Hologic Inc (HOLX) 2016 Q2 法說會逐字稿

Good afternoon and welcome to the Hologic, Inc. second-quarter fiscal 2016 earnings conference call. My name is Rene and I'm 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, Rene. Good afternoon and thanks for joining us for Hologic's second-quarter fiscal 2016 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. Then we'll have a question-and-answer session.

Our second-quarter press release is available now on the investor section of our website. 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 May 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 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 that's 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 from GAAP can be found in our earnings release.

Now I'd like to turn the call over to Steve MacMillan, Hologic's CEO.

Thank you, Mike, and good afternoon, everyone. We are pleased to discuss Hologic's financial results for the second quarter of fiscal 2016. We posted very good results overall, highlighted by 14.6% growth in non-GAAP earnings per share.

The strength of our business model was evident on three levels in the quarter. First, our US businesses grew revenue at a low double-digit rate, continuing a recent pattern of outstanding commercial execution.

Second, we again improved both gross and operating margins while making significant investments in our future. And third, we entered a new phase of our capital allocation strategy by repurchasing our common stock while continuing to pay down our convertible notes. Together, these strategic actions drove EPS growth more than double the rate of sales.

More specifically, domestic revenue increased 10.6% in the quarter, led by strong performances by our breast health and surgical businesses. International sales were lower, mainly due to expected declines in blood screening and the discontinued products we discussed in our initial guidance. But international breast health showed signs of stabilization, which I'll discuss in a moment.

Globally, total revenues grew 5.8% on a reported basis or 6.3% in constant currency terms. And if we were to exclude the headwind from discontinued products, second-quarter revenue would have increased more than 7% in constant currency.

Non-GAAP gross margin was 65.8% in the quarter, a significant improvement of 240 basis points compared to the prior-year period. We reinvested much of this incremental profitability for future growth and will continue to do so in the future. But still increased non-GAAP operating margin to 33.9% in the quarter, 40 basis points higher than last year.

At the same time, our strong cash flows enabled us to be opportunistic in buying back our common stock as well as our convertible debt to continue improving our capital structure and to enhance future earnings power. Bob will cover the details in a moment, but net income represented a very robust 19.6% of sales and grew 14.1%, while non-GAAP EPS totaled $0.47, up 14.6% compared to the prior year.

With that introduction and overview out of the way, I'd like to cover five subjects in my comments today. The first two have been topical over the last quarter: our domestic and international breast health businesses. And obviously, these franchises will continue to be important to our future as well.

But as we write new chapters in the Hologic story, the discourse is broadening as we build on our successes and add new strategic tools. With that in mind, today I'd like to highlight our surgical business, gross margin improvement opportunities, and the research and development pipeline. Hopefully, this discussion will provide a little incremental color into the multiple levers we can pull to generate sustainable revenue and earnings growth over time.

Let's start with our domestic breast health business, which grew a very solid 11.2% based on continued adoption of our Genius 3D mammography systems. Genius placements were strong, increasing both sequentially and year over year and we saw a good increase in service revenue as well. We continue to gain market share, and our investments in customer marketing are enabling us to do that while maintaining stable prices amid fierce competition. As a result, domestic imaging sales grew at a healthy midteens rate.

We believe we still have runway ahead of us as our 3D Systems are only about a third penetrated into our own installed base and roughly 20% into the market as a whole. We remain confident in the long-term opportunity as customer interest and orders in-house remain high and as clinical evidence continues to mount on the benefits of Hologic's exams for patients and physicians.

Specifically, a longitudinal study published in February in the peer-reviewed journal JAMA Oncology showed that the benefits of our Genius exams, fewer recalls, and improved cancer detection can be sustained and even improved over time with consecutive use. In addition, a separate study published just yesterday in JAMA showed that these benefits hold true for women with both dense and non-dense breast, further bolstering the case for widespread adoption.

Now let's turn to our international breast health business, which generated a lot of attention last quarter. While we still have a significant amount of work to do here, we did see signs of stabilization in the second quarter and are optimistic that we will see further signs of progress and predictability in the quarters ahead.

While revenue declined by low-single digits on a constant currency basis in the second quarter, it's important to note that last year's results benefited from sales of products that we have since discontinued. If we back out this headwind, international breast health sales would've increased at a mid-single-digit rate in constant currency, a materially better performance than the decline we saw last quarter.

As always, business improvement starts with people. And our Chief Operating Officer Eric Compton has made several important organizational changes internationally in recent months. We moved one of our key US breast health leaders to Europe, and he is now in charge of building stronger, mutually productive relationships with our dealer network.

Toward that end, we have signed several new performance-based contracts with our top dealers. In addition, we've hired a new European head of service, which we have identified as a critical role to support our dealers and direct customers. We also have brought on new leaders of marketing, molecular diagnostics, surgical, and regulatory. So the team is coming together nicely.

Now let me turn to those three new topics: surgical, gross margins, and R&D. Let's cover surgical first. Global sales were $90.9 million in the quarter and grew 15.9% in constant currency. Surgical has exemplified the tremendous commercial turnaround that has occurred at Hologic, with the second quarter representing the fifth consecutive quarter of double-digit growth in the United States.

It wasn't too long ago that surgical was viewed as a nonstrategic asset that should be divested. Today, however, surgical is a vibrant business with strong profitability and cash flows plus good growth potential. And I couldn't be prouder of the team who's made it happen.

Their formula for success has been straightforward: stabilization of our NovaSure franchise, which was declining at a high-single-digit rate only a couple of years ago, combined with excellent growth from our MyoSure products for uterine fibroid removal. We remain enthusiastic about the potential for MyoSure as we seek to expand the addressable market and replace older treatments.

