Operator: Good afternoon, and welcome to Hologic's Second Quarter Fiscal 2025 Earnings Conference Call. My name is Rachel, and I'm your operator for today's call. Today's conference is being recorded. All lines have been placed on mute. I would now like to introduce Mike Watts to begin the call.
Mike Watts: Thank you, Rachel. Good afternoon, and thank you for joining Hologic's second quarter fiscal 2025 earnings call. With me today are Steve McMillan, the company's Chairman, President, and Chief Executive Officer; Essex Mitchell, our Chief Operating Officer; and Karleen Oberton, our Chief Financial Officer. Our second quarter press release is available now on the Investors section of our website. We will also post our prepared remarks to our website shortly after we deliver them, and a replay of this call will be available for 30 days. Before we begin, we'd like to inform you that certain statements we make today will be forward-looking. These statements include known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied. Such factors include those referenced in the safe harbor statement that's included in our earnings release and SEC filings. Also during this call, we will discuss certain non-GAAP financial measures. A reconciliation to GAAP can be found in our earnings release. Two of these non-GAAP measures are organic revenue, which we define as revenue excluding divested businesses and revenue from acquired businesses owned by Hologic for less than one year. And also organic revenue excluding COVID-19, which further excludes COVID-19 assay revenue, other revenue related to COVID-19, and sales from discontinued products and diagnostics. Finally, any percentage changes that we discussed will be on a year-over-year basis and revenue growth rates will be in constant currency unless otherwise noted. Now, I'd like to turn the call over to Steve McMillan, Hologic's CEO.
Steve MacMillan: Thank you, Mike, and good afternoon, everyone. Thanks for joining us to discuss our financial results for the second quarter of fiscal 2025. As everyone knows all too well, it's been a tumultuous few months from a macroeconomic and policy perspective. But in this challenging environment, we took a step in the right direction this quarter by meeting our financial commitments, making good progress on our plans to reinvigorate growth, and demonstrating once again the reliability and adaptability of our business model. Specifically, total revenue for the quarter was $1.005 billion, a decrease of 0.5% in constant currency, but toward the upper end of our guidance. Our Diagnostics business continued to grow nicely, despite steep declines in our Africa business following funding cuts. And we also got a positive contribution from our skeletal franchise, as previous supply constraints began to lift. Non-GAAP earnings per share were $1.03 at the high end of our guidance range and flat compared to a year ago. This reflected solid gross margin expansion as well as benefits from share buybacks and a slightly lower tax rate. With that overview, let me discuss how we are approaching today's macro environment from a position of strength, and why we believe we can continue to deliver solid financial results across a range of unpredictable economic and policy scenarios. First, our products deliver significant value to patients and customers. For example, our market leading infectious disease and cancer tests are relatively inexpensive, and they help reduce overall healthcare costs by detecting disease early, when it can be treated most effectively. Our breast health products are another good example of this. We need to accelerate growth here for sure. And this quarter, we made good progress on our plans to do that, as Essex will discuss. We are confident in our efforts because we know that our foundation is incredibly strong. Our mammography products are best-in-class, and as a result, we command leading market shares. With our increasingly diverse portfolio, we can help women across the entire continuum of breast healthcare, and we have the best market position in this important category for women's health. In addition, our customer relationships are without peer, which translates into lots of recurring revenue. For example, strong growth in breast health service drove $212.6 million of overall non-product revenue for the company this quarter. This represented 21% of our total revenue and grew by a very healthy 12%. Second, we have a seasoned management team and a highly engaged workforce of more than 7,000 people, who are deeply committed to women's health. In addition to our global leadership team, we are beefing up our organization in key areas like business development, R&D, and quality. Importantly, we are adding experienced professionals to bring deep understanding of their respective end markets. And across the company, our level of employee engagement, which we have tracked every year since 2015 remains terrific. Most recently, we scored in the 98th percentile compared to similar companies, actually tipping up a point from recent years. And importantly, 99% of employees agree that Hologic's mission makes them feel their jobs are important, also up a point from last year. High employee engagement really shined through in our impressive response to the COVID-19 pandemic and gives us a competitive advantage in dynamic environments like the ones we're navigating today. Third, the strength of our balance sheet and cash flows give us tremendous strategic and financial flexibility. We generated $169.5 million in operating cash in the second quarter, largely due to our durable market leading brands. At quarter end, we had cash and equivalents of $1.43 billion, short term investments of $192 million, and an adjusted net leverage ratio of only 0.8 times. With our fortress balance sheet, we believe we are in a good position to capitalize on market dislocations from a business development perspective. We continue to search for acquisitions and investments similar to recent deals like Endomagnetics, Gynesonics, and Maverix, which are performing well. At the same time, we can also return value to shareholders by repurchasing stock. We have repurchased more than $4.5 billion of stock since 2016, including $200 million in the second quarter. Before I turn the call over to Essex, let me conclude by saying that the financial execution we saw in the quarter reflects our strong positions in core U.S. and European markets. But unfortunately, exogenous factors are affecting our growth in geographies like Africa, which we discussed in our last call, and China. Today, we are lowering sales expectations for China, which has become an increasingly challenging market due to geopolitical turbulence. With these areas now largely derisked in our forecast, we look forward to faster growth beginning in the fourth quarter, and into 2026. We expect this improvement to be generated by better commercial execution in breast health, easier comps in surgical, breast health and skeletal, organic growth from Endomagnetics and Gynesonics, and new product introductions. Now, I will turn the call over to Essex.
