Hologic Inc (HOLX) 2016 Q3 法說會逐字稿

Good afternoon and welcome to the Hologic, Inc. third-quarter FY16 earnings conference call. My name is Matt and I am your operator for today's call. Today's conference 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, Matt. Good afternoon and thanks for joining us for Hologic's third-quarter FY16 earnings call. With me today are Steve MacMillan, the Company's CHairman, President and Chief Executive Officer; as well as Bob McMahon, our Chief Financial Officer. Steve and Bob both have some prepared remarks today, then we'll have a question-and-answer session.

Our third-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 today. Finally, a replay of this call will be archived on our website through August 26.

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 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 to 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're pleased to discuss Hologic's financial results for the third quarter of FY16. Our results were very solid and illustrate how far we've come and how quickly we're progressing on our journey from turnaround story to sustainable growth company.

Revenues of $717.4 million exceeded expectations as all four of our businesses grew on a global basis despite a difficult comparison resulting from very strong results in the prior-year period. In our last call we focused on the emergence of our surgical business as a growth driver. This quarter surgical led the way with exceptional performance.

But we're also pleased with how our breast imaging, molecular diagnostics, and cytology businesses performed. And we made progress in strengthening our international franchises which we believe will be important contributors to future growth.

Our performance this quarter highlighted the breadth of our top-line growth drivers, which is often overlooked. Even as performance has improved ahead of schedule in many areas, new drivers are beginning to emerge thanks to the deliberate and proactive efforts of our team. And while this quarter is only a single data point, our results do give us increased confidence that revenue growth can continue at a healthy pace in the future.

Our third-quarter results also demonstrated, once again, our ability to increase profitability above and beyond already high levels. We boosted both gross and operating margins even while reinvesting aggressively to drive future growth.

We have been pleasantly surprised at our ability to achieve productivity gains and enjoying many other levers to drive earnings growth. For example, strategies that we had expected to play out over the longer-term horizon are materializing sooner than expected. Various internal restructurings yielded a lower tax rate in the quarter. And the combination of strong cash flows and market volatility enabled us to buy back more shares.

Together, all these efforts led to a very robust net margin of 20.2% in the quarter, non-GAAP earnings per share of $0.51, and excellent EPS growth of 18.6% on a non-GAAP basis. Based on this strong earnings performance we are raising our financial guidance for the year and now expect non-GAAP EPS of between $1.93 and $1.94.

As a reminder, the mid point of this new guidance is roughly $0.12 above our guidance at the beginning of the year. We're clearly exceeding our own expectations for sustainable bottom-line growth and feel good about our future prospects in this regard, as well.

With that introduction out of the way, I'd like to walk through our revenue highlights in the balance of my remarks. Then Bob will discuss expenses, the rest of our financials, and our updated guidance. Unless otherwise noted, percentage changes will be on a year-over-year basis.

Starting with the big picture, total revenues were $717.4 million in the third quarter, an increase of 3.4% on a reported basis, or 3.6% in constant currency terms. These figures include a roughly $8 million headwind from divested and discontinued products, such as Sentinelle breast coils and a molecular test for cystic fibrosis. If we were to back out this head wind, total revenues would have been grown 4.8% in constant currency terms.

These growth rates are stacked on top of a very difficult comp from the prior year. As a reminder, in the third quarter of 2015, total revenues increased 12.2% in constant currency. So, our ability to jump over a high bar this quarter gives us increasing confidence in the ability of our commercial organization to drive solid growth next year and beyond.

In terms of geography, US sales grew 4.7% in the third quarter, continuing a string of good results and indicating the improvements we've made in commercial execution. We continued to enjoy strong leadership positions and good momentum in the domestic marketplace. International sales declined 1.2% on a reported basis, driven primarily by blood screening, as expected.

In constant currency, international sales declined 0.4%, essentially flat. And if we were to normalize for divested and discontinued products, international sales would have increased slightly. It's also worth mentioning that international sales increased sequentially as well, an encouraging sign. Overall, we believe our international results in the third quarter show we are building a foundation for strong and consistent growth over time.

Toward that end our Chief Operating Officer, Eric Compton, has made good progress in filling out our international leadership team in recent months. In last quarter's call we highlighted new executives in charge of European breast health and service, as well as marketing, molecular diagnostics, surgical, and regulatory. More recently we have added new geographic sales leaders to run Latin America, Canada, and Asia-Pacific. So our talents to upgrade talent are coming together nicely.

Shifting to the types of revenue we generate, I want to emphasize that for all the attention our mammography systems receive, capital equipment represented just 23.4% of revenue in the third quarter. Said another way, more than 76% of our sales were recurring. More specifically, disposables, such as our diagnostic assays and surgical tools, represented 60.4% of sales, while service and other totalled 16.2% of sales.

Now let me discuss divisional revenues in the third quarter. I'll start with the growth leader in the quarter, our GYN surgical business. A couple years ago no one would have said those words in the same sentence. But today our team has achieved what others thought impossible.