And now, with the market withdrawal of a competitor to NovaSure, we have an opportunity to drive material growth for that product as well. We believe that NovaSure sales benefited from the competitive recall by a few million dollars in the quarter. And we are investing in marketing and physician outreach programs to ensure that this continues for the balance of the year.

The second topic I want to cover is our ability to improve gross margins. A year ago, we weren't overly bullish in this regard. But our operations team deserves a tremendous amount of credit for improving upon already strong profitability.

To highlight what we've been able to achieve, in the second quarter, non-GAAP cost of goods sold for our products was lower in absolute terms than it was in the prior-year period, despite an increase in sales. This is far bigger than a mix shift story. It is reflecting tremendous work by our teams.

To make this possible, new leadership has instituted productivity improvement targets for each of our plants, and local managers have responded with scores of specific projects. We are closing our Bedford facility, our former corporate headquarters, and moving the skeletal manufacturing that was done there to a contract manufacturer. And as we have discussed previously, we are doing a much better job of leveraging our corporate purchasing power across the business.

The third area I want to discuss is our research and development pipeline. And it's important to begin with a bit of context. The unfortunate truth is that our R&D pipeline was weak, reflecting years of a growth by acquisition mindset. Too often, R&D spending was viewed as a plug in the income statement, the amount that was left over while attempting to meet short-term financial goals.

To reverse this mentality, we have been adding talent and rebuilding processes across the Company to make R&D a driver of sustainable growth again. Although this process is far from complete, we are beginning to see the fruits of our labor.

In diagnostics, for example, we now have a robust menu of molecular assays available on Panther in Europe, spanning women's health as well as virology. Recently, we have secured CE Marks for new tests for HIV-1, hepatitis C, hepatitis B, and a sexually transmitted disease called mycoplasma genitalia.

In the United States, we are already the leader in women's health. We have filed the premarket approval application for our HIV viral load assay. And the PMA for our hepatitis C assay is scheduled to be submitted late this calendar year. Finally, our Panther Fusion platform, which will provide customers the flexibility to perform PCR testing in a single-unit dose format, is on track to be introduced internationally next year.

In surgical, we are now in the process of launching a line extension called MyoSure Reach. MyoSure Reach increases clinical utility by providing surgeons access to polyps and fibroids in more areas of the uterus. And we believe it will play an important role in extending our leadership position in the field.

Finally, in breast health, we are excited about two new biopsy products that will further build in our position as the innovative leader in the market. Our new 3D-enabled Affirm Prone biopsy system was introduced in Europe in March and is being launched domestically now. Affirm represents the first real innovation in the biopsy space in roughly 20 years and leverages our growing installed base of Genius systems by enabling physicians to perform a more accurate biopsy using 3D technology.

To further enhance our biopsy business, we expect to launch an entirely new biopsy tool named Brevera next year. Brevera has break-through potential as it allows real-time analysis of the biopsy sample. Thereby vastly improving the patient experience. Stay tuned for more information on this one.

Before I turn the call over to Bob, let me conclude by saying that we are pleased with our second-quarter financial results, which in some ways opened a new chapter in the Hologic story. As in recent quarters, our commercial teams generated robust growth in the United States.

At the same time, we generated operating leverage through productivity improvements while simultaneously investing for the future. And we boosted our bottom-line performance by opportunistically deploying capital. All in all, a solid, well-rounded performance.

Now I will hand the call over to Bob.

Thank you, Steve, and good afternoon, everyone. In my remarks today, I am going to highlight our other divisional sales drivers, then some key financial metrics, and then wrap up with our updated financial guidance for 2016. Unless otherwise noted, my remarks will focus on non-GAAP results and percentage changes will be on a year-over-year basis.

Overall, we had a strong second quarter, with double-digit growth in the US. In addition, three of our four businesses demonstrated global growth in the quarter. Steve already discussed breast health and surgical, so I will focus on diagnostics and skeletal.

Diagnostics, our largest business, reported sales of $304.4 million in the second quarter, growing 3.2% in constant currency terms. We are pleased to report another positive quarter in our cytology and perinatal business, which generated $116.1 million in sales, growing 3.5% in constant currency. US sales grew mid-single digits, which was by far our highest growth in several years, even with lingering headwinds from pap interval expansion.

Turning to molecular diagnostics, we posted sales of $126.1 million, up 5.8% in constant currency. Domestic sales increased at a faster rate as our fully automated Panther system continues to accumulate new placements and competitive wins. In addition, utilization and sales of our assays for trichomonas, HPV, and chlamydia and gonorrhea continue to grow.

Internationally, we had another solid quarter of Panther placements. This keeps us optimistic about our future growth potential in Europe, where we now have a full menu of women's health and viral load assays, as Steve mentioned. In blood screening, worldwide revenue of $62.2 million decreased 2.4% in constant currency, as expected.

While there were some geography shifts as our partner Grifols balanced inventory, the overall decline was mainly due to stronger ordering in the prior-year period to support the rollout of our business with the Japanese Red Cross. We do continue to see, however, trends towards lower blood utilization worldwide and therefore anticipate that quarterly blood screening sales will settle in the mid-$50 million range as the market and customer usage patterns mature.

In skeletal health, we had $22.2 million in global sales, a decline of 8.2% in constant currency. Domestically, sales increased at a low-single-digit rate, but international sales were negatively affected by distributor ordering patterns. Because this business is so small, it is not uncommon to see these kinds of fluctuations. And we do expect that skeletal will be a solid contributor to growth over time.

