Welcome to TD Cowen's second day of our annual healthcare conference. I'm Max Masucci, one of Cowen's life science and diagnostic tools analysts. I've had the pleasure of covering Hologic since 2017 with a short stint in between. It's great to see you. Thanks for being here. Thanks for having us. All right, we've got CFO Karleen Oberton and VP of IR. Yes. Ryan Simon? Yes. Thank you. All right. Great. Wanna make sure I got the titles right. Let's just jump into questions. If we compare the pre-pandemic Hologic to today, it's very different. In fiscal 2019, the company generated adjusted operating margins of just under 29%. You've directionally guided to fiscal 2023 adjusted operating margins of roughly 30%. We've received questions from investors around whether the roughly 30% operating margin guide is simply a conservative managing of expectations. I know there's a lot of moving parts. To kick off, maybe can you just briefly highlight the major core assumptions included in the 30% operating margin guide, and then what's excluded? Sure. Max, let me start where you started. Where is Hologic is a very different company- Yeah. ...from prior to the pandemic. We're more global. We're more diversified, and we have more growth drivers that are both organic and inorganic, and so feel really good about where the company is and certainly an exceptional balance sheet, exceptional capital structure, which enables us to go after those growth drivers, continue to go after those growth drivers here in the future. You know, from an operating margin perspective, maybe I'll do a baseline. As you said, there's a lot of moving parts. Yeah. If you go to baseline of Q2 fiscal 2020, this is the first quarter without Cynosure. We had divested Cynosure, it's really the first quarter without any COVID-19 impact. In that quarter, we did operating margins about 31.5%, that's the baseline. Mm-hmm. Max, when you look to the 30% here in 2023, there are certainly moving parts. One, we see COVID-19 revenue, which is coming down significantly, which has been accretive to operating margins coming down. Mm-hmm. You have recovery of the breast health business, so that's recovering from the chip supply issue. That recovery is, you know, pretty much on the gantries, which are margins are accretive to the corporate average, so that's kind of an upside coming through. You have lower operating expenses over the course of the year. Primarily related to marketing and our partnership with the WTA. Highest margins were in the first quarter. Highest operating expense in the first quarter, that will come down over the course of 2023. What's persistent throughout 2023 is inflationary costs. We've estimated that at 200-250 basis points over the course of 2023. You know, at this point, that looks pretty sticky. That might come down in 2024, but, you know, just don't know yet. Those are the puts and takes that gets us to that 30% over the course of the year. The, the next question, you know, we'll move a little bit further down the P&L and talk about net profit margin, because, you know, if you do compare the pre-pandemic, net profit margin, it was around 19.6%. Our fiscal 2023 EPS estimate, it puts you around 23.4%. You're certainly seeing some leverage there. If we take into account the six M&A deals that you did between 2020 and 2021, and then you've taken a bit of a pause, you know, as the net leverage ratio has declined. If we think about evolving regional exposure, and then also just an evolving mix of recurring revenues, you know, how should we think about Hologic in terms of a long-term, you know, profitability generator and what that ceiling has risen to... Yeah. ...compared to pre-pandemic times? Thanks for picking up on net margins. Our net margins have improved, you know, a few hundred basis points from prior to the pandemic. That's really a result of looking at the P&L up and down. It's the higher revenue growth, you know, operating margins, which are already rich compared to the industry, and then even working below the line on things like tax rate are all contributing to improvement in that net margin. When we talk about our long-term revenue growth rate of 5%-7%, you know, we look at growing earnings faster than that 5%-7%, and we really should get to high- single, low- double digit EPS growth each year with that revenue. As we look over the long- term, you know, some of the puts and takes are certainly as our molecular business continues to be a bigger part of our revenue, that is accretive to the margin profile. Also, our international business is growing faster, and that's a little dilutive to the margin profile. Mm-hmm. The acquisitions are a little dilutive right now, but that'll be an improvement over the course of time. Certainly, you know, the rest of the breast and surgical business, still nice operating margins on both of those. You know, I don't think I'd view it as focusing on operating margin ceilings, but focusing on that 5%-7% in low- double digit EPS growth is how we look at the business long term. Yeah, it doesn't seem like there's been any change to the guidance philosophy at Hologic. I mean, it's, you've been, I don't know. I don't know what the right word to say is, but maybe punished for the success that you've had in COVID. I wouldn't say punished, necessarily. From a stock perspective. Yeah. I would say that as when we think about the stock and the story, I think there's, you know, there's questions out there like COVID-19. What is the COVID-19 revenue? Yeah. What's the duration? I think what we've done beautifully- Yeah ... is manage that as just upside. Definitely. We managed the P&L on the base business because that COVID-19 revenue has come down significantly, we don't know what it will be, you know, going