Worldwide surgical sales were $102 million, surpassing $100 million on a quarterly basis for the first time. Sales grew 19.8% in constant currency, the fastest growth rate for this division in recent memory. In the United States the team delivered double-digit growth for the sixth consecutive quarter. And internationally the business grew by nearly 40%, albeit off a very small base.

As many of you know, a competitor recently withdrew its endometrial ablation product from the market, and to capitalize on this we increased marketing and sales activities in the quarter. As a result, global sales of our NovaSure product totalled $61 million, an increase of 14.6% in constant currency.

Not to be overlooked, sales of our MyoSure product for uterine fibroid removal also continued to show strength. Global MyoSure sales of 40.8 million increased 29.8% in constant currency.

Now let's turn to breast health, which has received a lot of attention in recent months. While this is understandable and appropriate, it's just as important to appreciate that Hologic is much more than a mammography company today. Hopefully our results this quarter help illustrate that point and provide confidence that the entire Company can continue to grow revenue solidly and EPS much faster even as growth from 3D adoption naturally slows.

We're very pleased with our breast health performance in the quarter. Global sales of $282.5 million increased 1.1%. Breast imaging sales totalled $239.3 million, up 2.3% in constant currency, driven by continued adoption of our Genius 3D mammography systems.

Domestic imaging sales grew more rapidly and exceeded our internal expectations based on Genius placements, which increased both sequentially and year over year. We estimate that Genius systems are continuing to gain market share, while our investments in customer marketing help us maintain stable prices amid fierce competition.

We still have lots to look forward to in breast health. Genius systems represent less than 40% of our own mammography installed base today and by our estimate, less than 25% of the market as a whole. And we remain confident in the long-term conversion opportunity as evidence continues to mount on the benefits of Hologic's Genius exams for patients and physicians and as we differentiate ourselves competitively.

As evidence of this, mammography customers recently surveyed by the independent market research firm KLAS, scored Hologic highest in overall product satisfaction. One director of radiology said, in quotes -- Hologic seems to be the only company that really understands the tomosynthesis market. It was clear from our implementation and our usage of their system that they are a full generation ahead of other vendors. Everybody else is playing catch-up -- end quote.

This is only one an anecdotal comment but it is consistent with the customer feedback we receive everyday and validates our leadership position.

As our install base of Genius 3D systems grows, our sales and marketing programs are focusing on ways to leverage this leadership position. For example, service revenue is becoming increasingly important and represents an annuity that complements and smoothes out our capital sales.

Some of you may not appreciate the size of our service business in breast health. To frame it for you, service revenue in this business exceeded $100 million in the quarter for the first time, and grew at a mid single-digit rate. Similarly, we have revamped our research and development efforts to capitalize on our growing Genius footprint and generated more continuous stream of product innovations.

For example, we recently launched our new Affirm prone biopsy system, which provides a better patient experience and enables doctors to capitalize on the increased sensitivity of 3D technology. Although it is still early days, customer feedback on the system has been positive, both in the United States and internationally.

Another component of future growth in breast health will be our international business. While we still have a lot of work to do here, we are making good progress and are optimistic that the business is becoming healthier and more predictable as we create the foundation for solid growth in 2017 and beyond.

In the third quarter, international breast health sales declined 2.9% in constant currency. But if we back out the headwind from divested and discontinued products, sales would have been flat. And on a sequential basis, sales increased slightly.

With this in mind I want to remind everyone that last year's international breast health number was exceptionally strong in the fourth quarter, and as a result we anticipate a year-over-year decline in the coming quarter before the business returns to growth in 2017. As we move into 2017, we do believe that the combination of multiple tailwinds, a still underpenetrated 3D opportunity, growing service revenue, a revitalized R&D effort and international expansion will enable breast health to be an important contributor to corporate growth.

Now let's cover diagnostics, which is our largest business and greatest source of non-GAAP operating profit. Diagnostics reported sales of $309.9 million in the third quarter, growing 1.2% in constant currency. Within diagnostics our cytology and molecular businesses performed well, while our blood screening business declined, as expected. Global sales of cytology and perinatal products totalled $122.2 million, growing 3.9% on a constant currency basis. Breaking this down a little further, both our ThinPrep and fetal fibronectin franchises grew in the United States and internationally despite lingering headwinds from Pap interval expansion domestically.

Turning to molecular diagnostics, we posted global sales of $131.8 million, up 6.0% in constant currency. Excluding sales of our discontinued cystic fibrosis product, molecular sales would have grown at a high single-digit rate. Our domestic business was solid as our fully automated Panther system continues to accumulate new placements and competitive wins, and as utilization of our assays for trichomonas, HPV, and chlamydia gonorrhea continues to grow.

But the real stand out here was our international business. Over the last couple of quarters, international molecular sales had turned slightly positive under new leadership, and we had added viral load assays to the Panther menu. Building on this, the business took a significant step ahead in the third quarter with constant currency growth exceeding 20%.

In addition, we had a record quarter of Panther placements outside the United States, coupled with a significant step-up in per-instrument utilization. All of these data points have us feeling good about the potential for international molecular diagnostics to become a new driver of growth for the Company over time.

