Mike Watts - VP of IR Steve MacMillan - President and CEO Bob McMahon - CFO

Isaac Ro - Goldman Sachs Tycho Peterson - JPMorgan Jack Meehan - Barclays Doug Schenkel - Cowen and Company David Lewis - Morgan Stanley Richard Newitter - Leerink Swann & Company David Clair - Piper Jaffray Anthony Petrone - Jefferies Michael Matson - Needham & Company Vijay Kumar - ISI Group Inc. Bill Bonello - Craig-Hallum Brian Weinstein - William Blair Jayson Bedford - Raymond James Jon Block - Stifel

Good afternoon, and welcome to the Hologic, Inc. First Quarter Fiscal 2015 Earnings Conference Call. My name is Vicky, and I am 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, Vicky. Good afternoon and thank you for joining us for Hologic's First Quarter Fiscal 2015 Earnings Call. With me today are Steve MacMillan, Company's President and Chief Executive Officer; and Bob McMahon, our Chief Financial Officer. Steve and Bob both have some prepared remarks today. They we'll have a question-and-answer session. If you did not already see our first quarter press release, a copy is available in the Investor Relations section of our website, along with a supplemental financial presentation for today's call. We also will post our prepared remarks to our website shortly after we deliver them. Finally a replay of this call will be archived on our website through February 28. Before we begin, I need to inform you that certain statements we make during this call may 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 fourth quarter earnings release or the supplemental presentation. With that, I'll turn the call over to Steve MacMillan, Hologic's CEO.

Thank you, Mike, and good afternoon everyone. We're very pleased to discuss our financial results for the first quarter of our fiscal 2015. In short we had a very good quarter and our results reflect the positive strides our team is making. The first quarter was our fourth consecutive quarter of sequential revenue growth and our highest organic growth rate in a number of years compared to the prior year period, which admittedly was an easy comp. Revenues of $653 million grew 6.6% on a reported basis and 7.7% on a constant currency basis. Importantly, our growth was broad-based in the quarter as all four of our business segments grew between 6% and 8% on a constant currency basis. At the same time, we demonstrated strong earnings leverage in the first quarter. Our goal is to grow profits faster than sales and we accomplished this in the first quarter. While revenues grew 6.6% on a reported basis, non-GAAP net income increased by 18.6% and non-GAAP earnings per share grew by 15.4%. Based on our results in the first quarter and our improving outlook, we are raising our financial guidance for the year. We also were able to voluntarily pay down some of our debt in the quarter, which remains a key priority for us. Bob will give you the details on both of items in a minute. But first, let me just say that we're pleased with the progress we've made thus far in transforming Hologic into a company focused on sustainable organic growth. This transformation is occurring because great products, great people and new leadership are coming together in a powerful way. In terms of products, we maintain market leading shares in several clinically important economically attractive markets which differ about Hologic today is out ability to grow sales in these categories. In some cases, growth is coming from accelerating the adoption of our newest technologies. In digital mammography for example, we were very pleased with the uptake of our Genius 3D tomosynthesis system in the first quarter, as overall breast imaging sales grew at a low double-digit rate. As some of you saw at the RSNA meeting in Chicago interest in our product is strengthening. This is based on a wealth of clinical publications, including the JAMA study, effective marketing by our team, and higher reimbursement levels that recently went into effect for Medicare patients. In other markets, like blood screening, we are growing from market share gains. For example, the new business that our partner Grifols won with the Japanese Red Cross was a significant source of upside in the first quarter. Similarly, although our liquid cytology business continues to decline in the United States based on longer screening intervals, we believe our rate of sales decline has slowed due to market share gains, as well as better focus and execution in the field. The same is true in our surgical business, where slower rates of decline for our NovaSure franchise and even a little growth this quarter have allowed MyoSure growth to shine through. Finally, in the market for sexually transmitted disease testing, growth is coming as we add test volume and menu to our fully automated Panther system. We are rapidly approaching our goal of placing 1,000 Panther systems in clinical diagnostics and blood screening, and revenue per system is growing steadily. The success of our strategy can be seen from the fact that sales of our molecular diagnostic products grew at a mid-single-digit rate in the first quarter, including strong sales growth in the important domestic market. Our product success would not be possible without our people, so I want to give a shout out to any employees listening to this call. From the first day I joined Hologic a little more than a year ago, I’ve been struck by the talent of our employees, and their passionate dedication to our mission. I’m especially grateful to our sales and service teams. They are well-respected by their customers, and their tireless efforts have enabled us to slow sales declines first, and now return to growth. To me, they define commercial excellence. To help our employees achieve their full potential, we have put in place a completely new and highly accomplished leadership team over the last few quarters new COO, new CFO, new Head of International, and new divisional presidents. These executives have made a significant impact already, and really are just now beginning to settle into their roles. They are helping change the mindset of the organization by raising expectations and promoting accountability. Maybe most importantly, they are competitors who know how to win. To round out the senior team, we recently hired John Griffin from Covidien to be our general counsel, and Ali Bebo from Ann Inc to become our Senior Vice President of Human Resources. John and Ali, who will start next week, are both very special leaders who surely will help make our leadership team and our company even stronger. We also hired back Mike Watts last quarter to lead our investor relations efforts. Many of you may know Mike from his years at Gen-Probe, and I know the rest of you will enjoy interacting with him in the future. So in summary, as we look back at my first year at Hologic, I’m proud of the progress we have made, and thrilled to have a team that can lead us to much greater successes. We are clearly ahead of where we expected to be at this point, but it’s still worth noting that we remain in the early innings of our corporate transformation. We realize that we can continue to improve just about everything we do as a company. Building a track record of financial execution is obviously high on our list, with consistent growth in sales and faster growth on the bottom line. In the near-term, the primary drivers to accomplish this are clear, gaining more than our fair share of the breast mammography market, increasing our Panther menu and pull-through, and expanding globally. But in the quarters ahead, we also will focus on revitalizing our R&D pipelines, and continuing to improve our operational efficiency. Over the longer term, as we have discussed before, we believe improving our capital structure and reducing our tax rate can drive additional value for shareholders. It’s an exciting journey that we’re on, and I believe we’re taking steps in the right direction. Now I will hand the call over to Bob to discuss the financials in more detail.

