Hologic Inc (HOLX) 2015 Q4 法說會逐字稿

Good afternoon and welcome to the Hologic Inc. fourth-quarter fiscal 2015 earnings conference call. My name is Shannon 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 Mike Watts, Vice President - Investor Relations and Corporate Communications, to begin the call.

Thank you, Shannon. Good afternoon and thanks for joining us for Hologic's fourth-quarter fiscal 2015 earnings call. With me today are Steve MacMillan, the Company's Chairman, President and CEO; 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.

Our fourth-quarter press release is available on the investors section of our website along with the 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 November 27.

Before we begin I'd like to inform you that certain statements we make during this call will be forward-looking. These statements involve known as well as 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, including 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 the supplemental presentation.

I'd also like to remind everyone that last year's fourth-quarter results included a one-time benefit associated with the restructuring of our license agreement with Roka Bioscience. This agreement added $20.1 million to Diagnostics' revenue in the prior -year quarter, boosted gross and operating margins and increased EPS by approximately $0.05. So in our call today all year-over-year comparisons in percentage changes will exclude this one-time event from the base year unless otherwise noted.

This is consistent with how we've presented and forecasted our financial results over the last year. Please reference our press release or the supplemental presentation for comparisons that include the one-time benefit from Roka.

With that I will turn the call over to Steve MacMillan, Hologic's CEO.

Thank you, Mike. Good afternoon, everyone. We are very pleased to discuss Hologic's financial results for the fourth quarter of fiscal 2015. Once again, our performance was strong as we executed well across all aspects of our business. Revenue grew at a double-digit rate on a constant currency basis while earnings per share grew even faster. And these results capped off an outstanding year in which our people and our products enabled us to exceed expectations across the board.

In 2015 Hologic achieved financial results that seemed impossible a year ago. While we have a tremendous amount of work ahead of us to build a sustainable growth company, we begin fiscal 2016 with a healthy sense of optimism.

With that introduction, let me dive into our fourth-quarter revenue results. Then Bob will take you through the rest of the income statement, the balance sheet and our initial 2016 guidance. As a reminder, the percentage changes we provide will generally exclude the one-time Roka benefit from last year might just mentioned.

Total revenues were $702.8 million in the fourth quarter, an increase of 9.7% on a reported basis and 12.2% in constant currency terms. Very coincidentally, these were exactly the same percentage increases that we posted in our third quarter, despite the more difficult comparables.

We were very pleased with the breadth of our revenue performance in the fourth quarter. Many of you have seen our simple red-green dashboard which tracks the sales growth of our four major businesses.

We are happy to report that for the first time all 15 boxes on that chart were green for the fourth quarter. In other words, every business and, obviously, the Company as a whole, grew in the United States and internationally. What's more, three of our businesses grew at double-digit constant currency rates in the quarter, making them dark green on our chart. Geographically, our US businesses performed well again in the fourth quarter with 12.2% revenue growth.

This performance is a testament to the value that our products bring to patients and the relationships that our sales teams enjoy with our customers. Over time, we want our international teams to build the same kind of success.

And while we have a long road ahead of us, we were encouraged by some early progress in the fourth quarter. International sales grew 12.5% in constant currency terms and, importantly, we achieved this growth without much contribution from our blood screening business with the Japan Red Cross. As you know, that growth benefit annualized in the fourth quarter.

A few areas picked up the slack. For example, international sales of our cytology and perinatal business increased 10.3% in the quarter on a constant currency basis. And we believe we're just scratching the surface of this long-term opportunity.

In addition, after several consecutive quarters of declines our molecular diagnostics business turned the corner and posted modest growth. And finally, our breast imaging products grew in excess of 20% internationally, although our penetration rates in market shares remain low.

Now let's provide some more detail on our divisional revenue performance. In a continuation of recent trends, Breast Health was again the growth leader in the quarter, driven by strong adoption of our Genius 3D Mammography exams. Globally, Breast Health sales were $286.3 million, up 21.66% in constant currency terms. Underlying this, sales of breast imaging products and service grew 26.2%.

Since it's the end of our fiscal year, we wanted to provide you a little more detail on Genius uptake to help you calibrate your models. In the United States, we shipped approximately 300 Genius systems to customers in the fourth quarter. This was our best quarter of shipments to date. On a cumulative basis we have now shipped approximately 2,400 3D systems in the United States. While we are making excellent progress, this represents less than 30% of our own domestic mammography installed base, so we have a long runway still ahead of us before the market fully converts to 3D.

We have also installed roughly 1,200 Genius systems in international markets, so our global installed base is now approximately 3,600. In addition to these strong placement metrics, two other factors have us encouraged about our future prospects in the mammography market.

First, we estimate we have gained more than 300 basis points of domestic market share over the course of fiscal 2015. As a result, we believe that our share of the overall mammography market was roughly 60% as of yearend.