Shifting back to the United States for a moment, during the third quarter we gained an emergency use authorization for our Zika virus test for diagnostic use. In addition, blood banks began testing donated blood for Zika with our Procleix assay under an investigational new drug protocol.

While we do not expect significant sales from these two new products, both of which run on the Panther system, our ability to rapidly develop these tests shows we can react quickly to public health emergencies in close cooperation with regulators and customers. In addition, should the Zika virus spread in the United States, we will be well positioned in the marketplace.

Apart from the highlight of the Zika IND, our blood screening business declined in the quarter, as expected. Worldwide sales of blood screening products were $55.9 million, down 12.9%, with all of the decline coming outside the United States. As in the second quarter, this decline was mainly due to stronger ordering in the prior-year period to support testing at the Japanese Red Cross, combined with continued trends toward lower blood utilization.

Before I turn the call over to Bob, let me wrap up the review of product sales by mentioning that our skeletal health division posted revenues of $23.0 million in the quarter. This represented a constant currency increase of 4.8% with growth both domestically and overseas primarily driven by our Horizon bone density scanner.

So, in conclusion, we are very pleased with our third-quarter financial results, and with the progress we've made toward building a sustainable growth company. Despite very challenging prior-year comps, all four of our businesses grew in the quarter, reflecting the many growth drivers at our disposal. Sales growth in the US breast health slowed to a challenging prior-year comp, but remained healthy. At the same time, strong results in surgical, molecular diagnostics, and cytology, demonstrated that Hologic is much more than a mammography company.

We continued to execute well in the United States and made good progress building a foundation for international growth. We once again expanded profit margins and redeployed capital, contributing to EPS growth at the highest rate in many years.

Now I'll hand the call over to Bob.

Thank you, Steve, and good afternoon, everyone. I'm going to walk through the rest of our third-quarter income statement, highlight a few balance sheet and cash flow items, and then wrap up with updated financial guidance for 2016. As a reminder, I will focus on non-GAAP results, and percentage changes will be on a year-over-year basis unless otherwise noted.

As Steve discussed, our revenue performance in the third quarter exceeded expectations, highlighted by global growth in all four business segments. This growth, coupled with favorable product mix and productivity gains, again drove improvements in gross and operating margins. At the same time, we continued to invest in initiatives that position us for long-term sustainable growth. Net-net, we delivered EPS growth well in excess of sales reflecting the impact of operational improvements, capital deployment, and a lower effective tax rate.

Now let's dive deeper into the third-quarter income statement. Gross margin of 65.7% increased 50 basis points and benefited from the growth of our surgical, cytology and perinatal and Aptima franchises.

We continue to manage pricing well as we focus on commercial excellence. And our marking initiatives highlight the clinical and economic value of our products. In addition, our operations teams continue to drive efficiencies and reduce costs across our supply chain.

Total operating expenses of $229.2 million increased 3.1% in the third quarter. This increase was driven primarily by sales and marketing expense which increased 15.5%. Given our gross margin expansion we have invested deliberately and opportunistically in commercial areas where we see a good return.

These include our Genius marketing campaign in breast health, our cervical cancer co-testing and initiatives in diagnostics, and efforts to gain competitive market share with NovaSure. These strategic initiatives are paying off through increased brand awareness, market share gains, and price stability, all of which contribute to higher sales.

Despite the increased sales and marketing spending, operating margins improved 60 basis points in the quarter, slightly more than gross margins based primarily on leverage in general and administrative expenses. Moving down the P&L, interest expense of $33.9 million was 12% lower than in prior year due to our efforts to both reduce and restructure our debt.

And, in addition, our tax rate is improving earlier than expected based on changes in our income mix and internal restructurings implemented this year and last. We now estimate that our effective tax rate will be around 32% for the full year 2016. We trued up to this rate in the third quarter reducing our effective rate to 30.6%, but we expect the rate to normalize back to 32% in the fourth quarter. As a reminder our tax rate was 34.25% just last year, so we are making good progress.

We are pleased that these efforts have enabled us to grow net profits even faster than operating profit. Our net margin was 20.2% in the quarter, a very strong level, and an improvement of 190 basis points over the prior year.

To wrap up the income statement review, diluted shares outstanding were 282 million in the third quarter, roughly 10 million lower than a year ago. Over the course of this year we have worked to pay down a portion of the in-the-money converts to reduce the dilutive effects, and more recently we have taken advantage of market volatility to repurchase our common stock. In the third quarter we bought back 3 million shares of stock for $101.2 million, which exhausted our prior $250 million repurchase authorization. Recently our Board of Directors has approved an additional $500 million repurchase program and we're very pleased to have that arrow in our quiver going forward.

While we're pleased with the progress we've made thus far in improving our capital structure and achieving a more competitive tax rate compared to other med-tech companies, we know we can continue to improve, and we believe these improvements will help us deliver EPS growth much faster than revenue over an extended period of time.

