1. Art and Diseño

Hologic 1QFY15 Financial Results
Conference Call Prepared Remarks
January 28, 2015
Note: May Change Slightly When Delivered
Mike Watts, VP, Investor Relations and Corporate Communications
Thank you, _________. Good afternoon and thank you for joining us for Hologic’s first
quarter fiscal 2015 earnings call. With me today are Steve MacMillan, the Company’s
president and chief executive officer, 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.
If you did not already see our first quarter press release, a copy is available in the
investor relations section of our website, along with a supplemental financial
presentation for today’s call. We also will post our prepared remarks to our website
shortly after we deliver them. Finally, a replay of this call will be archived on our
website through February 28th.
Before we begin, I would like to inform you that certain statements we make during this
call may 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 included in
our earnings release, and in our filings with the SEC.
Also during this call, we will be discussing certain non-GAAP financial measures. A
reconciliation to GAAP can be found in our first quarter earnings release or the
supplemental presentation.
With that, I will turn the call over to Steve MacMillan, Hologic’s CEO.
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Steve MacMillan, President and CEO
Thank you Mike and good afternoon everyone.
We’re very pleased to discuss our financial results for the first quarter of our fiscal 2015.
In short, we had a very good quarter, and our results reflect the positive strides our
team is making.
The first quarter was our fourth consecutive quarter of sequential revenue growth, and
our highest organic growth rate in a number of years. Compared to the prior year
period, which admittedly was an easy comp, revenues of $653 million grew 6.6 percent
on a reported basis and 7.7 percent on a constant currency basis. Importantly, our
growth was broad-based in the quarter, as all four of our business segments grew
between 6 and 8 percent on a constant currency basis.
At the same time, we demonstrated strong earnings leverage in the first quarter. Our
goal is to grow profits faster than sales, and we accomplished this in the first quarter.
While revenues grew 6.6 percent on a reported basis, non-GAAP net income increased
by 18.6 percent, and non-GAAP earnings per share grew by 15.4 percent.
Based on our results in the first quarter and our improving outlook, we are raising our
financial guidance for the year. We also were able to voluntarily pay down some of our
debt in the quarter, which remains a key priority for us. Bob will give you the details on
both of those items in a minute.
But first, let me just say that we are pleased with the progress we have made thus far in
transforming Hologic into a Company focused on sustainable, organic growth. This
transformation is occurring because great products, great people, and new leadership
are coming together in a powerful way.
In terms of products, we maintain leading market shares in several clinically important,
economically attractive markets. What’s different about Hologic today is our ability to
grow sales in these categories.
In some cases, growth is coming from accelerating the adoption of our newest
technologies.
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In digital mammography, for example, we were very pleased with the uptake of our
Genius 3D tomosynthesis system in the first quarter, as overall breast imaging sales
grew at a low-double-digit rate. As some of you saw at the RSNA meeting in Chicago,
interest in our product is strengthening. This is based on a wealth of clinical publications
including the JAMA study, effective marketing by our team, and higher reimbursement
levels that recently went into effect for Medicare patients.
In other markets, like blood screening, we are growing from market share gains. For
example, the new business that our partner Grifols won with the Japanese Red Cross
was a significant source of upside in the first quarter.
Similarly, although our liquid cytology business continues to decline in the United States
based on longer screening intervals, we believe our rate of sales decline has slowed due
to market share gains, as well as better focus and execution in the field.
The same is true in our surgical business, where slower rates of decline for our NovaSure
franchise – and even a little growth this quarter – have allowed MyoSure growth to
shine through.
Finally, in the market for sexually transmitted disease testing, growth is coming as we
add test volume and menu to our fully automated Panther system. We are rapidly
approaching our goal of placing 1,000 Panther systems in clinical diagnostics and blood
screening, and revenue per system is growing steadily. The success of our strategy can
be seen from the fact that sales of our molecular diagnostic products grew at a midsingle-digit rate in the first quarter, including strong sales growth in the important
domestic market.
Our product success would not be possible without our people, so I want to give a shout
out to any employees listening to this call. From the first day I joined Hologic a little
more than a year ago, I’ve been struck by the talent of our employees, and their
passionate dedication to our mission. I’m especially grateful to our sales and service
teams. They are well-respected by their customers, and their tireless efforts have
enabled us to slow sales declines first, and now return to growth. To me, they define
commercial excellence.
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To help our employees achieve their full potential, we have put in place a completely
new and highly accomplished leadership team over the last few quarters – new COO,
new CFO, new head of international, and new divisional presidents. These executives
have made a significant impact already, and really are just now beginning to settle into
their roles. They are helping change the mindset of the organization by raising
expectations and promoting accountability. Maybe most importantly, they are
competitors who know how to win.
