Good afternoon, and welcome to the Hologic, Inc. Second Quarter Fiscal 2019 Earnings Conference Call. My name is Dory, 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, Dory. Good afternoon and thanks for joining us for Hologic’s second 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 second quarter press release is available now on the Investors section of our website. We also will post our prepared remarks to our website shortly after we deliver them today. Finally, a replay of this call will be archived through May 24.

Before we begin, I would like to inform you that certain statements we make during this call will be forward-looking. These statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied.

Such factors include those referenced in the Safe Harbor statement included in our earnings release, and in our filings with the SEC. Also during this call, we will be discussing certain non-GAAP financial measures. A reconciliation to GAAP can be found in our earnings release.

Finally, any percentage changes 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..

Thank you Mike, and good afternoon, everyone. We’re pleased to discuss Hologic’s financial results for the second quarter of fiscal 2019. For the fourth consecutive quarter, we posted strong results overall, as total revenue of $818.4 million and non-GAAP earnings per share of $0.58, both finished ahead of our guidance ranges.

Like in recent periods, growth was driven by our largest businesses, Breast Health and Molecular Diagnostics, and our international franchises continue to perform well. This quarter we also benefited from improved performance in our Surgical division.

These strong revenue results continue the positive momentum that started to build in the second half of 2018, after we reorganized our leadership team earlier in the year. This momentum is based on some familiar strategies that we have discussed in the past.

We continue to focus on accelerating growth by leveraging our core strengths and market-leading products, especially our large installed bases of Genius 3D mammography systems and Panther instruments, which in turn create tremendous recurring revenue streams.

We are also increasing our penetration into international markets and broadening our product portfolios through both internal R&D and external business development. And we saw all these strategies pay off this quarter. With that brief introduction, let’s discuss our second quarter results in more detail now.

Revenue of $818.4 million grew 3.7% on a reported basis, or 5.2% in constant currency, ahead of our expectations. Within this, the acquired Faxitron and Focal businesses also exceeded plan, contributing $14.6 million to revenue, so we are off to a great start with these acquisitions.

In terms of geography, domestic sales accelerated in the second quarter, posting growth of 4.6%, our best growth rate in six quarters. This was led by Breast Health and Molecular Diagnostics, with improvement in Surgical as well. From a commercial perspective, we are executing better in our largest market, with a drive to continuously improve.

Our legacy international franchises also performed well, recording our ninth consecutive quarter of double-digit growth excluding blood screening and Cynosure. This strong, sustained performance clearly reflects the results of the significant leadership changes we put in place a few years ago.

Molecular and Surgical had the highest growth rates on a percentage basis, and our Breast Health business also performed well. Including international sales of Cynosure products, which declined significantly in the period, total international sales were $202.9 million, still a solid increase of 6.9%.

Now, let me provide some more detail on our divisional revenue results. Let’s start with our biggest business, Breast Health, where sales exceeded expectations and underlying trends remain strong. Global Breast Health sales totaled $321.5 million in the second quarter, a robust increase of 8.4%.

If we look at the division on a pro forma basis, as if we owned Faxitron and Focal in the prior year period, Breast Health growth would have been about 4.9%. Breast Health growth was balanced geographically, with U.S. revenues increasing 8.8% and OUS sales rising 6.9%, as our commercial capabilities continue to strengthen around the world.

Growth was also balanced between our breast imaging and interventional products, as our sales team focused on selling our growing portfolio. Our breast imaging segment grew 7.5%, while interventional sales increased a very strong 12.9%.

As we have discussed, our Breast Health division today is much steadier and more diversified than it ever has been, with innovative, market-leading products across the continuum of patient care and across the globe. Our second quarter results illustrated this in several ways.

First, our competitive position in our core mammography market remains very strong, based on clinically differentiated products and excellent customer relationships. We continue to install a consistent number of new 3D systems in the U.S., while maintaining premium pricing and high market shares.

And proposed changes to the MQSA, which emphasize the importance of breast density, should drive further 3D conversion and prove to be an incremental positive for us if implemented. As a reminder, our Genius 3D mammograms are the only ones proven to be superior to traditional 2D mammography for women with dense breasts.

As we’ve been saying for some time, and as virtually all radiologists understand, all 3Ds are not created equal; we have indications in our label and published trials that demonstrate our differentiated performance. Second, new products are contributing more and more to Breast Health growth.

Our new 3Dimensions and 3D Performance gantries, which help us segment our customer base better, again grew strongly and represented the majority of systems sold in the quarter.

And other new products, including Intelligent 2D, Clarity HD, SmartCurve and the Affirm prone biopsy system, continue to be well-received by customers, with significant runway still ahead.

Finally, sales of our Brevera biopsy system contributed slightly to growth in the quarter, although we expect to continue facing supply constraints over the medium term. And third, Focal and Faxitron, which we have combined into our new breast surgery franchise, are performing well.