More importantly, we think we can gain more share based on our first mover advantage, our superior product profile and the excellent work of our commercial teams. Reflecting their efforts, a recent study published by the market research firm KLAS showed that mammography customers scored Hologic highest in all 11 performance measures they evaluated. Second, despite the large number of shipments we've made in the last two quarters, the orders we have in-house have never been higher. This is not a perfect indicator of future demand, so we don't intend to provide much more detail here, but it certainly indicates customers are recognizing the significant value that our Genius technology provides patients.

We are bullish on our prospects in Breast Health despite what had become a cacophony in the media around the role of breast cancer screening. As I'm sure you have seen, the American Cancer Society recently updated their guidelines in this area. The ACS recommendations are different than what the United States Preventive Services Task Force proposed a few months ago and different than guidelines issued by other venerable organizations, such as the American Congress of Obstetricians and Gynecologists, the American College of Radiology, and others.

As a result, many of these groups, as well as numerous patient and advocacy organizations, have objected loudly to the ACS and US PSTF guidelines in recent weeks. Despite all the noise we do not expect these guideline changes to have a material effect on our business. We see some good in the ACS guidelines and the number of mammograms has remained relatively stable in recent years despite similar policy debates.

And most importantly, we still have lots of headroom to convert older technologies to our genius 3D systems. We do however have strong opinions on this debate and we are advocating for our position with policymakers, doctors, and customers. We believe four points are critically important.

First, mammograms save lives. Even in an era of better breast cancer treatments. Countless studies have shown this and both the ACS and the US PSTF acknowledge it as fact. Second, women should be informed about their options and have the right to make a personal decision and consultation with their doctors. The ACS clearly supports this, and we're doing our part to promote education through direct to consumer marketing which is having a positive effect. Third, no woman should be denied a mammogram due to her age or her ability to pay. According to the ACS, roughly 25% of breast cancer deaths occur in women who were first diagnosed before the age of 50.

So why do some organizations recommend starting screening at 50? In addition, the ACS says the lack of insurance coverage should not be a barrier to screening. That's why Hologic is supporting the bipartisan PALS Act in Congress, which would impose a two-year moratorium on implementing the US PSTF recommendations.

Fourth, our Genius 3D mammograms were specifically designed to address the limitations of older screening technologies, studies of which have been the basis of the recent guideline changes. If you want greater detection of invasive cancers, Genius mammograms have been proven to identify 41% more dangerous tumors. And if you are concerned about patient anxiety from false positives, Genius mammograms reduce callbacks by as much as 40%.

It's clear that all mammograms are not created equal. Our recent commercial success demonstrates that our customers understand this, and we are working hard to ensure that this message is understood even more broadly.

Now I would like to shift gears and focus on Hologic's other businesses, which also performed well in the fourth quarter.

Our biggest business, Diagnostics, posted sales of $304.2 million in the quarter, a solid growth rate of 4.4% in constant currency terms. As expected, Diagnostics growth slowed compared to recent periods as we annualized the growth benefits of the blood screening contract our partner Grifols won with the Japanese Red Cross. As a result, worldwide blood screening sales were $60.2 million in the quarter, up 2.3% in constant currency.

Elsewhere in Diagnostics, we are pleased with the performance of our ThinPrep franchise as global sales of cytology and perinatal products totaled $120.8 million in the fourth quarter. US sales were basically flat as market share gains continued to offset headwinds from longer screening intervals. But we are encouraged that international revenue grew at a double-digit rate.

Based on this, global product sales grew 3.2% on a constant currency basis, our best quarterly performance in a number of years.

Now let's turn to molecular diagnostics, where quarterly sales of $123.2 million increased 6.6% in constant currency. Domestic revenues increased a very solid 7.2%, based on strong placements of our fully automated Panther instrument, a healthy number of competitive wins and increasing utilization of our women's health assays. In addition, our international business grew nominally for the first time in many quarters, as highlighted earlier.

We recognize that one quarter does not yet make a trend. But hopefully, this represents the start to a multiyear growth cycle.

To round out the revenue discussion, we remain pleased with the trajectory of surgical sales, which totaled $86.8 million in the fourth quarter. This represented our third straight quarter of double-digit constant currency growth and our best overall performance in the last several years. Our MyoSure product for hysteroptic tissue removal again showed terrific growth while sales of NovaSure increased slightly a constant currency basis.

Finally, worldwide Skeletal sales were $25.5 million in the quarter, an increase of 13.7% on a constant currency basis, driven by continued growth of our new Horizon bone density scanner. You might recall that last quarter Skeletal was our only business that did not grow, so we are especially proud of the team for their double-digit performance, which became the final piece of our growth dashboard.