Now let me switch gears and discuss operating expenses in the second quarter. Total expenses of $221.2 million increased 12.9%, mainly as a result of our continued investment in breast health and diagnostic marketing programs along with the timing of R&D programs, which we foreshadowed last quarter.

This increase in spending, which will continue into the second half of the year is planned and deliberate. And a key component of our strategy to generate long-term sustainable growth.

Two factors contribute to our willingness to support these incremental investments. First, and most importantly, we see good returns on the specific projects we are pursuing. For example, our investments in consumer marketing for Genius are enabling us to gain market share while maintaining stable price in the face of new competition. Second, we already have an industry-leading operating margin and have shown that we can and will increase this margin over time.

But our goal is not to drive operating margins to unprecedented levels for our industry. Instead, we want to steadily improve them while also investing appropriately in DCF-positive projects for long-term growth.

At the same time, our goal is to allocate capital to enhance shareholder returns. And during the second quarter, we accelerated our efforts in this regard. For the last few years, our primary use of excess cash has been to pay down debt. And our long-standing goal of reducing net debt to 2.5 times EBITDA by the end of 2017 remains in effect. As evidence of this, we spent $311.4 million in the second quarter to repurchase convertible notes with a principal value of $226.6 million.

While our convertible debt totaled over $1.3 billion in principal less than 12 months ago, it is now down to $793.3 million, a reduction of more than $0.5 billion. And given the continuing strength of our cash flows, we are in a position to supplement debt reduction with opportunistic repurchases of our common stock.

Specifically, in the second quarter, we bought back 4.3 million shares of our stock for $148.8 million. While stock buybacks have always been part of our long-term plan, market weakness in the second quarter enabled us to pounce a little earlier than expected.

These strategic actions enabled us to sequentially reduce our share count in the second quarter, the first time in a long while that our diluted share count declined. In fact, diluted shares outstanding of 288 million were basically flat compared to the prior-year period, no longer diluting EPS growth. Specifically, non-GAAP EPS increased 14.6%, about 2.5 times the rate of sales.

Let me just emphasize that our debt reduction and buyback activities will not prohibit us from seeking out opportunities for tuck-in acquisitions. Our divisional business development teams are settling in and while no transactions are imminent, we are actively evaluating opportunities across our businesses.

Before I move on to guidance, let me cover a few other financial metrics from the second quarter. Improvements made to our balance sheet contributed to a total debt outstanding of $3.4 billion, a decrease of $534.1 million compared to a year ago, and net debt of $3.1 billion. Our leverage ratio, net debt over EBITDA now, stands at 3.1 times.

In the second quarter, adjusted EBITDA was $253.8 million, up 6.4% compared to the prior-year period. In addition, our trailing 12-month EBITDA surpassed $1 billion this quarter, a nice milestone for the Company.

Our ability to generate strong profits while lowering debt has again allowed us to increase return on invested capital as our second-fiscal-quarter ROIC was 11.7% on a trailing 12-month basis, a 170 basis point improvement over the prior year.

Finally, let's turn to our updated non-GAAP financial guidance for the full year and third quarter. Starting with the full year, we are raising the low end of our revenue guidance by $10 million to reflect the solid performance in the first half of the year. We now expect reported revenue of $2.81 billion to $2.83 billion in fiscal 2016, representing reported growth of 3.9% to 4.6%. Based on recent exchange rates, this equates to constant currency growth of between 4.6% and 5.4%.

Compared to our last guidance, there are a few puts and takes related to revenue. On the positive side, the market withdrawal of a competing surgical product should provide a tailwind to NovaSure, and the dollar has weakened slightly. The currency benefit for us is less than you might expect, however, since much of the dollar weakening has been relative to Japanese yen and other currencies where we have minimal exposure.

In terms of headwinds, we are more cautious on near-term blood screening revenue, given macro trends in the market, and we've derisked our international forecast slightly. I should also mention we've made the voluntary decision to stop selling CF InPlex, our test for cystic fibrosis, due to manufacturing quality issues at a key component supplier that recently resulted in a recall. This will represent a headwind of several million dollars to our US molecular diagnostics revenue in the second half of the year, but shouldn't have much effect on margins.

In terms of earnings for the full year, we now expect EPS of between $1.89 and $1.91, which translates to reported growth between 13.2% and 14.4% or constant currency growth of 14.6% to 15.8%. This is based on an effective tax rate of approximately 33% and diluted shares outstanding of roughly 292 million for the full year.

As you work through your models, you will see that our increased EPS guidance implies a healthy expansion of already industry-leading operating margins while accommodating increased investment. Specifically, we intend to continue investing behind our Genius campaign in breast health and cervical cancer cotesting and diagnostics.

We will aggressively fund the commercial activities to launch important new products such as our Affirm Prone biopsy system and capitalize on the competitive investment -- environment surrounding NovaSure. We also expect to make some key hires in our international business, which typically come in with initial sign-on costs for relocation and the like.

And we are pursuing some entirely new R&D initiatives, such as developing a blood screening test for the Zika virus, while also seeking out opportunities to accelerate R&D timelines for existing initiatives. For example, by increasing the breadth of outside support.

Not all of these investments are permanent in nature, but we do expect them to push operating expenses upward in the second half of the year. At the same time, however, our capital deployment activities are effectively offsetting the impact of these strategic investments on the bottom line.

Now, turning to guidance for the third quarter of fiscal 2016, we expect revenues of $695 million to $705 million. Compared to the prior-year period, this range reflects a reported growth of 0.2% to 1.6%, or 0.6% to 2% on a constant currency basis. As a reminder, these lower growth rates are due to a much tougher comparable in the prior-year period, when revenue jumped almost $40 million on a sequential basis.