Combined sales in the quarter were $14.6 million, a robust pro forma increase of 40.4% that reflects our successful integration efforts and the power of Hologic’s broader reach and resources. And we continue to be on the lookout for similar tuck-in acquisitions.

Now, let’s turn to Diagnostics, where revenue of $296.7 million increased a very strong 7.8%. Despite the external concerns around pricing in this market, this represents a material acceleration from recent quarters, although admittedly versus an easy prior-year comparable. Molecular remains the growth driver in this division.

Based on the productivity of our R&D team and the sophistication of our commercial organization, we are emerging as a broad-based molecular diagnostics leader with strong customer partnerships.

In the second quarter, worldwide molecular sales of $167.8 million grew 12.8%, an acceleration compared to recent periods and the highest growth rate in six quarters. Internationally, molecular grew 22.8%, well into the double-digits for the 11th time in 12 quarters.

Although international is a small piece of our total molecular franchise, we are seeing very strong performance there. And in the U.S., although we already enjoy high market shares in key assay categories, molecular grew at a low-double-digit rate.

This was better than in recent periods and reflects how we work collaboratively with our customers, especially our largest ones, to drive volumes and better patient care in established testing categories.

Molecular growth was broad-based in the quarter as we leveraged the razor-razor blade business model built around the fully automated Panther and Panther Fusion systems. We continue to place more Panthers and drive increased utilization by helping customers consolidate testing on our systems.

In the second quarter specifically, revenue growth was driven by strong global sales of our legacy women’s health assays for chlamydia/gonorrhea, HPV and trichomonas, as well as new quantitative viral load tests. And thanks to our outstanding R&D and regulatory teams, which have now earned U.S.

clearances in 10 consecutive quarters, we have many more assays and indications in development for markets around the world. So, we expect our Panther menu, which is already the broadest in the mid- to high-volume molecular space, to get even stronger.

Moving on, cytology and perinatal sales were $115.5 million in the second quarter, a slight increase of 0.3%. Like last quarter, cytology sales increased fractionally, while perinatal sales declined. 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.

With this in mind, we are pleased to have recently earned FDA clearance for our ThinPrep Genesis Imager, which improves workflow for customers and facilitates co-testing with ThinPrep and our APTIMA HPV assay. And we expect more innovation in cytology over the next couple of years.

Elsewhere in diagnostics, revenue related to our divested blood screening business was higher than expected at $13.4 million, an increase of 19% compared to last year. As a reminder, this revenue mainly reflects low-margin products and services under transition agreements we have with Grifols.

We expect this revenue stream to decline from second quarter levels in the balance of this year and into 2020. Now, let’s shift gears and cover GYN Surgical, where sales of $102.2 million grew 4.1%, our highest growth rate in seven quarters. While one quarter does not make a trend here, we are pleased to see our U.S.

sales force strengthening, which is driving improvement in underlying business trends as well as our competitive position. In addition, it’s important to note that new products such as our Fluent fluid management system and our Omni hysteroscope have begun contributing to growth.

As a result, MyoSure-related sales grew at a low-double-digit rate in the second quarter. NovaSure sales declined again, but less than in recent periods. Now, let’s turn to Medical Aesthetics, where sales of $73.8 million represented about 9% of consolidated revenue and declined 12.1%.

Domestic revenue finished in line with our expectations, but sales outside the United States were weak, driven mainly by challenges in Asia. By product category, sales of women’s health and other products declined low-double-digits in the quarter, while sales of our skin-related products declined in the high-single-digit range.

And as we have previously discussed, increased competition in the non-invasive fat reduction category negatively affected sales of lasers as well as high-margin, consumable PAC keys.

As a result, revenue in our body sub-category declined by a little more than 30%, and the long-term implications of this weakness contributed to our writing down the value of certain intangibles in the quarter. Karleen will talk about this more. Despite these challenges, there were some encouraging signs in Medical Aesthetics in the quarter.

For example, in the United States, our sales force continues to come up to speed, with several regions showing good performance and growth. In fact, U.S. revenue increased slightly sequentially, bucking the trend in what is usually a seasonally weaker quarter.

In addition, we are encouraged that initial customer feedback to our new partnership with Brooke Shields has been positive, and optimistic that our new marketing campaign will improve the performance of SculpSure in the future. To round out the revenue discussion briefly, Skeletal sales of $24.2 million grew 0.8%.

Although our revenue base is small here, we remain enthusiastic about the potential of our DXA systems to assess body composition in athletes. So, to wrap up, the major storylines at Hologic haven’t changed much over the last three months.

In simple terms, our key strategy of leveraging our core technologies and leadership positions, especially in Breast Health and Diagnostics, to expand our offerings both geographically and in adjacent product categories is paying off.

For the last four quarters, this strategy has led to very good financial results, which gives us the confidence to increase our guidance for 2019. 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 the income statement, touch on a few other key financial metrics, and then finish up with our updated financial guidance for 2019, as well as the third quarter.

