Good afternoon, and welcome to the Hologic, Inc. First Quarter Fiscal 2019 Earnings Conference Call. My name is Allen. 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. Please go ahead, sir..

Thank you, Allen. Good afternoon, and thanks for joining us for Hologic's first quarter fiscal 2019 earnings call. With me today are Steve MacMillan, the company’s Chairman, President, and Chief Executive Officer; and Karleen Oberton, our Chief Financial Officer.

Steve and Karleen both have some prepared remarks then we'll have a question-and-answer session. Our first quarter press release is available now on the Investors section of our website. We will also post our prepared remarks to our website shortly after we deliver them. Finally, a replay of this call will be archived through February 22nd.

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 can be found in our earnings release.

Finally, any percentage changes that we discuss will be on a year-over-year basis, and revenue growth rates will be expressed in constant currency, unless otherwise noted. Now I'd like to turn the call over to Steve MacMillan, Hologic's CEO..

U.S. Breast Health, International and Global Molecular Diagnostics, all of which posted double-digit constant currency growth to start our fiscal year. These strong revenue results continued the positive momentum that started to build in the second half of 2018 after we reorganized our leadership team earlier in the year.

They represent progress in our efforts to accelerate growth by focusing on our core strengths, especially in Breast Health and Molecular Diagnostics, and the efforts we began several years ago to dramatically transform the productivity and output of our R&D teams to create a much more robust stream of new products.

In Breast Health, we are building on our large installed base of market-leading, clinically differentiated Genius 3D Mammography systems.

Specifically, we have launched new mammography systems that help us segment the market better, developed new products that enable us to play a greater role in the patient's Breast Health journey, grown our service revenue and acquired two small companies to enter the adjacent growth market of breast-conserving surgery.

Together, these strategies have broken the boom-and-bust cycles of the past and should result in more consistent, predictable Breast Health growth going forward.

In Molecular Diagnostics, we continue to fuel an attractive Razor/Razorblade business model that is enabled by our large and growing installed base of fully automated Panther systems and the broadest assay menu in the mid to high-volume molecular space.

We now have more than 15 tests that have been FDA cleared or CE marked to run on the Panther or Panther Fusion platforms. Two-thirds of which have been introduced just since the start of calendar 2017.

And these new assays combined with our unique ability to partner with customers to drive demand and establish categories, such as sexual and reproductive health, have led to strong consistent growth in system utilization as well as sales.

We are also making great progress in extending our Breast Health and Molecular Diagnostics strengths to international markets where the opportunities are large, but our shares are low compared to the United States. Over the last few years, we have very deliberately and carefully built the foundations for reliable and consistent international growth.

As a result, OUS revenue excluding blood and aesthetics grew at a low double-digit rate in both 2017 and 2018. And we are off to a good start in 2019 with 14.9% growth in the first quarter. With that introduction, let's discuss our first quarter results in more detail now.

Revenue of $830.7 million grew 5.0% on a reported basis or 5.7% in constant currency, well ahead of our expectations. The acquired Faxitron and Focal businesses performed well contributing $12.2 million to revenue.

If you back out this contribution as well as revenue from our divested Blood Screening business you can see that growth would have been about 4.1%, still a significant improvement compared to recent quarters.

In terms of geography, our domestic businesses accelerated in the first quarter, posting growth of 4.1% led by Breast Health and Molecular Diagnostics. And as I mentioned earlier, our legacy international franchises also performed well recording our eighth consecutive quarter of double-digit growth excluding Blood Screening and Cynosure.

Molecular had another exceptional quarter internationally and our Breast Health and Surgical businesses grew at double-digit rates as well, reflecting the broad-based improvements we have made in recent years.

Including international sales of Cynosure products, which declined in the period, total international sales were $208.9 million still a robust increase of 10.7%. Now, let me provide some more detail on our divisional revenue results.

Let's start with our biggest business, Breast Health, which has reestablished itself as an important growth driver for the company and generated much of the upside in our results recently. Global Breast Health sales totaled $324.7 million in what is typically a seasonally soft quarter, a robust increase of 13.4%.

Even excluding $7.7 million of Faxitron revenue in breast imaging and $4.5 million from Focal in Interventional Breast, the division grew 9.1% globally. We are especially pleased that in the U.S.

which represented more than three-quarters of global sales in the quarter, sales increased by almost 8% excluding Faxitron and Focal, the sixth consecutive quarter of accelerating year-over-year growth.

As we discussed at JPMorgan, while some have been overly focused on our Aesthetics division, which represents only about 10% of sales, we have quietly but strategically transformed Breast Health from a domestic capital franchise into a steady diversified global growth business across the continuum of breast healthcare.

There have been several aspects to this strategic transformation. First, we have prioritized international expansion which was evident again this quarter with Breast Health sales growth in the mid-teens.

Second, we have strengthened our service business, a nice source of recurring revenue that is larger than gantry sales and grew steadily in the first quarter. Third, we have used our strong cash flows to complete two tuck-in acquisitions over the last six months, to establish a foothold in the adjacent growth market of breast conserving surgery.