Before I turn the call over to Bob, let me conclude by saying that we are very pleased with the transformation that is occurring in Hologic. But at the same time, we recognize that fiscal 2015 is in the rearview mirror, effective immediately. As our results have shown, we have made good progress in some areas such as commercial execution in the United states. But in many other parts of the Company, we have just begun to put points on the board.

So as we strive for sustainable growth, we will focus on shoring up our strengths while also addressing our opportunities. That will be a lot of fun and I am excited to continue the journey.

Now I will hand the call over to Bob.

Thank you, Steve. And good afternoon, everyone. I'm going to review the rest of our fourth-quarter income statement, the balance sheet and our initial financial guidance for 2016. Unless otherwise noted, my commentary will focus on non-GAAP results excluding the Roka benefit from last year and percentage changes will be on a year-over-year basis.

As Steve described, we again demonstrated impressive topline growth in the fourth quarter with double-digit revenue increases both in the US and abroad on a constant currency basis. In addition, our bottom line continued to grow faster than sales. Margin improvement at the gross and operating levels contributed to non-GAAP earnings per share of $0.43, 13.2% higher than in the prior-year period despite headwinds from both currency and share count.

Digging into the income statement, our fourth-quarter gross margin of 64.6% was strong and up 100 basis points compared to the prior-year period. Both geographic and product mix contributed to this increase. In the US, where margins tend to be higher, sales increased a very healthy 12.2%. And in terms of product mix, gross margin was fueled by increased adoption of Genius 3D mammography in our Aptima women's health assays, combined with stabilization of our ThinPrep and NovaSure products. Total operating expenses of $218.7 million increased by 9.9% in the fourth quarter.

As a percent of sales operating expenses remained flat compared to a year ago. The primary driver of the absolute increase was sales and marketing expense, which increased 15.1% as we continued to invest in our Genius 3D Mammography campaign as well as diagnostics marketing. Even as we reinvested in our growth drivers, we generated non-GAAP operating margin of 33.5% in the quarter., an increase of 100 basis points from last year. We remain one of the most profitable companies among our peers and intend to stay that way.

Now let me turn to cash flows and the balance sheet. From a financial perspective one of the great strengths of Hologic is the tremendous amount of cash we generate. In 2015 we generated $786 million of operating cash while needing to invest only $89 million in capital. And nearly half of that CapEx was spent on instruments for reagent rentals and diagnostics, meaning it was directly revenue-generating.

Not only do we have profitable products, we're working hard to be more efficient with our working capital, and the effort has boosted cash flows as well. For example, inventory actually decreased in fiscal 2015 by even as full-year sales increased by 9.9% on a constant currency basis. These strong cash flows provide us with tremendous financial flexibility. We have said many times before that we are committed to reducing the amount of debt we have while also improving the quality of our debt.

Earlier this year, for example, we refinanced both our back loan and our high-yield bond, resulting in lower interest rates and less restrictive covenants. Our strong cash flows enabled us to further clean up our balance sheet in the fourth quarter. Specifically, we repurchased $300 million in principal of our most dilutive convertible notes for $543.7 million. We recognize that we paid a premium for these notes, but if we keep executing on our business plan, we believe they would only get more expensive in the future.

Repurchasing and retiring these convertible notes helped us reduce our total debt outstanding to $3.6 billion at the end of the fourth quarter, a decrease of $628 million compared to a year ago. And our leverage ratio, net debt over EBITDA, now stands at 3.3 times. We are very much on track to meet or exceed our stated goal of reducing our leverage ratio to 2.5 times by the end of fiscal 2017.

Despite the significant cash outlay for the convertible notes, we ended the year with $493 million in cash and a net debt position of $3.1 billion.

To wrap up the historical discussion, adjusted EBITDA was $250.9 million in the fourth quarter, up 10.5% compared to the prior-year period. The combination of strong profit growth and lower debt has enabled us to significantly improve our return on invested capital. As of yearend, ROIC was 10.9% on a trailing 12-month basis, a 160-basis-point increase over the prior year.

Overall, we reported a very good fourth quarter, which clearly illustrated the strength of our business model and the progress we have made toward our financial goals -- grow the topline, reinvest in the business, find efficiencies so profits can grow even faster, generate lots of cash and deleverage, a simple formula but one that has paid off for the company and our shareholders of this past year.

Now I would like to shift gears and provide our initial non-GAAP financial guidance for the 2016 fiscal year. As always, this guidance is based on recent foreign-exchange rates.

In our guidance you'll see many of the same financial themes I just described. As we alluded to last quarter, we are forecasting mid-single-digit constant currency revenue growth in 2016 on top of increasingly challenging comps. And we expect increase profitability and balance sheet improvements to enable us to grow EPS at roughly a low double-digit rate, significantly faster than revenue.

Specifically, for the 2016 fiscal year and on a reported basis, we expect total revenues of $2.81 billion to $2.84 billion. Compared to the prior year this equates to constant currency growth of between 4.4% and 5.5% with reported revenue growth being between 3.9% and 5%.