Essex Mitchell: Thanks, Steve, and good afternoon, everyone. In my remarks today, I will first review our divisional revenue performance in the second quarter. Then I will discuss our exposure to the recently announced tariffs as they stand today. As Steve said, we are pleased to deliver revenue in the second quarter at the high end of our guidance range. Our performance was driven by another strong quarter in diagnostics and an accelerated recovery of product supply in our skeletal business. Starting with diagnostics. Second quarter revenue of $453.6 million grew 1.5% or 5.2% excluding COVID related sales. Growth for the division continues to be led by the molecular diagnostics, which grew 1.7% or 7.8%, excluding COVID. Specifically, we benefited from the continued strong growth of our BV/CV/TV assay, higher sales of our respiratory assays, and strong growth in our Biotheranostics oncology business. BV/CV/TV continues to represent a significant opportunity for Hologic. Studies show that in the U.S. alone, over 20 million women experience vaginitis each year. We estimate that less than 40% of these women are being tested with older manual testing methods still representing a meaningful portion of this. Our diagnostics team has been making great progress to address this unmet need by driving awareness and establishing reimbursement for our accurate high throughput molecular diagnostic test. As many of you track the weekly CDC data, the United States suffered through a severe flu season this year. This led to strong growth of our respiratory assays in the second quarter. As a reminder, these tests are run on our Panther Fusion sidecar. So heavy respiratory demand boosts interest in Panther Fusion among our customer base and also opens up the door for menu consolidation, including with lab developed tests. In our Biotheranostics oncology business, we continue to see strong adoption of our breast cancer index test, a unique indicator that helps a woman understand, whether she'll benefit from continued endocrine therapy. Offsetting some of the growth in our core molecular business this quarter was less HIV testing in Africa, which resulted from funding cuts to USAID that were previously discussed. Unfortunately, we're now seeing this affect other non-profit organizations, resulting in a significant disruption to the testing infrastructure that had been in place in the region. It's worth noting that excluding lower product sales associated with our work in Africa, core molecular revenue would have grown at a low double-digit rate in the second quarter. In our cytology and perinatal businesses , second quarter revenue declined 0.6%. Sales grew modestly in the U.S., as we continue to see adoption of our Genius AI product, but were offset by a low-single digit decline internationally. International sales were affected by the ongoing physician strike in South Korea and lower hospital spending in China. Moving to breast health. Revenue of $356.2 million declined 6.9% or 9.2% organically, excluding SSI and Endomagnetics. As a reminder, when we updated guidance last quarter, we anticipated this would be a down year for gantry placements. At the same time, we announced new leadership -- a new leadership team. We're excited by the progress this team has already made in three key areas, which are laying the foundation for better growth in the future. First, we've reorganized our sales team to have a clear split between our capital and disposable product sales reps. These selling processes require different skill sets, and we believe this reorg, combined with more concrete selling strategy will drive clear focus and improved performance within our commercial channels. Second, the team has refined our end of life strategy for older gantries that still remain in the field. We have clear line of sight to where these older units are and this month, we are rolling out a new offensive strategy that motivates both our customers and our own reps to upgrade these older units. Third, we began selling our Endomagnetics products directly through our own sales force in North America rather than through the distributor that Endomag has used in the past. By leveraging the capabilities of our commercial channel, we feel well positioned to address the significant market opportunity for wireless localization. Our Endomag team has strong momentum entering the second half of our fiscal year, and we continue to be excited about the acquisition overall. While our commercial team focuses on driving gantry upgrades, our service team continues to do an outstanding job with our current installed base of approximately 15,000 3D gantries worldwide. As Steve said, recurring service revenue grew strongly in the second quarter and now accounts for over 45% of total breast health revenue. In surgical, second quarter revenue of $162.5 million increased 5.1% or 1.1% organically, excluding Gynesonics. Our international surgical business grew 16.2% in the quarter, another strong result. As our team continues to drive market development and awareness for our minimally invasive GYN products, we see meaningful runway ahead globally. Of note, we've seen great traction since we launched our Fluent Pro system late last year. This system helps improve the performance and the user experience of our MyoSure platform, which has resulted in strong customer feedback. We were also excited to close the Gynesonics acquisition early in the second quarter. As mentioned on our last earnings call, Gynesonics financial results are meeting expectations. We're pleased with how the integration has progressed and we're excited for this future opportunity. Finally, in our skeletal business, second quarter revenue of $33 million grew 22.9%. Our team made great progress partnering with our third-party manufacturer to accelerate the production ramp of our DEXA system in the quarter, exceeding our internal expectations. Before turning the call over to Karleen, I wanted to provide some perspective on our exposure to tariffs that have been recently been announced. At a high level, the vast majority of our manufacturing is done here in the United States. For diagnostics, we manufacture in California, Massachusetts, and New Hampshire. We have a small production site in the UK, but that primarily serves the international market. In breast health, our mammography manufacturing is all done in Delaware. We do export products to China that are made in the United States. Manufacturing that's done outside of the U.S. is primarily for our surgical and interventional breast products. These products, excluding Gynasonics are produced in Costa Rica. For Gynasonics and Skeletal, we use third-party manufacturers in Mexico, but we expect products made in Mexico to be substantially exempt from tariffs under the USMCA. When we analyze the tariffs that have been announced relative to our manufacturing activities, we forecast a gross impact of $20 million to $25 million a quarter. Roughly two-thirds of our exposure relates to tariffs from Costa Rica and about 15% from China. All other countries make up the rest. Karleen will discuss how these increased costs will affect the balance sheet and income statement. But before I turn the call over to her, let me say that our estimates do not include higher prices that our suppliers may attempt to pass on to us. But they also do not include potential offsets from the many mitigation efforts we have underway. In the short term, we do not anticipate much pricing flexibility, since most of our affected sales are made under long term contracts. But like every multinational company, we are implementing and exploring a number of potential actions to mitigate the financial impact of tariffs in whatever form they may eventually take. Obviously, this is a fluid situation that may continue to change, and we will remain flexible. With that, I'll hand the call over to Karleen.