Faxitron and Focal performed well this quarter, posting revenue that was in line to slightly better than our internal expectations. Fourth, we have increased the productivity of our R&D engine.

New product sales contributed significantly to Breast Health growth this quarter, led by our new clinically differentiated 3Dimensions and 3D performance mammography systems.

These new products, which have helped us gain market share through better customer segmentation, drove 15% growth in breast imaging revenue this quarter, and together represented the majority of 3D systems sold.

These new gantries are helping us to continue to convert customers from traditional 2D mammography to 3D, which provides better clinical results. But at the same time, we have now begun to farm our existing installed base of 3D systems for upgrades, such as our new Intelligent 2D, Clarity HD and SmartCurve products.

These new upgrades contributed about 200 basis points to global Breast Health growth in our first quarter. Overall, we couldn't be more proud of our Breast Health team for building a diversified sustainable growth business.

We have more work to do, of course, but our Breast Health division has never been stronger than it is today, based on a clinically differentiated core of mammography systems, multiple new products built around this core and two complementary tuck-in acquisitions.

Before we move on, let me mention this, since we're starting a new fiscal year we've simplified our external reporting a little. Specifically, in Breast Health, we've eliminated the small other revenue line in our press release and added these sales to imaging.

These sales were only about $2.7 million in the first quarter compared to $2.3 million in the prior year period, so the numbers are too small to matter. Now let's turn to diagnostics where revenue of $296.6 million increased 5.0%, which we're very pleased with. Molecular remains the growth driver in this division.

As we said at JPMorgan, we have transformed this business as well from a niche player in sexually transmitted disease testing to a broad-based molecular diagnostics leader with strong customer partnerships.

In the first quarter, Molecular sales of $164.3 million grew 11.2%, accelerating for the third consecutive quarter, if you exclude non-recurring royalty revenue that benefited the fourth quarter of 2018. Internationally, Molecular grew well into the double-digits for the 10th time in 11 quarters.

And in the U.S., although we already enjoy high market shares in key assay categories molecular still grew at a high single-digit rate. This was better than in recent periods and reflects how we work collaboratively with our customers to drive testing volumes and better patient care.

As evidence of this, we announced last quarter that we were finalizing multi-year contract extensions with our two largest customers and both of these are now complete. Molecular growth was broad based in the quarter as we leveraged our fully automated Panther system.

We continue to place more Panthers and drive increased utilization by encouraging customers to consolidate testing on the system. In the first quarter specifically, revenue growth was driven by strong sales of our new quantitative viral load tests as well as legacy women's health assays for HPV Trichomonas and Chlamydia Gonorrhea.

And we have many more assays and capabilities in development for markets around the world. For example, just last week, we again demonstrated our leadership in the infectious disease space by announcing a first-of-its-kind FDA clearance for an innovative new assay to detect a sexually transmitted bacteria called M Genitalium.

Moving on, cytology and perinatal sales of $118.1 million declined 3.2% in the first quarter. It's worth mentioning that cytology sales were basically flat while perinatal sales declined significantly due to a shift in ordering patterns.

In the United States, growth in the cytology market remains challenged due to our high market shares and longer cervical cancer testing intervals. However, ThinPrep remains a core strength for us given the key role it plays in women's health and the ability to run several of our molecular assays out of its collection vial.

Elsewhere in diagnostics, revenue related to our divested blood screening business was higher than expected at $14.2 million, a little more than last year. As a reminder, this revenue mainly reflects low-margin products and services under transition agreements we have with Grifols.

Now let's shift gears and cover GYN Surgical, where sales of $108.4 million grew 1.4%. Surgical trends were consistent with recent quarters. MyoSure, which now represents a little more than half of Surgical revenue, grew at a high single-digit rate in the quarter, while NovaSure sales declined at a mid-single-digit rate.

We believe Surgical growth rates will improve over the course of 2019 based on improving sales execution in the United States and increasing contributions from new products such as our Fluent fluid management system and Omni hysteroscope.

Now, let's turn to Medical Aesthetics where sales of $79.8 million represented less than 10% of consolidated revenue and declined 11.6% a disappointing result.

This decline resulted from two primary factors; first, increased competition in the non-evasive fat reduction category negatively affected sales of SculpSure lasers as well as consumable PAC keys. As a result, revenue in our body subcategory declined by more than 40%.

Second, the women's health market has not recovered following the FDA's cautionary letters on certain procedures. As a result, sales of women's health and other products declined more than 20%. In contrast, sales of our skin-related products performed well in the quarter increasing about 10%.

So, what we have now at Cynosure is a salesforce that continues to come up to speed with some pockets of good performance in an aesthetics market that still exhibits attractive growth overall. It's also clear that we have more work ahead to generate the constant commercial buzz that this market demands.

We are developing new marketing approaches toward this end and also seeking out new products that can attract customer attention in the context of rapid product cycles. These include internally developed systems such as our TempSure Surgical capability as well as in-licensed products.

To round out the revenue discussion briefly skeletal sales of $21.2 million grew 8.5% against a very weak prior year comparable especially outside the United States. Given the small revenue base here relatively small changes in comps or ordering patterns can cause large swings in percentage growth rates.

