Hologic Inc (HOLX) 2019 Q4 法說會逐字稿

Good afternoon, and welcome to Hologic's Fourth Quarter Fiscal 2019 Earnings Conference Call. My name is Cody, and I am your operator for today's call. Today's conference call is being recorded. (Operator Instructions) I would now like to introduce Mike Watts, Vice President, Investor Relations and Corporate Communications to begin the call.

Thank you, Cody. Good afternoon, and thanks for joining us for Hologic's Fourth Quarter Fiscal 2019 Earnings Call. With me today are Steve MacMillan, the company's Chairman, President and Chief Executive Officer; and Karleen Oberton, our Chief Financial Officer. Steve and Karleen both have some prepared remarks today, then we'll have a question-and-answer session.

Our fourth quarter press release is available now on the Investors 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 through November 29.

Before we begin, I'd like to inform you that certain statements we make during this call will be forward-looking. These statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied. Such factors include those referenced in the safe harbor statement that's included in our earnings release and in our filings with the SEC.

Also during this call, we will be discussing certain non-GAAP financial measures and reconciliation to GAAP can be found in our earnings release. Finally, any percentage changes that we discuss will be on a year-over-year basis, and revenue growth rates will be expressed in constant currency unless otherwise noted.

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 fourth quarter of fiscal 2019, our sixth consecutive quarter of good, consistent results. Total revenue came in very strong at $865.8 million, a 7.3% growth rate in constant currency that exceeded our guidance. Improving operating and net margins drove non-GAAP earnings per share of $0.65, an increase of 12.1% and in line with our expectations.

We wrapped up fiscal 2019 with our best revenue growth of the year. This growth was balanced, with sales increasing in each of our divisions, both domestically and outside the United States. In addition to very good results in our largest businesses, Breast Health and Molecular Diagnostics, we are excited by the continued strengthening of Surgical, which posted its best growth in 10 quarters.

Before we discuss the quarterly details, let me step back and give a status report on the company as a whole since we're marking the end of our fiscal year.

We have clearly made a lot of progress over the last 6 quarters. In the first half of fiscal 2018, our overall growth rate was about 2%, if you strip out the divested Blood Screening business and the inorganic benefits of Cynosure. We restructured our leadership team around that time. And by the second half of last year, growth had improved to the 4% range. And for the full year of fiscal 2019, growth was 5.7%, well ahead of our initial guidance as we added 2 tuck-in acquisitions to solid underlying organic growth of about 4%. This organic performance, which excludes currency movements, Blood Screening and Faxitron and Focal, is impressive when you consider that we operate in several flat or declining markets where our leading market shares make it challenging to grow. In short, we have executed well over the last 1.5 years and expect to do the same in fiscal 2020.

Now let me break down our performance further by providing a brief snapshot of how we're doing in each of our major franchises.

In U.S. Breast Health, which grew 9.1% for all of 2019, we are using internal R&D and external acquisitions to build on an incredibly strong domestic leadership position in 3D mammography. By leveraging our installed base, we are creating a steadier, more diversified growth engine across the continuum of breast health care.

In domestic Diagnostics, which grew 4.5% for the full year, we are partnering with our customers to drive market growth and leveraging our installed base of fully automated Panther instruments with the broadest assay menu in the mid- to high-volume molecular space.

In U.S. Surgical, which grew 2.8% for the fiscal year, we have revitalized our sales force and our R&D engine to drive steadily improving growth.

In domestic Medical Aesthetics, which declined 9.9% for all of 2019, we have stabilized our U.S. sales force as we await internally developed and externally licensed new products to drive growth. Outside the United States, where revenue grew 8.2% in 2019, we have transformed what was effectively a startup a few short years ago into a consistent growth driver with much opportunity ahead for both revenue growth and profit improvement.

With that introduction, let's discuss our fourth quarter results in more detail.

Revenue of $865.8 million exceeded our guidance and grew a robust 7.3%. Within this, the acquired Faxitron and Focal businesses contributed $14.6 million to revenue. We are off to a good start with these deals with low-teens growth for the full year on a pro forma basis. Excluding sales from our divested Blood Screening business, which increased in the fourth quarter, revenue of $849.1 million grew 6.9%, still our best overall growth rate of the year.

In terms of geography, domestic sales of $656.2 million increased a very healthy 6.7% in the quarter. Excluding Blood Screening again, U.S. growth was 6.2%, accelerating for the fifth consecutive quarter. Outside the United States, sales of $209.6 million increased 9.2% in constant currency, a nice rebound compared to the third quarter.