Unless otherwise noted, my remarks will focus on non-GAAP results, and percentage changes will be on a year-over-year basis in constant currency. As Steve described, we are pleased with our second quarter results, as revenue of $818.4 million and EPS of $0.58 exceeded our guidance.

We benefited from strong performances by our largest businesses, Breast Health and Molecular Diagnostics, as well as improved results in our Surgical division. And our international franchises continued to grow solidly.

Our overall performance has been very solid through the first half of our fiscal year, and we are again raising our financial guidance as a result. Although 90% of our business is doing well, our Medical Aesthetics business continues to lag, as everyone knows.

As Steve said, we did see some positive signs in the quarter, but as we kicked off our annual strategic planning process, it became clear that from an accounting perspective, we needed to lower the carrying value of our intangible assets and equipment associated with key products like SculpSure, MonaLisa Touch and TempSure Vitalia.

As a result, we booked a significant GAAP write-down of $443.8 million this quarter, which hit COGS primarily but also other operating expenses. This action, which is non-cash, is in addition to the write-down we recorded a year ago, which related to goodwill and in-process R&D.

So, while this write-down is disappointing, I want to emphasize that it primarily reflects negative trends that we have previously discussed, and which we expect to improve based on the strategies we have in place. Now, I’d like to switch gears and review our P&L for the second quarter.

Gross margins of 61% decreased 170 basis points compared to the prior year period. Let me provide some color to help illustrate why we expect gross margins to improve in the back half of the year.

Several one-time items contributed to the decline in gross margin percentage this quarter, including inventory reserves, scrap charges and other adjustments, especially in Medical Aesthetics as we integrate our international locations.

Together with foreign exchange and Chinese tariffs, these non-recurring items reduced gross margin percentage by approximately 110 basis points this quarter. The rest of the gross margin decline resulted from factors we have discussed in the past such as product mix, especially Cynosure’s performance, and higher blood screening revenue.

So, as we look toward the back half of the year, we expect better margins due to the absence of these one-time charges, improved product mix, absorption benefits, the ramp-up of new product sales, and our ongoing cost reduction efforts. Moving on, total operating expenses of $272.8 million increased 2.2% in the second quarter.

This increase was mainly driven by the impact of the Faxitron and Focal acquisitions, which contributed roughly $6.6 million of expense. Excluding Faxitron and Focal, operating expenses actually declined 0.3%, reflecting a balance between tight cost controls and funding of our investments for future growth.

Operating margin of 27.7% declined 120 basis points in the second quarter compared to a year ago, primarily due to the negative gross margin effects that I discussed.

I do want to point out, however, that when you analyze the full geography of our income statement, the currency and compensation hedges we have in place below the line offset much of this operating margin decline. So, for example, if you look at adjusted EBITDA of $254.1 million, you’ll see that it increased 2.4% compared to the prior year period.

And EBITDA margin declined only slightly, to 31.0% this year versus 31.4% last year. Overall, our profitability remains healthy, and our updated guidance implies that operating margin will increase in the back half of the year, mainly due to the expected gross margin improvements I mentioned.

Finally, net margins of 19.0% increased 30 basis points compared with the prior year period, primarily due to benefits associated with an improvement in our effective tax rate. Our tax rate is lower than our previous guidance primarily because the U.S. Treasury has clarified certain provisions of federal tax reform through proposed regulations.

All this led to non-GAAP net income of $155.9 million in the second quarter, 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. At the end of the second quarter, our leverage ratio, net debt over EBITDA, stood at 2.6 times.

We remain comfortable around this level, recognizing that the ratio could fluctuate based on the timing of acquisitions and buyback activity. Finally, we generated $104.2 million of free cash flow in the second quarter.

We continue to generate strong cash flows, which enable 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 third quarter.

At a high level, we are updating our full-year guidance based on our good second quarter results and a lower effective tax rate, partially offset by increased investments we plan to make over the next two quarters. More specifically, we are increasing our constant currency revenue guidance and raising our EPS forecast. Let’s start with revenue.

As a reminder, we previously guided to sales of $3.305 billion to $3.335 billion, which represented constant currency growth of between 3.8% and 4.7%.

Based on our second quarter results, we are increasing our revenue guidance to $3.325 billion to $3.345 billion, which includes approximately $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 4.3% to 4.9%, better than our prior 2019 forecast. As you know, the U.S. dollar has strengthened materially compared to our prior fiscal year.

And based on recent exchange rates, we estimate that currency fluctuations are driving roughly $30 million of headwind in fiscal 2019. Despite this foreign exchange headwind, we feel confident about our growth in our core businesses, our ability to control expenses, and the lower effective tax rate.

As a result, we are increasing our EPS guidance to a range of $2.41 to $2.44, which represents reported growth of between 8.1% and 9.4%, roughly double a rate of revenue growth. I should point out that EPS growth would be higher if not for diminishing contributions from our divested blood screening business and a small residual impact from currency.