So, to wrap-up, we posted very good financial results in the first quarter, driven by strength in our largest businesses; Breast Health, International, and Global Molecular Diagnostics. We are working to further accelerate growth by leveraging our core strengths especially in Breast Health and Molecular Diagnostics.

We are off to a good start in 2019 and as a result we are increasing our guidance for the year. Karleen will discuss that guidance in a moment. So, now let me turn the call over to her..

Thank you, Steve, and good afternoon everyone. In my remarks today, I'm going to walk through the rest of our income statement, touch on a few other key financial metrics, then finish up with our updated financial guidance for 2019 as well as the second quarter.

Unless otherwise noted, my remarks will focus on non-GAAP results and percentage changes will be on a year-over-year basis. As Steve described, we are pleased with our first quarter results as revenue and EPS exceeded our guidance based on strong performances from U.S. Breast Health International and Global Molecular Diagnostics.

We also strategically deployed capital in accordance with our stated priorities. We closed on the acquisition of Focal Therapeutics, a nice tuck-in opportunity, to strengthen our position in breast-conserving surgery and capitalized on our share repurchase authorization.

Our fiscal year is off to a good start and we are raising our financial guidance accordingly, despite an incremental foreign exchange headwind. With that introduction, let me start by reviewing our P&L for the first quarter. Gross margins of 62.2% decreased 160 basis points compared to the prior year period.

This was primarily due to product and geographic sales mix, as our international sales carry a lower gross margin percentage than sales in the United States. Gross margin was also negatively affected by a stronger U.S. dollar, trade tariffs in China and disappointing domestic Medical Aesthetics sales.

And don't forget, as Steve mentioned, the upside in revenue related to our divested blood screening business comes with little growth margin. Total operating expenses of $274.7 million increased 1.1% in the first quarter.

This increase was mainly driven by the impact of the Faxitron and Focal acquisitions, which contributed roughly $6 million of expense. Excluding Faxitron and Focal, operating expenses actually declined 1.2%, reflecting our ability to drive operating leverage while still funding investments for future growth.

Operating margins of 29.2% declined 20 basis points in the first quarter compared to a year ago, primarily due to the effect of product and geographic mix on gross margins. Overall, our operating profitability remains very healthy and we continue to see opportunities to improve further.

Finally, net margins of 18.9% decreased 50 basis points compared with the prior year period. All of this led to non-GAAP net income of $156.7 million and non-GAAP earnings per share of $0.58, exceeding our guidance range. Before we cover our revised 2019 guidance, I'll quickly touch on a few other financial metrics.

Our finance teams had a very effective start to the new fiscal year. In addition to closing the Focal acquisition, we strengthened our balance sheet by restructuring our debt and acting opportunistically on our outstanding share repurchase authorization.

Specifically in the first quarter, we amended our credit agreement, which includes a five-year $1.5 billion senior term loan and a $1.5 billion revolving credit facility. We used these proceeds from new facility to refinance at a slightly lower interest rate, our previously outstanding senior term loan and revolver.

Based on our strong financial position, we were also able to extend our debt maturities, gaining increased financial flexibility. At the same time, we repurchased 3.7 million shares of our stock for about $150 million in the first quarter, helping reduce our shares outstanding. And we have more than $260 million remaining on our buyback authorization.

Even with all this productive capital deployment at the end of the first quarter, our leverage ratio net debt-over-EBITDA stood at only 2.8 times. We remain comfortable around this level recognizing that the ratio could fluctuate based on the timing of acquisitions and buyback activity.

Moving on, adjusted EBITDA of $260.7 million increased slightly compared to the prior year. Finally, the company generated $82 million of free cash flow in the first quarter. Excluding a non-recurring litigation settlement with Smith & Nephew, free cash flows would have been $116.8 million.

We continue to generate industry-leading free cash which enables us to pursue tuck-in acquisitions such as Faxitron and Focal while also acting on our share repurchase authorization as we see opportunities in the market. Now I'd like to shift gears and discuss our non-GAAP financial guidance for the full year and second quarter.

We are updating our full year guidance based on our good first quarter results, partially offset by the stronger U.S. dollar which is affecting all multinational companies. At a high level, we are increasing our constant currency revenue guidance and slightly raising our EPS forecast. Let's start with revenue.

As a reminder, we've previously guided to reported sales of $3.29 billion to $3.335 billion, which represented constant currency growth of between 2.8% and 4.2%.

Based on our strong first quarter results we are increasing our revenue guidance to $3.305 billion to $3.335 billion which includes between $40 million or $45 million of revenue from our divested blood screening business.

Based on recent exchange rates, our new revenue guidance translates to constant currency growth of 3.8% to 4.7% better than our initial 2019 guidance. As you know, the U.S. dollar has strengthened materially since we first guided.

In fact, based on recent exchange rates, we estimate that currency fluctuations are driving an incremental headwind of roughly $15 million to our previous revenue guidance. Despite this headwind, we feel confident about the growth in our core businesses and our ability to control expenses.

As a result, we are increasing our EPS guidance slightly to a range of $2.39 to $2.43 which represents reported growth of between 7.2% and 9.0%. I should point out that EPS growth would be higher, if not for the increasing currency headwinds and diminished contributions from our divested blood screening business.

