Hologic Inc (HOLX) 2017 Q1 法說會逐字稿

Good afternoon and welcome to the Hologic, Inc. first-quarter fiscal 2017 earnings conference. My name is Kelly Anne and I will be your operator for today's call.

Today's conference is being recorded and all lines have been placed on mute. I would now like to introduce Mr. Mike Watts, Vice President, Investor Relations and Corporate Communication to begin the call. Please go ahead, sir.

Thank you, Kelly Anne. Good afternoon and thanks for joining us for Hologic's first-quarter fiscal 2017 earnings call.

With me today are Steve MacMillan, the Company's Chairman, President and CEO, and Bob McMahon, our Chief Financial Officer. Steve and Bob both have some prepared remarks today, then we will have a question-and-answer session.

Our first-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 February 24.

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 the filings with the SEC.

Also during this call we will be discussing certain non-GAAP financial measures. A reconciliation to GAAP financial measures can be found in our earnings release.

Finally, unless otherwise noted all percentage changes we discuss will be on a year-over-year basis. And revenue growth rates will be expressed in constant currency.

Now I would 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 performance in the first quarter of fiscal 2017.

We posted solid results. Both revenue and earnings per share exceeded our guidance, illustrating the progress we are making on our journey from turnaround story to sustainable growth Company.

As we discussed at the recent JPMorgan conference the success of our turnaround to date has been based largely on improved execution by our US commercial teams. They stabilized market-leading products that were once in decline and optimized the potential of innovative growth drivers. Both of these trends continued in the first quarter of fiscal 2017.

But at the same time we are beginning to see the next chapter of our growth story emerge this quarter in two important areas. First, our efforts to revitalize our research and development pipeline are beginning to bear fruit as new products contributed progressively more to growth. And, second, we generated growth internationally after four consecutive quarters of declines in fiscal 2016. While we realize we still have much work to do outside the United States we are encouraged by the progress we are making and the foundations we are building.

As we look toward the future new products and international growth will play an increasingly important role in our success. And we expect a third area, business development, to contribute as well.

In this regard the divestiture of our blood screening business, which closed yesterday, will increase our financial flexibility as we seek growth through acquisitions and other capital deployment activities.

With that introduction out of the way, we'd like to provide an overview of our first-quarter revenue results, highlighting both established growth drivers and the early contributions from new products in international. Then I will review the blood screening sale briefly before handing the call over to Bob.

Let's start with our first-quarter results. Revenue of $734.4 million grew 5.6% on a reported basis or 6.3% in constant currency. We posted good growth over and above our most difficult comparison from the prior year.

As a reminder, sales in last year's first quarter grew a strong 8.1% in constant currency. This quarter we also absorbed a headwind of roughly 50 basis points from discontinued products, mainly a cystic fibrosis test in Molecular Diagnostics.

On the positive side, as discussed in our last quarterly call we benefited from four extra selling days between Christmas and New Year's which we estimate contributed roughly half our growth for the quarter.

In terms of geography, US sales grew a healthy 5.2% in the quarter versus a very difficult comp from a year ago when sales increased 12.8%. This performance was a continuation of strong recent results and once again validated the quality of both our products and our people.

We are also encouraged that international sales grew 6.1% excluding blood screening. Growth was again led by our Molecular Diagnostics and Surgical franchises, both of which grew faster than 20% in constant currency and are beginning to show results from the foundations we have built over the last couple of years.

While international sales clearly improved we want to emphasize that it's only one quarter and we are still very much a startup outside the United States. But now we have our leadership team in place and are beginning to establish a strong basis for future growth. As a reminder, in the past 12 months we have hired four new commercial leaders for Latin America, Asia Pacific, Canada and Europe.

Now let's turn to divisional performance in the first quarter. Surgical remained our growth leader and posted its eighth straight quarter of double-digit growth globally. Let me emphasize that's two years of double-digit revenue growth, not to mention high profitability, from a division that many people thought we should sell three years ago.

In the first quarter, which is seasonally strong for Surgical, sales were $114.8 million, an increase of 17.2%. MyoSure led the way by posting sales of $48.3 million and growth of 32.1%. We are achieving exceptional growth from MyoSure as our commercial teams continued to expand the market and capitalize on our new MyoSure REACH line extension.

As a side note, MyoSure REACH with the biggest sales contributor in the basket of new products that we track regularly. Last quarter we said these products exceeded $10 million in quarterly sales for the first time and this quarter they showed good growth on a sequential basis.

NovaSure sales of $66.4 million grew 8.6% as we continued to capture market share based on a competitive withdrawal. We should point out, however, that we have almost completely annualized this benefit. So NovaSure growth rates are expected to slow going forward as we previously forecast.

