Mike Watts - VP, IR, Corporate Communications Steve MacMillan - Chairman, President, CEO Bob McMahon - CFO

Tycho Peterson - JPMorgan Jonathan Groberg - UBS Jack Meehan - Barclays. Doug Schenkel - Cowen & Company Isaac Ro - Goldman Sachs Bill Quirk - Piper Jaffray Richard Newitter - Leerink Partners Brian Weinstein - William Blair Raj Denhoy - Jefferies Jon Block - Stifel Vijay Kumar - Evercore ISI Derik de Bruin - Bank of America Mark Massaro - Canaccord Genuity Jason Bedford - Raymond James

Good afternoon and welcome to the Hologic, Inc., First Quarter Fiscal 2016 Earnings Conference Call. My name is Cassandra 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, Cassandra. Good afternoon and thanks for joining us for Hologic's first quarter fiscal 2016 earnings call. With me today are Steve MacMillan, the company's Chairman, President and CEO; and Bob McMahon, our Chief Financial Officer. Steve and Bob both have some prepared remarks; then we'll have a question-and-answer session. Our first quarter press release is available now on the Investors section of our Web site, we also will post our prepared remarks to our Web site shortly after we deliver them this afternoon. Finally, a replay of the call will be archived on our Web site through February 26. 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 as well as 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 in our press release and in our filings with the SEC. Also during this call, we'll be discussing certain non-GAAP financial measures, a reconciliation from GAAP can be found in our earnings release. Now, I would like to turn the call over to Steve MacMillan, Hologic's CEO.

Thank you, Mike, and good afternoon everyone. We are very pleased to discuss Hologic's financial results for the first quarter of fiscal 2016. In short, the company is off to a good start to the year. We are executing on our key top-line growth drivers and exceeding expectations on the bottom-line based on the tremendous earnings power of the company, which has become even stronger over time than I initially thought possible. In the first quarter, total revenue grew 8.1% in constant currency terms driven by double-digit growth in the United States, our largest and most profitable market. Our U.S. businesses have turned around more rapidly than anyone anticipated based on better commercial execution and the quality of our products. And over the last few quarters, our domestic sales and marketing teams have kicked it up a notch generating robust growth from our key brands. This commercial improvement has led to significant benefits up and down our income statement. For example, in the first quarter, we posted non-GAAP gross and operating margins that were significantly higher than in the prior year period. We are clearly demonstrating that despite our already sector leading profitability, we can generate additional operating leverage by driving the growth of our most profitable products. Working down the income statement, earnings per share were $0.46 in the first quarter beating our expectations again. In addition, we increased EPS at a pace that was nearly 3x the rate of revenue growth. With that introduction, let me discuss the details of our first quarter revenue performance. Then Bob will take you through the rest of the income statement, the balance sheet and our updated guidance. Total revenues were $695.2 million in the first quarter, an increase of 6.5% on a reported basis and 8.1% in constant currency terms. Geographically, our U.S. businesses performed exceptionally well in the quarter. We posted 12.8% revenue growth domestically, a slight acceleration over the fourth quarter despite a more difficult comp. The strong U.S. performance outweighed what was a mixed bag internationally in the first quarter. We showed good continued progress in cytology, molecular diagnostics and surgical outside the United States. In constant currency terms, cytology grew high single-digit, molecular posted modest growth for the second consecutive quarter. And surgical grew in the mid-teens albeit from a small base. In contrast, we saw weakness in our international blood screening business which was largely expected and which resulted mainly from fluctuations in ordering patterns by our commercial partner Grifols. In addition, our international breast health results confirmed as we've highlighted before that we are a long way from optimizing our relationships with our dealers and distributors. Lower breast health and blood screening sales OUS contributed to total international sales declining a 11.5% in the quarter or 5.4% in constant currency terms. We are moving decisively to strengthen the international breast business drawing on the same tool kit that we employed to turnaround our domestic franchises. We are unifying leadership of all global commercial activities under our COO, Eric Compton. So that we may share some of our U.S. best practices internationally. As part of this process, our head of international has left the company along with our head of European breast health sales. In their place, Eric is diving deep to optimize our go-to-market strategy in key markets around the globe. We are highly focused on identifying the right commercial model for each country in each we operate, while there maybe some short-term volatility, we remain bullish on our international opportunities in breast health and we look forward to sharing more details about our plans as they come together. Now, let's provide some more color on our divisional revenue performance in the first quarter. Our biggest division Diagnostics, posted sales of $310.7 million in