Michael J. Watts - Hologic, Inc. Stephen P. MacMillan - Hologic, Inc. Robert W. McMahon - Hologic, Inc..

Brian D. Weinstein - William Blair & Co. LLC Tycho W. Peterson - JPMorgan Securities LLC William R. Quirk - Piper Jaffray & Co. Vijay Kumar - Evercore ISI Doug Schenkel - Cowen & Co. LLC Isaac Ro - Goldman Sachs & Co. David Ryan Lewis - Morgan Stanley & Co. LLC Anthony Petrone - Jefferies LLC Jack Meehan - Barclays Capital, Inc.

Jonathan Block - Stifel, Nicolaus & Co., Inc. Jonathan Groberg - UBS Securities LLC Mary Kate A. Gorman - Canaccord Genuity, Inc..

Please standby. We're about to begin. Good afternoon and welcome to the Hologic Incorporated Fourth Quarter fiscal 2016 earnings conference call. My name is Kamille and I'm your operator for today's call. Today's conference call is being recorded. All lines have been placed on mute.

I would now like to introduce Mike Watts, Vice President, Investor Relations and Corporate Communications to begin the call..

Thank you, Kamille. Good afternoon, everyone and thanks for joining us for Hologic's fourth quarter fiscal 2016 earnings call. With me today are Steve MacMillan, the Company's Chairman, President and CEO; and Bob McMahon, our Chief Financial Officer. Steve and Bob both have some prepared remarks today, then we'll have a question-and-answer session.

Our fourth quarter press release is available now on the investor section of our website. We also will post our prepared remarks to our website shortly after we deliver them. Finally, a replay of this call will be archived on our website through November 25.

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. A reconciliation to GAAP financial measures can be found in our earnings release.

Finally, any percentage changes that we discuss will be on a year-over-year basis, 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 2016. We once again posted strong results that illustrate the progress we're making toward building a sustainable growth company.

In addition, our results capped off a very good fiscal 2016 in which we delivered on our commitments. Today, I'll first provide a high-level overview of our fourth quarter results. But since it's the end of our fiscal year, we'd also like to provide a strategic update on the journey we've shared over the last three years.

We'll focus on our revenue and financial drivers for the full-year, and provide some color on the behind-the-scenes progress we're making in research and development. Let's start with our fourth quarter results.

Revenue of $726.8 million grew 3.4% on a reported basis or 3.8% in constant currency; a healthy performance despite a difficult comparison to the prior-year period. We also absorbed a headwind of nearly $4 million from divested and discontinued products. Net of these, total revenues would have grown 4.4% in constant currency.

Our Surgical business again set the pace with its seventh straight quarter of double-digit growth globally. We are also pleased with how our breast imaging and molecular diagnostics businesses performed, and encouraged that new products began to contribute to growth. We'll come back to this point in a minute. In terms of geography, U.S.

sales grew 7.4% in the quarter, continuing a string of strong results. Even if we exclude the $5 million royalty payment from our fourth quarter results, our growth rate accelerated on a sequential basis. As expected, international sales declined 9.6% as reported or 7.8% in constant currency, versus a difficult comparison in the prior-year period.

Apart from this tough comp, international Breast Health was stable sequentially in the quarter. There were also some pockets of strength globally, namely molecular diagnostics and Surgical, both of which posted double-digit growth.

Although these businesses are relatively small today outside the U.S., we believe they will be important growth drivers in 2017 and beyond. Profit margins remained robust in the quarter. Most importantly, non-GAAP net income grew 14.6%, more than three times faster than sales. And our net margin of 20.0% increased by 190 basis points.

With the benefit of additional capital deployment, we posted non-GAAP EPS of $0.52 or 20.9% better than in the prior-year period. So all in all, we posted a very strong fourth quarter that exceeded expectations and capped off an excellent year.

Thinking about the year as a whole, we made good progress in our journey from turnaround story to a sustainable growth company. To-date, our successes have been most visible in domestic sales execution, which in turn has driven the improved financial performance of the company.

One of the first goals we established three years ago was to stabilize two highly-profitable products that had been declining sharply, ThinPrep and NovaSure. In 2016, these products were more than stable; they returned to solid growth. Cytology and perinatal sales increased 2.8% on the year in constant currency.

Even more impressive, NovaSure sales grew 10% in constant currency, as our team capitalized on the market withdrawal of a competing product. As we stabilized ThinPrep and NovaSure, we also set out to maximize growth drivers such as our Genius 3D mammography systems and the Panther platform in molecular diagnostics.

Both of these products performed well in 2016. Genius drove 5.2% constant currency growth in total Breast Health sales in 2016, and we remain bullish on the opportunity ahead of us. While there has been lots of debate about a peak in system placements, we have a fundamentally different and more positive view of the future.

The 3D curve is very different than the 2D curve for a number of reasons, and we believe Breast Health sales will be stronger for longer than many anticipate. Although we've placed about 3,600 systems in the United States as of the end of the fiscal year, the market is still under-penetrated.

For example, 3D installations represent a little more than 40% of total Hologic mammography systems. And if you look at MQSA statistics, 3D installations represent just a quarter of total systems. We have been placing roughly 300 units per quarter in the U.S. recently, and at this pace should enjoy many more quarters of solid performance.

We are also gaining significant market share from our competitors, while our innovative marketing strategies enable us to maintain stable pricing. As our domestic installed base of 3D units has grown, so has the related service opportunity.

Breast Health service revenue again exceeded $100 million in the quarter and increased at a high-single digit rate, boosting overall growth. This increase in service revenue, combined with the potential of new product, gives us confidence that Breast Health can continue to grow even as 3D adoption matures.