Before we leave Surgical, let me mention that we recently received FDA approval for our new NovaSure ADVANCED line extension. We are pleased that in GYN Surgical, like the rest of our decisions, R&D is becoming an integral part of our growth strategy. For example, over the last few quarters we've been able to gain US approval for two new products that will extend our leadership position in the field.

Moving to Diagnostics, we posted sales of $325.4 million in the first quarter and 5.5% growth. In Molecular Diagnostics sales of $139.9 million grew 8.8% despite the discontinued products headwind based on share gains and increased utilization of women's health assays on the fully automated Panther instrument. Of note, international sales grew 25.8% as we continue to see the benefits of new leadership, record Panther placements and increasing assay pull-through on those instruments.

Specifically, revenue from our three viral-load assays is increasing nicely in Europe, although admittedly off a small base.

And in the United States this quarter we were pleased to receive FDA approval of our first viral-load assay for HIV-1. This is a highly complex assay that required a prospective clinical trial and a premarket approval from the FDA. So the approval is a testament to the quality of our Diagnostics R&D and clinical teams.

Building on the HIV approval, we hope to gain clearance for our hepatitis C test later this fiscal year and our hepatitis B assay in 2018. Once we have all three viral assays approved in the US we are optimistic that they will begin contributing to domestic revenue growth.

Elsewhere in Diagnostics, blood screening sales of $65.2 million exceeded our expectations and grew 7.4%. Most of the upside came from initial sales to support investigational testing for the Zika virus and from international ordering by our partner Grifols that reminded from very low levels a year ago.

Overall, blood screening sales declined in the United States but increased significantly in international markets. So keep that in mind as you are analyzing the performance of our core businesses by geography.

Finally, cytology and perinatal sales were $120.3 million in the quarter with modest global growth of 1.1% as domestic share gains by our ThinPrep liquid pap test continue to offset headwinds from longer cervical cancer screening intervals.

It's worth mentioning that while cytology products comprise more than 85% of this revenue line, the perinatal portion of the business has started to perform better, as well. This will be an area to watch in the future as we revitalize our new product development efforts.

Now let's move on to Breast Health where global sales of $273.3 million grew 4.6%. Domestic placements of our innovative market-leading Genius 3D MAMMOGRAPHY systems again increased modestly and orders remain healthy. We continue to gain market share while maintaining price discipline based on our superior product profile and strong customer relationships.

And we still have significant conversion runway ahead of us as less than 45% of our domestic installed base has upgraded to our Genius platform thus far.

Importantly, other supplemental growth drivers have begun to emerge in Breast Health as we very deliberately planned. Specifically, in the mammography segment strong growth in service revenues from a growing installed base of Genius systems combined with sales of our new Affirm prone biopsy system drove a 5.5% increase in domestic sales.

Outside the United States Breast Health sales were basically flat as we continue to work on a country-by-country basis to optimize our channel strategy and build our commercial capabilities. With each passing quarter we feel better about our prospects here, but as we have said before it will take time to fully realize the considerable opportunity in front of us.

To round out the revenue discussion, Skeletal Health revenues of $20.9 million decreased 10.7%. Although this is a small business for us this performance is clearly unacceptable. As a result, we've refocused our commercial efforts and are beginning to see an increase in DXA bookings that bodes well for improved performance later this year.

Now let me shift gears and touch briefly on our blood screening divestiture which closed yesterday. As a reminder, we sold our stake in our blood screening business to our former commercial partner, Grifols, for a purchase price of $1.85 billion in cash. Blood screening was a nonstrategic business for us as our partner managed sales and marketing and we lack the ability to control our own commercial destiny.

We believe this deal makes Hologic a fundamentally stronger Company in 2017 and beyond. We are receiving excellent value for our blood screening assets. The $1.85 billion purchase price represented a premium to our own internal valuation on an after-tax basis and is particularly attractive when you consider the underlying headwinds facing the blood screening market: both declining unit volumes and increased price competition. By monetizing the business today we've significantly de-risked our portfolio going forward.

In addition, divesting the blood screening business removes a drag on our growth which will enable us to increase both revenues in EPS at a faster rate. And as competitive pressures intensify this benefit will likely increase over time.

Finally, the deal markedly strengthens our balance sheet and increases our financial flexibility to grow through acquisitions. As mentioned earlier we continue to believe that M&A as a supplement to internal innovation, commercial execution and international expansion will be an important part of our future growth strategy.

Before I turn the call over to Bob, let me summarize by saying that Hologic is off to a good start in 2017. In the first quarter our domestic commercial organization continued to drive growth of our market-leading products.

At the same time, the next chapter of our great story began to emerge as new products and international started to contribute. As a result, both revenue and EPS exceeded our guidance and we significantly increased our financial flexibility by divesting our blood screening business for an attractive price.

Now I will turn the call over to Bob.