Now let me provide some more detail on our divisional revenue results. In our biggest division, Breast Health, our core 3D mammography business remains rock solid, and we are building on it with an increasingly diversified product portfolio that spans the continuum of breast health care. Based on internal R&D productivity and strategic acquisitions, we have established ourselves as the trusted experts in breast health. We offer innovative products that deliver better clinical outcomes for patients and workflows that make life easier for customers.

Together, these translate into steadier, more predictable revenue. In the fourth quarter, underlying trends in Breast Health remains strong. Global sales totaled $342.6 million, an increase of 7.1% against a tough prior year comparable. In terms of geography, domestic Breast Health revenue grew a healthy 6.4%. Outside the United States, we were pleased to post sales growth of 9.4%, accelerating compared to the third quarter.

In terms of breast subsegments, imaging sales grew 6.5%, while interventional sales increased 10.2%, as we focused on selling our growing portfolio. Imaging benefited from about $10.4 million of Faxitron sales, while interventional included $4.2 million of Focal revenue.

In imaging, sales of our Genius 3D systems increased strongly, establishing a new quarterly record some 8 years after the domestic launch, an impressive accomplishment by our commercial teams. On a cumulative basis, we have shipped about 6,900 3D systems in the United States, giving us a tremendous installed base onto which we can layer additional revenue streams.

We have converted more than 70% of our own installed base to 3D, yet there are still more than 5,000 Hologic and competitive 2D systems in the United States, providing us multiple years of conversion runway at our current pace, especially as we continue to gain market share.

As in recent quarters, imaging growth was driven by our new 3D performance and 3Dimensions gantries, demonstrating how innovative R&D is contributing to our growth strategy. Other new products, including Intelligent 2D, clarity HD and SmartCurve also added nicely to imaging growth. We have a long-term opportunity to further enhance our existing 3D installed base with upgrades like these as well as the new artificial intelligence tools that we are developing and expect to launch this year.

In interventional, our fourth quarter results benefited from strong growth from biopsy disposables, which more than offset a headwind for lower Brevera capital sales due to the supply constraints we have previously discussed.

Before I turn to Diagnostics, let me update you on our pending acquisition of SuperSonic Imagine or SSI, a French innovator in cart-based ultrasound technology. As a reminder, this tuck-in deal leverages our existing call points and is expected to be accretive to our revenue growth rate, albeit with some slight dilution to EPS in the near term.

In early August, we acquired 46% of SSI's shares and have now opened a cash tender offer to purchase the rest of the company. Because we haven't finalized the acquisition yet, we recorded SSI's fourth quarter results under the equity method of accounting for investments. This means we booked no revenue or expense from SSI, but did record our share of their non-GAAP net loss, $1.8 million, on a non-GAAP basis in other expense. We expect to close the deal by the end of our first fiscal quarter, and Karleen will tell you more about this.

Now let's turn to Diagnostics, where revenue of $306.8 million increased 7.1% in the fourth quarter. Excluding sales from the divested Blood Screening business, Diagnostics revenue grew 6.1%, still a very strong performance. Molecular remains the growth driver here based on the productivity of our R&D team, which achieved 19 global clearances in fiscal 2019, and the sophistication of our lab and physician-based sales teams.

In the fourth quarter, worldwide molecular sales of $172.1 million grew a very healthy 9.8%. Internationally, molecular grew 14.1%, well into the double digits for the 13th time in the last 14 quarters against a very difficult prior year comp. And in the U.S., although we already enjoy high market shares in key assay categories, molecular sales still grew 8.8%. This reflects how we work collaboratively with our customers to drive volumes and better patient care in established markets. Molecular growth was again broad-based in the quarter as customers consolidated testing on our large installed base of fully automated Panther instruments. Sales of our largest Aptima Women's health assays, including chlamydia, gonorrhea, HPV and Trichomonas, increased at an impressive high single-digit rate overall. Sales of our many new products also added to growth, led by our quantitative viral load tests, Panther Fusion, and early contributions from our Aptima vaginosis assays. Panther has carved out a unique, highly defensible leadership position in Molecular Diagnostics just as our Genius 3D mammography systems have in Breast Health. Over the course of 2019, our global installed base of Panther grew by more than 200, about the same amount as the year before. This brought our cumulative total to more than 1,700 units, 45% of which are outside the United States. Importantly, utilization of these instruments has continued to grow as new assays emerge from our R&D pipeline and as we partner with customers to drive overall testing volume. Average revenue per Panther is now about $240,000 a year on a global basis and grew at a high single-digit rate in fiscal 2019.

Moving on, Cytology & Perinatal sales were $118 million in the fourth quarter, a small increase of 1%. Cytology sales increased slightly, all outside the United States, while perinatal sales declined. Domestic growth in the psychology market remains challenged due to our high market shares and longer cervical cancer testing intervals.

