Hologic Inc (HOLX) 2014 Q2 法說會逐字稿

Good afternoon and welcome to the Hologic Inc. second-quarter fiscal 2014 earnings conference call. My name is Greg and I am your operator for today's call. Today's conference call is being recorded. All lines have been placed on mute. I would now like to introduce Deborah Gordon, Vice President, Investor Relations and Corporate Communications, to begin the call.

Thank you, Greg. Good afternoon and thank you for joining us for Hologic's second-quarter fiscal 2014 earnings call. With me today are Steve MacMillan, President and Chief Executive Officer, and Glenn Muir, Executive Vice President and Chief Financial Officer. Today's call will consist of opening remarks followed by a question-and-answer session.

The replay of this call will be archived on our website through Friday, May 23, and a copy of our second-quarter release is available in the Investor Relations section of our website. Also in that section is a supplemental second-quarter financial 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 we make during this call may be forward-looking. 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, included in our earnings release and in our filings with the SEC.

Also during this call we will be discussing certain non-GAAP financial measures. A reconciliation to the GAAP can also be found in our second-quarter earnings release. I would now like to turn the call over to Stephen MacMillan.

Thank you, Deb, and thank you all for joining us today. On today's call I will cover three key topics: one, our second-quarter results and highlights; two, actions taken since I joined the Company; and three, the results of our recently completed strategic review and how they relate to our plans for growth and value creation. I will then turn the call over to Glenn for a more detailed financial discussion.

Starting with our results and highlights, in the second quarter, we generated $625 million in revenues and $0.37 in EPS, both of which were a bit better than we expected at this stage in our turnaround. After experiencing a decline in revenues during Q1, we were encouraged to deliver modest year-over-year growth. Much work lies ahead, but these results are a sign that we are making progress toward our initial goals of reversing the sales declines. While one quarter alone does not make a trend, it does show we do indeed have near-term growth opportunities to offset the much-discussed headwinds.

I would now like to touch on some key highlights from the quarter. In our Diagnostics business, the Japanese Red Cross, or JRC, selected our new collaboration partner, Grifols, to screen the country's 5.3 million annual blood donations. This represents a huge win for Grifols and us, and is a strong validation of Hologic's Panther system and its capabilities. The JRC made its selection after rigorous scientific evaluation of our instrumentation and assays in comparison with the latest offerings from the incumbent vendor. The technological advantages of Panther and the benefits it delivers in terms of workflow, reliability and ease-of-use are becoming more evident in ongoing competitive evaluations.

Implementation of this contract will begin toward the end of our fiscal 2014. Therefore, the majority of the initial financial contribution will be realized in fiscal 2015. This win is a great way to kick off our new relationship with Grifols and we look forward to working closely with them to win additional business across the Globe.

The JRC's endorsement of the Panther platform builds on another strong quarter of Panther placements overall. We are seeing growing interest in the Panther platform and are increasingly confident we will reach our goal of installing 1,000 units by the end of fiscal 2015. While most of the Panther placements do not have the same visibility as a major contract win such as the JRC, they are nonetheless just as important to our business, even if they are occurring one lab at a time. Each and every placement helps lock in sockets that can yield ongoing revenue growth, especially with further menu expansion over time. We also made solid progress on executing on our opportunity to convert Quest testing volumes to our Aptima family of assays during the quarter. And even aside from Quest we are driving broader adoption of our Aptima HPV test and are encouraged by our progress.

The strength in our molecular and blood screening businesses largely offsets declines in our cytology and perinatal business, which are attributable to ongoing ThinPrep headwinds in the US due to interval expansion.

Within our Breast Health business, we saw two important developments during the quarter. First, global sales grew by a healthy 8% versus last year, driven by increasing adoption of our 3-D mammography technology, and we are now well on track to reach our stated goal of placing at least 500 3-D mammography systems in the US this year.

Second, in addition to the strong 3-D mammography results, we received positive news on the reimbursement front. In early March the AMA CPT editorial panel announced that the application for breast tomosynthesis was accepted for three category 1 CPT codes for both screening and diagnostic mammograms. While we will not know the exact codes and associated rates until November, we do know that beginning in calendar 2015 there will be three new CPT codes for breast tomosynthesis. Although it will take some time for the regional Medicare carriers and private payers to implement coverage and reimbursement for these codes, this is an exciting development for our Breast Health business, as well as for the patients seeking to benefit from this technology.

Clearly we are building momentum and are optimistic that upcoming developments on the reimbursement front as well as a growing body of peer-reviewed publications will stimulate further adoption of what we and many in the medical community view as a game changing technology.

When you look more broadly at the 3-D mammography market opportunity, it is also important to keep in mind that today less than 10% of the US digital mammography installed base is 3-D. In other words, we are building momentum and still have significant growth opportunities ahead of us.

