Earnings Call Transcript - HOLX Q2 2023

Operator, Operator

Good afternoon, and welcome to the Hologic Second Quarter Fiscal 2023 Earnings Conference Call. My name is Rachel, and I'm your operator for today's call. Today's conference is being recorded. I would now like to introduce Ryan Simon, Vice President, Investor Relations, to begin the call.

Ryan Simon, Vice President, Investor Relations

Thank you, Rachel. Good afternoon, and thank you for joining Hologic's Second Quarter Fiscal 2023 Earnings Call. With me today are Steve MacMillan, the company's Chairman, President and Chief Executive 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, as well as an updated corporate presentation. And a replay of this call will be available for the next 30 days. Before we begin, we would like to inform you that certain statements we make today will be forward-looking. These statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied. Such factors include those referenced in the safe harbor statement included in our earnings release and 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: one, organic revenue, which we define as revenue excluding the divested blood screening business and revenue from acquired businesses owned by Hologic for less than one year; and two, organic revenue excluding COVID-19, which excludes COVID-19 assay revenue, revenue related to COVID-19 and sales from discontinued products in Diagnostics; finally, any percentage changes we discuss 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 MacMillan, Hologic's CEO.

Steve MacMillan, CEO

Thank you, Ryan, and good afternoon, everyone. Thank you for joining us today to discuss our financial results for the second quarter of fiscal 2023. Our exceptional results confirmed that Hologic is now a much bigger, stronger company with more diverse and durable growth than pre-pandemic. On top of this transformation, with our strong cash flow and exceptional balance sheet, we are operating from a position of strength and are poised to carry our positive momentum forward. We've also said throughout the pandemic that we've dramatically strengthened the company. We recognize that this transformation was harder to see and fully appreciate against a backdrop of COVID spikes and supply chain anomalies. As these clouds continue to clear, the result of our robust transformation really shines. For the quarter, total revenue was $1.03 billion, and non-GAAP earnings per share were $1.06, both results were above the high end of our guidance. Before providing the highlights for the quarter, which admittedly did have two more selling days, and we were going against softer comps from last year due to the Omicron surge, make no mistake about it, we are very proud of these results. First and most notable, our organic revenue, excluding COVID, grew 21.9%, with two out of three divisions growing north of 25%. By division, excluding COVID, Diagnostics grew 14.9%, and again, powered by molecular diagnostics, which grew nearly 24%. Surgical also continued to deliver growth at 25.2%. And Breast Health returned to growth, posting a very strong performance of 25.7% growth. Our outstanding results are a testament to the commitment of our many colleagues around the world to our purpose, passion, and promise to elevate women's health. Without the discipline and incredible execution of our teams who have shown up every day throughout the pandemic, this strong performance would not be possible. Turning to our themes for today, first, we'll provide insight into the growth drivers in each division to showcase and reinforce the diversity and durability of our transformed business. Second, we'll review our strong performance against our 2023 guidance and longer-term growth targets, helping to frame the outlook for the remainder of the fiscal year and longer term. And to close, we'll reflect on where we stand with COVID today, our progress through the pandemic, and our excitement as we look ahead. With that brief introduction, let's now focus on our second quarter performance and specifically, the growth drivers powering our strong results. At the highest level, we continue to demonstrate and appreciate that many of you have come to realize that our business is dramatically different compared to where we were pre-pandemic. We are more balanced, more diverse, and more durable. Through the pandemic, we strategically added growth drivers across the company that are contributing to our top-line growth today and will do so for years ahead. These innovative products and services are also accretive to our overall strength within the markets we participate in, deepening our strong relationships with the customers we serve. While the macro environment continues to present a multitude of challenges, you can count on us to deliver. In Diagnostics, Molecular Diagnostics continues to lead the way. Our expanded global installed base of Panthers, over 3,250 strong, represents the catalyst for the division's sustained growth. The superior workflow of the Panther, combined with our broad menu of nearly 20 FDA-approved assays across the Panther and Panther Fusion systems, creates tremendous value for our customers and differentiates us from our competition. As we exit the pandemic, we are placing more menu with more throughput on more Panthers and adding more Panther Fusion systems, positioning labs to unlock our full breadth of menu over time. Hologic and our Panther systems are well positioned to continue our strong performance. Consistent with prior quarters, the pillars of Molecular Diagnostics growth were diverse in the period. Growth was driven by our BVCVTV vaginitis panel and aided by our core STI menu, including Chlamydia, HPV, and Trich. We also once again had strong contributions from Biotheranostics and our respiratory menu on the Panther Fusion, where we expect the latter of the two to be more seasonal in nature. In Breast Health, after four quarters of decline, primarily due to semiconductor chip supply headwinds, the division emphatically returned to growth, posting 25.7% growth for the quarter. Comp considerations aside, the strong growth in Breast Health resulted from a combination of four positive factors. First, semiconductor chip availability continues to improve, allowing for the delivery of more gantries in the quarter than planned. This included moving a number of gantries originally allocated for the back half of the year into the second quarter. As a result, for the balance