Hologic Inc (HOLX) 2015 Q3 法說會逐字稿

Good afternoon and welcome to the Hologic, Inc. third-quarter fiscal-year 2015 earnings conference call. My name is Don, and I am your operator for today's call. Today's conference call is being recorded. (Operator Instructions) I would now like to introduce Mike Watts, Vice President, Investor Relations and Corporate Communications, to begin the call.

Thank you, Don. Good afternoon and thank you for joining us for Hologic's third-quarter fiscal 2015 earnings call. With me today are Steve MacMillan, the Company's Chairman, President, and Chief Executive Officer; and Bob McMahon, our Chief Financial Officer. Steve and Bob both have some prepared remarks today. Then we will have a question-and-answer session.

If you didn't already see our third-quarter press release, a copy is available in the investors section of our website, along with a supplemental financial presentation for today's call. We also will post our prepared remarks to our website shortly after we deliver them.

Finally, a replay of this call will be archived on our website through August 28. Before we start, 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 differ materially from those expressed or implied. Such factors include those referenced in the 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 GAAP can be found in our earnings release or in the supplemental presentation. With that, I will turn the call over to Steve MacMillan, Hologic's CEO.

Thank you, Mike; and good afternoon, everyone. We are very pleased to discuss Hologic's financial results for the third quarter of fiscal 2015. We'll frame these results today in the context of our annual strategic planning process, which we recently completed.

To give away the punchline, we had an extremely strong quarter. We posted double-digit revenue growth both domestically and internationally on a constant currency basis, with 12.2% top-line growth overall. Our breast health business led the charge, as expected; but our diagnostics and surgical businesses contributed significantly as well. So the strength was, again, broad-based.

In fact, in the important US market, every business grew as fast or faster than last quarter, with total domestic revenues up a very strong 12.7%. Equally encouraging, the growth and stabilization of some of our key franchises in the United States, combined with solid pricing discipline and early returns from our productivity initiatives, led to very strong gross margins -- 65.2% on a non-GAAP basis.

This drove a material improvement in our operating margin and a 16.2% increase in diluted earnings per share, even as we made significant investments in our commercial activities. Based on all these factors, we are again raising our financial guidance for fiscal 2015, reflecting confidence in the sustainability of our results.

In fact, sustainable growth was the focus of our annual strategic planning process, which we completed this quarter. While we can't provide all the details of our strategic plan, I would like to give you a little color on how we are thinking about the business at a high level.

Shortly after I joined the Company in late 2013, we made four strategic choices that have driven our turnaround thus far. First, we decided to keep the Company essentially intact, but try to run it better. While we divested some small businesses, we believed then and continue to believe now that we can create the most value for our shareholders by optimizing the outstanding product and service assets that we have.

Second, we recognize the need for a major overhaul of our leadership, our structure, and our culture. We are focusing relentlessly on upgrading talent and increasing engagement and have boosted accountability and performance in part by moving to a divisional structure.

Third, we wanted to grow organically rather than relying on acquisitions, as we had in the past. We have doubled down on our key brands; stabilized previous sales declines; and, in some cases, returned these products to growth.

And fourth, closely connected to our focus on organic growth, we have overhauled our approach to capital allocation by reducing and restructuring our debt and increasing return on invested capital. The positive results of these strategic choices were clearly reflected in our financial performance this quarter. Now let's discuss those results in more detail. I will take you through revenue; then Bob will focus on expenses and the balance sheet.

Compared to the prior-year period, third-quarter revenues of $693.9 million grew 12.2% on a constant currency basis. Breast health was the clear growth standout in the quarter, driven by accelerating uptake of our Genius 3D mammography systems. Total breast health sales were $279.5 million, up 20.2% in constant currency.

Digging a little deeper, breast imaging sales significantly exceeded our expectations, growing 24.2% in constant currency terms. We should point out that imaging sales included about $5 million of nonrecurring revenue related to our divested Sentinelle business. But even without this, sales were exceptionally strong. We shipped a record number of 3D tomosynthesis units to domestic customers in the quarter and are encouraged to see a substantial runway still ahead of us.

As expected, most of the new placements replace our existing 2D systems, but we are winning competitive business as well. As we discussed last quarter, our Genius 3D marketing efforts are making a difference. And some of you may have seen that we expanded our media campaign in June with actress Kristin Chenoweth, who is encouraging women to request a Genius exam from their provider.

While breast health was the growth leader in the third quarter, our other businesses also performed very well, highlighting the unique value that our portfolio of market-leading products provides. Our biggest business, diagnostics, posted sales of $306.9 million in the quarter -- a very healthy growth rate of 7.0% in constant currency terms.

The story in cytology and blood screening was similar to previous quarters, while the molecular business outperformed. First, global sales of cytology and perinatal products totaled $118.1 million. Consistent with recent quarterly trends, sales were basically flat on a constant currency basis as domestic market share gains and slight international growth offset continued pressure from longer screening intervals in the United States. Although we are managing well against this headwind, we do not think it is behind us, as overall Pap volumes in the US continue to decline.

Second, worldwide blood screening sales were $64.2 million, up 18.5% on a constant currency basis compared to a relatively weak prior-year comparable that resulted from normal inventory fluctuations. Blood screening growth continued to benefit from the business our partner Grifols one with the Japanese Red Cross, which more than offset a continuing slowdown in US blood donation levels. As you know, the growth benefits of the JRC contract will annualize in our fiscal fourth-quarter.