Karleen Oberton: Thank you, Essex, and good afternoon, everyone. In my comments today, I will start by walking through the rest of our non-GAAP income statement. I will touch on several key financial metrics, then finish with our guidance for fiscal Q3 and full year. In the second quarter, we delivered EPS of $1.03 at the high end of our guidance range. In addition to posting solid revenue, we exercised disciplined expense management and utilized multiple levers such as share repurchases and tax efficiency to drive strong profitability for the quarter. Starting with non-GAAP gross margin. We finished the quarter at 61.1%, improving by 40 basis points compared to the prior year. The primary drivers of this improvement were strong diagnostic sales as well as adding Endomag and Gynasonics to our corporate profile. Their accretive gross margins create a solid foundation and clear pathway to operating profitability over time. Moving down the P&L. Second quarter operating expenses of $312.9 million increased 1.7%. This increase was driven by the inclusion of Endomag and Gynasonics in our results. Excluding these deals, our operating expenses would have decreased 4.6%, reflecting good expense control in a period of lower revenue. Second quarter operating margin finished at 30%, with a strong result considering we are integrating two acquisitions. Although, operating margin decreased by 40 basis points compared to the prior year, it increased 60 basis points sequentially despite lower absolute revenue. Below operating income, other income net was a loss in our fiscal second quarter of slightly more than $14 million. This loss was roughly in line with our expectations, but greater than the prior year as we generated less interest income given our capital deployment activity. Finally, our tax rate in Q2 was 19%, this reflected a true up to match our new expected full year effective tax rate of 19.25%. Altogether, net margin for the quarter was 23.2%, decreasing 80 basis points compared to the prior year, but still excellent compared to our peers. Our strong profitability helps us generate a tremendous amount of cash flow. Over time, this has contributed to our fortress balance sheet, as Steve said. As a result, we have the ability to execute on both tuck in M&A and share repurchases. In the second quarter, for example, we closed the Gynasonics acquisition for approximately $350 million, while also buying back 3 million shares for $200 million. This repurchase activity drove our weighted average diluted share count down to $227 million, a decrease of over 10 million shares compared to the prior year. Combined, these results led to non-GAAP earnings per share of $1.03, another quarter of delivering at the high end of our guidance range. With growing uncertainty in the geopolitical environment, our balance sheet and cash flow have us well positioned to navigate whatever comes next. In the second quarter, we generated cash flow of $169.5 million and exited the quarter with over $1.6 billion in cash and investments on our balance sheet. Now let's move on to our updated non-GAAP financial guidance for the full fiscal year and third quarter. While we are staying nimble in the face of rapid geopolitical changes, the tariffs announced in early April and the ensuing trade war in China are impacting our financial forecast in two main ways. First, even though we manufacture mainly in the U.S., as Essex said, tariffs related mostly to Costa Rica and China will increase inventory acquisition costs by $20 million to $25 million per quarter this year. From an accounting standpoint, we record these costs as inventory as they are incurred, and then amortize them through the P&L over inventory turns. This means that in the income statement, we expect cost of goods sold to increase by about $5 million in the third quarter, and by almost $20 million in the fourth quarter. These estimates assume no changes in policy and do not include the potential mitigation efforts that we have underway. Second, as China becomes increasingly difficult for U.S. based companies, we are lowering our forecasted China revenue for the year by roughly $20 million. We now expect only about $50 million in revenue from China in fiscal 2025, which we believe largely derisks us from future geopolitical turmoil. To reflect the net impact of these items on our annual outlook, we are lowering our non-GAAP EPS guidance range by $0.10, from $4.15 to $4.25. At the same time, we are maintaining our full year revenue guidance of $4.05 billion to $4.10 billion as the weakening U.S. dollar is roughly compensating for the reduction in China revenue. For the third quarter, we are expecting total revenues of $1 billion to $1.01 billion and non-GAAP EPS in the range of $1.04 to $1.07. We still anticipate solid growth in our fourth quarter in line with our longer term expectations. Because of the weaker U.S. dollar, we now forecast currency to represent a headwind of approximately $10 million to $15 million for the full year and a negligible headwind in the fiscal third quarter. In terms of the divisions, our outlook from our prior guidance remains largely unchanged. We still expect diagnostics to grow mid-single digits for the year, excluding the impact of the declining COVID-19 sales. Strong growth from our BV/CV/TV assay in Biotheragnostics oncology business will be partially offset by declining sales of our HIV test in Africa due to the federal funding cuts and lower sales in China. For COVID revenue, we expect assay sales to be about $5 million in the third quarter, and approximately $35 million to $40 million for the full year. COVID related items are expected to be about $25 million in the third quarter and $100 million to $105 million for the year. Finally, in Diagnostics, we expect blood screening revenue of about $6 million in Q3 and $20 million to $25 million for the full year. As a reminder, both COVID related sales and blood