the quarter, a growth rate of 3.7% in constant currency terms. But the three franchises within diagnostics demonstrated very different results. In molecular diagnostics and cytology, where we controlled the commercial channel, our results were very good. But blood screening sales declined. Let's discuss each piece in turn. In molecular diagnostics, quarterly sales of $129.6 million increased 9.9% in constant currency, our best growth rate since the Gen-Probe acquisition. Domestic revenues increased a stellar 11.5% and the formula was similar to recent quarters, strong placements of our fully automated Panther instrument, a healthy number of competitive wins and growing utilization of our women's health assays. We said at a recent healthcare conference that the average Panther system globally now generates more than a $170,000 in annual assay revenue despite being less than 30% utilized, this demonstrates both the current value of the system and it's future potential for customers and Hologic as we add new test for viral load and other targets in the years ahead. Outside the United States, sales of our molecular diagnostics products grew nominally on a constant currency basis for the second consecutive quarter as the business stabilizes after an extended period of decline. We are also pleased with the performance of ThinPrep, one of our largest and most profitable franchises. Global sales of cytology and perinatal products totaled a $120.4 million in the first quarter. U.S. sales actually increased by a modest 0.5% as market share gains more than offset headwinds from longer screening intervals. And internationally, we are encouraged that revenue grew 8.7% in constant currency. This drove global growth of 3.1%, our second consecutive quarter of decent constant currency growth. Our commercial team deserves much credit for transforming a business that was declining at a high single digit rate as recently as 2014 into a modest grower globally. In blood screening, worldwide sales were $60.7 million in the first quarter. This was roughly flat sequentially as sales have normalized without the benefit of growth from the Japanese Red Cross contract. Compared to the prior year, however, blood screening sales declined 6.5% on a constant currency basis. This reflects heavier ordering by our partner Grifols a year ago and general declines in blood usage that we are seeing in the United States and other markets. Now, let's turn to Breast Health where we continue to see strong adoption of our Genius 3D mammography exams in the United States. Domestic sales of breast imaging product including our Genius systems increased 18.7% compared to the 8.9% constant currency decline we saw internationally. Global sales of interventional breast products increased slightly on a constant currency basis and we are optimistic that new products will help stimulate growth in this category over the next couple of years. All of this added up to total breast health sales of $262.2 million in the quarter up 9.9% in constant currency terms. We also remain enthusiastic about our future prospects in the mammography market. We continue to gain share in the United States based on a superior product profile and excellent customer service. Our prices are stable despite increasing competition, which indicates that our marketing programs are working and that our systems are providing value to customers. And congressional action is prohibited any near term insurance changes arising from the controversial screening recommendations by the USPSTF. All-in-all, we've a lengthy runway ahead of us to continue upgrading older less effective technologies to our Genius 3D exams. To round out the revenue discussion, we are thrilled with the progress being made by our surgical team. Although the December quarter is typically a seasonally strong one, we certainly did not predict sales of $98.8 million or a constant currency growth rate of 18.8%. These are truly outstanding results, our best overall performance in the last several years. So congratulations to the commercial teams and new leaders who are making it happen. It's worth mentioning that surgical is Hologic's most profitable division on a gross and operating margin basis. So the magnitude of the top-line growth we're now seeing is having a nice positive impact on the company's gross and operating margins as well as earnings per share. Specifically, our MyoSure product for hysteroscopic tissue removal posted total revenue of $36.9 million in the first quarter with accelerating growth of 46.1% in constant currency terms. Equally impressive, global NovaSure sales of $61.7 million increased by 7.5% on a constant currency basis. We do believe NovaSure sales benefited from the recall of a competitive product but estimate that this benefit was relatively small in the context of overall quarterly sales. Finally, worldwide Skeletal sales were $23.5 million in the quarter, an increase of 7.7% on a constant currency basis driven by continued growth of our new horizon bone density scanner a very solid performance. Before, I turn the call over to Bob; let me conclude by saying that this quarter illustrates the value that our portfolio of products can provide to shareholders. Although breast health and blood screening declined outside the United States, we more than compensated by posting strong growth in mammography, molecular diagnostics and surgical. The net effect was top-line performance slightly ahead of expectations and a significant increase in profitability. All-in-all, we are off to a good start in 2016 and remain excited about the future. Now, I'll hand the call over to Bob.

