Operator:

Good morning, ladies and gentlemen, and welcome to Henry Schein's Second Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's call, Graham Stanley, Henry Schein's Vice President of Investor Relations and Strategic Financial Project Officer. Please go ahead, Graham.

Stanley Bergman:

Good morning, and thank you, Graham. Thank you all for joining us today. We delivered solid second quarter financial results, including strong operating cash flow, that reflected stable end markets. Gross margin has continued to increase, driven by our strategies to expand our high growth, high margin products and services and by the successful performance of our recent acquisitions. We are experiencing improving sales trends in our distribution businesses. However, the pace of recovery since the cyber incident last year has been slower than anticipated. Now, given the challenging economic environment, which we'll talk about a little bit later, in certain markets as well as this delay in cyber incident recovery, we are updating our '24 full-year financial guidance. We remain committed to our long-term financial goals through our advancement of the BOLD+1 strategic plan, which has stood us well, supported by a strong balance sheet and new restructuring plan. As we continue to generate synergies by connecting our distribution businesses, specialty products and technology and value-added services, we continue to see great symbiotic relationships between our various businesses. We are also announcing a restructuring plan to integrate recent acquisitions and right-size operations, and further increase efficiencies, targeting somewhere between $75 million to $100 million annual savings. We are comfortable that we will continue after this restructuring plan is put in-place with improving operating margins. And we are increasing at the same time our repurchase authorization, following recent Board approval, an additional $500 million, as we expect to leverage the strong cash flow we have. So, let me turn to the various business units, dental distribution to start with. In North America, patient traffic was generally flat with the prior quarter, with unemployment rates and dental insurance coverage generally remaining consistent with prior periods. We are experiencing improving sales trends in our dental distribution businesses and we believe we gained market share in the quarter, as we strengthened focus on gaining back episodic customers following the cyber incident. However, the pace of recovery since the cyber incident late last year has been slower than anticipated. We reported year-over-year decline in merchandise sales, which reflects the pace of recovery and, of course, lower sales of PPE products, which are primarily the result of lower glove pricing. Membership in the THRIVE Signature program continued to increase, with nearly 1,500 new members added in the second quarter, bringing the total membership to approximately 6,000 U.S. dental practices. This subscription-based program drives customer loyalty and has been very good, again in driving stickiness to our various businesses, whether it's distribution, specialty products, or, for that matter, specialty services. We were pleased with our North American dental equipment sales growth. This reflected positive trends across the board, traditional equipment, digital imaging, CAD/CAM, and products and services. We achieved modest growth in international dental merchandise sales, driven by good growth in the DACH countries and in Brazil. International dental equipment sales were impacted by a decrease in sales in France, as a result of changes in the DSO legislation, a generally slow economic -- generally slow equipment market in Italy and the expiration of tax incentives last year in Australia, with other markets generally in-line with last year. Given demographic trends, we expect patient demand to outpace the supply of dental services, we've seen this for a while, and for this to drive further efficiency need in the dental practices, which we expect to be a positive driver in the growth of our dental businesses, all fitting in the goal for the BOLD+1 strategic plan. Now, let's take a look at dental specialties. Shifting to our dental specialties business, sales growth in the quarter was generally consistent with the pace of growth in the first quarter, as acquisitions and our organic growth in Europe were offset by lower sales in North America. In Europe, sales of dental implant products posted solid growth as we continued to gain market share with our broad and highly competitive offering. Within North America, we received FDA approval to launch the bone-level Tapered Pro Conical implant in mid-June. This was a bit later than we expected, and we believe this timing impacted the quarter two sales growth, as some customers held back on purchases, deferred them in anticipation of the launch of this important new product. We expect dental implant sales growth in North America to resume in the third quarter, aided by this new product line. As a reminder, the Tapered Pro Conical positions us to provide an innovative, highly competitive offering for the half of the U.S. dental implant market we weren't previously addressing. The initial feedback we are receiving from customers is quite positive. And we look forward to reporting on our progress in future calls. Our endodontic business continued to grow, aided by small acquisition we made in Latin America. The focus for orthodontics last quarter was the launch of the Biotech Smiler clear aligner into the U.S. market. Again, our orthodontic business is very, very small relative to the entire specialty business. Now, it's important for our investors to understand we continue to align our dental sales teams, successfully deepening our penetration of the DSO segment last quarter across our specialties. It's the distribution side working in concert with the specialty businesses and the value-added services that are creating great value for our customers, and, in turn, for the profitability of Henry Schein. So, now let's turn to the technology and value-added services and Henry Schein One, which is our dental software business. The customer base for our Dentrix-Ascend and Dentally cloud-based solutions continues to grow during the second quarter and was up more than 25% year-over-year, with now worldwide installations exceeding 8,000. What I think is important to understand is when we -- in the past, when we sold software, we recognized sale on-prem software right away. We are switching rapidly to cloud-based solutions which are highly profitable in the long run and retention rate is great, but you don't recognize the full sale at the time -- the full revenue at the time of the sale. These cloud-based practice management software products are both the cornerstone of Henry Schein One, and at the same time, a powerful enabler of additional product sales and equipment merchandise at the Henry Schein level as well as driving specialty products through the Nemotech Software that is now being advanced in sales. The number of claims processed by our revenue cycle management e-claims business increased by single-digit percentages versus the prior year. Now, this is despite the Change Healthcare cyber incident. Under normal circumstances, we would have expected a greater growth. But the Change Healthcare cyber incident has slowed us down. We are servicing our customers. There's no interruption from that point of view. But there is some impact on the cash collection of our customers, because Change did process the actual payment. We process through Change the claims processing. We found an alternative source, but the actual check or electronic transfer to the customer, the funds, is still going through Change. Some dental practices are therefore facing cash flow challenges due to reimbursement delays. And we believe this continued to temporarily impact demand for certain software products, and we think a little bit also on the equipment side. This is, we believe, a temporary cash flow issue, which will get resolved, that never impacted -- didn't really impact our collections of our receivables, but it is a bit of a challenge to some practices that are not getting their checks as frequently as they were. The claims are being processed. The collaboration between Henry Schein One and our distribution and specialty products businesses supports highly integrated solutions, enables deeper customer relationships and multiple touch-points between Henry Schein and our dental customers, which helps drive growth as I mentioned early on, and this is especially the case for the DSO segment, although as we move towards our 2025 strategic plan, we will drive the synergy down into the smaller accounts. Many of our high-quality leads for Dentrix products and services are generated by the U.S. dental field sales representatives. And by the way, this is the case not only in the U.S., but in Canada and in all the markets abroad where Henry Schein One operates. Here are a few further examples of the integration. Nemotech, the specialty software, that was developed by Biotech in France is now integrated with our Dentrix practice management software in the U.S., providing, as we discussed during our Investor Day, the integrated three click digital workflow software for implants and orthodontics. This is being recognized by some of the big DSOs as very, very important. We have implementation with some of the big DSOs and we expect this to advance further, advancing Henry Schein's strength and connectivity to these DSOs. And, again, we'll, over time, advance the smaller practices. We also expanded our solutions offering by pairing Dentrix Detect AI, that's our the AI system -- clinical AI system we sell powered by VideaHealth, and Caries Detection Solution, with a terrific power product Curodont, an early caries treatment product. We're also having early success with the recent launch of Reserve with Google. All of these are being well received by the more sophisticated larger DSOs. And we will -- we are quite optimistic that the Videa-Curodont solution will become standard of care over time in many practices. So, these are some of the examples of the unique strength of our combined platform. And we continue to unlock benefits and value from the inter-connectivity -- the interconnectedness across our business, all of this is contained in our strategic plan thinking. Let me just now quickly return to -- now quickly turn to our medical group. Second quarter sales also reflect the slower than anticipation pace of recovery from the cyber incident. In addition, sales were impacted by ongoing migration to generic alternatives for certain branded pharmaceuticals, in particular, in the ejectable area where -- injectable area where we have very strong market presence. Of course, there was a decline in sales of PPE products, yes, all primarily result of lower pricing club pricing. As with dental distribution business, we continue to win back episodic medical customers, and in particular, large accounts that move from -- move their prescription drug business to other distributors, primarily the drug distributors. Once the customers understand our unique logistics capabilities, they are moving back. It takes time. They may enter into commitments. And I think, although this is slower than anticipated, we will get these customers back. Excluding the impact of point of care diagnostic tests, which were impacted by flu seasonality. So, the quarterly sequence of the flu diagnostic testing moving from one quarter to another did have an impact on the quarter. But sequentially, medical sales growth is improving. Our home solutions business again performed well, with sales up double-digit percentage during the quarter, led by the Shield Healthcare and Prism Medical businesses. We're particularly pleased with Shield. It's being well received since we acquired the majority interest in last October. So, although our overall home care sales volumes are still relatively modest, this is a strategically important market for us. And together with the movement of procedures to the ASC, the Ambulatory Surgical Center, represents enormous growth opportunity for Henry Schein. So, let me conclude my remarks -- my opening remarks, before Ron takes over with the specific math. We believe -- excuse me, we believe we delivered solid second quarter financial results, again, including strong operating cash flow. And although in the short-term, we expect our results to be impacted by the challenging economic environment in certain markets, we have, in dentistry, experienced these kinds of ups and downs over the years. This one seems to be a little bit more of a challenge. And, of course, the anticipated recovery from the cyber incident has been slower, but consistent. Every month, we get a little bit better. So, we remain bullish about the prospects for the business in general. Of course, we'll get into more details. But before we get into answering questions, let me ask Ron to discuss our quarterly financial results and the '24 guidance with a little bit greater detail. So, thank you, everyone. Ron, please.