screening revenues are backed out of our organic growth calculations. Within Breast Health, we still expect a low-single digit decline for the full year on a reported basis and a mid-single digit decline organically. As discussed on our last earnings call, we are forecasting lower gantry sales this year, following two years of elevated shipments. We continue to expect Breast Health to return to healthy growth in the fourth quarter. Lastly, in Surgical, we still forecast this business to grow high-single digits for the year, driven by the Gynesonics acquisition. We expect Surgical to grow in the low-single digits organically, driven by strong international sales and continued adoption of our new Fluent Pro Fluid Management System. Moving to the rest of the P&L. We expect gross margins in the low-60s for the full year, we forecast gross margins to decline sequentially from Q3 to Q4 as the P&L impact of the tariffs becomes more significant. For operating margin, we continue to expect low-30s for the full year, which is very healthy. Below operating income, we estimate other income net to be an expense of approximately $20 million in Q3 and at an expense of approximately $55 million to $60 million for the full year. Our annual effective tax rate of 19.25% reflects a 25 basis point savings from our prior guidance. Diluted shares outstanding are expected to be approximately $228 million for the full year. To conclude, in our second quarter, we were pleased to deliver on our financial commitments with revenue and EPS both at the high end of our guidance ranges. Tariffs in China are new headwinds that will affect our results this year. But we continue to be excited about building on strong market positions in our core businesses. We expect to make good progress on these efforts in the second half of our fiscal year and to exit the fourth quarter with improved growth rates. With that, we ask the operator to open the call for questions.
Operator: Thank you. [Operator Instructions] We will take our first question from Patrick Donnelly with Citi.
Patrick Donnelly: Hey, guys. Thanks for taking the questions. Steve, maybe one just on the tariff backdrop. I appreciate the color on that front. It sounds like you guys -- you have the China piece pretty well telegraphed here. On the higher cost -- potential higher costs from suppliers, then the mitigation efforts on your side, can you just talk through, I guess, the potential scenario of outcomes here? Are you having any of those conversations or suppliers talking about higher prices? What are the mitigation efforts? I just want to talk through kind of what's going on in the background and what that could mean for numbers as we move forward?
Steve MacMillan: Yeah. We don't think it's going to dramatically affect. We think there's offsets both ways. We're not having major discussions. We're just -- it's such a wacky time. It would be silly not to think that some people would be looking at that. But overall, it's really our Costa Rica footprint is what we're baked in and we figure we'll offset anything else.
Patrick Donnelly: Okay. Certainly volatile times. And then maybe one on the breast side, it sounds like maybe a little bit of a rejigger of the sales force, some more focused on the equipment side, on the consumables. Is that just strategically ahead of the launch? It sounds like breast is still kind of that mid-single organic decline this year, it ramps up into 4Q. But maybe just talk about the sales force focus and what you're hearing on the capital side, obviously, a volatile market as you just talked about, what's the appetite on capital from hospitals, what are you hearing there? Thank you, guys.
Steve MacMillan: Yeah, Patrick. Thanks. I'm going to just Breast Health question, because if I step back and give a bigger perspective on it, if you go back 15 years, right, this used to be a boom bust kind of business and it was very volatile in terms of our Breast Health business. And really what we set out and achieved through most of the 2010s as it were, is really getting a much more stable and steady business through both more steady placement of gantries instead of the boom bust and the clips and all that stuff that many of you remember, as well as building out our service business to be much more recurring revenue and strengthening the footprint into the interventional space where we've got more disposables coming through. So we really feel like we've proven that ability to have a nice longer runway and a much more steady business. And then two massive things hit us here in the early 2020s from COVID, which created its own challenges and then particularly the chip shortage. And the way we think about it internally right now, the last couple of years, our Breast Health business has looked more like an echocardiogram. It's way up, way down based on the downs and the chip shortages and then these weird comparables. And I feel like right now, as we exit and really flush through '25, and even getting into our fourth quarter of this calendar year -- this fiscal year, which is really only the third quarter. And then heading into next year, they will be getting back to much more of that steady business. And I think that's where we feel much better. And combined, as the interventional business has grown to your point, Patrick, and now with Endomag coming in, we have more sufficient scale to have a much more recurring revenue focus as well as the capital focus, which will set us up for both the Envision launch, but also maximizing Endomag and the IBS stuff. So I think we feel it's one of those times where sometimes the numbers are better than the business and sometimes the business you start to feel like starts to turn before the numbers fully demonstrated. And I would say we are clearly feel that way with our Breast Health team right now that they've turned the corner organizationally and that will start to show up here in the quarters ahead.