Thank you Steve. I’m going to discuss our first quarter results and then talk about our updated guidance. Unless otherwise noted, all my commentary will focus on non-GAAP results, and %age changes will be on a year-over-year basis. Steve already discussed total revenue, so I won’t repeat that now, except to reiterate my enthusiasm for the broad-based progress our sales and marketing teams have made. I do want to point out that in response to analyst and investor requests, we have provided some additional product sales detail in the presentation that is posted on our website. This detail follows the format that we laid out in our JPMorgan presentation earlier this month, and we intend to provide the same data each quarter going forward. We hope you find it useful to better understand our business, and for modeling purposes. Now on to divisional revenue. In diagnostics, sales were $304.1 million in the first quarter, up 6.4% % as reported, or 7.4% on a constant currency basis. This increase was driven by a 26.3% increase in global blood screening revenue from our partner Grifols, mainly from new business with the Japanese Red Cross, as well as additional ordering by Grifols to normalize their inventory levels. In the United States, revenue continued to decline at a mid-single-digit rate, primarily based on lower blood donation levels and ongoing efforts to manage blood usage. The improvements in our diagnostics business extended well beyond blood screening in the quarter. For example, our molecular diagnostic business was up a reported 5.6% and 6.2% in constant currency, mainly from increased usage of Aptima women’s health assays on our fully automated Panther instrument system. Another important contributor to our quarterly performance in diagnostics was an improvement in our ThinPrep liquid cytology franchise. Specifically, revenue from cytology and perinatal products declined by only 1.2% on a reported basis, and were actually up 0.5% in constant currency. We attribute this to better sales execution and focus, market share gains, and perhaps some improvement in the macro environment. It’s worth noting, however, that we are not calling a bottom to this market, and we expect sales to continue falling, although at a slower rate of decline than in previous quarters. Moving over to our Breast Health division, sales were $242 million, up 6.9% as reported, or 8.2% on a constant currency basis. This was primarily driven by an increase in breast imaging revenue, which was up a reported 10.9%, and 12.3% in constant currency, as customers continued to adopt Hologic 3D mammography. This was partially offset by breast intervention revenue, which declined a reported 2.3%, or 1.6% in constant currency. Overall, we are excited about the progress we are making with our Genius 3D product, and we have only just begun to penetrate the addressable market. We are often asked about the effect that a new competitor is having in the U.S. breast tomosynthesis market. While it's still early days, I can tell you that we are winning more than our fair share so far, and expect that to continue over time. We believe our success is based on a better product profile; that is, a superior FDA-approved indication, an impressive array of data on improved clinical outcomes, and product advantages such as faster scan times. Shifting to the GYN surgical division, sales were $84.4 million, up 7% as reported or 7.9% on a constant currency basis. This was driven by MyoSure, as revenue increased a reported 27.4 %, or 27.9% in constant currency. Quarterly sales of NovaSure systems also increased 0.1%, or 1.2% in constant currency, the first time this business has grown in a number of years, and a significant improvement compared to the declines seen in recent quarters. To round out the revenue discussion, let me mention that in skeletal health, sales were $22.3 million, up 4.5% as reported or 6.1% on a constant currency basis. Growth in the quarter was driven in part by our new Horizon bone densitometry scanner. Now let me turn to expenses and profitability. As Steve said, and as our guidance implies, our goal is to grow earnings faster than revenues. Although this won’t happen every quarter due to the timing of expenses and various other puts and takes, we did demonstrate good leverage in the first quarter. More specifically, non-GAAP earnings per share of 39 cents grew 