This updated full year guidance is based on diluted shares outstanding of approximately 272 million for the full year which reflects progress on our buyback program and effective tax rate of approximately 23% which is the same as our original guidance. Now let's turn to guidance for the second quarter of fiscal 2019.

We expect revenue of between $795 million and $810 million which reflects growth of 2.5% to 4.4% on a constant currency basis. On a reported basis, our guidance reflects revenue growth of 0.7% to 2.6%.

As a reminder, our second quarter of 2019 has one fewer selling day than the prior year period although we don't expect this to have a significant impact. In addition, it's worth explaining that we expect quarterly revenue to decline sequentially versus the $830.7 million, we posted in the first quarter for two reasons.

First, we forecast less revenue from our divested blood screening business; and second as a reminder the March quarter is seasonally weaker than the December quarter for our Surgical, Medical Aesthetics and Diagnostics businesses.

On the bottom line, we expect EPS of $0.55 to $0.57 in the second quarter which implies growth rates of between 3.8% and 7.5% continuing to outpace revenue growth.

As you update your forecasts, we would encourage you to model at the middle of our guidance range as we still – as it's still early in the year and we've tried to set realistic ranges that incorporate both potential upsides and downsides.

Before we open the call for questions, let me conclude by saying that we are pleased with how we started 2019 with our Breast Health, Global Molecular Diagnostics and International businesses driving robust growth.

We continue to generate industry-leading cash flows and put that cash to good use with a focus on tuck-in acquisitions and share repurchases. Based on all of this, we are raising our financial guidance despite incremental currency headwinds. With that, I will ask the operator to open 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..

Thank you. [Operator Instructions] We'll first go to Brian Weinstein with William Blair..

Hey guys. Thanks for taking the questions. I thought we could just start with a little bit on gross margins here. Obviously post blood screening the sale we've seen gross margins kind of trend a little bit lower here. I understand the commentary about OUS having a lower margin.

But can you break out for us kind of the margin by geography and just give us an idea about how you're thinking about gross margin longer term here as that mix continues to shift? Kind of something in the low 62s, is this the way that we should be thinking about the business longer term? Or is there an opportunity to maybe drive that to something back towards the mid-60s over time?.

Hey, Brian, it's Karleen. Let me give that a shot. So yes, so in the quarter margins came in a little over 62%, which was a little bit below that plan. And one of the pieces of that was the FX headwinds, which is about 50 basis point hit to the margins on the quarter.

I would also say that in the quarter the shortfall in the domestic Medical Aesthetics sales contributed to that. But as we think about gross margins longer term, yeah, we're trying to think that they would trend up from where they are now. I think there's a couple of things that we think about would drive that.

We continually evaluate opportunities for efficiencies both on supply chain and our manufacturing network as we pursue some of the tuck-in M&A strategies. We like to look for those products that would have accretive gross margins. As an example, Focal of the BioZorb product is very accretive to our overall consolidated gross margins.

And then international while there is a disconnect in the margins between the U.S., we think there is opportunity as that business grows to create more leverage there..

Brian? Sound like Brian froze in the Chicago cold..

Mr. Weinstein your line is still open..

Hi, can you guys hear me? Can you hear me still?.

Yes, there you go..

Yes. So, just on new products, you guys have talked a lot about it.

Can you give us some idea about the contribution to total revenue? What percentage of revenue new products represent? And then also can you highlight some of the key items in the pipeline that we should be looking forward going throughout the year? And then Steve just want to make sure you have a lifejacket because I hear it's supposed to be in the 60s when you leave tonight.

So, just want to make sure you're warm enough..

Thank you, Brian. So -- go ahead Mike..

Yes, hey Brian on new -- it's Mike. On new products, I don't have a specific number in front of me. We did say at the JPMorgan Conference that that total more than tripled in 2018 versus 2017. Certainly Q1 continued those trends. I would say some of the bigger products would obviously be 3Dimensions and 3D Performance in our Breast Health business.

We've been very successful with the Affirm prone table and Brevera. In the Diagnostics business, we're seeing really good uptake from the viral load assays as well. So, those are probably the main ones..

All right..

All right. And next we'll go to Bill Quirk with Piper Jaffray..

Great. Thanks. Good afternoon. And I can fasten on Tyler's share with Brian is complaining about, it's pretty balmy where I'm sitting..

What it is out there, Bill? It's like 20 below?.

Might be negative 35 at the windshield, but who is complaining. Steve if we -- Steve or Karleen, if we back out the Faxitron deal, looks like Interventional was fairly flat. I was hoping you could add some additional color about that particular business line and how we should be thinking about that trend over the balance of the year..

Yes sure. It's Karleen. So main reason for that trend is Brevera. I think we've talked about some of the supply constraints that we have on the disposals related to that capital equipment.

So, we've intentionally held back sales on the capital side because what we don't want is to sell the capital to customers and then not be able to supply the needle that goes with it for the procedures. So, don't want to have frustrated customers in the field.

As we think about that, we do believe that supply should improve as the year goes on and then we should see improving trends for that subdivision..