Thank you, Steve, and good afternoon, everyone. I'm going to walk through the rest of our first quarter income statement, the balance sheet, and our updated financial guidance for 2016. Unless otherwise noted, my remarks will focus on non-GAAP results and percentage changes will be on a year-over-year basis. As Steve mentioned, we delivered another solid quarter on the top-line with 12.8% sales growth in the U.S. more than offsetting the international choppiness we saw in breast health and blood screening. Strength in domestic revenue combined with the early returns of our productivity efforts help drive margin improvement at the gross and operating levels contributing to non-GAAP earnings per share of $0.46, a 17.9% increase over the prior year period. Even with headwinds from share count and currency EPS grew at a rate nearly 3x faster than sales. Moving down the income statement, our first quarter gross margin of 65.2% increased a 190 basis points compared to the prior year period. Gross margin benefited from mix both geographic and product and from our cost reduction initiatives. Not only did revenue grow at a double-digit rate in the U.S., some of our highest margin products also performed well including our ThinPrep, NovaSure and Aptima franchise. And I should point out that pricing remains stable across our product lines as our commercial team is focused on selling the clinical and economic value that our products provide. In addition, our operations and procurement teams are executing well driving efficiencies and reducing the cost to make our products. Total operating expenses of $221 million increased by 11.3% in the first quarter. This increase was driven primarily by sales and marketing expense which increased 15.6%. We continued to invest to extend our leadership in the mammography market and to explain why co-testing the best way to protect women from cervical cancer. Despite these investments better growth margins drove profitability improvement down to the operating line. Our non-GAAP operating margin was 33.4% in the quarter, an increase of 50 basis points from last year. Although our operating margin has already among the highest in our sector, the last several quarters have clearly demonstrated that they can expand further even as we fund key growth drivers. Moving further down the income statement, we are beginning to reap the benefits of our efforts to reduce and refinance debt. In the first quarter, interest expense was $32.8 million a reduction of 25% versus the prior year period. In addition, we are pleased that a lot of hard work to reduce our tax rate has begun to payoff earlier than expected. We now estimate that our effective tax rate will be around 33% in fiscal 2016 lower than our initial guidance and this added about a $0.01 to EPS in the first quarter. Although, this is just a first step in our multiyear tax improvement strategy, we are encouraged by the progress we've made so far. Finally, diluted shares outstanding were $292 million in the first quarter. As you know, we are focused on minimizing share count dilution by eliminating the convertible notes from our capital structure. In the fourth quarter for example, we repurchased $300 million in principle of our most dilutive convertible notes. And this had a beneficial effect on share count in the first quarter. In addition, the recent decline in our share price had the rather perverse effect of further reducing dilution from the converts. The combined effect boosted EPS by almost a $0.01 in the quarter. Now, let's talk about cash flows and the balance sheet. Operating cash flow was strong again in the first quarter at a $164.3 million, an increase of 7% over the prior year period. We spent $19.7 million on capital in the quarter leading the free cash flow of $144.6 million. Turning to the balance sheet, we ended the first fiscal quarter with $650 million in cash, 19.5% improvement over the prior year period. This strong cash position provides us with dry powder for potential tuck-in acquisitions even as we continue to pay down debt. At the end of the first quarter, we had total debt outstanding of $3.6 billion, a decrease of $322 million compared to a year ago and net debt of $2.98 billion. Our leverage ratio net debt over EBITDA now stands at 3.1x and we are on track to achieve our goal of lowering our leverage ratio to 2.5x by the end of fiscal 2017. To wrap up the historical discussion, adjusted EBITDA was $252 million in the first quarter up 8.1% compared to the prior year period. And we are tracking to generate EBITDA of more than $1 billion for the full year. Our consistency in delivering strong profit growth and lowering debt as allowed us to steadily improve our return on invested capital. As of our first fiscal quarter, ROIC was 11.3% on a trailing 12-month basis, 160 basis point increase over the prior year. Now, let's shift gears and turn to our updated non-GAAP financial guidance for the full year and second quarter. We are updating our guidance based on our solid performance in the first quarter, a stronger U.S. dollar and greater than expected earnings power. As always, this guidance is based on recent foreign exchange rates. As you know, the dollar has strengthened since we provided our initial 2016 guidance, compared to last year; we now expect currency to represent a $25 million top-line headwind in 2016. This equates to roughly $0.03 in earnings per share. And importantly, compared to when we initially guided in November, the stronger dollar is subtracting an incremental $11 million from our top-line. So for the 2016 fiscal year, we are maintaining our guidance for constant currency growth of between 4.4% and 5.5%. But on a reported basis, we are updating our guidance to reflect the additional currency headwind. So based solely on the stronger dollar, we now expect reported revenues of $2.8 billion to $2.83 billion representing reported growth of 3.5% to 4.6%. As Steve said earlier, we continue to forecast improvements on both the gross and operating margin lines based on favorable geographic and product mix as well as early returns from our productivity efforts. In addition, as you probably read, the omnibus budget bill that was passed by congress in December included a 2-year moratorium on the medical device excise tax among other key provisions. We are thrilled that congress has recognized the negative effects of this tax on domestic innovation and job growth. In fiscal 2015, we paid $23.6 million under this tax which was reported under general and administrative expenses. It's important to note 2 points however. First, since the moratorium took effect on January 1, we only recognized three quarters of this benefit in our 2016 fiscal year. In addition, we plan to reinvest most of the benefit in some of our more attractive R&D and commercial programs. Continuing with our full year guidance, we now expect our effective tax rate to improve to approximately 33% for the year and believed diluted shares outstanding will total between $296 million and $298 million for the full year. Given these updates and our strong first quarter results, we are increasing our non-GAAP earnings per share guidance. For the full year, we now expect EPS of $1.86 to $1.90. This translates to growth of 13.1% to 15.5% in constant currency terms or reported growth between 11.4% and 13.8%. So despite the currency and share count headwinds, we anticipate growing EPS more than double the rate of sales demonstrating bottom-line growth and operating leverage that seemed unlikely at best just a few quarters ago. Turning to guidance for the second quarter of fiscal 2016, we expect revenues of $680 million to $690 million. Compared to the prior year period, this range reflects revenue growth of 4.5% to 6% on a constant currency basis and reported revenue growth of 3.7% to 5.3%. We expect a sequential decline in revenue for two main reasons. First, our surgical business is seasonally weakest in the March quarter, especially in comparison to the strength we saw on the December period. Second, we are allowing for some potential choppiness in our international business. In terms of the bottom-line, we forecast diluted non-GAAP earnings per share of $0.45 to $0.46 in the second quarter. This represents growth of 11.2% to 13.6% in constant currency terms or 9.8% to 12.2% on a reported basis. It's worth mentioning that we anticipate a substantial R&D increase in spending in the second fiscal quarter based mainly on the timing of projects. Before opening the call for questions, I would like to reiterate that Hologic is off to a good start in 2016. In the first quarter, our momentum continued with Genius 3D mammography in our surgical and molecular diagnostic businesses priced to the upside. As a whole, our domestic business has performed great. These positives outweighed weaker than expected results in our international mammography business which we are dealing with aggressively. In the middle of the income statement, we are demonstrating the tremendous earnings power of the company by improving gross and operating margins and below the line, we are beginning to see the benefits from our efforts to reduce debt as well as our effective tax rate. With that, I will ask the operator to open up the call for questions. Please limit your questions to one plus a related follow-up and then return to the queue. Operator, we are ready for the first question.