forward, especially you have the public health emergency ending here in April. Yeah W hich may have an impact. You know, I think there's questions on the chip recovery, and I think what you'll see is over the course of 2023, that breast business will continue to improve, kind of answer that question. Again, I think operating margins on the base business has been a question, but I think I just went through that. We feel really good about where it is and where the business will go from here. Yeah, absolutely. I mean, so many near term, let's call it, you know, three-year dynamics, you know, that have changed. It's like it does appear to us at least, you know, someone who's covered the stock since 2017, that it's a, it's a, it's a different business, right? Absolutely. It doesn't seem like, the valuation, in terms of, you know, how you trade versus peers has sort of evolved in a similar way. Yeah. I think, if you look at our leadership team, there's a lot of sports analogy, a lot of people who have played sports on our leadership team. Kevin, NFL player. Yeah. We're focused on putting points on the board, right? We'll continue to do that, and that's a little bit of what guides our structures, our guidances. You know, we wanna make sure we meet our commitments and hopefully beat them again, continue to put points on the boards and be a stock that people can count on. Well, hopefully you can put some points on the board at the TD Garden tonight at our event. We'll leave that to Ryan. I'll take care of that. All right, cool. Great. Well, I just wanna remind anybody in the, in the crowd, if you have any questions, feel free to email me, max.masucci@cowen.com. Let's move into diagnostics. You know, you have essentially doubled the Panther global install base since pre-pandemic times. Before we get into the more important, you know, result of that, which would be the recurring revenues, I wanna first ask a few questions around placements. You did place, I believe, several Panthers to new regions where Hologic was previously underrepresented, or increased your exposure in- Mm-hmm ...in areas where you previously were underrepresented. You know, going forward, you know, you spoke to sort of that run rate to expect, do you see the majority of Panther placements being competitively displacing, or is there still a reasonably sized opportunity for what we would call greenfield placements because of those new regions you entered? Yeah. I would say it's a little bit of both, but I think, you know, the Panther placements is not what drives the revenue. Yeah. It's the utilization. It's the pull-through. Existing customers, again, that pull through as they add more menu, may also add Panther, another Panther to their efficiency in the lab. Mm-hmm. Yeah. One of the reasons... Yeah, that was one of the reasons why I wanted to get the placement questions out of the way before we get to the consumables. You know, you had the core Panther platform, which I believe was FDA approved in 2012, then came the Panther Fusion module. Mm-hmm. In 2020, Panther Plus and Panther Link, and in the future, Panther Trax. For new Panther adopters during the pandemic period, you know, which configuration was the most commonly adopted? Yeah. By and large, it's the regular base Panther. Yeah ... that was adopted. What you're talking about is our, what we call our Panther Scalable Solutions. Mm-hmm. When you talk about the links and the track, that's about efficiency within the lab- Mm-hmm ... and the workflow. Clearly during COVID-19 time, it was about the Panther, and it was even converting in some of our larger customers, the Tigris to the Panther. Yeah. Think about our largest customers have our legacy instrument, Tigris, which only four assays are approved on. Because COVID-19 was developed on Panther, that was essentially a recapitalization opportunity for those larger customers. As Panther Fusion really unlocks PCR capabilities and the full 19 assays that we have approved, probably only about 20% of that Panther install base have the Fusion on it. Oh, okay. 20%. That's good to know. I did have an opportunity to. I think you have a question in the audience. Oh, do we have a question? Yes. Go ahead. Yeah. Can you kind of take us up where you think the evolution of the breast and scalable business, if they're on the breast side, where that business is gonna go in the future? I mean, the 3D is pretty much an established, you know, technology now. Are things like AI gonna be the next or, you know, where is the future of that business? Certainly, 3D in the U.S. is, you know, highly penetrated and with a market share leader. I think there's obviously opportunities outside the U.S. for 3D capabilities and even 2D capabilities, there's definitely even analog devices that are out there. Certainly I think what we're probably in the U.S., somewhat of a replacement cycle is coming, and we certainly have a next generation gantry in a secret lab somewhere in Danbury, Connecticut that we're working on that will focus on improved image quality and even patient experience because that is one of the common reasons that a woman doesn't go for a mammogram is that the fear and the pain related to it. Certainly AI, as you talk about, we already have some AI capabilities, is a key focus organically and inorganically for us for that business. We've still got a decent chunk of time. You know, I will say that the... We just celebrated my mom's 19th year stage III B breast cancer survivorship, and she was misdiagnosed for seven years. The capabilities of the, you know, of the 3D system, you know, which are aimed towards, you know, women with firmer breasts were, you know, one of the reasons why, she was misdiagnosed for so long. I do have a number of breast health questions, I just wanted to sort of introduce that now. Let's move to assay utilization. 