In terms of the bottom line, we forecast diluted non-GAAP earnings per share of $0.47 to $0.48 in the third quarter. This represents continued strong growth of 9.3% to 11.6% on a reported basis or 10.1% to 12.4% in constant currency terms.

Our full-year guidance obviously implies a sequential step-up in the fourth-quarter revenue. This is due to normal sequential business momentum that we expect, contributions from new product launches, and the timing of some royalty revenue that is expected later this year.

Before opening up the call for questions, I would like to reiterate that our view on the second quarter is one of a good multilevel execution. Revenue grew at a solid rate based on continued outperformance domestically and stabilization outside the United States.

We improved already strong operating margins while accommodating increased investment in key growth drivers. And our capital deployment activities helped pay for these investments at the EPS line while setting the stage for leveraged growth over the long term.

Now that we are halfway through our fiscal year, we are optimistic about our full-year forecast. We are anticipating solid mid-single-digit revenue growth in line with our original expectations, as strength in the US offsets the weakness we have seen internationally.

We forecast solid expansion of operating margins while simultaneously investing for the future. And we expect the acceleration of our capital redeployment activities to allow us to leverage operating gains all the way down to EPS, which should grow at a midteens rate.

With that, I will ask the operator to open up the call for questions. Please limit your questions to one plus a related follow-up, then return to the queue. Operator, we are ready for the first question.

(Operator Instructions) Isaac Ro, Goldman Sachs.

I wanted to start with the outlook in the ex-US business and specifically understand kind of what's embedded in your outlook for this quarter. You've obviously made some changes to the team there, as you pointed out.

And curious if you can talk a little bit about how the changes in the team will juxtapose with just the operating environment. Just so we understand the guidance a little better.

I would say it's still very conservative near term. I think as we started to signal about this time last year, the deeper we've dug into international -- international, for context, is really much more of a startup than a turnaround.

We've got our three franchises across the geographies. And so what Eric is really doing and part of what precipitated the change is we need to really build out a team, not just get a team that was in place operating differently. So Eric is really going out and we are already recruiting and bringing in different people, different leaders.

But it's going to take -- that's going to be more a 2017, 2018 event, I think. And really we are thinking about international as drivers in -- especially, frankly, 2018, 2019, and 2020, and not as focused on the near term. So I think the near term is pretty cautious and conservative. But it will be coming through right when we need it.

Got it. That's helpful. Maybe second question would be on tomosynthesis. Just curious if you could update us on what you've learned about the nature of the product cycle here in terms of the pace and magnitude of adoption.

You know, you've given us some color the last couple quarters, but curious for an update there, especially if we put it in context with the JAMA study earlier this week. And then just what you are seeing in terms of how effectively your customers are able to get reimbursement and all that. Just an update on how that's going.

Sure, Isaac. I think if you go back two years, and I described it at the time that we probably saw it building as a freight train. Clearly, I think the combination of better reimbursement and especially our consumer marketing efforts and our own sales efforts really dramatically accelerated that. And instead of a freight train, it definitely looked more like an airplane I think taking off.

And you saw that especially, as you know, in our third quarter last year when we started really posting those 20% growth numbers. I think what we see is we still feel very good about the order trends and about -- frankly, the biggest piece I think we're incredibly excited about is the way we are holding pricing. And the demand still looks very good.

Having said that, we are going against obviously now as we go into this third quarter, we are going against the huge comps. And therefore, again, as we tried to signal in July of last year, the absolute growth rates will probably be slower here for the US breast health business certainly as we go into the coming quarters.

But I think still feeling really good that there is a lot of runway ahead. And I think when we talk to investors and you think -- I think people often think there's going to be a peak and then a huge trough. I think we are seeing it as probably it will be much more of a plateau that as we hit a peak. But there's still a lot of runway that should have us last for quite a while here.

Isaac, this is Bob. Just to follow-up on what Steve was saying, you know, the numbers were where we expected them to be. And what I would say as also in terms of the placements, while we're not going to give out a specific number, it was up sequentially as we expected and also up versus prior year. So we feel continued good about our continued adoption in driving that business.

Jonathan Groberg, UBS.

Thanks for taking the question. Congratulations on a solid quarter and on hitting on a lot of these important themes. I guess just two questions for me, both on the molecular diagnostics front.

One: can you maybe talk about ex-blood screening, kind of what you're seeing in some of the key tests there, both in the US and internationally? Because I think you specifically mentioned you'd had some pretty good uptake on the menu in Panther in Europe.

And then two: can you just clarify, Bob, on the cystic fibrosis test that you are exiting -- or are you exiting or is it just a recall? Or because of the recall, are you now exiting that business? And was that a few million dollars on an annual basis? Was that kind of going to be the headwind? Thanks.

Yes, I'll take it actually. We are exiting -- I'll take your second question first on the CF. We are exiting it permanently and it will be a few million just in the second half of the year. So it would be more -- a little larger than that on an annual basis.

Yes, it was roughly a $10 million annual number, annual product.

Yes. So we'll absorb that. And then in terms of the other tests, I think we feel really good about the continued uptake of both the full menu in the US and starting to see some encouraging signs on the uptake of the menu in Europe.

But again, we want to be very careful making sure we are not declaring victory until we start to string together a number of quarters. But I think we are starting to see some better Panther placements. We have a new leader of our molecular business in Europe who actually came, you know, later last year. So he is starting to get his traction and driving it. So I think feeling pretty good about where that business should be going.

And I think we continue to feel good about gaining share here in the US as well and across the major assays that we have.

Yes, if you start breaking out between trich, all the things, we are seeing growth -- nice growth, really, across each of the assays.

