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Good afternoon, ladies and gentlemen, and welcome to the Hologic, Incorporated Fourth Quarter Fiscal 2018 Earnings Conference Call. My name is Keith, and I'm your operator for today's call. Today's conference call is being recorded. All lines have been placed on mute.
I would now like to introduce Mike Watts, Vice President, Investor Relations and Corporate Communications, to begin the call. Please go ahead, sir.
Thank you, Keith. Good afternoon, and thanks for joining us for Hologic's fourth quarter fiscal 2018 earnings call. With me today are Steve MacMillan, our 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 fourth quarter press release is available now on the Investors section of our website. We also will post our prepared remarks to our website shortly after we deliver them. Finally, a replay of this call will be archived through November 23rd.
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 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 fourth quarter of fiscal 2018. It was a solid quarter overall as total revenue of $813.5 million and earnings per share of $0.58 both finished within our guidance ranges.
As we announced in September, continued strength in our legacy businesses offset lower than expected sales of Cynosure products due to the FDA letter on our MonaLisa Touch laser and our decision to suspend marketing of TempSure Vitalia handpieces and probes.
Our largest businesses performed well in the fourth quarter, continuing a trend that emerged over the course of the year. Growth in our domestic Breast Health business improved for the fifth consecutive quarter. Molecular growth accelerated excluding non-recurring royalties from a year ago. International sales increased solidly and U.S. Surgical returned to growth. And just after quarter-end, we completed a tuck-in acquisition that will further strengthen and expand our Breast Health franchise.
Before we discuss these details, let me step back and comment on the company as a whole since we're marking the end of our fiscal year. As I look back across 2018, there is no doubt that we are a much healthier company today than a year ago and that each of our major businesses is stronger. In Breast Health, domestic growth improved over the course of 2018 driven by new products and strong execution. In Diagnostics, we placed more Panthers, launched more tests, and solidified our relationships with our largest customers.
In Surgical, a revamped and more competitive sales force helped quarterly results improve steadily. In Medical Aesthetics, we dramatically improved our commercial capabilities although the numbers don't show it yet. Internationally, we built a solid infrastructure for sustainable growth with new leadership, new products, and new capabilities.
And finally, as we eliminated all of the convertible debt from our balance sheet, we enhanced our business development efforts, resulting in the acquisitions of Faxitron Bioptics and Focal Therapeutics. We have now completed four tuck-in deals successfully and expect more ahead. So overall, we made major progress since restructuring our leadership early in the year, and we enter 2019 with improved momentum.
Now let's discuss our fourth quarter results in more detail. Revenue of $813.5 million grew 1.3% on a reported basis or 1.7% in constant currency. Let me remind you that these percentages understate our true growth as the prior-year period benefited from higher sales from our divested Blood Screening business and $9.5 million of non-recurring royalty revenue in Molecular Diagnostics, which more than offset an extra selling day.
In terms of geography, our legacy International franchises demonstrated robust 10.4% growth in the fourth quarter, our sixth consecutive quarter of double-digit growth excluding Cynosure. Our Molecular Diagnostics business had an exceptional quarter internationally, and our Breast Health and Surgical business contributed nicely as well reflecting the broad-based improvements we have made in recent years.
Including OUS sales of Cynosure products, which declined in the period, total International sales were $198.4 million, still a solid increase of 6.3%. In the United States, positive trends that emerged in the third quarter continued in the fourth as growth rates improved sequentially in our Breast Health, Diagnostics, and Surgical franchises.
Now let me provide some more detail on our divisional revenue results in the fourth quarter. Our largest business, Breast Health, is clearly in a very different position than a year ago and has reemerged as an important growth driver defying external concerns about a cyclical decline. Global Breast Health sales totaled $322.2 million, a robust increase of 7.4%, including about $5 million from Faxitron. Internationally, we continue to perform well with sales growth in the mid-teens.
In addition, the much larger U.S. Breast business again strengthened in the quarter and posted growth of 5.4%, our best growth rate in seven quarters. We couldn't be more proud of the team for building a diversified, sustainable growth business to overcome the boom-bust product cycles of the past. Their strategic success was evident this quarter as growth was broad-based, encompassing mammography, Interventional, our new breast surgery franchise, and service.
At the core, sales of imaging products increased 6.2% globally in the quarter. It's clear that the introduction of our new clinically differentiated 3Dimensions and 3D Performance Systems have not only revitalized the market as a whole but helped us continue to gain market share.
Since it's the end of our fiscal year, I'll let you know that we shipped nearly 1,100 3D systems in the United States over the last four quarters, down just slightly compared to our placements in fiscal 2017, validating our stronger-for-longer forecast. Cumulatively, by year-end we had shipped more than 5,700 3D systems in the United States and are working to upgrade this installed base with new software and hardware.
At the same time, we still have runway ahead for additional placements, as customers, patients, and payers continue to recognize the ability of our systems to detect more invasive cancers while simultaneously reducing unnecessary callbacks. For example, 3D is only about 60% penetrated in our own installed base, which means that we still have nearly 4,000 2D units in the field. And overall, we estimate that 3D is about 50% penetrated in the domestic entry market as a whole including competitor units.