Elsewhere in Diagnostics, revenue related to our divested Blood Screening business was higher than expected at $16.7 million, an increase of 29.7% compared to last year. As a reminder, this revenue reflects low-margin products and services under transition agreements with Grifols, so the outperformance here hurt our gross margin percentage for the quarter.

Now let's turn to GYN Surgical, our most profitable division, where growth has been consistently accelerating behind a reenergized sales force and a revitalized R&D pipeline. In the fourth quarter, sales of $114.5 million increased 7.3%, our fastest growth in 10 quarters.

We want to spend a little time highlighting the tremendous progress we have made in Surgical, under the leadership of Sean Daugherty, who was named a division president a little more than 2 years ago. Under Sean's leadership, U.S. revenue growth has increased sequentially in 6 of the last 7 quarters against progressively more difficult comps. Underpinning this performance, we have made significant changes in the talent, structure and incentives of our domestic sales team, and these changes are paying off.

At the same time, our surgical business outside the United States, while still small, has been growing rapidly, and we've only scratched the surface of this opportunity. From a product perspective, MyoSure and NovaSure remain the leaders in the fibroid removal and endometrial ablation categories, respectively. MyoSure remains a healthy grower with significant runway ahead as we launch line extensions and supporting products and replaced more antiquated methods. As for NovaSure, we believe our market share is stable and in many cases, we are winning customers back, although we need to slow category declines.

Finally, new products have begun to contribute materially to surgical growth, most notably our Fluent Fluid Management System and new Omni 3-in-1 Hysteroscope. And we just launched our Omni Lok cervical seal and new Definity cervical dilator. So like Breast Health, Surgical is becoming much more diverse, enabling us to better leverage a large and strengthening sales force. And we intend to add more new products in the future through both internal development and acquisitions.

Now let's turn to Medical Aesthetics, where global sales of $76.9 million represented about 9% of consolidated revenue and increased 10.3%. As a reminder, we had an easy comparable in the prior year period as we booked a revenue reversal of $6.8 million associated with refunds and rebates of TempSure Vitalia in the fourth quarter of 2018. Excluding this, Cynosure sales would have been basically flat, reflecting a business environment that hasn't changed much. Specifically, our skin-related products continue to do well, while our lasers for body contouring and women's health continue to struggle a bit as we await new products, both in-licensed and internally developed to drive future growth.

To round out the revenue discussion briefly, skeletal sales of $25 million grew 3.7% based on growth of our DEXA systems for bone density and body composition testing.

To wrap up, our fourth quarter results represent our sixth consecutive quarter of strong execution, building on our market-leading brands and large installed bases in the United States, especially in Breast Health and Diagnostics, we are expanding internationally, churning out new products from our revitalized R&D pipelines and effectively integrating tuck-in acquisitions, while looking for more.

Now let me turn the call over to Karleen.

Thank you, Steve, and good afternoon, everyone. In my remarks today, I'm going to walk through our income statement, touch on a few other key financial metrics then finish with our initial financial guidance for 2020. Unless otherwise noted, my remarks will focus on non-GAAP results and percentage changes will be on a year-over-year basis in constant currency.

As Steve described, we are pleased with our fourth quarter results as revenue of $865.8 million exceeded our guidance, and EPS of $0.65 finished in line with our expectations. Our performance was balanced and strong with sales growth in each of our businesses, both domestically and internationally. In addition, operating and net margins improved as we continue to manage the business for leveraged profitable growth.

With that introduction, let me start by reviewing our P&L for the fourth quarter.

Gross margins of 61.7% decreased slightly by 10 basis points compared to the prior year period. This decrease was primarily due to higher manufacturing costs, the stronger U.S. dollar, trade tariffs in China and product sales mix. However, it's worth noting that gross margins did improve sequentially for the third straight quarter, and we expect this trend to continue in 2020.

Total operating expenses of $279.3 million increased 5% in the fourth quarter. But excluding Faxitron and Focal, operating expenses increased just 2.7%, reflecting strong expense discipline, especially in G&A. We continue to balance growth investments with our goal to drive operating leverage, and our R&D pipeline has never been more productive than it is today.

Based on improvements in the top line and strong operating discipline, operating margins of 29.4% increased 30 basis points. Operating margin also improved sequentially to our best level since the fourth quarter of 2017. Other expense net totaled $33 million in the fourth quarter. As Steve explained, this line included our share of SSI results, specifically a loss of $1.8 million, which was not contemplated in our most recent guidance. Other expenses also benefited from gains from our currency hedges. As a reminder, these hedges reset back to 0 in 2020, assuming currencies stay flat. Finally, net margins of 20.2% increased 70 basis points compared to the prior year period, our best results since the third quarter of 2016. In addition to better operating margins, we had slightly lower effective tax rate, which effectively offset the loss from SSI. Overall, our net profitability remains very healthy. All this led to non-GAAP net income of $175 million in the fourth quarter and non-GAAP earnings per share of $0.65, in line with our forecast. On a GAAP basis, we posted EPS of $0.15, lower than expected due to noncash impairment charges totaling $79.2 million related to Medical Aesthetics. As Steve noted, not much has changed in this business, but we booked these charges as part of our normal year-end accounting process of reviewing long-lived assets for impairment.