Could you just maybe comment on the kind of the annual consumable run rate? Is it increasing in Panther? Where are we at in terms of the annual utilization? Thanks.

We spoke, Jonathan -- we mentioned $170,000 on a worldwide basis last quarter. And it's actually increased from there this quarter. And the US being higher than that.

In terms of the average sales for Panther.

Yes.

And I think if I give you at the highest level how we are feeling about the diagnostics business right now, we are incredibly thrilled with what ThinPrep is doing. You know, remember that was a really ugly situation just a couple years ago. That business is now clearly flattened to modest growth.

Molecular is looking good and blood screening is probably a little bit behind. Blood screening -- and that's the one we don't control the commercial channel on. We are seeing probably greater inventory reductions certainly than what we expected at the start of the year. And we are absorbing them based on the strength in the other parts of the business.

Tycho Peterson, JPMorgan.

Bob, wondering if you can maybe comment on gross margins. You guys were about 150 basis points above what we'd been modeling. Just wondering how much of this is a function of mix versus maybe some of the operational improvements and what should we expect for gross margins going forward.

We are not going to give a specific target on gross margin going forward, Tycho. But what I would say is it is an element of both geography mix, product mix, and productivity.

Actually, geography mix is the smallest component of that; roughly about 25% of that improvement was due to geography. And the rest being between product and productivity. And what I would say is it's probably equally split between those two.

And we feel good about our continued improvement there with the initiatives that Steve talked about across all of the functions of our business. Our operations teams are really executing well and identifying opportunities to continue to improve efficiencies. And obviously as our sales growth drives more units through the factory, that also helps as well.

Okay. Then question for Steve. I know you get a lot of questions on managing kind of the tomo cliff. And just wondering with the pipeline components you've laid out today plus the service business, which you guys continue to highlight, do you feel like you've got enough of a line of sight that that's going to be kind of a smooth transition?

And if not can, you maybe just touch on capital deployment? You talked more about buybacks today, but how do you view the opportunity set? And then do you need to rely on tuck-ins to effectively manage the tomo cliff when that comes?

Sure, Tycho. First off, I'm going to try to dissuade you from using the word cliff because we've been working very hard to make sure that it won't be a cliff. And I say that in all seriousness. We've been very focused on what happened with the 2D curve and everything else.

And by thinking about how we extend out and do some line extensions and other things, that's been a huge part of our focus, to be able to have more of a plateau or a very soft decline in that segment of the business at some point in time as opposed to a real cliff.

And I think it's part of what we have coming -- things in biopsy. And frankly, Pete Valenti, who is running that business for us, has had a long, good track record of being able to put even some singles and doubles on the board in addition to just the every five- or eight-year home run that we've tended to have in this business.

So I would tell you I'm feeling incrementally better every time Bob and I and Erik Compton are down meeting with that business on what's happening in their pipeline. And we'll talk more and more about that certainly in the coming quarters and years. But I think we are feeling better about being able to mitigate that.

The other piece, I just want to jump back even on your question on margin to Bob. Because you know I was very adamant early on when I came of probably not expecting much margin expansion. This has been one of the very positive surprises to me.

And I think the big piece that I want to be clear on is we're going to use a lot of this gross margin expansion to continue to invest into the business, which leads to that -- the second part of your follow-up question there, which is as we go forth, we are certainly spending more in R&D, more in marketing. And it will allow us to do tuck-in acquisitions based on the cash generation.

So I think we are really opening up a new leg in the stool where we've got more levers available to us than we did two years ago. Two years ago, we were so hamstrung with the debt and the converts and everything else, we didn't have really an ability to potentially manage.

Because as we all know, we are going to see some ups and downs in the rate of sales growth. We are going to continue to grow. We're going to have some periods that will be a little bit slower while we wait for the next new products to come through.

I think we are feeling better and better that we are going to be able to deliver very strong earnings growth consistently. And in the periods when we are growing faster, we'll probably reinvest a little bit more. And in the periods that are slower, we may not have quite the accelerated investments in that time. So hopefully that starts to give a little more of a longer-term view of what we are thinking about.

Jack Meehan, Barclays.

I just want to ask -- get a little bit more granularity on the blood screening business and what you're seeing in the market today. And I think I caught a mid-$50 million number you referenced. Just what does the trajectory of that business look like over the next maybe three to six quarters?

I think it's going to be slightly down.

Yes, I think if we look, Jack, at the global market, let's take it by US. The US, clearly hospitals are getting better and better at managing their inventory, at minimally invasive surgery, at being able to limit their use of blood. So I think we are forecasting that the US is a slight decliner.

This quarter, our US business was actually up fairly significantly in blood. That was more an inventory correction. But I think the way we are thinking about it is this is a low-single-digit decliner. Internationally, I think we see the business very slight grower.

But globally, I think because of the declines in the US, we think about blood screening as a flattish to slightly down business. And that's -- you go back to the headwinds we had as a Company facing us a few years ago, it was blood, it was NovaSure, it was MyoSure. I'm sorry -- it was blood, NovaSure, and ThinPrep.

The two that we control the commercial channel, feel great about changing the long-term trajectory. I don't think we are quite as ready to declare a change in the trajectory of blood screening.

And I think the other thing that's important to note, Jack, there is this is a macro trend. We are not losing contracts. We have not lost any contracts. We are the market leader. So as the market goes, so goes our business.

And I think that's important to say that we continue to feel good about continuing to secure the contracts that we have. And this is more a utilization factor as opposed to losing contracts to competitive.