The updated full-year guidance is based on diluted shares outstanding of approximately 272 million for the full year, and an effective tax rate of approximately 22%, a 1% improvement compared to our prior guidance. Now, let’s turn to guidance for the third quarter of fiscal 2019.

We expect revenue of between $825 million and $840 million, which represents growth of 1.2% to 3% on a constant currency basis. On a reported basis, our guidance reflects revenue growth of 0.1% to 1.9%.

Since we only have two quarters left in our fiscal year, our revised annual guidance implies that as usual, revenues will be bigger in the fourth quarter than the third, based on seasonality and new products making increasing contributions.

On the bottom line, we expect EPS of $0.60 to $0.62 in the third quarter, which implies growth rates of between 3.4% and 6.9%, continuing to outpace revenue growth.

As you update your forecasts, we would encourage you to model at the middle of our guidance ranges, as we’ve tried to set realistic ranges that incorporate both potential upsides and downsides. This is particularly important after the dollar strengthened further last week.

Before we open up the call for questions, let me conclude by saying that we are pleased with our performance through the first half of 2019, with our Breast Health, Molecular Diagnostic and international businesses driving solid growth. We are also encouraged by improved performance in our Surgical division.

These businesses are well-positioned to drive further growth, given the strategies we have in place. Lastly, we continue to generate industry-leading cash flows and put that cash to good use, with a focus on tuck-in acquisitions and opportunistic share repurchases. Based on all this, we are raising our annual financial guidance.

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 will take our first question from Tycho Peterson with JP Morgan. Please go ahead, sir..

Hey, thanks. I'll start with Breast Health, Steve, obviously putting up good numbers there. Can you maybe talk about the replacement cycle? How much is the legacy installed 3D base you're starting to upgrade with 3Dimensions in 3D Performance.

And then, Faxitron and Focal are obviously adding a lot, how much cross-selling and bundling are you doing there too?.

In terms of the existing base versus the new, the vast majority of our revenue is still coming from selling new 3Ds to both competitive customers, as well as upgrading our existing 3Ds. I think, as we mentioned, we still got, 3,000 to 6,000 installed 2Ds left in the U.S. So, we’ve still got years worth of replacements.

and that's still the primary driver of our Breast Health business, which makes us feel so good about the sustainability, while we're starting to get certainly some of the grades, but they clearly are much smaller percentages of total on the upgrades.

As it relates to Faxitron and Focal, it's been very nice and that we've been able to merge the sales forces, put them together and off to a very nice start as we really start to sell the breast conserving surgery line, as well as a couple of our own legacy products that are in there. And, I would say, we're still deep down in the earlier stages.

This was really the first quarter that the combined selling organizations were on the street together. And we feel really good about the initial starts there..

And then, one follow-up on guidance. So, you do have a new competitor for NovaSure [indiscernible]. Just curious how you think about competitive positioning, and if you've seen any kind of impact at this point..

We are always mindful of new competitors coming into the space. Having said that, at this point, NovaSure has been safely and effectively used in 3 million patients at this point, and has a very strong, proven history and loyal base. We're out there telling that story every day. We've not yet seen any real impact from commercialization of anything.

We certainly would expect some over time. But frankly, we feel really good about particularly the total efficacy of our product relative to any comers..

And we will take our next question from Dan Leonard with Deutsche Bank. Please go ahead, sir..

Thank you. So, I want to ask a couple on the molecular business.

First, Steve, can you confirm that any price adjustments with large customers were in the numbers for the full quarter? And any color you can give on maybe how pricing and volume dynamics contributed to that double-digit growth rate you reported in molecular?.

Sure, Dan. As we had said, we did finalize those contracts last year, virtually all of any of the pricing changes were in the quarter. So, this is, I want to say, quite a new run rate, but from a pricing standpoint, basically reflected in there.

And I think what we feel really good, I know there was so much concern last summer with PAMA and with the renegotiations and everything else. We feel great about the relationships we've got with our largest customers. We are driving volume is really the big driver.

And we ended up with pricing that really makes sense for both our customers, but particularly for us and feeling particularly on the molecular side very good about the runway ahead..

And then, it's interesting that you’re flagging your legacy women's health assays as the big contributor here.

Can you update us on how fast do you think that category is growing in the market? And how much faster are you growing compared to the category to your share gain?.

Sure. I don't think we have great data on the full category. But, we think it continues to grow part of our whole messaging.

And it's what's helped us so much, frankly, with our largest customers is our physician sales force that continues to help educate the physicians and particularly our Yes Means Test campaign of trying to make sure that younger sexually active women are getting tested, we do think continues to drive the overall category.

So, this is one of these categories we looked at a few years ago and thought maybe not much growth left, but realizing that actually the true incidence of testing is, while we don't have a great feel, is clearly less than what should be done. And so, we've been really helping to drive that category.

And I think as the predominant share player, probably actually still growing faster than the category itself.

And, Mike?.