In terms of the components of this growth, we expect Breast Health and our Genius 3D Mammography product to once again lead the charge. We've forecasted total Breast Health revenues will grow about 10% with breast imaging higher than that. We anticipate mid- to high single-digit growth from our surgical business, reflecting its dramatic turnaround and high single digit growth from our Skeletal products. We expect diagnostics to grow in the low single digits as we have annualized the growth benefits of our blood screening business with the Japanese Red Cross.

I should point out that are revenue guidance incorporates roughly a $16 million headwind from various products and product lines that we have either divested or recently decided to discontinue. In other words, our guidance would have been about 60 basis points higher if these products were to be sold in 2016.

Working down the income statement, we expect improvements in both gross margin percentage and operating expenses as a percent of sales, leading to a better operating margin compared to 2015. We are pleased to be able to increase what are already sector leading margins while also investing appropriately in future growth drivers.

All this works out to non-GAAP earnings per share for the full year of between $1.80 and $1.84. This translates to EPS growth of 8.7% to 11.1% in constant currency terms and reported EPS growth between 7.8% and 10.2%. So we expect to increase EPS at roughly twice the rate of sales growth. And as you know, net income is growing even faster than EPS as we continue to work through dilution caused by our convertible notes.

This guidance assumes a full-year tax rate of approximately 34% and diluted shares outstanding of $302 million and $305 million for the year.

Now turning to guidance for the first quarter of fiscal 2016, we expect revenues of $680 million to $690 million. Compared to the prior-year period, this range reflects revenue growth of 5.7% to 7.2% on a constant currency basis and reported revenue growth of 4.2% to 5.7%.

Obviously, our first-quarter guidance is down sequentially compared to our actual fourth-quarter results. This is due to three factors.

First, we have 3% fewer shipping days in the first quarter than in the fourth. Second, most of our mammography customers as well as many of our Breast Health sales reps in the US will attend the RFNA in Chicago, costing us a week of installations. And finally, both our US and international sales meetings take place in the first quarter, pulling reps out of the field.

In terms of the bottom line, we forecast diluted non-GAAP earnings per share of $0.41 to $0.42 in the first quarter. This represents anticipated growth of 7.7% to 10.3% in constant currency terms or 5.1% to 7.7% on a reported basis.

Before we open the call for questions let me conclude by saying that our fourth-quarter results capped off what has been a tremendous year for the Company. Our commercial teams executed on the delivery of best-in-class products and we are building a foundation for sustainable. Building on our strong topline, we improved our profitability and reduced our debt.

Based on these successes we have a lot to look forward to in 2016. Financially we believe this includes mid single digit revenue growth on a constant currency and low double digit EPS growth.

With that I will ask the operator to open up the call for questions. Please limit to your questions to one plus a related follow-up and then return to the queue.

Operator, we are ready for the first question.

Vijay Kumar, Evercore ISI.

Congrats, another terrific quarter. Maybe one clarification first on the guidance. Looks like you're guiding to -- by my math, somewhere between 70 to 100bps of margin expansion. Is it what's baked into the guidance because I'm not sure the below the line, but the interest expense looks like, just given the debt refi. So I just want to make sure that we are modeling this the right margin line.

So what we're seeing -- first, I will give some clarity around the interest expense. It's roughly $18 million year-on-year benefit associated with the refinancing of both our term loan and the high-yield bond. And so, your quick math is pretty accurate in terms of operating margin improvement for next year.

Great. And then maybe one for Steve. It really is perfect, right, this turnaround. In Diagnostics, if I just had to sum up what you have been saying and what your peers are saying, right, now some of your peers are still looking at cytology and looking at headwinds from the interval expansion for Pap smear testing. It looks like you are clearly gaining share. So I am just wondering how much room do we have for these share gains. Right? What inning are we in? And as we look toward the pipeline, is there something else that we can look forward to on the diagnostic side? Thank you.

We do feel good that we are fighting through the interval expansion with some share gains in US. We are publicly getting pretty far into the innings on how much share we can take there. But there's still opportunities. We are still getting reports every month of little wins here and there on the edges.

So I think we are incredibly enthused by the progress both in the US but also starting to try to get that business cranked up internationally. Eric Compton, when he came into the Company, really started saying we love ThinPrep and starting to get the team reenergized around that business and the division leadership. They have all rallied behind it. So I think we feel pretty good.

And then on the pipeline stuff, as you know, we have announced the Panther fusion project that is still probably a couple years away from coming to market. But we are excited by that. And really, the closer-in piece will be the viral load. And we did just get HCV approved -- cleared effectively with our CE market. So I think we are going to be able to start to go into the OUS markets a little bit this year and then obviously filing for that in the United states, to hopefully be hitting in that late 2017-2018 timeframe. So, starting to get excited about just the market potential that that will open up for us, which is effectively as large or larger than the total market we play in today.