To round out the senior team, we recently hired John Griffin from Covidien to be our
general counsel, and Ali Bebo from Ann Inc to become our senior vice president of
human resources.
John and Ali, who will start next week, are both very special leaders who surely will help
make our leadership team and our Company even stronger.
We also hired back Mike Watts last quarter to lead our investor relations efforts. Many
of you may know Mike from his years at Gen-Probe, and I know the rest of you will
enjoy interacting with him in the future.
So in summary, as we look back at my first year at Hologic, I’m proud of the progress we
have made, and thrilled to have a team that can lead us to much greater successes.
We are clearly ahead of where we expected to be at this point, but it’s still worth noting
that we remain in the early innings of our corporate transformation. We realize that we
can continue to improve just about everything we do as a Company.
Building a track record of financial execution is obviously high on our list, with consistent
growth in sales and faster growth on the bottom line. In the near-term, the primary
drivers to accomplish this are clear – gaining more than our fair share of the breast
mammography market, increasing our Panther menu and pull-through, and expanding
globally.
But in the quarters ahead, we also will focus on revitalizing our R&D pipelines, and
continuing to improve our operational efficiency. Over the longer term, as we have
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discussed before, we believe improving our capital structure and reducing our tax rate
can drive additional value for shareholders.
It’s an exciting journey that we’re on, and I believe we’re taking steps in the right
direction.
Now I will hand the call over to Bob to discuss the financials in more detail.
Bob McMahon, CFO
Thank you Steve. I’m going to discuss our first quarter results and then talk about our
updated guidance. Unless otherwise noted, all my commentary will focus on non-GAAP
results, and percentage changes will be on a year-over-year basis.
Steve already discussed total revenue, so I won’t repeat that now, except to reiterate
my enthusiasm for the broad-based progress our sales and marketing teams have made.
I do want to point out that in response to analyst and investor requests, we have
provided some additional product sales detail in the presentation that is posted on our
website. This detail follows the format that we laid out in our JPMorgan presentation
earlier this month, and we intend to provide the same data each quarter going forward.
We hope you find it useful to better understand our business, and for modeling
purposes.
Now onto divisional revenue.
In diagnostics, sales were $304.1 million in the first quarter, up 6.4 percent as reported,
or 7.4 percent on a constant currency basis. This increase was driven by a 26.3 percent
increase in global blood screening revenue from our partner Grifols, mainly from new
business with the Japanese Red Cross, as well as additional ordering by Grifols to
normalize their inventory levels. In the United States, revenue continued to decline at a
mid-single-digit rate, primarily based on lower blood donation levels and ongoing efforts
to manage blood usage.
The improvements in our diagnostics business extended well beyond blood screening in
the quarter. For example, our molecular diagnostic business was up a reported 5.6
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percent, and 6.2 percent in constant currency, mainly from increased usage of Aptima
women’s health assays on our fully automated Panther instrument system.
Another important contributor to our quarterly performance in diagnostics was an
improvement in our ThinPrep liquid cytology franchise. Specifically, revenue from
cytology and perinatal products declined by only 1.2 percent on a reported basis, and
were actually up 0.5 percent in constant currency. We attribute this to better sales
execution and focus, market share gains, and perhaps some improvement in the macro
environment. It’s worth noting, however, that we are not calling a bottom to this
market, and we expect sales to continue falling, although at a slower rate of decline
than in previous quarters.
Moving over to our Breast Health division, sales were $242 million, up 6.9 percent as
reported, or 8.2 percent on a constant currency basis. This was primarily driven by an
increase in breast imaging revenue, which was up a reported 10.9 percent, and 12.3
percent in constant currency, as customers continued to adopt Hologic 3D
mammography. This was partially offset by breast intervention revenue, which declined
a reported 2.3 percent, or 1.6 percent in constant currency.
Overall, we are excited about the progress we are making with our Genius 3D product,
and we have only just begun to penetrate the addressable market. We are often asked
about the effect that a new competitor is having in the US breast tomosynthesis market.
While it is still early days, I can tell you that we are winning more than our fair share so
far, and expect that to continue over time. We believe our success is based on a better
product profile; that is, a superior FDA-approved indication, an impressive array of data
on improved clinical outcomes, and product advantages such as faster scan times.
Shifting to the GYN surgical division, sales were $84.4 million, up 7 percent as reported
or 7.9 percent on a constant currency basis. This was driven by MyoSure, as revenue
increased a reported 27.4 percent, or 27.9 percent in constant currency. Quarterly sales
of NovaSure systems also increased 0.1 percent, or 1.2 percent in constant currency, the
first time this business has grown in a number of years, and a significant improvement
compared to the declines seen in recent quarters.