Yes, Dan, it’s Mike. I might just add one thing. And obviously, those tests are all not alike, right? So, a like trichomonas is still fairly underpenetrated. Obviously, the growth rates there would be much higher than for the base chlamydia/gonorrhea business. And we would expect the same thing to happen with the new test like MGen over time as well..

And we'll be taking our next question from Doug Schenkel with Cowen. Please go ahead, sir..

Hey, this is Chris on for Doug today. Thanks for taking my question. I just want to follow-up on the previous question.

I know you don't to be too granular with molecular diagnostics performance, but could you just help us assess sustainability or the double-digit growth rate for the segment? I mean, you have introduced a number of assays and you're still pretty early with the viral load opportunity.

So, is it right to think that molecular diagnostics could at least grow double digits for the balance of the year?.

We would not guide to double-digit for the rest of the year. We did mention we had an easier comp. I think we had a very good first quarter, we had an easier comp this quarter. I think, we feel very good about strong sustainable rates but would not model for sustained double-digit.

I think outside the U.S., yes; inside the U.S., I’d probably be modeling more mid to maybe slightly higher single-digit growth. But, I think we’d like the overall trajectory..

Okay.

And then, for the follow-up question, could you just help us dissect the gross and operating margin performance, a bit more detail? I appreciate the commentary on some of the onetime charges but even if we back out those costs, margins would have been a bit below Street expectation, despite the strong revenue contribution from the high-margin businesses of Molecular Diagnostics and Cytology.

So, I’m just curios what are those some of the other headwinds for margins..

Hi. This is Karleen. So, let me take a stab at that. I think beyond the onetime items, we clearly had higher blood screening revenue than we anticipated. And to remind everyone, there’s virtually no gross margin on that revenue.

Coupled with some of the products mix that we had in the quarter, specifically in the Cynosure business, contributed to the margin headwind..

We will be taking our next question from Vijay Kumar with Evercore. Please go ahead..

Maybe a couple on guidance here.

Just, Karleen, on the gross margins here, the one timers as you called, what is the visibility that you have in gross margin stepping up? When you talk gross margins improving in the back half, is this all gross margin driven, and I guess the implications that the revenue mix in the back half it should be similar to what we saw in 2Q?.

Yes. So, I think what gives us confidence in the back half is that we don’t pursue those onetime items again and again. Majority of those related to the Cynosure business and some of the integration activities that are now substantially complete for the international locations.

I think when we look at the back half of the year, our normal cadence is that revenues increase as well as volumes increase which are going to drive favorable absorption just as well as overall larger gross margin dollars.

From a planning perspective, the teams have cost reduction efforts that kind of kick off at the beginning of the fiscal year and start to really contribute as we get to the back of to the year..

And then, one follow-up on the guidance here. You beat EPS by same. [Ph] You look at the tax rate lower, it almost looks like most of the guidance range came from the lowering of tax rate.

I’m just curious, is there anything happening below the line in the back half on the FX hedges and how should we be thinking of some of those items?.

Yes. I don’t think there is anything unusual in the bank half below the line that we’ve anticipated in the guidance. I think, as we think about the guidance, yes, there is definitely beat in the quarter, there is some benefit from lower tax rate.

But we'd really like to -- what we also want to do is allow the R&D teams to invest some more in the back half to accelerate some projects..

FX hedges should be gained in the back half?.

In theory, yes..

[Operator Instructions] We will be taking our next question from Jack Meehan with Barclays. Please go ahead, sir..

I was hoping on the GYN Surgical business.

Could you break out the contributions from NovaSure and MyoSure? And Steve, I was curious, just given the growth rates for MyoSure, how much runway you think there is left to drive adoption to get up to the NovaSure level?.

So, let me start off with the contribution. So, on a worldwide basis, total Surgical division was about $102 million with a little over 40% of that comes from NovaSure and the balance from MyoSure..

So, to pick up on it, MyoSure has become the bigger part, and it's defied our expectations for a long time, and seems to continue to grow. We still see opportunities, frankly, to grow the overall category, and continue to feel good as that being a major driver for Surgical, particularly as the U.S.

sales force has gotten back up to speed and in a strong place today..

Yes. I think, Jack, in the prepared remarks we mentioned that MyoSure in aggregate grew very low-double-digits in the quarter and NovaSure was consistent with recent quarters, it didn't go down as much kind of in that low to mid-single-digit decline range. And Dory, for you. It’s fine to allow folks to ask one follow-up question to.

So, Jack, if you have a follow-up, go ahead. .

Got to be related, though, Jack. Got to be related..

Well, maybe on the NovaSure point then.

I’d just be curious, as you look at the back half and then the 2020, do you think that this can get back to growth or are you thinking that kind of stabilization is the right way to be thinking about this business for you?.

I think stabilization is probably about the best we can do just given how penetrated we are in a category that's probably not really going -- growing and may have some competitors emerge. So, I think, we continue to keep that flat as probably a pretty good performance..

And we will be taking our next question from Bill Quirk with Piper Jaffray. Please go ahead, sir..