Thank you. [Operator Instructions] And we will go to our first question from Tycho Peterson of JPMorgan.

Thanks. Steve, I guess I want to start on the international breast health where we have been getting a lot of questions on the decline. Can you maybe just walk through the extent of the dealer issues, how contained this is, how quickly you can work through it and what kind of cushion you are baking in for the remainder of the year?

Yes. On the wall of worry, Tycho, it's something we think about, I wouldn't be overly freaked out by it. I think the way we are thinking about it is, we got just about every business performing better than we expected. But I think the deeper we dug in the second half of the year and you continue to hear us say really going back a few quarters. Hey, we are probably closer to a start-up than a real turnaround here. And we have a lot of work to do even building our relationships with the dealers. And I think what -- as we go back and look at it, clearly, our fourth fiscal quarter was really strong and followed up a weaker quarter. And that's not what we want to be delivering and don't have that sustained relationship. So we are making some changes internally and we are not going to blame the dealers. We are going to always look at ourselves. And I will say that we need to be a little closer to it. But it's the only little piece of the puzzle, I think right now for us to continue to work on. And I will also say, I think we are all accustomed to not every business is always firing on every cylinder the day it does, we are probably in trouble. This is kind of one of our areas of opportunity. I think the next couple of quarters; we will probably be a little bit softer. We are going to plan for that while we get to the right longer term place. But as Eric -- as Eric Compton after his first reviews of it said it's -- obviously reminds him of a little bit of when he walked in the door of Hologic two years ago and some of the same rebuilding needs to occur. And things like pricing discipline and marketing, market access, just a lot of the fundamentals that we have never put in place.

Okay. And just a follow-up, the management changes you alluded to, are the changes done, do you have team in place now you need for Europe?

No. We are putting those in place. So we've exited a couple of people and we are in the process of putting new ones in. So that's why I think over the next quarter or two, price doubles, softness and that's basically what we've baked into our guidance.

And we will go next to Jonathan Groberg of UBS.

Great, thanks and congratulations on incredibly solid quarter. Obviously, a lot of questions on international breast health but you just answered some of those. So can you maybe talk a little bit about your -- looks like you know for the quarter, at least to start the year, your operating expenses grew quite a bit more than sales, kind of what's your expectation for OpEx growth for the year versus kind of gross margin for the year?

Hi, Jon. This is Bob. So as we mentioned in our prepared remarks what we are looking at is actually is very strong performance on our gross margin basis combination of product and geography mix as well as some of the productivity efforts that we are doing. And we are looking to reinvest a portion of those. Our gross margin is probably operating a little better than what we had anticipated and we are looking to reinvest that in those growth drivers and places like our marketing and to a certain extent some of the R&D investments to drive that growth rate on the top-line. That being said, we are still expecting operating margin expansion consistent with that we had guided to in November and we believe that we are able to do that and we have demonstrated that certainly in the first quarter continued to have operating margin leverage and we expect that throughout the course of the rest of the year.

So just a follow-up on that kind of tie it into the first part of the conversation around international, is it more about getting the right people, I know you thought you had the right person in your first hire, but is it more about getting the right people or is it more about throwing more money at the issue? And have you contemplated how -- is that kind of in your guidance now the outlook for -- how much you might need to spend in order to -- to get the start up going internationally?

It's all about the right people. It's not about spending Jonathan. So we will have it nailed.

And we will go next to Jack Meehan of Barclays.

Thanks and good afternoon. So just want to ask about the U.S. mammography business and just curious on your view for the landscape this year whether its hospital CapEx trends or the competitive dynamic just your view on the rate of placements from here?

Jack, we still feel really good. The U.S. says -- we said the U.S. breast imaging business was up 18.7% in the quarter. That's coming off of some pretty good comps and everything we are seeing and hearing. As we continue to feel we are making very good progress both with our own customers as well as competitive in-roads. And I think we feel as good if not better about that business and the fact that we are going to end up by the end of the 3D curve. I said early on we think we will end up with a little bit higher share than we started. And I think if we anything we feel better and better about that prediction and more and more confident everyday that goes by. We continue to hear great stories from our teams.

Got it. And then just curious as you see hospitals taking on the new 3D units, do you still see them adding new capacity or you are seeing some replacements of 2D units as well?

It's largely replacement is the way to think about it. I don't think we see the number of gantries being significantly different at the end of the 3D curve versus where we are today.

And we will go next to Doug Schenkel of Cowen & Company.

Hey, good afternoon guys and thank you for taking my questions.

Hi, Doug.

I just want to cover really two topics. One is really just a math on guidance and then really the other topic is just on pricing in certain product categories. So first on, guidance, just to try to run through the waterfall, you beat earnings guidance at the high-end by $0.04 this quarter. You increased EPS guidance for the year at the mid-point by $0.06. We estimate lower share count gets you $0.03 to $0.05 and lower tax rate gets $0.03 to $0.04, so it seems like we might be missing something here. Is there a change in mix that you expect to occur or are there areas that maybe you're investing a little bit more in either in sales or R&D relative to your last guidance. Why don't I pause there and I will come back with the pricing question?