of the year, we anticipate Q3 and Q4 gantry delivery levels to each register modestly below Q2, though still well ahead of last year as our visibility and chip availability continue to strengthen. Second, exceptional demand for our clinically differentiated mammography instruments remains high. Despite the duration of the chip headwind, our backlog remains strong, and we are seeing no increase in order cancellations. Third, in Q2, we again delivered strong service revenue, which is the largest source of revenue for the division as we consistently demonstrate our value proposition and strengthen our relationships with customers. And fourth, the interventional side of the Breast Health business returned to form, growing 13.9% for the quarter, driven by our disposable portfolio such as Brevera biopsy needles and Somatex Tumark markers. This strong interventional result also serves as an indication of our success navigating some of the non-chip related supply chain headwinds we faced in prior quarters. To close out Breast Health, we'd like to take this opportunity to thank our chip supply partners who have aligned with our purpose and have prioritized women's health. As a result, we had the ability and confidence to deliver more gantries than projected this quarter, and our customers are better positioned to screen more women sooner rather than later. We are thankful for these strengthened partnerships, which have also undeniably influenced our innovation and design efforts, making Hologic even stronger for the future. While much attention has been given to Diagnostics and Breast Health, our surgical business has also remarkably transformed during the last few years and is emerging as a meaningful driver of growth for us globally, a completely different business than three to four years ago. It's much bigger, stronger, and faster growing. In Q2, Surgical grew more than 25% and was driven by strong contributions from our hysteroscopic portfolio of MyoSure, the Fluent fluid management system, and NovaSure. On the latter, we are encouraged by yet another strong quarter for our latest NovaSure iteration, the NovaSure V5. In addition, our laparoscopic portfolio continues to build momentum and is growing into a larger driver for the division. Now we'll move on from the division growth drivers to reflect on our performance against our guidance for the year. At the beginning of the fiscal year, we said that each division would deliver low double-digit organic growth for 2023, excluding COVID. As the Q2 close marks the halfway point of the fiscal year, we are pleased to share our progress towards achieving our 2023 goal. Through the first half of our fiscal year, the total company has delivered organic growth of nearly 14%, excluding COVID. And by division, Diagnostics, Surgical, and Breast Health have grown 15.4%, 19.6%, and 9.1%, respectively. This puts us in great shape to achieve or exceed our initial low double-digit 2023 targets. Looking ahead, Diagnostics and Surgical will have much tougher comps going forward. By the close of Q3 last year, both divisions were posting solid numbers, resulting in healthier, stronger comps that we will now be facing. For Breast Health going forward, due to the phasing of the chip headwind, the opposite is true. Our Breast Health comps in the back half of fiscal '23 will be softer than in Q2. Now, focusing on our longer-term growth projections with recent, very strong results, we understand that some may question whether our 5% to 7% excluding COVID, organic revenue growth rate through 2025 is still appropriate. In short, we believe that it is because we see fiscal '23 as a unique year. Taking a step back, we view our long-term revenue goal as more impressive today due to our expectation for double-digit growth in 2023 on top of our already strong performance since we announced the target. Shifting gears to our final topic today, COVID. In Q2, we generated $71 million in COVID assay revenue, exceeding our prior guidance of $50 million. We are excited for the opportunity to turn the corner and further concentrate our energy and resources to continue to drive our dynamic business forward. Since the start of the pandemic in early 2020, we maximized the opportunities presented. We rose to the occasion, delivering high-quality, highly accurate molecular tests to meet the world's needs. For this, we are extremely proud. Should COVID waves return, leaning on a massive expansion of our manufacturing capacity and operational flexibility, we are even more capable of weathering future storms. We are also extremely proud of the larger and stronger business Hologic is today. We've accelerated years of Panther placements across the globe. As a byproduct, we expanded our largely domestic business into a much more formidable global enterprise. Today, Hologic is a more recognized and respected worldwide brand which is immensely more influential in advancing women's health around the world. With the benefits from our response to the pandemic, we diligently and thoughtfully invested in our business, adding growth-driving products through organic R&D innovation and completing strategic acquisitions. Equally important, through it all, even during the strongest quarters of COVID revenue, we maintained expense discipline. We managed our business with precision and never got ahead of ourselves with headcount. When the world needed it most, we made opportunistic and carefully timed marketing investments with our Super Bowl ad and WTA sponsorship, each encouraging women to prioritize their health and return to well-woman exams that were put off during the pandemic. Maintaining our operational discipline and opportunistic investment approach affords us the ability to continue to support R&D, marketing, and sales initiatives today, all while keeping expenses relatively flat versus a year ago, after adjusting for the Super Bowl and WTA initiatives. All in all, our Q2 results demonstrate that we are realizing the benefits of our transformed, bigger, stronger business that is fueled by our purpose-driven culture. We've built our culture from the ground up over many years, and it has powered our success through the challenges of the pandemic, where we maximized our opportunity. As a result, Hologic has transformed into the strong force we are today and at the same time, transformed our future. We have strengthened our durable growth path, and our future is bright. With that, let me turn the call over to Karleen.