So first question is going back to the molecular franchise. And I was hoping, Steve, maybe get a little color on -- helping us think about the incremental growth.

How much of this is kind of new accounts versus existing accounts adding some of the new menu that you’ve had approved? And then, as a related question, a couple of your large customers were just added to the UnitedHealth Preferred Lab Network, and would be curious about how you're thinking about that incrementally driving some performance here over the next couple years?.

Sure. I think, we don't have the exact breakout as to new customers versus existing because sometimes as they consolidate and things like that. I'd say that the simple way to think about it is, we are getting more business with our existing customers. We're clearly seeing frankly some nice increases with our two largest customers.

We continue also to place Panthers across the network. And so we see ongoing growth there. But, I think it's particularly we feel really good about our position with the two biggest customers.

And especially to your point, as they pick up a little more business in the quarters and years ahead with United Health and some of their various contracts, we like our position with them and think that's going to continue to help drive some good strength.

Anything else, Bill?.

Oh, sure, absolutely. So, a related follow-up question to the total business that is. Just help us think little bit about, I guess, one, sustainability of OUS Breast Health? And then, secondly, could you just revisit the topic of kind of how 3D adoption is going, specifically in Europe? Thanks..

That was a clever related that you worked -- one follow-up related into two different ones. Good Job, Bill. So, I'm sorry, the sustainability of Breast Health....

Yes. I think, first was the international sustainability. And I think, we feel really good about that. I think there's a lot of runway. It’s early days on the overall conversion to 3D there internationally, coupled with still opportunities to go direct in key markets..

And we will be taking our next question from Dan Brennan with UBS. Please go ahead, sir..

Great, thank you. Thanks for taking the questions. Steve, I wanted to ask you a question. Given the growing signs of success of your strategy in imaging via more expanded product sets to meet the needs of the different sized customers, what's the realistic runway you think as we look out for that U.S.

breast imaging business, now that you’ve potentially mitigated some of the more cyclicality inherent in that business?.

Yes. I think, Dan, overall, we always want to be too careful to get too far ahead of ourselves in terms of longer term outlooks. I think, if you look at the pure mammography business in the U.S., it's probably not grown all that much. The number of gantries is going to be relatively flat probably five years from now as it is today.

So, as we had seen that all along, we thought, okay, it's all about broadening the portfolio, figuring out other ways to bring value to it. So, I’d probably still think about it as a low to mid single digit kind of business.

And I think our ability to take share and find new avenues above that are what can take us to outperform what is probably much more of a lower single digit market. And obviously we’re very focused on outperforming it..

Great. Thank you for that, Steve. And then, maybe this is correlated. So, basically, you made the mention in the prepared remarks regarding the dense breast proposals out of the FDA.

I'm just wondering, to the extent those get implemented, could you help us think about giving your superior label there? And this is the question we've gotten numerous times to investors like, how should we think about the opportunity for you to kind of market that and how that would translate into and impact on the business? Thanks..

Sure. This could sound flippant, but I’d basically consider anybody that would use anybody other than our system would be malpractice. But having said that, I think what it does is, you guys know the market shares, which we don't talk about a lot, but we're by far the dominant player in the space, particularly in the U.S.

And I think our ability to continue to keep growing our market share off a very high levels, should continue to be there, given the dense breast indication that we have..

And our next question will be coming from David Lewis with Morgan Stanley. Please go ahead, sir..

Steve, maybe start with you for a second on investments and work maybe one follow-up. Just quickly on investments, Steve, just as you think about capital deployment, at this point with the Aesthetics business.

Is there any consideration now with the write-down that you look to divest that business or sell that business? And related to that is, right now as you think about the balance sheet, what is your interest in deploying capital for M&A and sort of where do you think the key strategic areas are for the business?.

Sure, David. We continue to manage the Company for the long haul. And obviously not every decision we’ve made has been perfect. But we continue to strengthen the business. And frankly, we are excited about some of what we have going on, even in Medical Aesthetics right now.

So, we have some great sales people, Brooke Shields joining on as a partner, we feel really good about that. Having said that the broader piece of capital deployment, I think as you’re really seeing, really focused more on a lot of our core businesses and particularly the biggest divisions.

So, the two that we’ve done in Breast Health, we feel great about. And I think we really are to a stage that we weren’t a few years ago, which is truly just tuck-ins.

And so, the broader capital deployment that can refine good tuck-ins that fit our existing businesses, no need to open additional legs, invest in the businesses that are delivering and executing, and from that also continuing to do with cash left over, both ongoing share repurchases, debt paydown and being very prudent at this point in time with our capital.

Karleen, do you want to add anything to that..

Yes. No, I would just say, clearly, we view M&A as a priority from a tuck-in perspective, but the teams are bring really critical at the targets we evaluate here. But there’s an activity that’s ongoing..