Now let's turn to molecular diagnostics, where quarterly sales of $124.6 million increased 8.9% on a constant currency basis. This growth rate accelerated for the third consecutive quarter and included stellar domestic growth of 12.6%. All of our key women's health assays for chlamydia and gonorrhea, HPV, and Trichomonas grew solidly in the quarter, and all won important new competitive accounts.

Much of this success was due to continued adoption of our fully-automated Panther instrument. Placement of new Panthers were robust in the quarter, and we have now shipped well over 1,000 units to clinical diagnostics and blood screening customers. In addition, utilization per instrument continues to grow.

To round out the revenue discussion, let me mention that we remain pleased with the turnaround in surgical sales. As you might recall, surgical was a standout last quarter, but admittedly versus a softer prior-year comparable. This quarter our surgical team achieved a second straight quarter of double-digit constant currency growth, but against the much more challenging comp, as we continue to see benefits from more effective pricing strategies and the new clinical specialists we have hired.

Although we do not yet view this business as a double-digit grower over the long-term, we were pleased the global sales of our NovaSure product were flat on a constant currency basis this quarter. And MyoSure sales again increased by more than 30%.

Finally, worldwide skeletal sales were $22 million in the quarter, down 1.4% on a constant currency basis. Sales increased solidly in the United States, based on continued strength of our new Horizon bone density scanner but declined internationally due to fluctuations in distributor ordering patterns. We are not concerned about this single quarterly result, although skeletal was our only business that didn't growth this quarter. On the positive side, we'll have something to shoot for as we close out our fiscal year.

We have lots of aspirational goals over the long-term as well. Hologic has been mainly a turnaround story for the last year or so, but we don't want to be perceived that way forever. Instead, our goal is to build a sustainable growth company. To do that, we are focused on adding new drivers to the toolbox we already have, which contributed to our strong third-quarter results.

For example, we are focusing on creating an international growth engine for the long-term. We have the right leader in place, and Claus Egstrand is building a high-performance team around him. We have identified several attractive growth opportunities and are building the capabilities to capitalize on them, but we are in the very early innings of this effort.

Second, we are boosting the level of innovation and productivity in our research and development activities. This is a multifaceted effort that involves new leadership, better marketing insights, more efficient processes, and greater accountability. This will not be a quick effort either, but it can have a significant long-term payoff.

So while it's clear that we have accomplished a lot so far, it's just is clear that we have a lot of work ahead of us. There are many chapters still to be written in the growth story of Hologic, and we view that as very good news for our shareholders, as our longer-term initiatives will make us an even stronger company. Now I will hand the call over to Bob.

Thank you, Steve; and good afternoon, everyone. I'm going to walk through our third-quarter income statement and performance, describe improvements we've made to our balance sheet, then discuss our financial guidance -- which we are increasing for the third time this year. Unless otherwise noted, my commentary will focus on non-GAAP results, and percentage changes will be on a year-over-year basis.

As Steve said, momentum has been building steadily in all of our businesses, and this trend continued in the third quarter as our top line grew at double-digit rates, both domestically and internationally, on a constant currency basis. At the same time we showed solid leverage on the gross, operating, and net profit lines -- so despite a currency headwind, earnings per share increased by 16.2%, significantly faster than revenues and ahead of our most recent guidance.

I should point out that net income grew at an even faster rate, but the translation to EPS was diluted by a higher share count resulting from the convertible notes on our balance sheet and our rising stock price. One of the highlights of the quarter was our strong gross margin of 65.2%, an improvement of 230 basis points compared to the prior-year period. Several factors contributed to this result. First, we benefited from the 12.7% revenue growth in the US, where margins are generally higher.

Second, in terms of product mix, stabilization of both our ThinPrep and NovaSure product lines; continued growth of our Aptima women's health assays; and the acceleration of Genius 3D sales and service all boosted the gross margins. And third, we benefited from both the efficiencies that come with higher volumes and very early returns from our productivity initiatives.

Total operating expenses of $222.4 million increased by 12.2% in the quarter. The biggest contributor to this increase was variable compensation, as higher performance-based compensation resulted from the strong financial performance we've seen this year. We also made additional investments in a few high-return areas, as we foreshadowed last quarter.

For example, non-GAAP research and development expenses increased 8%. And sales and marketing spending grew 13.9% as we boosted support for our Genius 3D mammography efforts based on early positive returns.

Net-net, we delivered a non-GAAP operating margin of 33.2% in the quarter, up a very healthy 170 basis points from last year. We remain one of the most profitable Companies in our sector and are committed to remaining so, even as we invest appropriately to generate sustainable growth.

To round out the income statement, interest expense declined by 11.8% due to continued debt repayment. Our tax rate of 34.25% was in line with expectations and improved slightly compared to last year. And, finally, our diluted share count in the quarter was 292.6 million shares, an increase of 4.8% that resulted mainly from our strong stock performance pushing convertible notes further in the money.

Before turning to our updated guidance, I want to highlight a few other metrics that demonstrate our commitment to operational excellence and our focus on improving financial efficiency. Total debt outstanding was $3.9 billion, a decrease of $0.3 billion compared to a year ago.

We generated operating cash flow of $242.3 million in the quarter, a very healthy increase of 53% compared to the prior year. This significant increase was driven by higher net income combined with working capital improvements, primarily from better inventory management. Based on this excellent cash flow generation, we ended the quarter with $888.8 million in cash and equivalents and a net debt position of $3.053 billion, an improvement of $579 million compared to the prior-year period.