Thank you, Steve, and good afternoon everyone. I'm going to walk through the rest of our first-quarter income statement, the balance sheet and our updated financial guidance for 2017. Unless otherwise noted, my remarks will focus on non-GAAP results.

As Steve described, our first quarter was a quarter of solid execution and this began on the top line with revenue growing 6.3% in constant currency. In addition, non-GAAP EPS finished at $0.52, a reported increase of 13% as we continue to show good leverage down to the bottom line of the income statement.

Now let's start by discussing how we accomplished this. Gross margins of 65.2% were flat compared to a year ago as favorable product mix was offset by increasing international sales and the negative effects of a stronger US dollar.

Total operating expenses of $231.1 million increased 4.6% in the first quarter mainly due to the extra days in our fiscal calendar and the timing of marketing expenses. As Steve mentioned, we are pleased with returns that we are beginning to see from research and development and expect to continue investing there to generate sustainable growth. Even while accommodating these investments, our operating margin of 33.7% improved by 30 basis points in the first quarter.

Below the line our non-GAAP effective tax rate of 31% was 175 basis points lower than a year ago. And while we have no special insight into the prospects for corporate tax reform, we do believe would benefit significantly from most of the changes being discussed in Washington.

And to wrap up the discussion of the income statement, EPS of $0.52 grew 13% compared to a year ago, more than double the rate of sales and ahead of our guidance. Please note, we estimate that our blood screening business contributed $0.10 of EPS in the first quarter, flat versus the prior-year period. You'll see that we include in our press release the historical contributions of blood screening to quarterly EPS to help you with an apples-to-apples comparison going forward.

Now let's turn to cash flows and the balance sheet. In the first quarter adjusted EBITDA of $269.1 million improved 6.8%. We continued efforts to reduce our convertible debt by calling what was left of our 2037 notes.

Once the administrative procedures are complete, we will have elevated from our balance sheet this most dilutive tranche of notes originally totaled $450 million in principal. And as you know, the remaining two charges of our converts are callable in December of this year and March 2018, just over a year from now.

We continue to generate strong cash flows with operating cash flows of $169.6 million in the quarter. We spent $24.7 million on capital leading to free cash flow of $144.9 million.

Turning to the balance sheet, we closed out the quarter with $646 million in cash and $3.3 billion in total debt outstanding, resulting in $2.7 billion of net debt. This represents a reduction of $0.3 billion versus a year ago. And based on this our leverage ratio net debt over EBITDA stood at 2.6 times at the end of the quarter, a much healthier level than just a few years ago.

To wrap up discussion of the results we have steadily improved our return on invested capital through consistent profit growth coupled with lower debt. At the end of our first quarter ROIC was 13.1%, on a trailing 12-month basis 180 basis points increase over the prior year.

Now I'd like to shift gears and discuss our non-GAAP financial guidance for the full year and the second quarter. We are updating our guidance based on our good first-quarter results, the divestiture of our blood screening business and the stronger US dollar, which is affecting all multinational companies.

With the divestiture and FX changes it's important to note that our expectations for our ongoing base business are consistent with our initial constant currency guidance. We remain on track for a good year with mid-single-digit sales growth for our core business.

Now let's start with that updated revenue guidance for the full-year 2017. Given the number of moving pieces I'm going to take a minute to walk everyone from our previous guidance to our current guidance.

As a reminder, we previously guided to reported sales of $2.94 billion to $2.98 billion which represented constant currency growth of between 4% and 5.5%. As you know, the US dollar has strengthened materially since we gave our initial guidance back in November. Given our relatively higher proportion of US sales, currencies represent less of a headwind for us than most of our peers.

Nonetheless, based on recent exchange rates we estimate that currency fluctuations are driving an incremental reduction of just over $20 million to our previous revenue guidance. This applies to our core business excluding blood.

Now let's fall in the much larger impact of the blood screening divestiture. Since the deal closed yesterday, at the end of January we are essentially removing from our full-year forecast eight months of regular blood screening sales. But we do expect some trailing low-margin revenue mainly related to raw material and instrument supply that we will continue to provide.

We forecast this trailing revenue to total $15 million to $20 million for February through the remainder of the year. So taking into account our first-quarter actuals and relative to our last blood screening revenue forecast of $240 million, the net impact of the divestiture is a revenue reduction of between $130 million and $140 million. Said another way, we now expect to record blood screening revenue of between $100 million and $110 million this fiscal year with the majority of it in the first and second quarters.

Factoring in a few other minor adjustments this leads to our new revenue guidance of $2.785 billion to $2.825 billion. Underlying this our base business remains healthy. For example, if you were to exclude at the midpoint $105 million of blood screening sales from 2017 and also remove blood from last year's results, our new guidance would imply constant currency growth for our core business of between 4.2% and 5.8% on an apples-to-apples comparison.