Before we move on to our initial 2020 guidance, I'll quickly touch on a few other key financial metrics. Our leverage ratio stood at 2.3x at the end of the fourth quarter. We remain comfortable around this level, recognizing that the ratio could fluctuate based on the timing of acquisitions and buyback activity. The combination of strong profit growth and lower debt, improved our return on invested capital. As of year-end, ROIC was 13% on a trailing 12-month basis, an increase of 40 basis points over the prior year. Finally, in the fourth quarter, adjusted EBITDA improved to $277.7 million, an increase of 5.5%.

Now I'd like to discuss our initial non-GAAP financial guidance for fiscal 2020. Before I do, let me remind you that, as usual, there are several puts and takes in comparing 2020 to 2019. In terms of headwinds, revenues from our divested Blood Screening business is expected to decline significantly in 2020. And in foreign exchange rates at recent levels will be a drag on reported results of about $17 million or roughly 50 basis points on the company overall.

On the positive side, the acquisition of SuperSonic Imagine will represent a tailwind to reported revenue growth in 2020. Our guidance assumes that SSI's revenue and operating results will be consolidated into Hologic's financials at the beginning of the second quarter, with revenues totaling $25 million to $30 million for the 9 months.

Current Street estimates include a wide range of timing scenarios, so hopefully, this guidance will help with modeling. For the first quarter, we have assumed our portion of SSI's loss. And as a reminder, SSI will be slightly dilutive to non-GAAP EPS for the full year, as we said when we announced the deal.

As you update your forecast, we encourage you to model at the middle of our guidance ranges at this early stage, as we've tried to set realistic ranges that incorporate both potential upside and downside.

We anticipate that fiscal 2020 will be a good year for Hologic overall. Specifically, we anticipate constant currency revenue growth of 3% to 4.5%, in line with our improved organic performance in 2019. If we meet the high end of this range or exceed it, organic revenue growth should accelerate compared to 2019. Based on recent exchange rates, our top line guidance translates into reported growth rates between 2.5% and 3.9%, and sales of $3.45 billion to $3.5 billion.

We expect tuck-in acquisitions to continue being an important part of Hologic's story going forward and believe that additional deals will boost revenue in 2020. But as you think about our organic growth rate, I would point out that the Blood Screening headwind and the SSI tailwind that I previously discussed basically offset each other next year. Said another way, our organic growth rates should be similar to the constant currency growth rate of 3% to 4.5% in 2020, depending on how you model the various components.

In terms of global divisions, our guidance contemplates similar growth rates in Diagnostics, excluding Blood Screening, breast and surgical in the lower part of mid-single digits. We forecast less growth in skeletal and Medical Aesthetics. Within these estimates, international revenue should grow in the high single digits on a constant currency basis, in line with 2019, as we continue to see opportunities to drive substantial -- to drive sustainable growth in multiple markets across all our businesses.

In Diagnostics, molecular should continue to lead the charge in 2020 behind Panther Fusion and increased utilization of more than 15 women's health, virology and respiratory assays. We anticipate $30 million to $35 million of revenue from the divested Blood Screening business, much lower than in 2019.

In Breast Health, growth will be driven by multiple new products, accretive growth from Faxitron and Focal, our international business, 3 quarters of SSI results and a large service annuity that now totals well over $450 million annually.

In Surgical, we expect growth from the continued expansion of MyoSure, the stabilization of NovaSure, the new products Steve discussed, and international.

In Medical Aesthetics, we expect growth from an increasingly productive sales force and new products, including TempSure Firm and StemSure, which we recently launched in Europe.

In terms of profitability, we forecast gross margins to improve [compared] (added by the company after the call) to 61.6% in the full year 2019. We expect better margins due to lower manufacturing costs, improved product mix, absorption benefits, the ramp of new product sales and our ongoing cost reduction efforts. These benefits will be partially offset by the expansion of our international business, which adds gross margin dollars, but pressures our gross margin percentage. In terms of the quarters, we forecast the gross margin percentage will increase sequentially as the year goes on based on the mix benefits from newly launched products and higher overall revenues.

In terms of operating expenses, we expect to continue showing strong leverage that helps drive healthy growth and operating margin percentage, and ultimately, EPS, even as we absorb an incremental $8 million in costs related to the new European MDR and IVDR regulations. Our guidance does not, however, include a reinstatement of the medical device excise tax, consistent with Street's current modeling and our expectations that it will be suspended again.

