2QFY17 Financial Results Conference Call Prepared Remarks FINAL: 5/10/17

Transcription

1 2QFY17 Financial Results Conference Call Prepared Remarks FINAL: 5/10/17 Note: May Change Slightly When Delivered MIKE WATTS VP, Investor Relations and Corporate Communications Thank you,. Good afternoon and thanks for joining us for Hologic s second quarter fiscal 2017 earnings call. With me today are Steve MacMillan, the Company s chairman, president and chief executive officer, and Bob McMahon, our chief financial officer. Steve and Bob both have some prepared remarks, then we ll have a question and answer session. Our second 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 on our website through June 2. Before we begin, I would 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 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 financial measures can be found in our earnings release. Finally, unless otherwise noted, all percentage changes we discuss will be on a year-over-year basis, and revenue growth rates will be expressed in constant currency. 1

2 Now I d like to turn the call over to Steve MacMillan, Hologic s CEO. STEVE MACMILLAN Chairman, President and CEO Thank you Mike, and good afternoon everyone. We re pleased to discuss Hologic s performance in the second quarter of fiscal It was another good quarter in terms of our financial results, with both revenues and earnings per share exceeding our guidance. And it was a transformational quarter from a strategic perspective, as we made tremendous progress in three areas that will help drive the next chapter of our sustainable growth story international expansion, our R&D pipeline, and business development. It s a testament to the strength and dedication of our team that we delivered constant currency growth in core revenues excluding blood screening and Cynosure of 5.4%, and EPS growth of 21.6%, while simultaneously building new global capabilities, launching multiple new products, and closing two major deals. All in all, this was the busiest and most productive quarter we ve had since I joined Hologic more than three years ago, and our accomplishments accelerate our transformation into a sustainably higher-growth company. With that introduction, now I d like to provide an overview of our second quarter revenue results, highlighting international and new products. Then I ll discuss growth opportunities at Cynosure before handing the call over to Bob. In the second quarter, reported revenue of $715.4 million grew 3.2% on a reported basis, or 3.8% in constant currency. This includes partial-quarter contributions from both Cynosure and blood screening. If you were to back out Cynosure sales, revenue would have been $699.4 million, exceeding our most recent guidance of $675 to $685 million. Of this amount, revenues from our divested blood screening business totaled $38.3 million, down markedly from the prior year period but still about $10 million higher than expected. Net of these, revenue in our core business grew 4.7% on a reported basis, or 5.4% in constant currency. 2

3 As you ve seen in recent periods, our ongoing efforts to both revitalize and reshape our portfolio paid dividends again in the second quarter. As a reminder, if we rewind to 2015, it was our US Breast Health division that drove growth behind the rapid adoption of Genius 3D mammography. As this growth driver slowed last year, Surgical emerged to pick up the slack. And now in the second quarter, as Surgical annualized some competitive benefits, our molecular diagnostics and international businesses both stepped up to post double-digit growth rates, with Cynosure waiting in the wings for the future. With that context, let s provide some quarterly revenue details. Growth in the second quarter was led by molecular diagnostics, where global sales of $142.1 million increased an exceptional 13.3%. In the United States, where sales increased at a low-double-digit rate, our commercial team is doing an excellent job of cross-selling our full product portfolio, gaining market share behind our fully automated Panther system, and expanding the market by driving compliance with testing guidelines. Outside the US, where sales grew more than 20 percent for the third time in four quarters, we continue to see the benefits of healthy Panther placements and multiple new product introductions. Our Surgical division also performed well again, with global sales of $101.1 million increasing 11.9%, our ninth straight quarter of double-digit growth. Novasure sales were basically flat, as expected, as we have annualized the benefit of a competitive recall. But Myosure continues to shine, with global sales growth again in excess of 30%. In terms of geography, international sales really emerged as a growth driver in the quarter, growing 11.1% excluding blood screening and Cynosure. While we still have a lot of work ahead of us, let me remind you that over the past 12 months, we have hired four new commercial leaders for Latin America, Asia Pacific, Canada and Europe. These leaders have been busy building the foundation for strong and sustainable growth in the years ahead, while already putting a few wins on the board. While molecular diagnostics and surgical led the global growth charge this quarter, we also believe that our international breast health business is improving as new leadership works, on a country-by-country basis, to optimize channel strategies and strengthen our commercial capabilities. International breast health sales increased at a mid-single-digit rate in the second quarter, and the opportunities ahead of us remain robust. To further capitalize on these opportunities, in April we acquired Medicor, our long-time distributor of breast and skeletal health products in Germany, Austria and Switzerland. Although this is a small acquisition, it provides us a nice platform for future growth by giving us direct access to our customers and full control over commercial strategy. In addition, it s a 3