Karleen Oberton, CFO

Thank you, Steve, and good afternoon, everyone. In my statements today, I'm going to recap our divisional revenue results, provide a walk-through of our income statement, touch on a few other key financial metrics and finish with our guidance for the full year and third quarter of fiscal 2023. As Steve said, our second quarter financial results were very strong and well ahead of our expectations for both revenue and profitability. Total revenue came in at $1.03 billion, beating the midpoint of our guidance by over $70 million. Our non-GAAP earnings per share were $1.06, 25% higher than the midpoint of our guidance. We also continue to repurchase our shares. In Q2, we repurchased approximately 600,000 shares for $50 million. Year-to-date, we have repurchased 2.2 million shares for $150 million. Before moving to our divisional results, we want to emphasize again that our balance sheet is a bedrock of strength in an uncertain macro landscape. With nearly $2.6 billion of cash and a leverage ratio well below our target range, we have a tremendous amount of firepower should opportunities for capital deployment arise. However, while we are very active, our philosophy remains to be patient, which we will discuss in more substance shortly. Before we do that, let me recap our divisional revenue results. In Diagnostics, global revenue of $464.7 million declined 52.2%. However, it is important to recognize that COVID testing revenue in the prior year period was inflated because of Omicron. Specifically, we generated $584 million of COVID assay revenue in Q2 2022, more than 8x higher than our COVID assay revenue for Q2 2023. Therefore, a more accurate depiction of the long-term health of the Diagnostics business is to exclude COVID assay and related ancillary revenues. By making this adjustment, we see that organic diagnostics revenue increased 14.9% in the quarter. The Diagnostics division continues to be led by molecular, which grew nearly 24% in the period, excluding COVID. As Steve highlighted, power in Q2 performance within Molecular Diagnostics was our increasingly diverse portfolio of assets as the newer assays contributed alongside our legacy women's health portfolio. Rounding out Diagnostics, our cytology and perinatal businesses declined 0.7% compared to the prior year. Moving to Breast Health, our fiscal second quarter results were terrific. Total revenue of $385.4 million increased 25.7%, and while this performance was aided by soft comps due to supply chain headwinds in the prior year, the outcome still exceeded our estimates. Moving next to Surgical, second quarter revenue of $144.8 million increased approximately 25% compared to the prior year. Finally, in our Skeletal business, revenue of $31.6 million increased slightly more than 53%. It is important to point out that growth rates in our Skeletal business can change based on the timing of just a few orders; therefore, we would caution when modeling not to extrapolate this level of growth going forward. Now let's move on to the rest of the non-GAAP P&L for the second quarter. Gross margin of 62.1% was driven by strong performance in our base business and higher-than-expected COVID-19 testing revenues. Total operating expenses of $317 million in the second quarter decreased 6.3%. The decrease was driven by less marketing spend as our Super Bowl ad and the initial portion of the expense from our partnership with the WTA were incurred in the prior year period. When normalizing for these marketing initiatives, total operating expenses would have been relatively flat compared to the prior year, partially offsetting lower marketing spend in the quarter was higher R&D and sales expense as we continue to invest in internal programs to drive top line growth. Below operating income, other expenses represented a gain in our fiscal second quarter. Net, we benefited from higher interest rates in the period as interest income from our nearly $2.6 billion cash balance more than offset elevated interest expense on our floating rate debt instruments. Finally, our tax rate in Q2 was 19%, as expected. Putting these pieces together, operating margin for Q2 came in at 31.3%, and net margin was 25.9%. Non-GAAP net income finished at $265.7 million, and non-GAAP EPS was $1.06. Moving on from the P&L, cash flow from operations was $206.3 million in the second quarter. We had nearly $2.6 billion of cash on our balance sheet, and our leverage ratio remained at 0.2x. As it relates to our broader capital allocation strategy, our philosophy remains unchanged. We continue to be very active and selective in screening potential targets, while also exercising discipline and patience. We are operating from a position of strength as we explore opportunities. Now