Isaac Ro with Goldman Sachs.

It's actually Joel Kaufman in here for Isaac. Just a quick one on tomo. You guys have said that you're looking to achieve higher share for this product cycle than you did in 2D. Just how is that progressing? And where do you guys see the best opportunities to gain share either by customer group or by geography?

Sure, Joel. I think we've gained, we've estimated, about 300 basis points of share this year, probably moved it by our best estimates from about 57% up to about 60%. And that's on the installed base, which probably suggests share of new installs is probably even higher.

So we are seeing opportunities, first off -- geographically, let's call it one geography the United states. We see it still as a significant opportunity in small hospitals, big hospitals, teaching institutions, all of our existing customers.

Frankly, we are opening up new doors and getting discussions in accounts we haven't been penetrated in before. So I think feeling great about the US opportunities, and just in the early stages of really starting to get more serious about our international opportunities as well, where we are still sizable but candidly underdeveloped and don't have nearly the market shares abroad as we do here.

Yes. Just to build on that statement, I think one of the things that's exciting, certainly in the US -- Steve mentioned that we are roughly only 30% in penetrated into our own installed base. That would translate into being even much lower than that in terms of total 3D opportunities. So as we gain share, we feel really good about both the near- and medium and long-term opportunities to convert and gain share both in the US and outside the US.

Great, thanks. And then maybe just one on surgical -- regarding the M&A landscape, do you guys feel better or worse about the opportunities you have there to bolt on some complementary assets?

I think we feel pretty good. It's hard to say better or worse. I think in a simple thing, a simple way to look at it is we kind of blew up the business development activities when I arrived at the Company almost two years ago. We have now got teams back in place that were looking to visually for the opportunities. And Surgical is clearly an area that will be a great tuck-in acquisition opportunity for us. So we have rebuilt the team there to be focused on that as well.

Jon Groberg, UBS.

Congratulations on a solid quarter. Steve, can you -- you ended in the US with 2,400 Genius systems. I don't know; do you have a target that you are shooting to end fiscal 2016 at, for Genius?

Higher than where we ended the current year. No, not exactly. But we told you effectively what we did in the fourth quarter here. We would certainly want to be continuing, call it at that trajectory or whatever as we go into the year. But I think all of it points out there's still a long way to go, a year's worth of penetration here.

Within your guidance that you gave there is not a specific number you guys are targeting?

No, not that we want to divulge.

Okay. And then my second follow-up there is, Steve, you are investing more in R&D. I know you mentioned on the Diagnostics side some of the things that you are working on. Within Breast Health, in particular, and some of the dynamics you talked about going on within that country, how important is it for you to explore alternative screening technologies? Or how are you thinking about that? I know here at [AMP], for example, there's a lot of excited around things like liquid biopsies. And I'm just curious how you guys are starting to evaluate that.

I think we think we are fairly uniquely poised as a company when you think about obviously we've got the digital imaging from our Breast Health business. We also have a great molecular diagnostics business combined with, frankly, ThinPrep, the cytology business that's really different modes of diagnostics and all largely in the women's health space, for the most part. Part of what we are doing and really driving across the divisions is the R&D organization is looking both how we improve what we have but also starting to look at what can those emerging areas be that may be between or offshoots of the existing technologies today.

So I feel a lot better today than I did even six months ago around our -- and certainly better than 12 months ago around our capabilities to start to get a lot more serious in a lot of these emerging areas. If you think about it at the highest level, year one was just put wheels back on the bus. And year two here has been really starting to build some great R&D capabilities. And we are early stages.

But Bob, Erik and I have been out meeting with the divisions just over the last month or so. And I tell you it's the first time I'm starting to be much more excited about what is coming still several years out but some better things coming in the pipeline.

Doug Schenkel with Cowen and Company.

So appreciate the additional data on the Genius installed base shipments in the quarter, market share and market penetration. Clearly, there's plenty of room to grow. Beyond additional Genius placements, is there a meaningful opportunity to generate revenue on placements made in fiscal 2015 that have not been yet 3D-enabled? So that's really the first question.

And then the related second question is, as we think ahead a few years out when the 3D market becomes a lot more penetrated and the opportunity to place more boxes becomes a little smaller, is there an opportunity for Hologic to be more successful with the service contract attachment rate with Genius than, say, the Company was in the past with 2D? And if so, are there any early signs are initiatives that are ongoing that would position you to generate essentially more recurring revenues in breast imaging over the long term? Thank you.

Sure. I'll try to make sure I nail the first part of that, which was in 2015 I would tell you most of what we sold domestically was 3D, so probably not a lot of additional revenue other than those service contracts that will kick in.