Adjusted EBITDA was $249.7 million in the third quarter, up 12.6% and tracking to $1 billion annual run rate. With the strong EBITDA growth and debt reduction, our leverage ratio net debt over EBITDA has improved further to 3.2 times, and we are well on our way to our target of 2.5 times by 2017.

The combination of a growing top line, improving productivity, and lower debt have contributed to a significant improvement in ROIC, which was 10.6% in the quarter on a trailing 12-month basis, an increase of 230 basis points compared to the prior-year period.

Improving business prospects and strong cash flows also enabled us to continue the transformation of our balance sheet in the third quarter. We refinanced both our bank loans as well as our senior notes, providing us with greater flexibility and lower interest rate.

In May we established a new five-year secured credit agreement that consisted of a $1.5 billion senior term loan and an upsized $1 billion revolver. We pay interest on this new debt at LIBOR plus 1.75%, saving more than $8 million in interest annually based on recent interest rates.

We used the proceeds to pay off our previous term loans, so our total debt remains substantially unchanged. But importantly, we extended the maturity on the debt to 2020 and gained additional flexibility to retire our convertible notes when they become callable.

Then, in early July, we completed a private offering of $1 billion of senior notes at par, with an interest rate of 5.25%. The proceeds will be used to pay off existing senior notes, reducing interest expense by $10 million annually and pushing out the maturity two years to 2022.

All told, we significantly improved the quality of our balance sheet in the third quarter and gained flexibility to further enhance shareholder value in the future. We are making excellent progress, but we still have more work to do to achieve our long-term capital deployment goals. Specifically, we recognize that a capital structure containing such high levels of convertible debt is unusual for a company our size, and we are committed to normalizing this over time.

Now I would like to provide an update on our financial guidance for the full fiscal year and the fourth quarter. Based on our strong third-quarter performance, we are pleased to be raising guidance again. As always, this guidance is based on recent foreign exchange rates.

For the 2015 fiscal year and on a reported basis, we now expect total revenues of $2.687 billion to $2.697 billion. Compared to the prior year, this equates to reported revenue growth of between 7% and 7.4% and constant currency growth of between 9.1% and 9.5%.

We expect non-GAAP earnings-per-share for the full year of between $1.65 and $1.66. This translates to reported EPS growth of between 13% and 13.7%, or 17.1% to 17.8% on a constant currency basis. As noted in the release, these percentage changes from the prior year exclude one-time benefit associated with amending the Roka license agreement, which added $20.1 million of revenue and $0.05 of EPS to the fourth quarter of fiscal 2014.

As we alluded to last quarter, our increased EPS guidance incorporates some incremental investments to accelerate and extend our growth prospects, especially in breast health and diagnostics. It assumes a tax rate of 34.25% for the full year and a higher diluted share count of 291 million for the year as the higher stock prices pushed some of our convertible notes deeper in the money.

Obviously, this implies that our share count for the fourth quarter will be higher -- probably around 299 million shares. And looking ahead to fiscal 2016, we expect our share count to be close to 305 million, based on current market conditions. We note that this share count is higher than what we see in most sell-side models.

With only one quarter left in our fiscal year, the math on our fourth-quarter guidance is straightforward. We expect revenue of between $685 million and $695 million. Compared to the prior year, this guidance reflects reported revenue growth of 6.9% to 8.5% and constant currency growth of 9.3% to 10.9%. We anticipate that this revenue performance will drive diluted non-GAAP earnings per share of $0.41 to $0.42 in the fourth quarter. Non-GAAP EPS is expected to grow 7.9% to 10.5% on a reported basis, or roughly 13.2% to 15.8% in constant currency. Again, these percentages exclude the one-time benefit associated with amending the Roka license agreement.

If we recall where the Company was when we gave our initial 2015 financial guidance last November -- less than a year ago -- we have clearly come a long way. And in fact, our performance has turned around more significantly and more rapidly than even we thought possible. In the third quarter, specifically, our top line grew at 12.2% in constant currency terms, and we showed material operating leverage that drove EPS growth of 16.2%.

But we don't expect these kind of growth rates to continue forever, especially at the comps get tougher. Our strategic planning process does give us confidence in our future trajectory. With that, I will ask the operator to open up the call for questions. Please limit your question to one, plus a related follow-up; and then return to the queue. Operator, we are ready for the first question.

(Operator Instructions) Tycho Peterson, JPMorgan.

Thanks. Great quarter, guys. Maybe just starting with breast health at 20% constant currency growth. Can you maybe just talk about what you are seeing in the field? Are you seeing faster conversion, presumably, than maybe you had anticipated? Where do you think we are in the tomo upgrade cycle?

We are clearly seeing an increase, Tycho. And I think what we are starting to see is the impact of our marketing efforts and, frankly, a lot of patient demand actually starting to drive hospitals to really accelerate further. I think it's clearly a big uptick, and faster than what we would have anticipated.

But we are hearing a lot of pressure, certainly from the hospital systems. And I think, based on incoming orders, continuing to feel good.

We then remind you that we are still in the early to early/mid-innings of the potential left just in the United States. So we're still well less than half of the way at all -- even nearly through our installed base. So there's still a lot of runway ahead of us.

And then onto molecular, 9% constant currency growth is great. We saw Roche put up good numbers for their HPV business as well. Can you maybe talk about the market dynamics that you're seeing in molecular? Obviously, you don't have the primary screen yet. So maybe just talk about competitive dynamics as well?