Now for the second quarter of fiscal 2017 we expect sales of between $675 million and $685 million. Again, this includes one month of regular blood screening sales plus a portion of the trailing revenue related to the raw material instrument supply that I mentioned before. So in total we expect blood screening to contribute between $25 million and $30 million to our second-quarter reported (technical difficulty).

To give you a sense of our underlying core business, if you were to back out $27 million of blood screening sales at the midpoint and also remove blood screening revenue from last year, our quarterly guidance implies constant currency growth rates for our core business of between 3.6% and 5.3% on an apples-to-apples basis. As part of this, let me remind you that the Surgical sales are somewhat seasonal, and so we expect them to decline sequentially from our first quarter to second quarter like in prior years.

Now let's move on to our revised EPS guidance. As a reminder, we've previously guided to earnings per share between $2.12 and $2.16. Using the same logic as before, we are essentially removing eight months of regular blood screening EPS from our previous forecast, then we add back a small amount of earnings from the $15 million to $25 million of trailing revenue that I mentioned.

These sales will come in at lower-than-normal margins. So relative to our initial guidance we forecast the net reduction in EPS from the blood screening divestiture will be about $0.21 for the full year in 2017.

Factoring in a slight headwind from currency, we arrive at our new non-GAAP EPS guidance between $1.90 and $1.94 which includes roughly $0.13 related to blood screening. Again, by way of illustration, if you were to back out blood screening EPS from this year's forecast and last year's results our forecast implies reported EPS growth rates for our core business of between 11.3% and 13.8% on an apples-to-apples basis.

Now for the second quarter of fiscal 2017 we expect earnings per share of $0.45 to $0.46 which includes roughly $0.03 of regular earnings from our blood business that was just divested. Using the same methodology as before this implies reported EPS growth rates for our core business of between 13.5% and 16.2% on an apples-to-apples basis.

Our new guidance assumes a full-year tax rate of approximately 31% and diluted shares outstanding of between 287 million and 289 million for the year. Our guidance does not assume any additional capital deployment, although we do intend to explore repurchasing some of our remaining convertible notes and our common stock.

We are not incorporating any potential benefit into our guidance for two reasons. First, the magnitude and timing depend on market and other conditions and, second, since we are already four months into the year the 2017 impact is likely to be very small.

As you update your forecasts we would again encourage you to model around the midpoint of our guidance ranges. Not only have incorporated both upsides and downsides into our forecast, we also had some added uncertainty around the trailing blood screening revenue.

Now before we open the call for questions I'd like to conclude by saying we are off to a good start in 2017. We begin our fiscal year with quarterly revenues that exceeded expectations, encouraging results from key future growth drivers including new products in international and earnings that grew at a multiple of sales. And, finally, we completed a divestiture that strengthens our balance sheet while accelerating the Company's growth rates.

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.

Thank you. (Operator Instructions) Dan Leonard, Deutsche Bank.

So first off, I'm curious if you can comment on whether or not your M&A pipeline has built since you announce the blood divestiture?

We had a lot more calls from bankers, but I would say we are pursuing the same plan. We've got a lot more people wanting to meet with at various conferences, but at the end of the day, Dan, we are keeping very focused, very disciplined and going about things the same way we've always been.

Okay. Thank you for that.

And not an entirely related follow-up, but can you comment on as it relates to your order book for [tall mall]? Maybe any thoughts on the hospital capital spending environment and whether any of your customers have shown any more uncertainty given all the changes and potential ACA and what have you?

Sure, Dan. We continue to be in very close touch with our sales folks around are they sensing any changes in the environment.

We are not hearing much or anything. And I tell you I think we continue to feel very good about the bookings that are still coming in on the business. So that could always change, but nothing at all at this point.

Jack Meehan, Barclays

I wanted to ask about the molecular franchise. Maybe start with sexual health and just anything worth pointing out in terms of the trends with some of the core tests you have there.

Yes. I think at a high level when you see the 8.8% global growth in molecular we continue to feel very good both domestically and really internationally. And a lot of that is, frankly, it's all the core business.

It's the woman's health assays. Internationally the virals are starting to contribute, Jack, but they are still very small. And we've got a few ancillary assays here or there, but for the most part it is our core women's health assays driving the growth.

Jack, just to add to that, if I look at the core assays that we have both on a domestic and global basis I would say we grew faster than market. We gained share in the three key assays that we have, and we already believe we are the number one share in CTGC, HPV and [trick]. And I think we continue to feel very good about the continued pace of our Panther placements as well, so I think that bodes well for the future.

Great. That's helpful. And then just wanted to follow-up, Bob, on the share repurchase.