Now let's turn to a second major growth driver, the Panther system, our fully-automated diagnostics instrument. Panther helped our molecular business grow 7.8% in constant currency in 2016, behind increased sales of women's health tests for chlamydia and gonorrhea, HPV, and trichomonas.

By the end of fiscal 2016, we had shipped more than 1,000 Panther units just to diagnostic customers. And we're encouraged that a growing number of these placements are coming internationally.

Panther shipments to customers outside the United States grew dramatically in 2016, and we believe we are just scratching the surface of this long-term opportunity.

At the same time, our sales team is partnering with lab and physician customers to ensure that patients are tested according to the best clinical guidelines, providing better care while increasing organic volumes.

In fact, on a global basis, the average Panther generated more than $190,000 in assay revenue in 2016, a high-single digit increase in utilization. And we are optimistic that this number will increase further as we roll out viral load assays in Europe and the United States.

As we look back on fiscal 2016, the stabilization of ThinPrep and NovaSure, combined with strong growth from Genius and Panther, drove excellent full-year results. You might recall that 12 months ago, our initial guidance called for revenue of $2.81 billion to $2.84 billion for the year. We finished at $2.83 billion; so we delivered on our commitment.

At the same time, we achieved significant margin improvement in 2016. For the year, non-GAAP gross margin was 65.6%, an impressive 140 basis points better than last year. This enabled us to make incremental investments in marketing and R&D to drive future growth, while still delivering operating income of 33.6%, 30 basis points better than in 2015.

Combined with a lower tax rate and repurchases of both convertible debt and common shares, we posted non-GAAP earnings per share of $1.96 in 2016. This was 17.4% higher than in the prior year and comfortably ahead of our original guidance. Looking beyond earnings, we're also very pleased with our cash flow in 2016, which is often under-appreciated.

We generated $787.2 million in operating cash, with only $94.5 million in CapEx. And roughly half of this CapEx went toward revenue-generating instruments such as our Panther systems. As a result, free cash flow for the year was $692.7 million, 23.3% higher than non-GAAP net income.

Our operations and finance teams deserve tremendous credit for making this happen. As one measure of their success, inventories at year-end 2016 were $8.4 million less than a year ago, even though product revenues were about a $109 million higher.

Taking a step further, inventories are now below the levels of even two years ago, demonstrating tremendous progress by our team. Obviously, these strong cash flows gave us the flexibility to continue improving our capital structure in 2016.

We repurchased $274.2 million of convertible notes for $392.8 million during the year, as well as 7.3 million shares of common stock for $250 million. As a result, our leverage ratio, net debt over EBITDA, has fallen to 2.8 times, a little more than half what it was at the time of the Gen-Probe acquisition.

In addition, diluted shares outstanding were slightly lower in 2016 than in the prior year, providing a boost to EPS. Before I turn the call over to Bob, I want to emphasize that strong cash flows also enabled us to invest appropriately and consistently in research and development, which increased about 8% this year.

And we are just beginning to see the fruits of our labor. In the fourth quarter of 2016, sales of key new products exceeded $10 million in revenue for the first time. These new products include viral assays in Diagnostics, the Affirm prone biopsy system in Breast Health, and MyoSure REACH in Surgical.

We recognize that $10 million is still small in the context of overall Hologic, but it's a good start and we are optimistic about the potential of these products in 2017. In addition, our R&D pipeline is building behind the first wave of new products.

In Diagnostics, we recently filed for regulatory approval of our Aptima Hepatitis C viral load test in the United States, and anticipate launching it commercially in 2017, following the introduction of our HIV viral load assay. Sales of these products will become more meaningful in 2018, when we also have a Hepatitis B assay available.

We also filed recently for U.S. regulatory approval of our herpes test, which will complement our existing portfolio of women's health products on the Panther system. And finally, we are beginning clinical trials for our respiratory assays on the next-generation Panther Fusion system.

In Breast Health, we have fundamentally reshaped our R&D strategy away from the boom and bust approach of the past, toward a model that strives for continuous innovation built around our leadership position in 3D mammography.

The Affirm prone biopsy system fits in this vein, as does our upcoming Brevera product, which will provide real-time specimen radiography to improve breast biopsy workflow and the patient experience. We are hopeful that Brevera will begin to contribute to growth late in 2017 and more meaningfully in 2018.

Finally, in Surgical, we are encouraged by the early success of our MyoSure REACH line extension, which is providing new capabilities to customers and therefore helping expand the market.

In the same way, we are working to leverage our market-leading position in endometrial ablation by launching internationally a next-generation NovaSure device that will improve patient comfort as well as physician usability. Compared to the dramatic improvement you've seen in U.S.

sales execution, our progress in research and development is just becoming visible. We have a lot of work to do in these areas, but are excited about our early progress. In some ways, domestic sales execution represents the tip of the iceberg in terms of what's possible here.

Below the surface, we are working diligently to boost new product innovation, build our international capabilities, and further enhance profitability.

As our new leadership team settles in, and as talented, engaged employees at all levels of the organization continue to do their thing, we look forward to sharing more successes with you in 2017 and beyond. Now, I will hand the call over to Bob..

Thank you, Steve and good afternoon, everyone. I'm going to provide more detail on our divisional revenue performance, review the rest of our fourth-quarter financials, and then discuss our financial guidance for 2017. Unless otherwise noted, my commentary will focus on non-GAAP results, and revenue growth rates will be expressed in constant currency.

We closed out our fiscal year with results that surpassed expectations. Revenue grew at a healthy rate, and favorable gross margins allowed us to reinvest opportunistically in the business, while still delivering strong bottom-line growth.