You know, I think we continue to feel really good -- certainly about our position in HPV and our Panther system. So again, as you well know, there'd been so much attention paid to the Quest contract, say, a year ago. But what we've really been focused on over the last year and even during that time is additional Panther placements.

And as those Panthers come online, we have more machines in the field. And then as people get experience with them, they start to put more of our assays on them. And it just builds over time.

So we are feeling very good. There's probably some positive market -- you know, overall market dynamics here, so that we don't want to take all the credit for it. But clearly, I think if we look throughout the molecular diagnostics industry right now, volume is probably looking pretty good.

Yes. And Tycho, I would add -- this is Bob -- specific to HPV, while we don't disclose that, we feel really good about our performance in HPV. I believe it was faster than the market, and we believe we are number one in that marketplace in the US.

Bill Quirk, Piper Jaffray.

Great. Thanks. Good afternoon, everyone. This is actually Alex filling in for Bill. So first one for me: any update on the timing for NAT testing in China?

Not really.

No, it's rolling out sporadically across the country.

Okay. Great. And then where are we with the virology launch in Europe? And when should we expect these assays to make it Stateside?

And then, somewhat related, what's the potential impact on the business following CMS's five-year recommended interval for combined HPV and Pap screens? Thanks.

Hi, Alex, it's Mike. Let me take the question on virology timelines. As you know, we introduced not too long ago our HIV product with a CE Mark in Europe. We would probably look to the next calendar year to flesh out the menu with additional HCV and HBV assays, and then probably in the 2017 calendar year to bring the first product to the US, which would be HIV as well.

And on the question of five-year screening -- I think we continue to see, as we referenced in the script, an extension of the interval as it relates to Pap. I think in the long run we, frankly, think the science is flawed to go to five years. And I think that will continue to play out. People will understand that it may be a little too far. But in the meantime, we are dealing with that.

Vijay Kumar, Evercore ISI.

Congratulations on a great quarter. So, Steve, I'm just curious on -- you know, given sort of that massive, massive showing within breast health, any comments around where we are -- you know, what the penetration levels are within 3D tomo?

And I'm more curious on the potential for share gains here, right? Clearly, it looks like your customer base -- they are believing in the new technology, right? So does this provide a longer tail for you to sort of gain share against competition? Thank you.

Thanks, Vijay. Good to hear from you. The way we looked at it in terms of our installed base -- and we are not giving the exact numbers -- but feel very good on both our conversions, but also the fact that we are well under -- well under only halfway there. So we are not even close to halfway through our base, which -- you know, this should continue to run really for several years in terms of the momentum.

And to the competitive piece, we are definitely winning competitive customers. And I think we're certainly -- I think it's fair to say we are winning more competitive ones than we are losing. I think people really are seeing the combination of our proven technology. We have the best clinical data out there, with the study published in JAMA. We have the best label. We have the fastest scan time.

This really is -- frankly, we are more differentiated in the 3D world than we probably ever were in the 2D world. And I think our sales teams are doing a tremendous job of educating customers that way -- combined with some patient demand and our marketing efforts, all of which clearly led to an inflection in the quarter, but one that we feel good about sustaining here for a ways.

Great. Maybe one quick one for Bob. Great margin pull-through. I'm just curious -- how much of this was driven by volume uplift, given the top-line performance, versus some of the structural things that you've been talking about, Bob? Can we expect sort of margin upside here as people look over the next few years?

Yes, I think we've talked about the productivity initiatives that are starting to be put in place. I would say that those are still in their early stages. And as we think about this, certainly the US -- we benefited from the US growth being much faster than we had anticipated, which really helps from a geography and a gross margin perspective.

Our guidance going forward -- we anticipate a slight decline sequentially in our gross margin, but still up versus prior year. And the way we're thinking about it is, as we are looking to grow our international business longer-term, you know, that's going to put down the pressure on our margins. We generally see slightly lower margins outside the US than inside the US.

I think what's happening is actually some of the higher volume in the US, coupled with some of these initiatives -- we are actually seeing some of that benefit before the international growth kind of kicks in. So we feel good about where we are and the progress we are making. Not ready to say that we are going to continue to see margin improvement enhancements to the level that we have this quarter.

David Lewis, Morgan Stanley.

Good afternoon. Steve, you talked about sustainability as a tenet of the STRAP plan you just concluded. And obviously, given this tremendous quarter, you talked about these two major drivers of sustainability, if I'm catching you right. One was international; the other was -- you said innovation; I'm kind of calling that the pipeline.

Just taking the second one here for a second, when do you expect to start seeing material productivity coming out of the pipeline? And when you start thinking about innovation for this business, how heavily do you think you are going to have to rely on M&A?

Sure. Great question, David. I think on the pipeline, truthfully, we are still a few years away. I think as you probably wrote shortly after I started, there's investments and cultural shifts that have to happen. And I think the way we are thinking of it at a high level is the impact of what we are doing today is probably more an 2018 and beyond event, being perfectly candid. I think we've kind of said that the pipeline was not rich.

In the meantime, I think there's so much more opportunity in the shorter-term with the products we have to help us bridge through what is probably a longer gap than we would prefer. So I think we feel pretty good.

I think, clearly, on the M&A front we've refocused on organic growth. We will certainly start to re-crank up what I'd call small-scale, bite-size kinds of things. But even nothing in the very short-term on that as we have continued to pay down the debt.

Having said that, I think with the performance we are generating, we are running at a very good pace relative to our debt to EBITDA goals by the end of 2017. We are clearly running ahead of that, which will probably give us a little chance to maybe do some more tuck-ins to help us even bridge a gap, if there was one, before the pipeline really kicks in. But we're still not -- we're not returning to the old days of big acquisitions and any of that stuff.