Stanley Bergman:

Thank you, Ron. So, as we lead into the Q&A, I want to reiterate, we are confident in the prospects for our business, even in the face of challenging economic conditions. Although, we do believe markets are stable and that we can continue to gain market share through the recovery from the cyber incident, which is going in the good -- in a direction, but not as fast as we expected when we gave last guidance a quarter ago. And we also are comfortable that we will benefit from the trends in increased specialty procedures. I think we've rounded out the implant offering we have. We had a big gap. We've got that in-place in the United States, and in Canada soon. And we're also confident that the movement of medical procedures to alternate care settings will continue. We are generating good synergies connecting our distribution businesses, specialty products and technology and value-added services. While we focus on these opportunities, we're also taking action to increase shareholder value, as we've noted in the restructuring plan. We need to right-size the restructuring plan. The sales have not grown as rapidly as we thought. Some of that is attributable to the fact that inflation does not exist at the moment. We believe in our markets, very moderate, and may actually be going down slightly, as our customers are more price-conscious and moving to some alternative brands and owned brands. But we think from a gross profit point of view, this will be fine, in fact, maybe slightly accretive. And, of course, we will continue to buy stock. We anticipate spending the $500 million. And so, with that in mind, please, let's answer some questions. Operator?

Jon Block:

Thanks, guys, and good morning. Maybe I'll just stick to the same topic. Ron, the 2024 sales growth expectation is now 5% at the midpoint, down from 9%. So, I think we're looking at roughly $0.5 billion of a step-down. Maybe you can just talk about what of that is coming from, call it, the more conservative approach to your distributor recapture versus that of the slower economy, that you also allude to in the press release. And I'll just stop there, and then I'll ask my follow-up on the same topic.

Ronald South:

Certainly. Hi, Jon. The -- from midpoint to midpoint, we came down 4 points, right, but it is -- the math works to approximately what you have enumerated. If you -- going back and thinking about our original guidance and our -- even our amended guidance on sales from the first quarter, our Investor Day assumption go back 1.5 years ago was that long-term growth for dental was about 2% to 4% in terms of market growth. And our assumption this year was at the low-end of that range. And, of course, part of that growth would be coming from anticipated price increases as well. As we've progressed through the year, our view has shifted to more flat year-over-year market growth, which still reflects stable patient traffic environment. And I think others in the industry have even indicated flat to negative growth in the market, right? As the pricing itself has also remained fairly flat to the prior year and we see customers are frequently moving to some lower cost options, including our own corporate brand in some cases, which in general is positive for us from a gross profit perspective. Those conditions, and you couple it with the Company specific challenge of recovering from the cyber incident, which have been delayed, but are still showing sequential growth quarter to quarter, are the primary drivers to the reduction in our sales guidance, right? So, the fundamentals of the business remain intact. We believe we are once again gaining market share, working our way back to pre-incident market share and we expect that to continue over the balance of the year.

Jon Block:

Okay. And just as a follow-up or tack on to that to push you guys a little bit. You talked about the recapture being slower than you would anticipated so far. But you still expect to get this business back. And, I guess, my question is, like, why? Why do you still expect to get that business back? Here we are, almost nine months, 10 months post-cybersecurity incident. I would think it's like a hot lead and either you get them back with incentives, or they might move, especially, if they're episodic to a different platform that they're somewhat content with. So, maybe you can talk about your conviction on getting those customers back and the strategy to do so? And thanks for your time.

Operator:

And the next question comes from the line of Jason Bednar with Piper Sandler. Please proceed with your question.

Stanley Bergman:

Jason, again, let Ron give you some thoughts on specifics that have been baked in to the extent we can give you that information baked into our assumptions. But in general, we believe the consumable market in the United States and Canada is relatively stable. Yes, there's been a shift, I think, to more price-conscious opportunities. I don't think that necessarily impacts our gross profit. It may depress our sales slightly. And we believe we can gain market share on the pure distribution of products. Adding to the profitability, I think, continues to be our specialty businesses, in particular, implants, bone regeneration, that's material. And we think we are well-positioned globally in that area. We don't really have exposure to China. We're selling very little there. There's going to be ups and downs there, Asia generally. But the market that we're the strongest in is the DACH region in Europe, and I think we're very well-positioned. We are, I think, well-positioned in the United States, specifically with the implant dentist that is looking for high value, but a branded product. We are hopeful and expect that as the year goes by, this year, we will be able to get some market share in that area. I think, the endodontics not as big as implants, continues to move in a positive direction. And the medical business, yes, there have been some anomalies there, the pharma side, the whole point of care switching between one quarter and another. But I think the movement to the alternate care side, the Ambulatory Surgical Center, the home care, those are all positive, good ways in which for us to sell our own brands. And I think we will recover in that area. We've done okay with the large customers. The smaller ones, the same as I noted in response to Jon's question, we just have to get our sales force in front of more of those smaller customers, our tele sales group, our e-commerce group. I think equipment continues to be an area that we're quite optimistic about in the United States. We did have relatively good equipment growth. There was an anomaly with scanners because of a big sale last year. But generally, we're in positive territory. I think we're gaining market share. We have some challenges on equipment abroad. We have a big market share in France. There has been a bit of an impact there on some legislation. Italy is not so great. Australia will -- we had a challenge this quarter because of some tax benefits that lapsed. I think, as the year goes by, into '25, we will do well in that market. And then, generally, I think, in the equipment market, we'll be okay, we'll grow. There is, I might add, though, a view on pricing. Dentists are looking at value. I think some of the manufacturers have understood this, others are adjusting. But the average unit price may come down slightly, but I think the profit will be fine, specifically, as our clinical workflow initiatives kick in. And on the Henry Schein One side and the value-added services side, I think, those are all going to be contributors to profitability this year and more in '25. So, Ron, I don't know if you have anything that you can share from a macro point of view in your guidance formulation.

Jason Bednar:

Okay. All right. That's helpful. As a follow-up, I want to shift gears a little bit and discuss what came up on a conference call last week from one of your manufactured partners. I'm sure you've anticipated this question. But just wanted to see if you can discuss what your position is with respect to the relationship with your manufacturing partners and maybe address the status of your particular agreement with Dentsply Sirona? When specifically if you can share it as your contract come up for renewal? And can you discuss how you're proceeding now that you're aware that your main distribution competitor received a non-renewal notice on their contract?

Operator:

And the next question comes from the line of Elizabeth Anderson with Evercore ISI. Please proceed with your question.

Stanley Bergman:

Sure, Elizabeth. Implants. So, the easiest, the purest, would be Europe. And the biggest market for us is DACH. That is Germany and Austria, and a little business in Switzerland. In general, we continue to do very well. We have a complete line. We have an outstanding sales force, built over many years. We have what's needed. We are not the biggest player in Europe yet on -- in Germany on bone regeneration, but we're growing very nicely. We only enter that market about three years or four years ago. But on implants, we're doing very well and continue to expect to do well. And in the other European markets, we will continue, I think, to do well. But we have relatively small market share, except in France, where we're the number one player. And with all the challenges in France. And just because you're asking such a specific question, I will answer, but generally, we're not going to provide specific information on specific countries, but we are growing in France. Biotech is growing organically and doing quite well with its implants. I think they are the number one. So, Europe is the easiest, the purest. As it relates to Latin America, our S.I.N. new joint venture, although it's viewed as acquisition growth, continues to gain market share. Fortunately, they were not hit by the sad situation in that part of Brazil that got a lot of rain, but overall, it's doing well. The BioHorizons part of the equation is a bit challenged because of a couple of the countries of instability in Latin America, but they were not a participant, really, in the Brazil market. And our view to Latin America is primarily through S.I.N. As it relates to the U.S., until last year, we were gaining significantly in market share. Our sales were good. This year, the market is a little bit frozen for us because of our introduction, our customers, our sales force are aware of the new product. We were supposed to get it around March, April, but we got the FDA approval in the middle of June. It's going to take a little time to fire up, but we're quite confident that we will do well in -- with our new product, which I think is also well received by DSOs, whether they are BioHorizons DSOs or Henry Schein DSOs. Bringing the S.I.N. product into the U.S. will also be helpful. So, we did go backwards in terms of our sales, but I'm not sure in terms of market share in the United States, it's hard to tell. Data is not readily available. We do extremely well in the bone regeneration field in the United States. Canada is kind of flattish. And just off of top of my head, that's where we are. And I'm quite happy and confident with the progress we're making in the implant arena as well as the biomaterials arena.

Ronald South:

Yes. I mean, specifically, Elizabeth, I'll address the distribution businesses first, because I think that's probably of the most interest to people. We have experienced from Q1 into Q2 growth in our distribution businesses as we recapture some market share. As we said before, that recapture has not been as high or as at the pace that we had originally desired. But we are recapturing share and that has continued into July and we expect it to continue for the balance of the third quarter and then, of course, into the fourth quarter as well. So, that's with distribution. I think with the other products, it's a -- they can be a little choppier. You get into the kind of the European holiday season now with distribution there. But I would say within the -- especially within the U.S. distribution business, we feel very good about the ongoing trends there.

John Stansel:

Great. Thanks for taking my question. Just wanted to dig in a little bit on the medical side. Can you just speak in a little bit more detail about the effects from some of your larger customers, potentially ordering away with the pharmaceutical distributors? And then what your expectation is for that return process over the back half? Thanks.

John Stansel:

Great. And then, just on the potential kind of the shift towards owned brands that you've called out here, is that embedded in your guidance? Does that kind of persist through the back half? And is this kind of a more sticky shift to private label brands for you, or do you expect that to revert at some point?

Operator:

And the next question comes from the line of -- my apologies. The last question comes from the line of Dane Reinhardt with Baird. Please proceed with your question.

Ronald South:

Hi, Dane, it's Ron. It's -- this is where it gets a little fuzzy because it is difficult to assess. Like you said, we -- based on [indiscernible] and based on other data we had, you get a feel for the, so-called, recovery from cyber. Those customers are very sporadic though, they're very episodic with their purchasing habits. And some that you recapture, you might not see again for a while. Then you get somebody else. So, they have not been as consistent. And that's where it gets kind of difficult to put a number behind the actual percentage of recapture there. For us, it's important that we not only focus on recapturing our old customers, but also gaining other new customers. So, the focus of the business really is on gaining market share, whether it be former customers or new customers. That's really the focus of the business, as it should be, under the just ordinary course of business. In terms of what we're seeing in dental and medical, I would say that the effect has been -- is relatively the same across the two. I don't think it's slightly -- it could be a little more accentuated with dental, but I would say it would only be slightly more in terms of that, so called, recapture rate. And again, we have to use a lot of assumptions to determine what is that real recapture rate, right? And I forgot the last part of your question. You had a three-part question.