15.4%, more than double our reported revenue growth even though the stronger dollar reduced our reported EPS by about a penny. Nonetheless, we exceeded the guidance we provided in November. Non-GAAP gross margin was basically flat in the first quarter at 63.3%, as improvements in product mix and operational efficiencies offset the stronger dollar and continued pressure on price. Non-GAAP total operating expenses of $198.5 million increased by only 1.2 %, a significantly lower rate of increase than revenues. Non-GAAP research and development expenses increased, mainly due to a ramp up in diagnostics product development. As we have said before, revitalizing the Company’s R&D pipelines will be an important strategy to generate sustainable, organic growth. Non-GAAP sales and marketing expenses also increased, mainly due to increased promotional activities in Breast Health around 3D mammography. But in non-GAAP general and administrative expenses declined, mainly due to lower external advisory fees, and we will continue to look to this line of the income statement for operating leverage. This all led to non-GAAP net income of $111.6 million, an increase of 18.6%. Net income benefited from our continued efforts to pay down debt. 7. Now I’d like to turn to our updated financial guidance for the full fiscal year and next quarter. Based on our strong performance in the first quarter, we are raising our guidance. Please note that this guidance is based on recent foreign exchange rates, with the understanding that currency has become a significant headwind for us and other multinational companies. I’m going to cover a lot of numbers in this discussion, so I’d encourage you to refer to our press release for clarity. For the 2015 fiscal year, and on a reported basis, we now expect total revenues of $2.57 to $2.60 billion. Compared to the prior year, this equates to reported revenue growth between 2.4% and 3.6 %, and constant currency growth between 4.4% and 5.6%. Still on the full year, we now expect non-GAAP earnings per share of between $1.54 and $1.57. This translates to reported earnings growth of between 5.5% and 7.5%, or 9% to 11 % on a constant currency basis. Let me emphasize that even in the short time since we gave our initial 2015 guidance in November, the U.S. dollar has strengthened significantly. So compared to three months ago, the full-year guidance we are providing today incorporates an incremental revenue headwind of roughly $25 million due to foreign exchange, and an EPS headwind of roughly $0.02 over and above our initial guidance. Said another way, if foreign exchange rates had not moved since early November, the updated guidance we’re providing today would have been $25 million higher in revenue, and $0.02 higher in EPS. Now let’s turn to guidance for the second quarter of fiscal 2015. We now expect total revenues of $640 million to $650 million for the quarter. Compared to the prior year period, this guidance reflects reported revenue growth of 2.4% to 4.0 %, and constant currency growth of 4.5% to 6.1%. We also anticipate diluted, non-GAAP earnings per share of $0.38 to $0.39 in the second quarter. Non-GAAP EPS is expected to grow 2.7% to 5.4% on a reported basis, or roughly 5.5% to 8% on a constant currency basis. Finally, I would like to conclude my remarks by reiterating that reducing debt remains one of the company’s top priorities. In the first quarter, we voluntarily prepaid $300 million of our Term Loan B facility. Our leverage ratio is now down to 3.8, based on net debt of approximately $3.5 billion and trailing 12 months EBITDA of $924 million. Our goal remains to reduce this ratio to 2.5 times by the end of fiscal 2017. In addition, return on invested capital remains an important performance metric for driving shareholder value, and it therefore weighs heavily on executive compensation. Adjusted ROIC for the 12 months ended in December was 9.7%, up from 8.2% a year ago. All in all, we are pleased with our financial performance in the first quarter, but still see many opportunities for continued improvement as we continue down the path of building a company that can be counted on for sustainable organic growth. With that, I will ask the operator to open the call up for questions. Please limit your questions to one plus a related follow-up, then return to the queue. Operator, we’re ready for the first question.