That's very helpful, Stephen. Then, Bob, just a big question on -- you know, given the top-line performance, I think most would have expected greater drop-through. So obviously you are balancing significant top-line performance and reinvestments in the business, which is the right thing to be doing.

But as you think about SG&A, it seems like that was the real reinvestment this quarter. Can you just give us a flavor about where some of those investments in SG&A are going? And should we expect those investments to continue here, obviously heading into 2016? Thank you.

Thanks, David. Good question. You know, one of the areas that we are really focused on and it's really helping, I think, drive the top line is really the investments around our sales and marketing. So that's probably one of the areas that we will continue to look to generate incremental investment, because it's driving the top line.

We've seen a nice ROI, principally behind our breast health business as the ramping up of the 3D adoption continues to go. Even with that incremental investment, we still had a nice operating income leverage of approximately 170 basis points versus prior year.

We are probably one of the leading profitability Companies in our sector. We will continue to grow and invest appropriately to drive that top line. That's probably the biggest area. As we also talked about, there was variable compensation that was really as a result of the top line as well that kind of goes with the investments. But the incremental investment was really around that sales and marketing investment.

Isaac Ro, Goldman Sachs.

I wanted to focus on tomo for a minute, putting some of your earlier comments into context here. If we think about what the adoption curve should look like for tomo this time versus what 2D looked like, I noted that you said that you felt like you had a stronger competition this time around than last. So should we assume that to mean that you guys are aiming to perhaps increase your overall market share in this business, even though you have some pretty sizable competitors?

Yes, I think we always go against formidable competitors. I think we think our product is even more differentiated, which -- our goal clearly is to take what is already a strong leadership position, but go even higher. So our goal was not just to replace what we have. We think we ought to be able to win. And so hopefully that does give us a little bit more runway.

Maybe I'll just add on that. I think one of things that we talked about is this cultural shift. I will tell you, the organization -- breast health, or diagnostics, or the surgical business -- they are not satisfied with just replacing our installed base. Our goal is to grow faster than the market and gain share.

Great. That's helpful. And then just maybe another question on diagnostics: obviously you are doing a pretty good job holding the line in the core Pap business. Wondering when we might get a better sense of your expectations and plans to drive some innovation on the molecular side, given all the assets you have. You clearly have a lot of things to work with. But just curious about when we might know more about pipeline and kind of the longer-term plan to accelerate growth? Thank you.

Sure. I think at this point what we will really say on the molecular side -- you know we've got the virology program coming, first, as Mike referenced earlier, certainly outside the US and then inside the US. We have disclosed that we are working on an upgrade to Panther, as well, which would allow the PCR capability. And that will then allow us to do more assays in the PCA world.

Those are still a few years away. We're in the earlier stages there. But you can imagine we are going to be doing a lot of the standard menu expansion, those kinds of things that other folks are working on, and building off of the strong base we have. And, really, this is a business that every additional Panther we place today will be beneficial down the road.

Brian Weinstein, William Blair.

Can you just first are talking about kind of pricing throughout the organization? Maybe talk about -- is tomo pricing holding where it has been? Is there any kind of price reduction from competitors coming online? Also, what's going on as far as pricing on the molecular side? Thanks.

Yes, Brian. I'll take this. You know, price pressure is kind of a way of life in healthcare. And certainly we see that in our markets. But what I would tell you is the good news is our products -- we are selling on the benefits of our products. And I will tell you that the pricing that we've seen over the last year has been relatively flat across all of our major product lines.

I think some of that is incentivizing our reps for margin improvement; arming them with the benefits of our products; and then, also, more pricing discipline that we have. I think if you look at it, just looking at our gross margins, certainly they have gone up despite the price pressure. Some of that is a result of the mix and so forth. But I feel good about kind of where our pricing is and our ability to continue to grow, despite some of the pricing pressures.

Got it. And then for the fourth-quarter guidance, it implies basically down sequentially from the Q3 levels, except for the very, very high end of the range. Is there anything in particular in the fourth quarter? Was there anything that was pulled forward into the third quarter that is causing that fourth quarter to be down sequentially in your guide? Thank you.

There was nothing pulled forward. Let's be really clear about that. A couple of things -- we had mentioned there was a $5 million extra, basically from the Sentinelle divestiture, which was us providing basically a trailing agreement there.

There is also a little bit of seasonality. I think what we've really done over the last year is started to normalize this business more so. And we are going into the summer months. So I think things like surgical procedures for our surgical business a little bit more down in that July/August time frame, I think, as we see around the world. So it's really quite right along those fronts.

Brian, it's Mike. I would just add -- on the bottom line, obviously, as the share price continues to do well, the share count increases. And that weighs a little bit on EPS as well.

Jack Meehan, Barclays.

Thanks, and congrats on the quarter. I just wanted to start and ask about the better results in molecular. How much of the improvement in the quarter was related to Panther placements versus instrument pull-through? And then just how, as you look through the end of the year, how do the placements look as you look out?

You know, we continue to place Panthers. The growth is really -- it's a multivariate. It's both more machines out there, and then it's ones that we've placed previously starting to be used a little bit more, Jack. And we continue to feel good about the pace of placements.