Operator: Thank you. We will take our next question from Tejas Savant with Morgan Stanley.
Tejas Savant: Hey, guys. Good evening. Maybe one for you, Karleen, to kick things off on the guide. Looks like you've got the organic constant currency ex-COVID number by about 60 bps or so, and you talked of obviously tariffs in China in there. But I'm curious as to whether that Africa weakness in molecular diagnostics or perhaps incremental sort of weakness in Breast Health were part of that mix as well? And it sounds like Skeletal recovered a little bit sooner in the year. So any upside from that? Just wondering beyond tariffs in China, how to think about the 60 bps haircut?
Karleen Oberton: Yeah. I think the 60 bps haircut is primarily related to the China takedown in the back half of the year, as well as, I think we indicated that the Africa call down, I think we talked about $10 million a quarter and our last call is probably a little bigger than we had originally estimated as it's impacting other non for profit entities. So I think that those are the biggest drivers of the takedown in the percentage, the 60 bps that you called out.
Tejas Savant: Got it. And then one follow-up for you, Steve, on the gantry side of things. Are you considering revisiting sort of that premium price positioning you plan to charge for Envision, just given current market conditions or do you still feel good about the quality and the value that the platform offers? And if it's the former, then could we see a little bit of margin pressure there, since, I think this is a higher COGS instrument than your current platform?
Steve MacMillan: Yeah. I can take that one here. What I would say is we feel very confident with the value that our product brings. And if you think about where our current 3Dimensions product sits in the market, it has also at a premium delivering more value, I would say, than our competition. So I think what we thought about is really being creative on how we bring this product to market with different options and acquisition models to partner with customers, to really give them the best-in-class technology to really identify cancer quicker and better, I would say, than we have in the past. So this is not that much more. I would say it includes of all the software that we offer coming standard. So it's pretty comparable to where we stand today in the market.
Operator: Thank you. We will take our next question from Jack Meehan with Nephron Research.
Jack Meehan: Thank you. Good afternoon.
Steve MacMillan: Hey, Jack.
Jack Meehan: Hey, Steve. First, wanted to ask about China, which is something I never thought I would do on a Hologic call, just because it's such a small portion of revenue, but I was curious like what you're seeing there in the market today and the revenue that's coming out of the guide. Just any color on like what segments that's coming out of?
Steve MacMillan: Yeah. I think at a high level, Jack, because it's been small for us, we're probably less competitive there as we go forward. So we're just effectively de-risking it. It's largely our Diagnostics business, so which we still feel pretty good about. But just to with that current environment right now, we just would rather derisk it a little bit further.
Karleen Oberton: Yeah. And Jack, just to put it in perspective, the call down that we have would reflect, an ongoing $30 million business annually. I know we talked about $25 million is $50 million, but $30 million would be an annual basis going forward.
Jack Meehan: Got it. Okay. Thank you. And as one kind of broader follow-up, Steve or Essex or Karlene, just would love to get your thoughts on the utilization environment, like just your feel for how that is at the moment. Either -- I was looking at the guidance Surgical organic growth of 1%, and I know there's some things weighing down the Diagnostics growth at the moment, but do you feel like things are like fairly steady and maybe there's some of these one-off headwinds or any change you've sensed in that regard?
Steve MacMillan: Yeah. I think overall, Jack, we feel pretty good on the utilization level. Guidance surge is not exactly growing much at this stage. And I think we still are kind of flushing through the bolus that we had of the makeups. So I think, again, as we kind of look to the future, we feel like we're getting all those weird comps behind us, but I would say slower and steadier as it is on the guidance surge side.
Essex Mitchell: Yeah. I would agree with that. If you look at what elective procedures have done over the last few years. Obviously, through the COVID times, they were extremely slow if not existed. And then we saw a significant boom similar to our gantry performance over the last couple of years. What we're seeing is a tripling back of everything from colonoscopy to GYN procedures, highly elective procedures are kind of in a more middling slow range versus a more non-elective procedure. So procedure volume as a whole, I think in the industry is solid. I think when you look at highly elective procedures, it's a little bit slower than the overall space.
Operator: Thank you. We will take our next question from Puneet Souda with Leerink Partners.