let's move on to our updated non-GAAP financial guidance for the third quarter and full year fiscal 2023. In the third quarter of fiscal 2023, we expect strong financial results with total revenue in the range of $930 million to $980 million, representing another quarter of double-digit growth when you exclude COVID. For the full year fiscal 2023, we are again increasing our guidance and expect total revenue in the range of $3.925 billion to $4.025 billion. To help with constant currency modeling, we are assuming minimal foreign exchange headwinds in the third quarter at less than $5 million, and for the full year, we are expecting approximately $40 million in foreign exchange headwinds. These headwinds have improved compared to our previous guidance as the relative strength of the U.S. dollar has abated over the past several months. Turning to our divisions, each business maintains its own unique growth drivers for the remainder of our fiscal 2023 and beyond. In Diagnostics, we expect continued strong performance out of molecular, aided by steady support from cytology. Within molecular, we are excited to go after additional greenfield opportunities with newer assays such as BV/CVTV and Amgen while also reinforcing our leadership position in core women's health screening. Closing out non-COVID diagnostics, we expect blood revenue of slightly more than $30 million for the year. In terms of COVID revenue, we expect COVID assay sales to be approximately $25 million in the third quarter of 2023 and $245 million for the full year. COVID-related items, inclusive of a small amount of discontinued product revenue, are expected to be slightly less than $30 million in the third quarter and approximately $120 million for the full year. Moving to Breast Health. As mentioned, we capitalized on improved chip availability and moved a number of gantries allocated for the back half of the year into Q2. As a result, we are assuming total Breast Health revenue above Q1 2023 levels for each quarter in the back half of this fiscal year, but below Q2. These results are still expected to deliver healthy double-digit revenue growth compared to the prior year in Q3 and Q4. Finally, in Surgical, we expect strong low double-digit growth in fiscal Q3 and for the full year. Starting with our legacy portfolio, we are pleased with the performance of NovaSure and MyoSure. In NovaSure, customers continue to see the benefits of our innovative V5 line extension. With MyoSure, we continue to grow the myomectomy total addressable market. However, the beauty of our surgical business today is that the franchise is more than just NovaSure, MyoSure, and our guidance contemplates Fluent, Bolder and Acessa adding accretive growth to the division's top line. Moving down the P&L, for the full year, we continue to expect our non-GAAP gross margin percentage to be in the low 60s, and our non-GAAP operating margin percentage to be approximately 30%. Within this operating margin profile, we have again incorporated elevated inflationary pressures into our guidance of approximately 200 to 250 basis points, which we expect to persist throughout fiscal 2023 and likely into fiscal 2024. In terms of operating expenses, we expect spending to move lower sequentially in Q3 and remain relatively flat in Q4. As Steve shared, we are proud of how we have managed expenses over the last several years. Our level of operating expense is expected to decline not because of a reduction in headcount but rather due to our efficient management of larger marketing initiatives coinciding with periods of elevated COVID testing revenue. Below operating income, we expect other income net to be an expense of slightly more than $20 million for the full year. Our guidance is based on an annual effective tax rate of approximately 19%, and diluted shares outstanding are expected to be approximately $250 million for the full year. All this nets out to expected non-GAAP EPS of $0.83 to $0.93 in the third quarter and $3.75 to $3.95 for the year. To conclude, our strong second quarter results exceeded our guidance, and we are once again raising our full-year estimates despite larger macro uncertainties. Our growth in the quarter was broad-based, with each business growing double digits organically, excluding COVID. Our results reinforce the fact that Hologic is a much stronger company than just a few years ago. We are larger and more durable than prior to the pandemic, and our balance sheet is as strong as it's ever been. As we move to the back half of our fiscal 2023, we are excited to continue to advance women's health while also delivering strong financial results and creating value for all of our stakeholders. With that, we ask the operator to open the call for questions.