Moving on to our surgical business, while sales were still down versus year ago, the trends are modestly encouraging as growth in MyoSure as well as broader international opportunities for both MyoSure and NovaSure are helping offset the domestic NovaSure headwinds.

Finally, while much smaller, even our skeletal business reversed multiple quarters of sharper declines and posted growth of over 4% in the quarter.

Overall, the key take away from this quarter is that every franchise showed improved performance, demonstrating that despite the headwinds we face, our core assets have the ability to perform better and drive overall Company growth.

The second item I'd like to cover is actions taken since joining the Company in December. My initial focus has been on performing an in-depth evaluation of our leaders, our businesses and overall structure and our products. In March, we announced key changes to senior leadership that will play a significant role in establishing the team that will not only help lead our near-term turnaround efforts, but also create and execute a long-term plan to generate sustainable growth. I am extremely pleased that Eric Compton has joined as our Chief Operating Officer. In this role, he will oversee the day-to-day operations of our business units, as well as our global R&D and manufacturing efforts. Eric joined us from Johnson & Johnson, where he enjoyed a long and successful career with increasing responsibilities, most recently as the Worldwide President of Ortho Clinical Diagnostics.

I'm also pleased to have Claus Egstrand on board as Hologic's Senior Vice President and General Manager of International. Claus joined us from Merck and has tremendous amount of experience overseeing a variety of international businesses within large organizations over his 30-plus year career. Having worked previously with both of these leaders, I am confident that we are building a team comprised of the right people in the right roles to win.

On a separate senior management team note, we also announced that after a 25-year career here at Hologic, Glenn will be retiring. I would be remiss if I didn't thank Glenn for his leadership and significant contributions over the years. We are in an active process to bring in a new CFO and are grateful that Glenn will remain in his role to ensure a seamless transition and continued execution of our financial strategies.

Before I do turn the call over to Glenn, I want to update you on the third item, our recently concluded strategic review. We promised on our last quarterly call to provide the conclusions of the review. And to be perfectly clear, the purpose of the review was always to determine how best to maximize shareholder value. We carefully assessed a wide range of options, including significant divestitures, but concluded that the best near-term path of the greater value creation is to, one, accelerate growth of our existing businesses; two, no major divestitures, though there are opportunities to divest fringe assets; and three, implement more effective capital allocation and financial planning with a major opportunity to lower our tax rate significantly over time.

And now for a little more detail on how we plan to achieve these goals. Beginning with item 1, accelerating organic growth. Our game plan for growth can be distilled down to three focus areas, people, products and global expansion. As I mentioned earlier, we have made important changes to our senior management team with an eye toward providing strong leadership, improved execution and performance-oriented accountability. In addition to people, our products are at the core of our efforts to return to sustainable organic growth. We have a terrific portfolio of products and our path to growth will require an ongoing innovation engine. To support this we are implementing initiatives designed to produce a steady stream of new products in each of our businesses. In addition to significant innovations, we believe we can also drive value through ongoing product improvements and line extensions that broaden the reach of our products in the global marketplace. Simply put, our plan will require additional investments in R&D and international expansion, but we plan to fund these via sales growth and reallocation of internal spending. As indicated last quarter, global expansion will be a critical element to our growth strategy over the long term. We have many best in class products that command leading market shares domestically, yet hold disproportionately low market share positions internationally. This is an area where new members of our senior management team will add value and insight.

With regard to divestitures, as we indicated on our last call, we do not plan to make any significant divestitures at this time. That said, we will be doing some pruning around the edges. Although there will be a modest near-term impact to our topline, we believe the trade-off is worthwhile since these are among our lowest margin businesses. Glenn will speak further to some of our efforts in this area.

Finally, our strategic review reaffirmed that our primary commitment from a capital allocation standpoint is to pay down debt. In addition, one of the biggest initiatives to emerge from our strategic review process is the need to immediately focus on long-term planning that will reduce our tax rate. This certainly will take time, but represents a clear opportunity to improve profitability. Fortunately, our tax planning initiative dovetails nicely with our plans to further globalize the business, since greater resources will need to be allocated to non-US markets. With that, I will now turn the call over to Glenn.

Thank you, Steve. Unless otherwise noted, all of my commentary regarding changes will be on a year-over-year non-GAAP basis.

Second-quarter revenues of $625 million were up 1% compared to prior year of $619 million. Prior-year revenues included $10.6 million from Lifecodes, a business we sold in March 2013. Diagnostics revenues of $291 million declined 4%. These results were in line with our expectations as the decrease was primarily attributable to the Lifecodes divestiture and lower ThinPrep revenues.

Revenues in our cytology and perinatal business declined 4%. International revenues were flat while US revenues declined in the high single digits, primarily as a result of lower sales of ThinPrep due to the ongoing screening interval expansion.