Hey, Doug. This is Bob. You're generally on top of it for both the share count and the tax benefit. I think what the other piece that we alluded to -- the incremental headwind associated with FX. So if you think about the very -- at a very high level the tax and -- tax benefit and share count roughly we think about $0.06 offset by about $0.02 of FX and then we -- the operational beat in the Q1 like you said about $0.06 growth.

Gets you in the neighborhood. Okay.

Yes.

And then on pricing really quickly, some of our recent checks suggest that there may have been a pick up with more aggressive pricing from competitors particularly in chlamydia and gonorrhea, CT/NG. Can you talk about if you are seeing anything that's really different from kind of the normal pricing pressures you see in the market and if there is -- basically what's baked into your guidance outlook for pricing changes in molecular? Thank you.

Yes. I will tell you. I think we feel as good as we felt since we have been here about pricing. And I think, we have got so much more discipline. I will tell you, we are hearing more and more competitive attempt frankly in both the molecular side as well as on the mammography side where there is some pretty big disparities and with Bob McMahon and Eric Compton's leadership in the divisional presidents, we have been doing a much better job of fighting on price -- not fighting on price, fighting on the features and benefits and not going down there. And it's part of the hidden piece and I think that we are seeing in our gross margin expansion. As we talk about the gross margin piece, it's clearly it's a -- the incredible progress we are making on the operational side. It's a mix benefit. But also frankly I think much better pricing discipline and we're holding pricing far better and in some cases getting a little bit of up ticks even in and what is a much more competitive environment.

And we will go next to Isaac Ro of Goldman Sachs.

Good afternoon, guys. Thank you.

Hi, Isaac.

Hi. How are you?

Good.

Wanted to just maybe come back to the breast imaging comments that you guys touched on earlier. And wondering if you could put those in context with that we are seeing from the other major equipment player this quarter. And I'm specifically curious, if you are seeing any more signs of aggressive bundling or pricing practices from those players and whether or not that's a factor we should be considering in the market?

We are seeing it. And Isaac, I would tell you what I'm really, really proud of our team fighting it off. I think we are actually winning more based on the overall success of our business. The combination of our product, our label, the ease of use and our Genius marketing campaigns which frankly has probably been the single biggest differentiator of hospitals understanding. They are better aligned with us in the mammography space than with anybody else because we are driving patients to the hospitals that have our systems and I think it's been a dramatic step change in our own organizations ability to ward-off going down the pricing games. And I've heard more and more anecdotes of much bigger pricing discounts from competitors on accounts that we have not lost and in fact we have won.

Yes. Just to build on that, Steve. I mean over the last 18 months we had two competitors come into a market where we were the sole competitor. We've not only maintained stable pricing but we gained share. I mean that’s a huge credit to the -- our domestic breast health team led by Pete Valenti and that team, just tremendous job.

Got it. That's helpful. And then maybe just several question on the balance sheet and M&A didn't come up so far this quarter, I'm curious if it's possible whether we might see you guys get in the marketplace this year where the tuck-in deal or two to augment the business. And if so kind of what -- how is the shopping list look, how would you characterize evaluations in deal funnel? Thank you.

Sure. Isaac, I think we are still in the earlier stages probably than I preferred to be on the true business development side. We have rebuild the capabilities aligned them with the divisions, I think the divisions are starting to look and starting to get the shopping list. But I put it really in, probably the first inning. And we started to look at a few things we said no to. I do think valuations are going to be our friend as we go forward and obviously, with the tremendous cash generation and getting our balance sheet cleaned up. We are going to be ready. I think our teams have been so focused on great commercial execution and getting the R&D pipelines back in shape that sort of the next piece that will start to play out. But we are probably still a little slower, so I wouldn't anticipate anything super quick on that front.

And we will go next Bill Quirk of Piper Jaffray.

Great. Thanks. Good afternoon everybody.

Hey, Bill.

Hi, there. First question, Bob, you mentioned that obviously there is a number of factors that help drive the gross margin improvement year-over-year and you alluded to the fact they were in kind of the early days from a supply chain standpoint. So I guess, two part question here, one, can you help break this down a little bit further in terms of what the contribution was from lining your supply chain? And then, again, I don't want to put words in your mouth, it sounds kind of really early days for this initiative?

Yes, we are. I'm not going to give you the level of specificity that you probably would like to have there. I would say it is a -- the productivity enhancements that we were talking about are -- through our sourcing organization as well as looking at running our factories more efficiently and I think -- our operations team has done a great job of driving that. Obviously, we started that last year and we are seeing one of full year benefit. We are starting to see the full annualized effect of that this year. And it felt really good about that. I would say it was a fairly meaningful component of the gross margin expansion, obviously, with our U.S. business driving significant growth that also had a big impact as well. And as we are thinking about the -- way that the U.S. business grew with the higher margin products in our surgical businesses, so that actually helped us -- overall as well. So it was a nice balance between the kind of the three of those things. But I think we are in the early innings of sustained kind of improvement on the gross margin basis.

Hey, Bill. I would add to that. You heard me say certainly a year ago, I didn't think as a company, we would probably see much gross margin expansion. And if I say things that have changed over the last year in my own outlook that's one that -- I think we are seeing much better opportunity than I ever imagine possible. So it's back to that -- it's always puts and takes. That's one of the really good guys coming our way.