And I tell you I think we feel pretty good both about our attach rate as well as the service business that is growing nicely and frankly will be a great, longer term piece and candidly when you look at it, our service business today is about as big as the capital business of our breast imaging business. It's become a sizable chunk and will contribute exactly to that recurring revenue stream going forward.

Let me give you some of the specifics around our existing 2D installed base. So the good news for us is the vast majority of those are not upgradable. And so we think that that will actually -- a full conversion. So as you know we do have a software upgrade that is roughly 20% of our existing 2D installed base that would be software upgradable. The rest, we believe, are going to be full conversions. And to build on what Steve talked about, obviously the installations of the products that came in 2015 we have roughly a year's worth of warranty so that will then show up as a contract -- service contract as Steve mentioned -- in 2016 and beyond.

(multiple speakers)

David Lewis, Morgan Stanley.

Bob, do you want to go ahead before I ask my question?

No, no. Go ahead.

It can't be as important as your question, David.

I find that very hard to believe. But thanks, Steve. Thanks for the confidence.

So, guys, I wanted to come back to guidance here for a second. And one for Bob, maybe, here, one for Steve. So optically you are guiding to half the growth rate in 2016 over 2015, which is slightly below the Street at the midpoint.

So number one, can you give us more detail on these discontinued products? Because if you adjust for those you get back to the Street consensus, constant currency, at the midpoint.

And just a second question for Steve, more broadly, and less technical. Just given the moment you described off the fourth quarter, why is 5% or half the growth rate in 2016 versus 2015 the right number?

I'll take the first then I'll let Steve answer the second. The biggest piece of that $16 million was actually the remainder of the Sentinelle business. We had divested that at the end of 2014. We did have some product as part of the transition services that tailed into 2015. That is now finished and complete. And there are some other smaller is products in our Breast Health business that we just recently talked about. But those are the two big components of that $16 million that I referenced.

Yes, and to pick up on it, David, I'd come at it two different ways as we think about the guidance for this year. One is I'd say the macro comment, it gets so easy, as you know, and we have all watched companies that have a few good quarters and start to get a little ahead of themselves. And as you know, we've worked too hard to get this Company turned around and want to make sure that we continue to deliver on our commitments.

So that's certainly a macro approach to how we want to set guidance. And you've seen it even at your conference a couple months ago, just -- while it's fun to watch the investors get so ebullient and start to think about us as a double-digit revenue company, we still know we have work to do to really get there. And gosh knows, we'd aspire to it but we're not quite there yet.

The other simple fees, if you just break it down maybe a little more analytically from the ground up, this year we ended up probably getting 1.5 points in the Japanese Red Cross. That all came through. And if anything, frankly, there was some pipeline build that this year the blood screening might be a slight headwind. So that's probably almost a 2 percentage point dip, say, versus last year's in terms of growth.

The 60 basis points that Bob just mentioned in terms of the discontinued items. And then I'd say just generally going off some pretty hefty comps, three straight quarters of double-digit growth in our Surgical business. That now, just to jump over those numbers, started to get pretty big as well as the Breast Health business. We are coming off a couple quarters in a row of 20%. So those 20% growth quarters led us to the very high single-digit growth this year.

Hard to believe we are still going to have 20% growth on top of 20%.

Probably the final piece, we will remind you -- you have certainly mentioned it. Relative to our original guidance for this year, we feel very good that we went way past that. I don't see us going that far past that again next year now that I think we've got a much better handle on the business. But we still want to make sure we're putting numbers out that we feel very confident in being able to hit.

Tycho Peterson with JPMorgan.

Maybe just first on the international bill, I know you've talked about a number of opportunities, going maybe more direct in breast health markets. You are obviously going to have virology in Europe and then with surgical maybe pushing more in LatAm and in Canada and places. Can you maybe just talk from a resourcing perspective where you are putting more feet on the ground and what we can maybe monitor externally in 2016?

It's still like the first inning of most of those things because we are just getting the capabilities and even things like that ability to go direct. Frankly, we have a lot of great dealers around and a lot of long-term contracts. So we are really looking franchise by franchise as to how best to attack this.

And I think as we have been starting to say, the international buildout is one that's going to really play out over time. And we are feeling, certainly, encouraged by fourth-quarter results, encouraged in general by that progress. But we have still got a long, long way to go and we're still in the very, very early innings.

And maybe on the manufacturing side, should we expect some news in terms of shifting more of the manufacturing offshore? How do we think about that now that you have freed up some of the IT covenants?

Very minimal. First off, we are making some nice progress on our gross margins. We also, obviously, quality is a big deal. And before we start moving manufacturing around or anything else, we want to make sure that we are doing.

Having said that, we are closing our bid for facility, which makes our Skeletal products, and we are moving some of that. So we have been setting things up. But we will be very deliberate in how we proceed here. Our big piece, and I think we are showing a lot of great operational improvements, as Bob said. One of the quiet strengths of the year is we reduced inventory by over $40 million in a year that we grew revenues, the topline, by $200 million.