Operator, Operator

Our first question comes from Patrick Donnelly with Citi.

Patrick Donnelly, Analyst

Karleen, maybe just one on the margin profile. You guys have done 31%, I think, both this quarter and last quarter. That guidance still for 30% operation margins obviously implies a bit of a step down here in the second half. Can you just talk about, I guess, the moving pieces in the second half? And then just thinking forward about what the right exit rate would be? Because, obviously, again, the second half will be a little lower as we work our way towards '24, just thinking about the margin profile. I know during COVID, you guys always talked about kind of that landing rate margin numbers. So if we could just revisit that and the second half and then also does that move forward right ballpark to think about the out margin would be helpful?

Karleen Oberton, CFO

Yes, sure. So I think when you look at the second half compared to the first two quarters, certainly, the low COVID revenue are putting pressure on that operating margin compared to the first half. And I think prior to the pandemic, Patrick, what is also putting pressure on those operating margins are the higher inflationary costs that we've quantified it. 200 to 250 basis points for the full year. So I think moving forward to think about low 30s is probably the right way to think about it as we move forward, like you said.

Patrick Donnelly, Analyst

Okay. Understood. M&A commentary has become a more prominent topic this quarter with investors. Karleen, you had a lot of insights during the call. Can you discuss the pipeline and the interest level? I know you all want to approach this with patience, but what is the right sizing, perhaps in terms of leverage ratio? Are you focusing only on core areas? I believe you mentioned before that you don't want to complicate the structure further, but I would appreciate it if you could elaborate on the M&A side since it has gained more attention since last quarter.

Steve MacMillan, CEO

Yes. I think overall, Patrick, our strategy remains the same, which is being patient, diligent, and active. I think our focus continues to be leveraging the capabilities and strengths that we have and leveraging the existing sales channels. So bulking up the businesses that we have makes sense. We are considering widening the aperture to consider larger deals, but frankly, those would be things with more mature earnings profiles and still be accretive to growth. Each of the divisions has some pretty nice pipelines. We've also, because the core business is doing so well, again, I think it gives us that ability to be patient because we don't have to do anything. It’s this magical combination of we can afford to be patient. We've got a lot going on, but we'll continue to see where it goes.

Operator, Operator

We'll take our next question from the line of Tim Daley with Wells Fargo.

Timothy Daley, Analyst

So just curious about the growth performance driven by the selling days. I think you guys called out two extra selling days in the quarter. What was the contribution of that towards growth? And then how should we think about that for the year? And then as well, any potential offsets or not once we start thinking about modeling 2024?

Karleen Oberton, CFO

Yes, the contribution really wasn't that significant, probably less than 200 basis points in the quarter. I think when we compare it to Q1, we had that full calendar week, which drives the service revenue, which really didn't have any minimal impact in this quarter. And as we look at the balance of the year, I think it's a pretty negligible effect of extra days.

Operator, Operator

Our next question comes from the line of Casey Woodring with JPMorgan.

Casey Woodring, Analyst

So you talked about Breast Health pull forward on ship allocations, which drove the non-COVID beat here. Is there further upside to chip allocations this year? Because we see another surprise pump in the back half, I would be interested to hear what you're hearing from suppliers on that front?

Steve MacMillan, CEO

Yes, Casey, I think it was kind of more of a one-time bump here as it now gets very steady. I think we feel really good about our visibility frankly, not just through '23 but into '24, and we continue to manage this for the long haul. We had to run a little extra overtime for some of our service people with the extra installs, and I think we'll be at a really good rate here going forward.

Casey Woodring, Analyst

Great. And then just longer term, have you changed your expectations at all within molecular diagnostics as it relates to the 5% to 7% total diagnostic growth guide? Just looking at the non-COVID side has been strong for a number of quarters. So just trying to think through your expectations on that business, have they changed at all since you gave that initial guidance now back in July of 2021?

Steve MacMillan, CEO

Longer term, not necessarily. We always just want to be careful not to get ahead of ourselves. I think clearly, in the short term, and what we aspire to be is certainly better. And clearly, what we're putting up right now is great. Now it's going to be much tougher clearly when we start bumping up against 24% comparable levels, then growing that in that 5% to 7% on top of those numbers cumulatively is going to be a lot better off than frankly, when we gave the guidance. So in fact, in some ways, it actually is much higher, but we don't want to get too far ahead of ourselves on that number.

Karleen Oberton, CFO

Yes, Casey, I would just add that we've always said that we'd expect molecular to be at that high end of that 5% to 7%, if not slightly over, but overall diagnostics would be within the 5% to 7%.

Operator, Operator

The next question comes from Anthony Petrone with Mizuho Group.

Anthony Petrone, Analyst

And congrats on another strong quarter here. The first one will be on surgical the 25% organic. Just trying to get an understanding of how much of that is underlying procedures within women's health just coming back versus, let's say, synergies with Bolder Surgical? And then I'll have 1 quick follow-up on molecular.

Steve MacMillan, CEO

Sure, Anthony. I think it's probably more the market coming back. Combined with Surgical was weaker in this quarter a year ago because of the Omicron surge. I think back to a year ago where people were kind of picking at gee, surgical might not be as strong or whatever else, and it was back to that was a market dynamic. Now there's probably some catch-up going on regarding procedures as you're hearing really across the med tech space. Having said that, I think we feel really good about how we're performing among that, both with our existing businesses and frankly, having the broader portfolio that you referenced.

Karleen Oberton, CFO

Yes, we are gaining good momentum internationally with our surgical business. Although it is a smaller segment, this positive traction is definitely contributing to our growth rate.

Anthony Petrone, Analyst

And then on molecular, just excluding COVID, another strong quarter. Just wondering if you could provide an update on where utilization on the Panther systems that were placed during the pandemic, those new systems where you had some demand pull. Just where utilization on those systems is today? And where do you think it can go over the next 12 to 18 months?

