 2014, and we are committed to executing against this plan. Our renewed focus on ROIC and capital allocation, as well is our corporate strategy to grow organically rather than through large M&A, demonstrates our commitment to further creating shareholder value. And with that, I will turn the call back to Jack.

Thank you very much, Glenn. Since I rejoined the company as CEO, we have taken steps to position ourselves for long-term success. While we still have significant work ahead of us, we are fortunate to be a leader in our key markets, and have a team of highly committed associates.

Our goals and priorities are clear, and we intend to execute against these goals, and position the business to return to growth in 2015. I do appreciate all of you joining us today, and look forward to updating you on our progress. Now, I will turn it over to questions, and I should say that David Harding and Rohan Hastie, who run our two major businesses, are with us today, and they will be on the call to answer the questions. Operator?

(Operator Instructions)

Bill Bonello, Craig-Hallum.

To follow up on the ThinPrep business, can you give us a sense of where you think you are in terms of the conversion to longer intervals, if that is a process that you expect to be complete by the end of fiscal or calendar 2014, and then as part of that, maybe your thoughts on Roche applying for HPV as a primary screen, and if that is approved, what that might mean for ThinPrep trends beyond 2014?

Hello, this is Rohan, sure, we're happy to answer those two questions. So in terms of interval expansion, I think we are still expecting to see a double-digit interval expansion within the US for 2014.

Again, I think we are still looking for some good share shift away from our competitors. But we have seen this year without regard as well, so I think our market share will increase in that time, but volumes will decrease within that double digit plus range for 2014.

I certainly think by the time that 2015 comes around, we will start to see a dropping off of that decline, if you would, and much more stabilization within that market. Do I think it will be flat in 2015? Probably not, but I think we will have taken the majority of the falls in 2013 and 2014.

And I'm sorry the second part of the question was?

Your thoughts on Roche applying for an indication to have HPV as a primary screen, and what that might mean for ThinPrep longer-term?

Yes, I think HPV primary will be noise for us within the market, primarily. I think that the Pap is so engrained within that gynecologist cervical cancer screening modality, that migrating away from that to going to an HPV primary is something that I think we will be able to manage effectively in the market.

We certainly feel that having a large physician sales force can certainly message the benefits of co-testing. I would remind everybody that testing for HPV and PAP liquid-based cytology is the best clinical screening modality for cervical cancer, and we will continue to push that message within our marketplace.

Shaun Rodriguez, Cowen and Company.

Last quarter, I think you mentioned that the Quest deal should result in a meaningful contribution for chlamydia/gonorrhea starting this fourth quarter. With HPV, it may be taking little bit longer.

You mentioned they've installed the systems, so can you update us on the utilization ramp here, your assumptions for how this progresses over the course of 2014, and if you could, the impact this deal will have on your pricing for the overall Gen-Probe business? Thank you.

So I will start with the latter part of the question first. There's no doubt that in terms from AUP within this market, that Quest got some good pricing from what they had previously, based primarily upon the competitive dynamics of this marketplace right now. There are more people selling chlamydia/gonorrhea tests.

In terms of the utilization Quest have started right now, switching over to our chlamydia/gonorrhea test, so we will start to see the pick-up of that at the latter end of this quarter and Q2. Their HPV business will take a little longer to convert over, so that contribution will take a little bit longer.

But I would say that, that is slightly offset by some of the AUP dynamics we are seeing within this market, from competitive activity anyway. So we are comfortable with the revenue growth that we are going to get from Panther, we are comfortable with the revenue growth we will get from Quest. So the deals that are being completed right now, I think as our peer group companies have slated as well, are slightly lower AUPs than what we've seen previously.

Vijay Kumar, ISI Group.

On the guidance, and, Glenn, I know that you mentioned that you would be looking at asset sales. A, does the guidance contemplate any divestitures, and I guess if you look at the guidance commentary within the slide deck, you have OpEx up next fiscal year, and I believe it is -- that based off of an increase in variable comp. I am trying to reconcile, if revenue and EPS is down, how should we think about variable compensation being up for next year?

Yes, Vijay, so as it relates to guidance, we don't have any divestitures built into that guidance today. Nor do we have any share buybacks or anything like that. So, it's our current platform and programs with that we have today.

If we look at that operating expense line, we do have that flat to up slightly in FY14 in our guidance, and we have had quite a bit of cost savings throughout the end of FY13, but one of the areas that we have really skinnied down is the whole area of variable compensation. So when we look at FY14, and we are not talking at the executive level, here, we are talking at the real management and rank-and-file level, we are reintroducing some of the variable compensation we did not have in 2013.