So there's a lot of good work going on with our operational footprint.

Yes. I think, just to build on that, Steve, Tycho, in operations there's really -- in the near term we have really a couple of opportunities that we are seizing upon and you are starting to see some of the early results, the first being around our sourcing and our strategy around procuring primarily our raw materials. Outside of the service roughly 70% of our COGS is materials.

So we've brought in a Chief Procurement Officer. She is bringing in some nice savings there as we leverage that. And I think also our Chief Supply Chain Officer, really focused on driving efficiencies out of the plan. So as our volumes go up, obviously we get to cover the overhead there, but also driving a much more efficient operation. That's driving the results that you are seeing and we still see that happening. And then as we grow internationally, I think that that's something that we would be looking at. But to Steve's point, that's probably more of a long-term piece.

Jack Meehan with Barclays.

I just wanted to ask a couple on Diagnostics, which is timely, obviously, with AMP now. Just wondered if you had an update on Panther placements and then just the thoughts around the trajectory and how things looked, I think, into the next fiscal year.

So a little bit of an update on the numbers there. I think we said in our last call, last quarter, that we d exceeded our goal of 1,000 shipments. So that was encouraging. Will tell you that we had a very good quarter in the fourth quarter as well, particularly outside the United States. So perhaps that is some green shoots for future growth down the road.

But pleased with a number of placements. An increasing number of those now are competitive, as you can imagine, as our existing business on the DTS is pretty small now. So a good number of wins and good competitive share as well.

Got it, that's helpful. And then maybe just one for Bob. I might have missed the number you threw out for guidance just around revenue growth in the Diagnostics business. You get blood screening could be a little modest headwind next year. Just wondering if there are any other moving parts you have in mind. Thanks.

Yes. So what we had said, Jack, was low single digits for the Diagnostics business as a whole on a constant currency basis. And we did talk about the benefits of the blood. The Japanese Red Cross when in blood screening have anniversaried themselves here in the fourth quarter, where it was significant double advantage growth in the first three quarters, it was roughly 2% in the fourth quarter.

So as we look at that, given the continued business here in the US, we feel good about the placements and so forth. But that's what our forecast incorporates.

Bill Quirk with Piper Jaffray.

This is actually [Laura Sands] on for Bill Quirk today. In terms of the Surgical business that continues to show a strong rebound. Can you help us think about the sustainability of the NovaSure turnaround?

Sure. I think we feel good that we've turned that business from a decliner to basically a flat to ever so slightly growing business, probably that's about what we should expect going forward. And I think we see MyoSure continuing to be a very strong grower. So feeling pretty good still about the trajectory of the Surgical business.

Okay, great. And then returning to the international business for a moment, can you talk to the pacing of this effort? And how should we think about the incremental topline contribution as well as potential tax benefits over the next couple of years?

Sure. I think probably it's going to be a similar growth rate to the US for still the next couple of years. Longer term we would certainly want it to be outpacing the US, given the underdevelopment. But we are not there yet.

And in terms of the tax rate, ergo the US is still a big chunk of our business and still growing very strong. So you are probably not going to see much tax rate improvement really, still, for another year or two. We are putting all the pieces in place. Bob, I don't know if you want to add to that.

No, you are absolutely right, Steve. The guidance that we put out for fiscal 2016 has a tax rate of roughly 34%, which is roughly where we ended up 2015. And we would expect some of that to start coming in, in the 2017 timeframe.

Brian Weinstein with William Blair.

Can you talk a little bit about pricing both in the US and OUS, what you saw in 2015 and what you are thinking about in 2016, and maybe break that down little bit by key products and how we should be thinking about pricing?

I think we feel -- we continue to feel pretty good about the resiliency of our pricing. To give you a perspective, certainly in our mammography business, despite the additional competition that started at the beginning of our fiscal year and then with Siemens coming in, if you looked at our fourth-quarter ASPs domestically, they were roughly flat versus year ago. And I would say in our Diagnostics business, in our key assays, generally flat to maybe very modest declines. Some of that may be just a result of deteriorating pricing and so forth as volumes go up. But we have been very pleased with the discipline that we have put in place here in the US across our major products. And that would also hold true within our Surgical business. There's a mix but basically flat in those businesses.

Internationally, I think there are obviously lower prices, one, because of the business model that we have with the dealers. But also just generally, the macroeconomic situation outside the US is generally lower prices. But again, nothing materially changed year on year. We're not projecting any material change going forward in our guidance, either.

Okay. And then just as far as use of cash, to make sure that I'm clear on this, any use of cash would be first debt paydown, then buyback of some of the high-yield stuff and then maybe some tuck-in stuff? Is that the way to think about the way you guys are thinking about using your cash next year? Thank you.

Very well said, Brian.