Puneet Souda: Yeah. Hi guys. Hi, Steve. Thanks for taking my question. I'll combine it into one. On the supply chain side, I would love to understand what you can do in terms of supply chain management. A number of companies are mitigating the impact by moving the inputs to different countries. I'm just wondering what you can do there. And then on the Gantry side, just trying to understand on the capital expense, why wouldn't you see more CapEx pressures from the hospital and the hospital systems in the current economic environment? And how should we think about the Breast Health, new gantry, and the headwind from that, given the launch next year? Thank you.
Steve MacMillan: Yeah. I think, Puneet, on the supply chain stuff, probably like everybody, we're evaluating things. I think ultimately, we feel very good about our supply chain in that all of our mammography equipment is made in the U.S. Our Diagnostics stuff for the U.S. is U.S., so we're heavily, heavily dependent there. And then it's really the Costa Rica piece, but we've got a great manufacturing footprint in Costa Rica. I don't think we're going to be moving that by any stretch. So we'll always evaluate, but ultimately, over the long run, we think we're in a really good position on that front. Regarding the CapEx and our new gantry coming, I think we feel very good in that, again, these are not massive purchases and it's something that frankly gets amortized over time, and these are not huge, huge purchase prices for hospitals. And I think we feel really good about the value that we continue to bring. I've learned anything through a bunch of years in healthcare, when you bring a meaningful product improvement to the market and we've got the ability to be talking to the hospitals in advance. They'll carve out some budget for it and I think we feel pretty good.
Operator: Thank you. We will take our next question from Vijay Kumar with Evercore ISI.
Unidentified Participant: Hi. This is Kevin on for Vijay. Just one on the replacement cycle. I know you've talked a little bit about your gantry end-of-life strategy, but can you give us the latest update on the replacement cycle? How long is the typical life the gantry is out on the field today? And more broadly, where would you say we currently are in the replacement cycle? Thanks.
Karleen Oberton: Yeah. This is Karleen. I'll kick that question off -- that answer off, I should say. I think the average -- we are in a replacement cycle already, as we talked about, we have an end of life strategy, so that would tell you that we're in it. I think what we're finding is that, the average life of the gantry has extended from what was probably seven to nine years to maybe 10 to 12 years. I think that's a combination of our outstanding service force that takes care of the installed base and keeps our customers up and running as well as lack of outside catalysts to drive a conversion like higher reimbursement or superior technology. So I think we're in it. And I think we would expect over the longer term, as Steve, I think, laid out just a steady placement of gantries every year.
Operator: Thank you. And we will take our next question from Anthony Petrone with Mizuho Group.
Anthony Petrone: Thanks. Good afternoon, everyone. One supply chain, I know a couple of years ago, semiconductors were an issue. It's being thrown around here in a global trade war, and it looks like at least at the moment, we have exemptions. So maybe just a revisit on semiconductors. How is your inventory of semis and does that present a headwind or lack, thereof, when you look at the next gantry cycle? And I have one quick follow-up.
Essex Mitchell: Yeah. This is Essex. No, we don't have anything on the forefront with regard to that. I think we really expanded our network through the last challenge and haven't seen any headwinds on the forefront here in the future.
Anthony Petrone: That's helpful. And then maybe just on the molecular side, I know in the past, there have been contracting cycles with some of the big lab operators, Labcorp Quest, for instance. Maybe just an update on where we are in those cycles? And your latest views perhaps heading into one or more of those contracting cycles, both in terms of price and volume? Thanks.
Karleen Oberton: Yeah, Anthony. I'll just take that and say that we're not going to disclose the nature of our agreements with our larger customers. I think what I'd point you to is the molecular growth in the quarter that again absent the HIV headwinds that we have, molecular would have grown another low double-digit this quarter. So feel great about that business. And certainly, our underlying customer relationships are strong.
Operator: Thank you. We will take our next question from Mike Matson with Needham. Please go ahead.
Unidentified Participant: Hi, everyone. This is Joseph on for Mike. I guess with the first one, just looking at the gantry launch, I was wondering if you could -- if you guys give us any color on maybe anything that you're hearing from docs or I guess, any type of pre-order list you're building? Just any type of metrics that you could give, obviously, at least a couple of quarters until the launch, but could you just try and help us interpret this upcoming demand? And then just related point, my apologies if I'm not understanding this, but the refined end of life strategy for these older gantry units, are you guys attempting to upgrade these old units to the gantries that are currently available or again, is this kind of pre-ordering for the next launch?
Steve MacMillan: Yeah. No apology needed. Good question, Anthony. What we're doing is on the -- to answer the second part of your question first, actually offering our existing gantry. So our 3Dimensions, particularly for those customers that still have the old ones, oftentimes, they're ready to upgrade and we've still got best-in-class of anything. So in some cases, we may be bifurcating that will give them some of the existing 3Ds and then we'll add the newer gantries when it comes. As a reminder, on the newer gantry, it's really a '26 event. So we're still a little further out there.
Essex Mitchell: So yeah. And with regards to feedback, I think as we really debuted the product at RSNA, we received great feedback at that time. We've continued to engage with physicians and they feel great about it. We're continuing to receive positive feedback, refine the product, and getting really excited for the launch.