I would say we -- to build on what Steve just said, we feel very good about the placements; actually had the strongest placements in the third quarter of Panthers. And it's really kind of a three-pronged approach. So it's placing more boxes; the revenue per box continues to grow, which says that there's more assays going through those boxes. And that's also -- you know, our sales organization has done a great job of also working with the physicians and clinics to drive utilization versus guidelines. So it's really kind of that three-pronged approach, really living on the benefits of that strong workflow and automation that the Panther brings.

Got it. And just wanted to follow up on the last question as well -- just as you bridge into the fourth-quarter guidance, can you maybe just tell us in the past quarter how the pacing of the growth went through the quarter, especially in breast health -- just how you expect the momentum to continue into the next quarter? Thanks.

Jack, we are not going to get into that level of specificity. Just we'll say overall we feel good about the overall momentum.

Doug Schenkel, Cowen and Company.

So subsequent to the completion of the recent strategic review, I was wondering if you wouldn't mind providing us with an update on really where Claus and the rest of the O-US team is in the context of building out the O-US infrastructure? And I guess related to that, does some of the recent strength give you an opportunity to specifically maybe accelerate some of the timing of investment related to the O-US buildout?

Doug, it's a great question. I'll tell you, I think we are legitimately in the first inning of the international buildout. Because if you really -- and Bob and I have spent a fair amount of time over there recently. We are halfway between a startup and a real company -- when you look franchise by franchise outside the US, that some of these businesses we're just barely getting going.

And it would be a perfect time to invest even more. We would tell you, right now we are pacing it based on where we stand. It's things like -- I would love to add more salespeople around the world on our surgical business tomorrow. The reality is we don't necessarily have reimbursement in place in all the key markets.

So it's going to be in longer build. And if I could, I think we would dump a lot of money there right now. But we would be throwing money that's not as efficient. With Bob at my side, who is incredibly good at making sure we're -- you know, every investment we make, we think about ROIC -- it's going to be more paced, which will probably give us more longevity as we really go forward. Bob, I don't know if you want to add to that.

Great. That's helpful. And then maybe just another follow-up on Panther. For the last few quarters you have talked about a robust pickup in the pace of placements. In response to a question before, you indicated that utilization per box is trending up.

Assuming that very few of these are replacements, and assuming that the vast majority are reagent rentals, is it right to conclude that you are probably feeling little bit better about sustainably growing MDX, at least in the mid-single digit range, given the predictability associated with these placements?

Yes, that's fair.

Okay. Thank you.

Jon Groberg, UBS.

Just to be clear, are you -- did I miss it, or are you no longer providing an exact Genius placement number?

Jon, we are barely hearing you. Jon, can you try that again?

Can you hear me okay now?

Perfect. Sorry.

Sorry. So I was just -- wanted just a clarification. You've been providing kind of updates on Genius placements. I may have missed it, or it sounded like maybe you weren't going to be providing those anymore? I just wanted to be clear.

Hi, Jon, it's Mike. We want to give you the color that you guys need, obviously, to build your models and such. Honestly, we have talked a little bit about it internally, and we don't really want to get in the habit of providing that number on a quarterly basis.

I think that lots of factors, some of them beyond our control, can affect placements or sales in an individual quarter. And frankly, we want to discourage a little bit of that over-infatuation with the quarterly numbers. Had a record quarter this quarter in placements. Very, very strong demand. But if you could bear with us, we will probably try not to give that out every quarter.

Okay. In the context of your international comment, is it fair to say most of that was US -- the growth in Genius?

Absolutely, yes. Though we did have some reasonable growth internationally on our breast health business, as well -- a combination of both 2D and 3D. But clearly the strength was the US.

Richard Newitter, Leerink Partners.

Hi, thanks for taking the questions and congrats on the quarter.

Thanks, Rich.

So just two prick ones, both on tomo. First, in the US, I was wondering -- I know that for a period of time, you guys had placed 2D systems that were kind of 3D enabled, but just hadn't necessarily been lit up. I was wondering if you could provide any color on whether or not -- you know, there are many kind of 2D, 3D enabled systems in your US installed base left. Have those kind of all lit up subsequent to the January 1 reimbursement?

Yes. So we still have a portion of our 2-D systems that are upgradable that are in our installed base, although it's approximately 15% to 20% of the installed base. So the vast majority of them will require a full gantry system upgrade to 3D.

Okay. That's helpful. And then maybe, Steve, outside the US as one of the initiatives, I think, for kind of investment and where there's opportunity, I would imagine it's kind of improving the market share and performance on the 2D/3D side. Can you talk a little bit about what steps you are taking there, what initiatives we can expect going forward to kind of improve performance there and to really capitalize on your opportunity? Thanks.

Sure, Rich. It's really re-engaging and assessing our dealer network outside the US. Mostly we go through dealers outside the US, and I think what Claus and his team have been doing is building stronger relationships with those dealers to really get them driving the opportunity bigger.

I would tell you, I think as we look back at our history, we've probably been more transactional -- just trying to get orders when we can -- and we are building much more of a partnership that includes better pricing discipline on our part, which is part of what's helping the margin structure overall and things like that. So I think it's re-engaging that. It's getting into the tenders.

It's a longer-term process. And making sure that we've got the best dealers market by market to really build the business around the world. So it's a refocus. It's also recognizing in some cases, we should be focusing on 2D in some of the markets, depending on where those markets are -- not necessarily just trying to jam 3D everywhere. So it's really market by market and the heavy lifting of executional excellence that's going to drive that business over time. Again, we are early stages of what we can really be there.

Yes. I think just to build on that, I think one of the other areas focusing on those dealer markets is also looking at what countries we can win and drive success in. So it's really a focus on, call it, 10 to 12 countries in a much deeper and significant way as opposed to spreading our resources thin.