Sales of Interventional Breast products also showed robust growth again, increasing 15.9% globally and reaching double digits for the fourth consecutive quarter. Growth here is being driven by important new products such as our Brevera biopsy system, but also by our sales force leveraging the breadth of our portfolio to partner more comprehensively with customers.
To reinforce this last point, we wanted to highlight the tuck-in acquisition of Focal which closed in early October. Combined with our recent acquisition of Faxitron, Focal strengthens our position in the rapidly growing market for breast-conserving surgery and expands our ability to help women diagnosed with breast cancer throughout their continuum of care from screening through treatment.
Focal's main product is an innovative marker called BioZorb, an implantable, three-dimensional marker that helps clinicians overcome challenges in breast-conserving surgery. From a financial perspective, acquiring Focal is accretive to our revenue growth rate and gross margins, broadens our recurring revenue base and provides an attractive return on invested capital. In addition, combining Focal and Faxitron, then layering on Hologic's much greater resources and capabilities should help accelerate growth going forward.
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.
Now, let's turn to Diagnostics, where revenue of $288.9 million declined 0.5%. As discussed, we had some unusual items affecting Diagnostics growth this quarter, so the headline number does not represent what's actually a very healthy business. For example, Molecular sales of $158 million grew 3.4%. But if you exclude roughly $9.5 million of non-recurring royalty revenue from the prior year period, underlying growth was actually 10.2%, accelerating for the second consecutive quarter.
Internationally, Molecular grew in double digits for the ninth time in 10 quarters. And in the U.S., although we already enjoy high market shares in key assay categories, Molecular still grew a healthy mid-single-digit rate, excluding the royalty revenue from a year ago.
Sales of Aptima, women's health and virology assays on our market-leading Panther system, remain the primary growth drivers in our Molecular business. Over the course of 2018, we shipped more than 200 more Panthers to lab customers around the world, bringing our cumulative total to more than 1,500 units, more than 40% of which are now outside the United States.
Importantly, utilization of these instruments has continued to grow as new assays emerge from our R&D pipeline and as we partner with customers to drive overall testing volume. Average revenue per Panther now exceeds $225,000 a year on a global basis and grew at a low double-digit rate in fiscal 2018.
Moving on, cytology and perinatal sales of $118.0 million declined 1.2% in the fourth quarter. In the United States, cytology growth remains challenged due to our high market shares and longer cervical cancer testing intervals. However, during the fourth quarter, we were pleased to see the United States Preventive Services Task Force issue their final cervical cancer testing guidelines. These final guidelines reversed an earlier draft and retained an A grade for Pap + HPV testing or co-testing in women between the ages of 30 and 65.
Both tests are crucial because data from multiple large studies prove that co-testing identifies more cervical pre-cancers and cancers than either test used alone. So the final USPSTF recommendations remove a near-term concern for investors, but more importantly ensure that women will continue to have access to the most commonly used cervical cancer screening method in the United States, an approach that we believe is simple, highly accurate and cost-effective.
Elsewhere in Diagnostics, revenue related to our divested Blood Screening business totaled $12.9 million, an expected decline of 28.3% that depressed growth rates for our Diagnostics division and the company as a whole.
Before we move on, we wanted to address a concern some of you had about our Diagnostics business. While there has been outsized focus on a single lab contract, we've actually been working diligently to solidify our business with our two largest customers. And I'm pleased to let you know that in recent weeks, we have signed a multi-year deal to continue providing cytology and molecular tests and instrumentation to one of these customers.
In addition, we have agreed on terms for a multiyear extension of our supply contract with the other customer and expect to finalize this contract in the next few weeks. As you know, we don't discuss the details of individual contracts, but I will tell you that we are pleased with this outcome and have incorporated the financial effects in our 2019 guidance. Most importantly, we look forward to continuing to work with both customers to grow our shared businesses for years to come.
Now let's cover our GYN Surgical division, where sales of $107.4 million grew 3.1%. Over the course of 2018, Surgical steadily improved each quarter and returned to meaningful growth in the fourth as we predicted in our last call. As we have discussed, our new leadership team is improving the culture of our Surgical sales force and we are beginning to see the benefits of their more aggressive competitive approach.
MyoSure, which has become the largest product line in the Surgical franchise, continued recent trends of strong performance, growing low-double digits in the quarter. NovaSure continued to show modest sequential improvement, declining less than in the third quarter, but overall sales were still down mid-single digits compared to the prior year. Finally, we should highlight that we launched our Fluent fluid management system in the fourth quarter and are seeing good early interest from customers.
Apart from these operational results in Surgical, in recent weeks we also settled a long-standing patent dispute with Smith & Nephew related to MyoSure, agreeing to pay them $34.8 million and a small ongoing royalty. We are pleased to put this matter behind us so we can focus more fully on growing the business.