[Operator Instructions] We'll take our first question from Isaac Ro with Goldman Sachs.

Good afternoon, guys. Thank you.

Hi Isaac.

I just want to start with ThinPrep, it was certainly encouraging to hear the improvement there sequentially in absolute. Maybe if you could talk a little bit more about how you achieved that and the specifics around how you plan to sustain that improvement going forward?

Sure Isaac, I think to a large degree our team has refocused the sales team are not just giving up and just accepting the declines and I think this is one of those classic scenarios of putting some more energy behind it. I will say Eric Compton, our COO has started a “We love ThinPrep” speech within the company and things like that are getting everybody reengaged in what is still a tremendously great product. So I think we're slowing it in the U.S. and we're seeing opportunities outside the U.S. and I think we're certainly more confident that the steepest declines are behind us. We don't want to get out in front of ourselves in terms of being too far ahead on the market, but I think we're feeling certainly the most definitive that that rate of decline is halting.

Got it. That's helpful and then on Breast Health, you mentioned the market share opportunity for tomo being attractive here. Just talk a little bit about how that compares U.S. versus international? I tend to think of the international market as being a little tougher just given the nature of the competition, but curious how you're thinking about the competitive landscape in tomo U.S. versus ex-U.S.? Thanks.

Yes. Thank you. We're actually encouraged on both fronts. Clearly a lot of momentum in the U.S. right now with the JAMA study, the incremental reimbursement and just our overall position. But I would even tell you the JAMA study I think has given new life to our teams outside the United States and it's gotten a lot of pick up on a global basis and we did see a pickup and a meaningful pickup internationally in the quarter. And I think as our new leader Claus Egstrand internationally is reengaging a lot of the folks there. I think we're actually probably more encouraged about the opportunities outside the U.S. than I would have been three or six months ago.

Yes, hey. Isaac, this is Bob, just to add on to that. I think one of the things that I think really encourages us about the O.U.S. is not only just tomosynthesis, but also our 2D opportunity and that's one thing where I think there is a whole untapped opportunity of actually converting analogue 2D and that ultimately form 2D to 3D. There are many more analogue systems outside the U.S. and rather than trying to convince them to convert right to 3D, we're also looking at taking our leading technologies in 2D and converting their as well.

We'll go next to Tycho Peterson with JPMorgan.

Hey thanks. Just looking at some of the businesses that have turned here, particular NovaSure and Skeletal Health, can you just maybe comment on how much of that growth was a function of new products versus maybe just revitalizing the sales force and changing combination with them?

Sure. Combinations Tycho, first we would be remiss if we didn't remind people those certainly were the easiest comps. Having said that, I think what you see in both businesses is revitalize sales force is really stable sales force. If you go back to we've told a few people that we had tremendous turnover in that surgical sales force really in 2013 and 2014. They've been settling down in a customer facing business very important. We're getting a little bit of new news coming through on the products, but it's really I would say a very strong sales execution story and the sales force is settling down being reengaged.

Yes, I think just to build on that, we did launch the 6 millimeter that had an immaterial impact in the first quarter. we feel really good about that business going forward on the NovaSure but to build on Steve's point it was really about execution. In the Skeletal business, it is being driven by the horizon, which is a relatively new product.

And then just follow up, can you talk about expectations for Gen-Probe's molecular business? Part of your strategy is obviously to revitalize some of the growth and you have had some early success with viral load with HIV in Europe. Can you maybe just talk about where you are from an investment standpoint and how much you need to reinvest in Gen-Probe to get the molecular business growing again?

Sure. Certainly we're feeling good, by the way we're not yet seeing commercial impact from the HIV in Europe. I think that give us hope for the future in terms of what will be coming. I think the interesting part on that business has probably been missed is the growing panther placements that were occurring through last year, while everybody was focused on Quest and ultimately that Quest was going to anniversary, we're now beyond the Quest contract anniversary, but we're starting to see that growing freight train of strength from the Panthers. Now that -- to continue that, A, there is certainly some mileage ahead of us here, but to the second part of your question in terms of investment, we are revamping investment to really build out a stronger pipeline over time and that will be more years out, other than the viral load stuff that we have coming in the next few years first outside the U.S. and then still a couple of years away in terms of the U.S. But we feel right now again it's an execution story as we then start to put more on and then you will see additional investment in R&D here going forward. So we're both delivering, but also investing for the future.

We'll go next to Jack Meehan with Barclays.

Hi thanks and good afternoon and thanks for all the additional detail on the presentation too. I just want to start with the updated guidance for 2015 making sure I have all the puts and takes rate, just trying to bridge the guidance. I would guess the term loan and the better first quarter performance reached $0.03 good guys and FX was a $0.02 headwind. Is there anything else in the remainder of the year that we need to keep an eye on just given the strength in the quarter. I might have thought that the full year guide might have come up a little bit higher?

I think in this environment with the dollar changing and everything else right now and keep in mind, we still had a softer comp. we feel very good about the direction of the business, but frankly to take the low end, the needed low end of our guidance was at the top end of the old. We think it's a very prudent way to go forward. Bob you want to add?

Yes, I think just the other -- just for modeling purposes, $0.03 is too high on the interest rate. We actually prepaid that at the end of the quarter. So think about that more appropriately a little over -- or a little less than $0.02. So not the full $0.03 that you're talking about because we have three quarters of the year benefit there.

Got it, that makes sense and is there any way to size the -- I guess just trying to figure out the strength and the blood screening business, what's the Japanese red cross versus the inventory level change was for Grifols'?

Yes, for one, that's kind of a hard number to come up to actually detail out what I would say a lot of product associated with the inventory levels is associated with the Japanese Red Cross. So, rather than looking at it as to specific entities what I would say is that growth is demand driven by the Japanese Red Cross and also increase in their inventories. We expect most of the inventory increase to be behind us now and no going forward will be primarily on the back of the Japanese Red Cross.

We'll go next to Doug Schenkel with Cowen and Company.

Hey, good afternoon guys. Thanks for taking the questions.

Sure Doug.

Actually, maybe just I guess another currency question, and actually wondering given you guys have talked for good reason about the opportunity that exists to get a bigger footprint internationally, just the strengthening of the dollar recognizing the balance sheet is getting a lot better but you are still a little bit stretched. Does the strengthening of the dollar at all give you any opportunity to get a little bit more optimistic in investing O U.S. to maybe accelerate some of the aspirations internationally?