24.5% year-over-year organic growth in non-COVID-19 molecular diagnostics revenues in fiscal Q1. You have 19 FDA-approved assays. We spoke to it a bit earlier, but pricing in terms of the assays for U.S. versus OUS Panther users, is that, you know, are pricing differences meaningful enough to influence sort of that long-term, you know, margin expansion goal you guys have set? Yeah. We certainly haven't disclosed the difference in margin between U.S. and OUS, clearly, the pricing is lower outside the U.S. for our assays. What I would say is that, substantially all the assays are manufactured in our San Diego facility, so just as we increase that volume, that's, you know, a tailwind to overall margins for the molecular business. That won't impede our focus outside the U.S. in that growth because just, again, increasing that volume improves the margin. Yeah. Essentially the volume leverage is, you know, sufficient enough to overcome the pricing delta? Won't overcome it all. Yeah C ertainly, you know, that growth. Combat it. Yeah. The other thing on OUS, just to put it in perspective, is even though there's some lower margins, you know, we have significantly invested over the past several years in our commercial capabilities, that will also be a point of leverage as we move forward for that business. Yeah. Absolutely. You know, putting some context around, there was a comment made on a recent call, I believe by Steve, that, for new adopters, that have gravitated to other items in your menu, there is often, you know, the contracting process can often include multiyear contracts- Mm-hmm ... and whatnot. You know, we have 55% of new Panther customers, I believe as of April 2020, new customers being as of April 2020 that are now running at least two other assays in addition to COVID-19 testing. Can you put some context around the sustainability of that menu adoption that you're seeing outside of COVID-19? And then whatever you can offer on your contracting process, I think that would be great. Yeah. I think that that metric, which is in our corporate presentation, I think the other metric was that, you know, I think over 85%- Yeah ...are running at least one other assay. I think there was a concern of instrumentation mothballing or the instruments coming back. We gave out that metric to give people a sense of these new customers that took Panther in the time of COVID-19 are now contracting and committing to other elements of our menu, assay menu. In that, those contracts are multi-year, usually five years a commitment, maybe some as low as three. That gives a sense of the stickiness of the Panther instrument once it's in there, that people appreciate the workflow, the automation, the hands-off time, that that instrument brings, and therefore are validating other assays. That process of validating a new assay is doesn't happen in one week, it's usually several months. You know, once an assay is in there, it's usually gonna stay. Yeah. That's why we contract for, you know, close to five-year periods because that instrument stays on our balance sheet, right? All the revenue comes through the assay pull-through. The customer doesn't buy the instrument. We kind of rent it to them, so to speak. Mm-hmm ... through the assay. Makes sense. All right. Well, let's move to breast health. Yeah. You know, you did have a slide in your deck that displayed the percentage of breast health revenues represented by gantries and how that's evolved between 2014 and 2022, and it's, you know, it was 17% exiting fiscal 2022. Interventional solutions and services have become a larger, you know, have become larger pieces of the pie. Maybe just given that, you know, you do have your product portfolios has expanded in terms of, you know, breadth and diversity. You know, what do you know, which interventional products and breast services seem to have the most resilient, you know, long-term, you know, growth outlook? First, Max, congratulations to your mom and her long-term survivorship. That's great. As it relates to gantry and the percentage of the total revenue, I think the 17% in 2022 is probably artificially low given the supply chain headwinds that we talked about. I would say we've been intentional in diversifying that breast health business away from just being a gantry or capital business. Mm-hmm. It has led to both organic and inorganic in the interventional, in the breast conserving surgery businesses that we have. I would say to highlight, you know, Brevera is an organic development which is optimizes the process of a pathology and imaging, you know, kind of one-in-one device- Mm-hmm ... kind of real time. As well as the breast conserving surgery has been really more from an acquisition standpoint, where we have Trident, another, in the localizer, others that kind of improve that process for the woman through when she has a positive diagnosis and she has, you know, biopsy and then extraction- Mm-hmm ... of the tumor. All those are, you know, exciting elements. Then, you know, as we looked at the breast health business, those organic and inorganic are what we call the continuum of care, and so we'll continue with that, and maybe we get into some form of, you know, treatment or things like that. Again, that continuum of care is where we look at acquisition in organic development opportunities for the business. Yeah. It makes sense. My mom, you know, double mastectomy, adjuvant chemotherapy, radiation, follow, you know- Yeah ... with tamoxifen. You acquired Biotheranostics. Yes. Yes. Yes. W hich is a company known for quite some time, which is a breast health focused, you know, I guess you'd consider it specialty diagnostics, specialty cancer diagnostics. It's a