I'll begin by discussing our Surgical division, which remained the growth leader in the quarter with sales of $101.5 million and growth of 17.6%. Fueling this growth was MyoSure, where sales of $42.6 million grew 33.4%, thanks to the outstanding efforts of our commercial team.

In addition, NovaSure sales grew 8.7%, as we continued to gain market share and capitalize on a competitive withdrawal. Now moving to Diagnostics, we posted sales of $311.9 million in the quarter, a solid growth rate of 3.1%. In molecular diagnostics, quarterly sales of $134.3 million increased 9.6%.

As Steve noted, we booked a $5 million royalty payment this quarter, but at the same time, we also absorbed a headwind of almost $3 million from our discontinued cystic fibrosis product line.

So the underlying trends in the business remained strong, and we continue to gain share and increase utilization of women's health assays on the fully-automated Panther instrument.

In addition, international sales grew at a mid-teens rate, and we posted yet another record quarter of Panther placements outside the U.S., providing a strong platform for future growth. Elsewhere in Diagnostics, our cytology and perinatal products posted sales of $121 million and increased slightly compared to the prior-year period.

Share gains for our ThinPrep product continue to offset headwinds from longer cervical cancer screening intervals. And finally, our blood business declined 6% as expected, as we continue to see the impact of lower blood utilization and fluctuating ordering patterns by our partner Grifols.

Partially offsetting these headwinds were initial sales of our Zika products. As we enter 2017, we believe macro trends towards lower blood utilization will continue to be a drag on sales growth. Now moving to Breast Health, we posted global sales of $292.3 million and solid growth of 2.3% over another challenging comp.

In the U.S, continued adoption of Genius 3D systems was supplemented by a growing service annuity and our sales of our new Affirm prone biopsy system, driving an increase of 7.2% in sales. Over the last two quarters, our U.S.

Breast Health results have clearly illustrated a point we've made repeatedly in recent months, that the business can continue to grow despite increasingly challenging comps.

And to round out our revenue discussion, Skeletal Health revenues of $21.2 million decreased 17.3% in constant currency, due mainly to lower volumes of our Fluoroscan mini C-arm products. Now moving down the income statement, fourth quarter gross margins of 65.7% increased 110 basis points compared to the prior-year period.

Gross margins benefited from both geographic and product mix, as well as continued pricing discipline and operational improvements. Total operating expenses of $235.5 million increased 7.7% in the fourth quarter. We continue to take advantage of improving gross margins to reinvest strategically in the business.

For example, quarterly R&D spending increased 16.3%, and we're beginning to see some of the benefits as Steve discussed. In addition, as we mentioned last quarter, a change in the retirement provisions of our equity plan drove an additional $4 million of expense.

Despite these investments, our non-GAAP operating margin remained a healthy 33.3% in the quarter. Below the line, we continue to make good progress in two areas that have been a priority for our finance organizations. Based on lower debt levels, interest expense of $32.9 million in the fourth quarter declined 14.8%.

At the same time, our non-GAAP effective tax rate of 31% in the quarter was more than 300 basis points lower than a year ago. While we are very pleased with the results we've produced in a short amount of time, we are still at the beginning stages of this process and see continued opportunity ahead.

And finally, to wrap up the fourth quarter income statement, non-GAAP EPS of $0.52 grew 20.9% compared to a year ago, much faster than sales growth. The multiple levers used to drive EPS growth in the quarter give us comfort in our ability to continue growing EPS at a multiple of sales. Now let me turn to cash flows and the balance sheet.

In the fourth quarter, adjusted EBITDA of $263.9 million improved 5.2%. We continue to focus on reducing our convertible debt. In the fourth quarter, we repurchased $47.6 million in principal of our 2037 notes for $81.3 million, and intend to redeem the remaining $12 million in cash when the notes are callable this December.

Despite retiring a portion of our convertible debt and repurchasing shares over the course of 2016, we ended the year with $548.4 million in cash, an increase of $57.1 million compared to the prior year. We finished the year with total debt of $3.3 billion, a reduction of $0.3 billion compared to the prior year.

And our leverage ratio, net debt over EBITDA, currently sits at 2.8 times, close to our target of 2.5 times. The combination of strong profit growth and lower debt continues to drive improvements to return on invested capital. As of year-end, ROIC was 12.7% on a trailing 12-month basis, an increase of a 180 basis points over the prior year.

Now, I'd like to cover our non-GAAP financial guidance for fiscal 2017. We are forecasting mid-single digit revenue growth in 2017 on top of increasingly challenging comps. We expect an improving operating margin and lower tax rate to drive EPS growth at roughly double the rate of sales growth.

Specifically, we anticipate constant currency revenue growth of between 4% and 5.5% in fiscal 2017. At recent exchange rates, this equates to sales of $2.94 billion to $2.98 billion on a reported basis, with reported growth rates between 3.8% and 5.2%.

As you update your forecasts, we would 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 upsides and downsides. Our guidance includes the net benefit of three extra selling days based on our fiscal calendar.

Compared to the prior-year periods, we will gain four selling days in the first quarter. Although this will be the historically slow week between Christmas and New Years, while we will lose one day in the fourth fiscal quarter. We estimate this benefit to be between 50 and 70 basis points of sales growth, with a negligible effect on EPS.

At the same time, our guidance also includes a roughly $5 million headwind from products that we have either divested or recently decided to discontinue. In other words, our guidance would have been about 20 basis points higher if these products remained in our portfolio.