4 good example of the kind of tuck-in acquisitions that we continue to pursue, even after the larger Cynosure deal. So while we are not yet declaring victory outside the United States, I can honestly say that for the first time since I joined the Company, we can see clear capabilities to drive strong and sustainable growth in our international business in the quarters and years ahead. Another reason we are optimistic about our future prospects, both internationally and domestically, is the steady cadence of new products beginning to emerge from our R&D pipeline. For example, sales of new products continue to increase, and exceeded $25 million in the second quarter, led by Myosure Reach and the Affirm prone biopsy system. While this revenue is obviously not all incremental, we are nonetheless pleased with our progress. And we continue to add more new products. In the second quarter we launched our nextgeneration Novasure Advanced product in the United States. We announced FDA approvals of two important new diagnostic assays, our viral load tests for HIV-1 and the hepatitis C virus. And we continue to expect US regulatory clearance for our hepatitis B assay next year. Now let me turn to our third major initiative, business development. As you can imagine, closing both the blood screening divestiture and the Cynosure acquisition in a single quarter was no small feat, and I d like to publicly thank our team for all the hard work and long hours involved. Together these two deals de-risk our product portfolio, will accelerate our long-term growth rates, and provide us opportunities to expand profit margins. Overall, they have made us a fundamentally stronger company. Cynosure added $16 million of revenue to our second-quarter results, based on sales recorded after the acquisition closed. For the full March quarter, however, Cynosure s sales totaled only $77 million. Although the March quarter is seasonally weak for Cynosure, sales also were negatively affected by the significant distraction that began early in the quarter when a media outlet reported that Cynosure was in talks to be acquired. These negotiations clearly distracted management s attention and resulted in unusually high turnover in the sales force, as well as delayed hiring of new reps. Together, these changes had a significant but transient effect on revenue. With the deal now closed, we have made great progress on stabilizing the sales force, just as we did with Hologic three years ago. And also like Hologic, the Cynosure sales force has innovative, market-leading products to work with. 4

5 Looking beyond this March quarter blip which doesn t affect Hologic s results anyway we see two huge positives in Cynosure: an attractive, growing market, and technological leadership that has led to great products. Cynosure has tapped into, and helped create, a movement toward less invasive aesthetic treatments an area that we believe has enormous growth potential for many years ahead. In terms of the market, medical aesthetics growth is being driven by major societal trends an aging population, higher levels of disposable income, and a focus on personal appearance in a world of selfies. And even after Allergan s acquisition of Zeltiq which by the way operates only in the body sculpting segment the overall aesthetics market remains highly fragmented. Cynosure has become the clear leader in the overall market thanks to its deep expertise in lasers, which in turn has produced best-in-class products. Cynosure s core competency is identifying customer needs and finding products to meet them, either through organic innovation or external business development. I d like to highlight three of these Cynosure products now. These products serve as the foundation for the revenue categories that we will disclose going forward body contouring, skin, and women s health and other. We re hopeful that as we provide more transparency on Cynosure s products and business, you ll come to share our excitement about our future in medical aesthetics. In non-invasive body contouring, most of you are familiar with Sculpsure, a 1060-nanometer laser that was launched in late This is a large market today, totaling over $1 billion, but it remains very under-penetrated, so we believe there is more than enough room for multiple players. This is especially true given the inherent competitive advantages of Sculpsure, which have been demonstrated by roughly 1,400 unit placements and very solid head-to-head performance since launch. In addition, we believe that Sculpsure has many opportunities for future growth. For example, we recently filed for regulatory approval to use the system on the back, for bra fat, and on the inner and outer thighs. We also are completing clinical trials for an indication to use Sculpsure under the chin, in what s called the submental area. We expect that Sculpsure s efficacy in this area will be a further competitive differentiator, and hope to receive regulatory clearance in the first half of fiscal