Perfect. Thanks Karleen. And then secondly guys wanted to ask a little bit about the Mycoplasma genitalium assay that was just approved. I mean it seems like a pretty natural extension of the reproductive health diagnostics offering that you have.

Can you help us think about market size and how we should think about this filtering into the Diagnostics business? I recognize that it's probably not as large of a market as say HPV or Chlamydia, gonorrhea. But just help us give a few items to think about to frame it up..

Sure Bill. And this has been a really great one for our team because believe it or not we started looking at this back in the early 2000s when we started to realize that just the existing assays didn't seem to capture everything in terms of cervicitis and some of the other things. And our team has been quietly working on this one for quite some time.

And I think it's going to be probably a lot more like our Trich assays. These kind of things that, any given quarter here you're not going to see a huge amount it's going to be getting off. But we've already been in talk with some of the payers. We think it will emerge to be a very significant assay, call it, in the three to five-year horizon.

But certainly over the beginning times, here like most of our assays, very small out of the gates as we build the support and the awareness. But it's another one of these where we do think our TMA technology puts us in a unique position to have more sensitive and specific assay in this space.

So limited expectations for this year, but it's going to one that is again in 2020, 2021, 2022, 2023, 2024 we'll look back and say, this has turned out to be a really nice addition to our portfolio..

All right. We'll take our next question from Vijay Kumar with Evercore ISI..

Thanks. So maybe, Steve, just on breast imaging. I'm getting to organic overall breast because of high singles here. And this is all coming from imaging. I mean, some of the comments you're making on new product traction, upgrade cycle.

Why shouldn't these trends be sustainable in the back half, right? Because certainly it looks like there is something going on in the CapEx market. Stryker this morning spoke about beds and stretchers being up.

Maybe just can you comment on CapEx environment and why these trends are not sustainable?.

Sure, Vijay. I think, let's say, it was a really nice quarter. We also had a softer comp. Yeah. I think the comps get stronger as the year goes on. The other piece, just if you look at the global economic environment right now, we want to be careful. It was a great quarter, an awesome quarter.

We want to be careful not to get too far out of our ski tips here, not knowing where things are going. But I will tell you, we feel really, really good about the underlying trends. We're hearing good things from our customers and we'll see where we go. But we're just one quarter into the year..

Helpful, Steve. And I had one follow-up. I mean, just curious I think we had RSNA in December and I would have thought that's going to be weak, but you guys crushed it. Maybe Karleen, on the EPS guidance, it looks like revenues, bottom up came up a little bit, right? We had some FX offsetting, maybe better M&A and the Q1 strength.

But did I hear you correctly? I mean, share count went down on the guidance for $4 million. And that's about 140 bps contribution, but your EPS was just tweaked up by $0.01. Is there something below the line that we should be thinking of? Or is this a margin question? Thank you..

No, no. I don't think there's anything below the line. I think FX is incremental headwind on the bottom line as well, that we factored in here. So I think it's just early, early out of the gate here and don't want to get ahead of ourselves..

All right. Our next question comes from the line of Tycho Peterson with JPMorgan..

Hey, Tycho..

Hi. Apologies. I'm going to have to ask about Cyno though, and I appreciate it's down 10% of revenues. But we did see some pretty tough results out of your peer the other day from Allergan.

Just curious, is there something in the market that's kind of causing this shift? And it sounds like for some of their commentary there, just kind of equipment, a little heavier.

So can you maybe just talk to pricing? And then secondly, Vitalia, now that it's reintroduced, can you just talk on conversations with the FDA around generating data and how you think about kind of backing that up? Thanks..

Sure. Tycho, on the first part, within the body contouring category, we've been relatively constant on holding our pricing. It was a tougher quarter.

I think what we've clearly learned and it's going to affect our R&D and licensing strategies here as we go forward is in any given quarter often times the docs had a little bit of amount of money that they're going to spend for new equipment. And if you got kind of the shiny new toy you may go that way.

And there's been a product or two from some of the private companies that have done pretty well in the short term. You get a little bit hot in the quarter and that clearly affects things. I think as it relates to Vitalia going forward, we've been back in discussions obviously the last five weeks. There wasn't a lot of discussion going on with the FDA.

But we feel like we have a pathway forward. It's going to be a couple of years, pragmatically before we really have the data on both that and MonaLisa to strengthen the data and claims. So that's where we're just imagining expectations in that women's health piece of the business for the next number of quarters.

But still very bullish about the longer-term outlook. But it's clearly kicked it out a couple of years past what we had hoped and expected..

Okay. And then on diagnostics, there is some news out today that the FDA is going to have an evaluation panel on looking at devices for HPV detection. I know it's kind of professional just curious, if you have any thoughts there. And then can you also clarify on perinatal what the shift in ordering pattern was about? Thanks..

Sure. Good job getting two follow-ups into one. So, thanks Tycho. The FDA panel, we're encouraged by this. And obviously as the leader in both HPV as well as PAC and co-testing and everything else, we've been having great dialogue both with FDA as well as the National Cancer Institute and see that there will be continued evolutions.

What we're seeing around the world right now is a real mixed bag all over the place different countries having different approaches, whether it's co-testing in submarkets, clearly adopting mRNA our technology in a lot of markets.