Below the line, we expect other expenses net to be greater in fiscal 2020 than the roughly $130 million we recorded in 2019, primarily due to the absence of foreign currency hedge gains based on recent exchange rates. All this leads to forecasted earnings per share between $2.60 and $2.65 in 2020. This represents reported growth of between 7% and 9.1%, about double the rate of revenue growth. Despite EPS headwinds from currency and diminishing contributions from our divested Blood Screening business, we expect quarterly EPS to ramp up sequentially as the year progresses, as it did in 2019.

This guidance assumes a full year tax rate of approximately 21.75%, flat to 2019, and diluted shares outstanding of about $272 million for the year. We also expect to continue generating robust free cash flow in 2020 in the mid $600 million range, excluding one-time items.

Now let's cover guidance for the first quarter of fiscal 2020. We expect revenues of $835 million to $850 million in the quarter. This reflects constant currency growth of 1.2% to 3%, and reported growth of 0.5% to 2.3%. As a reminder, our Breast health business performed exceptionally well in the first quarter of 2019, which contributes to lower growth rate this year. In most years, Breast Health is seasonally weaker in the December quarter due to RSNA and the holidays. We forecast non-GAAP diluted earnings per share of $0.59 to $0.61 in the first quarter, representing 1.7% to 5.2% growth on a reported basis.

Before we open the call up for questions, let me conclude by saying our fourth quarter capped off a successful year for the company. Our largest businesses, Breast Health and Molecular Diagnostics, led the way. And Surgical continued to improve, driving revenue outperformance overall. We are encouraged by the continued strong commercial execution, the progress in our international franchises, the productivity of our R&D pipeline and the deals we have completed.

We continue to exercise tight expense controls and strategically redeploy capital. Overall, we feel confident in our foundation heading into 2020 and have the levers to deliver healthy revenue and EPS growth.

With that, I will ask the operator to open the call for questions. (Operator Instructions) Operator, we are ready for the first question.

(Operator Instructions) And we'll hear first from Tycho Peterson with JPMorgan.

I'll start with guidance. Steve, you haven't really backed off the notion that you can be a mid-single-digit growth company. Obviously, you're guiding a little bit below that. But given the kind of state of new product launches that you highlighted on the call, it seems like the bias would be maybe towards the higher end of guidance. So are there things that are actually going to be a little bit of a drag on growth as we think about next year? And then can you talk a little bit about which of the new product launches could be most incremental for next year?

Sure, Tycho. Make no mistake, we feel really good about the ZIP code that we're getting into here in terms of organic growth. And certainly, if you look in this most recent quarter, the number was well above where we've been. We just don't want to get too far ahead of ourselves. It's kind of like we had a great first quarter to the year, 13%. We're about to go against a 13.5% comp in Breast Health and 11% in Molecular Diagnostics as we start the year. So we just don't want to get too far ahead of ourselves. But don't mistake that for confidence in the underlying growth in the business, all the new products coming through, building quarter upon quarter, Surgical bouncing back and getting stronger. So I think we feel very good. We're just -- this is coming out of the gates. It's certainly an uncertain global economy and everything else right now. There's no sense with us being that too far ahead of ourselves. But don't mistake the guidance for how we feel about the business.

And then for the follow-up question on margin leverage. First of all, Karleen, you called the -- called out the tariffs on gross margins. I'm wondering if you can kind of quantify that. And as we think about 2020, just curious where you see the operating margin levers from your perspective.

Sure. So I think for the first part of your question, Tycho, we've quantified the China tariffs around $10 million annually as the headwind. And as we look at operating margins into 2020, we do expect leverage. One, we expect gross margins to improve. We expect higher revenue. And we do believe there's still opportunities in the middle of the P&L, especially as we integrate recent acquisitions to contribute to the margin growth.

And we'll take our next question from Bill Quirk with Piper Jaffray.

So I guess, first question, Steve, kind of a bigger picture. I appreciate that the capital exposure in the model is much less than it once was. And we're still hearing some pockets of potential capital softness, particularly in the U.S. Curious what your thoughts are at present.

I think as one of the few people who's running a company through the last major economic meltdown, as you know, [Bill Moyers] can be a little more cautious. And having said that, I think we feel better and better about our -- the sustainability of our business. First off, we're so much less dependent on capital. Our Diagnostics business, our Surgical businesses, these are all recurring revenue. And increasingly, our Breast Health business between -- the gantries are a smaller and smaller portion of that. The service business is big, the additional product upgrades and those kind of things that are smaller outlays that can be funded out of operating expenses from the hospital budgets. I think we feel very, very good about the likelihood of continued growth within the businesses, and the fact that we've really transformed what the company looked like, certainly, going into the last downturn.