Now let's turn to Medical Aesthetics where sales of $70.6 million declined 12.9%. As we disclosed in September before the Morgan Stanley Conference, Cynosure sales were negatively affected by the FDA letter on certain women's health procedures and our voluntary decision to suspend marketing of our TempSure Vitalia product. Specifically, sales in the fourth quarter were more than $15 million lower than initially expected due to refunds and rebates associated with prior sales of Vitalia handpieces, unused probes, and TempSure systems, as well as reduced MonaLisa Touch sales. Normalizing for these effects, revenue would have been roughly in-line with expectations, reflecting a domestic sales force that is coming up to speed in what remains an attractive growth market.
We have adjusted our marketing messages for MonaLisa Touch in response to FDA's concerns and are working collaboratively with the agency to design the clinical trials that hopefully will lead to more specific indications and labeling. We continue to believe that a higher level of regulatory scrutiny will benefit us over time so we welcome a more level playing field on which we can communicate the tremendous value that products like MonaLisa Touch provide.
To round out the revenue discussion briefly, Skeletal sales of $24.4 million grew 1.4% as we continue to see strong sales of our Horizon system for bone density testing and human performance management.
So, to wrap up, we posted very good financial results in the quarter with improving momentum in Breast Health, Molecular Diagnostics, and Surgical, and continued strength internationally. We logged some nice successes in our Diagnostics business, both with the USPSTF and our largest customers, and completed a second attractive tuck-in acquisition for Breast Health. We are clearly exiting 2018 on a much better trajectory than when we began the year, and we look forward to continued growth in 2019.
Now I'll turn the call over to Karleen.
Thank you, Steve, and good afternoon, everyone. It's been a pleasure to meet some of you in the first few months as CFO and I look forward to getting to know many more of you in the coming months. In my remarks today, I'm going to walk through our income statement, touch on a few other key financial metrics, then finish with our initial financial guidance for 2019. Unless otherwise noted, my remarks will focus on non-GAAP results.
As Steve mentioned, we closed out fiscal 2018 with a good fourth quarter. Revenue and EPS both finished in-line with our guidance. A strong performance from our core businesses offset a negative surprise with Cynosure's women's health products. We also strategically deployed capital in accordance with our stated priorities. We completed the acquisition of Focal Therapeutics, a nice tuck-in opportunity to further expand in breast-conserving surgery, and capitalized on our share repurchase authorization.
With that introduction, let me start by reviewing our P&L for the fourth quarter. Gross margins of 61.8% decreased 230 basis points due primarily to geographic and product sales mix, non-recurring royalties included in the prior-year period, and refunds and rebates associated with our TempSure Vitalia products.
Total operating expenses of $265.9 million decreased 3.6% as we continue to balance growth investments with a desire to drive operating leverage. For example, even though research and development expenses were lower than a year ago, we have the best new product portfolio in recent memory. We have significantly improved the talent of our teams and the productivity of our efforts.
Operating margin of 29.1% declined 70 basis points in the fourth quarter. However, normalizing for the Vitalia refunds and rebates, as well as non-recurring royalties in the prior-year period, operating margins would have grown about 140 basis points. Overall, our operating profitability remains very healthy and we continue to see opportunities to improve further.
Finally, net margins of 19.5% increased 170 basis points as the factors just discussed were offset by improvements in our effective tax rate. All of this led to non-GAAP earnings per share of $0.58 within our guidance range and consistent with the forecast we provided just before the Morgan Stanley Conference. Steve mentioned that Cynosure revenue was more than $15 million less than expected. I want to remind you that TempSure refunds and rebates also directly reduced profit in the quarter, lowering EPS by almost $0.02.
Before we move on to our 2019 guidance, I'll quickly touch on a few other financial metrics. We continue to generate strong cash flows that provide us tremendous financial and strategic flexibility. During our fiscal year, we generated $687.3 million in free cash, excluding $60 million of tax recapture payments associated with the extinguishment of the company's convertible debt. We used some of this cash flow to repurchase 2.3 million shares of stock for $88.5 million in the fourth quarter, and also completed the Focal acquisition in early October for a purchase price of $125 million.
At the end of the fourth quarter, our leverage ratio, net debt over EBITDA, stood at 2.6 times, slightly below our year-ago level despite all the capital deployment that occurred in fiscal 2018. We remain comfortable around this level, recognizing that this could fluctuate based on the timing of acquisitions and buyback activity. Finally, in the fourth quarter, adjusted EBITDA of $263.3 million increased slightly compared to the prior year.
Now I'd like to cover our initial non-GAAP financial guidance for fiscal 2019. Before I do, let me remind you there are several puts and takes in comparing our 2019 guidance to our actual 2018 results.
In terms of headwind, revenues from our divested Blood Screening business is expected to continue declining significantly in 2019. And foreign exchange rates at recent levels would also be a drag on reported results. In addition, based on our 2019 holiday schedule, we technically have two fewer selling days than in 2018, although this is not expected to have a big impact.
On the other hand, tailwinds to reported growth in 2019 will include the acquisitions of Faxitron and Focal, both of which are off to a good start. As you update your forecast, we would encourage you to model at the middle of our guidance range at this early stage. We've tried to set realistic ranges that incorporate both potential upside and downside.