Our molecular Diagnostics business declined 8%, primarily as a result of our divestiture of Lifecodes. However, operationally, after adjusting for Lifecodes, molecular grew 1%. Overall performance in molecular was also mapped a bit by weakness in our flu business. However, our core Aptima franchise experienced healthy growth in the low double digits, resulting primarily from strong uptake at Quest and broader adoption of Aptima HPV.

Blood screening revenues were up 5.5%. Strong international growth helped offset the anticipated impact of lower domestic blood donations. The recent JRC win will build on our strength in international markets.

Moving onto Breast Health, revenues increased 8.5% to $239 million, driven primarily by very strong growth in 3-D mammography system sales, which drove an 8% overall increase in Breast Health product sales. We also realized incremental revenues to a smaller extent from growth in sales of our C-View system as well as from biopsy systems sales, specifically the Eviva.

Solid service revenue growth of 9% was driven by a growing install base of digital mammography systems. Partially offsetting these increases was the expected overall decline of 2-D mammography systems sales as customers shift to 3-D.

Now turning to GYN Surgical, revenues of $72 million were down 2%. Strong double-digit worldwide growth in MyoSure, and to a lesser extent international NovaSure sales growth, helped offset a low teens decline in domestic NovaSure sales.

I will now review second-quarter non-GAAP performance for the rest of the P&L. Gross margins were 62.5%, down 10 basis points from last year, but above our original annual guidance range of 61.5% to 62%. The strength in Q2 gross margin was due to higher than expected revenues and a favorable revenue mix from blood screening, domestic 3-D mammo and service. As we look at the second half of the year we are comfortable we will be at the high end of our original annual range based on anticipated fluctuations in product and geographic mix.

Operating expenses were $188 million, representing a decrease of 4%, and our estimated annual tax rate remained at 34.5%. As a result of higher than forecasted revenues and margins, we generated earnings per share of $0.37, exceeding the high end of the guidance we provided last quarter by $0.03.

Before turning to the balance sheet, I will expand on a couple of decisions we made to streamline operations that resulted in charges during the quarter. As Steve mentioned, we are exiting some of our smaller businesses. As part of this effort we are seeking a buyer for our MRI breast coils product line. Based on recent fair value estimates we recorded a $29 million charge in our GAAP P&L, primarily related to intangible assets. This is an example of a business line divestiture that will help us focus our resources on more strategic and profitable areas of the Company. We do not yet know the timing of this divestiture and we will update you as appropriate.

In addition, as part of our efforts to gain further efficiencies, we are closing our high tech drum business in Germany, and we consolidated certain assets into our newer Delaware facility. Consequently, we reduced headcount and plan to sell our facility in Germany. We recorded a small charge in our GAAP P&L associated with this plant closure in our second quarter.

Despite these charges, we see these as positive developments in our plan to focus resources where they can have the greatest impact on our growth strategy. As we continue to make progress on these and similar initiatives, we will provide updates. We will also look at other small divestitures depending on the valuations they can command.

Now turning to the balance sheet. We finished the quarter with $490 million in cash, down $339 million since the end of fiscal 2013, primarily as a result of $563 million in debt payments we made since the beginning of our fiscal year, partially offset by various cash inflows. During the quarter, we successfully completed a refinancing of our term loan B, resulting in an interest rate reduction of 50 basis points. As part of this transaction, we made a $25 million voluntary prepayment on this loan balance.

We generated $69 million in operating cash flow during the quarter and $249 million year to date. Therefore we still expect to generate $500 million to $525 million for the year.

In addition, our return on invested capital on a trailing 12-month basis was 8.3%. For definitions and calculations of operating cash flow and ROIC, please refer to our supplementary PowerPoint presentation.

We ended the quarter with total debt obligations of $4.3 billion and a net debt to EBITDA ratio of 4.4 times.

On the capital allocation front, deleveraging is our overarching priority. As I mentioned a moment ago we voluntarily prepaid a small amount of debt related to the term loan B and we will continue to apply excess cash to debt repayment.

Lastly, we did not repurchase any shares during the second quarter under our share buyback program.

I will now review our fiscal 2014 third-quarter and full-year non-GAAP guidance. As a reminder, our guidance is detailed in our supplementary PowerPoint presentation and assumes currency rates consistent with the averages during Q2 2014. It does not assume any share repurchases or divestitures.

For the third quarter we expect revenues in the range of $615 million to $625 million, which are flat to 2% down year over year, and we expect EPS in the range of $0.33 to $0.34. For the fiscal year we are raising our revenue guidance range to $2.46 billion to $2.49 billion from our previous range of $2.425 billion to $2.475 billion to reflect higher than expected revenues to date. We are also raising our EPS guidance range to $1.37 to $1.40 from our previous guidance of $1.34 to $1.38. This new EPS range is also based on the stronger results to date, tempered by slightly higher than anticipated spending in the second half.