Got it. That's helpful. Just one on Panther. The incremental Panthers that you are placing in the field now, I'm just curious. What's the mix of the customers look like? Is it existing customers adding capacity? Is it new customers? How much of a driver has been Europe? Any additional detail would be great. Thanks.

Yes, it's a bit of both in terms of existing and newer. And to some degree, we are starting to go into some slightly smaller accounts. We've penetrated most of the large ones. And part of us as we look at our menu for the future and what we have coming, we realize if we can get a few more Panthers placed even in midsize accounts -- hospital labs, other reference labs -- that's going to benefit us as well.

And frankly, Panther has got a pretty good footprint for OUS, but we've never really put the resources behind it. So we are starting to place a few more internationally, especially in Europe right now.

Doug Schenkel, Cowen and Company.

This is actually Chris on for Doug today. Thanks for taking the question. Bob, can you help us walk through the bridge for the EPS guidance? Our math suggests that just the share count reduction relative to the prior guidance should get you about $0.03 of benefit, increase EPS by $0.02 at the midpoint. And this was despite [AP] this quarter.

I guess the question is are you changing any other operating investment or assumptions that would impact EPS growth?

Your math is very similar to our math. We calculate that the change in share count calculates about $0.03. We've raised the midpoint $0.02, and we talked about the increased investment that we plan to make and are going to be deliberate about making in both R&D and marketing in the second half of the year.

And that's essentially the math that you should be able to walk through. We are expecting higher operating expenses in the second half as a result of the benefits that we are seeing in those to generate long-term sustainable growth, both in R&D and marketing. And so we are taking some of that benefit and reinvesting it in the business.

Chris, the way I would add to that is if you think about it, we grew EPS about 14%-ish last year. At the high end of the range this year, it's going to be another 14% on top of 14%. There is a point at which you don't want to go too far, because we are thinking about this over the long haul.

Great. That's helpful. And hopefully I'm right on this, but can you talk about the OUS cytology perinatal growth? It appears OUS growth for that business slowed on a sequential basis. Is this right and what was the cause of this?

You are exactly right. I think we saw a little bit of inventory correction in China primarily. And I think we probably with some distributor changes and everything else, there was a little more inventory probably in the channel there than what we had fully grasped.

So I think it's underlying consumption looks good. And I think we may have another quarter or so of a little bit of adjustment here. And then probably be -- as Eric has dug in deeper and deeper, we are getting better granularity, better visibility, and I think it's more of an inventory contraction issue.

Bill Quirk, Piper Jaffray.

First question is timing around the Zika virus assay. I know you guys have one in development. I know one of your competitors has introduced it in the southern part of the country. But just kind of thinking about timing around that rollout.

And then I guess the second part to that question is the testing strategy here has been a little different than what we've seen historically, where it looks like we are doing region-by-region testing rather than the whole country. So I would love to hear your comments on those two. Thanks.

Sure, Bill. On the first part, we've been working very aggressively with both CDC and FDA on the topic. And we should have a blood screening product via IND for use here in the coming months; by early summer, certainly. By the peak mosquito -- in time for mosquito season.

We don't yet know exactly how the market is going to play out. We've been through this script before with dengue and West Nile and not being quite sure. Clearly, it does look like there is a regionality to this. And we are prepared with the various centers to be ready and responsive to what is needed to be done. And our primary focus initially is on blood screening.

We are also as part of the additional investment in the second half also looking on the diagnostic side of it as well that would be further out time wise.

Got it. And then just a real quick follow-up. The PMA that was filed on HIV viral load, I'm assuming that happened during the quarter. Can you give us any incremental color there?

No, it will be. It will be.

It will be; excuse me. And then about -- just about a 12-month turnaround time on that, guys?

Sorry, Bill; just to clarify. So HIV has been filed in recent months. And yes, for a PMA, you typically assume about a year.

Perfect. Thank you.

Vijay Kumar, Evercore ISI.

Loved your Boston Scientific headline today, by the way.

Thank you, Steve. I'll make sure I have a better one for you guys. Just maybe turning to -- this is the guidance. And when you look at the 3Q to 4Q sort of ramp, can you just explain to me, Steve or Bob, your comfort on sort of the -- it just seems to be 3Q to 4Q, it seems to be slightly higher than normal sort of the Q-on-Q ramp.

Hi, Vijay. This is Bob. Obviously, the sequential spike is greater when you are modeling at the top of the guidance range. So I would suggest that you model kind of to the midpoint.

But it's driven by our confidence in sequential growth in 3D. That's a big piece of it as well as the other businesses. So the impact of our new product launches such as the Affirm biopsy, which had been built into our plan.

The -- some of the growth in the NovaSure business that you recall, that would be strong there. And then we also have some royalty revenue that shows up in our molecular diagnostics business in the fourth quarter, again which we had anticipated this year.

Great. Maybe one big picture question for Steve on cap deployment. I saw that you guys took out the convert in the Q. I'm just curious at what point do you feel, Steve, comfortable on maybe deploying capital for M&A versus lowering the debt load?

We are ready and willing to spend it on M&A. And actually, we did make an acquisition of our own stock in the quarter. Figured that was actually a pretty good acquisition that we made, and we're feeling pretty good about that.

The teams are definitely looking and we are -- Bob and Eric and I are now reviewing on a more regular basis ideas. We also just looked -- and so we will not let it get in the way. Ultimately, I look forward to the day that we have no converts left on the balance sheet, but I would suspect we'll be doing some acquisitions along the way while we are continuing to clean those up.

So still in the way. At this point in time, still focusing the divisions on what we called bite-size -- things that supplement the existing businesses. And you know, we are very willing and ready to go.