We anticipate fiscal 2019 will be a solid year for Hologic overall. At the highest level, we are forecasting constant currency revenue growth roughly in the 3% to 4% range with EPS growth about double that. Specifically, we anticipate sales of $3.29 billion to $3.335 billion in 2019 with reported growth rates between 2.2% and 3.6%. Based on recent exchange rates, this translates into constant currency growth of 2.8% to 4.2%, better than our run rate exiting 2018.
We do expect tuck-in acquisitions to be an increasingly important part of Hologic's story going forward and therefore encourage you to focus on these reported numbers in constant currency. But as you do think about our underlying organic growth rate, I would point out that based on recent exchange rates, the headwinds and tailwinds I previously discussed basically offset each other next year. Said another way, organic growth rates should be pretty similar to constant currency growth rates in 2019 depending on how you model the various components.
In terms of geography, we expect our U.S. business to grow in the low-single-digit range in fiscal 2019, an improvement over last year while absorbing all of the decline in Blood Screening sales. International revenue should grow in the high-single digits on a constant currency basis, slightly less than 2018 as we have annualized most of the benefit from our two European distributor acquisitions.
In terms of divisional growth in 2019, our guidance anticipates that most of our businesses will grow in the low- to mid-single-digit range except for Breast Health, which we expect to grow in the mid-single digits. In Diagnostics, Molecular should continue to lead the charge in 2019 behind Panther, Panther Fusion, and increased utilization of more than a dozen women's health, virology, and respiratory assays.
We anticipate approximately $30 million to $35 million of revenue related to our divested Blood Screening business much lower than in 2018. In Breast Health, growth will be driven by multiple new mammography, biopsy, and surgical products that we have discussed, including those from Faxitron and Focal, our International businesses, and a large service annuity that now totaled well over $400 million annually. In Surgical, we expect growth to be driven by the continued expansion of MyoSure, more modest declines in NovaSure, new products such as Fluent in International. In Medical Aesthetics, growth from a stabilized and increasingly productive sales force and new products including TempSure which was recently cleared for surgical use.
As Steve mentioned, we do not expect any revenue from TempSure Vitalia in 2019, and we expect MonaLisa Touch sales to be significantly less than in 2018 given the regulatory environment. In terms of profitability, we forecast gross margins to improve slightly compared to 62.7% in the full year 2018.
As we have previously discussed, while the expansion of our International business adds gross margin dollars to our income statement, it does put pressure on gross margin percentage. So geography mix will offset most of the gross margin benefit we expect from operational improvements and continued adoption of new products. In terms of operating expenses, we expect to continue to show strong leverage that helps drive healthy growth in operating margin percentage and ultimately EPS.
Below the line, we expect other expenses net to be materially greater in fiscal 2019 than the $132 million we posted in 2018, primarily from higher forecasted interest rates. All this leads to forecasted earnings per share between $2.38 and $2.42 in 2019. This represents reported growth of between 6.7% and 8.5%, with the understanding that EPS growth would be slightly higher if not for the diminishing contribution from our divested Blood Screening business.
This guidance assumes a full year tax rate of approximately 23%, flat to 2018, and diluted shares outstanding of about 276 million for the year. We also expect to continue generating robust cash flows in 2019 with free cash flow estimated around $700 million, excluding one-time items such as acquisition-related tax payments and legal settlements.
Now let's cover guidance for the first quarter of fiscal 2019. We expect revenues of $800 million to $815 million in the quarter. This reflects reported revenue growth of 1.1% to 3% and constant currency growth of 1.7% to 3.6%. We forecast non-GAAP diluted earnings per share of $0.55 to $0.57 in the first quarter. This represents 0% to 3.6% growth on a reported basis.
As a reminder, there is some seasonality to keep in mind in our first fiscal quarter. While Surgical tends to have a seasonally strong quarter, this benefit is offset by Breast Health, which is seasonally weaker due to limited installations during RSNA and over the holidays.
In addition, on the expense side, remember that our U.S. and European sales meeting take place in the first quarter and that this will be the first full quarter to include expenses from Faxitron and Focal.
Before we open the call for questions, let me conclude by saying that we are pleased with how we finished 2018 with our Breast Health, Molecular Diagnostics and International businesses driving solid growth. We continue to generate industry-leading cash flows and put that cash to good use with a second tuck-in acquisition and share repurchases.
We have stronger momentum as we enter 2019 and anticipate a better year as all these trends continue and as our Surgical and Medical Aesthetics franchises return to growth.
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. We'll take our first question from Raj Denhoy with Jefferies.
Hi. Good afternoon.
Hey, Raj.
So, yeah, thanks for the detail on the guidance for next year. Maybe I could start with Molecular. I know you didn't want to give us too much detail around the new contracts you signed, but you had a very strong quarter here in the fourth quarter, up over 10% on an underlying basis. When you think about that business into the next fiscal year, I mean, should we think about it in the 5% range? Or really, maybe you can help us in terms of how to think about that for the next year.