Doug, we're not thinking about it quite that way. I think we're looking at the opportunity certainly as a longer-term and we are making the investments we need to. I don’t think we're, frankly we don’t want to throw bad money or good money after incomplete plans. And I would say the team is still in the early stages of putting together the best plans and maybe if we were at a different stage in our managerial cycle, we had a really experienced team that's been in place for five years, you might look a little more opportunistically, but I think given right now we're really looking at it strategically.

Okay that's helpful. And then going back to breast health, you began I think what you call the Genius consumer marketing campaign back in October. I'm just wondering if it's too early to tell how successful was that spend and if that is starting to play a role in helping uptake of 3D and maybe even at some level kind of fortifying the argument that hospital is going to get onboard with 3D otherwise you are going to risk losing volumes to other centers?

Yes, without directly quantifying it we've heard from a number of customers that probably said they had helped push them over the edge and I know we've got a number of hospitals now starting to actually use it and marketing it, you know marketing our product in their own efforts. So I think we're definitely feeling like it is not a catalyst. I think the simplest way to think about where we going on breast health right now is a bunch of things coming together. The JAMA study came out right, if you got back to the fall, JAMA comes out, we start marketing more, the positive reimbursement, frankly a competitor on the market were we think we've got and it is very clear we've got a superior label and we've got the clinical data and a team that feels very good and these things are really working together to generate certainly the double digit growth we had this quarter in the breast imaging and we feel very good about where that business is going.

We'll go next to David Lewis with Morgan Stanley.

I have two questions, maybe Steve I'll start off with you and Bob I'll give you a change to tag team one. So, if you think about the balance sheet for a second, I guess, for Bob what are probabilities near term in terms of extinguishing some of this debt, where do you go first and why? And then Steve I wonder just give n the improving operating performance and obviously considering you've only been a little over a year but it's been a good year, what's the earliest timeframe in which you start considering M&A? And then I had a quick follow up.

Sure, well Bob starts…

Yeah sure, so thanks David and obviously we just prepaid the $300 million on our term loan B. That was the most expeditious way to do it without any prepayments of penalties and so forth. So, we're looking at it across the spectrum overtime are looking at start picking off the various segments or sub-segments of our debt. What I would say is, we're looking at as you know, we have a fairly complex capital structure, debt structure with some converts and so forth some of those are in the money. Those are certainly some candidates that we would be looking to, to evaluate early extinguishment as well our or extinguishment when call date comes as well as some of the other activities around our 6.25 interest rate debt. So I would say we're going to be opportunistic, but do it in an economically NPV positive way.

And David, I'll pick up on the second part. As you think about the ability to start doing what we call some M&A and I would categorize it that the first steps will probably likely be tuck-in and I think about it in terms of capability, both financial capability as well as managerial capability. And I think we're still going to be a slight, call it, I wouldn't expect anything still in the next couple of quarters, but later in the year, next year, can we start to get to that position. I think what we wanted to do is financially we're getting stronger certainly, but the primary use is still going to be to pay down debt. Meanwhile getting the management team fully in place where we're smart enough to make the right bets when we do make them. And if you think back to some of our experiences at other companies, you want to be in the role long enough that you know you're making the best judgment, not just the first thing that comes along. And I think one of the real positives that's coming out of our improved performance is a company is suddenly just the amount of ideas coming to us in what I'd say the last 30, 60 days relative to ideas that came to us previously we now becoming much more viable partner for smaller companies that maybe looking to commercialize based on the success and frankly the quality of the team that we have over here now. So, I think yeah, we're starting to screen a lot more, but we'll probably still be a little ways away.

Okay Steve, very helpful, thank you. Then Bob just a quick question, grow rate is obviously moving in the right direction. This notion that there is not significant margin opportunity in the business is a significant lesson debate. So I want to come back to the quarter here, very significant margin expansion in the quarter, so I want to kind of try to break it down into components. Does this reflect frankly just a stronger quarter than expected and you had greater drop through is because the issue is the quarterly margin performance is not really trending into the balance of the full year. So this is a better quarter than expected, was there some sense of conservatism as we're thinking about the guidance or Frankly there is just opportunities for new reinvestment that perhaps you weren’t thinking about in November. So what were some of the factors for why that margin expansion in the quarter doesn't kind of pull forward to the year?

Yeah, well, it is a combination of all, a little combination of all those factors David. So you know, obviously we were pleasantly surprised by the strength of the business in the first quarter that drove some of the margin expansion. We also had year-on-year improvement in our G&A areas associated with those onetime advisory costs that didn’t materialize in this quarter. And then I think as we think about it going forward, there's two components, one is we are looking at opportunities for, to a certain extent some reinvestment work which is prudent and makes sense, but then also we're facing increasing headwinds around FX which will put pressure on our margins to a certain extent primarily around our gross margin and the predominance of our manufacturing is in the U.S. And so we're in total about0.05 is what we're estimating for the full year and incremental to since the last time we gave guidance. Only about a penny of that hit in the first quarter. So we still had about $0.04 of that incremental headwind to go.