Ronald South:

Yes. So, in terms of the back half guide, it does -- we expect to maintain the momentum we have in terms of recapture of market share, although, again, not at the pace we had originally anticipated. But we anticipate regaining -- and gaining market share into Q3, into Q4, and that'll help drive some of that increase. We also expect the back half of the year to be better in specialty. We have the new product launch in North America on the implant. So, we also -- we do expect specialty to be better. And we expect the technology business to bounce back a little better in the second half as well. So, all of those would be contributors to that. In terms of your question around brand, I do think that the -- we are seeing -- like I said, we see some move towards corporate brands. Those are better margins for us. It doesn't quite show up on the top-line, so it does help contribute a little bit to some of that gross margin favorability you see out there.

Operator:

Ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Operator:

Good morning, ladies and gentlemen, and welcome to Henry Schein's First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] And as a reminder, this call is being recorded. I would now like to introduce your host for today's call, Graham Stanley, Henry Schein's Vice President of Investor Relations and Strategic Financial Project Officer. Thank you. Please go ahead, Graham.

Ronald South:

Thank you, Stanley, and good morning, everyone. As we begin, I'd like to point out that I will be discussing our results as reported on a GAAP basis and also on a non-GAAP basis. The items excluded from our first quarter non-GAAP financial results for 2024 and 2023 are detailed in Exhibit B of today's press release.

Stanley Bergman:

Thank you, Ron. As investors can hear, we continue to make good progress in restoring sales to pre-incident levels with specific focus on bringing back episodic customers and advancing several programs, of course, to reinforce to our customers the value and benefits Henry Schein provides to our customers.

Jason Bednar:

Stan or Ron, I wanted to start on gross margin. That was really the biggest positive surprise in the quarter to us. By our model, you're at a record high, and that's in spite of volumes maybe being a touch lighter than we would have thought.

Jason Bednar:

All right. Very helpful, both of you. And then as a follow-up, I wanted to ask on dental equipment. I know the message last quarter was one of a shortfall in deliveries tied to the cybersecurity incident. A lot of that business would shift into the first quarter and eventually be realized dental equipment didn't show as much growth as what we were looking for. What was the shift out of the fourth quarter, maybe just simply not as large as we would have thought we were just over modeling that? If I guess, was that consistent with your expectations, what you saw in the first quarter?

Stanley Bergman:

It was hard to gauge exactly how much business will flip from 1 quarter to the other, Jason. Remember also our equipment people in the fourth quarter last year we're very much engaged in providing support to customers during the incident period.

Jonathan Block:

Stanley, maybe you could provide some more color on the implant market growth and how you're faring from a share perspective. I don't know, maybe that worldwide market is growing low single digits. It seems like you guys grew low single digits in implants in the quarter on an organic basis, but I think you're underindexed in China relative to peers where a good amount of growth came from in terms of the other players. So do you feel like you're capturing share more prominently sort of on an apples-to-apples basis where you guys actually compete? And then I'll ask my follow-up.

Jonathan Block:

Got it. That was great. That was very helpful. And maybe just a quick one, Ron, for you. The Street was 9% or even below that top line. We were at 8% for 2024 anyway. But I'm just still looking for a little clarity on where the top end of the sales guidance is, call it being locked off.

Ronald South:

Yes, John. It's not -- there's not a whole lot of fluctuation that we're expecting on FX. I think we can kind of carve that piece out, that might be a minor impact. We still expect acquisitions to have a similar contribution than what we were saying with the original guidance as well.

John Stansel:

Just on the technology side, I appreciate that the change cybersecurity event impacted the business a little bit here. A, is it the right way to think about performance impact as kind of the difference between that 3.2% global internal growth and say, like a mid-single to high single-digit growth number that you would kind of have been producing over the last few quarters?

Ronald South:

Yes, John, on the Change Healthcare effect, what we did see with Henry Schein One is that we had a relatively steady revenue growth during the quarter that stagnated a bit in March. And that's -- we attribute it to what we saw with Change.

Jeffrey Johnson:

I wanted to talk about the North American dental consumables number that you put up, the down 5%, I think if we adjust for that cyber number, you said 300, 400 basis points down 1% to 2%. That fits pretty well with some of the independent industry data that came out in 1Q.

Stanley Bergman:

Jeff, you're asking, again, another good question here. I think pricing is relatively stable. If you look at raw data and we look at that, of course, from our database, inflation is maybe 1% to 2%.

Ronald South:

Yes. To answer the first part of your question, Jeff, yes, the spread and the impact on Dental and Medical is pretty consistent, right? It's not the 1 bearing the brunt more so than the other.

Elizabeth Anderson:

I was looking on the medical environment. We have heard of higher sort of some outpatient utilization trends broadly in the market.

Stanley Bergman:

So Elizabeth, I think the shift from the acute care setting to the alternate care setting for procedures continues. I don't think it was more profound this quarter than the past year or 2.

Elizabeth Anderson:

Got it. And then maybe as a follow-up, as we sort of think through some of the cost cuts, et cetera, as your moving on, one of the things it seems like SG&A was a touch higher than at least we were modeling here in the quarter.

Ronald South:

Yes. Elizabeth, the SG&A, the whole kind of mix of the P&L of some of the businesses that we acquired last year are going to be a little different, right?

Michael Petusky:

So Stanley, I'm wondering, you've had PRISM for a few years and Shield I think for a couple of quarters. I'm just curious, home health, obviously, large end markets, presumably opportunities for above-average growth. I'm just curious.

Stanley Bergman:

Thank you, Mark. Thanks for that question. Home Care Solutions continues to be a big area for us going forward. We continue to expect to grow organically, make some additional investments. Our business is approaching $350 million annually, $20 million a month or so. And we expect that to continue to grow nicely from an organic point of view, and we will add to that platform.

Michael Petusky:

Okay. Great. And then just shifting to Dental. I guess one of the benefits of talking to anybody at Henry Schein or leadership at Henry Schein, there's a lot of folks, including yourself, Stanley, that have been in the chair for a long time. You've seen different markets and different challenges and all the rest.

Operator:

And the next question comes from the line of Justin Lin with William Blair.

Ronald South:

We've been happy with all of them, some do better than others in the early stages. We are busy integrating our large implant acquisitions we did last year, Biotech, which has now annualized. That will show up as internal growth beginning in the second quarter.

Kevin Caliendo:

A lot of comments around April and the back half of the year and new product launches and like there's so many moving parts with M&A and the like.

Kevin Caliendo:

Okay. That's helpful. And if I can just do a quick follow-up on the implant, the new products. What does this do to your portfolio of products? Is it improving what you had, sort of -- I've always envisioned that you're sort of between value and premium.

Stanley Bergman:

In the U.S., we're expanding and we're going into about half the market that we do not cover today. We're waiting for finalization of the approval. We expect that in the second half of the year.

Operator:

Good morning, ladies and gentlemen, and welcome to Henry Schein’s Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded. And I would now like to introduce your host for today’s call, Graham Stanley, Henry Schein’s Vice President of Investor Relations and Strategic Financial Project Officer. Thank you. Please go ahead, Graham.

Stanley Bergman:

Thank you, Graham. Good morning, everyone, and thank you for joining us. We are rather pleased with our performance in the fourth quarter and for the full year of 2023, which was in line with our expectations and reflects a solid recovery from last year’s cybersecurity incident. Our fourth quarter financial results included strong growth in our technology and value-added services businesses and in global sales of implants and biomaterials, largely driven by acquisitions, and were negatively impacted by higher than usual acquisition related expenses and adjustments. As we discussed last quarter, the cyber incident primarily affected our dental and medical distribution businesses in North America and Europe. These distribution businesses recovered well in the second half of the quarter. The revenue impact from the incident was at the low end of our expectations and the earnings impact was at the high end largely due to the success of our promotion activity, which drove sales and customer retention. Overall, we feel good about the pace of our recovery, driven by our durable customer loyalty and strong relationships our field sales consultants, our telesales representatives and service technicians have with our customers around the world. And of course, coupled with our most effective direct marketing and customer care capabilities, which includes a very strong e-commerce presence, particularly on social media. Today, our North American and international distribution businesses are experiencing merchandise sales that are running below pre-cybersecurity – below the pre-cybersecurity levels – pre-cybersecurity incident levels and we estimate that the incident is currently having a low-single digit percentage headwind to our merchandise sales growth, with some episodic customers not fully returned yet. We are doing a lot of work in this area and we expect the residual impact to be short-term and diminish over the first half of the year through our sales and marketing programs and as I noted, including our digital marketing. The 2024 guidance we are introducing today reflects our continued confidence in the stability of the underlying markets we serve, our recovery efforts from the cybersecurity incident, and the execution of our strategic plan. For 2024, while we expect to have some short-term residual impact from the cybersecurity incident, we believe we will continue to strengthen our leading market position. The markets we serve are expected to grow towards the lower end of the ranges we set out at our Investor Day last year, and we also expect some remaining impact from lower year-over-year PPE pricing, primarily impacting sales growth in the first quarter or the first third of the year. We are also introducing adjusted EBITDA guidance as we believe this provides investors with additional – with an additional metric that reflects the performance of the business as we pivot to higher growth, higher margin products and services. We believe we are well-positioned to grow the business in line with our financial goals of high-single digit to low-double digit operating income and earnings per share by continuing to execute on our BOLD+1 Strategic Plan. So let me now turn to a review of our quarterly highlights from each of our business units, beginning with the dental distribution business. In North America, we believe patient traffic the dental office picked up in November and December, although in January illness and weather impacted cancellations, but this has improved in February. We have seen in our medical business that point of care diagnostic sales are also strong, indicating that flu visits to medical doctors are elevated as a result of this year’s late flu season and which adversely impacted dental patient traffic. We expect the effect on patient traffic from the flu season to normalize by the end of March. International markets remain steady and consistent with the third quarter. Regarding North America and international dental equipment, there was a decline in sales both in traditional and digital equipment. Equipment sales is very important. Reflect a redeployment of our field sales consultants as well as our equipment sales specialists during the cybersecurity incident to focus on addressing immediate customer needs rather than initiating and processing new equipment orders, resulting in moving sales into the first quarter of 2024. Digital equipment sales also reflected year-over-year lower prices of intraoral scanners, but we expect to see good demand for intraoral scanners to continue and the impact of these price declines to be less significant going forward. We’ve had a lot of questions on this, but we expect equipment sales to be supported by the investment plans of many of our DSO customers who have in place – who have these plans in place and have continued to expand their operations, and this not only applies to the national DSOs, but to many of the regional DSOs too, who are investing in their practices both from an equipment point of view and a software point of view. The impact of lower global equipment sales was partially offset by overall good growth in our global equipment technical services. Our technical services capability is a strategic advantage for us as we believe we provide excellent response times and high quality service for our customers. We are known for this globally. Now, let’s turn to the Global Dental specialties businesses or products. Turning to the Global Dental specialty products, we believe we continue to increase our global market share in implants and biomaterials this quarter as we believe for the full year of 2023. We believe the implant markets we serve in the aggregate were generally flat in the fourth quarter against previous against the 2022 sales. Against that backdrop, and I’m referring to the market in general by the way, against that backdrop, our global implant and biomaterial sales grew by quite a bit more than 30%, mainly due from acquisitions but also some internal growth. We posted significant growth in the European, Latin American and Asian markets, mainly from the Biotech acquisition in France and the S.I.N. acquisition in Brazil, along with above market share growth in our leading BioHorizons, Camlog brand in Europe, primarily in Germany, while we had low-single digit growth in our U.S. implant sales. As a result of the cyber incident, our endodontic sales growth slowed somewhat last quarter. Our orthodontic sales were also impacted by the cyber incident and by the expiration of the motion product patents earlier this year. To address this, we launched a replacement product this quarter, which is being well received in the marketplace. We remain highly optimistic about the growth in our dental specialty products in 2024, as we have a robust pipeline of product innovations plan across various geographies in the first half of the year and we expect sales growth to continue to outpace the market growth. Let’s turn now to our technology and value-added services business. Excellent sales growth was driven by Henry Schein One with most core products posting double-digit gains including our practice management software, revenue cycle management, analytics, and our AI solutions. As we have seen all year, Henry Schein One growth was driven by Dentrix Ascend and entirely cloud-based solutions. The customer base of cloud solutions continued to grow well and increased by about 36% compared with the start of the year. We launched a number of digital clinical workflow solutions for our customers, including AI technologies, to provide our customers with highly effective diagnostic solutions. During the fourth quarter, we worked with one of the largest DSOs to introduce their AI solution. We are pleased to now have over 1,000 users subscribing to these solutions. Product enhancements introduced last quarter, including remote scheduling and payments are also contributing to growth. Claims eligibility and patient relationship management features will be areas of significant focus during 2024. We continue to see strong interest and good growth in Dentrix Ascend from our DSO customers and we are recently announced two new large multi-site Dentrix Ascend accounts. Turning to our medical business, growth during the fourth quarter was also impacted by the cybersecurity incident. In addition, the late flu season also negatively impacted point of care diagnostic sales and patient visits, which were down versus the prior year. However, the late flu season is driving higher quarter one sales. Our new $300 million plus homecare platform grew sales in the high-single digits during the quarter, with this market segment continued to grow faster than the overall healthcare market. Finally, in late December, we announced that we signed an agreement to acquire a majority interest in TriMed, which marks our entry into the upper and lower Extremity segment of the growing orthopedic market, this being a complement to our Brasseler saws and blades business, which is also doing quite well. This transaction, the TriMed investment fills a need particularly for our ambulatory surgical center and orthopedic specialist customers who expect to leverage our customer relationships and our contractual expertise to grow the business. We expect to close this transaction later this quarter. Concurrently, we entered into a strategic relationship with Extremity Medical, a medical device company focused on developing complementary products for bone infusion, fixation and motion prevention treatment. So, in summary, we are executing well against our BOLD+1 Strategic Plan and we made significant progress. Very pleased with us on our strategic priorities during 2023. We did complete a number of strategic acquisitions, investing almost $1 billion supportive of our 2022 to 2024 strategic plan. These acquisitions are growing well in the high-single-digits to low-double-digit percentages and we are on track to achieve our goal of generating 40% of our operating income from sales of our high growth, high margin products and services and we estimate that we would only have to be slightly below that threshold and that we only would have been slightly below that threshold in the fourth quarter and for the full year of 2023 if the cyber incidents had not occurred. As we look to 2024, our priorities include continuing to focus on customer experience. This is critical for us in all our businesses, and of course, the recovery of sales post the cybersecurity incident. We also will focus on and prioritize further enhancing technology and product development, including our integrated digital workflow and continue to grow sales in specialty products by integrating recent acquisitions and through new product launches. And we believe we have a good pipeline of product launches in both our dental specialties products area and our value-added services, including Henry Schein One. With that, I’ll turn the call over to Ron to discuss our quarterly financial results and our 2024 guidance. Ron, please.

Stanley Bergman:

Thank you, Ron. The 2024 guidance that Ron just discussed reflects somewhat of a transition year following the cyber incident. That said, we are incredibly pleased with the great strides the team has made in our recovery efforts. Actually, it’s quite remarkable how effective this team operated while actually advancing the execution of our strat plan. We look forward to continuing this momentum and delivering our long-term growth metrics that we established during our Analyst Day event last February. I know we’ve covered a lot of ground today, it’s a little bit complex, but we are here to clarify any questions or thoughts that investors may have. So please.

Elizabeth Anderson:

Hi, guys. Thanks so much for the details on the outlook and the quarter. That was very helpful. I just think as I had a couple of questions about the equipment sales commentary, I was wondering if you could go into a little bit more detail on sort of the end market environment and sort of any way you can quantify what you’re expected push out into 1Q from the cybersecurity impact, specifically on equipment. Yes, that would be a great place to start. Thank you.

Ron South:

No, Elizabeth, I think what we can say is that we do expect good equipment sales growth in the first quarter, and a lot of that is from some of these orders that got pushed from Q4 of 2023 into Q1 of 2024. We have contemplated the estimated impact of that when arriving to our $0.15 kind of residual impact from the cybersecurity incident. So that $0.15 in some respect, is a net number. It would take into account some of the favorability that we also expect to get from the pushback of some of these equipment orders or sales into Q1.

Stanley Bergman:

On the launches, Elizabeth, I’ll give you highlights, if you want more, please call afterwards, because there’s a lot. On the endodontic side, Brasseler is expecting to advance the Pediatric Putty program, lower cost Pediatric Putty, Aquasil, in the K-Files direct endodontics portfolio. This is in Europe. There’s a new NiTi file coming out with edge, the bioceramic sealer launch in the U.S. further activity in that area with edge. On the orthodontic side, I covered this already. We had a significant challenge with the patent expiration of the Motion Pro, and for about three quarters our pricing collapsed. But at this time, the new motion portfolio, the clinical system that we introduced, achieved class one approval and bit delayed, and we’re seeing very good recovery there.

Operator:

And the next question comes from the line of Jason Bednar with Piper Sandler. Please proceed with your question.

Ron South:

Hi, Jason. Yes, your estimates are – I would say, are generally accurate. We expect about 3 basis points or 300 basis points of growth that would come from just the recovery on cybersecurity and to get to a more normalized level. And we do think acquisitions can get us pretty close to another 3 percentage points of growth as well. So that accounts for six points there of the 8 to 12, FX could get is somewhere between, say 0.5 point to 1 point. So that kind of narrows down what that internal growth piece would be, which reflects continued accelerated growth in our technology and value added services, some growth, obviously, in the core business as well as in the specialty businesses to kind of COVID that remaining GAAP.

Ron South:

Well, I think the core growth you might be referring to would include specialty. So that’s going to be part of that. We did kind of direct to the low end of the market growth rates that we had communicated on Investor Day last year, but those are market growth rates. So it’s up to us to try to outperform that market, and that becomes part of our growth assumption.

John Stansel:

Great. Thanks for taking my question. Just wanted to look into some of the margin assumptions here. Now, I think just on a base level, you’ve got adjusted EBITDA margin, probably expanding, call it, 30 basis points at the midpoint. And then on growth, when we think about normalizing for cybersecurity with the numbers you’ve provided, we’re looking at kind of low-single-digit core adjusted EBITDA growth. Is that the right way to think about how you’re seeing the core profit dollars expand when we look to 2024?

John Stansel:

Great. And then just looking at capital allocation 2023, you probably were above the long-term guides for cash deployment on M&A. As we think about 2024, is there a shift in the way that you guide us to think about capital deployment, particularly around potentially debt pay down? Then it sounds like you’re not incorporating any share repurchase in the guide. Is there anything we should think about there as it relates to overall capital deployment?

Operator:

And the next question comes from the line of Jon Block with Stifel. Please proceed with your question.

Stanley Bergman:

Yes, John, I agree with your numbers. I agree with your math. As I mentioned before, the 2024 numbers do include some investments we’re making in the business, some things that had to be deferred from 2023, as well as ongoing investment that we believe is necessary for future growth in the business. And that’s reflected within our earnings estimates.

Ron South:

Yes. I’ll confirm the latter part of your question, Jon. I will confirm, yes, your understanding of that is correct. And yes, we do look at the possibilities for 2025 as being what we said in our Investor Day a year ago that being that our long-term goals at that point in time were revenue growth of 6% to 8% and EPS growth at 8% to 11%. That’s what we’re working to position ourselves for as we get into 2024.

Jeff Johnson:

Hey, thanks, guys. Let me ask kind of one, two parter just to follow up on two things that have been asked. And then I do have a fundamental question as well. But Jon just threw out a kind of a 3% to 4% organic, hopefully not groupthink here, but that’s kind of where our math was as well. Ron, does that what’s kind of 3% to 4%, I think Jason said kind of maybe a bigger range, but 3% to 4%, kind of the organic core growth rate you’re looking at this year when we take into account deals and the cyber stuff and all that. And then you mentioned a 0.5 point to 1 point on currency, I just want to make sure you’re talking a headwind or a tailwind there as you model it on currency. Thanks.