Sure. I think that probably makes sense on the Molecular business, Raj. I think we feel very good about where that's going. That clearly would be a mid-singles. Then, obviously, the total Diagnostics business, probably a little less because of the cytology piece. And if anything, we might hope to beat that on the Molecular side, but we like where we're going right now with it.
Okay. Maybe just one other point of clarification. You noted – and again, looking at my notes here, but you said the commercial capabilities in Aesthetics has improved and you're not seeing it in the numbers yet. And I'm curious if you could maybe give us a little bit more detail on it in terms of what you're referring to there. Is it the sales force that's finally stopped hemorrhaging folks or – again, because it remains a bit of a drag here, so when we think about it improving, what should we really be thinking about?
Yeah, Raj, it's great. It's really referring to both sales and marketing, but especially the sales team. We came into the quarter, and I would tell you, July was off to a tremendous start, which showed we've got the team and the products in place. We feel really, really good about where that team is. Really, only a year after Kevin Thornal went in as President. And I will tell you in late July, I was really looking forward to this earnings call because I knew it was going to be the one that we were going to be reporting strong double-digit growth based on what we could see already happening in the quarter, and then the FDA and TempSure letter. But we're seeing those results and especially what was going on at that point in time.
And then as we look at, frankly, the territories that were, call it, more vacant a year ago, we now have good people in. And so we certainly feel much better about where we are. I'd say we've now got a normalized sales force and feel really good and frankly, still attracting some very good people coming over.
We'll take our next question from Isaac Ro with Goldman Sachs.
Good morning, guys. Thank you. Two questions from me.
Hey, Isaac.
Hi, guys. One on Diagnostics, one on Aesthetics. On Diagnostics, just to try and close a book here on the large contracts, could you try and give us some quantification as to the impacts so that we can get a better sense of the underlying growth in the business if we exclude the impact of the new contracts?
Hey, Isaac, it's Mike. I'm sorry to play traffic cop on that one a little bit, but, I mean, we're really not at any liberty to talk about the economics or the specifics of those things. As you can imagine, that's pretty highly competitive information and highly confidential. We want to keep it to ourselves. We did, as we said in our script, work that into our 2019 guidance, and we're pleased with how it worked out.
Yeah. And I think just to build – simply, if you do think about it, we're guiding our Diagnostics business, call it, likely low- to mid-single-digit growth. Clearly, Molecular is going to be better than that and cytology is probably a pretty flattish business, if that can help a little bit.
Yeah. No, that's helpful. Thank you. And then on the Aesthetics side, with that $7 million in refunds and rebates, just trying to get a sense of, is there anything left there that we should expect in the next quarter or two as that closes out? Or is that pretty much all in the past now? Just trying to make sure that as we look at the sequential trend in Aesthetics, that there are no surprises left before it kind of gets back to the growth mode. Thank you.
Hey, Isaac, it's Karleen. Yeah, I think we've captured everything. I think our teams here did a really nice job. They actually connected with each of over 160 TempSure customers and believe we've captured all in the fourth quarter and don't have any exposure as to prior-period sales moving forward.
We'll take our next question from Tycho Peterson with JPMorgan.
Hey, thanks. I'll start with Breast Health. Steve, a couple of questions there. You mentioned the upgrade opportunity. I'm wondering if you could kind of flesh that out a little bit. Are you starting to kind of replace some of the early 3D systems or were you specifically talking about 2D? And then just a little bit of color on performance of the new products, 3Dimensions and 3D Performance, to what degree are those getting into new customers?
Sure. Yeah, the first part is both software upgrades to existing 3D systems that we'd already sold. We are also upgrading certainly the later generations of 2Ds that we can upgrade, as well with 3D, that's also a software change so that does factor in.
In terms of the second part, 3D Performance and 3Dimensions, I think we're just really pleased that you go back a year ago and we're a little bit on our back heels. And as those products launched, being able to get our messaging out, we're seeing very good uptake. And you've seen it certainly in the MQSA data but also in our overall results here where our Breast Health business really strengthening through the year. And I think we feel really good based on orders as to where that business should be headed this year.
Okay. And then just one follow-up. On guidance, can you clarify what's embedded for acquisition contributions in terms of a dollar amount? And then on NovaSure, when do you think that kind of bottoms out and starts to recover? Thanks.
Yeah. So in terms of the acquisitions, obviously Faxitron and Focal are both included. I think we've talked about combined historically they did about $40 million and we're looking for them to probably grow in the double-digit range.
We'll take our next question from Dan Leonard with Deutsche Bank.
Thank you. First off, Steve, can you give us an update on the competitive intensity you're seeing in Surgical?
Yeah. I don't think it's anything different than what we've felt over the last few years. There's always a little pockets here or there, but I would not say anything meaningfully different, Dan.
Okay. And then for my follow-up. On the body component of your Aesthetics business, I actually thought that might have been a little bit stronger given the positive commentary and from prior calls. Can you help you reconcile the two? Is it just seasonality or was there something else that happened in that category?