Got it. And then as a follow-up, just -- following up, rather, on one of the diagnostic comments you made about the average utilization for Panther. Can you remind us where you are in percentage terms on average? I seem to recall that we were at something like 40% to 50% utilization on the systems? And then just briefly, kind of how high can that go? Is about 80% as good as it gets, and then you're looking at a second system?

Sure. Not to get too granular with it, bill, the -- I would say, in the U.S., we're certainly seeing numbers probably above that. And outside the U.S., still below that 40-ish-percent number. So we still have a lot of runway ahead of us. And I think part of what we feel really good about is the continued placing of the Panthers. And then the way we keep thinking about this is we keep placing more and more Panthers each year, another 200-ish last year. And then as you know, we're putting more and more menu on to each Panther, both domestically and internationally. So there's still a long way to go without us having to place an enormous amount of additional Panthers. So a lot of the capital has already been made. That's been part of the gross margin issue, even internationally, as we've been placing more of the Panthers and then that will recoup, and it will be part of our margin expansion story in the years ahead.

Yes. Just to add to that, we look at certain key international markets. We only have 1 or 2 assays approved on the Panther. And as we pursue additional regulatory approvals, that will drive that increased utilization and the margin expansion that Steve mentioned.

And I'll take our next question from Jack Meehan with Barclays.

I wanted to just focus on the Diagnostics business. Obviously, pretty strong in molecular. I was just curious what you thought the runway was like for placements in the U.S. Just based on the math, around 1,700 -- overall, 45% U.S. Last year, it was 1,500, about 40 -- or I'm sorry, that was international. 40% international was last year. It just seems like a lot of the placements were international over the last year. So what's the runway for placements in the U.S.? And maybe just more broadly, are you seeing any signs of consolidation amongst labs? And how might that impact kind of the runway for Panther.

Sure, Jack. I think highest level, we're probably in the seventh-ish inning in the United States, still a little earlier internationally. But I think still some significant opportunities, particularly with our largest customers. To your second point of lab consolidation, I think that's an inevitable that we expect to continue to see. I think it's part of where we feel great about the relationships that we've cultivated, very deep relationships, obviously, with the largest players in the United States. We continue to work very closely with them to help both drive categories, volumes. And as they are really the consolidators, we will benefit, certainly, from a volume standpoint going forward.

Jack, it's Mike. If I can just add one thing to that about the U.S. market. As Steve said, we have placed a lot of Panthers in the U.S., but we have, I think, 15, 16 different tests approved on Panther domestically, and only about half of our customers use more than 2 assays. So there's lots more room on board those systems to layer additional menu as it gets approved and it's already approved.

Great. And that was going to be my follow-up question is, I think I caught sexual health grew high single digits overall. So I was wondering if you could just give us a mark-to-market in terms of what the virology versus Fusion splits, how -- just looking at 2019, what the total was for the year, and what's the guidance within the molecular forecast assumes for those continuing to expand?

Yes. I mean, that's a lot of detail there, jack. We probably aren't going to go quite that far. I mean, I think we talked -- we've talked about virology a year ago being in the $20 million range. I don't think it quite doubled, but kind of close to that in the most recent 2019. Fusion is off to a good start ramping off a base, but that base is much smaller than that.

We'll hear now from Ivy Ma with Bank of America.

This is Ivy. I guess, just a broad question to start off. Can you talk more about the OUS trends? You were talking about investing more in OUS to expand the base, which might have some impact on the margin. I just wanted to see what's the opportunity there? What's still out there untapped? Or still what's the largest opportunities out there?

Sure, Ivy. I think as we look at it, we see tremendous opportunities for all of our franchises in all of the major geographies. I think we really put more of a footprint down in Western Europe over the last few years, where we now have -- we've gone direct in the Breast Health business, really in the U.K., in Portugal, Spain, Germany, Switzerland, Austria. We still use dealers in most of the rest of Europe. But I think we've really built a competency there. Our Diagnostics business, we've gone more and more direct in those businesses. In Surgical, we're really just getting started. We're really only in a few countries in Europe and starting to build that business out as well.

Shifting over to Asia Pac, it's really a fairly similar story. The biggest underdevelopment, candidly, is Japan. That will take longer, certainly, to build out just given the fundamental dynamics, particularly in the Breast Health space there. But I think we're seeing very nice progress across the Diagnostics business, including cytology, and big opportunities in Breast Health, in Diagnostics and Surgical, certainly over time as well.

So I think the way we think about it is each year, we're building a few more competencies, and it's not going to be something you're going to see an inflection point, but consistently growing at an accretive rate to the overall company. Did you want to add to that comment?