Thank you.

Anthony Petrone, Jefferies.

Great. And congratulations on the quarter. Maybe begin breast health and then a couple for Bob on the financials.

Maybe just the contribution from service in the quarter? I know that has been increasing pretty significantly as well, and you have a number of 3D systems that are likely off-warranty at this point. So maybe the contribution from service as opposed to sales and upgrades?

And then maybe, Steve, anything on the task force guidelines? I know that the comment period closed in mid-May. I'm just wondering if there's any update there on how you think that plays out. And I'll follow up with some questions for Bob.

Well, look, Anthony, let me just quickly answer the service question. Then I'll turn it over to Steve on the guidelines.

So service was a strong growth driver for us as well. It actually grew [about] 7% total Company for the quarter, actually close to 9.6% on a constant currency basis. So that's -- a lot of that is on the back of the installed -- you know, the acceleration of the installed placements on 3D and the higher service revenue associated with those installations.

And no update, really, on the preventative services task force guidelines.

All right. Helpful there. And then just, Bob, on the balance sheet and tax leverage, I think my math is coming up with a debt ratio of a little over 4. Maybe just an update on what the target is and timing on that? And then also just an update on tax, and the strategies going forward, and what you think for tax leverage over time? Thanks again.

So just quickly, the distinction between your 4 and our probably 3.2 is net debt versus gross debt. And we've been talking about a net debt target of 2.5 by 2017.

In terms of the tax, we are still working through some of the foundational elements of that. And actually some -- well, the refinancings were as much for providing us with, obviously, pushing out maturities and providing us with interest savings.

And so as much as also helping us with the tax and providing some operational flexibility, better covenant profile that allows us to move IP around as we are looking at our manufacturing. The way that you should think about tax is: really, we are still building that foundation in 2016 and start to see some of those savings and leverage on the tax line in the fiscal 2017 time frame.

Bill Bonello, Craig-Hallum.

Just a question on the outlook for continued clinical data and other sort of external catalysts that would push tomo adoption -- obviously, last year you had kind of a banner year with the big studies, capped off with the reimbursement decision. As we look forward, sort of beyond your own sales efforts, what external types of things might we anticipate that would continue to drive that conversion in the market?

Bill, I don't know that we see any real major external events coming. I do think we feel very good about our ability to continue to drive the business. And as you -- you know, maybe going partially where you might be going -- as you think about 2016 for us, fuller, we are not ready to give guidance or anything else.

But I think for the total Company, as you think about it, some mid-single digit growth on top of the exceptional performance this year in revenue. And obviously, we are going to be looking to add that leverage onto the bottom line across the total Company. But I guess no real external of events probably expected on the breast health piece.

Okay. And then just one truly related follow-up on that. In terms of the conversion that you are seeing, at one time there was some discussion as to the extent that individual centers were converting their systems -- whether they were going completely to 3D, or whether they were adding a couple 3D instruments and keeping the bulk of 2D. What are you kind of seeing on that front right now? Are you seeing a complete the conversion across customers? Is this everywhere across the board? Any color on that?

We are seeing probably a faster adoption rate of institutions that had one or two systems. And it's really being driven by two things.

One is the radiologist experience. We continue to hear, and every time I've been out in the field, we continue to hear from the radiologists: they don't feel good anymore giving 2D exams to people once they've seen the 3D results. They know they are detecting more cancers with 3D, and they know they are preventing more false positives, and therefore basically reducing biopsies.

So I think there's a passionate belief among the radiology community that, as they've gotten experience with 3D, it's the best patient care they should be offering. And so what you have in these institutions where they've had several, they are probably going back and seeking funding for a more full-scale conversion, faster than what we might have imagined.

It's also being partially driven, I think, by greater patient awareness -- some of our own marketing and PR campaigns; as well as, frankly, just a lot of popular media that's out there. Even some of the mainstream media reacting negatively to the USPSTF guidelines. So you've got all these things feeding together that are encouraging, probably, a faster adoption.

Derik de Bruin, BofA Merrill Lynch.

So a lot of my questions have been answered, but just a couple to follow up here. So $56 million, 8% growth in R&D this quarter. Is that a reasonable run rate to think about it over the next few quarters?

Yes. I mean, I think the way we kind of think about it is when we look at R&D at around 8% of our revenue, we think that that's about right. On a quarterly basis you will see some puts and takes, depending on what the -- you know, the investments for the development programs. But that's a reasonable proximity, yes.

Great. And then just one quick Panther question. You have said record placements in the quarter. Just give us some idea -- how many new customers? Are there any swaps -- people swapping out Tigris for Panthers? Competitive wins? Just a little bit more dynamic on that market.

Hi, Derik; it's Mike. So just to clarify that comment, the reference to record Panther placements -- it certainly was a record for this year, but it would not have been a record of all time. So I don't want anyone to think that.

Very healthy placement this quarter; you know, best of the year, but not the best all-time. And we're seeing -- I think we had a particularly good quarter of competitive wins. Certainly still some customers upgrading, but a good percentage of placements this quarter were in fact competitive takeaways. So we are pleased with that.

Mark Massaro, Canaccord Genuity.

As we look out at the breast health business, it looks to me like there's at least two more quarters of relatively easy comps. Steve, can you just talk about the positive sources of upside as you look out with respect to comps? And maybe can you comment on seasonality in this summer quarter coming up?