So, that is a piece of the increase that we see. And even with that increase, we are only talking operating expenses up slightly in FY14.

Isaac Ro, Goldman Sachs.

You mentioned low single-digit growth in 2015, plus, Glenn, in your prepared comments. Is that the type of growth you expect to see the business, assuming no changes to the current portfolio, and if so, what kind of healthcare utilization environment do you think you need to have as a backup in order to hit that growth?

Right, so, in the prepared guidance we are talking low to mid single-digit growth back in FY15, on both the top and bottom line. So, we are looking at FY14 as a transformational type of year. We are retrenching, a big part of this is because of the market environment we see out there.

So when we look out to FY15, there is an expectation that things are going to stabilize throughout all of FY14, and we will begin to see growth with some of these new products emerging. So we have been talking about 3D tomo, for some time, I talked a little bit about the numbers on systems that we are currently placing. We are getting tremendous interest in that product line.

When we look in the diagnostics group, the Panther machines are just now going out the door, and even for Quest, they didn't have any meaningful sales in Q4, but they certainly will in FY14. So, what I think we are getting in place are the pieces we need for that FY15 growth, but I think the problem we have in 2014 is more the headwind. It really is, as it relates to ThinPrep, the expansion on the interval, as it relates to NovaSure, it is that whole utilization is there are some lower-cost alternatives.

And that will moderate. We do believe that will moderate in 2015 and beyond. I don't know, Jack, or did you have anything to add?

No, no, I am with you on that.

Tycho Peterson, JPMorgan.

A couple of follow-up actually to prior questions. First on divestitures you brought up the challenges you fairly describe against the secular, but, as we think about your options with divestitures, would you be willing to divest declining businesses if it is dilutive to earnings?

And then as a follow-up, on sales and marketing you provided some of the cost pulls. Can you give us a sense as to where those occurred? It was a little better from a sales and marketing perspective, than we were modeling, in terms of cost cuts.

Glenn and I will both handle that. For your first question, relative, a nonperforming asset, would we sell it, you said if it was dilutive, and the answer is yes. Glenn, on the other one?

I would focus on the first one, Jack. Tycho, the thing is, on most our operating segments, any one of them would be dilutive to earnings. We have great earnings power in each of those segments now, so we appreciate that.

What we have to look at is the value and the potential we would get out, and how we would redeploy that cash. But we are looking very hard at that right now, nothing is off the table, but it is a pretty complex thought process to go through on cash flow and taxes, and we want to get it right. And the second part of the question, Jack was?

Tycho, please repeat.

Your sales and marketing cost came in lower than we were modeling, and as you highlighted, at the lower end of guidance. Maybe just talk to some of the steps you've taken in sales and marketing cost?

I'm going to pass it over to David and Rohan, because we have streamlined, and we've realigned the forces. David, do you want to go first?

Yes, this is David Harding. We have definitely taking a hard look at all of our sales and marketing expenses, reflective of the more modest revenue growth rates, and have restructured a number of things, both on the surgical and breast health side of the business. We've taken out layers of management, we've gotten more efficient in the way that we deploy our marketing expenditure, and generally are trying to do more with less at this stage.

Yes, and I would echo that, Tycho, we're seeing the same on the diagnostics side of the business. We've definitely pushed out some of our commercialization efforts.

We just played very close attention to conference attendance, conference spending, general marketing spend, and likewise in terms of the overall sales force, to making sure that we have appropriately sized for region touch to get the maximum benefit from that sales force. So it's been a management issue, just making sure that we keep a close eye on those costs, and utilize that cash as effectively as possible.

David Lewis, Morgan Stanley.

This is actually James in for David. First, Jack, a question about your role in the business. What can you do tell us about your commitment to stay with the business for not only the upcoming transition year, but also for two to three years beyond that?

Well, since David is not there, I should ask you about his. I had a feeling that you would ask that, since that is one of his favorite ones. Look, until someone tell us me differently, I am the permanent CEO here, and I want to make it clear, I committed to rebuilding, refocusing the Company, address the concerns of all the shareholders, the team members, and our customers, who I am visiting with on a weekly basis.

So, I think everything I'd discussed reflects that level of personal commitment, and my focus for delivering those results. So the Board has asked me to concentrate on restructuring our business and achieving the strategic and operational goals, which we are committing to today. So, I don't know how I can make it any clearer.