While we posted modestly better than expected results so far this year, we are still early in the stages of a turnaround and our guidance for the remainder of the year reflects that as well as the ongoing headwinds we face. We certainly aim to do better, but feel this is a realistic outlook today.

In summary, our second-quarter results saw us return to growth, and lay the groundwork for a stronger year than we anticipated at the outset of fiscal 2014. We look forward to demonstrating our ongoing commitment to organic growth and debt reduction in the coming quarters. And with that, I'll turn the call back to Steve.

Thanks, Glenn. Before we take questions I'd just like to reiterate that we are pleased to report results slightly ahead of expectations. The results of the quarter further demonstrate that we are winning in the marketplace and can continue to do so with the strong portfolio of products we currently have. The JRC contract win and strong 3-D mammo results are evidence of that. Our strategic review has been completed and we are moving forward with a strong leadership team to optimize execution, drive new product development, and capitalize on underpenetrated opportunities across the globe. We will be divesting some small fringe assets, but our focus is now squarely on organic growth and debt repayment.

In the months ahead I look forward to updating you on our progress and providing additional details on our vision for Hologic's future. With that, Greg, we'll please open it up to questions.

(Operator Instructions). Jayson Bedford, Raymond James.

Good afternoon, and congrats on the progress. Just -- I guess I wanted to ask about the earnings guidance. Given the revenue levels, it appears that operating margin will really have to come down in the second half, and historically this has been a business where second-half margin has been stronger than the first. So can you just shed a little light in terms of, is there increased spending associated with the back half of the year?

I'll take that one. To be quite candid, I think we cut a little bit too much coming into the year. And as I look to get the R&D organizations rebuilt, and even some of our sales and marketing efforts, probably a little more spend in the second half than what we had in the first. I will also tell you it will be well controlled and not set ourselves up of getting ahead of ourselves. But it really comes down to me in my mind, we probably cut a little too deeply going into the fiscal year.

Okay. I'll limit that to one, thanks.

Doug Schenkel, Cowen and Company.

Good afternoon and thanks for taking the questions. My first question is, could you just provide some thoughts on the expected impact of the approval by the FDA of Roche's HPV test as a primary screen? I would think that may present ultimately an opportunity for you on the Aptima side but could present more challenges on the ThinPrep side. Could you just walk us through your thoughts there?

Sure. I think long-term, you nailed it exactly. First I'd like to congratulate Roche for the work that they did to get that. In the short-term on ThinPrep we frankly don't see much impact. When you think about how well-established the Pap test is also in terms of code testing and the guidelines and the conservative nature of the specialists involved here, we think this is going to take some significant time.

Over years, will it start to have an impact? Yes. In the coming quarters, probably don't expect much. Having said that it's part of even the guidance; we want to be a little conservative just in case. We always plan to be conservative and hopefully be better off than that.

Long term I think as we become a major player in the HPV space, it probably does create some opportunity for us as well. And we like our growth there, but again, clearly Roche is going to be a tremendous competitor there and has the leg up on this particular chapter.

Okay. And one quick follow-up to Jayson's question. I know he was focused on historical second-half spending patterns, and Steve, you did talk about ramping some investment on the R&D side. That being said, the sequential drop off in sales and marketing spend was pretty material, pretty impressive. Is that an area where you would expect to spend more or do you think we can see the type of leverage we saw this quarter moving forward?

Sure. Long term you're going to see leverage, because as we -- a lot of the cuts and changes made I think in some ways make us healthier, leaner, and we certainly don't want to bounce back. You know I've always run lean organizations, we're going to keep that.

Having said that it is pretty big drop, and I think just going into the year we might have cut into a little bit of bone that you can survive with for the short term. But want to rebuild some of the bone, particularly as I would say in the sales, marketing and the R&D efforts. But on a going basis we will be reallocating certainly out of some G&A as we go forth. So there's probably a little bit of conservatism in the OpEx spending.

We are at that very interesting stage right now where I am thrilled with what the team delivered here, but we want to be careful not to get ahead of ourselves. There is still -- we don't want to be getting too far ahead of ourselves and too excited, but there are some very good things going on.

Great, thanks for taking the questions.

Tycho Peterson, JPMorgan.

Thanks for taking the question. Obviously a lot of news around more [installation]. Understanding you guys do not sell laparoscopic devices for MyoSure, can you maybe just talk about impact that you could potentially see in the business and do you need to kind of manage this with physicians?

Sure. Actually the great part is the physicians get this. And understand that probably the only thing we have in common with laparoscopic morcellation is the term -- is that word. But as you well know, Tycho, it is a very different process. We operate completely differently from those systems.