Sure. Obviously, as we start to go into next fiscal year, the comps start to really change. And hence we are not going to be growing our breast health business 20% on top of 20% growth.

So I think the comps get harder, and yet we feel good about the underlying trajectory, really, for all of our businesses. So I think -- you know, feeling pretty good. But obviously, as we start to think about guidance for next year and everything else, it will be more tempered relative to the kind of numbers we are putting up right now.

Okay. Great. And then with respect to the organizational structure, I know you've done a great job of bringing in new leadership. Are you done there? Are there additional adds you are contemplating? And then can you also comment on expanding internationally as well? Thanks.

Yes. I'd say we are in the later innings of any major personnel changes. We've got most -- the key leaders in place. Still a few opportunities here and there, but for the most part we have really just about made all of the key changes with, as you point out, the exception -- internationally we are still building the team.

Bob and I were over in Europe a couple of weeks ago, and Claus had three new leaders literally just started in June. So I think they are probably a year behind internationally what we've done in the US in terms of building out the team. So they are earlier innings there.

Jayson Bedford, Raymond James.

Thanks for taking the question, and congratulations. You guys have done a nice job with the business.

Tough to poke holes here, but I wanted to ask about the non-US molecular business, which seemed a little bit weaker. And I just wanted to give you -- if you can give us some expanded thoughts on your molecular business outside the US.

I don't have to expand it too much. You're right; it's weak. It is a big opportunity for us. And one of the leaders I just referenced that we just brought on board a couple weeks ago is our new leader of international diagnostics sales. So it is a clear source of upside and not one of our prouder businesses at the moment.

Okay. That's fair. And maybe just for Bob, you mentioned the early returns on the gross margin line from the productivity initiatives. To the extent you can, can you just give us a little bit more detail on what the initiatives are? How long will they take to fully implement? And maybe, again, if you can, the ultimate impact of these initiatives on the gross margin line?

Yes, so Jayson, I'm not going to give you kind of what -- the ultimate game plan and what our targets are. But what I would say is: these are both near-term, and then we have medium-term and longer-term. Some of the near-term are just the cost improvement opportunities of driving more efficiencies through the plants. We have talked a little bit about, in previous calls, around sourcing. We've seen some early initiatives there that are driving some cost improvements.

I still think that just opportunities continue to drive sourcing savings as we look to centralize that organization and drive. And then longer-term, as we look to streamline our processes within the factories and to get more of a Lean kind of mentality, I think that there's a big opportunity there. So we've got short-term, medium-term, and longer-term opportunities.

Operator, I think we've got time for probably two more questions.

Jon Block, Stifel.

Great. Thanks. Good afternoon. First one, Steve, for you: back in the day was the move from film to digital in mammo. There were some metrics where facilities with film were literally seeing lost volumes at their practice. And I'm just curious; you mentioned your marketing spend. Are your reps currently armed with any similar or hard data on to move from 2D to 3D, which is arguably helping accelerate 3D demand? Or is it mostly media-driven phenomenon at this point, and some of that data might still be on the come?

Yes, there's great clinical data. There's our label, and there is consumer demand. So I would say it's multivariate.

Okay. And then the other one, just a little bit more big-picture. I think one of the concerns when you took over was, gee, did op margins peak out here at 30%, 31%? Clearly that was the wrong thought. You are 33%. You are plowing significant investments in the business.

Can you just talk to us structurally -- anything that would prevent those op margins from moving to 35% over time? And I guess, Bob, maybe if you want to weigh in here -- is it something where the international growth in the margins that accompany that won't allow you to get there? Or anything where you just see so many opportunities in front of you where you just won't allow that level of profitability to drop through in the near-term? Thanks, guys.

Yes, I think that's -- you know, the way you are thinking about the -- in the latter part of the question is kind of how we are thinking about it. So as the international business grows, certainly that's at a lower margin, which is going to put some pressure on it. We talked about it kind of balancing those lower prices.

But then, also, I think as we are digging under the covers, so to speak, we have still got a relatively new management team across. We do see a lot of opportunities, not only for streamlining, but also growth opportunities that we want to appropriately invest in. So that's one thing that I think as we think about not only investing relative to ROIC, but also to the top and bottom lines, we are not going to be afraid of reinvesting into the business to have that sustainable growth that Steve talked about before.

Yes. And I wouldn't see us getting to 35%. I think the 33% range that we are at is probably a healthy level.

Mike Watson, Needham & Company.

Hi, it's actually Brad in for Mike. Just two quick ones for me to finish up. Just wondering, with the strength in surgical, can you give an update on the sales force? Have you guys been adding reps? Is that kind of what's driving it? And if so, how many?

Sure. What we've really done there is we've added some clinical specialists to help support some of the caseload, particularly with our MyoSure procedure. So what it's done is it's allowed the sales reps to really focus on hunting and building out the customer base, while we have had the clinical specialists serving a lot of the case coverage. And that really has helped.

Perfect. And then just wondering how you guys are thinking about the growth profile of blood screening in Q4 and then going forward, just as you guys lap the Red Cross agreement in Japan?

Yes. Great question, Brad. We've had four good quarters of growth, clearly, from the JRC. And that's now behind us -- this was the fourth quarter. So I think we see this pretty flat now, probably returning to a basic market.

I think the global blood screening business is probably a flattish to even slightly down. And unfortunately for us, we will probably be much closer to those numbers now going forward.

I think that is all the time we have.

Thank you. That is all the time we have for questions today. This now concludes Hologic's third-quarter fiscal 2015 earnings call. Have a good evening.