little bit outside of- Yeah ... you know, your, you know, your traditional realm. I'm just gonna skip down a little bit. You know, we are hosting a panel tomorrow morning, an MRD monitoring panel. One of our company's MRD tests just earned Medicare coverage to guide treatment decisions- Mm-hmm ... in the adjuvant setting for breast cancer patients. That one might be a little bit more emotional than this discussion, just as a heads-up. You know, you do have a you know, your... I don't know where you are in terms of the integration of Biotheranostics into the San Diego HQ, but are you leaving room for any, you know, potential additional acquisitions that are breast focused that could enhance that sort of continuum of care for you know, for breast cancer patients over that longer duration? Yeah, certainly from a BD perspective, all of our divisions are looking at targets so that there could be other things within breast health for sure. As it relates to Biotheranostics, you know, really pleased with the performance of that acquisition. Strong top line growth and just about fully integrated into the San Diego facility. I think they might have moved in last week. You know, state-of-the-art lab and really working on some lab automation and improvement of their infrastructure and their systems, making it easier for customers to order the tests which will help continue growth for that acquisition. Great. Just sort of sticking on the topic of breast, but sort of pivoting back a little bit. I think the number that was provided initially when the chip supply shortages started impacting breast health was that, an expected roughly $250 million in fiscal 2022 breast health revenues could be pushed into fiscal 2023. You know, given, you know, you've slightly outperformed, I would say, in the quarter since that's, that statement in terms of gantries and, you have cited that I think you have about two quarters of visibility into chip allocation. it would be great to hear You know, how should we think about that original $250 number now, or how should we frame the chip-related revenue recapture opportunity in 2023 today compared to when that statement was made? Yeah. I would reframe that a little bit in that, yes, we quantified the $250 in FY 2022. I think we fully realized that from our original guidance for that year. Mm-hmm. I wouldn't say that $250 just moves into 2023. It's more of a continued recovery of the breast business for chip supply over the course of FY 2023, such that off a lower comp, 2022- Yeah ... we get double digit growth for the breast business in FY 2023. Again, we believe that will be sequential improvement and likely return to growth here in Q2 where we've had declines in Q1. What I would say in regards to chips, feel confident about our 2023 guide, that we've kind of secured the chip supply that we need to fulfill that. We are still on allocation, the indications is that allocation will improve, but it really hasn't at this point. Again, the indications are things are improving. What I would say is that I wouldn't expect any... Even if we got all of our full demand of chips, for next quarter, we're not gonna have a blowout breast health quarter because of the limitation of it's our same FE field service engineers that install the gantries that maintain the install base as well. We're doing both with the same resources. While we didn't lay off those resources when we had the headwind, we're certainly not gonna ramp up as we recover. I think the other thing, Max, that I'd point out is the backlog is strong. The backlog continues to grow. We haven't seen any increase in cancellation rates and, you know, feel good about as the supply recovers, we will recover as well. That's great. I'm gonna ask one more question, and then I'll open it up to anybody who has a question in the audience. Just, you know, it hasn't been too long since you reported earnings, but China headlines, you know, continue to sort of dominate, you know, the news outlets and whatnot. I would just, maybe a spot check on your expectations for regional performance, any puts and takes there, and if you have any change in opinion today compared to- Yeah ....when you initiated the guidance? Yeah, no real change. I think, you know, to put it in perspective, you know, China is less than 3% of our revenue, you know, kind of pre-pandemic, to put it in perspective. We have limited direct supply chain exposure to China. Mm-hmm That's not an issue. You know, we look at our strategic plan, it is an area of opportunity for us. We'll manage it as we see appropriate given the changing dynamics. You know, in any event, it's not certainly in the near term a major concern for us. You know, certainly an opportunity more not. Yeah. Great. We'll take a pause here. Yeah. When you're not here having fun with us- Mm-hmm ... you're back in the office Hologic and around the executive conference table, what's like the one or two questions that are making the most healthy debate about the future of the business? Yeah, certainly it's, you know, one of the things that we talk about is the M&A opportunities. You know, as we look at, you know, like I said, our capital structure, our balance sheet, we certainly have the firepower to do acquisitions. You know, we've been a little quiet on the acquisition front, but it's more a reflection of discipline, right? We wanna make sure that we maintain high standards and that we acquire the right assets that really improve the growth rate of the company as we move forward. You know, I think we've also what's around the table has been, for over a year now, has been recognition that the COVID-19 revenue is gonna go away, and let's make sure we don't get over our skis in terms of headcount and talent. We've really maintained almost