We'll go next to Richard Newitter with Leerink Partners.

Hi. Thank you for taking the questions. Steve, maybe I could start out on the OUS kind of transformation I know that you have been talking about since you've taken over. That's something that you identified right from the get-go as an area for significant improvement across all businesses. Maybe you could just provide a quick update on kind of what you've done so far, where you still have room to go through initiatives, how much is there internally left to do, and maybe piggybacking off of prior question, what could you do externally?

Sure, clearly all of our focus is on internal, let me take it in buckets. We started to see some upturn better performance certainly in our fourth fiscal quarter and that continued into this quarter. Now some of it is the Japan Red Cross. So I want to make sure we don't take full credit for what's happening there, but we are seeing the new leader Claus Egstrand has really taken a much more focused approach to the business paring back instead what we call the peanut butter analogy of going after all the countries. He's really focusing in the key franchises in the countries and reengaging our dealer network on the breast health side and has brought in some very good executives from the diagnostics world to really focus on diagnostics. He also has identified properly big opportunity for us and really getting the teams working and reengaged opportunity for us and really getting the teams working and reengage and it's really a lot of blocking and tackling, but given the enormous underdevelopment, shall we say in terms of where we are, his whole team has been we have the products and we just need to execute better, whereas I would say when I first arrived there was a lot of whining that we didn’t have the right products. And you know we needed for example low-cost tomo and as Bob articulated earlier, one of the things Claus figured out is we don’t necessarily need low cost tomo, we can still sell 2D in a lot of markets that still haven't moved from film. So, it's looking market by market at the opportunities. There is nothing sexy about it, but it's good hard work blocking and tackling, re-engaging. In terms of the second part of your question around deploying M&A, we will be looking, but it's not at all the primary driver. We think we've got so much runway with the products that we have, that probably not likely to be a huge near-term focus for us.

That's very helpful and then just a quick one on the breast imaging side, you know maybe you could tell us now that GE is on the market, to the extent that you maybe teams and pitches were reengaged with GE heavy accounts, but now that they have something that the customers are starting to compare it to because there is a GE product, are you actually able to convert some of the GE accounts to Hologic to tomo or is most of the stress you are having within the existing Hologic accounts? Thanks.

I want to be very careful around how I say this, because you know me to be conservative. But I think the approval has probably been a much bigger net positive to us given the label that they got approved and the product they got approved considering they came three years late.

We'll go next to Bill Quirk with Piper Jaffray.

Hi good afternoon everybody. It is actually Dave Clair in for Bill. So the first question from me, I was hoping to get an update on the state of the Chinese adoption of any T-testing? And then is this going to be a national rollout in China or is it province by province?

We are very little into Asia. Our understanding is province by province and I think they are in very, very early stages. And it is definitely not going to be a national, it is not like the Japan Red Cross, you push a button and go.

Okay, and then you mentioned increasing Panther menu as a priority, so can you give us any color on potential pipeline assays there and any updates on viral load?

Yeah at this point we have publicly talked about viral load. We've got that coming first in Europe. Call it really next year for intents and purposes and then a year behind that to the U.S. and then the additional menu we've really been revamping and not prepared to talk about that at this point.

We'll go next to Anthony Petrone with Jefferies Group.

Thanks and good afternoon. Maybe just a follow up there on clinical diagnostics in terms of the HIV viral load, do you have a plan to maybe launch that on Tigris as well and then may be just a high level comment on pricing and margin of that essay versus the existing portfolio? And then I have a follow on3D.

Sure, the HIV, we do not have plans to commercialize that on Tigris at this point. Panther is really the way of the future and that's where we're focused. We're not getting into specific pricing discussions on that.

Understood, and then just on 3D, maybe just an update on how you see the product cycle progressing from here and you have JAMA and the CPT code in place. Steve you gave some good statistics at J.P. Morgan about 1400 systems have been converted at the installed base. If you do the math it's been around 300 to 600 per year. Should we be forecasting sort of an acceleration in placements from that range? And then what is the opportunity just in terms of going after completing targets where all the comments from the GE launch here? Thanks again.

Sure Anthony. I think we continue to describe the 3D tomo adoption as a freight train more than a rocketship. I think that momentum building and you probably would expect to see an acceleration of the adoption from the last few years and that really should carry us here for at least a number of years based on where we stand right now in terms of a total of call it 12,000 or 13,000 installed opportunities in the United States and still where we are less than 15% of the market, so big opportunity here over the coming years. Now again, it's not all going to come in one year or two because of when people have installed and capital cycles and everything else. And, you know, frankly that gives us more confidence about the longer-term sustainability of our growth trajectory, but meanwhile we are certainly approaching it with a great sense of urgency.

We'll go next to Mike Matson with Needham & Company.

Thanks for taking my question.

Sure, hey Mike.

Hey, so just to take you back to your Stryker days Steve, I was going to ask a question about the capital spending environment. So, we've seen some signs of the capital spending at the healthcare facilities and hospitals is picking up and I was wondering if that was factoring into the strong growth you were seeing with your mammography business as well?