Once the press started to hit -- if you recall, the Wall Street Journal was kind of out in front of this, or New York Times, whatever back in December, we've been really close to the physician community here.

And our MyoSure, what I would remind everybody, our MyoSure hysteroscopic tissue removal system, we have basically moved away from the morcellation word. And the physician community totally gets it. Our team was just out at ACOG over the last few days. This is much more of a consumer media event, and certainly concern on the other side.

It should not have an impact on our business. Having said that, again, you always want to be cautious and conservative and know that anytime there is dustups in the media these days, there's the chance for confusion among possible patients, and some conservatism, so there could be a little bit of that. But overall the physician response has been very good. And our sales force -- this is where our surgical sales force is tremendously educated and it's been a wonderful resource for even some of the physicians that even get caught up in the media itself and want that reassurance or want that clarification.

And then just to switch you over to some of the reinvestments you'll be making, as we think about Gen-Probe and the pipeline there, are things like viral load assays and the [Radion] PCR technology still on track, or are they kind of being put on the back burner as you evaluate other options?

No, they are both front and center. I think the Panther platform is tremendous, and it is going to be about building out -- if you look at both of those as extensions off of Panther, one on the assay part and building out the menu, the other part is making Panther even better and more broadly usable, they are both, we see, key to our future there.

It's a great asset at Gen-Probe, what we got out there, and I think frankly we probably didn't do the greatest job in the early days of integrating, but pulling that team together now and there are some great things out there.

Vijay Kumar, ISI Group.

Hey guys, congrats on a nice quarter. And maybe just getting back to the guidance question, there are a number of moving parts in the quarter, right, so you obviously had a blood screening one and a couple of other folks mentioned you have those concerns on morcellation, as whether HPV. So I just want to make sure what's sort of baked into the guidance? How much of a Japanese win do you have on the guidance and what kind of sensitivities do you have around either HPV or morcellation kind of softening?

Sure. Let me start with the JRC. The JRC, we see really kicking in, in August. So it will be a modest fourth-quarter event. But really it's going to be much more about 2015 for that contract kicking in.

On both what I would call both ThinPrep, even NovaSure, and to some degree MyoSure, we are probably a little cautious right now. Again, I want to make sure we get our sea legs. We've got a lot of change going on in the Company. Luckily our field forces are really delivering right now.

But I'm right at that stage right now where I'm feeling good about some things but you never know what you don't know yet. And just making sure that we get back, given our history, wanting to really get back on a path where you guys can count on us quarter after quarter to deliver what we said.

Great, thank you, guys.

David Lewis, Morgan Stanley.

Good afternoon. Steve, I want to push you a little bit here on the strategy. It's really the same word but in two different areas, but the word is incremental. When you talked about investment to reaccelerate growth, it sounds like you have those areas to reinvest, but it also sounds like you want to invest at a rate commensurate with sales. I'm wondering, just given this transformation, why not take bigger action to invest faster now and accelerate that path to growth?

And then the same question, maybe this is more for Glenn or for yourself, same thing on tax rate. It sounds like the strategy is let's redomicile IP, let's move manufacturing operations, which are incremental ways of lowering your tax rate. There are structural (technical difficulty) tax rate lowered. So in two areas of the strategic plan, there could be a faster way to get there and I'm wondering why the decision was made to be more incremental than faster. Thank you.

Sure, great question. First on the incremental, let me add an extra clarification. I picture our investments in R&D being at a probably significantly higher rate than necessarily sales growth and funding that out of probably some reductions in G&A and other areas. So effectively what I think you'll see is we will be investing more in R&D, and sales and marketing, probably beyond an incremental basis, but offset from the G&A side. Could we be more aggressive? Possibly.

We are also at that stage that bringing in the new leaders, I want to make sure that we are smart about where we put those investments. And we are in that interesting blend right now where signaling to the team, look, we think we can generate a lot more growth. And we are looking at the ideas, but we are not just going to ramp it up, so what you're probably going to see is it will ramp up over time as the ideas bubble up and as the competencies bubble up. And I think if we see great opportunities we will certainly look to invest more there, so we won't be held back but we will be smart about it.

On the tax piece, I may go ahead and let Glenn jump in on this one.

You know, the tax rate is really reflective today of where we are as really a US-based company, with primarily US sales and US operations. And it's our intention to take greater advantage of the international opportunity out there and to move some manufacturing and IP resources overseas to be closer to those customer markets. But that will take a little bit of time, and those are the efforts that will help to bring that tax rate down from being a primarily US-based tax rate today.