I was surprised that just with the upcoming proceeds from blood screening that you weren't a little bit more active in the quarter or thought about putting it to work. Just your philosophy there and any updated thoughts would be great. Thanks.

Yes, I think first, obviously, with that we weren't able to even if we wanted to because we were in blackout for a large majority of that time. But that being said, I think our priorities continue to be, Jack, that we want to clean up the balance sheet.

We've talked about the converts. We've taken out now the first tranche of those converts. By doing that, it also helps with the dilution.

So we will continue to look at that and also be very disciplined about our approach around M&A and growth and augmenting our R&D activities and then be opportunistic with the share repurchase. And that's the order of priority, so we are looking at all of those levers throughout the course of the year. Timing is always difficult to predict on those things, but rest assured that we plan to utilize those proceeds in the various ways.

Bill Quirk, Piper Jaffray.

Good afternoon everybody. First question is on Novaseek, continues to surprise to the upside despite lapping some of the competitive dynamics. Can you just talk maybe a little bit about what your expectations are for Surgical broadly and Novaseek in particular here as we think about 2017?

Sure, Bill. I think we've been very pleased with what our team had already done by stopping the declines in NovaSure and turning it into a modest growth business before the competitive withdrawal.

We've clearly benefited for the last almost four quarters from a competitive withdrawal that's inflated those growth rates. But we still think it can be a growth business and MyoSure, as well, continues to probably defy a lot of expectations. So we continue to be very, very encouraged by what this business can do.

Now after eight straight quarters of double-digit growth, certainly the comps and the stacked comps and everything else continue to get tougher and tougher. But we feel good about where the business is going and good about the international opportunity and good about the fact that we are just wanting NovaSure Advanced that will bring some new life into the franchise. Having said all of that, we are clearly assuming a return to single-digit growth here as we go into the second half of the year and probably a more modest growth rates than what we've been able to achieve.

I was going to say, Bill, if you recall the competitive product was first recalled at the end of our fiscal first quarter and then was permanently taken off the market in our second quarter. So we would expect Q3 and Q4 to be at a more normalized growth rate, to Steve's point.

Okay, got it. Appreciate the color on NovaSure, no question.

Secondly for me, more of a housekeeping question I guess, the raw material supply going to Grifols, that's not a one-time or one-year phenomenon, right? That's presumably something that should continue, albeit at low margins, in 2018 and beyond? Thanks.

Yes, Bill. That's right. It's a combination of a couple things.

Probably the biggest piece is actually the Panther systems and the spare parts associated with those. So we will continue to be a partner there for a period of time as well as that raw material that we just talked about. But that is a -- we would expect that to continue on into beyond 2017 for a period of time, yes.

Vijay Kumar, Evercore ISI.

Congrats on a nice quarter. Steve, maybe going back to an M&A question. If I think about you have the proceeds -- as you think about the policy uncertainty whether it's from border tax or from a corporate tax reform is that an implement or a hurdle when you think about available assets?

Not really. I think we are going to continue to look at the assets. There is so much uncertainty now certainly around whether it's tax rates around everything else.

We are going to continue to look at everything on its own merits and continue to be very disciplined in what we are looking at. But we've got the money. It doesn't mean we're going to rush out and spend it.

And just a follow-up for that. Is the main impact of border tax and corporate tax, in general that's a positive benefit for Hologic, somewhere around 500 bps of reduction in tax rate. Is that how we should be thinking about it?

Yes, Vijay, it is a positive for us when you think about our manufacturing. And, obviously, our revenues are largely US-based but also when you look at our COGS it's roughly 70/30 US/international. So we would expect to be benefiting.

It's hard to put a number on that because we don't know what the actual base rate is. But rest assured we would expect to be a net beneficiary associated with any kind of border tax adjustment.

Tycho Peterson, JPMorgan.

Steve, can you talk a little bit about international Breast Health? Flat in the quarter but presumably you've got a timeline for that to start to grow.

You've got the right management team there. So can you just talk a little bit about when you think they may start growing again?

Sure, Tycho. As we said earlier on Diagnostics and Surgical will probably be leading the growth internationally given the fact that they are more direct than dealer.

Having said that, we are seeing some pockets of building and even our European Breast Health business where we put a new leader in place nine or 10 months ago we are starting to see some better results there, but you also have other businesses like Latin America that are a little more fluctuating. So I think as we look fundamentally we feel the business getting stronger, and I think it will slowly start to tick up over the course of this year. Yes, it's probably going to be more 2018, 2019 before it can hit more of a stride again just as we work through dealer issues and other things, but feel we are definitely on the right path and making good progress.

And then for my follow-up on Skeletal Health, you had a tough quarter there last quarter as well. It sounds like things have turned but can you maybe just talk of what has driven the softness and what you can really do to improve that business?