Jeff Johnson:

Yes, fair enough. And then the fundamental question I just wanted to ask is, as you move some of the ace surgical stuff now out of the specialty sales force into the FSCs, same with some of the EdgeEndo stuff. Should we think of that as an incremental opportunity? I mean, I guess, obviously it is. But were some of those products already being sold to the GPs, and those sales just getting handed off from the FSCs to the specialty sales reps, and now it’s something that the FSCs can actually get comped on, or is this a big kind of incremental opportunity? Because those products weren’t even really being detailed in a big way at the GP level. Thank you.

Operator:

And the next question comes from the line of Michael Cherny with Leerink Partners. Please proceed with your question.

Stanley Bergman:

Very good question, Michael. Also, I think we continue with our role of helping practitioners operate a more efficient practice so that they can operate a more efficient practice, and on the clinical side. So in order to do that, we believe that our clinical workflow, which I think is quite unique, we covered that at our Investor Day and have made quite a bit of progress in that area. So that leads to greater sales in digital equipment units for sure in the scanners, in the 3D printing arena, I think the chair [ph] side mill is relatively flat today, but particularly in those two areas, as well as 3D printing as well as imaging, 2D, 3D imaging, all connected to our software. I think all of that helps us advance our position on the digital side, where it’s already quite strong, both in the United States, Canada and internationally, particularly in the markets where we offer practice management software. So I think overall the digital side, we will continue, I think to gain market share in a rapidly growing market. On the traditional side, I think we continue to edge forward with our market share. We’ve been doing that for years, both here in the United States and abroad. There are a couple of international challenges, namely in parts of Western Europe where some of the national brands, because of pricing have lost some market share and we’re now selling more of the lower priced brands. So it brings down the selling price. I’m not sure it brings down the profits, but overall, we are quite bullish about our equipment business. It’s not what it was during the COVID – the post-COVID period, the market has stabilized and we are comfortable that we can grow market share. At the same time, our equipment service business is doing very well. We’ve invested in software in systems in that area throughout the world and that is paying off.

Stanley Bergman:

I thought we mentioned, but maybe we were not clear. I think we will see a little bit more in the beginning part of the year and I think we will stabilize. Having said that, there is a possibility of additional less feature friendly, feature full systems being introduced into the United States, but I think that will only expand the market. What we’re – I don’t know what are we 40% of dentists – half the dentists using one of these scanners. I think every dentist should use one. I think the patients want that. And so there’s a huge opportunity to expand the market, plus replacement business is also growing and systems that integrate with our software that is also growing space. You combine that with the 3D printing and the whole digital space is very, very exciting. And I think we’ve probably gotten to the bottom on the price erosion side or close to it, maybe a little bit more, as I said, first three, four months of the year. And if a lower price product is introduced less features, I think that will only expand the market.

Nathan Rich:

Great. Good morning, and thanks very much for taking the question. I wanted to ask about the, I think you described it as a low-single digit kind of gap in merchandise sales that you’re still seeing related to the cybersecurity incident. What type of customer or purchase have you not seen come back yet? And how should we think about the company’s plans to close that gap? And it sounds like you don’t expect a residual impact to extend beyond 1Q. So do you, I guess expect to recover those kind of order volumes this quarter and sort of be back to pre-incident levels kind of going into the second quarter.

Nathan Rich:

Okay. Great. And maybe just a quick follow-up on, I think it was Jon’s question on first quarter expectations. Could you maybe just talk about how significant the weather and flu impacts that you mentioned seeing in kind of January, maybe in February were to the business? And just as we put that together, what the kind of residual impact of the cybersecurity incident on consumables, is the right way to think about what you’ll see in the first quarter, sort of like a mid-single digit type decline in that part of the business.

Operator:

We have time for one last question coming from the line of Justin Lin with William Blair. Please proceed with your question.

Stanley Bergman:

Hey Justin, I don’t think there are any major investments to bring S.I.N. to the United States. They already had approval at the time we acquired or invested in the actually acquired the business. Of course, there’s educating about salesforce in the United States. They already have a specialty salesforce. I don’t – S.I.N. has a specialty salesforce. I don’t think that they’re going to have to invest much more than the income that they generate from expanding their sales in the United States, expect that actually to be accretive. So I don’t think that will be an issue. There is some work going on that’s costing us money in the alignment of the aligners between Biotech and Henry Schein orthodontics. We’re going to be merging facilities. We’re going to be moving around the world, different sites for the manufacture of the aligners and going to be operating under one brand. So there’s some investment in that. There’s quite a bit of investment in the recovery of the systems from an operational point of view. But I mean that’s all baked into our numbers and not material in the context of the entire Henry Schein business.

Stanley Bergman:

By the way, Shield, I think will just be – its totally accretive, that whole healthcare – home healthcare business is a very nice business for us and certainly not a drain on earnings. Sorry.

Stanley Bergman:

Yes. Our – yes, first of all, it’s less than 10% of our specialty business. It’s doing quite well, particularly with DSOs where we provide very good value. I think it’s doing quite well in France, a number of European countries, but again, it’s relatively small and I wouldn’t expect this to move the numbers much from a corporate point of view, other than enables us to go into a customer and offer all the products and related services that the customer may need. So it’s a good product offering. But again, as I said specifically for DSOs, several large ones are quite happy with our software business and that’s with our aligner business and with the software in that field. And it’s growing quite nicely, but it’s really an adjunct to our specialty business. Okay. So let me thank everyone for calling in. I know these numbers are complex. Graham and Ron, stand by to clarify any of the questions you may have, answer the questions. We remain confident in the business, quite enthusiastic with the relatively quick recovery in the latter part of the fourth quarter and into the first quarter. Of course, we had some challenges with the flu in the first quarter. I think you heard that from a number of analysts, read the newspapers. You can see that dental visits were canceled in January, but it’s recovered in February. And our medical doctors did okay with additional flu visits so far in the quarter. I think the recovery is going well. We have to remember that our team was entirely focused on servicing customers and not on sales for most of the fourth quarter, and that our equipment team was really servicing customers but not really going out and selling much in the fourth quarter. I don’t think we missed a lot of business, but we now have to get back into the business of selling, which we are installing. And I think we’ll do fine in the equipment area as well both here and internationally. European business is stable. Australia, New Zealand is stable. Brazil, slightly challenged because of the economy, but we’re still growing. And our software businesses are great. In particular, we are very impressed with how quickly our team at Henry Schein One responded to the challenge of the major clearinghouse in claims, having gone down last Wednesday, and our ability to service claims through alternative methodologies so quickly. I think our customers will appreciate that and I would expect us to garner some new customers in that process. And these specialty businesses are doing well. We believe we continue to grow market share, particularly the implant side, in a market that is relatively stable to slightly growing. And we will be back with, I think some very positive growth on the endodontic side now that the equipment, the systems are fully restored. And, yes, the orthodontic side will grow. So with that, and with our enthusiasm for our digital workflow taking hold, and the medical business continuing to have a great position in that market, including the homecare, I remain very enthusiastic about a strong 2024. And again, Ron and Graham are ready to clarify questions you may have. So thank you very much for calling in. And we’ll be back, I guess, in two months. But I think we’ll be going to some investor conferences as well. And there are some calls that you can call into that some of the analysts have set up. So thank you very much.

Operator:

Good morning, ladies and gentlemen, and welcome to Henry Schein's Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded. And I would now like to introduce your host for today's call, Graham Stanley, Henry Schein's Vice President of Investor Relations and Strategic Financial Project Officer. Thank you. Please go ahead, Graham.

Stanley Bergman :