In terms of divisional growth for 2017, our guidance contemplates low- to mid-single digit growth in Diagnostics and Skeletal, mid-single digit growth in Breast Health, and slightly higher growth in Surgical. In Diagnostics, molecular should lead the charge behind Panther and an expanded international menu including virology assays.

We forecast that cytology and perinatal sales will be flat to up slightly and we also expect blood to be flat to up slightly, as new Zika sales offset negative macro trends.

In Breast Health, we expect continued strength in Genius 3D mammography, a growing service annuity, contributions from new products including the Affirm prone biopsy system and Brevera towards the end of the year, as well as a return to growth for our international business.

In Surgical, we expect growth to be driven by MyoSure market expansion efforts and NovaSure share gains, as well as international sales. Geographically, we expect our international business to begin contributing to growth in fiscal 2017, in line with the company's overall growth rate.

In terms of profitability, we forecast continued improvement in non-GAAP operating margin in 2017, but how we get there will be different than last year.

In 2017, we forecast a slight improvement in non-GAAP gross margin percentage, combined with greater leverage from operating expenses, leading to more improvement in operating margin than we saw last year. All this leads us to forecast that earnings per share will be between $2.12 and $2.16 in 2017.

This represents growth of 8.5% to 10.6% in constant currency and reported growth of between 8.2% and 10.2%. Again, we'd encourage you to model at the middle of our guidance range at this early stage of the year.

This guidance assumes a full-year tax rate of approximately 31% and diluted shares outstanding of between 289 million and 291 million for the year. Our guidance does not assume any capital deployment beyond calling what's left of our 2037 convertible notes in December. Now let's cover guidance for the first quarter of fiscal 2017.

We expect revenues of $720 million to $730 million, flattish on a sequential basis, as the benefit from extra selling days between Christmas and New Year's is offset by the normal seasonal decline we experienced due to our global sales meeting and the RSNA Conference in Breast Health.

Compared to the prior-year period, this range reflects revenue growth of 3.8% to 5.2% on a constant currency basis and reported revenue growth of 3.6% to 5.0%. We forecast non-GAAP diluted earnings per share of $0.50 to $0.51 in the first quarter.

This represents anticipated growth of 9.1% to 11.3% in constant currency terms, or 8.7% to 10.9% on a reported basis. Compared to our fourth quarter actuals, please note that operating expenses will increase in the first quarter due to the timing of sales and marketing activities and the extra days.

Before we open up the call for questions, let me conclude by saying that our fourth quarter capped off another good year for the company. Our financial performance demonstrates that we are transforming from a turnaround story to a sustainable growth company.

We feel confident about the foundation we have established heading into 2017, and have the levers necessary to deliver mid-single digit revenue growth with EPS growth roughly double that rate. 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 and then return to the queue.

Operator, we're ready for the first question..

Our first question is from Brian Weinstein with William Blair..

Hey, guys. Thanks for taking the question and thanks for the good written guide. I have enough to worry about tonight like breaking that 108-year curse in a couple of hours, so I appreciate that..

You're in first here, so you can get ready to focus on, Brian..

I appreciate that. Thank you very much. So, as we look at your guidance range, you had clearly signaled ahead of time that you were going to give a wider range and you certainly did that.

I'm curious, you guided us to the midpoint but not on the high-end of the line there, is that really a function of kind of how you expect new products to contribute? You talked about $10 million from that this quarter and what not.

But do you expect that new products are really the differentiating factor between that high-end to low-end and any color on that would be helpful. Thanks..

Sure, Brian. The new products will certainly be a piece of it. I think we've all been around long enough to know no matter what we put into our forecast, it always comes out a little differently. And I just think it's a very prudent thing given particularly the environment to have a slightly broader range.

I do think we see a little more – if the new products are doing well, which we fully expect they will, I think it clearly pushes us towards that higher end. I think we get into that 5%-ish range as things take off. We always want to be a little cautious until we start to see the success. I will tell you, I think Affirm is off to a very nice start.

MyoSure REACH off to a very nice start. And these are really the first new products we've launched since we've come on. And also our international molecular diagnostics business is really starting to take off. We had a couple of quarters there of double-digit growth as well.

So, there's a lot we feel good about, but again, still very early stages and a lot to play out..

Yeah, I think the other thing, Brian, just to build on that is some of these products haven't gotten full approval yet as well. And so there is an estimate of timing to start with, but we certainly feel very good about our path there, but there is some flexibility there as well..

Yeah..

And you mentioned OUS, specifically in molecular diagnostics. And I think you talked about a return to growth next year somewhere in, I think, maybe mid-single digits or something overall.

But can you talk about some of the things more specifically OUS that you guys are focused on, some of the other products that you guys are focused on next year that potentially could add to growth there? Thanks..

Yeah, I think there's couple of things we're excited about for international. First is the leadership team there Eric Compton has really put in place.

As we exit this year, we basically got a completely new leadership team internationally from how we entered the year, other than our leader of the Diagnostics business in Europe, who is already showing and really been leading the way with great growth.

But I think as we look to international, the molecular diagnostics business ought to be a real standout for us. I think Surgical continuing off of a smaller base, but continuing to show good growth, and Breast Health will return to some growth, as we're working a lot tighter with our dealers and getting things in place there.

So I think we feel incrementally significantly better entering this year than we did at this time last year about international..

Our next question is from Tycho Peterson with JPMorgan..

Hey, thanks. Steve, want to actually focus on margins. Guidance assumes some nice operating margin expansion.

Can you talk a little bit about the drivers? I know you've over-invested during the growth boom, so can you maybe talk about some of the levers you can pull for margin expansion in 2017?.