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To round out the revenue discussion, let me mention that in skeletal health, sales were
$22.3 million, up 4.5 percent as reported or 6.1 percent on a constant currency basis.
Growth in the quarter was driven in part by our new Horizon bone densitometry
scanner.
Now let me turn to expenses and profitability.
As Steve said, and as our guidance implies, our goal is to grow earnings faster than
revenues. Although this won’t happen every quarter due to the timing of expenses and
various other puts and takes, we did demonstrate good leverage in the first quarter.
More specifically, non-GAAP earnings per share of 39 cents grew 15.4 percent, more
than double our reported revenue growth even though the stronger dollar reduced our
reported EPS by about a penny. Nonetheless, we exceeded the guidance we provided in
November.
Non-GAAP gross margin was basically flat in the first quarter at 63.3 percent, as
improvements in product mix and operational efficiencies offset the stronger dollar and
continued pressure on price.
Non-GAAP total operating expenses of $198.5 million increased by only 1.2 percent, a
significantly lower rate of increase than revenues. Non-GAAP research and
development expenses increased, mainly due to a ramp up in diagnostics product
development. As we have said before, revitalizing the Company’s R&D pipelines will be
an important strategy to generate sustainable, organic growth.
Non-GAAP sales and marketing expenses also increased, mainly due to increased
promotional activities in Breast Health around 3D mammography.
But non-GAAP general and administrative expenses declined, mainly due to lower
external advisory fees, and we will continue to look to this line of the income statement
for operating leverage.
This all led to non-GAAP net income of $111.6 million, an increase of 18.6 percent. Net
income benefited from our continued efforts to pay down debt.
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Now I’d like to turn to our updated financial guidance for the full fiscal year and next
quarter. Based on our strong performance in the first quarter, we are raising our
guidance.
Please note that this guidance is based on recent foreign exchange rates, with the
understanding that currency has become a significant headwind for us and other
multinational companies.
I’m going to cover a lot of numbers in this discussion, so I’d encourage you to refer to
our press release for clarity. For the 2015 fiscal year, and on a reported basis, we now
expect total revenues of $2.57 to $2.60 billion. Compared to the prior year, this equates
to reported revenue growth between 2.4 and 3.6 percent, and constant currency
growth between 4.4 and 5.6 percent. Still on the full year, we now expect non-GAAP
earnings per share of between $1.54 and $1.57. This translates to reported growth of
between 5.5 and 7.5 percent, or 9 to 11 percent on a constant currency basis.
Let me emphasize that even in the short time since we gave our initial 2015 guidance in
November, the US dollar has strengthened significantly. So compared to three months
ago, the full-year guidance we are providing today incorporates an incremental revenue
headwind of roughly $25 million due to foreign exchange, and an EPS headwind of
roughly $0.02 over and above our initial guidance. Said another way, if foreign
exchange rates had not moved since early November, the updated guidance we’re
providing today would have been $25 million higher in revenue, and $0.02 higher in EPS.
Now let’s turn to guidance for the second quarter of fiscal 2015. We now expect total
revenues of $640 to $650 million for the quarter. Compared to the prior year period,
this guidance reflects reported revenue growth of 2.4 to 4.0 percent, and constant
currency growth of 4.5 to 6.1 percent. We also anticipate diluted, non-GAAP EPS of
$0.38 to $0.39 in the second quarter. Non-GAAP EPS is expected to grow 2.7 percent to
5.4 percent on a reported basis, or roughly 5.5 percent to 8 percent on a constant
currency basis.
Finally, I would like to conclude my remarks by reiterating that reducing debt remains
one of the Company’s top priorities. In the first quarter, we voluntarily prepaid $300
million of our Term Loan B facility. Our leverage ratio is now down to 3.8, based on net
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debt of approximately $3.5 billion and trailing 12 months EBITDA of $924 million. Our
goal remains to reduce this ratio to 2.5x by the end of fiscal 2017.
In addition, return on invested capital remains an important performance metric for
driving shareholder value, and it therefore weighs heavily on executive compensation.
Adjusted ROIC for the 12 months ended in December was 9.7 percent, up from 8.2
percent a year ago.
All in all, we are pleased with our financial performance in the first quarter, but still see
many opportunities for continued improvement as we continue down the path of
building a company that can be counted on for sustainable organic growth.
With that, I will ask the operator to open the call up for questions. Please limit your
questions to one plus a related follow-up, then return to the queue. Operator, we’re
ready for the first question.
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