Michael Mattson, Needham & Company.

I wanted to ask about in the mammography market, I guess GE got their CE Mark for their tomosynthesis product, and I guess they are selling it in Europe now, so I was wondering if you have seen that in the market, if it's had an impact on your sales outside of the US, and then additionally what are your thoughts on when and if that product comes to market in the US, is that -- have you accounted for that in your guidance?

Yes, this is David, I'm happy to take the question. We have seen the unit in the market in Europe, and there are a few installations around.

We are anticipating that GE will launch of the United States at some point, we are not exactly sure when, but we do anticipate it being within this fiscal year, probably sooner rather than later. We have certainly accounted for that in our projected growth rates, but we are very confident that our product is clinically superior.

We've got excellent clinical results, proven through large numbers of studies of many patients, and we are very happy with the way that our system is performing. I again, we welcome competition in this market, and have fully anticipated it.

I would add to that, that this is fully baked into our numbers. We expect GE, you always expect at RSNA, they are going to announce some approval, so we've anticipated sooner rather than later.

But if you just look at the market itself being a replacement market and the fact that we have 60%, 65% of the US market, and GE's strategy is not to go out and say let's see how many of the Hologic and Siemens sites we can go sell our products to. They are going to go to their install base, which is sizable, and they are going to -- because I would assume that they have a demand -- pent up demand for not being on the markets, so they're going to attack those first.

Internationally, they have been out very long time with this product so it is nothing new to us. I think it is a positive, inasmuch as I think it might reset some of their pricing, because until they've had it, they have priced their 2D system extremely low, and maybe this will bring a sense of reality on pricing. Also, I believe in the US, it only can help us with them talking about the benefits of tomosynthesis, and putting their marketing dollars behind it, and I welcome their marketing dollars talking about the technology in and by itself.

The fact, like David said, we have over 100 papers written on tomo in almost every major company. We are working with the societies on tomo studies. So, we are so well-positioned to continue to drive share gains over the next five years with this product and subsequent products, that we are going to bring to market.

Brian Weinstein, William Blair & Company.

My question is on Gen-Probe, in the revenue synergies there. You have talked about maximizing those, and the pace being slower than you're expected. Can you talk specifically, how do you fix that, specific steps you are talking about there?

And secondly on the write-down of the asset, I understand on the molecular side, it's some Third Wave stuff potentially, but you were very positive on the rest of the molecular diagnostics business, so can you talk specifically what changed relative to your original expectations, given how positive you are sounding like on the future of that business? Thanks.

When you were talking about the pace slowing down, you meant maybe the uptake, I would assume you meant the uptake in the assays, which certainly has been a factor, especially that we have now installed the systems in Quest and as Rohan has talked about, it can be a six/nine-month process just to get HPC certified in these labs. But between Rohan and Glenn, I think they can talk about the write-down and the impact on that.

Yes, I think we are relatively comfortable with where the revenue synergies, are quite frankly. Again, I think that, as we stated time and time again, this Quest deal would never of happened had Hologic and Gen-Probe not been combined. And I think we are seeing that portfolio component, that portfolio sale being replicated at all segments of the market right now.

We are going in and we are talking about ThinPrep, CTGC, trichomonas, HPV, and that whole portfolio of womens health testing is really starting to have traction within the marketplace. And that indeed is being replicated internationally. We have had a couple of very big closes within the United Kingdom over the past six months, really.

But again within the portfolio of women health products that we are offering, so in that regard, the revenue synergies, I think we are comfortable with. In my way, I think again, with that position sales force component, has been tremendously important for us in terms of generating awareness of Aptima HPV, generating awareness of nucleic acid testing for trichomonas right now. I think that has made a big contribution to us.

I think what has happened though, is some of the AUP pressures that we've seen again from the competitive activity within the market right now for our competitors trying to hold onto business or compete for business, has certainly driven down some of the AUPs that we've been seeing. And then also we had a little bit of a slow start to FY13 as well, which did not contribute.

I would add one more thing, and that is as far as the synergies go, we exceeded what we said we would do, and we did it in a much shorter period of time. The other thing that Rohan didn't touch upon, which is an interesting dynamic that is happening now internationally.