Now I'd like to highlight a few balance sheet and cash flow items, beginning with inventory. Inventory decreased by $14.5 million or 4.9% compared to a year ago despite a 3.4% increase in sales. This speaks to strong alignment between the operations and sales teams who know that every dollar saved in inventory serves as dry powder for debt reduction, acquisitions, or share repurchase.

Speaking of our debt, at the end of the third quarter total debt outstanding was $3.4 billion, a decrease of more than $0.5 billion from a year ago. During the quarter we paid off $175 million that had been outstanding on our $1 billion revolving line of credit using proceeds borrowed at a lower interest rate under a new $200 million accounts receivable securitization program.

Adjusted non-GAAP earnings before interest, taxes, depreciation and amortization, or EBITDA, totalled $262.5 million in the third quarter, an increase of 5.1%. Based on EBITDA of more than $1 billion over the last 12 months, our leverage ratio, calculated as net principal debt over EBITDA, stands at 2.97, the first time this ratio has fallen below 3 since the Gen-Probe acquisition. In addition, we are well on our way to achieving our target leverage ratio of 2.5 times by the end of FY17.

Strong profit growth and lower debt have continued to improve our return on invested capital, or ROIC, which was 12.3% on a trailing 12-month basis, a 170 basis points increase over the prior year. Robust cash flows and minimal capital expenditures continue to be hallmarks of Hologic's financial performance. Operating cash flow was $246.2 million in the third quarter, an increase of 1.6%.

Free cash flow, defined as operating cash flow less capital expenditures, was $225.1 million. Notably, free cash flow was 55.1% higher than non-GAAP net income. Our financial health clearly extends well beyond our P&L as we continue to focus on working capital and control our capital expenditures.

Now let's turn to our updated financial guidance for the full year and fourth quarter. At the mid points we are raising both revenue and non-GAAP EPS guidance based on the Company's strong performance in the third quarter. Let's cover the revenue guidance first.

For the full year we are increasing our previous guidance by $10 million at the low end and now expect total revenues of between $2.82 billion and $2.83 billion for FY16. This represents solid mid single-digit growth of 4.3% to 4.6% on a reported basis or 5% to 5.3% in constant currency terms, despite the headwind from divested and discontinued products.

With only one quarter remaining in our fiscal year, this annual guidance obviously implies revenues of $714 million to $724 million in the fourth quarter. Compared to the prior year period, which is another tough comp, this range reflects revenue growth of 1.6% to 3.0% on a reported basis, or 2.1% to 3.6% in constant currency terms. In addition, our guidance includes an expected headwind of roughly $4.5 million from divested and discontinued products which depresses our constant currency guidance by about 60 basis points.

Based on our revenue range, our fourth-quarter guidance implies that revenues will be about the same or slightly above our third-quarter actuals. We no longer expect a significant sequential step-up implied by our prior guidance as some revenue that we originally forecast in the fourth quarter materialized a little earlier than expected. In addition we forecast another quarter of incremental softness of blood screening sales, as inventories and ordering patterns continue to normalize.

Turning to our updated bottom-line guidance, we now forecast non-GAAP EPS of between $1.93 and $1.94 for the full year. This translates to reported growth between 15.6% and 16.2% and constant currency growth between 16.9% and 17.5%. This earnings guidance is based on recent foreign exchange rates, a full-year tax rate of 32%, and diluted shares outstanding of approximately 288 million for the full year.

This full year guidance translates to non-GAAP earnings per share of $0.49 to $0.50 in the fourth quarter. This represents growth of 14% to 16.3% on a reported basis or 15% to 17.3% in constant currency terms. Implicit in our fourth-quarter guidance is a sequential increase in operating expenses, several million dollars of which relate to a change in the retirement provisions of our equity plan that will make it more consistent with peers.

Before opening up the call for questions, I want to reiterate how pleased we are with the financial results we have achieved so far in FY16. From a revenue perspective, our surgical business continues to exceed expectations. We still enjoy momentum with Genius 3D mammography, remain pleased with our molecular diagnostic and ThinPrep businesses, and are turning the corner internationally. From an earnings perspective we continue to generate tremendous growth through gross and operating margin improvement and lower tax rate and capital deployment.

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 and then return to the queue. Operator, we are ready for the first question.

(Operator Instructions)

Jonathan Groberg, UBS.

Thanks a million and congratulations on another solid quarter and raise. Can you maybe talk a little bit, Steve, about international and Diagnostics? I think you said that was up 20% currency neutral, record Panther placements. Was there anything beyond new management, better execution, that benefit from the Zika that you mentioned? I'm just curious if there is anything else you can -- any other color you can provide on that.

Yes, Jonathan, to be very clear, it is the new management that we put in place. We actually hired a new leader for our European Diagnostics business, really just about a year ago, last summer. And he has been revamping the team, getting up to speed. And then we did launch, we got the clearance, if you recall, early this year -- really, early this calendar year, to the viral loads. We got the HCV, HBV, and HIV. So, they're rolling out in conjunction with a new leadership team and the Panther placements, and those things are really driving it. Zika, by the way, is not in those numbers. That is just really our core women's health assays, plus the viral load.