Unidentified Participant: Okay. Perfect. And a quick one, if that's all right. In the Skeletal business, was this largely a full catch up quarter? Is there still a lot of catch up to go? Just looking into the second half, should we expect kind of elevated Skeletal revenues or is it more or less back to normal?
Karleen Oberton: Yeah. I wouldn't expect any elevation in the fourth quarter, probably getting closer back to normal quarterly trends. I would say this was a quarter where we caught up the most, given the ramp up in supply.
Operator: Thank you. We will take our next question from Lu Li with UBS.
Lu LI: Great. Thank you for taking my questions. I think the first one on the guide. So my quick math is showing that the Q4 is roughly like 4% above the Q3 level. So I'm wondering any color that you can share on why higher growth in Q4, like any conversation that you have with the customer that really gives you the confidence about the ramp?
Karleen Oberton: Yeah. So -- yes, we do expect Q4 sequentially to be higher than Q3, that will be driven by the -- the recovery in the Breast Health business. We would expect that we'll have higher gantries in the fourth quarter than we do in the -- both the second and the third. We will also have -- Gynesonics will be a full quarter and Endomag direct in the U.S. as we've talked about, those are some of the things that will drive the fourth quarter as well as think about Skeletal was pretty much a full stop ship in the fourth quarter of the prior year.
Lu LI: Got it. Appreciate that. And another question maybe just on kind of like the full year guide. Any other upside or downside scenario that we should be thinking about? I know that there a lot of color that you already provided in terms of the tariffs. But is there any scenario where there's a retaliation coming out from Europe given that most of your manufacturing is actually in the U.S., would that be an issue? Just wondering if there are like any other mitigating factors that you can lever?
Karleen Oberton: Yeah. I mean I think we've provided the guide in the range based on what we know now. And since we really don't know what's going to happen in the future, there's no need to really comment further.
Operator: Thank you. We will take our next question from Casey Woodring with J.P. Morgan.
Casey Woodring: Great. Thank you. I'm just curious on that 12% non-product revenue growth rate, you called out mainly on the breast service component. How did that compare to your expectations in the quarter? What drove that strong number? And then how should we think that -- think about that for the rest of the year and maybe on a longer term basis too going forward? And I have one follow-up. Thanks.
Karleen Oberton: I would call that this great execution by our service leadership. We continue to look at our attach rates, grow our attach rate. We continue to optimize pricing and the installed base continues to grow. So all those things lead to that growth. So performed largely in line with expectations.
Mike Watts: And Casey, it's Mike. Just as we report that externally as a detail, our Biotheranostics oncology revenues in there as well. And as you probably heard from the script, that continues to grow nicely as well.
Casey Woodring: Okay. Yeah. That was actually my follow-up was what Biotheranostics grew in the quarter. I mentioned it's pretty insulated from a lot of this macro noise. So curious how that's contributing to that molecular growth rate moving forward? Thank you.
Karleen Oberton: Yeah. The Biotheranostics is accretive to the overall molecular growth rate and I would just say that a strong quarter here in Q2 given there's a portion of that revenue that is on a cash basis. And so that sometimes there's lumpiness in the cash collections and the billing patterns. And Q2 of last year was a little bit of a lighter revenue quarter, so probably a little stronger growth rate than we would expect going forward.
Operator: Thank you. And we'll take our next question from Michael Ryskin with Bank of America.
Unidentified Participant: Hi. This is Aaron on for Mike. I just wanted to double click on tariffs for a moment. I know we've talked about it a lot, but we're already two quarters in, 2026 is around the corner. So how are you thinking about given the ever changing environment we're currently in, how are you thinking about mitigation strategy and tariffs overall heading into 2026?
Karleen Oberton: Well, first of all, we're not providing any guidance for 2026. I'd just refer you back to our prepared remarks that based on what we know today, we would expect a headwind of $20 million to $25 million a quarter, and we'd expect that would continue into '26 unless there's a significant policy change.
Unidentified Participant: All right. Understood. And you touched on M&A buybacks and capital deployment given the current macro-environment. Does that change how you're thinking about it at all?
Karleen Oberton: No. I think we feel comfortable with our capital allocation strategy as we talked about, we've got $1.6 billion of cash and investments on the balance sheet. Our priority is tuck in M&A and share repurchase as appropriate. I think given the current balance on the balance sheet as well as our ability to generate cash flow going forward gives us the optionality to do both as we see appropriate.
Operator: Thank you. We will take our next question from Doug Schenkel with Wolfe Research.
Unidentified Participant: This is Avery on for Doug. Just first on imaging. Are you hearing at all from hospital procurement teams that they're holding out on buying new gantries because they're waiting for Envision? And then just building on that, without holding you to any expectation for next year, could the imaging business potentially grow above that long term 3% to 4% expectation with the replacement uplift? Thank you.
Steve MacMillan: Yeah. So with regard to what we're hearing from hospitals, I would say we are not hearing that people are holding out largely. There are a few customers that are excited about it. They may have a later version of gantry, they are looking forward to it. But largely, all of the software that is available in our current 3Dimensions will be available on our Envision product moving forward. There are a couple of key accessibility and workflow features that I would say that you will get as a clear advantage with Envision moving forward, also having all the software built in. But largely customers today are not going to hold back on delivering, I don't think best care to women who are going for their annual mammograms for a lot of the features that we do have available today that they can upgrade to with 3Dimensions.