Good to hear. Second, I guess just kind of a bigger picture question on blood screening and blood utilization in general. I mean, certainly, we have had the trend of the lower hemoglobin transfusion triggers in the U.S. for a while. You alluded to that we may be starting to see this internationally as well. So I guess similar question here, guys, kind of how much through the process are we, both in the U.S. and OUS? I would just be curious what your partner, Grifols, has been telling you on that.

I think we see -- in the U.S. I think we see continued low single digit declines probably in the blood screening business. Internationally probably more flattish as more countries adopt our nat testing but some more advanced ones start to cut back a little bit. So I think we see the international business more flattish. Having said that we got a couple of quarters right now that were absorbing the inventory fluctuations particularly from the year ago with the JRC where frankly we were both doing consumption plus inventory build. And now as the inventory is contracting back, we just got a couple of rougher comps that we are getting through. The underlying business slightly down but still a very good business for us but certainly it's not going to be accretive to our top-line growth rate over time. They would be dilutive to that.

And we will go next to Richard Newitter of Leerink Partners.

Hi. Thanks for taking the question.

Hi, Rich.

I was hoping just to start off on the investments that you guys are making and one of the more frequent questions we get are about your pipeline and when we will get greater visibility into what you guys have in store as you eventually come out on the other side of the tomo ramp. So first, just can you give us any sense as to whether organic or external -- where the priority is? You alluded to some of that, Steve, earlier. And then, two, any color on when we will learn about the pipeline in greater detail and what can you give us today? Thanks.

Sure. Sure, Rich. Clearly, the primary focus has been on rebuilding the organic growth pipeline and I think the simplest way to think about that is probably also why we are not further along on the business development front. We feel pretty good what we are putting in place. The other piece that I start to give you a little bit of a tidbit is, a lot of what we are working on or what I call singles and doubles. And the company was built historically on every eight years we launch a mega product like 2D and then 3D Tomo. And a lot of what we are looking at is how do we cushion the blow in between and looking at some smaller things that we can be doing to bring in between those big cycles. And the diagnostics business, it's about building out menu and in the breast health business it's not just what's the replacement for 3D tomo, it says there is a lot of other stuff that we can bring out in IBS and other stuff along the way. So I think what you will start to see and as you know with me stylistically, I like to get a few points on the board before we start talking about them. And given an organization we inherited that had a few launches on the table that we had to scrap when I got here because they weren't really ready for primetime. I want to make sure, we really have our ducks in a row before we, a) start talking a lot more but I would tell you we are -- we feel better and better but it's going to be more singles and doubles than probably triples and home runs. So we will continue to update it as we go but that may give you a little more flavor from what you had historically.

That's helpful, Steve. Thanks. And then just maybe one more on the surgical business.

Hey.

Yes. There you go. Nice growth acceleration there and I am just trying to get a sense for how sustainable this is. Should we be thinking of this business on a kind of a newer double-digit trajectory going forward and then do you have the portfolio you need to achieve that? Thank you.

Yes. Thanks Rich. I wouldn't go there yet to the sustainable double-digit. Having said that, they posted several quarters in a row. The 18.8% clearly shocked us. We quietly put a new leader in that business late last summer. And we don't talk about all the changes we make. But that business is actually just in the last six months, we have a new VP of Marketing, a new President and new Head of Business Development, a new Head of R&D. And are more bullish and excited the team that Eric has put in place there is really, really good. And they are doing that with just two products today. We stopped the declines on NovaSure. You know it better than most that hey, just two years ago, NovaSure was a high-single digit decliner. We stopped that one and actually turned it into a positive. And the -- and MyoSure, I know when I first came here, it was growing 20% people figured we are about maxed out, last year went to 30% and we just had a 46% growth quarter. And that's even when the people asked just the market size a year or two ago and I couldn't quite answer it. And I think we are seeing -- there maybe more potential there. And then, it's a great sales team that clearly could take on another product. So I think that's an area where we are very willing and stepping up our activities and looking at bolt-on acquisitions. It's an area we're in the nascent stages frankly we're starting to expand internationally. And it's a business, it can do a lot for the profit margin and profitability profile of the company. So it's one -- we are more and more excited about. I just still model single-digit growth. But like everything we are -- we're certainly aspiring to continue the great trend. But, clearly, we did mention there was a competitive recall we think helped us in that last quarter. And so that we certainly don't see the 18.8% growth as sustainable. Aspirational, yes. And we will take it back to the division head and set that as a new goal. But pragmatically speaking we are not that good yet.

And Rich, I guess the only thing I would add to that on surgical is, is the quarter that we are in now which is our second fiscal quarter does tend to be seasonally weakest quarter for us. And typically the first quarter of our fiscal year is the strongest one.

Yes. This quarter is typically a 7% to 10% decline just because of the reset of insurance plans and all that stuff from a sequential basis.

And we will go next to Brian Weinstein of William Blair.

Hi, guys. Thanks for taking the question.

Hi, Brian.

How are you doing? Just wanted to ask a little bit about breast imaging again. You commented last quarter that quarters in-house had never been higher. I'm curious kind of what your backlog looks like right now and if you have seen any impact at all in terms of time to close from any discussion around the task force or any of these insurance companies that have been kind of reiterating non-payment for tomo. Is there anything in the field that you are picking up on that?