Yes, I think we probably took our eye off the ball just a little bit. We've been continuing to evolve the sales organization in the US and, frankly, it's sold in conjunction in a lot of cases with our Breast Health portfolio. As we launched Affirm and have the managers focused on other new products I think we probably took our eye a little bit off the ball on staying as focused.

There's also a little bit of competitive activity in the C-arm space, but in general I think -- we report it as a segment but it's managed more as a product line to some degree and a relatively small one and just didn't -- haven't delivered for the last couple of quarters. But we feel good -- the order trends we're starting to pick up here.

Isaac Ro, Goldman Sachs.

One question on molecular and maybe a follow-up on business development. On the molecular side, I think between yourselves and Roche there's been pretty good growth trend from a couple of the major players this quarter.

Curious if there is a market share dynamic that you think is meaningful or is it really just market growth? We, obviously, don't have good visibility into every player, but certainly seems like you guys are holding your own against some of the bigger companies.

Isaac, our first assumption whenever we are doing reasonably well is always that the market is doing well. Sometimes after the fact it actually looks like share has been -- has helped. Clearly Roche continues to do well.

They are a very strong player. We think we have certainly done okay, but the market was probably half decent last quarter. You know, we don't have complete visibility but I would always rather assume it was that than be taking credit for share.

Yes, having said that, I think the market dynamics have been healthy but if you look at the major products that we track, the three big ones, we definitely believe we are a share gain or over time on all three.

That's helpful. Thank you. And then just a follow-up --

I always love that to come out after the fact, as you know. The same with Genius 3D.

Got it. Thank you.

And then on the business development side, you guys talked a little bit about your plan to invest time and resources there. How do you feel about your ability to execute on M&A to the extent that interesting deals were to float across to radar tomorrow, do you feel like you would be able to go ahead and execute on them given the balance sheet?

And really I'm just talking about the team from the senior level. Do you have all the people in place, and would appreciate to the extent you can comment, just remind us the metrics that you guys typically try to apply on ROIC versus EPS accretion when you are evaluating these deals. Thanks.

Sure. At the highest level we do have the team in place now. We added our final edition was a head of corporate business development. And I liken it a lot to what we've done internationally with our leaders that over the course of the last year we have put the foundations in place, we've put the right people in place, but I do think we are in a good place to execute on deals now.

Each division has a very good business development lead and then we got the resource at corporate. So we've quietly been building that up.

I will tell you, we've looked at a lot of deals. And I learned long ago from my mentor at Stryker, John Brown, that most cases the best decision on business development is no. And we've continued to be very disciplined, but the flow and the amount of time that certainly Bob and I have spent on deals over the last six months, much, much better.

And I think as we sit here I will probably be surprised if 12 months from now if we haven't done something but continuing to stay focused. And to your second point, ROIC is going to continue to be a key part. Ultimately we want something that is top-line and bottom-line accretive in growth rate for the Company.

So we'd be looking at things that could accelerate our top- and bottom-line growth. Not just stuff, for example, that would make us bigger, but at the end of the day it's going to be about both growth rate and ROIC will be the big things we'll be looking at as well as obviously being able to leverage our existing channels is always going to be the first port of call.

Jon Groberg, UBS.

Congrats. Steve, just two unrelated questions for you if you don't mind. The first is if you could maybe give a little bit of a more detailed update on Affirm and some of the other new products, how that did?

More broadly, I'm curious one of the question marks around Hologic has been some of the assets while they are all women's health don't necessarily fit together. I'm wondering if you can just talk about are you finding synergies or finding ways to better find revenue synergies whether it be to the OB/GYN channel or across some of your different products? I'm just kind of curious how that sales development is going with your existing assets and what opportunities you might think would fit in in the future?

Sure, Jon. The first part in terms of Affirm I think we feel very good about each of our products continuing to build momentum. And I think as we said about things like Affirm, Affirm is going to add to our growth here in 2017.

It will be bigger in 2018 than it will be in 2017. It will probably be even bigger in 2019 than it is in 2018. So I think we are in the early stages of all of these launches like virals, like Affirm and then things that will be coming on behind these. So feeling good about that.

In terms of the leverage, I think one of the more obvious paths we've been able to leverage is in Genius 3D MAMMOGRAPHY, for example, where we've been able to detail to OB/GYNs that we have this technology. And in the past all we did is call on radiology, so we are looking and there are opportunities where our salesforces are at least talking about some of the other products in our portfolio.

And we are looking for them where they opportunistically exist. We are not forcing synergies where they don't exist.

And that said, even though there is not a tremendous amount of cost synergies we are still a very profitable business, as you know, Jon.

Yes. We also like to, as you look forward in terms of our Diagnostics business which is on the molecular side and also the cytology side, then you've got an imaging side. As we look at where science is going, the ability to have people that have some general expertise in different modalities of Diagnostics across women's health we think ultimately there's some opportunities that may play out deeper into the future.