Karleen Oberton, CFO

Yes, we haven't disclosed the specific utilization number, but we have indicated that since April 2020, over 85% of customers globally using the new Panthers are conducting at least one additional assay beyond COVID. Additionally, around 55% are using at least two other assays, which reinforces the strong demand for the new Panthers that have been deployed.

Operator, Operator

Next question comes from the line of Liza Garcia with UBS.

Elizabeth Garcia, Analyst

Congratulations on another strong quarter. Regarding Biotheranostics, could you provide more details on that? You've mentioned a strong contribution, and I know you've recently opened the lab and are working on initiatives to improve the customer ordering flow. How should we view the business's run rate and its potential within the diagnostics platform?

Steve MacMillan, CEO

Yes, we are very excited about the growth potential, even more so than when we acquired the business. The team is exceptional. We've successfully relocated the lab to our San Diego facility, and we believe that the market penetration of this opportunity is still very low, which indicates significant potential for growth. We have been implementing more automation to simplify the ordering processes. Overall, we are genuinely enthusiastic about its rapid growth and believe it will positively impact the division for many years to come.

Elizabeth Garcia, Analyst

That's helpful. I want to revisit the guidance surge. I understand there was some weakness last quarter, but even when looking at the two-year growth, I'm still seeing low double-digit growth. You've mentioned the performance of NovaSure and V5, and it seems to have exceeded your expectations. I also know that Fluent and Acessa are part of the portfolio. Can you share your thoughts on where that portfolio can go and your perspective on the growth potential?

Steve MacMillan, CEO

Liza, we are very enthusiastic about our progress under Essex Mitchell's leadership, who has been steering the business for the past few years. He has significantly enhanced our U.S. operations and led successful acquisitions of Acessa and Bolder. We're witnessing impressive growth, although I believe this quarter might have been a bit of a catch-up with market procedures. We always aim to remain grounded, but we are very pleased with our current team. As noted by Karleen and highlighted in the press release, our international growth rate for Surgical is exceptional, exceeding 30%, and nearing 40% this quarter, which is becoming quite significant. Looking ahead, Surgical is certainly positioned as an important growth driver for our company.

Operator, Operator

Next question comes from the line of Andrew Cooper with Raymond James.

Andrew Cooper, Analyst

Maybe just one more on breast and thinking about the commentary for the back half of the year. How much of that pull forward do we think about working the backlog down, and that's why maybe a little bit lower quarter-over-quarter into 3Q versus still being a little bit limited by chip supply? Just where are you in terms of kind of the allocations versus what you'd ideally like to have? And just help us think about sort of the cadence as we work through the back half of the year in terms of why a little bit lower or being able to maintain maybe the growth level that you saw in this quarter?

Karleen Oberton, CFO

Yes. What hasn't changed is the chip availability. With that increased confidence, we allowed to accelerate into Q2 from the back half. So the total production outlook hasn't changed. And I think as we've always as Steve mentioned, to accelerate even here in the quarter is an uptake on our service, our field service engineers to do those installs. So, like we've said all along, we don't think we'll have any outsized quarters as we move through this recovery. Certainly, cancellations are at a minimal level, and that backlog is still really strong.

Andrew Cooper, Analyst

Okay. Super helpful. And then maybe just one more. You mentioned the respiratory seasonality in the prepared remarks. Can you maybe just help us think about the sizing of kind of where that business is on a non-COVID basis today? And how you think about what that seasonality really looks like through the course of the year as it continues to kind of stick with us post-COVID?

Karleen Oberton, CFO

Yes. I mean really strong performance. If we think about growth year-over-year, that non-COVID respiratory more than doubled versus the prior year in the quarter. But what we are planning conservatively is a significant step down in Q3 and Q4, given the seasonal nature of the respiratory infections. But this continues as the flu seasons in the flu season; we're seeing really nice uptake in growth in that business.

Operator, Operator

Our next question comes from Puneet Souda with SVB Securities.

Puneet Souda, Analyst

Steve, congratulations on another solid quarter. At a high level, considering the uncertainty in the economy, which businesses do you believe can perform better than others, especially with ongoing conversations about a possible recession and lower expectations for the second half? Where do you think your team should be monitoring demand more closely, and which areas do you expect demand to continue exceeding the broader economic uncertainties?

Steve MacMillan, CEO

Yes. Truthfully, I think we feel good about all three of the businesses as we go into the back half of the year. I mean, obviously, it's the biggest thing is it's one reason we wouldn't get ahead of ourselves and start to raise guidance and long-term expectations when we're going into that exact uncertainty that you're referencing. But the fundamentals of each of the businesses, I think we feel really good about.