Thank you, Graham. Good morning, everyone, and thank you for joining us. Before reviewing our third quarter performance, I'd like to update investors on the cybersecurity incident that were discovered on Saturday, October 14, primarily affecting some of our distribution businesses. That morning, we initiated our business continuity plan when we promptly took precautionary actions, including taking certain systems off-line and other steps intended to contain the incident, which led to temporary disruption of some of our operations. The following week, our distribution centers were processing orders with temporary interim processes and were generally delivering orders to customers within one to two business days. In accordance with our business continuity plan, we activated a previously identified team of leading cybersecurity experts to assist in the investigation and recovery of the systems and to advise us through the recovery process. Over the past weeks, we have worked to create a clean network in a controlled manner from the backup data we maintained. Our distribution businesses are now operational and we are initiating our e-commerce platform early this week, and we're indeed hopeful that the website will come up tomorrow morning. We've also made significant progress resuming the high levels of service our customers expect from us. Over the last week, orders from our distribution businesses were approximately 85% to 90% of what they were pre-incident. We expect orders to increase with the reactivation of our e-commerce platform. Of course, our field sales consultants and telesales representatives have deep relationships with our customers, and our complementary software and other value-added services bring value that we believe continues to make us the best choice for our customers in the areas of services we provide. As a reminder, this incident mostly affected the operations of our North American and European dental and medical distribution businesses. Our distribution operations in Australia, New Zealand, Asia and Brazil were generally not affected. Henry Schein One, our practice management software, revenue cycle management and patient relationship management business was not affected. And our manufacturing businesses and our equipment sales and service operations were mostly unaffected. We are now aware that a significant amount of information was obtained by an unauthorized third party in the cybersecurity incident. Bank account information for a limited number of suppliers was misused, and we have already separately addressed this with those impacted. More details have been posted on our Investor Relations website. We are continuing our investigation of the cybersecurity incident. In a moment, Ron will speak about the financial impact of the cybersecurity incident, which will affect our fourth quarter financial results. I would like to extend a heartful thanks to our customers as well as our suppliers and team members for their patience and the incredible support we've received from all of our constituents during this period. Our customers, our suppliers and our team understand that a cyber incident could occur to any business and has been particularly prevalent in the health care arena over the last six months. Turning now to the third quarter. We're reporting solid financial results for the third quarter. We achieved good total sales growth and non-GAAP diluted EPS growth despite continued lower sales of PPE and COVID-19 tests. Our internal sales growth slowed in the third quarter due to some market softness in September as a result of general macroeconomic weakness as well as lower sales of PPE products at COVID tests. However, we believe that the dental and medical markets that we serve are relatively recession-resilient. Sales of PPE products and COVID-19 test kits continue to decline but at lower rate compared to the earlier year. Increased customer demand for lower-priced corporate brand, merchandise and generic products, along with growth of equipment technical service revenue, also has helped our profitability this quarter. Profitability for the quarter benefited from our technology, value-added services and dental specialty products as we continue towards our goal of achieving 40% of operating income from sales of high-growth, high-margin products. We are now more than halfway through our three-year gold BOLD+1 strategic plan. Despite current macroeconomic conditions and the cybersecurity incident, we have confidence in the stability of the dental and medical markets and remain committed to our strategic priorities and long-term financial model, which includes high-single digit to low double-digit growth in operating income. Year-to-date, we have closed several strategic investments, and just last month, we were pleased to announce the closing of the acquisition of Shield Healthcare, a business that distributes medical products to patients in the home including continuous glucose monitoring. Overall, these acquired businesses are performing well. So let me turn to a review of our quarterly highlights from each of our business units, beginning with dental distribution. In North America, dental offices generally remain busy. However, dental patient traffic somewhat slowed in September. This seemed to be the result of an increase in patient cancellations, which we believe were partially due to the seasonal uptick of flu cases and COVID-19. And our overall consumable merchandise sales, excluding PPE products reflected this. Looking at our international dental business, overall volumes of consumable merchandise held steady across the regions. Sales of traditional dental equipment in North America have largely reverted to pre-pandemic levels with growth in it mid-single digits. Dental equipment sales continued to be impacted by lower average selling prices, and we expect this to normalize in the first quarter of 2024. The equipment backlog was sequentially slightly higher and included strong orders taken at DS World Show held in September -- actually at the end of September of 2023. This increase reflects typical seasonality as we head into the fourth quarter. International dental equipment sales reflect a slowdown in sales in large equipment, and this is in parts of the world outside of North America, not everywhere. Our equipment sales vary quarter-to-quarter, of course, partially as a result of purchasing dynamics of large DSOs. But over the long term, we continue to expect equipment sales growth in the range of low to mid-single digits. Dentistry is undergoing a significant transition to integrate high-tech digital workflow systems in the dental practice. Henry Schein is well positioned to be the brand of choice for our customers who are seeking an integrated digital clinical workflow, and we remain confident in the long-term outlook for dental equipment in general. Turning now to the dental specialties. Overall, we believe we continued to gain global market share during this quarter. Our global implant business grew 40%, predominantly through acquisitions. BioHorizons Camlog to continue to perform -- outperform the market, growing sales in the mid-single digits. Our acquisitions of Biotech Dental in France and S.I.N., S-I-N, in Brazil are showing strong growth in implants and related products in the local markets. Our value brand, The Dentist, is also growing well. This is offset by somewhat slower -- in fact, a slowing market in North America. The performance of our endodontic business continued to be strong, and the clear aligner segment of our orthodontic business grew by double digits, albeit on a small base. So we're optimistic about the long-term growth prospects for the specialty markets as we continue to see adoption of specialty procedures among general practitioners the growing adoption by DSOs of specialty procedures and, of course, due to the macro trends of demographics. We're also optimistic about the dental specialty products in 2024 as we have a robust new product line with upcoming launches in various geographies. So we are really optimistic about our specialty businesses in 2024 driven by the macro demographic trends and our robust new product pipeline. Let's now turn to our technology and value-added services businesses. We had excellent sales growth in our technology and value-added service businesses, driven by the Henry Schein One practice management software sales and by Large Practice Sales, the practice brokerage business we acquired at the close of this quarter. Henry Schein One's growth continues to be driven by practice management software solutions and, of course, particularly by Dentrix Ascend and Dentally, our cloud-based solutions, which provides the opportunity for their practices to integrate clinical workflow, and it's very important throughout the dental office. Once again, the customer base of cloud solutions increased by about 40% this quarter compared to prior year. DSO accounts in particular are seeking integrated platforms along with the tools that are enhanced by artificial intelligence. In this connection, we recently formed a DSO Strategic Advisory Council, which is strategically focused on growing practice revenues and solving operational issues for large group practices. We of course, have similar programs for midsized practices and for the smaller practices, where this advisory kind of service is provided by our field sales consultants. During the third quarter, we introduced new features and upgrades, including the launch of Lighthouse 360. This new platform facilitates integrated patient communications, reputation management and overall practice success. This feature rich product includes online patient scheduling, digital customized forms for patient intake and payment reminders and more. Henry Schein One's goal is to continue to grow our practice management customer base and to increase the breadth of solutions offered to our existing customers. Our priorities regarding software integration are critical to achieving this goal, and we are well on our way towards an integrated clinical offering for the clinical aspects of the practice with a focus on specialty procedures as well. Turning to our medical business. Third quarter growth was in the low single-digit, excluding sales of PPE and COVID-19 test, similar to recent quarters. This growth reflects high prior year comparison sales growth and higher sales on lower-priced products, including generics and corporate brands, albeit with higher margins. Of note, we are now distributing COVID-19 vaccines, although we do not expect this low margin product category to have a significant impact on sales or profits. In September, we saw an uptick of sales COVID-19 test kits, which we expect to continue into the fourth quarter. So in summary, the underlying fundamentals of our core business remain solid. We are executing ahead of schedule with our 2022-2024 BOLD+1 strategic plan. So with that in mind, let me ask Ron to discuss the quarterly financial results and our full year guidance. Ron, please?

Stanley Bergman :

Thank you, Ron. I appreciate that. Operator, we are ready to take any questions that investors may have.

Jon Block :

Hey, guys. Good morning. Thanks for taking questions. Maybe the first one, just high level. Stan, what are you guys hearing from the customers? The ordering frequency from a practice might be, I don't know, maybe roughly every two to three weeks. So some customers might have encountered the issues pretty minimal number of times, maybe one time, possibly twice at most. What have you guys heard regarding, call it, customer retention? Or do you think you don't have a better feel for that until the actual website is back up and running, which seems, to your prior point, tomorrow morning? And then I'll just ask a follow-up.

Jon Block :

That's great color. Thanks, Stanley for that. And maybe I'll pivot, Ron, to you for the second question. Any really high-level thoughts around 2024? And not a specific number, but just maybe just the construct. Should we think about it as sort of growth on the core underlying EPS of $5.22, the revised midpoint, and then offset by, call it, the lag hit on the cybersecurity incident? And on that second point, I just want to make sure, the $0.55 to $0.75 4Q '23 cyber hit, that's all, call it, decremental low sales? I think you said no expenses in there. That would be excluded from non-GAAP. Is there any promotional stuff in there? Sorry, and last sort of question, tack-on, how do we think about the exit impact for December? Because you talked about the top-line impact for the quarter, but obviously December would likely be much lower than what you've experienced in October. So any color on the cadence for the trailing throughout the fourth quarter. Thanks, guys.

Operator:

And the next question comes from the line of Elizabeth Anderson with Evercore ISI. Please proceed with your question.

Stanley Bergman :

Thank you, Elizabeth. Again also two very, very good questions. So let me just provide one more time the context which, I think, we tried to communicate our prepared remarks. So we experienced the cybersecurity incident, we got suspicious. And what we did was -- and our CTO made a brilliant move, he brought the whole system down immediately. He knew -- he was quite comfortable that our backups were good. So our backups have turned out to be very good. And what we need to do now is turn on application by application. Before you can turn on that application, you have to do certain forensic work to make sure that there are no sleepers in there. And so that's what we've been doing. I would say that at the moment, other than the website, we're more or less back to where we were. There are a few areas that require additional turning on, some involving invoicing, some involving the returns function. And the only area we can't really supply right now because we're super cautious is on controlled drugs, although we have an affiliate that was not impacted and they are shipping controlled drugs if need be. We expect all of these areas, and this is expect, to be up and running this week. There are some isolated areas where we have challenges. I would say they have less to do with the customer side. We have some parts of the world where we have WMS systems that are not fully functional yet. It's not impacting the customer because the E3 system, the basic buying system is working, has been working for a while. But it's just taking us a lot more human capital, human resources in receiving the products, putting them away, and picking. Those areas will come back, I think, in the next few weeks. So I think from a customer point of view, we're in pretty reasonable shape today. Yeah, if a customer has an inquiry on certain purchases made some time ago, we may not be able to give an instant response. We may have to do some research through the backups. But in general, operationally, actually we were doing quite well a couple of days after -- two days after the cyber incident. The key here is to remember that our backups are in pretty good shape, and we feel very confident in the way we're bringing up these systems one at a time. Our team on the IT side is remarkable, our investor -- our consults are just the best. And we feel pretty good that we are bringing up systems that are stable, and we just have to go through the cycle. But I don't think we're talking about that long. But I'm not sure -- but I'm quite sure that from a customer point of view, other than the items I mentioned, we'll be in pretty good shape tomorrow hopefully when the website comes up.

Elizabeth Anderson :

Yeah. That's what I was asking. Thank you.

Elizabeth Anderson :

Got it, thanks so much.

Operator:

The next question comes from the line of Jeff Johnson with Baird. Please proceed with your question.

Stanley Bergman :

Yeah, Jeff.