Hey, Brian. This is Bob. What I would say is our -- our backlog continue to be very robust. And we have not seen any extension or time to close or anything like that. I think that's a lot of noise that people may fear about kind of in the press but when it actually comes to -- actually making purchase decisions and so forth that hasn't affected us one bit.

Great. And then if I -- I'm sorry. Go ahead.

Go ahead.

I was going to say, on cytology, you continue to reference share gains. Can you kind of talk about what inning you are in on those share gains, where you think you are in terms of market share at this point?

Sure. We are not quite sure on market share but we feel very good. We are obviously a very strong leading thing probably in the three quarters of the market share range. So up in that 70-plus percent, certainly in the U.S., we think we're much lower outside and I think part of where we are really encouraged and where I think we have made great progress internationally over the last year, year-and-a-half, is starting to get the belief and the conviction of what we need to do to grow the cytology business outside. You remember we said, one of the first things we can do to return this company to growth would stop the sharp declines on the ThinPrep business. And I think we feel pretty good about what we are doing there actually feel great.

And we go next to Raj Denhoy of Jefferies.

Hi, Raj.

Good afternoon. Hey, how are you doing Steve?

Good Raj.

Wondered if I could ask -- maybe start with Panther. You have given this metric now of $170,000 per machine. Is there any updates you can give us in terms of timing on when you can get the menu expanded and when you expect viral load in the United States and then subsequent tests beyond that?

We are just rolling out viral load outside the U.S., we got the CE Marking and so we are rolling that out off of and I think that will help our molecular business. We are obviously coming off of a pretty weak base candidly internationally. It's nothing like what we have here. And really it's going to be a fiscal 2018/2019 event in terms of the true viral load impact for us in the U.S. We'll get HIV approved sooner but frankly we ultimately want to have the full range of HIV, HBV, HCV, which we won't have really until later on in 2018. So the way we think about that is, it's probably going to end up hitting at a beautiful time for us as some of the mammography business maybe slowing a bit in the U.S. and that one kicks in and provides another leg up for us.

Okay. That is helpful. And maybe just another question, too, on R&D spending was actually down this quarter relative to last year. And although you did make a comment that you expected to step up pretty dramatically, as you move through the back half of the year, is there anything you can give us in terms of what dramatically stepping up means and why it has been somewhat low up to this point?

Hey, Raj, this is Bob, simply timing when we look at the clinical programs that we are having. We expect to ramp up in Q2. So don't read anything into that other than just timing.

And we will go next to Jon Block of Stifel.

Great. Thanks guys. Good afternoon. Maybe just the first one, Bob, for you. Constant currency growth was left unchanged for 2016, but how do we think about the changes to the components of the guidance that you broke out last quarter? Again, GYN was so big. International breast health was maybe a little shy. Should we just flow that through the best we can or any official changes, again, to the components of the top-line?

No, specifics, I mean. I think you would flow those in obviously we were pleasantly surprised to the upside on the surgical business and then the U.S. I think our U.S. business is doing a little better than what we anticipated in our international business a little more choppy and so forth. So outside of that we are not going to give specific guidance to the individual components other than to say that any softness that we maybe seeing in the near term or the short-term internationally is going to be offset, we expect by the strength in the U.S. business.

Okay. Got it. And then, Steve, my apologies if I missed this on some of your call there, but we have seen the international breast health business bounce around a good about before, but when you talk about what is currently going on and we have the headline risk of international and what we deal with every day from where we sit, can you just give a little bit more detail? In other words, is it the way that you are working with dealers, the relationships that you think you guys can strengthen in the coming quarters, or has there been any change to, call it, end-user demand out in the field in certain countries? Thanks, guys.

Sure, Jon. I think this is more an internal execution issue of us dealing with our dealers versus the market per se. Having said that we were hopeful to get some bigger orders in some of the emerging markets this year and we will probably just backing off that we are making some progress in Brazil and places like that. We are probably being a little more cautious about as we go in but it's much more our own execution. And frankly, again, it's a small part of our business that we know as great potential. And we will realize it. But it's more than I think than anything external or macro that we would really point to. It could be macro but we are not going to look to say it's that. I think the opportunity is still there.

And we will go next to Vijay Kumar of Evercore ISI.

Hey, guys. Thanks for squeezing me in. So maybe one on --

Hi, Vijay.

Hey, Steve. One on breast imaging and I'm sorry to sort of pick on this, but the dealer issues that you are having in international sort of what gives us the confidence or visibility that this is a short-term issue? And it looks like the U.S. growth slowed down sequentially. So I'm just wondering if you can give us some color on what happened U.S. versus OUS.

Yes. Two pieces. I think first off the U.S., we continued to feel really, really good. I mean, obviously, the growth rate Vijay what you pointed out will be slowing down as we were going against some monster comps especially when we come into the second half of this year, but really already from here on. We are now going in against much tougher comps from here guys. We are still growing the business but we are not going to be putting 20% growth rates up on top off strong growth rates from year ago. The outside of the U.S., I look at this folks, it just like every other issue we faced since we came to the company. We are not the perfectly well-oiled machine. I think we are making a little bit of progress, having made the progress that I would like to see. And it's just a matter of better execution which is something we know how to do. And it just requires a little greater focus than probably what I was providing.