Puneet Souda, Analyst

Got it. And then a question on HPV stand-alone versus co-testing that's come up again in our investor conversations. So just wondering any updated thoughts on the potential for it to go stand-alone versus co-testing? And do you think the USPSTF guidelines could get revised potentially with updated information from the ACC? And do you see any risk for COVID testing from sort of primary testing with the new emerging competitors in the space?

Steve MacMillan, CEO

Yes, let's start at the highest level. We firmly believe that more frequent co-testing remains the best healthcare option for women. We've noticed anecdotal evidence suggesting an increase in cervical cancer screenings since the intervals have been extended. There is substantial data indicating that co-testing greatly outperforms HPV primary testing alone. While some advocate for HPV primary and the USPSTF may consider that, it doesn't align with the best scientific approach. We are committed to delivering the best care to women globally, and we will continue to promote co-testing as the optimal strategy. Most doctors in the U.S. recognize this, regardless of potential changes in USPSTF guidelines. We anticipate any shifts will be gradual due to the significant success of the PAP test in nearly eradicating cervical cancer over the past few generations, especially in the U.S. We hold a strong stance on this matter, believing that time and scientific evidence will support our viewpoint. However, we acknowledge there will be pressure from large pharmaceutical companies aiming to push for HPV primary testing. Nevertheless, we are confident in the science backing our position and believe our business will remain resilient.

Operator, Operator

Our next question comes from Jack Meehan with Nephron Research.

Jack Meehan, Analyst

Wanted to get your latest expectations on COVID-19. So I heard the guidance commentary. We've heard from some of the big labs about volume falling off, and we have the PHE expiry coming soon. Can you just talk about the stickiness of this product line and what your latest stab is on when an endemic number or guidepost might be for 2024 here?

Steve MacMillan, CEO

Yes, Jack, I think the fundamental reality on COVID is none of us have been able to predict more than a quarter out going. I think, if anything, our expectations for next year might be a little bit less. I think we're certainly starting to see it start to ramp off a bit. Yet, what we feel really good about is those that are still going to do it, we'll be using us. I think there'll still be usage at the hospital levels for admissions, for staff, those kinds of pieces. We're still having it this quarter. Clearly, you see it coming down to just a few percentage points of the total business at this point. It's hard to fully predict certainly by the time guidance next year will be more up to date. It certainly looks like it's falling off pretty sharply at this point, which keeps down for our company and getting on with it and letting people look at the true transformation of the business, we kind of like, but a little bit of that profit flowing through isn't bad either.

Jack Meehan, Analyst

Makes sense. Just as a follow-up, I wanted to talk about something that might be a little bit more, not that COVID isn't durable, but might be more durable in the eyes of investors, the vaginitis panel. Can you just give any color on the size of that business now? Is it annualizing over $100 million at this point? And just talk about like the penetration in your customer base, how is that going?

Karleen Oberton, CFO

Yes. We're really pleased with the performance in that uptake, and our full year outlook would be that that would be over a $100 million business. Clearly, one of our top women's health assays and think there's still room to grow there. So really excited about that uptake and what we can do there with our customers.

Steve MacMillan, CEO

It's been a really nice surprise for us how big that's getting held quickly, Jack.

Operator, Operator

Our next question comes from Tejas Savant with Morgan Stanley.

Tejas Savant, Analyst

One quick cleanup question on guidance. Actually, Steve, if I may. You got the approval in Europe and Canada on V5 for NovaSure. How are you thinking about the revenue implications of that over the medium term here? NovaSure, I mean, it's been a flattish business, doesn't get too much attention from investors, but I think it's still the second largest piece of that segment for you?

Steve MacMillan, CEO

Yes, that business has been very successful. When I joined ten years ago, it was the major part of this division, and MyoSure was quite small. It's been exciting to see MyoSure grow. Our team has worked hard to keep NovaSure strong despite market challenges from the ACA Act and other factors, and we continue to innovate; it's still a valuable procedure. The overall procedure numbers in that market are likely still declining modestly, but I believe we're performing well in terms of market share and innovation.

Tejas Savant, Analyst

Got it. That's helpful. And then one on Imaging. Karleen, I know you talked about sort of the cadence you're normalizing versus F2 2Q levels for the gantries. But did you benefit at all from this very significant correction in demand that some of these semi manufacturers are seeing? I know you've talked about your chips being very distinct from what into consumer products in the past. Just curious as to whether that drove a little bit of the uplift here? To your point, Steve, around the macro being something you're watching, is this just sort of a little bit of conservatism and wider error bars around sort of the normalization trajectory here that's making you take a relatively conservative stance of the gantry replacements versus the field service engineers in that aspect of it?

Karleen Oberton, CFO

Yes. Regarding the chip issue, the increase in availability was not directly related to a decline in demand from other sectors. It result from our partnerships with suppliers, helping them understand our chip usage and its importance, and working closely with them. Did you have a second part to your question?