But I would say, as Bob said in his script, nothing imminent. I wouldn't even necessarily expect anything much in this fiscal year, necessarily. So we thought mop up some shares while the market gave us a nice opportunity.

Brian Weinstein, William Blair.

Thanks for taking the question. Seeing if we can get maybe a little bit more granular on Genius. You know, if we use the airplane analogy, when do you guys think that you will level off at 35,000 feet, in other words.

Is it -- do you think you have -- through sometime through 2017? Do you think it's a longer ramp than that? Anything that you can help us triangulate on on when you hit that plateau.

Sure. It probably is 2017, at some point in 2017. And I would've thought originally it would have been 2018 or beyond. I think the success and the faster climb -- we are getting to 35,000 feet faster. Probably a good year faster than I would've imagined. But I think we'll definitely be able to stay up there for a while. I think we are starting I think 2017 is probably it.

Okay, that's helpful. Thank you. And then on the repurchases, can you remind me: do you have anything in your covenants that restrict the repurchase amounts that you have? And what your current authorization is for share repurchases? Thanks.

Brian, this is Bob. We have currently an authorization for 250, so we roughly have about 100 million at the end of the quarter. There's nothing significant in our covenants that would prohibit anything of that size and nature.

Raj Denhoy, Jefferies Investments.

You know, I wonder if I could explore this idea of you guys plateauing a bit in tomo. The guidance you gave for the third quarter as well as the fourth quarter sort of implies that that's happening, right?

And when we think about 2017, though, is the growth that you've implied for the back half of the year, which is something in the 2% to 3% range, really what we should think about for the business until you get to this next product cycle, whether it's in diagnostic or otherwise? Is that how we should think about the business over the next 12 to 18 months or so?

I think first off, we are not quite plateaued yet. We're still implying some growth in the final couple of quarters. But definitely much slower growth.

And I do think we are preparing for a 2017 that's going to be slower top-line growth than where we've been over the last four, five, six quarters. I think just being pragmatic about it. And that's part of the investments we're making today so that we know we can set ourselves up to continue to deliver, frankly, very healthy EPS growth, even in what might be a slightly lower top-line growth environment.

But is something in that sort of 3%-ish range the way we should think about 2017 for you guys from a revenue growth standpoint?

You know, we are just not ready to get into pre-announcing 2017 guidance at this point. But it's certainly going to be lower than where it was. It's probably not a horrible number to use at this point in time.

David Lewis, Morgan Stanley.

It's actually Scott in for David. Steve and Bob, I think guidance for this year implies comp-adjusted stability into third quarter versus second quarter. And then kind of a sharp acceleration into the fourth quarter. Can you just give us an idea of what's driving that effect?

In the fourth quarter, we talk about continued growth in 3D sequentially. We also have the benefit, the continued benefit, of some tailwinds around our NovaSure business with the competitive market withdrawal.

And we have some royalty income that shows up in the fourth quarter as well as the new product -- products like the Affirm Prone biopsy table, that show up more in the fourth quarter than they do in the third quarter.

Understood. Just a follow-up on the GYN surgical part on NovaSure, can you -- I think you mentioned in your commentary earlier that the impact from the competitive recall was about $1 million to $2 million. Can you size the opportunity from here? And do you expect kind of pro rata share going forward or a higher share going forward? Thank you.

We will always expect a higher share. We don't have a completely great handle on exactly what that number will be going forward. But I can tell you just with our surgical team this week, and they are having a lot of success doing a tremendous job on both NovaSure and MyoSure, and it's clearly been one of the more positive upsides to do business. Again, if you look over the last two years where surgical was and where it's going, we are feeling really good about the trajectory.

But that is one of the areas we are making incremental operating investments in to capture that. And so that's part of the second-half investments as well as the 3D Genius campaign and the cotesting in the marketing side on the diagnostics business.

Derik de Bruin, Bank of America.

So in HPV, one of your competitors mentioned they've seen some share gains in the US on their primary testing assay. Can you sort of comment on that? I mean, obviously, your gains in cytology would suggest that your cotesting isn't suffering from this.

So could you just talk about -- first of all, I guess certainly share gains in the cytology market. And then just on the primary testing situation.

I think we are feeling pretty good about -- I mean, ultimately the science on -- you know the science as well as many. Probably some of the best. I think the science is very much on our side on cotesting, and we feel very good about what we are seeing, both on the cytology side and frankly on our HPV side. So I don't -- we certainly don't see us losing share on HPV.

No, I would say both on HPV and ThinPrep, Derik, in the quarter grew above market.

Great, that's helpful. And just one quick follow-up. I guess when you look at where you are in Panther placements versus the total addressable market, how far would you say has Panther penetrated?

Fifth or sixth inning, Derik, in the US.

In US. Great.

And earlier innings OUS.

And that again is we got to fill capabilities. Outside the US.

Rich Newitter, Leerink Partners.

Thanks for taking the questions. Just wanted to make sure that I had the buckets right for the moving parts on your constant currency guidance. And what went up and what's kind of good and what's bad -- or incrementally good and incrementally bad.

So it sounds like the blood screen reduced outlook is, call it, maybe $10 million in the back half. It's a bad guy. You didn't have FX, which is a good guy. If you could quantify that on some level or quantify each of these buckets, that would be great.

It sounds like you have a little bit better of an outlook in GYN with a competitor off the market. So maybe incrementally better there. And then you also have the new MyoSure product, so that's the third bucket. That's a good guy.

And then you said that you had a slightly weaker or more conservative OUS outlook. And I'd love to know just kind of where that factors in in magnitude relative to the blood screening, which my math is getting to about $10 million incremental weakness.