Great. And then, one follow-up on diagnostics. I mean clearly, this was a monster diagnostic quarter. And it is U.S. business, you grew high singles. It feels like you are clearly gaining share. Can you provide some color on what is going on and how sustainable is the share gain, right? Because when you look at sort of the Aptima franchise, I mean those are some pretty big product lines and pretty mature. So I am just wondering why this business is so strong and what is going on. Thank you.

Yes. Vijay, I think it's been the hidden piece and back to a focus on execution where we've clearly been a little more focused in the U.S. But our team has been continuing to place Panthers, continuing to speak to the benefits that our products bring and obviously, you know us well enough to know we are not one of these out there trumpeting, gee, we are number one. We beat this person. We got this competitive win. But quietly we are really proud of what we've done on the HPV franchise in the U.S. and combined with cytology, combined with the co-testing message, combined with Panther placements. They are all -- no one thing is magic. But when you systematically pile them up it provides a very nice outlook and has us feel pretty good, this is -- this strength is going to continue.

And we will go next to Derik de Bruin of Bank of America.

Hi, good afternoon.

Hi, Derik.

A lot of the questions have been asked, but let me just do a couple here. So can you talk a little bit about the contribution to services for the breast health business? I know it is going to be more of an impact on the business going forward as some of those systems sort of that you placed earlier now start -- people have to start paying for service contracts. Can we think about instrument placements versus services and how it goes in the mix?

Yes. I think we feel pretty obviously the service revenue in the quarter was not as strong as the overall product revenue. But that will be a great kicker as basically every system for the most part in the second year is when those will kick in. And we will say this. We are seeing a higher attach rate on the 3D service revenue contracts than we did on 2D. So a) it's a little bit higher. So I think it's sort of one of those pieces that will kick in and we feel very good about for the future. And the team is doing a better job of actually selling service contracts today probably in a tougher environment than we ever have.

Yes. Just one other thing Derik just to kind of give you a little more color on that. While on total service when we looked at it for the total company only grew roughly kind of 2%, when you actually peel the onion back and look at the biggest component of that, which is our domestic U.S. mammography business that grew in the mid single digits which is consistent with what we have been talking about as that business with that high attach rate, higher ASP relative to the service contracts on the lower ASP 2D. So we continue to feel good about that business.

Just a little clarification for me on this. So why was the 2D attachment rate on services so low historically?

Well, it wasn't -- well -- it was extremely high and we are going from an extremely high level to actually any -- even extremely higher level. It was well into the 80% and we are doing even better than --

Yes, 85-plus percent.

Yes.

And we will go next to Mark Massaro of Canaccord Genuity.

Hey, guys. Thanks for taking the question and congrats on the good quarter.

Thanks Mark.

I wanted to ask, you acknowledge that you have seen some bundling from some of the competition in breast health and meanwhile you've also stated that you gained share. I was wondering if you could just talk about the dynamics internationally. Is the bundling occurring more frequently internationally than it is in the U.S., and can you just help us understand some of the pressures you saw internationally in context of gaining market share?

Sure. I think it's less bundling internationally than it still the stage of development internationally. We've not done nearly as good a job of selling the benefits of 3D. Just on government affair standpoint from a marketing standpoint, a lot of what we've going in the U.S., we were doing a great job of internationally because where through dealers. We have not worked with them closely enough to really segment the market. We started it, obviously, there is a lot of opportunities for 2D. We need to do that but we had so much focus on 3D and I don't think we've just done as good job of fully marketing it through. So that's a part of the whole issue of consolidating the international business under Eric. We kind of I set it up, when I first got here to have Eric really focus on the U.S., Claus focus internationally. It probably led to two silos more than sharing the learning across the geographies and frankly I feel like it's done a great job overall. But, it -- we probably left a little bit on the table related to our international development. So now, Eric is on the case and here we go.

Maybe a little outside the box here, but would you consider identifying countries in Europe where you could go direct in the breast health side in particular?

Yes. We are looking at it everywhere as to what's really the best model. And that will be something I think you can expect us to report back on over time. I would tell you there is a lot more complexity to it all in that candidly in a number of geographies, we had given the marketing authorizations to the dealers. So the dealers actually own the marketing authorizations, which is not something you would typically expect of a company this size. But a) it's one of these, you go into the onion and peel it back a little more, more work to be done, which is why, we just think it's going to take us a little bit longer. I kind of viewed it as, it would be a great thing to have in the out years when things slow down in the U.S., we probably aren't getting there as fast as I would like to but we will probably end up getting there at a time that would be ultimately actually pretty well timed for the total company.

And we only have time for one more question. And we will take our final question from Jason Bedford of Raymond James.

Thanks for squeezing me in. I will ask two questions that require one word answers, so we can keep it within an hour here.

Right Jason.

So what was the installed base of Genius at the end of the quarter? And then, what are the -- what's your latest thoughts on gross margin expectations for 2016? Thanks.

Higher and higher. Yes. We're not getting --

Any better words than that, Steve?

You asked for one word answer Jason. As a reminder, we're only going to give the placement numbers on an annual basis rather than getting into quarterly pieces but we were very pleased with the additional placements of certainly the Genius systems, frankly, Panthers as well looking into our diagnostics business. And then, gross margin I think, we are basically guiding to, we think there was a 100 basis points of improvement year-over-year. And feeling very encouraged by that opportunity.

Thank you.

Great. Thank you, Jason.

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