And there's a lot of different approaches happening around the world right now and I think the FDA wants to kind of take a peek at both that as well as the U.S. We've been in those discussions and feel pretty good about what we're working on for the longer term in this category as well. So, we will see where it goes.

Did you want to add something, Karleen?.

Yes, I was just going to answer the question with regards to perinatal and the ordering pats. So this Tycho' goes back to the recall that we had. So what happened is we had products become available again in Q1 of 2018. We had an acceleration of restocking of the product as well.

We had a reversal of the reserve that we had taken in the previous period..

We'll take our next question from Isaac Ro with Goldman Sachs..

Good afternoon guys. Thank you. So just on guidance question if I could. I'm just trying to deconstruct the impact of -- if I think about FX being a little bit worse debt refi helpful and then obviously the operational changes getting better.

If you could try and maybe take each of those piecemeal I'm trying to figure out how those all kind of netted together?.

So, yes, I think from a top line perspective, are you talking the top line and the bottom line, Isaac?.

EPS. I mean, obviously the EPS update was not significant on a net basis. But I felt like there are a few moving parts that's why I wanted to try and deconstruct it..

Yes. So, I would say that on the FX piece that was probably a couple of pennies that drops to the bottom line kind of a headwind that we didn't have from the original guidance..

Okay.

And then debt refi?.

That’s pretty meaningful. $15 million of incremental FX and drops to gross at least what happened..

Yeah. It's probably $0.02 to $0.03. .

Yeah. The other stuff below the line, Isaac was about the same really not much change in other income expense. It's mainly that FX piece..

Okay, got it. And then maybe separate topic. On the Breast Health business, I think the question was asked earlier about what was going on with the imaging side. I'd be interested if you could maybe identify the growth contribution you got from better capture of aftermarket revenue the nonmammography-related products.

You gave a little bit of detail there, but just looking to get more? Thank you..

Sure, Isaac. I think the biggest piece is we've been fragmenting the market. Everybody's been looking for what was going to be the next big whether it's 2D, 3D, or “4D”. And what we've been saying all along is we're turning this into understanding the market, bringing new innovations. We brought 3Dimensions at the higher end.

We brought 3D Performance at the lower end. And we've, obviously, still got a firm prone, the biopsy system. We've got all of these products. And then increasingly we did reference about 200 bps of growth of now really starting to sell upgrades in terms of the Clarity HD, the SmartCurve panel things to already our 3D base that are out there.

And I think that's the exciting part now that we have both continued innovations on the core mammography 3D systems, but also starting to mine the base that's already out there. We've watched the SmartCurve panel and again we've got over what 5,000 6,000 – well over 5,000 about 6,000 installed base out there. And we have more business coming through.

We've also got the service revenue coming through as well.

So it's that shift from just a boom bust launch one new product once a decade and ride it up and then ride it down to a steady stream of innovation, customer segmentation understanding, which customers want which, and the ability to go mine even the existing 3D bases to start to bring more upgrades along the way..

All right. Our next question comes from Richard Newitter with SVB Leerink..

Thank you. Steve, if I could just – how are you doing? If I could just follow-up on the breast imaging. So I appreciate what you're saying. I think it's great that there's a bit more stability and predictability and that the R&D strategy is paying off.

But I'm also just wondering, is there a to use your words 4D-like product that's cooking? And if so when might we be thinking about that product cycle? Is that three years away? Two years away? And then I have a follow-up..

Sure. You can imagine we've got lots of great additional things in our pipeline. We've always -- we've been the innovator in this space, certainly over the last decade. We continue to innovate on both claims and products and it's a huge reason why we are by far the leader in the 3D space and in the mammography space in the U. S.

and why we have significantly gained the market share over the last five years. So, having said that, we've still got a bunch of our existing 2D base to convert to 3D, and what we've been trying to tell you along is, there'll be more innovations.

It may not be quiet the impact in the future because of the fragmenting customer base and just because of the way we have filled up the customers and going back and mining the existing base instead of waiting until the next big thing coming.

And our goal that we've said all along been in the company now for 20, 21 quarters, we said, we wanted to build a very sustainable growth business in Breast Health. That's exactly where we've been.

So we're far more focused on doing that and believe that our innovation engine is much more geared for that going forward than for just a big one-hit wonder. But we do have some very cool things still in the pipeline..

Okay. That's helpful. Thank you. And then just going back to the Aesthetics business for a moment. You mentioned several times kind of a shift in thinking to kind a keep up with the shiny object kind of nature of this business. You're going to collaborate more through business transactions or relationships, I guess.

Can you just give a little more color around how that would work? What kind of structures these relationships would take? And are you open to a further tuck-in M&A in that segment as it presents itself? Or this is the direction going forward that you'll take in the Aesthetics segment? Thanks..

Yes. I think the fascinating part is given the lifecycles of some of the products in the aesthetics space, we think there's a lot more opportunities frankly to have a balanced approach of both organic and inorganic innovation.

And the inorganic to a large degree doesn't even have to be acquisition as much as it can be in-license, like we did with Nitronox. And we're in discussions with a lot of other companies. And when we've certainly seen some of the private competitors in this space, it's not necessarily needing to acquire.