Yes, I would just add to the comments I made earlier, the opportunities clearly expanding the assay menu in key countries. Internationally, it's going to drive growth. And as well as on the Breast Health business compared to the U.S., we are still converting from analog to 2D, not just 2D to 3D. So continued long runway for our key products.

That's very helpful. And just to follow-up on that. Karleen, you talked about the margins. There are a lot of puts and takes in the margin trends for next year. Can you provide any sort of quantification, if you can, for those myriad of factors?

Yes. So I think Ma, you're referring to gross margins. There was a lot of puts and takes in the results; more takes, I think, than we expected. But as we look to 2020, I think we think about a range of gross margin expansion of about 50 to 100 basis points. And as I talked about, we believe that will build as the year goes on, and that -- from an operating margin perspective, probably a little more than that.

We'll hear now from Doug Schenkel with Cowen.

This is Chris on for Doug. Just want to start another question on Europe. Given the mixed macro backdrop in Europe, curious if you have seen any order softness, especially for the more capital-oriented businesses?

We are not seeing any softness in Europe at the moment. I'm always a little nervous between Brexit, between everything else you have going on there, but we've been planning and preparing. And I think for us, we just continue to feel like our teams are getting stronger and stronger there. So I feel good about our outlook. And really, I can't tell you how excited we are by our team in Europe. They have just come so far in the last few years.

Okay. And then maybe a question on Breast Health. I think you've been tracking to 250 to 300 placements in the U.S. It sounds like maybe it was above that in Q4. Maybe just help us think about the right way to model the gantry placements in 2020 for U.S.

I think we see it pretty much in that range. And we can go back to 4 years ago or so when we said we were intent on breaking the cycle and the job Pete Valenti and our U.S. team has done has been truly breakthrough in breaking that cycle. And I think what we've gotten into is much more of a steady cadence of a replacement cycle that we had articulated we saw coming years ago and it was our intent to do. And so I think it's kind of settling into that range, which works out pretty well because the positive for that is it still gives us years ahead. I think everybody can see from the MQSA data that's available, we're clearly gaining far more in the competitive set than just upgrading our own. So I think it still gives us years of runway ahead of us here, plus then being able to go back and get additional revenue from mining the installed base further. But I think that's a rough way to think about it.

We'll now move on to our next question from Vijay Kumar with Evercore ISI.

This is [Luke] on for the Doc. Just quick on Breast Health. So you guys had a great quarter there. And just thinking about -- as you talked about the place that's coming in a bit ahead in the overall macro uncertainty into 2020, do you guys see any pull forwards there on the CapEx side?

We have not, Luke. I think we kind of wondered about that a little bit in our fiscal first quarter of last year when Breast Health was really strong, but haven't really seen much to that effect at this point in time.

Okay. And then, I guess, Cynosure, on the next one, the aesthetics business, returning to flat to growth ex the items in '18. So the outlook in there for '20, you guys are expecting that to kind of accelerate. How should we think about that in Q1? And is that something that's going to build over the quarters? Or should that be pretty stable?

Yes. Keep the expectations down there. I think it will build over the year because of the way the product pipeline is shaping up. We've got some things coming that probably won't quite hit in our fiscal first quarter, but should hopefully start to hit as we go into, frankly, the new calendar year. So I think we feel certainly better about the build on that business through the year.

We'll take our next question from David Lewis with Morgan Stanley.

This is Mason on for David today. You referenced stabilization of NovaSure in fiscal '20. Does that mean you're expecting this business to grow next year? And any updates on the competitive environment you can provide?

We're not declaring that we see that business -- that Novasure itself growing necessarily next year. We do feel great about the trajectory of the Surgical business.

Got it. And your share count guidance doesn't incorporate any significant amount of buybacks, it looks like. But over the past couple of years, you've repurchased about 5 million to 7 million shares a year. Does this mean we should signal an uptick in M&A activity this year? Or how should we think about capital deployment balancing?

Yes. So I don't think anything's changed in our capital deployment strategy, really between tuck-in M&A and share repurchase. I think from a guide perspective, we just assumed a minimal share repurchase to manage dilution. As we just sit here today, it's early, and where -- where the deal flow play out.

We'll hear now from Raj Denhoy with Jefferies.

This is Anthony for Raj. Just a quick one on guidance, and then a couple on Breast Health. Just on guidance, SuperSonic Image SSI. I'm just wondering what's baked in there for 2020 at the guidance line. And just a follow-up on Breast Health.

Sure, Anthony, it's Karleen. So what we said is, as you know, we don't own 100% of that today. We're in the tender offer process. So what our guidance assumed is that we will have revenue from SSI for the 3 quarters, Q2 to Q4, in a range of $25 million to $30 million. We've also assumed that for Q1, we'll have our portion of their loss as well in Q1, but no revenue or expenses.