So, I think what we're excited about as we start to look forward, in Diagnostics, molecular has effectively been non-existent outside the US -- not non-existent, been pretty small -- and now we're really getting that footprint, and as we're placing these Panthers, starting to feel like this is the beginning of something that really is sustainable and has some good growth ahead of it. As well, the cytology business continues to tick along, as well, with some modest growth outside the US, also.

I was going to say -- Jonathan, this is Bob -- just to build on what Steve was saying, I think, really, what we're seeing right now is a very competitive assay menu when we're going up against the competitive nature, with the viral loads and the SED. So, I think we've got as competitive a menu as anyone else does.

And I think, what we had seen is a series of strong quarterly placements for the last several quarters and we're starting to get those back on. They're up and running in that tester record. So, I think we're seeing that pull through, and seeing the benefits of the Panther system, which we've seen here in the US around benefits of automation, and so forth, which I think will really play well, particularly in Europe.

If I could just follow up, the basis for my question is, is there anything that you can learn from the new management and how long it took and what you're seeing that is at all applicable to what you may be able to achieve in Breast Health? Or are they just two different businesses?

They are different businesses, but there is a lot to learn. And I think, Jonathan, probably the way to think about it is, as we started to describe, really about this time last year, we really are moving -- we're really a start-up company outside the US, franchise by franchise. I think what we've seen, the new leader within the European Diagnostics business, he's bringing a level of focus, he's building out a team. There were some people there. He's changed some out, gotten the others to operate up. But it really is starting to build it up.

And I think that's what Eric Compton has really been driving, especially this year, is getting the right people in place for the longer term. I'll give you just anecdotally, Bob and I happened to be in Japan last week. And, again, half of our employees in Japan have been with us less than a year. So, it truly is, we look at a company of our size from the outside and think -- okay, they just have to get it going and turn around what's there. This really is building it out.

So, I think we've seen some emerging signs in Diagnostics over the last couple of quarters. Didn't want to quite say it yet until we thought -- okay, this is now sustainable. And I think we're in the same infrastructure building in Breast Health and other stuff.

Breast Health, because more dealers involved, will probably take a little bit longer. But I will tell you, underneath the surface, we're feeling very good where, as I always say, the infrastructure gets better before the numbers show it. And I think that's the stages that we're in right now.

Great. Thanks. Congratulations, again.

Tycho Peterson, JPMorgan.

Thanks. Steve, wondering if you could talk about the sustainability of GYN Surg. Obviously you've seen some good strength there. Particularly on NovaSure, are you able to disaggregate how much of that is just coming from the ThermaChoice recall and maybe picking up some share there?

Sure, great question, Tycho. I think the way we should think about it right now is we're clearly benefiting, and most of the NovaSure growth, I think we should say, is, candidly, coming from the competitive recall, of which we still have another, call it, quarter, quarter and a halfish, ahead of us, with that.

Having said that, I'd remind everybody, as we said, this was our sixth straight quarter of double-digit growth, both domestically and globally for our GYN Surg business. So that business had turned it around, had strengthened dramatically, and was then well poised when the competitive issue happened. So we're taking advantage of it. MyoSure continues to grow.

I think the way we think about our GYN Surg business here is, we're not ready to declare it a sustainable double-digit grower, but it is clearly a very solid grower. And, again, this is one where, internationally, we're just in the very early stages, as well.

Again, it's moved from what I would call an appendage on the Company a couple of years ago, to something that can actually start to meaningfully contribute to our total growth. It is also hugely accretive to our gross margin, operating margin. It is a great cash generator. There is a lot of good things. And it is helping in our tax rate, frankly.

Tycho, this is Bob. Just to build on that, we actually referenced some of the -- exceeding expectations we actually think that some of the share gains materialized a little earlier in the third quarter than what we were expecting in the fourth quarter, really on the back of the work that, that team has done there and the investments we have made in sales and marketing. We think that there still is legs there, as Steve said, but that ramp has actually happened nicely for us in the third quarter.

Okay. And then, just a follow-up to the question earlier on Diagnostics. It is early days for viral load. I don't know if you can put any metrics around how that business has tracked relative to your expectations. But can you also talk about whether that's a good proxy for when you ultimately do roll out in the US? And what's the latest thinking on timing? Could you have viral load here by the end of next year or is that more of a 2018 event?

It is still pretty small within Europe. It is not yet material to the Company. But I think the initial signs are pretty good. I think what's very encouraging to us is, in Europe, we're launching from a much weaker base than where we are when we bring the viral loads to the United States.

So when we bring the viral loads, which, to the second part of your question, is really a FY18, and probably really second halfish of 2018 by the time we have all three. So, we will have likely one much sooner. But by the time we have HBV, HCV and HIV, it will be later on in 2018, and by that point we'll be launching in the US from a much bigger installed base, much stronger position overall. So, I think the fact that we're even able to have some success in Europe, in other people's backyards, is already an increasingly encouraging sign for it when we do come to the States.

Bill Quirk, Piper Jaffray.