6 Finally, let me mention that we believe we can help drive consumer demand for Sculpsure, building on the successes we have had with Genius 3D mammography. As this demand builds, we expect to sell an increasing number of disposables known as PAC keys associated with the system, thereby boosting sales and profitability. In fact, we re pleased that consumable sales began to pick up in the last quarter. The second product I want to highlight, one that may be overlooked by the investment community, is PicoSure. After years of internal development at CynoSure, PicoSure was the first pico-second laser approved by the FDA in 2013, and it remains the gold standard today, with about 1,000 placements in the field and one million patients treated worldwide. Unlike traditional lasers, which rely on intense heat that can generate significant redness and downtime, PicoSure is a gentler option that activates the body s natural cellular response to revitalize skin with minimal discomfort and downtime. PicoSure has been used mainly for tattoo removal historically, and is differentiated because it employs different wavelengths that can remove all colors of tattoo ink from various skin types. But PicoSure is increasingly being used for skin revitalization the removal of pigmented lesions, acne scars and wrinkles especially on the face. As shown by a number of studies presented recently at the annual meeting of the ASLMS, PicoSure and the disposable Focus lens array generate similar or better results than nanosecond lasers, but with fewer treatments and less downtime. We believe the market here could become very large as we educate providers and patients about the differentiated benefits of PicoSure. Almost everyone can benefit from facial skin revitalization, and patient satisfaction is exceptionally high. In addition, PicoSure has significant potential outside the United States. In China, for example, PicoSure has been approved for tattoo removal, but we intend to submit for regulatory approval for pigmented lesions later this year. The third product I want to highlight is Mona Lisa Touch, a fractional CO2 laser that is used to treat the painful symptoms of menopause, as well as women with vaginal problems following a hysterectomy or breast cancer treatments. The product, which we distribute for the Italian company El.En, delivers controlled laser energy to the vaginal wall to promote collagen generation and rejuvenate the vaginal mucosa. At the risk of sounding too bullish, the market for this product could be enormous. In the United States alone, more than 30 million women experience Genitourinary Symptoms of Menopause, or GSM, which is also called vaginal atrophy. In terms of potential domestic placements, Cynosure has sold roughly 700 Mona Lisa Touch systems to date, out of an estimated 16,000 women s health-focused practices. And for many women, the therapy can be 6

7 truly life-changing, as evidenced by 18 published studies and many other trials currently underway. Mona Lisa Touch was rapidly adopted in 2015 in its first year after launch, but sales stalled in 2016 as new competitors entered the market and Cynosure devoted sales resources to Sculpsure. We believe the product can do much better as part of Hologic, where we can leverage our large OB/GYN salesforce to generate leads among a customer base we know very well. Before I turn the call over to Bob, let me summarize by saying that we are excited about the current and future opportunities for Cynosure to grow in the medical aesthetics market. Similarly, we remain enthusiastic about the potential of our R&D pipeline, as well as the momentum that is building internationally. We made tremendous progress on all these fronts in the second quarter, while simultaneously posting revenue and earnings results that exceeded expectations. Now I will turn the call over to Bob. BOB MCMAHON CFO Thank you Steve, and good afternoon everyone. In my remarks today, I m going to highlight some of our other divisional sales drivers, walk through our second-quarter income statement, touch on a few other key financial metrics, and then finish with our updated financial guidance for Unless otherwise noted, my remarks will focus on non-gaap results, and percentage changes will be on a year-over-year basis. As Steve mentioned, we posted good financial results in our second quarter, highlighted by 5.4% constant currency growth in our core business, when you exclude blood screening and Cynosure. Steve already highlighted molecular diagnostics and surgical, so I ll start my discussion with Breast Health. Global Breast Health sales of $280.5 million increased 2.1% in constant currency against a challenging prior year comp. In the United States, incremental placements of 3D gantries continued to moderate, like in recent quarters, as we pursue smaller, more price-sensitive customers. But at the same time, booking trends remain solid and our backlog is healthy. In addition, more than 75% of American women in our target patient population now have 7

8 incremental insurance coverage for 3D, which we believe will solidify even broader market adoption over time. Also in the second quarter, Breast Health service revenue again benefited from an expanding installed base in the United States, with low-double-digit growth year over year, while sales of our new Affirm prone biopsy system continued to build. And as Steve mentioned, international Breast Health sales grew at a mid-single-digit rate for the first time in over a year, as new leadership continues to make good progress in optimizing our distributor relationships. Moving on to cytology and perinatal, global revenues of $115.6 million were essentially flat in constant currency. The story here has not changed much. We maintain very high market shares domestically, yet still face headwinds albeit moderating from longer cervical cancer screening intervals. And we see significant opportunities outside the United States both to increase market share within liquid-based cytology, and to drive conversion from traditional Pap tests over time. To wrap up the revenue discussion, Skeletal Health revenues of $21.8 million decreased 1%, a slight improvement over disappointing results in the first quarter. Moving down the P&L, gross margins of 63.9% decreased 190 basis points compared to the prior year, mainly due to the blood screening divestiture, the negative impact of a stronger dollar, and product mix. Total operating expenses of $223 million were up slightly compared to the prior year, mainly due to the addition of the partial quarter Cynosure expenses at the end of the quarter. Beyond this, operating expenses remained well-controlled, helping support a very healthy operating margin of 32.7% in the quarter. To round out the discussion of the income statement, a lower effective tax rate and slightly reduced share count enabled us to once again increase EPS at a multiple of sales growth. Specifically, reported EPS of $0.50 grew 6.4% compared to a year ago, double the rate of reported sales growth. As noted in our press release, blood screening contributed $0.04 to EPS, so if you back this out along with a penny from Cynosure, you can see that non-gaap EPS in our core business grew by more than 20%. 8