Great. And then just on Breast Health. Just wondering if there's an update on the FDA proposal around dense breast screening. Just when do you think the timing would be for a final rule? And what do you think really that means for 2020 within Breast Health? Should the final rule call for more robust imaging and screening for dense breast patients?

Sure, Anthony. I'm probably owed for my lifetime on exactly predicting those kind of things out of FDA. I think what we do feel great about is what we control, which is we are the only 3D with the dense breast indication. That is helping us win new business all of the time as people see that we're the ones that have that, whether that guideline comes through from FDA in 2020 or not, exactly when it comes through, we don't see it as having necessarily a material uptick in our business other than a further reinforcement of where the business is going.

Yes. As a reminder, that's been going on at the state level in a bunch of states for quite some time, so that contributes to what we're seeing today as well.

Yes. It's clearly a net positive for us.

We'll take our next question from Brian Weinstein with William Blair.

This is actually Andrew Brackmann on for Brian. Brian, wanted to be on the call, Steve, but he's out celebrating the Bears win over the Eagles in the second half of that game. Maybe just on...

I thought Brian was actually going to be at the open tryouts with the Bears that they're having, so --

His leg's not too good. I heard they need a kicker.

Well, then he (inaudible) match every other kickers. All right. Back to our regularly scheduled program.

Yes, exactly. On Breast Health, you mentioned the artificial intelligence products sort of rolling out through 2020. Any additional detail you can provide on what sort of impact that might have this year, and then sort of the lever it can provide to the company over the next several years?

Sure. I think it will be less in terms of meaningful acceleration or anything like that. It would just be more of the products where we're starting to sell like Clarity HD, our SmartCurve panels, where we're able to start to monetize additional software into the gantries and into our sales. But over time, we think it's going to help establish that much more of a moat around our business by being the leaders to leverage the largest installed base in the business. So I don't think you'll be able to meaningfully break out, hey, AI products are going to add x million of growth, but they will start to dribble in here later on in 2020, and then start to contribute more in 2021 and beyond.

Okay, that's helpful. And then just a clean-up question on the Brevera issue. I may have missed it, but any update on when that might be behind you guys?

Sure. I think it will likely be later this year. Our expectation is we will be back on the market with new capital probably in our fiscal fourth quarter. So we should be there. So give Brian our best.

(Operator Instructions) We'll hear now from Dan Brennan with UBS.

I just wanted to ask a question first, Steve, on molecular. What's baked in for 2020 growth? Is the high single-digit consumable sustainable? And can you comment on kind of the competitive dynamics in that market?

Sure. I think as we think about the growth rate for molecular next year, probably smart to think about it as in the mid-singles, and then gaining -- pushing upwards towards high-singles. Certainly, we're going to be going against some really tough comps, especially the first 3 quarters of this year, against global double-digit numbers. So I think it will still be very strong growth in that space. I think for the competitive environment, we feel pretty good that we continue to innovate. And as we are rolling out more and more assays, that business should certainly be good. So we've guided our overall diagnostics business, as Karleen said, probably in at least the low mid-single digits. So molecular will clearly be leading above that.

Great. And then maybe a follow-up, just on M&A, the tuck-in strategy's been working well. It sounds like there will be more to come. So can you just give us some color on the appetite to maybe do anything bigger? Kind of how should we think about kind of the level of maybe the size of deals that we should expect going forward now that you've successfully executed a bunch of these?

Sure, Dan. Actually really glad you asked that because probably what's been underappreciated is we've really shifted from a -- what's been a corporate-led business development strategy for what had been most of the 2000s, and frankly, up -- even up to the Cynosure deal. But over the last few years, we've really built the divisional-led tuck-in capabilities. And I think we're just starting to really see what we'll be able to do there. In terms of magnitude, I would not expect us to exceed, for example, our annual cash flow in terms of rough amount of deals. So I think we're definitely in the tuck-in mode. There will certainly probably be a few that could be bigger than the $100-ish million deals we've done to date, but nothing that's going to blow the mind or anything. I think we like, really frankly, being able to both do some acquisitions and do some stock buybacks within each year. And while not a formal policy, it's something we've discussed quite a bit as a management team and our board of really being able to use the natural cash flow that we have each year as opposed to needing to lever up or take on something more. And I think we've now seen there's more opportunities within our core businesses and things that we're excited by. So thank you.

Cody, I think about that -- that's about all the time that we have. So thanks, everybody, for your time on the call today, and we will talk to you all soon.

Thank you. That concludes Hologic's Fourth Quarter Fiscal 2019 Earnings Conference Call. Have a good evening.