Unidentified Participant: All right. And then on a -- sorry. On capital deployment specifically, obviously, valuations have come in over the past few months. Can you give us any color on your priorities from an M&A perspective? Are you considering layering on to your existing MedTech portfolio and potentially gaining more exposure to broader surgical categories?
Steve MacMillan: Yeah. We're never going to get that detailed. We kind of can do shopping across Diagnostics, Imaging, and Surgical. We've done a bit of both, obviously with both Endomag and Gynasonics, and we continue to look across the portfolio for tuck ins across the company.
Operator: Thank you. We will take our next question from Conor McNamara with RBC Capital.
Conor McNamara: Great. Thanks for taking the questions, guys. The first one is on the Diagnostics business. What percentage of that -- of your revenue in Diagnostics is on rental contracts? And then do those contracts have any of pricing change, put in the contracts that just reset on an annual basis or are those fixed price throughout the life of the contract?
Karleen Oberton: Yes. So under our molecular business, those are -- the Panther instrument is basically, majority is under rental agreements where the customer pays on the per assay utilized. Those are typically three to five year contracts that have a have typically fixed pricing. So -- but there's nothing unusual that's happening in that dynamic, that structure of that business has been in place for many years.
Conor McNamara: Okay. Great. And then at the start of the call, you mentioned strong replacements of the Fusion -- Panther Fusion in high respiratory season. Can you just talk about where the Fusion penetration is and what you're seeing on ordering patterns from those Fusion customers? Thanks for the questions.
Karleen Oberton: Yes. So I would just say that what we track is -- Panther Fusion would never be a one-for-one with Panther. We track more of how many customers have a Fusion capability within the lab. And at this point, we're probably about a third of our customers have that capability. And I think the comment was stating that the respiratory menu does run on Fusion and as we have these elevated seasons, it typically generates more interest in that instrument.
Steve MacMillan: And Conor, we are seeing some nice steady growth of customers adopting the Fusion, which now that we've placed all the Panthers, especially through COVID, a lot of the growth for the next five years really will be adding Fusions to ultimately all of our customers ideally and then that opens up the additional menu opportunity expansion. So I think it's why we feel both very good results for Diagnostics today and also for the future.
Operator: Thank you. We will take our next question from Andrew Cooper with Raymond James.
Andrew Cooper: Hi, everybody. Thanks for the questions. A lot already asked. And maybe just one on the African Diagnostics piece. Some of that funding, I think we've talked about, cut and then maybe coming back. And so just would love any insights on sort of movement you're seeing there? Any glimmers of hope or signs that, maybe this is the new normal for the long term? Just help us think about the trend there would be great?
Steve MacMillan: In terms of the international stuff, the Africa stuff, we're assuming it's gone and it will be upside if it comes back. So we certainly hope that some of it will, and would expect that some, but we've taken it out of the forecast.
Essex Mitchell: Yeah. And largely funding can come go, but the infrastructure as we see it right now is effectively broken on the continent that delivers that. Most of the testing and also medical supplies that go are that the people on the ground that actually administer that, whether the funding there is not -- they're not there any longer. So that's why we've essentially taken it out of our forecast.
Andrew Cooper: Okay. That is helpful. And then I want to go back to the services piece. I guess, just one, what else goes into that besides the gantry service and Biotheranostics? And then two, as you guys talk about it a little bit more, I think this quarter, is that a business model that you'd like more of your ambivalent to, how do we think about the desire to kind of grow that, whether it's organically or inorganically?
Karleen Oberton: Yes. So I would say you're right that it's the gantry service and the Biotheranostics makes up the vast majority of that revenue line. I think we'd love to see that business grow. Certainly, both Biotheranostics and the Service, the -- more the Service revenue, the greater our usually our attach rates are with our customers and really creates that stickiness of the relationships that we have with our customers.
Mike Watts: And operator, I think we have time for one more question.
Operator: Thank you. We will take our last question from Mason Carrico with Stephens.
Mason Carrico: Hey, guys. Thanks for taking the questions here. Maybe within Molecular Diagnostics, it'd be great to get an update just on what you're seeing year-to-date on a competitive front? And if I could just ask my follow-up here. BV/CV has been a core driver for you there. I think you've categorized it as in middle innings at this point. So what do you view as key to ensuring that molecular continues to be a key driver for Hologic as that assay's market matures?
Steve MacMillan: Yeah. While we're in the middle innings, it's a long game and we're probably still in the early to -- early part of those middle innings. So I think we see the women's health portfolio continuing to grow. And then we're really expanding the menu here over time as we will just keep adding menu, the Fusion sidecar opens it up. So I think it's that installed base that we have in Panthers that we see years and years of very nice growth coming for our Diagnostics business.
Mason Carrico: Great.
Operator: Thank you. This now concludes Hologic's second quarter earnings call. Thank you for your participation, and you may now disconnect.