Good afternoon, everyone. Steve, just to start off on tomo here, I thought your tone was a little more positive perhaps than last quarter, and I'm curious if we can dig into why. Does this have anything to do with the competitive dynamic? It strikes me that there is potentially an opportunity here, over several years, to take some incremental share from your two principal competitors in the mammography space domestically.

Sure, Bill. It is probably because I just met with our Breast Health sales leadership team earlier today. But, aside from that, we continue to feel very good about where that business is going. I think some of the comments -- one of my comments on the last call might have been more misinterpreted. I think what we're really seeing fundamentally in the Breast Health business is our ability to take more market share than I ever would have imagined, call it, 2, 2.5 years ago.

But I think the business is also very encouraging. It's going to be stronger for longer. And while there has been so much obsession from the outside of what I call the peak followed by the cliff, we still see -- we're still -- as we said in the script, we're less than 40% even into our own installed base. We're less than 25% even into the installed base in the marketplace. And as we're gaining market share, it says there is still a lot of runway ahead of us.

What I've been trying to signal all along is, look, don't expect the kind of growth rates we'd had historically. But the business fundamentally has a lot of great quarters still ahead of it.

Fantastic. Separately, on Surgical, just spend a couple minutes here on the Bovie Medical deal. Is this a deal we should be expecting -- or deals we should be expecting, in Surgical going forward, a try-it-before-you-buy-it sort of deal, Steve? Or are you still looking around at additional products for the back?

Sure, thanks, Bill. As we've said, we're clearly looking for additional products for Surgical. Having said that, right now I'm really glad we don't have much more, because we have been handed this opportunity to permanently increase our market share, obviously, with the competitive situation.

I think, as we go forward, we're just beginning the business development efforts. And I think you'll see a series of things, whether it's a very limited distribution deal like this one where we're trying it with a few reps and that [for two] outright acquisitions.

I would say on the business development front, everybody should know, we've gotten much more active. We've said no to a number of things over the last quarter or two, and I think a lot of that has been our teams getting very much more disciplined about what we're looking at and more active. And I think, frankly, getting to the stage where you're saying no to deals and why is the no and what should we be looking for, I think as we go into 2017 feeling better and better that we'll be finding some things that we will be saying yes to.

But certainly some may be distribution, some will be outright acquisition. I wouldn't view that as the model of what we'll necessarily be doing. We'll just be flexible.

Doug Schenkel, Cowen.

Hey, good afternoon. Thanks for taking the questions, guys. Maybe first question for Steve, second question for Bob. Steve, in the third quarter there were a number of nice developments. Molecular was better than expected, particularly OUS, and Surgical growth was quite strong. You remain enthused about a firm in Brevera. Recognizing one quarter usually doesn't make a trend. Would it be fair to say you feel a bit better about your ability to power through the impact of US 3D growth plateauing than you did maybe even a quarter ago?

And then, for Bob, you beat the midpoint of guidance by I think it is $17 million this quarter. You're increasing full-year guidance to midpoint by only $5 million. I was hoping you could provide a bridge between the quarter and the full-year guide. Thank you.

Great, thanks, Doug. I would say I feel a little bit better. I think the truth is I've always felt a lot better than I probably communicated. On the last call I truly believe it was a complete over-reaction. My strength does continue -- or my confidence continues to build as I watch each quarter play out.

We were going up against a monster comp this quarter. And our team is still really, call it, two years old or less, for the most part, and wanting to make sure that we can deliver before we get out ahead of ourselves. So, I think I feel a little bit better but I think, overall, I feel very confident about where we're headed.

I felt more confident than came off last time. So, it's not a dramatic shift in how I feel, but it is clearly probably a dramatic shift in the perception, and I own that. But feeling very good about a lot of things we have going on.

Doug, this is Bob. Just to follow up on the second part of your question, yes, as you mention, we did raise the guidance by $5 million at the midpoint versus the $17 million beat. If you recall our previous guidance included a fairly sharp sequential increase in Q4 revenue. And some of that revenue, as I mentioned actually earlier, materialized a little earlier than expected -- places like our Surgical business.

And then, beyond that, we do see potential for incremental sequential weakness within our blood screening business, as that business continues to normalize from an inventory perspective. That said, our fourth-quarter guidance still implies solid year-over-year growth despite another challenging comparison, and a headwind of about 60 basis points from those divested and discontinued products.

So, we feel good about the guidance. And, just as importantly -- maybe more importantly -- our EPS guidance is even stronger, a series of multiples above that for the fourth quarter, growing at 14% to 16% on an as-reported basis.

Okay. Very helpful. Thank you.

Jack Meehan, Barclays.

Hello. Thanks, and congrats on the quarter. I want to start with some of the commentary around the service contracts in Breast Health. And I think I caught this was the first quarter over $100 million. I know there is some moving parts around warranty and just how that is rolled through since you hit the inflection at this point last year in terms of the instrument placements. Could you walk us through what you think the sustainable rate for that is and whether you're seeing better attachment with 3D placement?