If I add one other kind of color commentary as it relates to maybe dimensionalizing, say the R&D investments, take our surgical business as an example. That's an area where we really have done very little on ongoing incremental innovation, improving our products, building out, we have basically a two-product division. So as we challenge that team to come up with a third, fourth and fifth products and then line extensions and everything like that, I'm totally convinced we will build that capability over time and make those investments. But it's not like from second quarter to third quarter we're ready to just turn on the spigot. I think it's a little bit of what we've had with the extra strong profit here in the second quarter.

It's one thing to talk about the R&D, it's another to make sure that we fund it appropriately over time. Hopefully that gives a little more granularity or color to that.

(Operator Instructions). Mike Matson, Needham & Company.

Thanks for getting me in. I guess I was just wondering on the strength of the 3-D mammography growth that you had, do you think that the CPT code had an effect in the quarter? I know the dollar amount is not known yet, but just having your customers know that there is a code coming, and that will help their ROI on buying one of these systems -- do you think that played into the strength at all?

It probably didn't have a huge impact in the quarter in terms of actual booked revenues. I would say it's having a huge impact on the field force morale, and also the psyche and the buyers. And I think it does give us confidence going forward that the known certainty that something is coming, even though we don't know what the numbers are is reassuring to the hospital customers; that we should start to feel that even more going forward.

I think as we said last quarter, we were focusing the field not to use that as an excuse to hold back, and I think our team was really out there fighting despite not having it. And then we were holding the reimbursement team to really get this across the finish line, and I think they are delivering there as well. But I think it does bode reasonably well for the quarters ahead.

That's all I have, thanks.

Isaac Ro, Goldman Sachs.

Good afternoon, guys, thanks for taking the question. I just want to ask about the cytology business. I think Glenn, in the prepared remarks you said it was down I think 4%. I was wondering if you could put a little color on the US versus ex-US dynamic there from a growth standpoint. And the reason I ask is just trying to get a sense of where we are in the process of digesting those wider intervals for ThinPrep, where you think we are in that process. Thank you.

I can jump in on this one. I would tell you this, the US was down probably very high single digits, and the international was about flattish. So we don't want to go into exact specifics, so I think you are still seeing that hit in the US market.

And we are assuming that continuing, and hopefully it will start to slow but we are not ready to declare an inflection point in the slowdown yet. Glenn, did you want to add to that?

No, that was basically it. We are seeing continued some softness on the US side. I think we were kind of pleased it wasn't more than what it was. It seemed to hold up fairly well for the quarter.

That makes sense. Thanks a bunch, guys.

Anthony Petrone, Jefferies.

Thanks. One on mammography, maybe Stephen or Glenn. Can you maybe just comment on when the mammography business reaches an inflection point, maybe where 3-D uptake sort of offsets the 2-D declines?

I think you are starting to see it -- I think we really started to see it in this quarter, where we are seeing especially the US, and acceleration in that business. If you look globally we posted 8% growth, our US growth was even a little bit better than that.

I would add that almost 1/2 of the mammo systems were 3-D. So that's a pretty impressive number that we've built up to over this time frame, is to jump up that just about half now are 3-D tomos all mammo units going out the door.

And then just a quick one, is pricing stable there?

At this point, yes. It may get a little rougher once other competitors come into the US marketplace.

Jon Groberg, Macquarie.

Thanks for taking the question. If I could I guess maybe just following up on some of the investments, maybe can you maybe talk about the evolution? I think Gen-Probe was investing a lot in R&D and had kind of a focus on expanding internationally. I think that was a focus previously of Hologic as well, you said maybe you put the brakes on that and cut a little more deeply then perhaps you should have. But can you maybe talk, is there anything materially different about how you're going about doing that than what the plan was before? Thanks.

Sure. The question being R&D or international? I'm sorry.

I think a little bit of both. To me it sounds like that was a strategy previously, maybe it kind of got slowed down. I'm just wondering if it's just about throwing dollars or if there is something more material about how you are thinking about doing it versus what the plan had been previously.

Sure. Let me take the R&D piece first. Post the acquisition we did cut pretty deeply into the R&D organization. And I think now we are really looking at the assays that we want to develop as well as fusion and everything else we want to bring to market. And sending the signals that we want to invest, we want to be thinking about the future, that our whole plan for organic growth really is R&D-driven and very much off the model that Gen-Probe had executed so successfully; and frankly that Hologic back in the early 2000's had executed very, very well as we built out the mammo business. So it's emulating those models, of great investments in R&D, great R&D teams and a steady stream of products.

On the international front I think frankly we've probably had some starts and stops in terms of investments. And at the end of the day we've got -- we are really looking at it very granularly now, by franchise, by country. And which franchises are we going to invest in, in which countries; looking at what are the reimbursement rates for each of those countries; and I think getting very specific about where the opportunities are; not applying what we call the peanut butter principal, just saying let's go grow international.

But we can look at our surgical business, country by country, where are we not developed, where do we have opportunities? The same for the molecular diagnostic business. And as much as Gen-Probe was starting to look there, they were still at the very early innings of global expansion.