Sure, we've clearly invested heavily, Tycho, especially on the marketing and the R&D fronts as this year was coming in well and obviously way hot on the EPS line.

We've really – I would say those, we had expanded and invested more than our rate of sales, we'll probably come back into those being slightly leveragable relative to the rate of sales as we go into the current year..

And then, as we think about Breast Health, Cigna was obviously the first to move forward with reimbursing Tomo for routine screening.

Can you talk a little bit about how that's progressed and where you see other payors along that path?.

Sure, we really applaud Cigna. They obviously got on board. I would tell you it's a struggle with both Aetna and United at this point. We're working through it. We would love them to take the same approach towards their patients that Cigna did, but we're working through with them.

And we basically have not assumed that they come and that could be an additional source of upside if or when they fall during the year..

Our next question comes from Bill Quirk with Piper Jaffray..

Great, thanks and good afternoon everybody..

Hey, Bill..

Couple of questions on virals, guys. Obviously, glad to hear that everything is on track for the U.S. launches. And if we're doing the math right, I think you should be accretive to the overall Diagnostic gross margins. But, that said, we've also heard about some pricing pressure over in Europe.

And so can you help just kind of set the stage for us about what you expect in U.S.? And then maybe just a couple words on what you're seeing in Europe thus far. Thanks..

Sure. To be clear, the virals will be a very small contributor in 2017 in the United States. And that's where they're going to be coming at a much better margin.

So right now they are contributing to the top line growth, and certainly top- and bottom-line in Europe, but the big pickup for us will really be more in 2018 on the margin side, as it relates to the virals..

Yeah, and I think in Europe we're seeing good traction there, Bill. We talked about the Panther placements. 2016 was a very good year in Panther placements, specifically in Europe, but also internationally, in general. I think that's largely on the back of our viral system, our viral load assays.

And we'll get the full benefit of that in 2017 as those instruments that were placed get a full year. The other thing is in that we noted that the revenue pull-through per Panther has increased. That's both in the U.S. as well as internationally. So I think that that's a harbinger for good growth going forward..

And just the overall pricing dynamic in Europe?.

Yeah, pricing is lower in Europe, but it's pretty much as expected based on our models. It's a little lower outside the U.S. than in the U.S., but not anything different than what we had anticipated..

Okay. Got it, very good. Thanks, guys..

Great. Thanks, Bill..

Next we have Vijay Kumar with Evercore ISI..

Hey, Vijay..

Hey, guys. Congratulations on a nice quarter..

Thank you..

I feel like we were all waiting with bated breath and just given what's happened MedTech, we're glad to see this come through.

Just maybe one on the guidance on the revenue, what does the guidance assume for OUS growth, international growth for next year? Because I would have thought, just given what happened sequentially 3Q versus 4Q international trends, any color on international would be helpful..

Sure, it basically is in line with the total company growth rate next year. So I'd say we're picturing actually balanced growth for the first time. The last couple of years, it's been way skewed to the U.S., has been generating most of the growth. But I think we see this year really being a rebalancing (37:13).

Recall the fourth – the current quarter is not indicative of a trend, given that last year's fourth quarter turns out – there was a lot more put into that last year's fourth quarter than we fully understood, just as dealers bought in to maintain their contracts against minimums and things like that.

So, I think, again, we feel far better coming into this year and seeing expected growth..

Great. And then maybe one for – go ahead, Bob..

Yeah, I was just was going to say the other thing to bear in mind there is, we had mentioned that the blood screening business will be roughly flat to slightly up year-on-year. That was a big headwind internationally through all of 2016 as the inventories and ordering patterns of our partner were adjusting. So we expect to kind of lap that.

So that gives us help for turning that trajectory around as well..

And then maybe one for you, Bob. You did mention that the guidance doesn't assume anything on the capital deployment front.

I mean just I think in your prepared remarks, you also highlighted free cash generation, right? I guess my question is what's the focus for cap deployment over the next 12 months?.

Yeah, we continued to focus on – we mentioned that in December we plan to call the first tranche of the remaining amount of that first tranche of convertible notes. I think outside of that, we continue to be focused on debt paydown as well as growth in M&A activities, and then finally share repurchase.

The latter of those two is hard to predict, and certainly the convertible notes, we've don't those ability to actually call those formally until 2018. And so that's why we've done it. But we will be opportunistic as appropriate within the market..

Again, just to clarify, that would be fiscal 2018..

That's correct..

December of 2017..

That's correct. Thank you..

Thank you and our next question comes from Doug Schenkel with Cowen and Company..

Good afternoon, guys and thank you for taking my question. I guess, I have one question on just assumptions you're baking into guidance. It has a few parts to it. So I'll rattle through these and then I'll get back in the queue.

The first part is, for new products, it seems like you might be assuming that new products contribute about 100 basis points to fiscal 2017 growth at the midpoint of guide.

Is that about right? Secondly, what's your view on the sustainability of NovaSure growth, given the benefit from competitive disruptions will annualize over the course of this fiscal year? Third, are there any major blood bank tenders that come up this year that we should be contemplating in our models? And lastly, how do you expect Panther utilization to increase above the $190,000 annualized figure that you provided in fiscal 2017 based on geographic and menu expansion? Thank you..

Hey, Doug, are you sure you don't want to throw a few more on that..

Yeah, I know. One question with 74 parts. Hey, Doug, this is Bob. I'll take the first on the new products. We feel very good about that. We mentioned the $10 million in Q4. We obviously expect that to grow throughout the course of 2017.