Jack, this is Bob. I think from an attachment-rate perspective we continue to feel very good about our attachment rate. We haven't seen any incremental change, either up or down, and it continued to be very strong, in excess of 85%. So, I think that is a real testament to our sales teams and, more importantly, our service teams and the customer satisfaction that we have with our products. I don't see any change there. And I think what you would expect to see is a continued -- the nice part about that is it is a nice solid annuity in that probably mid-single-digit growth rate area going forward.

Some of this is we're actually transitioning from a 2D system to a 3D system where you will get the incremental benefit associated with the higher-service contract. And then, the beauty of actually the competitive share gains is you get the full benefit of the service contract on that. We're seeing both of those, as well. We think that, that has a lot of legs, not only for the rest of this year but certainly into 2017 and beyond.

Great. That is helpful. And one on the early success with viral load in Europe, just where you are seeing some wins, where do you think you're differentiated in the market? Could you just walk us through the value proposition for the Panther? Thanks.

I think it is the same benefits largely we have here, which is work flow, automation. And the Panther system, the footprint is a very nice addition for Europe.

David Lewis, Morgan Stanley.

Good afternoon. Hey, Steve, I was hoping you could -- it is hard to miss this qualitative commentary around stronger for longer. You just said it so much this call, I thought maybe you would make it the new Hologic tag line. But the reality is, I would like you to maybe take that qualitative commentary and I wonder if you could make it quantitative for us next year. I know it is too early to give guidance, but I think about the fourth quarter, there is stability, your guidance for the fourth quarter suggests that continues. So, as you think about next year, low-single digits versus mid-single-digit revenue growth for the business, are you comfortable in more of a mid-single-digit outlook?

David, based on the market reaction following our last quarter, I will stick to giving the guidance in our fourth-quarter call rather than commenting on a number before we formally approve the budget. Having said that, we do believe we'll have a solid year in 2017. And we'd clearly be disappointed with the low-single-digit 3% number that was mentioned last time.

I think the bigger point I was trying to make last time is -- by the way, wherever revenue guidance ends up, we believe we'll deliver EPS growth at a multiple of that. I think that was the broader point I was trying to make, that how better we're feeling about the earnings growth, but do feel incrementally better about the sales growth.

Okay. I think that resonated. Thank you, Steve. And then a couple points, maybe one for Steve and one for Bob. The first thing, Steve, M&A has not been a part of the story here since you arrived. But, given Bob's comments about the leverage and where you will be at the end of 2017, I wonder, is 2017 a hunting period for M&A and 2018 is when we should expect more action? Or, given what you see on cash flow and what Bob said about the levels of debt by the end of 2017, is next year a year where M&A can become more active in terms of deal consummation? And can you give us any sense, if that is true, size of those transactions?

David, as you know, it is really hard to predict on exact timing. I would say that we're looking at stuff right now. So, it could be any time. Having said that, just given the pragmatic realities of where we stand in our current fiscal year, 2017, I would expect we'll probably actually execute something in the 2017 time frame.

Our hunting activities clearly ramped up in, I'd say, the last three to six months in our activities. And I think 2017 will be likely that certainly would contribute as well to 2018 growth on some of that. But, again, as you know, we'll pounce when the opportunities are right, and feel like we're in a position that we could today. We are going to continue, as we're talking about, bolt-on, bite-size kinds of things. We're not looking at billion dollar deals.

And I think, David, just to build on that, what we feel very comfortable with is that we have plenty of capacity to be able to do things when we want to. And we will look at many more than we will ever do, and we will be very disciplined in our approach to deal with the deals. Just in this last quarter, free cash flow of $225 million gives us a lot of flexibility. And we continue to use all levers to continue to drive that higher.

And we do -- and, David, I think you know from a couple years back looking at it and talking about our exec comp plan -- we are very focussed on ROIC, and given the history of this Company, and where we have been. And that's still been part of a decision to say no to a few of the things we have been looking at. So, we'll continue to be very disciplined on that.

Okay. I think investors will certainly appreciate that, Steve. Lastly, Bob, just looking at the fourth-quarter guidance, as I mentioned, the revenue trends look stable with the third quarter. Is there any reason why margins in the fourth quarter wouldn't show the kind of year-on-year improvement you have been showing for the prior three quarters? Our back of the envelope math suggests the fourth-quarter margin won't be as robust year on year relative to the prior three quarters. And I'll jump back in queue. Thanks, guys.

Just quickly, we talked about we anticipate continued commercial investments that are going to drive incrementally or sequentially from Q3 to Q4. And probably more importantly, the change in our retirement plan that I mentioned before will be effective in our fourth quarter. That's roughly a $0.01 impact to the quarter.

Isaac Ro, Goldman Sachs.

Thanks a bunch, guys. Bob, just a question on tax rate, to start. You mentioned in your prepared comments some of the internal restructuring initiatives you've got. Curious if that is an ongoing process that could carry through to next year. As I look back on your prior comments on tax rate in general, you characterized 2016 as a foundational year, with leverage to show up next year. So, given that you said things are moving a little faster, just curious if a lot of the leverage that you had hoped for next year has already played out or if we're still in process.