a neutral headcount for the last year, 18 months, and allows us to be not focused on, like other companies, headcount reduction, but focused on growing the business because we've had constraint over the last 18 months. It's also, you know, Steve is always challenging us on what are the other opportunities, what are the other regions that we should be exploring? What are, you know, from an innovation standpoint, should we be exploring outside the U.S. or other opportunities? It is about those growth drivers of revenue and efficiencies beyond where we're at today that we talk about. Yeah. just come back to the Panther and Panther Fusion and how important that is to driving further assay utilization. I heard where you said you need the Fusion to increase on that, you know, you know. Yes. Yeah. I would say our biggest assays run on Panther alone. It's more of some of the respiratory, our newer assays that run on that Fusion capability. I would think about the biggest opportunities clearly on the Panther, less on the Fusion. It is an opportunity for sure. You're kind of capped in terms of... It's not like you go from two to four on the 55% that we're using, or you can't get six anyway, different assays being used just on the Panther alone. Yeah. I'd clarify, you can actually get to six just on the Panther alone. You know, the newer assays, as Karleen mentioned, will be on the Panther, will be on the Panther Fusion. You know, in most cases, it's not typical for a customer to just sign up for all six in one, like Karleen mentioned earlier. It takes time for them to validate the assays and also build the business for their assays as they, you know, educate physicians in their region that they're starting to test for those particular analytics. Clearly there's been a proactive push towards ESG, which I think is appreciated by, you know, by everybody. Do you feel that? I mean, you've really made some great progress there and achievements. Do you feel like that's translated into new opportunities or new clients in the investment community, or is that sort of a lagging situation? Well, what I would say was, one, as a healthcare company uniquely focused in women's health, it mean that our purpose is part of who we are, and it's always been who we are. It wasn't new with ESG, right? Yeah. I think if you look at our corporate presentation, we have our virtuous circle, which talks about as we work on things like market access and market development and bring more of our screening, which helps women detect cancers earlier, saves lives, saves healthcare systems money, the earlier you detect it. The more we do that, the more revenue we generate, the more we're able to put money into organic and inorganic developments for women's health, and improve women's health across the globe. It's always been a part of us. It's very authentic to us. COVID-19 has allowed us to invest and elevate our investments and our purpose through the Global Women's Health Index, through our Project Health Equality, and our partnership with the WTA. We believe that we've just elevated our profile. To give you how the virtuous circle is, you know, during the height of the pandemic, we were able to bring Panther Solutions and really elevate our name with health ministries- Mm-hmm. ...government officials, and so they now they know what we do and what we bring. We're able to have access, which does market access and development that we didn't have before. We're just a higher profiled organization. Yeah. I think something worth, you know, worth calling out because it's been evident over the past, even, you know, few quarters and few years. Yeah. To speak to new investors, I'm certainly seeing it firsthand with respect to it opening doors to European interests for sure. Okay, great. Well, I think we might have time for one more question here. Sorry. What do you think- Yeah, go ahead. ...understood then by the market or investors or either maybe you play for an opportunity and risk side as well, but stuff that, you know, you can see that maybe would go, and then anything maybe on sort of downside that you would say maybe this is the thing which is kind of most worrying about? Yeah. I mean, our largest shareholders I think understand the story. You know, when we talk with them, they understand it. They understand the opportunity, certainly with the molecular business. They understand the opportunity from our M&A strategies and that will diversify and elevate the growth drivers. Certainly, from our industry, that accelerated revenue growth is what drives PE multiples. I think, as I mentioned earlier, people who aren't as familiar with the story or, you know, the questions are COVID-19 impact, supply chain recovery. I think there's been, is it a business issue or really just supply chain? I think we will prove that it's just been a supply chain issue. It isn't a demand issue that we've experienced. Certainly, we've had such elevated earnings growth, such we've been opportunistic in our OpEx. You know, is there a headwind to our earnings profile? I think I try to go through the 2023 and how there really isn't, that the base business is still a strong earnings growth business and we'll continue to invest. Yeah. In, you know, optically, right, 2023, it's just because of the success you had in the prior year, right? For people that might be new to the story, they might be thinking, you know, "Okay, what's going on here?" I mean, that could be one thing. Number two, you know, I'm sure you still feel confident in the recapture rate- Mm-hmm. ...of any breast health systems, you know, versus- Feel great about our backlogs. Yep. -whatnot. Yeah. Okay. Absolutely. We're up on time. Thank you so much for joining us. Really appreciate it. Thank you. All right. Thank you.