Governments are -- when they are looking at programs for women, especially in the screening side, they are looking at cervical cancer screening, and they are looking at mammography screening. And we've seen and we are having conversations with certain governments relative to combining our mammography with cervical cancer testing. And we find ourselves in a very unique position to do that, and whether it becomes an HPV or becomes a PAP test, we can play in both areas and bring the best mammography to the market as a combination in a tender.

I'm sorry, I should add that you are correct that the write-down was due to Third Wave and Gen-Probe so we really finished an accounting exercise and we have a slight change in the out year growth rates, reflective of a bit of a slow start in FY13.

Okay.

Glenn Novarro, RBC Capital Markets.

Two questions. First, can you clarify your fiscal 2015 guidance? Are you seeing low single-digit revenue growth and mid single digit EPS growth? That's my first question.

Then second, can you give us an update on government reimbursement for tomo? I know, Jack, on the last call you said you would be going down to DC a lot. any help there would be -- any update would be great. Thanks.

Glenn, why don't you handle -- I'll handle reimbursement side.

Yes as it relates to FY15, Glenn, we believe after FY14, there well be a return to growth. So when we look at our revenues and our earnings, we believe that both top and bottom line will be low to mid single-digit growth. Okay.

And let me talk about reimbursement for a minute. We -- first of all, we had a little problem going to Washington.

Somehow when we got there, everybody had left town. Because they had shut it down. But now that they are slowly coming back, we continue to have conversations with CMS.

We continue to work a three-pronged attack there, dealing with the legislative side, the private payer side, and CMS. And I think, we have to work all three. CMS is constrained, in that there is so much going on right now with Obamacare, I'm not sure that they are in a position to make decisions relative to a lot of the different projects before them right now.

But, we have been very encouraged by the legislators that have taken a very active role in dealing and talking to CMS for us, because of the fact that they believe and have read all of the documentation. They've talked with physicians who have come to Washington about the benefits of tomo from just a pure catching cancers early to the economic benefits. And hopefully, we can get CMS to move off the dime and do something here.

But, there is certainly some frustration on our side, but on a to-date basis, what we can do is continue to push on the private payer side, and that is where we are putting a great deal of our energies, now. Because that is, whether it be some of the larger ones on a regional basis that are paying $30 to $70 for a mammogram right now, or the fact that we've had a group in Florida right now approve a plan for reimbursement, specifically for tomo.

These are all very positive things. Is going to take time on the CMS side and we can not wait for them, so we have to continue to push on the payer side and continue to work the legislative side, and hopefully CMS comes up for air. And we are working with ACR, we have talked with AMA, so we are trying to hit all of levers that we can on this.

Jonathan Block, Stifel.

I have two quick ones, and maybe the first one is a follow-up to the last one. Jack, do you think you have a notable commercial win on the reimbursement side for tomo in 2014?

I really can't answer that. I don't know. I think the win I know about is the one at a time insurance companies that we are picking off. We have a team out there talking on them.

As far as CMS goes, I think I said this in the last call, I gave up long ago trying to bet on what is going to happen with a government agency. So, I have to unfortunately defer to that, but we will continue to push the legislative side in the meantime, and push with CMS. We are hoping, I guess that's all we can say at this point.

And this is David, just to add, I think the important thing to note is that about 60% of the institutions that are submitting claims to their insurance companies are in fact getting reimbursed at these incremental levels that Jack talked about, between $30 and $70. There is already good payment history that is occurring, even without major reimbursement policy decisions at this stage.

And you had a second question or is that the question?

Another question, you talked earlier about the stabilization in the Pap business, as we enter 2015. I think you also alluded to NovaSure. Can you talk to, big picture, what is going to unwind from 2014 to 2015 that will allow that high margin business to stabilize?

Okay, I'll let David handle it, certainly on the surgical side. But as I did say on my talk, we have made some changes in leadership on the surgical side, added some very talented people.

We have also looked at how we are selling, and we've looked at that sales force, and how it is organized today. And we think that is going to have an impact in driving future sales, but David, go ahead.

Yes, on the NovaSure side, I think we mentioned to you earlier that there are lower-cost alternatives that are out there, in the form of hormone-eluting IUDs and the like. And those have been taking some share away from NovaSure, but we do see that bottoming out in the 2014 period.

We also see our international business continuing to grow and offset some of that. So that is why we believe that in addition to our sales force activities and getting more effective on the sales force side, we will see it flatten and then start to utilize a little bit more in 2015.

And on the ThinPrep side, Rohan, do you want to handle that?