Yeah. I think we did have a tougher comp. That we had the submental launch that happened right at the end of the previous year in that quarter so we got a lot of revenue writing at the end. So you got a little bit of that. And frankly some of the icons, some of the other products just got a little hotter in the quarter, and I think people were having some success there. Anything more?
No, I think that's right.
Great.
We'll take our next question from Vijay Kumar with Evercore ISI.
Hey, guys, congrats on a Steady Eddie quarter. So, Steve, maybe I want to start on the Diagnostics piece. And if I look at the guidance, gross margins being up year-on-year, relative to what the Street – I think the Street was overtly nervous on maybe large contract renewals, and it looks like this is coming much better than expected. But I guess my question is, is there upside here? Because when you look at Dx, in your commentaries, you said Molecular is growing and accelerating. It was actually up 10%. Why shouldn't we expect these trends to continue into 2019? And as you mentioned, some of the conversations you have with the large customers, was there any – should we be thinking about the virology opportunity amongst your large customers? Any thoughts on that I think will be helpful.
Sure. I think we feel good about where Molecular is going right now but don't want to get too far ahead of ourselves. A 10.2% quarter, we're about ready to say that that is a sustainable number, probably not. Would it be something we want to shoot for? You bet. But our International business was off the charts strong as that's been building up. But I don't think the sustainability of that – we'd probably be careful saying at this point in time because particularly International, we've grown International 9 out of the last 10 quarters in very strong double digits.
And that, as we start to go against those comps, it's starting to be a very meaningful part of the business. That's going to get tougher, I think, in the road forward. But I think overall we feel very, very good about where it's going. Yeah.
And then maybe one on guidance here. Karleen, and maybe, Steve, for you too as well, I guess when you look at the parts of gross margin (00:43:34) maybe up slightly year-on-year, but if we're looking at higher tax rate, higher below-the-line expenses, are we now looking at operating margins being flat or even expanding at the high end to get to the EPS range?
And when you think about the free cash in a tremendous free cash here. So, Steve, when you think about priorities for free cash deployment, is this all debt paydown given higher interest rate or should we be thinking of tuck-in M&As? Thank you.
Vijay...
It's like nine questions in...
That was a world record for follow-up.
So maybe I'll start on kind of the assumptions for guidance next year. I think we're pleased with the gross margin up slightly versus next year when you think about absorbing the impact of tariffs, as well as currency headwinds.
We are assuming that we have increased our leverage and our operating income line which is going to drive the EPS growth on the bottom. And I think the tax rate I think you said is increasing but it's actually flat 23% year-over-year.
And I think from a cash flow perspective, as we've stated before, we're really focused on deploying that free cash flow. Priority would be tuck-in M&A followed by opportunistic share repurchase just like we've done recently here with Focal Faxitron in the 2.3 million shares repurchased in Q4.
Good job.
We'll take our next question from Jack Meehan with Barclays.
Hi. Good afternoon. Steve, I was wondering about if you could just elaborate a little on your conversations with the FDA and what exactly you're looking at in terms of putting together a clinical trial on the women's health side. Do you think it's possible you could be back in the market with either MonaLisa or Vitalia this year? Is this going to be more of a 2020 event?
I think the simple way to think about it is obviously MonaLisa is on the market but I think the whole market is kind of retrenched at this point in time. And I think the smart thing to assume at this point in time is Vitalia will not be back during the fiscal year. If it came back sooner, then it'd be a wonderful upside to us. But I think as we look at the work that needs to be done, it's probably an out-year event.
Got it. And then just as a follow-up, it would be great to hear your expectations on Fusion as we enter the upcoming respiratory season. On how much within the mid-single-digit or so Molecular growth do you think that's contributing there?
Yeah. Fusion, as we've been saying all along, is really a multiyear build that's very small this year. So we've got the respiratory assays on it just beginning that. But as we've always said, Fusion is a gateway that over time it allows us to go much further into PCR assays and everything else. I think frankly based on a supplier or whatever and their own issues, I think it might have been taken out of context. But we're very pleased with the initial uptake, but I've always said this one's going to build over many, many years.
And, Jack, it's Mike. One piece of that is obviously is adding menu to the platform over time. And we started with the three respiratory assays, as Steve was alluding to, which is a good start. Just got our Group B Streptococcus, which is a women's health assay approved this quarter, and just in recent days got clearances for some of the software that take the open channel capabilities up a notch. So, doing a good job of building out that menu, but as Steve said, it's going to take a little bit of time.
We'll take our next question from Doug Schenkel with Cowen.
Hey, Doug.
Hey. Good afternoon. This is actually Chris on for Doug today. Thanks for taking my question. So I just wanted to start with another question on Diagnostics. Just curious if you could provide some commentary on how broader Diagnostics pricing is trending? And how are you embedding the impact to pricing and revenue guidance? I guess said differently, what could Molecular grow this year if pricing remains stable?