We think it's probably contributing Mike. You know that we'll credit the external environment for some of our growth as opposed to taking full credit for it. So certainly I think it has been modestly helpful to us and I also just think that in general the way that the clinical data the additional, I think what has really happened in the last three months probably more than anything is hospitals are recognizing 3D truly is the future. And that's probably driving it more than even the capital cycle, but the capital is certainly helping us a bit.

Okay thanks, and then just a follow up on the questions about the international business, just wondering if you could give us your view on how you sort of balance your progress in the developed markets like Europe and Japan versus the emerging markets, how big of an opportunity is there in the emerging markets and is that something we could see a benefit from in the near-term or is that going to be a longer-term story?

I call it a qualified balance approach. The interesting part is we do still have so much opportunity as you point out in the developed markets. We have gaping opportunities still in Europe, in Japan and China depending on which market you put that in. But we also are seeing some opportunities in Latin America and certainly some of the other Asian countries. So I think on an absolute dollar basis, we'll probably see a little bit more out of the developed markets, but certainly growth out of both and I think we're earlier stages in the emerging markets and we're still early stages on some of these pieces all over, but it should be coming over time here. I guess one of the benefits to kind of the strategy that we have and given the fact that we are so underdeveloped outside the U.S. in some of the developed markets as well is just that the margin pressure that you see in the emerging markets and that growth isn't near the same as in the developed markets. And so when we think about the difference in the U.S. and no OUS markets we still have some pressure there in terms of market, but not the effect that some companies that are going strictly after growth in emerging markets only. And so that's helping us in terms of the amount of investment and operating income growth as well.

We'll go next to Vijay Kumar with Evercore ISI.

Hey guys, thanks for taking my question and then maybe I'll just start off with one housekeeping question on the guidance rates. So if you're looking sort of the implied growth rates for the back half you just printed 8% Q1 sort of pointing out maybe midpoint or slightly above the mid singles the second quarter. So that implies sort of low singles for the back half and I was wondering was this sort of what caused the variance. I understand some of it is comp is this any particular segments I'm just curious what the assumptions were?

Sure, I think at a high level if you look at our guidance for the year now it is, call it mid single digit growth 4.5% to 5.5%. We think in this environment this year that will be pretty good performance. We obviously got a huge head start. We do start in the second half of the year starting to go up against a little bit better performance and that's why we keep, we want to point out that this first quarter was clearly against a very soft comp. But we don’t want to be signaling a huge deceleration. What we're really saying is we feel good about the business, but it is not growing at the rate yet that we just posted this quarter.

Thanks Steve and maybe one for Bob. You know something that you mentioned caught my attention. Lower advisory fees and that sounds sort of its repetitive in nature, is that the way to read it or I am not sure how to read the comment?

Yes, so there were some one-time cost associated with -- in our Q1 of '14 that wouldn't be replicated going forward. I think that helped us in our managing our G&A areas or actually G&A decline as I spoke about Vijay. I would expect to continue to have strong cost controls there, but not at the rate of decline that we saw in the first quarter?

Yes, Vijay just a little additional color. Recall we had a lot of activism in the stock and proxy, thoughts in everything else going on in the year ago quarter.

We'll go next to Bill Bonello with Craig-Hallum.

Hey, thanks a lot for taking my call. I wanted to revisit the notion of the so called investor debate over earnings power and just curious Bob now that you've been there for a while when you look across in the income statement, would love to get your thoughts. I know you're clear that you should be able to grow earnings faster than revenue, but I am wondering if you can give a little bit more color on some of the things that you've been able to identify as opportunities in particular. I know you guys just hired a new head of global supply chain and it sounds like maybe there are low hanging fruits there, but if you want to elaborate on that or other opportunities?

Yes, I'll start at maybe the highest level and give you maybe some examples. So if we think about our gross margin, as I think about that going forward, what I think is we're going to generate operational efficiencies, but that's going to offset continued pressure and price some of the growth outside the U.S. And so you should think about that more as flattish. An example that some of those operational efficiencies would be things like sourcing or procurement. So one of the area that we've identified now bringing on our supply chain head is looking at across our entire network and footprint, how do we leverage the spend that we have more efficiently and so that would be a way of looking at our quite honestly the largest P&L line item that we have and driving a lot more savings out of the materials that go into our products. That's the way that we will be able to drive some efficiencies. In addition as we drive revenue, that's going to help with efficiencies in our existing footprint through just more throughput into the manufacturing facilities. So those are two big components of how we will continue to drive affiance there. I would expect it to have some modest operational leverage in the OpEx side. I would expect us to have R&D investments continuing to grow albeit not at a rate necessarily accelerate faster than sales, but certainly at the level of sales. Same with sales and marketing and then what I would look at is the G&A area is funding that growth and over time you would see some modest leverage in the operating. Where we will get the most leverage from a net income standpoint is through two elements. One is by paying down debt, re-interest rate, our interest expense will do down and certainly we believe that we have opportunities and our tax albeit longer term to drive that down and drive operating -- net income growth.