Yes, I just think that the penetration of adoptions will -- for last year and this year is when we will see the maximum amount of adoption, and we certainly expect that to fall-off as that rate becomes much more fully penetrated within the market, and we predict that will be within the 2015 period. Again, to reiterate I think that we will still see some margin expansion within that timeframe, I just don't think that it will be at the rate that we have seen over 2013 and 2014.

I guess I should add to surgical, we will be introducing product enhancements, new products, and that sales force realignment we believe is going to be a key to the growth, to the return of growth on the NovaSure side.

Richard Newitter, Leerink Swann.

Jack, just on that last point, can you maybe clarify? How much of the return to low to mid single-digit growth in fiscal 2015 is contingent upon factors you feel you have control over, versus underlying improvement in the market? It sounded like a blend there, in surgical, for example, that you have some new products and the sales force alignment in ThinPrep, it is a bit more cervical interval expansion. Can you get to low-to-mid single digits if some of the macro factors don't turn?

I think we can. We have really vetted these numbers in coming up with our estimates. We thought that they were very realistic for this year, we were not sandbagging.

We looked at the process last year. We looked at the process this year. We changed the process from certainly a bottoms-up review, and we needed to stress test that several times.

When you look at the tomo, when you look at the uptake in assays, when you look at the incremental business that is going to come from Quest, when you look at what is going to happen on the new biopsy side, we see it as all very good positives to help drive this growth. We also have 3,000 plus Selenias out there, 7 to 10 years old, that need to get replaced and they are going to get replaced in the 2015 on.

So we believe that those are also positive. The secular headwinds of the interval on the ThinPrep side, we really -- we've gone heavy on the discount this year, and we believe it is going to start to flatten out, which then, of course, we are coming from a different base, which will allow the other products that are growing to offset that and emerge into those single digits we talked about.

Amit Bhalla, Citigroup.

Jack, as this discussion of the longer growth rate in the Company has been beaten around, I was hoping you could talk about the leverage in the business, because it doesn't sound like when you talk about 2015, 2016, there is much in terms of leverage from the top to the bottom line? And maybe put that into context of some of the improvements you are trying in supply chain. And then secondly for fiscal 2014, what is the overseas diagnostics business going to grow, in the context of overall diagnostics down mid-single digits? Thanks.

Okay. I think we have a variety of people will be handling this one, I think Glenn will get involved, also. Certainly, the EPS is going to outpace revenue, and from a standpoint of just international in general, I think I will let David handle that, because that is a very bright spot for us right now. It has help to offset the decline in the US, certainly of ThinPrep and of surgical. And we just completed, it's very timely because Rohan, myself, and David just came back from our international sales meeting overseas, where we had all of our people in from the diagnostics and surgical side, so we can report back to you on that. David?

So on the international side, for the diagnostics piece in particular, we expect modest growth that will help to offset some of the domestic decline on the surgical side of the business, again, growing very rapidly. Good double-digit growth there and again on the breast health side, growing solidly in the mid-single digits range.

So the international business will grow. It won't completely offset all of the declines in the US on the diagnostics side to be sure, but nor will it in the surgical side, but it is a very important component of our future growth in all aspects of the business.

Rohan?

I would add on the diagnostic said that there remains continued opportunities for us in both ThinPrep and HPV as different countries are evaluating expanding their cervical cancer screening offering. So whether it's an HPV primary with a reflex of cytology or lead with cytology with a reflex for HPV, we feel there is an opportunity there for us.

And then from a molecular side, that Panther platform is -- the market is much more fragmented within Europe and other areas of the world, for that matter, that the Panther plays exceedingly well within those market segments. And I think we are starting to see some really good traction with instrument placements of Panther there as well.

And then, as the other element we don't talk much about, we are certainly helpful of some international blood screening opportunities for us, for countries that are looking at instituting blood screening for donations, or indeed some potential share shift internationally as well. So I think we are feeling very optimistic about 2015 from the diagnostic sector.

And from an organizational standpoint, the international infrastructure is really in place. We are making a few adds, certainly to the management right now, but service efficiencies, I think, are going to start to come online in 2014, especially on the Gen-Probe side, as we've put these programs together and try to do cross training.

And there is going to be manufacturing changes in our capital equipment that is all part of this remanufacturing, delivery of our service, delivery of our application service. So we are making a huge push in that area, which we expect to start seeing the benefits in 2015.

Thank you. And that is all the time we have for questions today. This now concludes Hologic's fourth-quarter fiscal 2013 earnings call. Have a good evening.