Yeah. We're seeing just modest declines. Obviously, the PAMA pressures and everything else, but I'd say marginally negative but not a whole sales step change down. I think frankly based on a lot of us being able to sell our workflow advantages with Panther, everything else, being able to try to fight off steeper price cuts.
Okay. And then for my follow-up question, could you just provide an update on how efforts to reallocate resources in Medical Aesthetics is progressing? And then are you assuming any material new product launches this year to hit your Medical Aesthetics revenue guidance? Thanks.
Sure. Yeah. I think we feel good about the rebuild of the sales force there, obviously with TempSure Vitalia off the market, going back and selling a little bit more out of the rest of the product line. We did – as we look into this year, TempSure is just getting a surgical indication, so that'll provide a little bit of news as well for us through the year.
We'll take our next question from Bill Quirk with Piper Jaffray.
Great. Thanks. Good afternoon, everybody. Want to circle back to a couple of questions that were asked or alluded to earlier. So I guess first is given that we're entering or getting close to entering year two of PAMA, Steve, would anticipate any incremental pressure on the Molecular business? And obviously the same goes for the third year of that obviously a year away.
Yeah. I think that's embedded in our growth rates. And I think we feel pretty good about -- we've got additional volume. We have new products coming, and it's just another pressure we absorb like any other business going forward.
Yeah, the other piece of that, Bill, as you know as well as anybody is in an environment that could be consolidating, I mean, we're pretty well-positioned with Panther and a menu now that has – geez, off top of my head – well over a dozen assays. So it plays into the need for the customer to drive efficiency and improve the workflow.
Understood. Thanks. And then also just wanted to, I guess, get some additional color on the Interventional side of the business, Steve, clearly one of the bright spots here this year. Just talk to us about the sustainability of the growth platform with that business. Thanks.
Yeah. I think this has always been part of Pete Valenti, the Head of our Breast Health business, as he thought about adjacent areas to really expand into and put a lot of energy from the day he walked in the door. If you think about it, we launched the Affirm prone biopsy system a couple of years ago, Brevera, and now Faxitron and Focal will also start to fit into that. So it's really been much more of that portfolio shift from just gantries to extending across the continuum. And really like where that business is going. Is it organically a double-digit grower? Probably not. But are we going to be able to generate very strong growth? We've had four double-digit quarters in a row. It's becoming a very meaningful contributor to the business. And with Faxitron and Focal also coming into that, it should continue to be a very strong grower here for some time.
Yeah. And I would just add, Steve, that on Brevera, demand is outpacing supply. So as we get supply in line, we should see some acceleration from Brevera. So we feel really good about that as well.
Great.
We'll take our next question from David Lewis with Morgan Stanley.
Good afternoon. Just a few clarifying questions here first and then maybe a follow-up. I guess, for Karleen and Steve, just to follow up here, number one, just thinking about the organic growth for fiscal 2019. Our math has 2.5% to 3.5% organic growth as the implied range. Karleen, is that close to your math?
No, we're closer to 3% to 4% organic growth.
Okay.
But when you deal with currency and Blood Screening going down, David, it probably comes out to be a little bit better.
Okay. And your assumption, Karleen, in that number is, I'm assuming, $45 million to $50 million of M&A contribution in 2019?
Yeah. So what we're thinking about in the organic growth is that the incremental growth for Faxitron and Focal is part of ours because we believe that like we've seen with our distributors that we've purchased internationally, that those businesses will actually perform better as part of Hologic versus stand-alone. So that could be the difference of how we're thinking about it.
Yeah. And don't forget Faxitron, one quarter is organic, next year as well.
Right, right.
It could be part of it.
Okay. Some consideration for the future will be just to give a direct organic growth number. I think investors – sort of non-standard, I think investors would appreciate it, just food for thought. And Steve, just following up, the SculpSure number, the on-body number, I'm just trying to understand, sequentially that number is down on an absolute basis. Even if the comps are more challenging, the business is still down $6 million sequentially. How can that business be down sequentially on an absolute basis and the underlying trends in the business be getting better?
Seasonality. Don't forget seasonality is a big deal. That quarter is always down significantly sequentially because of the summer months.
We'll take our next question from Richard Newitter with Leerink Partners.
Hi. Thanks for taking my question. This is Jaime on for Rich. A quick question that I had, I guess, you guys had announced a agreement with Porter Instruments (sic) [Porter Instrument] within your Medical Aesthetics business. Just wondering if you could give a little bit more color on the strategy there and how it might influence your revenue projections for the Medical Aesthetics business in 2019?
Sure, Jaime. It's really an ancillary product that we're distributing that helps reduce the pain for the patients. So it's a – basically, it's a nitrogen oxide product that patients can take. In the grand scheme, relatively small revenue, but complementary to the procedure and enhances the patient experience for a lot of the other products and procedures that we sell. But it should be starting to be somewhat meaningful as we go forward.
Yeah. And strategically, I think it illustrates what we can do as we can build out our sales force, right?
Yeah.
We'll have one of the larger and more well-equipped sales forces in the industry. So the ability to bring our own organic innovations is one piece and then hopefully, look for some in-license type opportunities as well.