Rich, we are probably not going to give all that level of detail.

Because no matter what we do, we will be wrong as to how it'll play out.

Exactly. But I think your numbers are not that far off. I would say the FX is probably a little smaller than you may estimate for others, because we do have about a little over a third of our international business is actually based in US dollars.

The other piece is the CF recall and market withdrawal that we mentioned before, which is roughly -- we mentioned that that's a $10 million annual business. So think about that as roughly a $5 million headwind in the back half of the year.

Okay. And just the weaker OUS kind of -- or more conservative OUS outlook, is that separate from blood screening? Or is that part of that?

Yes, it's a little different, but it's not that -- it's small. It's -- you captured the other big pieces.

Jon Block, Stifel.

Thanks and good afternoon. Steve, maybe the first one for you. And I get all the airplane analogies, but at the end of the day, we are still in a tomo product cycle that's arguably 20% penetrated for the industry. If I look back, that's where sort of you had film to 2D at this massive inflection point.

So I get the tough comps and maybe wanting the plateau than the cliff word, but can you just talk to why the 2017 growth plateau in tomo? When again, arguably, when I look back, at least at the last product cycle, that's really where you saw the incremental penetration start to take off?

I think if you really look, we had such a positive inflection point in the third quarter last year, we are in that run-up right now. I think we would always rather be a little conservative on potentially pre-announcing -- the fundamental reality is we are not totally sure. The dynamics are different than they were at that point in time. From both a competitive set as well as where hospitals stand, everything else.

You know, we do think there's probably some upside from private sector insurance that will continue to kick in as it plays out. And I think it's why we still feel really good about where it's going.

But I think pragmatically, we are picturing it as less of this incredible spike and probably just reaching kind of a new level where it's continuing to increase slightly for a while, but not the 20% growth rates that we were getting for a few quarters in a row.

Got it. Perfect. Then just one more. It is a little bit more granular, but international molecular, I know it's small, but were the revenues up year over year like the prior two quarters?

And then just at a higher level, can you talk about what you are seeing with international molecular? You've got the viral load assays over there. Are you seeing that help sort of gain market share on the heels of some of those approvals? Thanks, guys.

Yes, as a backdrop, remember our international molecular business is still frankly way too small. So it was roughly flattish in the quarter. We are seeing some growth in Europe, and I think that's where we really want to see the growth and are probably staking a little more of an opportunity.

Still some fluctuations in some of the other smaller markets around the world. But I think what we expect over time is we are placing -- we actually have started to really place some Panthers in Europe. I think we will see that as Europe probably being the beachhead for building out that international molecular business. It also should start to provide some steadier growth and a steadier foundation to the business to build out.

Fundamentally what we've lacked in the Company is a true foundational business for really any of our franchises outside the US. We've had -- we get sales here and there from certain tenders, but we haven't had the fundamental strength where you are starting each quarter knowing you've got a nice book of business that's automatically coming in.

Even in the old days, we used to sell the Panthers instead of reagent rentals and things like that. So we are just trying to get a lot more disciplined to get a much healthier business.

Jayson Bedford, Raymond James.

Thanks for taking the questions. Wanted to follow-up on the 3D discussion. Do you think the lack of widespread private payer coverage is impacting the uptake of 3D? I've noticed that you guys have become more aggressive on the marketing side there.

We don't think it's -- we feel pretty good about the uptake. And I think it's an incremental opportunity. I don't see we see it -- we don't see it as a real barrier. We see it probably as additional upside.

Okay. And then just to follow-up on the international buildout, I realize that it's a long-term initiative. But when do think, Steve, you will have the team in place internationally?

I think we'll have most of the team in place by the end of this fiscal year. And we've got a lot of the key team -- we had quietly started to rebuild the team, particularly in Europe, late last year. That's when we brought the new molecular diagnostics leader in. The new service leader was hired in the last quarter. Our new breast health person over.

So I think we feel pretty good about the team coming together by the end of this fiscal year. And some of them are already hitting the ground and getting it. But it's definitely more of 2017, 2018, 2019 as we really get into the longer-term planning.

And we are really upsizing that team. We don't want just some quick wins for the sake of wins. We want it to be the enduring business. Because part of what we got in the last couple of years was the occasional big win. But it didn't necessarily translate into ongoing business.

Operator, I think we have time for one more question.

Mark Massaro, Canaccord Genuity.

Guys, thank you. You noted that you are closing the Bedford, Mass, facility. Can you comment on timing and cost savings? Related to that, have you been able to realize any benefits related to optimizing your supply chain?

Yes. I think starting on the second part, optimizing the supply chain, you are clearly seeing it in our gross margin. I think the part that might've gotten missed in my script -- and that was the part that probably shocked me the most when I was going through the financials for the quarter. Our absolute cost of goods is lower this year than last.

So we are producing more product at less absolute money than last. And that's clearly a result of some of the procurement and productivity initiatives that Mike Kelly, our supply chain leader, has put in place under Bob McMahon's guidance, and a lot of help from Eric Compton as well.

The Bedford facility will be closing later this year. Candidly, it's going to have a fairly minimal impact on the true P&L because it's a leased facility and we are stuck with a bunch of lease costs and other stuff in there. But it's -- we are still just doing a lot of cleaning up through the Company. And we've consistently said we've made a lot of progress in the last couple of years and there's still a lot of opportunity ahead to be better on so many fronts.

Thank you. Nice quarter.

Great. Thank you. Thanks a lot, Mark. I think that wraps it up.

Thank you. That is all the time we have for questions today. This now concludes Hologic's second-quarter fiscal 2016 earnings call. Have a good evening.