And I think you had mentioned a 100 basis point, that's probably at the low end, maybe it's a little higher than that, maybe a 105 basis point maybe at the midpoint to think about that, and that's really driven behind the Affirm and Zika. Those are probably the two largest new products.

Brevera will happen, but it's in the back-half of the year, and then certainly some of the virals and so forth in the U.S. will play a role, but again, the majority of that will happen in the 2018. So that's the first question. And I think sustainability of NovaSure, we feel very good about that.

But remember the formal withdrawal of the competitive product happened in our second quarter, so we expect to have larger and better growth in first and second quarters than we went out in the back-half the year. We expect growth throughout the course of the year, but the first and second quarters will be bigger than the back-half for NovaSure.

In terms of the major blood banks, you need to ask Grifols, those are their customers, and so we're not going to be able to be in a position to answer to that.

And then in terms of Panther utilization, we do expect, that's one of the big areas that we're focused on, that's continuing to not only place Panther systems, but increase the utilization of the installed base. So I do expect that utilization to grow in line with the forecast that we had talked about for our molecular business. Thank you, Doug.

Great..

Next up, we have Isaac Ro with Goldman Sachs..

Good afternoon, guys. Thank you..

Hey, Isaac..

Hey. So, just want to spend a minute talking about innovation. You guys have clearly done a great job restoring consistency in the core business, but maybe a little bit less appreciated has been some of the new products you put out there, both the ones you mentioned and maybe some of the ones you haven't talked about.

And so, if I look at the R&D spend here, it's up a good amount year-over-year, and just thinking a little bit about how to frame the way you guys are investing your R&D dollars going forward.

Maybe if you could talk a little bit about thematically where you think your best bang for your buck is invested? And as we look over a multiyear period, how should we think about investment across the various divisions?.

Sure, I think if you take a macro view at it, Isaac, we've dramatically overhauled really the R&D organizations at all three businesses and really proud – it's taken some work and it's all been happening behind the scenes, but really trying to break that grand slam or the boom bust ideas.

So what we've got going on now is a lot of folks focused on both substantial innovation, but also incremental innovation.

And if you take our Surgical business as an example, we had launched NovaSure and launched MyoSure and never really did any product upgrades or anything through the years, just threw them out there and then watched eventually price degrade or whatever else. So, launching MyoSure REACH is a classic example of something that we're working on.

We also just mentioned, we're actually launching an upgraded NovaSure product outside the United States. You can imagine, we'll be planning on bringing that to the United States once we get that through approval.

Likewise in Breast Health, instead of just focusing on the replacement for 3D Tomo, saying okay what are we going to do in the meantime and how can we leverage 3D? Well, the Affirm prone biopsy system, Brevera, there will be other things that we're looking at in that vein as well.

And again, we wanted to put some points on the board before we start talking about the future, just as you know us stylistically. And then the same as it relates effectively the Diagnostics business, there were things that aren't really in play when we got here.

Turbo charged the Fusion, the development of the Fusion platform, which is then opening up that ability to do the same kind of singles and doubles as it relates to future assays and be able to broaden out the menu there. And again, those will be a lot of singles and doubles that will come behind the viral load programs.

And we really hunkered down early on to push the viral loads through and across the finish line. Those have kind of been up and down, on and off, and we've really put a sustained commitment and started to feel very, very good about our ability in each of the divisions to be bringing a more steady stream of innovation..

Hey, Isaac, this is Bob. Just to build on what Steve's saying. Steve talks a lot about people make a difference. And so over the last several years, we've really not only focused on rebuilding the commercial teams, but also the R&D teams. And so when I think about the R&D spend, we spend roughly 8% any quarter, it can change.

That's probably the right amount. But I think right now what we've done is fundamentally, as Steve mentioned, change the mindset of the organizations and how they're going about actually developing products, linking R&D with marketing, truly having insight-driven innovation and creating that competitive advantage.

We spend most money as a percent of sales in our Diagnostics business, less in Breast and our Surgical businesses. I think that is probably going to stay roughly the same, but it's really the makeup of it and the leadership making a big difference in terms of how we evaluate the innovation pipeline..

That's really helpful color, thanks. And maybe just a follow-up for Bob on the financial side of the guidance.

Can you talk a little bit about tax planning, maybe what's baked into your guidance this year for tax rate? And are there any opportunities that could translate to a lower tax rate that moves the needle this fiscal year or is it maybe still a longer term thing?.

Yeah, I think it's still a longer-term thing, Isaac. If you recall, we didn't anticipate anything actually really starting to happen until 2017 and we were actually able to pull some things forward into 2016. So you saw one of the benefits in 2016 as being having a lower tax rate relative to 2015.

And so with that, we still see that kind of steady improvement, but we have actually accelerated some of those efforts, resulted in the lower tax rate in 2016. Longer term, we continue to evaluate kind of what that looks like.

We're roughly on that point per year, I think that that's probably a reasonable way to model going forward, which in this 31% that we're talking about really is roughly a point better than where we were for the full-year 2016. So that's the way I would think about it. Isaac..

Thank you. And next, we have David Lewis with Morgan Stanley..

Hey, David..

Good afternoon. How are you doing? So couple of quick ones here. First, for Bob and then I've got – two for Bob and one for Steve. That'll be fast, I promise.

So, Bob, just coming back to international for a second here, if you do the math, you go sort of from mid-single digit declines to mid-single digit growth, where you pick up 10 points of relative on 20% of your business. It's two points of growth. So it's a key driver of the improvement in 2017.

Your comp adjusted growth for international though in the fourth quarter actually got worse.

So just can you just help us understand why fourth quarter actually slowed comp adjusted, but you're confident you get that reacceleration in 2017?.