Thanks.

Doug Schenkel, Cowen and Company.

Both things I want to talk about are specific to Diagnostics. In the US in the quarter with some extra days we might've expected a bit more growth. I was just hoping that you might be able to provide a little more color on how things broke out between blood, cytology and US molecular specifically.

And then on a more positive note, international sales was strong in Diagnostics. I know it's early to say too much about how things are progressing with the international salesforce and how they are progressing, but it would just be good to hear a little bit more about whether this is driven largely by instrument placements or whether utilization is also ramping up. Thank you.

I think the highest level in terms of the US, with a lot of our customers we actually have standing orders every month and the extra days didn't have as much of an impact as we probably would have thought. We traditionally do very little business in that week between Christmas and New Year's. So it helped a little bit.

It would have been nice to have helped more maybe. But, again, I think a fairly lightweight.

Internationally Panther placements I think continue to be probably the single biggest driver. Utilization is starting to get up, but we are definitely getting some new customer wins that's starting to drive that.

Doug, a couple of other things to think about. We had mentioned, one, the headwind of the cystic fibrosis product that we were going against. So if you actually strip that out, that was a couple million dollars in the quarter last year that didn't happen this year. That would add at least a point, point and a half of growth.

In addition to your point around blood, blood actually declined in the US high single digits. And so despite the sales of the Zika and so forth it was still down. And so that is actually depressing the overall Diagnostics business, and if you strip that out the business looked a lot better in the US.

David Lewis, Morgan Stanley.

This is actually Scott Lange asking for David. Two quick ones for me.

Steve or Bob, the 2Q revenue guidance adjusted for blood screening and the stub sales seems a little light versus our assumptions. Are there any timing-related dynamics to consider in the second quarter or pull-forward into the first quarter?

There is not pull-forward, I can promise you that. Yes, it's our toughest comp. I think we go into easier comps in the third and fourth quarters, so it's a little bit below our annual guidance but --

Yes, the other thing is, Scott, when you are modeling our Surgical business typically the fourth quarter, calendar quarter which is our first quarter is the largest quarter there. And you'll have a sequential decline for our second quarter. That happened last year.

We are anticipating it happening in this year. So when you look quarter to quarter that's when you would see that core business sequential decline, largely because of the Surgical business. Now versus year ago we still expect it to grow, but you do see that kind of step down.

That business is becoming a bigger chunk. It probably is a little bit more pronounced.

Got it. And then just as a quick follow-up for Bob. Regarding the dilution from blood screening, does an ASR not make sense in order to lock in some dilution offsets and can you also comment quickly on the margin dilution you expect from the overall blood screening divestiture? Thank you.

Yes. Every company -- each indication or instance is different around whether an ASR is appropriate or not. What I would say is we still look at our balance sheet and say we can clean it up with the converts and simplify our balance sheet there. And I think given the short-term nature of those things getting ready to be callable I think that is probably our first priority versus an ASR.

And then again as Steve was talking about, we are really looking at opportunities for growth, as well. And so I think those would probably take priority over the share repurchase, and we think that there may be some opportunities, as Steve said, between now and the end of the year, or a year from now we would expect to be doing something in both of those cases. So that's how we are thinking about that.

On the margin perspective, to your point, because blood was a very profitable business as you know our margin will decline. Again, on a core apples-to-apples basis we expect margin to increase year-over-year but you would see a slight decline versus year ago on an actual reported basis. Less than probably 100 basis points given that we do have still that four-plus months worth of blood in our business, but that should give you a perspective.

Brian Weinstein, William Blair.

Question on O-US infrastructure. You talked about some of the hedge that you have in place now in the four territories that you cited. But can you talk about any added investments that are needed to either people or infrastructure over the next several quarters and how you think about profitability O-US versus US?

Sure. We've got the right leaders in place. We are investing in people, adding salespeople where needed and all that. But we are all self-funding effectively that and just being rigorous like we are in every decision we make.

Add a few so we are not coming out and saying we are going to get quarter or a year off while we make investments. We are self-funding those. As things take off in one market we will add some reps, for example, in another market and build it that way.

So I think we feel good. Overall to your second part of that question, profitability internationally is lower. We typically, on a margin basis we typically have a combination of factors from some lower selling prices.

We are also, by the way, because we produce a lot of our products in the US, the strong dollar is not our friend as it relates to international margin. And also going through dealers, particularly in the Breast Health, all of those serve to depress the gross margin which, therefore, as our business continues to grow and international picks up the ability for that much more expansion of gross margin starts to moderate.