We feel very good about the progress we have been making, Isaac, and have been working very hard. As you know, our tax rate is much higher than any of our med-tech peers, and so that is one of the big focus areas that my team has got. What I would say is it's too early to tell you specifically what our number in 2017 is we actually have been able to pull forward. But what I will tell you is, over time, we continue to have opportunities there and expect that effective tax rate to go down.

Okay. And then, just the last one, coming back to mammography, you covered a lot of ground there. But if I look at what is going on broadly in capital equipment in med-tech, there's been pretty good pockets of strength across various categories. And I think yourselves and your competitors have talked about maybe a little less growth in mammo than you would have otherwise guessed, given where we are in the adoption curve for tomo. So, I'm just curious if you could put any more color on the feedback you're getting, at least in the US, with regards to customer appetite for mammography equipment. Is there anything out there that is causing a temporary slowdown in the adoption process that might explain the trend here versus other categories of equipment?

No, Isaac, we're not seeing any slowdown or push back from the customer. It is as much a capacity issue of the hospitals to take what they have and natural replacement cycles more than anything. And I would say, if anything, we have had more customers pull stuff a little bit forward because they've wanted to compete and offer it. So we're not seeing that.

I remind people, there is a fundamental limitation to how many systems can be installed and used. The auto industry is an example. If every company launched a new product next year, auto sales don't suddenly jump up from 16 million to 20 million. There is just a natural rate of replacement that is still happening here.

And I think that is what leads us back to the stronger for longer, that the market is not going to grow by 25% this year, but it is going to be there and it's there for us as we keep converting.

Hey, Isaac, this is Bob. Just one of the things that we look at, that we continue to feel good about and pleased with is the actual bookings, as well. Those continue to meet and exceed our expectations.

Vijay Kumar, Evercore ISI.

Hey, guys, congrats on a nice quarter. Maybe I'll start with a big-picture question, Steve. I know you said that you wouldn't comment on the 2017 outlook, but just maybe, if I think out loud on some of the moving parts for next year, it looks like Diagnostics international has to come in better. We're feeling better about Breast Health. And when we really think about next year, you have blood coming, declining maybe for the first half of next year, but offsetting that you have GYN. Is that the mix of, when you talk about balance, is that how we're supposed to think about growth for next year?

Vijay, I'd love to give you a better answer but I really want to get the budget nailed. But I think we're feeling good about the trajectory of where we're headed. Sorry, I can't get specific at this point.

Fair enough.

It didn't serve me well last time to pre-talk about the next year. Fundamentally, we're feeling good about where this Company is headed.

That is fantastic. Maybe one question on breast imaging -- or interventional breast, I guess. I know you guys launched a cable launch and maybe looked a [tad little] softer on the interventional side. We don't talk a whole lot about it. I'm just trying to understand, is this a function of, does this allow you to bundle your table along with mammo systems? Is there an opportunity in that area?

What is really in the interventional today is mostly the disposable activity, and that has been under a little bit of pressure. I think as we do launch the table, whether it's bundling per se, or just the fact that we have got probably the best product and we've got a great sales team, I think we have good hopes for the Affirm table. We're in the very early stages right now of getting the quotes and getting the orders, basically the sales process through. I do think that will be a nice contributor to start to kick in here in 2017 for us, and it will help just the overall Breast Health business.

Operator, I think we have time for one or two more quick questions.

Raj Denhoy, Jefferies.

Hello, thanks. Maybe just staying on breast imaging for a minute, there is still lack of insurance coverage for, I think, most women in the United States for 3D imaging. Is there any progress on expanded coverage at this point or anything we can look forward to over the next few quarters?

Raj, we're deeply engaged in a lot of discussions. As I think I've said historically, that was not -- the private pay competency was not something we had as much in our Company. But our team has really made a lot of progress just in the last, I would say, last six months or so.

It is hard to predict timing. And I -- candidly, for any modeling or whatever, I wouldn't assume we necessarily have anything this calendar year. Having said that, we are getting a couple of state mandates. And if you saw recently, both the state of Illinois and the state of Connecticut have now mandated coverage. And we're probably, overall, in the 40% to 45%-ish coverage, maybe up to 50% in terms of covered lives. But the private pay piece will be probably the next step up for us. And, having said that, just like prior to getting the incremental reimbursement from CMS, we're not sitting there waiting for this to come to sell our systems.

Richard Newitter, Leerink Partners.

Hello, thanks. Just a quick one. I wasn't sure if you provided this, but the OUS Breast Health growth rate, did you guys give that number? And can you remind us what it was last quarter and what the trend was?

It was down in constant currency, 2.9%. And if you adjust it for the divested and discontinued, it was roughly flat.

And sequentially it was about flattish, as well.

I was just looking for the trend. What was that year-over-year growth rate trend from last quarter to the current quarter?

About the same, Rich, I think.

Yes. This quarter versus same quarter last year, net of divestitures, about flat.

Ladies and gentlemen, that is all the time we have for questions today. This now concludes Hologic's third-quarter FY16 earnings call. Have a good evening.