Just a quick follow-up, Steve. This is a very balanced quarter relative to last quarter, we saw very significant Breast growth, Breast growth still above market this quarter. Last quarter, you gave us a lot of color in terms of gantry outlook and the pipeline and the transition to that pipeline.

So, can you just update on sort of where -- how you feel about the gantry backlog kind of mid part of the year? That’d be very helpful. Thank you..

Sure. We continue to feel very good about the backlog and the ongoing order rates that we track obviously on a very regular basis, but feel good about the ongoing orders growth in the gantry business..

And we will take our next question from Brian Weinstein with William Blair. Please go ahead sir..

Steve, on the breastsoftware upgrades that I recognize it’s early, but can you talk to us a little bit about what you're seeing there and what this potentially could become for you, longer term? I think, in the past you’ve given us some revenue numbers in the quarter, and any thought on that would be welcome as well..

Sure. We’re still in the early stages of starting to upgrade our existing 3Ds, but between Clarity HD, Intelligent -- the Intelligent software and the SmartCurve paddles. So, they are relatively small but starting to be somewhat meaningful within that division, but still very early stages. And I think it provides just long-term runway.

So, it’s -- I would say the way we're thinking about it day-to-day, Brian, the organization is very focused on continuing to convert 2Ds to 3Ds, but also going back and circling and seeing the opportunities, clearly things like the SmartCurve paddle, and the Clarity HD, very nice add-ons to our existing business and a lot of runway ahead..

On the follow-up there, when we think about OUS, can you just give us a little bit more color on specific countries and areas where you’ve seen particular strength? And Karleen, your comment about opportunities to go direct in key markets, can you expand on that and the likelihood that we would see something there at some point this year?.

So, I don’t think we’re going to be specific, countries that we’re looking to go direct, but just that there are opportunities that we're considering in certain of our key markets as not all distributors are actionable either. So, weighing all the characters of the targets. .

Yes. I think, Brian, we do feel good about obviously over the last 5, 6, 7 years, even we’d gone direct in the UK before. I arrived and we’ve obviously done great acquisitions in Germany, in Portugal and Spain.

So, we’re now directing three of the biggest countries, certainly in Europe and continuing to look at how to strengthen our capabilities there, and also doing well in the countries where we’ve now converted from dealer to direct. So, like the foundation of the building over there..

I’d just also add Brian just from an international perspective in the Breast Health, that we talked to just a lot about Europe, but obviously Asia Pacific, there’s a lot of got good momentum and opportunity there moving forward..

And we will take our next question from Anthony Petrone with Jefferies. Please go ahead, sir..

The first question I’ll have is on Breast Health and then I’ll shift to GYN Surgical [technical difficulty] in diagnostics the first question. My question there is on OUS molecular, the number jumps off the page, 22% growth, and I think it comes with the clearance from a competitor.

I think Abbott announced CE mark clearance for Alinity in certain essays. So, just kind of trying to get a sense of the sustainability of OUS molecular just given the competitive landscape and a follow-up will be on surgical. Thanks..

Sure. I think, we continue to feel really good about our OUS molecular business. The growth rate is 11 out of 12 quarters in a row, we had double-digit growth rates. And we’re still relatively underdeveloped. So, even though there are competitors out there, we’re still in our earlier stages of growth. So, it’s still a relatively smaller business for us.

And yes, there is competitors there but I think we feel pretty good about our ability to continue to grow at certainly healthy rates..

Yes. And I would just add that in key countries we don’t have the full menu approved that we have here in the U.S. So, we have focused strategies on trying to get the menus expanded in key countries that will drive higher utilization. So, a lot of good stuff there as well..

And a quick follow-up in surgical would just be the litigation front there and endometrial ablation and gave us an update a few weeks ago. Does that have an impact going forward, or is it more just similar competitive dynamics we should see over the next 12 months, two years? Thanks..

Yes. Anthony, it’s Mike. I think, the competitive dynamics there are very stable. We believe we are maintaining share and in some cases, winning customers back, which I think is a testament to the work that's going on in the field.

And, obviously, don't want to get too much into an open legal process, but the normal, kind of appeals and all that stuff continues to go on. And, we'll just give you an update when we have one..

And we will take our next question from Richard Newitter with SVB Leerink. Please go ahead..

Hi. This is Jaime on for Rich. So, I wanted to ask a couple of questions on Medical Aesthetics. I guess, the first being, you guys are saying U.S. was in line, OUS was a little bit weaker driven by Asia.

So, I was just wondering if you could talk a little bit more about the dynamics that you're seeing in that market that's impacting growth, and then I'll have a follow-up..

Yes. So, I think, given the international markets, I think, as I had mentioned, we are kind of ongoing and integrating into our leadership, our regional leadership structure. And so, as we make some of those changes, we've had some disruption on the cadence of sales there.

I think as we integrate, we kind of looked at some policies and procedures and had some accounting adjustments that we made as well, but feel good over the longer term that as our leaders take control this business we’ll have nice cadence of growth..

Okay.