Yeah, if you look at the kind of trends of the business on a sequential basis, that's where we feel confident. We knew that we had kind of an outsized number in Q4 of last year, which resulted in your comp-adjusted numbers looking worse.

But when we look at the fundamentals of the business and some of those pockets, things like molecular, Surgical, the trend in the stabilization of our Breast Health business, which is probably is the biggest – one of biggest changes and then certainly we feel pretty clear about – we have pretty decent line of sight into the inventory levels now with the blood screening business.

I think those are kind of the building blocks that were headwinds last year, that certainly will be our tailwinds going into 2017. I think, Eric, as Steve mentioned, has done a tremendous job of really focusing the teams on the fundamentals. We've gone to the regional basis.

We've brought in a bunch of new leaders there and I think they're just starting to get a hold on things. But I think we've seen good progress and good momentum going into 2017 on those couple of barriers..

Okay, and then an unfun question for you and a fun question for Steve.

Stock-based compensation FASB changes, any impact on your earnings for 2017? And then for Steve, fiscal 2017 guidance is in line, I think positive, but I think the enthusiasm for Hologic post our conference since September really wasn't about 2017, it was about sort of the view that this business can deliver not just one year of 5% and 10% growth, frankly, but several years of 5% and 10% growth.

So I wonder if you could just sort of synthesize for shareholders what are some of those business dynamics you're seeing that give you that confidence that this isn't just one good year, but it's a few good years to come, and I'll jump back into queue. Thanks..

Sure, the stock-based comp piece, there's no impact..

No material impact..

And I think, David, each year when on a look out, I'm always far more worried about the year further out just as I was probably more worried about 2017 earlier in 2016.

And every year, what I keep seeing is our teams just keep putting more new products in place, better people in place, and I probably feel better about the sustainability of this company at any point since I've been here. Because I think by the time we go into 2018, we're going to have more products hitting.

We're going to have the international business that much further along. There's so much of what Eric's focused here during this year. What we've been doing in international this year is really putting the foundation in place that I hoped and wanted to be putting in place sooner, but we really weren't doing it.

So I think just fundamentally, we just keep getting stronger and stronger. The comps will be getting tougher this and that, but overall, feeling very good. We're going to have a lot of stuff hitting in late 2017 and into 2018, and that's one of the pipeline stuff will really be coming through..

Our next question is from Anthony Petrone with Jefferies..

Thanks, and good afternoon. Maybe one on molecular and an update on Breast Health, OUS specifically.

I'm just wondering what the capital utilization rate of Panther is at $190,000? So just kind of looking ahead, and maybe where that could actually go, longer-term not only for 2017? And then on Breast Health, I guess the question really is, Bob, going back in – I don't know, some meetings, you did speak about the 2D opportunity OUS as being pretty substantial over the next several years.

So I'm just wondering if we can get an update on that opportunity specifically..

Sure. So on the molecular utilization at the $190,000, I think we had talked about previously, call it roughly 30%, it's probably a little higher than that now, maybe a third of the capacity and now, which means that there's still plenty of opportunity to grow utilization on the instrumentation.

It's never going to get to a 100%, but certainly, we have room to grow. And if we look at Tigris as an example, it's up in the 65% to 75% range in those utilization. So there's still plenty of opportunity there from a molecular standpoint. In regards to Breast Health, yeah, we are still enthusiastic about the opportunities both in 3D as well as 2D.

I think the team has been focused and really looked at country by country, screening guidelines. How we work with not only our dealers, but also starting, more importantly, with governments and so forth and meeting some of the governments where they are. And the beauty of our 2D system is its software upgradeable to 3D.

And so we have both the best 2D system as well as the best 3D system. And so that is still a strategy that we feel good about in the markets that we're focused on and an opportunity not only to place both 2D and 3D systems, but have that opportunity for upgrade over time..

That's helpful. Just a follow up there would be, is 50% to 60% the goal for Panther in terms of capacity utilization and is there a round number for OUS mammography units that is the target? Thanks..

I don't know if we have a specific goal. It's really on how confident and comfortable the lab is. At some stage, they're going to want a second Panther as a backup.

So rather than focus on a capacity goal, what I would focus on really is we have plenty of opportunity to continue to grow utilization of our assays and our upcoming assays in the pipeline on the existing Panther..

Our next question is from Jack Meehan with Barclays..

Hi, thanks and congrats on the nice quarter. I wanted to follow up there on Panther. Just was wondering if you could give any updated thoughts the individual sexual health products, how they performed in the quarter.

And then, as time goes on, have you seen more cross-selling of the individual products? Maybe just as you look at the labs, how many are using one test or two tests or all three with trich? Any color would be great..

Yeah, maybe I'll talk to the last question first.

That's one of the reasons that the utilization is growing the way it is, is the team, in particular in the U.S., has done a fantastic job of being able to sell the entire menu, and really done a customer segmentation that says, okay, if they've got chlamydia, gonorrhea, are they testing for trich? Are they testing for HPV? And that has really driven that utilization in the U.S., and it's starting to drive that utilization internationally as well, now that we have the viral loads.

I will tell you in terms of growth rates for our major assays, still obviously the largest is our chlamydia, gonorrhea, CTGC assay that grew in the low-single digits. And then HPV and trich continue to grow in excess of market. So those are gaining share.

We feel good about our ability to continue to drive growth in 2017 in those markets, as well or those assays..

Great. And one more follow-up on Panther. Just in international with the success you've had with viral load, is there a sense that you can say these customers now, a certain percentage are using viral load? And I guess what I'm trying to get to is obviously with the strength of the U.S.

fleet, if there's a way that we can think about the commercial strategy here and what percentage we can think would adopt the test over time?.