Derik de Bruin with Bank of America Merrill Lynch.

It's [Ann] calling in for Derik. The first question that I have is regarding gross margin expectations for next year. I think you will continue to see the benefit from the rich tomo mix. So can you just talk about expectations there? And then the second question is on the Diagnostics side. You mentioned that you were driving better utilization of your installed Panther base. So how are you doing that and what should we expect going forward? Will that trend continue?

I'll take the first one. So Vijay asked the question about margin improvement, roughly 70 to 100 basis points. I think that math is in the ball park. And I would say that the majority of that improvement is in fact in our gross margin, if you look at it year on year. We do expect some operating expense improvement. We've said in the past, small basis points. We intend to reinvest primarily in places like our marketing efforts. We've had a lot of great progress, primarily in the work that we have been doing behind our Genius 3D campaigns. It's really driving not only awareness and also patient demand. And we want to continue that in 2016.

And we are also investing some in Diagnostics marketing as well as in our R (technical difficulty). So that's how you should think about the margin improvement in our -- built into our guidance.

Jayson Bedford with Raymond James.

Just a couple -- on MyoSure, the growth there continues to be stellar. I'm just wondering, do you think you are benefiting from the withdrawal of the Power Morcellator last year? And then, just as a related follow-up, is there any way to frame the market opportunity for MyoSure, just to gauge the sustainability of this growth?

We don't think we are really benefiting. It's still really two very different procedures. I think the only word they might have in common is morcellation. At the end of the day we just think MyoSure is a great procedure, a great product. Not -- we are probably not ready to define exactly the market size because I think it's turning out to be bigger than a number we might have put out there at the beginning.

So I think there is clearly still runway when you look at, if anything, our growth rate actually accelerated off of a larger base in 2015 than it did in 2014. And that's another one, too, where we are still very early stages internationally as well, on that business. So a lot of opportunity ahead.

Mark Massaro with Canaccord Genuity.

Congrats on another strong quarter. I would love to hear your comments on direct to marketing -- excuse me, direct-to-consumer marketing in the Breast Health business. Obviously, it's something you have talked a lot about in the US market. But as we think about the international markets, how much are you doing in Europe today? And to what extent do you think direct-to-consumer marketing can step up, especially in Europe?

We are effectively doing none outside of the US. We have really -- our marketing team, even as a company, is really only about a year old. And I think we've made tremendous progress, learning a lot in the US. There's a lot more that we've got to figure out as we penetrate internationally just from a regulation, a customer reaction and everything else. So I'd say it may be something we start to wade into a little bit in the current year but probably not nearly the driver of growth that it has been in the United states, particularly as you think about it.

I think the biggest piece, A, it has been great to patients. But, B, what it has really done is the patients have been going to the hospitals. They have been asking for our product by name. It has really precipitated the hospitals buying it. And I think we are just -- still most of the countries outside of the US, patients just are still not ready probably to drive that kind of behavior, nor are the hospitals geared to accept it. But we will be looking opportunistically for areas where we might be able to. But I'd suggest it's going to be very minor.

Great. And I know that tax rate is -- it's an initiative for you. I may have missed it; what do you expect to do for a tax rate in 2016? And when do you think you might be able to benefit from relocating to other jurisdictions? Is that potentially a 2016 event? What are some of the moving parts there?

Our guidance for 2016 is a tax rate roughly of 34%. And that's effectively the same as what we had in 2015. But I will tell you we were working feverishly to try to get that done as soon as possible. But it's a ways out.

Yes, it's going to play out longer-term on the tax rate.

That's right.

Time for one more question, I think.

Jon Block with Stifel.

Just first on the competitive wins on tomo, 300 basis points of share is a big number in a year. And I'm thinking your 2D basis, probably hard to [poge]. You have got the better label, the faster scan times. Can you just talk a little bit, Steve, about how you are retro-incentivized? Is there a kicker for a competitive win so that they might be hunting there first in the market?

We have not put, necessarily, kickers in for competitive. But our reps are seeing opportunities and going out after them. We did tweak our compensation plans for last year, and I think they have effectively provided more upside for especially our best performers. I think we've seen a hungrier, more aggressive sales force kicking in here in 2015 that we think we will continue in 2016, both upgrading our existing base but also I think we're seeing a lot more activity among competitive users than we've ever seen before.

Okay. And lastly, just to stick with mammography, for clarification I think, did you mentioned the backlog? Was that an all-time high? Did I hear you correctly? And if so, was that specific to US? Or was that a global number? Thanks.

You did hear it correctly. It is that it all-time high, most of the driven by the US, candidly. So feeling very good about that.

So with that, operator, I think we are all set. Thank you, everybody, for tuning in. We feel, obviously, a great year behind us and we're on to 2016. Thank you.

This now concludes Hologic's fourth-quarter 2015 earnings call. Have a good evening.