You can actually license, write it for a few years and the lifecycles are clearly different than rest of our businesses. So in some cases frankly licensing is a better way to go probably than acquisition..

Next we'll go to Dan Leonard with Deutsche Bank..

Hi, Dan..

Thank you. Hi, Steve. So, two questions on breast imaging. First, I was hoping you could elaborate a little bit on what you're talking about regarding farming the installed base of 3D for upgrades.

What is the runway there? And how durable should we think about the 200 basis points of tailwind you reported in the quarter?.

Sure, Dan. I think there's a lot of runway ahead. If you think about it, we launched our first 3D systems in the United States almost eight years ago now. And in the meantime we've come up with better detectors.

We've come up with particularly better software packages and then things like the SmartCurve paddle that also come with different algorithms and different software packages. So the ability to go back now as we think about the future it's not just converting our 2D to 3D.

It's now looking at all of our existing 3D systems, many of whom were bought by early adopters and thought-leading institutions. So want to make sure they are staying on the cusp of state-of-the-art. And as we've come up with frankly better CAD packages, better packages software to be able to drive, there's a lot of opportunity there.

And we do think that'll be a meaningful way. If you look at our SmartCurve paddle that's probably not even – it's just in a small percentage at this point of our existing 3D base. I mean, I'd say, it's probably certainly less than 20% and that's probably even less than that. So as you start to build it out.

There's opportunities for years and years as well to just be upgrading our 3D while we continue to upgrade 2D. And I think that becomes part of the – it becomes a broader playbook than the days of yore. So we have so many things at our disposal now to drive that sustainable growth..

And then my follow-up is a bit similar to Vijay's question from earlier. So I know that typically the December quarter is not a seasonally strong quarter for breast imaging, but it does seem like it was seasonally strong in the hospital capital spending environment.

So based on whatever data or intelligence you have internally, do you have any way to isolate how much the performance might have been due to just healthy year-end customer budgets and healthy market as opposed to run rate performance in self-help?.

Yeah. We don't have a great handle. You get a little anecdotes here or there. Somebody had some extra money in their budget at year-end and spent it, this kind of stuff. But it's also why we just want to be careful not to get too far ahead of ourselves. I'll tell you we feel very good about the underlying order trends.

We feel very good about the competitive wins we're getting. We feel very good about a lot of what's going on in the business. But to – we can't be quite as granular saying, we got 160 bps that came from extra budgets being released or anything like that, that would just be pure speculation..

All right. Our next question comes from the line of Jack Meehan with Barclays..

Good afternoon..

Hey, Jack..

My first question is on a topic I'm sure you love which is the adoption of ASC 606 with the new fiscal year. I'm curious relative to result under the prior standard did that impact the results in the quarter at all? I asked just I know there are some changes around revenue recognition.

Just curious if that impacted the results versus if they have been reported under 605?.

Jack, you'd be surprised. I think we'll let Karleen answer this one..

Yes, Jack. Jack, there was minimal impact in the quarter. I think the only – moving forward our business model aren't – there's no real meaningful change to our revenue recognition under our business model under the new rules.

The only impact that we had was on adoption related to deferred revenues to the order of I think it was about $6 million to $8 million that was on our balance sheet that we really had no performance obligation, which is essentially written-off to retained earnings in the adoption, but other than that really no impact..

Great. Yeah. Thank you for the clarification. And then did want to follow-up on the Molecular segment a two-parter. Just in the U.S. with some of the reimbursement changes, I'm curious what you're seeing on the pricing environment, if there's been any change for Molecular specifically. And then international growth looks pretty good.

So maybe just talk about the adoption of Panther ex-U.S. would be helpful..

Hey, Jack, it's Mike on the first piece, I'll take that one. Yeah. The PAMA-related reimbursement cuts. As everybody knows nothing has changed dramatically in terms of our ASPs. Pricing depends on the quarter, but tends to be flat or down just a very little bit depending upon the product.

I guess, the thing that I would point out is even as those reimbursement rates come down, you think about it it's still pretty good reimbursement for some of these tests especially that are helping bring patients into the facility and that are being run on a fully automated Panther instrument that doesn't really have a lot of additional labor costs associated with it.

So there's still I think decent profit there.

On the international piece, Steve did you want to take that?.

Yes. I think International we've continued to be placing Panthers continued to drive menu particularly in Western Europe. I think we've made a lot of progress over the last few years. We've got a leader over there it's been doing great things. And the magic with every Panther we place the new start to menu coming in.

We also just got a lot better tracking the metrics as well usage per Panther. There were days in the old days we used to sell a Panther and then it wouldn't get used.

We've gotten so much just rigorous basic operational discipline and understanding every Panther around the world what it's doing, and if we can help drive more business through it working it that way, so no magic, just good hard work customer by customer making progress..

The next question comes from the line of David Lewis with Morgan Stanley..

Good afternoon. Steve, one for you and then one for Karleen. So Steve questions on breast on call and I think the strategic change in breast is getting a lot of attention, so just two kind of related questions there.