Okay. That is very helpful and I have no related follow-up question.

All right. Thanks Bill.

We will go next to Brian Weinstein with William Blair.

All right. Thanks for taking the questions. I know you talked about the Chinese once market, but in general are there any new budgets screening tenders out there that we should be thinking about and also can you just refresh us on the timeline for your contract with the American Red Cross. How long does that go?

Sure Brian. We obviously never want to comment on specific contracts or contractual timing for any single customer, especially by the way when that contract is between Grifols and as specifically we talk about the American Red Cross. We will tell you we had a long-term multifaceted collaboration with the American Red Cross and it does have many years left to run. So we feel very good about that. In terms of the first part of your question. The other tenders around the world, they come up all the time but nothing of this significance certainly of the JRC of the American Red Cross. So they are certainly the two biggies.

Got it and then with respect to the molecular diagnostics growth in the quarter, which was good, can you comment at all about specific assays that were driving that. Obviously Qiagen was out again today talking down some of their HPV growth. Are you seeing a pickup in HPV? Is it CT/NG, Trich? Is it across the Board? Where are you guys seeing the strength?

Yes certainly we would say HOV has been a big strength of ours also Trich. So we're seeing it across the Board. Effectively our portfolio there of women's health products, but HPV has been a tremendous driver for us.

Yes, we believe that HPV we're gaining share significant gain share at the expense of them. So we feel good about all of our assays. All of our assays grew in the quarter.

Operator, I think we might have time for maybe two more questions.

We'll go next to Jayson Bedford with Raymond James.

Good afternoon, and thanks for squeezing me in.

Sure Jayson.

I had just a couple questions. Just on the 2Q guidance, historically this is a business that would have kind of a big fourth quarter, softer first quarter, and then increased sequentially throughout the year. I would argue last year the fourth quarter wasn't quite as big, but certainly the first quarter was much stronger. Yet your second quarter guidance implies a sequential decline. And so, I guess I realize that surgical is always down sequentially in this quarter, but I'm wondering why would revenue be down quarter on quarter? It seems like it's a little more than just FX.

Well that actually is the biggest issue. I think what we feel good about is especially as you pointed out that fourth quarter to first quarter we think we're getting a much more established cadence here and I think frankly if it wasn’t for FX, keep in mind it's moved fairly significantly here quarter -- last year to now and even last quarter to this quarter, we would probably be on the border of sequential growth continuing.

Okay.

Okay. Just to give you a flavor we're expecting FX to double -- the impact to double in the second quarter versus the first quarter. You saw the dramatic strengthening of the dollar really in January of this year and so that's by far in a way the largest piece of that and we expect that to continue throughout the year.

And Jayson the one other piece we were slightly stronger as we pointed out just from some of the inventory stuff. So if that was normalized, I think what we were really seeing is an underlying trend of continuing to grow sequentially.

Okay. And as a quick follow-up, international growth was a lot faster than U.S. growth in the quarter. When you look at the geographical mix of the business for the rest of the year, is double-digit international growth sustainable on a constant currency basis for the year?

Certainly the Japan Red Cross piece is helping us a lot there, that's our goal, we're not quite ready to declare the work at that level.

We'll go next to Jon Block with Stifel.

Great, and thank you for squeezing me in. I'll try to be brief, two quick ones. Steve, maybe the first one. If you could just talk the lay of the land, U.S. tomo several months post the reimbursement news what are you seeing in the field? In other words are you seeing maybe the sales cycle shortening with some of the additional visibility, and then also you cited a strong backlog at the end of September in U.S. Breast Health. What are you seeing at the end of the calendar year?

Sure. I think the -- I think we feel better from the field and I will tell you that we probably -- my own read was we took a slight step back when our friends got approved and then we showed up at RSNA and then we started to realize the full labeling in the offering and the team is I think feeling better than ever about what we can do in this marketplace with the product we have. So right now I think we're feeling far better, backlog we don't report on it quarterly, but continuing to be very good.

Okay. And then I may have missed this earlier, but on the blood screening side you put up some big, big numbers and you referenced JRC, and I always realize there's going to be sort of ebbs and flows with big deals. But is there a way to think about normalized growth ex that impact, so in our models when we start thinking out when you lapped that deal, how the underlying growth may look more in that division? Thanks, guys.

Sure. I think we articulated it that on an annualized basis, the first year it was $20-ish million. So call it $20 million to $25 million. It was going to give us about a one percentage point boost for the total corporation for the year and then it anniversaries. And I think just the way we think about that, it's a little bit like the Quest deal and the molecular business in the U.S. where you can get a little bit of a boost, but then it's our jeep spilling that that and growing in the after math of that with anniversaries. So we're busy working with our partners Grifols right now to think about what's next.

Thank you. And that is all the time we have question today. This now concludes Hologic's first quarter fiscal 2015 earnings call. Have a good evening.