So a lot of this is now a very strong focus. Bringing Claus Egstrand in, I can tell you he is 2.5 weeks into the job right now and already I think seeing a lot of opportunity. And again, those are opportunities that won't happen necessarily the next quarter, but they will happen here in the coming years.

That's very helpful. That's what I was going to get at in my next question, just to be clear, do you think we should start seeing proof of the success within one year, two years, I'm just curious what you think the timeframe is. Thanks.

Sure. I think on international expansion you ought to start to see that within a year-ish. Some markets like Japan will be a little slower, but I think it's very clear that we ought to start to see certainly topline growth, maybe not a lot of bottom line because we will be making the investments in those businesses.

On the R&D front, re-accelerating and everything else. As we've talked with our board it's probably a couple of years away before we really start to see the fruits of what we start to put in now. But what we've also said is luckily, we've had a couple of great franchises with Panther and the 3-D tomo that could help drive a lot of growth here over the next couple of years while we reinvest in the R&D for the out years.

Brian Weinstein, William Blair.

Thanks for taking the question. This is Matt in for Brian today. Just in light of the recent JRC win here, just wondering are there other large tender opportunities coming up in the near future. And you mentioned that Japan certainly was very focused on the technology evaluation. Just your thoughts on whether others are more cost or technology focused, any comments there would be helpful. Thanks.

Sure. There's certainly nothing of the magnitude of the JRC coming up; there are some tenders going around Europe, the Middle East.

And frankly it's a great question you ask around technology versus pricing. We probably worry a little bit some of them may be a little more price-driven than what we are seeing. I think what we loved about Japan is everybody probably well knows that the quality concerns in Japan are always at the top of the list. And we prevail very well there.

Where it's pricing game, we are certainly seeing some aggressiveness in the competitive set to try to hold onto business. And that puts some certain pressure on that business as well.

Thanks for taking my question, Steve.

Richard Newitter, Leerink Partners.

Hi, thanks for squeezing me in, guys. Steve, as you say that you think you are nearing an inflection point in 3-D tomo adoption potentially in the US, can you talk a little bit about the strategy and the progress you may be making with conversations individually with individual insurers?

And then also what can we expect in terms of the timing and the process once you do get more clarity around final amounts on the CPT code? And how should we think about that actually translating into actual coverage from a timing and what you're strategy is to work with insurers to get that materialized?

Sure. I think pragmatically, the insurer piece won't play out until well into 2015. I think everybody is going to be fairly cautious, and that is where -- we are at such an interesting time in the Company right now where there's some nice nuggets here that look good but we want to be cautious and not get ahead of ourselves. So between -- let's face it, CPT will come out in November, it will kick in, in January. By the time you get the local -- between the Medicare pieces and then also private payors adopting it, it's probably going to be rolling out really through 2015. But I think what it does do is as the clinical evidence of 3-D mammography, and as more word gets out about just the superiority of what we have, I can tell you there's not one of us on this call whose wives, mothers, daughters, whatever you wouldn't want to have 3-D.

And I think as the consumer awareness also builds in this very important area, that should bode well.

So I think the way I would really be thinking about the 3-D business is let's not get ahead of ourselves, let's not think there's a huge spike here. But I think we should think about it as it should be a really nice run here for a number of years given where we are.

Bill Quirk, Piper Jaffray.

Good afternoon, everybody. A quick one for me, just kind of coming back to morcellation. I realize that you've -- it sounds like anyway, that you have perhaps dialed back some of your expectations for MyoSure. But with one of your main competitors off the market, any chance that we could actually see that be a source of upside over the balance of the year and also as we think about it in 2015?

No. You know what, it really gets back to we do not compete against the J&J piece. For the same reason we shouldn't be affected, unfortunately, it's a great question, you'd like to think we could go get that business. But for the same reason we are unaffected because we are used in a completely different procedure, we are not indicated, nor does -- nor would we be able to go in and effectively try to get that business.

You can bet it was one of the first things, as I am still learning our products, that I jumped on thinking okay, we don't have a problem, where's the opportunity. Unfortunately we don't.

Fair enough. And just a follow-up on a blood screening question. Any update on China? Obviously they have been incrementally moving towards using NAT. I know there's a handful of folks involved here, but just a general update there would be great. Thanks.

You know what, we don't really have an update there other than we are going through the process. Sorry I don't have anything more for you, Bill.

Okay. Thanks, Steve.

John Block, Stifel.

Thanks for taking the questions. The first one, numbers were certainly strong across the board, but one thing that stood out to me was Breast Health internationally, if I look at constant currency, down almost 4% year over year. Maybe if you can just give us some color, I'm surprised it was down mid-single digits in light of the product cycle internationally. Can you talk about the capital environment overseas? And then specific to GE, anything different in the competitive landscape now that they've been out there with their tomo offering for a couple of quarters? Thanks.