9 To quickly touch on a few key financial metrics beginning with the balance sheet, total debt decreased $123 million compared to the prior year. We are proud that we were able to fund the Cynosure acquisition with cash from the blood screening divestiture, with no need to increase debt. Our leverage ratio, net debt over EBITDA, currently stands at 2.1 times, although that number would be approximately 2.7 this quarter if we were to adjust for the roughly $650 million in taxes on the gain from our blood screening divestiture. We remain comfortable with our debt level and strong cash flow generation. We believe we have more than enough capacity to continue pursuing small tuck-in acquisitions like Medicor, eliminate our convertible debt, and opportunistically act on our outstanding share repurchase authorization. Before moving on to our updated guidance, let me mention that adjusted EBITDA was $255.9 million in the second quarter, an increase of 0.8% compared to the prior year. And return on invested capital was 13.2% on a trailing 12-month basis, a 150 basis point improvement over the prior year. Finally, let s turn to our updated non-gaap financial guidance for the full year and third quarter, beginning with our full-year sales guidance. As a reminder, our previous guidance range of $2.785 to $2.825 billion included mid-single-digit constant currency growth for our core business, once you back out sales from our divested blood screening franchise. Now as we move into our third fiscal quarter, there are a few moving pieces, especially the addition of Cynosure. But our view of the core business remains constant, with an expectation of mid-single-digit growth. Taking into account our Q2 results and adding Cynosure, we now expect reported revenue of $3.05 to $3.08 billion in fiscal 2017, representing reported growth of 7.7% to 8.7%. Based on recent exchange rates, this equates to high-single-digit constant currency growth of between 8.4% and 9.5%. Included in our updated sales guidance is roughly $115 to $125 million from our divested blood screening business, higher than our previous guidance due mainly to the stronger performance in the second quarter. Also included in our guidance is an estimated, full-year contribution of $235 to $245 million from Cynosure. This may prove to be a conservative estimate, but we want to give ourselves some time to master the cadence of the business, as well as acknowledge that recently hired sales representatives will need some time to get up to speed. Also as a reminder, Cynosure s December quarter our first quarter of fiscal 2018 is typically their seasonally strongest. 9

10 Now let s move on to our revised EPS guidance for the full year. As a reminder, our previous guidance range of $1.90 to $1.94 included roughly $0.13 related to blood screening. We are raising our non-gaap EPS guidance to a range between $1.98 and $2.02, which includes a $0.14 contribution from blood screening and a Cynosure impact of between $0.03 and $0.05 as previously communicated. Please note that while we will continue to see blood screening revenue throughout the year as we fulfill our contractual obligations to Grifols, these sales will have a minimal impact on EPS. Again by way of illustration, if you were to back out blood screening EPS from this year s forecast and last year s, and also remove our Cynosure estimates at their midpoint, our forecast continues to imply reported EPS growth rates for our core business in the mid-teens on an apples-to-apples basis. I d also like to provide some color on the non-gaap margins that are imbedded in our guidance following the blood screening divestiture and Cynosure acquisition. In terms of gross margins, blood screening was more profitable than our corporate average, while Cynosure is lower. Netting these out, our second-quarter gross margin should be a good base from which to build going forward. It s important to note that the product mix for Cynosure is in the early stages of shifting from hardware to higher-margin consumables, so we expect profitability to improve over time. In terms of the overall Company s operating margin line, we carried minimal operating expense for blood screening, while Cynosure invests heavily in sales and marketing. As a result, we expect operating margins of around 30% in the back half of the year. This remains one of the best operating margins among our peers, and as I mentioned previously, we see room for improvement going forward. Our new guidance assumes a full-year tax rate of approximately 31%, and diluted shares outstanding of between 287 million and 289 million for the year. As usual, our guidance does not assume any additional capital deployment. Finally, for the third quarter of fiscal 2017, we expect sales of between $790 and $805 million. This includes blood screening sales of between $5 and $10 million, as well as Cynosure results of between $110 and $115 million. We expect earnings per share of $0.48 to $0.50 in the third quarter, which includes a small benefit from Cynosure and minimal impact from blood screening. 10

11 As you update your forecasts, we would again encourage you to model around the midpoint of our guidance ranges. We ve incorporated both upsides and downsides into our forecast, there is uncertainty around the remaining blood screening revenues, and obviously the Cynosure business is new for us. Before opening up the call for questions, I d like to reiterate a point made by Steve earlier. Our second quarter was another good one in terms of financial results, and a great quarter from a strategic perspective. In our core business, molecular diagnostics and surgical continued to drive growth, while our international business is contributing progressively more as well. We re seeing our pipeline of organic innovation continue to expand, and we ve set the stage for the next chapter in our sustainable growth story by divesting blood screening and acquiring Cynosure. With that, I will ask the operator to open up the call for questions. Please limit your questions to one plus a related follow-up, then return to the queue. Operator, we are ready for the first question. 11