Steve MacMillan, CEO

Yes, we are being cautious. We're focused on long-term management and thinking ahead to 2024 and how things will unfold then. This year is already very strong, and we don’t want to get ahead of ourselves.

Operator, Operator

Our next question comes from Andrew Brackmann with William Blair.

Andrew Brackmann, Analyst

I've actually got two questions on Molecular Diagnostics and sexual health specifically. So I'll just ask them both up front. First, CDC had the report out a few weeks ago showing the rise in FTI cases. So maybe can you just sort of remind us on some of the initiatives that you have here with customers and public health services broadly for your testing solutions? And then just secondly, on this platform, can you just sort of talk about what you're seeing internationally with this franchise anything in terms of where wins might be coming from, be that versus competitor tests or even sort of LDTs transitioning here?

Steve MacMillan, CEO

Yes. I believe the first part is really the unique aspect of our company that often doesn't receive the attention it deserves, which is our dedicated physician sales force within our Diagnostics business. It's a significant investment for us, but having our representatives reach out to physicians and educate them about the guidelines, especially the changing ones related to opting out, results in earlier screenings. This strategy enables us to collaborate with major labs and hospital systems that appreciate the educational support we provide. It assists us in shaping and building markets. Hologic has effectively created numerous markets through physician education, from the original Pap test and thin prep to what NovaSure and MyoSure have achieved, and we are continuing this in diagnostics, particularly with STIs. Regarding your second question on international efforts, the deployment of so many Panthers globally has facilitated more discussions and the introduction of our offerings worldwide, which we hope will help in educating and influencing guidelines in those countries in the coming years.

Karleen Oberton, CFO

Yes. The only thing I would add internationally for molecular diagnostics is our viral business, specifically in Africa, continues to have really nice double-digit growth as we make investments there to help that region.

Operator, Operator

Our next question comes from Derik De Bruin with Bank of America.

John Murphy, Analyst

This is John for Derek. I wanted to ask about a recent decision by a federal judge that nullified important aspects of the Affordable Care Act, affecting complimentary coverage for various preventive services, such as mammograms and cervical cancer screenings. How do you see this developing? Are you concerned about reimbursement, or do you fear that patients might have to pay out of pocket, which could discourage them from getting screened?

Steve MacMillan, CEO

No. I mean, there are been so many various court cases between state, federal, all kinds of, frankly, goofiness going on in the political and court systems right now. we tend to think here, things will prevail and be fine over time. So we're not going to react to any one thing that could easily get overturned again.

Operator, Operator

Our next question comes from the line of Vijay Kumar with Evercore.

Vijay Kumar, Analyst

Steve, congrats on a really strong quarter here.

Steve MacMillan, CEO

Thanks. Sorry, I missed you on the visit out here.

Vijay Kumar, Analyst

No. No, all good. You guys made it up with the print. I guess on some of the numbers we're seeing here, Steve. I'm this is almost.

Steve MacMillan, CEO

Personality come on.

Vijay Kumar, Analyst

You made it up with some pretty impressive numbers. This is almost also kind of numbers 20%. Now and from a perspective, there's backlog. So I was just curious, when you look at numbers like 25% GYN, and 15% overall diagnostics to you. What do you think is driving this? Is this a catch-up of backlog? Or is this perhaps a pull forward of demand? And related to that, Steve, first half, I think the organic now was almost teens, mid-teens. I think the prior guidance here for all segments, double digits. Is the implication now for the back half 6% to 7% in line with the longer-term shafts? So just talk about what drove first half and what the implication is for the second half?

Steve MacMillan, CEO

Yes, I believe the outlook for the second half remains significantly more positive than the numbers mentioned. We are still projecting double-digit growth in both the third and likely fourth quarters. To be clear, I don't see this as a pull forward. I think the GynSurg market, similar to some orthopedics and other sectors, is experiencing a sort of catch-up effect. Many doctors may have been performing more procedures now to make up for the reduced activity over the past few years. So, while I expect next year's same quarter may not be as active, it doesn't appear to be a pull forward; it's more about catch-up activity. We are very optimistic about our surgical business, having introduced additional growth drivers. This area has often been overlooked due to the impacts of COVID spikes, and I am truly proud of the team's efforts. We've expanded with Fluent, and both MyoSure and NovaSure are performing well. Additionally, we have Bolder and Acessa contributing to the growth, and our international business is strengthening as well.

Karleen Oberton, CFO

Yes, I think the commentary in terms of backlog is exactly the right way to view it.

Operator, Operator

Our next question comes from the line of Vijay Kumar with Evercore.

Vijay Kumar, Analyst

No further questions, thanks.

Operator, Operator

Thank you. This now concludes Hologic's Second Quarter Fiscal 2023 Earnings Conference Call. Have a good evening.