And then, I guess, my follow-up would just be, are you seeing anything more within the competitive -- from a competitive perspective across some of the different units, specifically body? And kind of what is the expectation for the remainder of the year, given some of these new strategies that you talked about with Brooke Shields? And any other potential color that you can give around, strategies you are rolling out would be helpful.

Thank you..

Yes. So, what I would say is that clearly, we've talked about we have seen competitive factors in the Medical Aesthetics business, specifically in the body sub-segment. Now, we are excited about the Brooke Shields campaign and what that will be able to do, but don't know how meaningful it will be, at this point.

I think what I would focus on is what our key strategy is, in-license additional products, to put more in the bag of our sales team to create that cadence of new products, excitement for that sales team, what we think will contribute to turnaround in the U.S. business..

And we will take our next question from Jon Block with Stifel. Please go ahead..

Great. Thanks, guys. Good afternoon. I'll probably just go for a clarification and then a small question on Breast. So, Karleen, the onetime color was very helpful with gross margin.

I just want to make sure, when you say higher and fiscal 2H, just to be clear, is that off the 61% non-GAAP or is that off this adjusted, call it 62? And then maybe, what are your thoughts longer term for gross margin? And then I’ll ask a quick follow-up?.

Yes. So, I would say, it's off the adjusted 62, is what we expect in the back half. And I think, as we said, we're not giving longer term guidance. But, I think looking at gross margin in that low-60s is the right way to think about them..

Okay. So, just as we think about an exit rate or a run rate, pay more attention to the fiscal 2H 2019 there..

Yes. I think there is some noise in the first half..

Yes..

Okay. And then, Steve, I’ll pivot. I think, Medical Aesthetics has sort of been asked and answered for the most part.

But just over to Brevera, can you just talk about the timing for supply to get back on track there? And then what are the actual plans itself? In other words, is that something you're going take in house from a manufacturing standpoint, or will you continue to outsource that? Thanks, guys..

Sure. Thanks, Jon. I think, we’re probably -- before we’re in really great shape on supply is probably well into next fiscal year because we do have a partner and we're obviously working with that partner right now to resolve the longer term piece.

But, we're making some product enhancements to it to make it simpler to make and get beyond the short-term situations we’ve been in..

And we will take our next question from Mark Massaro with Canaccord Genuity. Please go ahead..

Given the dynamics in Medical Aesthetics, should we be thinking about pro forma run rate in the negative double digits or do you think that’s the initiative with Brookfield can potentially move you up into the right?.

So, I think as we think about when started the fiscal year we thought this would be a low single grower. I think that’s based on the performance in the last two quarter, as we think about fiscal ‘19, it’s probably low to mid single digit decliner. But, I think what we see is improvements in each quarter as we move through the year..

Okay. And then, related to that I guess could you give us a little bit of help about thinking about the cost of the clinical trials with Vitalia and MonaLisa Touch? I don’t think the Brooke Shields marketing would be all that expensive.

But I guess my question is, when you factor in the clinical trials costs, the marketing costs, why do you think that keeping the Medical Aesthetics business is worth more than divesting it?.

Obviously, we’re continuing to focus and thinking smartly about where we go for the future, and investing prudently in the business. So, we're being smart about how we gauge the spending at this point in time. It’s clearly not making the kind of money that we would like, and in fact losing a little bit in the short-term.

And we’re in that process of putting together our longer term plans..

And, I would say, -- Mark, it’s Mike, I would just add to that. I mean, products like MonaLisa Touch I mean really are very valuable, clinically differentiated products that provide a lot of value to women. So, we definitely want to proceed those indications that will enable us to differentiate ourselves in the market..

Okay. Thank you..

Dory, I think, we’ve got time for one more question..

And we will be taking our final question from Derik de Bruin with Bank of America Merrill Lynch. Please go ahead. .

This is Ivy [ph] on for Derik today. Thank you for squeezing me in. Congrats on quarter. So, just one clarification question on the Breast Health. It sounds like the momentum of Breast health should continue.

So, given updated guide, are there any changes on the growth perspective for the sector, particularly given the given the tough comp in first half of the year? Just any additional color would be helpful. Thank you..

Yes. So, I think as we started the fiscal year for Breast Health, we had talked about it being mid-single-digit grower. I would say that based on the performance of the last two quarters for the full year, maybe it's mid to high-single-digit growth.

So, yes, you're right the comp’s definitely get harder in the back half of the year and so the growth might come down a bit..

And one follow-up. So, this quarter, the acquisitions Focal and Faxitron was better than expected. Is that something we should base of estimates for the rest of the year? Looking for just any additional color. Thank you..

So, they had meaningful growth in this quarter. I would say that we expect high-double-digit from them moving forward, but I don't know that it would be in the 40% range. It should be come down..

Great. Thank you, everyone..

I think, that's all the time we have. Thanks everybody very much..

This now concludes the Hologic’s second quarter fiscal 2019 earnings call. Have a good evening..