Yeah, so we're still in the early days of the viral loads. We just now – we launched those maybe – they had the full complement six, nine months ago, obviously with the tender-based contracts in Europe. It takes some time.

I think the good news is the leading indicator of that, which is the Panther placements, is happening, but it's probably a number that we expect to grow into 2017 and 2018 for sure, but it's still early days..

Our next question comes from Jon Block with Stifel..

Great. Thanks, guys. And I'll try to ask two relatively quick ones. So, Bob, the first one, I think the guidance implies about 100 bps of Op margin expansion, and you mentioned somewhat shared between OpEx and gross margin expansion. So that leaves about 50 bps for gross margin, down from roughly 140 bps this year.

And I certainly understand the headwinds by international growing faster in 2017 relative to 2016, but still a decent stepdown.

So, can you just talk to us about that stepdown in gross margin expansion? And then are you still getting a good gross margin pull from your three major divisions?.

Yeah, so certainly, we've got margins that are – we finished FY 2016 at almost 66% gross margin. That's nothing to be ashamed about. We feel good about that. ..

I'd rephrase it, that we're still continuing to expand as opposed to a stepdown from (57:53)..

Yeah, yeah, exactly. And the international business certainly is a lower-margin business, which is going to impact some of that. And then certainly in 2016, we benefited from Surgical being outsized growth. We still expect growth in our Surgical business, but not at the level that it had in 2016. So there's some product mix in there as well.

I will tell you that our operations teams are incredibly focused on continuing to improve the operational aspects of their business and we've established good pricing discipline. And I think there's still opportunities to improve margins; I think just perhaps not at the level of 2016, given some of that product mix that with had.

And then in the OpEx margins, it's going to be across the product lines or product areas. As Steve mentioned, we opportunistically look to invest in places like marketing and some of the other areas. We have the ability to kind of to move some of those levers as we need to..

Okay, perfect, very helpful. And then just, Steve, maybe you. Just longer term on that Surgical division, is the right way to think about NovaSure sort of flattish once you cycle through ThermaChoice? And maybe more importantly, just to take a step back, if you could opine upon MyoSure.

I mean, rarely do you have 30% sustainable growth and now to the point where you've got a product annualizing at over $150 million. So just maybe talk about the sustainability of why you're seeing that sort of growth rate and just the market opportunity that you see in front of Hologic for that product. Thank you..

Sure. I would say MyoSure has been probably our wonderful continued surprise that it's been able to generate, as you just said, two straight years of 30%-plus growth after a year in which it had looked to be slowing in the 20%-ish range, kind of really reaccelerated. We're not sure how high is up yet there.

And I almost don't want to call the market, because I think we're finding more and more avenues and more and more opportunities to tap into other procedures and things. So we continue – even through the year, that growth rate has not yet slowed. We brought some news to it. And I think we see that as still being a real growth driver for us.

NovaSure will clearly come back to earth in terms of growth rates. But again, we're going to be bringing news to that franchise and we've adopted a mindset that we don't accept anything but an expectation of growth, even on older businesses and it's our job to figure out how to grow them.

I am confident that team will continue to find ways to keep growing what is a great, great product. But certainly at slower rates, probably, once we get through the big competitive piece..

Next we have from UBS, Jon Groberg..

Great, thanks. I'll actually just ask one question.

Steve, the capital deployment that was brought up earlier, can you maybe just talk about where you're at in terms of your team's ability to do more M&A? Whether or not you would be disappointed if you didn't do something from an M&A standpoint in 2017? I mean, it seems like where you're at as a firm, you seem to have a little bit more confidence internationally.

Obviously, the core business in the U.S. is doing well, the M&A piece hasn't really kicked in yet. Thanks..

Yeah, thanks, Jon. I would expect we'll likely do something in 2017. It might be very small. It might be more mid-size, not really sure yet. I think our still relentless focus has been always on keeping the base business growing at a healthy rate. And then I do think there may be come some opportunities.

I would tell you, we'd looked at a lot of things, some of which we're patient on and we want to make sure that they make sense. So, I'm seeing a lot more. I would say, if you look at my percentage of my time spent with the divisions on business development deals today versus a year ago, it's a dramatic difference.

And we're seeing a lot of good things and a lot of things that may not be making the full hurdle, because we're obviously being very disciplined as we go. But I do feel good that we're going to continue to be smart and sensible in the capabilities, have come a long way..

Operator, I think we have time for one more question and then we'll wrap it up..

Our final question is from Mary Kate Gorman from Canaccord Genuity..

Hi, Mary Kate on for Mark Massaro. Thanks for taking my question.

You know, I was hoping to ask, have you begun to see more favorable reimbursement decisions in 3 Tomo as a result of the updated NCCN guidelines similar to Cigna? And along that line, do you anticipate new payors coming on next quarter as a result of payors revising coverage decisions in the new year? Thank you..

Thanks, Mary Kate. We're certainly using the NCCN guidelines and the additional clinical data to try to drive additional private pay. I would not expect anything necessarily in the next quarter. Hopefully in the coming quarters, we would hope to continue to make progress there. But there's a lot of prickliness.

Frankly, there's a lot going not private pay world right now, and this isn't necessarily getting the full attention that we think it should. But we'll continue to drive that and expect that over time we'll knock those barriers down. But I think all of that would be additional upside..

Great, thank you..

Okay, operator, I think that wraps us up..

Okay. Thank you. That is all the time we have for questions today. This now concludes Hologic's fourth quarter fiscal 2016 earnings call. Have a good evening..