Sure. Great insight. I would say that the international breast piece was more an anomaly, some very big sales that happened in the previous year, especially in the Middle East, and frankly some of the emerging markets. So I think what you have -- what we have had as I dig in -- and it's where I want to be careful and want to start to get to a more regular cadence -- we've had some real huge variations in geographic swings in the Breast Health business to me that I'd like to see be smoother over time. So I think it's less a trend. Clearly with the competitive set out there, Phillips, GE, Siemens, even Fuji, it is a more competitive world outside the US. But I don't think -- I think this was probably a slightly unusually softer quarter due to the comps of last year.

Okay, perfect. And just a quick follow-up. Glenn, this might be more for you. On the initiatives around tax planning, when could we possibly see that come into play? Is that 2015, or think further out? And as part of that, could you arguably see some inefficiencies on the manufacturing as a result as we get there? Thanks, guys.

On the tax timing, we are talking further out than FY 2015. We have to begin to set up some of that manufacturing IT transfer now. It needs to be tied into where we are doing business for some of the emerging markets, so there's a lot of planning that's involved.

I don't think it has to necessarily have an impact on the efficiencies of our manufacturing. We do some nice manufacturing outside the US now. Costa Rica is a great example. In fact some of the margin improvement is because we've moved many of our disposable products down to Costa Rica. So I think there are some opportunities there.

We just now are at a better size and scale to be able to take advantage of some of these international opportunities, but they are more than a couple years out, John.

There's real structural work that needs to happen.

(Operator Instructions). Bill Bonello, Craig Hallum.

Thank you very much. Can you just talk a little bit about your plans for a couple of the businesses where you've been seeing declines for a while now, the domestic ThinPrep and NovaSure? How are you thinking about investment in those businesses? Could we just have to accept that they kind of steady decline or are there things you believe you can do to reverse that trend at all?

Great questions. On a macro basis, I think ThinPrep, with the extensions of the interval expansions, there's just going to be unit losses there that no matter what we do from a selling standpoint or anything else, we are thinking about R&D are the ways that we can inject some different life into a franchise like that. NovaSure, the same thing and our sales forces are still out there fighting.

So part of our strategy to return to organic growth that we're talking about internally is if we can even slow the rate of decline, particularly those two key franchises, which by the way are also great gross margin franchises. Even on the margin if we can use to slow the declines. I'm not sure I would be ready to say we can turn them around in the US.

I would say it's back to though also our global footprint. And both franchises are underdeveloped internationally. ThinPrep is a little bit more established, but there are significant opportunities we really think for both franchises outside the US. And I think, again, we've been subject to the bigger headwinds of US reimbursement or US issues because we have been way too dependent on the US market. And so part of our diversification and insulation from some of those trends will be to build these franchises outside the US.

[Jeff Relic], Canaccord.

Good afternoon, folks. Steve, where do you think you are on Panther consumable yields? What I'm asking is what kind of percent of your target yields are you at now given the Quest business starting to ramp? Thanks.

You know what, Jeff, I honestly don't know the answer to that yet. We'll have to get back to you on that. There's still a few parts of the business I'm not 100% in detail. Glenn (multiple speakers)

Yes, we've been making good progress on the Panthers. A big chunk of the Panthers have gone out in the last 6 to 9 months so they are just now ramping up.

But just to clarify, Quest is not Panther. Quest is Tigris. So what we've been able to do with Quest is they did order quite a few Tigrises at the end of last fiscal year; those are now in place and those are now up and running. And you are seeing the benefit on the CPG side, you're seeing the benefit on the HPV side and now on the trick side from Quest.

Okay, thanks, Glenn.

There's a lot more room on the Panther side. It is all about getting Panthers out there. We are ahead of our schedule to get 1,000 Panthers in the field by the end of FY 2015. We feel good about that. Once we have that, it's then expanding the menu and Steve talked about that. So I think we are in a good position with that product. People love the Panther. It's a great piece of automation and workflow.

John Zecy, Morningstar.

Thanks for taking my question. I just had a quick question on the diagnostic pipeline. If you could maybe just talk a little bit more about the opportunity in viral load testing? Just trying to get a sense of how the pipeline is going to evolve and sort of your plans for rolling that out, and how that might potentially offset some of the ThinPrep softness. Thanks.

Sure. We clearly have articulated that that is an area we are developing. That will still be a little bit -- particularly in the United States market, that's still going to be years away. But we are developing those assays and do expect to be there. Nothing -- again, that's certainly further out in terms of timeframe at this point.

Thank you. That is all the time we have for questions today. This now concludes Hologic's second-quarter fiscal 2014 earnings call. Have a good evening.