Yeah.
Okay. That's helpful. And then on the Surgical business, I don't know if I maybe missed it, but did you guys give an actual range for what you're expecting that business to grow in 2019? And if so, can you talk a little bit about the cadence? I know it's shown sequential improvement here in fiscal 2018. So is it fair to assume that that can continue to accelerate in 2019? Thanks.
Sure. What we said is we expect low- to mid-single-digit growth for that division and it's really a couple of elements there. We expect on NovaSure to have lower declines versus 2018. But we do expect to have MyoSure continue to grow in the high single-digit, maybe low double-digit range, as well as contribution from our new Fluent product that was recently launched.
One thing to keep in mind on the pacing of that, I mean, there is a little bit of seasonality in Surgical. Our December quarter, which is our Q1, tends to be a little bit stronger and then the Q2 tends to sequentially get a little less and then it builds over the course of the years. So just keep that in mind as you're modeling.
We'll take our next question from Daniel Brennan with UBS.
Great. Thank you. I was just hoping to get a – first question would be just on the virology opportunity. Maybe you can provide some color what the traction's been so far, U.S. versus OUS, and what's kind of assumed in fiscal 2019 for virology?
Sure. You know what? We've been very pleased with the virology uptake. We've always described this as a – I always think about it as a thin slice of pie that each quarter, when we look at our graphs, each quarter is selling more both domestically and internationally. But it's a multiyear build. And as we've continued to say, even in the U.S., a lot of major contracts were locked up for a while, so we're building it nicely over time. And I think it'll be bigger in 2019 than it was in 2018, be bigger in 2020 than it will be in 2019, and probably bigger in 2021 than in 2020. So just kind of keeps building steadily, frankly, in a very nice pace.
Okay. Thanks, Steve. And then maybe on the OUS opportunity, obviously, it's been a big driver. I think you provided guidance for high single-digit, given that you've now comped out those two acquisitions of the distributors. But maybe provide some color regarding the underlying drivers from here. What are some of the biggest opportunities OUS that still might be untapped or ahead of you? Thank you.
Sure. It's almost franchise-by-franchise. I think we've got a much stronger presence for Breast Health now, certainly with now having direct operations in Germany, Spain, as well as the UK, feeling really good about our European business and just the underlying capabilities to drive both the gantries, but also starting to get into the Interventional space, products like Brevera and those things as well over time.
Diagnostics, we've been making great progress. As we mentioned, almost 40% of our Panthers are now outside the United States. So we've been getting good traction with our women's health assays, also obviously the virals as well outside the U.S. And our Surgical business, while still small internationally, has been showing really nice growth as well. So I think we see opportunities there, and frankly Medical Aesthetics will be as well outside. It sounds like we have time for two more questions.
I think we have time for two more questions. We'll take our next question from Derik de Bruin with Bank of America Merrill Lynch.
Hi. Thanks for fitting me in.
Hey, Derik.
Karleen, a couple of – hi – a couple of clarifications. I may have missed it, but did you give a specific revenue guide up down for Medical Aesthetics for the year?
Yeah. I think for the year we expect Medical Aesthetics to grow kind of in the low- to mid-single-digits.
Great.
And really we do expect that women's health is going to be a headwind for that business next year.
Okay. And guidance for net interest expense?
So I think we just said it's going to be up over the current year – maybe up about $50 million.
On a broader one – got you. And then just a bigger question, Steve, in the Breast Health market, obviously your biggest competitor in that market is a tad distracted at the moment. Can you talk a little bit about the competitive landscape? What's going on? I guess how much of your market opportunity of that -- of competitor installed base do you think is up for grabs?
We like to think it's all up for grabs. I would say pragmatically the sales reps aren't nearly as distracted as corporate management is. So at the field, we don't always feel those things quite as much as the rest of us might. Having said that I think we just continue to innovate. We are one or two generations ahead of certainly that competitor. And they still haven't matched frankly what we've been selling a couple of years ago. So I think we just continue to innovate and feel very good about our progress at the Street level. And it's why I think we're gaining market share every single year right now and expect to continue to do so.
Ladies and gentlemen, we have time for one final question. We'll take our final question from Brian Weinstein with William Blair.
Hi. Good afternoon. This is actually Andrew Brackmann on for Brian. Two questions on Panther. I'll just ask them upfront. I think you said the utilization last year grew low-double digits. Could you maybe talk about what's implied in your guidance for this year? And then maybe could you talk a little bit more about the competitive landscape there? Are you seeing anything different? Thanks.
Sure. I think we assume frankly for additional Panthers, we'll continue to place more Panthers and we'll continue to get a little more usage from each Panther that's out there. The competitive landscape, I don't think it's dramatically different. Obviously as we become a bigger player, particularly on a global stage, not just in the U.S., we're running into other strong competitors around the world. But I wouldn't say we're seeing anything materially different.
Ladies and gentlemen, thank you. This is all the time we have for questions today. This now concludes Hologistics (sic) [Hologic's] fourth quarter fiscal 2018 earnings call. Have a good afternoon.