Yes, a couple of follow-on things on that, Brian. I think one of the things that's really exciting is the opportunity, now that we do have these regional heads in, they are going to be able to prioritize the investments across the regions rather than having to spread them across the globe. And that's what this teams are doing right now, and I think that actually will actually increase the productivity of the spend that is there.

And then on the second piece while international is lower margin than the US cannot year-over-year we do expect margins to expand on a global basis. So we are compensating for that.

Anthony Petrone, Jefferies.

A couple on Breast Health and then two quick tax questions. Just on Genius installed base, I'm not sure you've given it at the end of the quarter but if that's available that would be helpful. And Steve you mentioned share gains, continued share gains in the US driving Breast Health.

I'm just wondering what the outlook is going forward for ongoing share gains? And then on tax, I'm just wondering with the political environment it looks like Hologic could be a big beneficiary as it relates to both border tax adjustment but also the reduction in statutory tax rate. So any thoughts around that would be helpful. Thanks.

Sure, Anthony. On the Genius placements we only provide the numbers on an annualized basis, so we did that at the end of last quarter. We don't provide quarterly numbers.

Having said that, it grew modestly in the US this quarter versus the same quarter last year. So continuing to grow. And on the share front I think we continue to feel good that we are probably punching above our weight and continue to feel good about what we are doing in terms of marketshare gains there.

Steve, let me add, and a shout out to our Breast Health team here in the US who is just doing a fantastic job around price and price discipline. So despite two competitors at a lower price our pricing continues to not only be stable, it was actually up slightly in this last quarter. And I think that speaks to the value of our products, the competitive differentiation that we have and the ongoing clinical and technical support that we have with our products. So I think that that's one of the hidden gems of really helping continue to drive that business.

And then on tax, as you rightly assume we do think that we will be a beneficiary of whether it be the border tax or any type of corporate tax reform. There's still a lot of details to be figured out there, but one thing I think we are probably in pretty good shape given not only our geographic footprint from a revenue perspective but probably even more so our geographic footprint from a manufacturing.

Essentially all of our -- almost all of our Breast Health business and Diagnostics business is produced here in the US. Our Surgical business outside the US, but that's obviously our smallest piece, and as I said before roughly 70% of all of our COGS emanate out of the US. So I think we would benefit nicely given the potential for corporate tax reform.

Richard Newitter, Leerink Partners.

This is actually Ravi in for Rich. Just maybe one on the capital deployment areas.

Is there any sort of a limit to how much the converts that you can repurchase or any covenants limiting the amount that you would be able to call back? And then if I could just get a follow-up on portfolio management strategy with the underperformance in the Skeletal Health business. What is your take on whether the portfolio needs to be where it's at or are you continuing to evaluate the businesses for additional sales or not?

And then I'm going to try to get one last one in. Some of our checks here are talking about a strong flu season. Any commentary there would be appreciated.

Yes. We will take the last one first. Our flu later assays are very small, so that's not a real impact for us. I would say I guess on the converts, there are certain limitations if we would go out and privately negotiate those, creeping tender rules and so forth.

It also depends on whether the holders are willing to sell, so that would happen over time. But, again, within 12 months those things are all going to be callable.

And the last one, I think, was around Skeletal and the underperformance there. We are not going to sell the business because it had one or two quarters of underperformance.

We think the first thing is let's fix it. We are not going to sell it in that.

And the other thing is, it's fairly integrated into our breast business, especially around the service component. And so we've got a large installed base as well as the service techs out in the field that can serve as both products. So it's probably more integrated actually than even the blood business that we just recently divested.

Kelly Anne, I think we are coming up on 5:30 Eastern. So I think we've got time for maybe one more question.

Derik de Bruin, Bank of America Merrill Lynch.

So the cytology market has been very tough, obviously changes in protocols and such. Is there anything that you see that can potentially revitalize that business?

And also along those lines, you mentioned some new products in the perinatal market. Are you looking at preeclampsia or some other things in the area? Can you elaborate on that?

Sure, Derik. As it relates to cytology the way we think about it is flattish in the US is probably about as good as we could expect for some time here as we continue to offset the extension of the intervals with our own share gains. We still do think there's opportunities outside the United States, significant opportunities that is going to be a longer-term build. But when you look at the presence of liquid-based cytology outside the US, it is still underdeveloped, so there we think we do have some opportunities.

On the perinatal piece I would say we've got our own clinical programs and it may be more indication-related or other things that we are looking at, but we realize we've got a nice little perinatal business and a dedicated sales team there, so there may be some opportunities to try to drive that business. That's one of the smaller businesses that we have quietly refocused on a little bit internally so you don't forget about it and starting to feel there maybe some opportunities for us in the coming years.

Thank you, everyone. That is all the time we have for questions today. This now concludes Hologic's first-quarter fiscal 2017 earnings call.

Thank you everyone. Have a good evening.