Is the weighted market growth rate -- weighted average market growth rate for this business higher now? Are you saying that you can grow faster than weighted average market growth rate versus period of time based on some of the changes you made and what's the new number for this business? How do you see this business going forward?.

Yes David. Just look at results versus past, I don't know that we've got a perfect weighted average market growth rate for the category. I do think if you look at the last 20 quarters or whatever, we've probably grown faster than whatever that weighted average market is. And we continue to try to be shifting and driving that to a higher number..

Okay. And then Karleen just a lot of questions on margins and you talked about currency. But revenue's up. Operating income is about the same. Is it all just currency or is there any select areas of reinvestment or conservatism? Because it looks like there's a limit of reinvestment as op income still the same by our math. Thanks so much. .

Yes. So on an op income -- I think if you look at the sales and marketing lines are up specifically as we talked about the strategic changes in the Breast Health business. We have invested in that sales team to have a team that can sell the portfolio of products. So if there's been reinvestment that's where it's been..

Next we'll go to Doug Schenkel with Cowen..

Hey good afternoon guys..

Hey Doug..

Just maybe starting on capital deployment, could you update us on your plan for 2019? You repurchased more shares more quickly than we expected and lowered share count guidance for the year. So I'm just wondering what we should think about in terms of our -- or how we should think about share repurchases for the balance of the year.

And building off of that I'm just wondering if market volatility is impacting your M&A efforts at all..

So I'll start with that. So as we've talked about with the free cash flow, we originally guided at the beginning of 2019 that we estimated about $700 million. The priority there is clearly M&A. So we deployed about $125 million in the quarter on the Focal acquisition.

And then what we've said it's going to be very opportunistic in regards to share repurchases after M&A. And I think we executed on that in the quarter and I think that's what you'll continue to see out throughout the balance of the year..

Okay. That's helpful. And then maybe just a couple follow-ups on Molecular Diagnostics. In your prepared remarks, Steve, you mentioned that you've been having a bit more success getting Panther customers to consolidate more menu on to Panthers. I'm wondering if this is primarily in the U.S., or if it's happening more broadly geographically.

And I guess on the topic of virology and menu, I'm just curious if you'd be willing to comment whether you've had any success converting your two large lab customers to use viral load assays as part of the contract renewal. Thank you..

So Doug, probably on the first part of, whatever I was really talking about is, I think we're getting much more granular at getting smarter at penetrating wherever there's a Panther, making sure we're getting a lot more usage. I don't want to overplay that we're getting all this massive consolidation on to our Panthers.

We still see huge opportunities for that. So it's more customer-by-customer, particularly outside the U.S., which was really my reference where we would've placed the Panther, it wasn't getting -- it might have been – being used for one assay instead of two or three or four. So we've been building that out more than anything.

But I think, obviously, continuing to feel very good. And we're not going to comment on specifics of our largest customer contracts consistent with the -- our policies for quite some time. But there would be a huge inflection. I think you'd probably expect something of that that you're – we're seeing ongoing strength..

Operator, I think we might have time for one more question..

Okay. Thank you, sir. We'll take our last question from Raj Denhoy with Jefferies..

Hey. Good afternoon, guys..

Hi, Raj..

Maybe I could ask just a couple of cleanup ones here. So Focal and Faxitron, I guess, $12.2 million in the quarter. I know it's still early days.

But anything in terms of what you think the opportunity set for that is now that you've had it for a while? And is your breast-conserving portfolio sort of fully baked here? Or where should we expect more acquisition in that category?.

Yes. I think we feel really good about the sales teams we've got there and the products. We're still, I'd call, in a very early stages of pulling those sales teams together and leveraging especially the disposable side of the sales force.

I think everything we've seen has reinforced that these are both good acquisitions that are on or above our new models. Not sure that we necessarily need more things in the portfolio. I think we feel good about that. I'd also say, it's most -- both are mostly U.S. businesses today. And again, over time probably significant opportunities outside the U.S.

Those will come a little bit more over time as we ramp up the right organizations and some of that. But I think we're off to a really good start, really pleased. And as we've talked in the past, certainly, Raj you well know it, these are the great kind of the tuck-in deals that I think will be very good for us..

Great. And then, maybe just very last question, just on NovaSure. You mentioned still down, but expectations will improve over the course of the year.

So any more detail around that, sort of the cadence of the approval and what's needed to actually get that back on track?.

Sure. I think, certainly our own sales team is promoting it more. It's been an interesting one, because the whole GEA market has kind of dried up a little bit or shrunk really ever since one of the competitive products was taken off the market and in a weird way there maybe some competitors coming later in the year.

The way we almost think about some of that is, it may actually reignite some discussion. There is still way too many hysterectomies done in this country. And I think as we get our messaging out a little deeper, we'll continue to try to strengthen that business. But it's clearly well established in an established category that hasn't been growing.

And with that category not growing, given our very strong market share we've kind of been going sort of along the ways of the market. So we like to get it going back a little bit better. .

Thank you..

Thanks Raj..

Thank you everyone. That is all the time we have for question today. This now concludes Hologic's First Quarter Fiscal 2019 Earnings Call. Have a good evening. You may now disconnect..