Stanley Bergman :

So Jeff, obviously, we've provided a lot of thoughts around this, as have analysts and as the industry. So in broad terms, we believe our business is relatively recession-resilient. It goes down a bit, it will come back. Our North American dental consumable business, as you correctly point out, had flat internal growth. We saw moderate softness in patient traffic in North America due to appointment cancellations, mostly in September. It's hard to tell how long that has continued. It was similar in the first two weeks of October. But thereafter, obviously, because of the cyber incident, it's hard to project. If you look at -- I'm talking about North America now, sales of traditional dental equipment have been largely reverted to the pre-pandemic levels. And we think that's growth in the mid-single digits. Digital equipment sales continued to be impacted by lower average selling prices and it's hard to again give you an absolute as to when we expect this to normalize. My sense is, and that's what our equipment people say, it will normalize sometime in the first quarter of next year. If you look at our international business, overall, volumes of consumer build merchandise held steady across most regions. If you project that into the international equipment sales, there is a slowdown in large equipment in parts of the world. But there are also some unique reasoning for that in places -- for example, in places like Australia, there was a tax incentive that ended. So yeah, I think there is some caution amongst our customers in parts of the world because of the macroeconomic issue in parts of Europe. I don't think it's necessarily bad in any one country. Overall speaking, I think health insurance is, in the U.S. typically provided through employment could be a lagging indicator. So this could impact activities, hard to tell. And if it does, it's probably mostly higher end procedures. I think we indicated that on the implant side in North America, we did see some softness on the premium side. Outside the U.S., of course, we have countries -- there's a lot more government payment to support. So it's hard to give you an indication of really how far down people's views would go of the economy having an impact on dentistry. But from the past, it's never been significant. By the way, we are seeing similar trends between private practices and the large practices. But of course, equipment sales for the DSOs are not as strong as they were given the cost of interest. But we also have to understand that DSO sales could be lumpy, they always have been. On patient traffic, if you take a look at the ADA [ph] survey, it did indicate some patient traffic slowness in the third quarter, probably mostly in September. There's an argument that it's because of the flu, traditional flu, COVID-19 impact. And then you go and you take a look at implants in Europe where they were okay. So there's not a definitive downward trend, but there is a little bit of caution at the margin. And I think we have to take that position. At least, we have to plan for that.

Ron South :

Sure, Jeff. I think I'll kind of address the first item around customer retention and the third item of customer loss somewhat together. And I think we will have a greater feel for that in the coming weeks. The -- as I was saying earlier, the restoration of -- or the reactivation of our website will bring us much more intelligence in terms of what that customer retention and what the potential for customer loss might be, and as a result, what the necessary investment may be to recover some of that business and some of those customers. And that will be taken into consideration when we communicate our 2024 guidance in February of next year. I think in terms of higher cyber spend, like everything else, we'll assess where we think is -- what is the appropriate investment if we believe it's necessary relative to anything else, we will do that. But I think right now, we're still in the midst of understanding the cause of this. The forensic investigation is ongoing. And we will invest accordingly according to that, if necessary. If it's necessary to increase that investment, we will.

John Stansel :

Good morning, guys. Thanks for taking my question. I just want to talk about some of the swing factors that could move you from the $0.55 to $0.75 in the cybersecurity headwind. What are some of the factors that you could see? Is it really just a time to ramp back up to 100% of like pre-incident levels? Or is there anything else built in there that we should be thinking about as we look at that?

John Stansel :

Great. And then just on the kind of the 85% to 90% of pre-incident volumes, can you give us kind of a sense qualitatively of how that's trended since that, I think, the 24th and onwards when you were generally operational? Has that kind of increased week-over-week? Has that been kind of static? And then, I guess, you kind of indicated there that a big portion of this may just be people who prefer to use the online portal. Is that how you're thinking about the remaining customers who kind of haven't been ordering with you?

Stanley Bergman :

Just to add to Ron's comment, for a period of time, the only way our customers' good order with us was through a field sales representative or through telesales. A huge percentage of our orders, something like 70% of our orders, come digitally. That's the good news. We trained our customers that the best way to do business is digitally. The challenge is that 70% of orders had to go through our field representatives and telesales. That funnel was not large enough for a few weeks. So customers couldn't -- not all customers could buy through us. As we expanded our digital ordering capability, as our field sales people got more efficient ways in which to into the orders and we have incredible work around that came up very quickly, but for a period of time they were not there. And the telesales team had limited capacity. Of course, we were able to expand the telesales team's capacity. We had a model in place. We have a procedure in place that actually was tested during COVID, and literally overnight, we expanded the capacity. The challenge was the funnels for a few days were not big enough to accept all the orders. So now we can accept the orders. It will be much more efficient with direct customer entry through the website, and we expect that is going to result in customers coming back who had to maybe go elsewhere for urgent products. But I think a number of our customers, specifically some of the smaller ones held out. And I think they will come back and give us the orders that maybe they were holding on to. But it's going to take some time through the end of the fourth quarter for us to ensure that our systems are back to normal and in terms of the customers' thinking

Jason Bednar :

Hey, thanks for taking questions. Sorry for the background noise. [Indiscernible] here. I wanted to ask, of the 85% to 90% that you're talking about, Stan and Ron, are there certain categories that have been slower to come back or certain geographies, maybe bifurcate North America versus Europe or dental versus medical, just anything there. And then I have a follow-up.

Jason Bednar :

That's really helpful. Thanks for that color. And then as you think about -- I think a lot of you trying to tease out the exit rate renewal what things look like in 2024. Out of that 10% to 15% where you're still operating the low pre-cyberattack levels, any sense of like of that 10% to 15%, how many of those customers are under contract like large accounts within dental or medical or have your practice management software in the elements that would make it more sticky and really, I think, exemplify how value industry reattain a lot of the business that you expect you will. Thank you.

Operator:

And our next question comes from the line of Nathan Rich with Goldman Sachs. Please proceed with your question.

Stanley Bergman :

Yes, I think this is a good question, Nathan. We did not have E3 operating for -- I can't remember when it was, the first week. So we were buying based on historical data of about a month or so old. That system came up pretty quickly. There was some challenges in the receiving department because we didn't have the full software stored on the receiving side. But I would say other than maybe one or two actually suppliers that had concerns about corrupting their systems, we're back electronically ordering, even those of, I think, one that I was involved with quickly removed any concern they had. And we've been buying product in an orderly way. I would say that on some manufacturers, we went into the quarter with very good inventory for multiple reasons. But essentially, our suppliers have been very helpful. We've gotten the product we need. We may have slightly increased inventories in certain areas. But Ron can address the balance sheet, per se. But essentially, I have to say the support we've gotten from our manufacturers has been truly remarkable. Some that helped us with drop shipments maybe in the first week or two. We felt we wanted to lighten up our load in our warehouses, but it wasn't needed. We just took that as a precaution.

Nathan Rich :

Great. And if I could just follow up quickly, I think it was Jeff's question earlier, just on the outlook for the dental business. I think the revised revenue range didn't really incorporate a significant impact from the macro environment. And I guess I'm just wondering if we should interpret this as the variability that you saw, whether it was patient traffic or equipment sales in certain international markets just hasn't been significant enough to kind of change your view of the overall trajectory of the end market at this point.

Operator:

We have time for one last question coming from the line of Kevin Caliendo with UBS. Please proceed with your question.

Stanley Bergman :

Yeah, much more.

Kevin Caliendo :

Okay. That's helpful. I just wanted to understand the bend Venn diagram here, who we were talking about.

Kevin Caliendo :

And I appreciate the commentary around the lower end. That even sounds better than many of your peers have spoken publicly on the trends that they're seeing in October and November for the fourth quarter. What -- I sort of want to ask Stanley this question, just big picture. What do you think is actually driving the slowdown in demand in dental, even if you guys aren't seeing it as acutely as maybe some of the others probably because of mix, probably because of your own positioning? But how often have you seen this kind of macro environment, how long do you think it lasts? What do you think is causing at this time? Just love to hear your take on that and how long do you think it lasts for.

Graham Stanley:

Mid-February.

Operator:

And ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Operator:

Good morning, ladies and gentlemen. And welcome to Henry Schein’s Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is recorded. And I would now like to introduce your host for today’s call, Graham Stanley, Henry Schein’s Vice President of Investor Relations and Strategic Financial Project Officer. Thank you. Please go ahead, Graham.

Stanley Bergman:

Thank you, Graham. Good morning, everyone, and thank you for joining us today. We are today reporting solid results for the second quarter, driven by our North American dental businesses with strong equipment and steady general merchandise sales, and with continuing strength in sales of our technology and value-added services, our implants, biomaterials and endodontic products. The underlying fundamentals in the U.S. dental market remains strong and demand for dental services and customer confidence continues to improve as, of course, evidenced by our -- by the ongoing investments our customers are making in their practices. In addition, we are seeing growing demand for our implant systems and endodontic products, as well as our integrated software and services solutions, which are generating strong growth by delivering greater efficiency and a better experience to our customers. In the alternate care market, that’s the medical market, electric procedures are close to normal levels, while second quarter visits to primary care physicians were down year-over-year, reflecting last year’s higher visits to physician offices and urgent care centers as a result of the extended flu season last year. As expected, sales of PPE and COVID test kits continue to decline. However, we are now seeing sales level off sequentially -- we are now seeing sales level off sequentially and we expect the year-on-year impact to be much lower in the second half of 2023. When excluding these product categories, local currency internal sales growth for the company was 3.3%. In general, our North American dental business performed better than we expected at the start of the year, offset by some incremental COVID-related headwinds facing our medical business, as discussed earlier on. Our outlook reflects overall confidence in our business and in the markets we serve, and accordingly, we are affirming our non-GAAP diluted EPS financial guidance for 2023. Our financial results and guidance demonstrate the strength of the business as discussed earlier and continued advancement of our 2022-2024 BOLD+1 Strategic Plan. We are successfully executing key initiatives -- the key initiatives actually, in the plan including expanding our specialty products and value-added services portfolio, optimizing our distribution businesses, leveraging key customer relationships and driving digital transformation. Year-to-date, we have committed over $1 billion to acquisitions that accelerate the implementation of our strategic plan, adding high growth, high margin products and services to our offering. With this clear focus, we believe we are well positioned to further enhance Henry Schein’s leadership in the markets that we serve and to deliver long-term sustainable shareholder value. Among the larger transactions are our strategic partnership with Biotech Dental, which we closed in April, the acquisition of S.I.N. Implant System, which we closed in July, and the recently announced acquisitions of Shield Healthcare and Large Practice Sales, which we expect to close in the third quarter. With these transactions, we have significantly expanded our implant, bone regeneration and clear aligner product portfolio, digital workflow capabilities, presence in distributing products directly to the patient in the homecare arena and value-added services. Continuing our strategy of following the patient to provide healthcare services where it’s being delivered, we expect our recently announced agreement to acquire Shield will create an offering with more than $300 million in annual revenue that distributes medical supplies across the United States directly to patients in their home. On completion of this acquisition, this business will be led by Adam Hughes, who joined Henry Schein as Vice President, General Manager of Homecare Medical Products and has significant experience in this area. We are excited about the fundamentals of this market, which supports a growing aging demographic experiencing more chronic disease beyond added convenience to the patient, the trend of moving care to their home is expected to provide efficiency in the overall healthcare system. And most important, many of our customers have asked us to provide the service. We have been providing it in a moderate way up to now, but now we are committed to advancing our position in this market to support our customers, who have requested us to move into the homecare arena as a continuum of care. Our homecare medical product offering will now include enteral, ostomy, incontinence, wound care and diabetes products, and we plan to leverage our physician relationships, as noted earlier on, product distribution expertise and corporate brand assortment to further grow this area. Also for many years, we have had a successful practice transitions group dedicated to existing smaller and midsized dental practices. And I am enthus -- most enthusiastic about the acquisition of Large Practice Sales, a leading transition advisory services business which expands our capability to advise dental practices on Larger Practice transitions, of course, being of service to our DSO customers as well. We are also advancing the integration of our digital -- of our dental digital workflow software with our practice management software to create a unique digital solution for dental practitioners. In this connection, we have asked Andrea Albertini, CEO of our International Distribution Group to lead the cross-company One Schein solution and accelerate out what we have internally called our three-click integrated software solution for our customers. This simplified open architecture process begins with the capture of any image from an intraoral scanner or 2D/3D Digital Imaging unit through our practice management software, followed by the application of embedded artificial intelligence solutions to help in diagnosis, case acceptance, planning and design and ending with direct -- with the direct connection to fabricate the prosthetic through either [inaudible] mill, a 3D printer or the transmission digitally of the file to the dental lab. Let me now turn to a review of the quarterly highlights from each business unit, beginning with the dental distribution. In North America, dental offices were generally busy and this helped our second quarter dental merchandise growth, of course, excluding sales of PPE products. A driver in equipment sales was a broad equipment -- was, of course, our broad equipment offering, which enabled our customers needing solutions to increase productivity to meet demand, and of course, drive up the efficiency of the practice, and of course, better clinical care. North American dental equipment sales were up double digits, sales of traditional equipment continued to be strong and we are pleased that sales of digital equipment returned to growth this quarter. International equipment sales were relatively flat to the prior year. The equipment backlog in North America has held steady and our international equipment backlog is returning to pre-pandemic levels. Now turning to our dental specialties. Sales of dental implants and biomaterials were key drivers in the second quarter, complemented by endodontics and clear aligner businesses. We are seeing implant demand increasing in North America with sales of our BioHorizons Camlog premium implant delivering mid-single-digit growth, a sequential improvement versus the first quarter, internationally, demand for implant systems remains very good. Generally, demand for implants continues to favor value-priced products. We believe that our Camlog -- our BioHorizons Camlog product offering is well positioned. But also the moving of demand for value-priced products is reflected in our double-digit growth achieved by our Medentis provider of dental implants and bone generation products. Looking at recent deals, our transaction with Biotech Dental brings a market-leading portfolio of dental implants at clear aligners to Henry Schein and digital workflow software. Similarly, on the other hand, that S.I.N. Implant Systems provides us an entree into the large Brazilian implant market and complements our successful Brazilian general dental consumables and equipment business. Both Biotech and S.I.N. offer high quality implants at an attractive price and we have exciting opportunities of expanding these cost-competitive products to other geographies, including the United States, providing, of course, a more comprehensive offering and enabling us to be even more competitive in the implant and bone regeneration space. This quarter, growth in our endodontic business continued to be driven by our Brasseler and Edge brands in both North America and internationally. Our orthodontic business is making steady progress with our aligner business, although this is still a relatively small component of our global revenues. We are seeing growing demand for our specialty products from DSOs and that’s from -- specifically from our DSO customers, and recall, we have a pretty decent market share in the DSO market and we see continued adoption of specialty procedures among dental practitioners. We have grown our global implant bone regeneration and related products and services into over $800 million in revenue and our specialty products to approaching $1.2 billion in revenue in the aggregate on an annualized basis. We now offer a broad range of premium and value alternatives to North American and international practitioners. We expect dental specialty growth to accelerate in the second half of the year due to these acquisitions, but also due to year-over-year comparisons easing. Now let’s turn to the technology and value-added services business, where the largest component, of course, is Henry Schein One. Global growth in Henry Schein One is being driven by ongoing migration to our cloud-based practice management software solutions, Dentrix Ascend and Dentally, and by growth in our revenue cycle management business resulting from increased patient traffic driving a higher volume of e-claims. Dentrix Ascend and Dentally grew to approximately 7,000 customers and this today represents approximately 40% year-over-year growth. Customers and prospective customers are partially -- particularly enthusiastic about incorporating our artificial intelligence solution into their practice management software product. We believe our embedded solution is certainly best-in-class. We have grown our technology and value-added services businesses into an almost $900 million revenue portfolio on an annualized basis. In addition to Henry Schein One’s technology solutions, we now offer a broad range of value-added services through our businesses such as eAssist, which provides revenue cycle management, and Unitas providing advice on PPO agreements with insurance providers along with other services including financial services, practice transitions, staffing services, education and remote patient monitoring for office-based dental and medical practitioners. We expect the technology and value-added services sales growth will accelerate during the second half of the year. Turning now to the medical business. During the second quarter, our medical business achieved low single-digit growth, excluding PPE products, and of course, COVID-19 test kits. This compares with mid-double-digit growth last year. It’s really important to us then, when results benefited from some late season sales at point-of-care flu diagnostic tests. This year, excuse me, was a more typical flu season, and as a result, we had much lower sales of flu COVID-19 and multi-assay diagnostics and related products. Sales growth was also affected by the conversion of certain pharmaceuticals and other products to lower priced generics and corporate brands, of course, with a higher gross profit margin. This is a trend that is taking place throughout healthcare. Sales of medical equipment were relatively soft in the market. The market took a temporary pause to assess likely future demand. However, we have subsequently seen investment interest return in July. So, in summary, the fundamentals of our core business remains solid, in fact, very good, and the team is executing well on our 2022-2024 BOLD+1 Strategic Plan. With that, I will turn the call over to Ron to discuss specifics relative to our quarterly financial results and provide full year guidance. Thank you. Ron, please.

Stanley Bergman:

Thank you, Ron. We are here to answer any questions which investors may have. So, Operator?

Elizabeth Anderson:

Hi, guys. Thanks so much for the question. I have maybe one shorter term question and one long-term question. In terms of the shorter term question, obviously, the fair value adjustment was new this quarter. And I just wanted to sort of make sure I understood, was this something that you knew sort of last quarter when you updated your guidance or because I am just trying to understand whether the guidance moved down ex that? And then for my longer term question, it’s obviously very interesting with you adding all these new capabilities and geographies in. How do we think about, like, for example, for S.I.N. and like how long that might take or what your plans are in terms of bringing those implants into the United States? And then similarly, in terms of the medical, the ability to sort of push those sort of more broadly across -- the new products across your portfolio? Thank you so much.

Stanley Bergman:

Thank you. Elizabeth, the S.I.N. Implants, not the whole line, but significantly important part of the portfolio already approved in the U.S. are selling to some extent and are being well received by our particularly DSO customers where we, in fact, by coincidents last week were able to land a pretty decent DSO that is interested in the S.I.N. Implant System. It puts us whole S.I.N. transaction puts us in a very competitive position now, because to some extent, in the U.S. and maybe some other markets, although Camlog -- BioHorizons Camlog is a premium product selling at a slightly lower price than some of the major brands, if not all of them, we still were missing a piece in our portfolio on the more economic side of implants and now I believe we are well positioned with S.I.N. and I believe in the next year or so, we will be able to also launch the Biotech line in the United States. Different market segments, but I think we are definitely in a very competitive position now and are actually starting to see some sales.

Stanley Bergman:

No. I think we acquired Prism about a year or so ago or two years ago, which was mostly an East Coast business with a relatively limited portfolio. Shield puts us into the West Coast with a broader portfolio. And Shield was missing the wound care offering that Prism had. So we believe we will create synergies relatively quickly. There are costs, of course, on the integration, which we have taken into account in our guidance, mostly one-time costs. But I think in 2024, we should be able to start adding accretion in a nice way. This has really been an area that our customers, our big IDN customers have wanted us to perform and we didn’t undertake these kinds of services. We have one DSN -- IDN in New York area that we service in the homecare area, but we didn’t really have the full capabilities between these two acquisitions and another small one which we hope to announce soon, we will have a pretty good offering in products for the home and will be a great extension to our physician and urgi care business.

Brandon Vazquez:

Hi, everyone. Thanks for taking the question. Maybe first on one high level question just on the macro backdrop. Can you guys talk about where you are seeing some strengths and weaknesses in the environment today? I think maybe equipment looked pretty strong in the U.S., but maybe a little weaker international and then consumables globally looked kind of stable low single digits. So curious how all these segments on the dental side are playing out from the macro side?

Brandon Vazquez:

Perfect. Thank you very much. One -- and maybe one other quick one for Ron. We are trying to -- can you clarify, you may have given this already on the call, but just to be clear. Can you kind of talk about what EPS growth is in 2023 and based on that guidance ex the PP&E COVID and part of why I am asking is just to make sure we understand what underlying dynamics are as we are kind of looking at our 2024 models where maybe PP&E and COVID sales can kind of stabilize and we can return to some more normalized growth rates? Thank you.

Operator:

And the next question comes from the line of Jeff Johnson with Baird. Please proceed with your question.

Stanley Bergman:

Very good question, Jeff. Thanks for asking. I think you need to take the fourth quarter of 2022 and the first quarter of 2023 and more or less average out because of the cut-offs. It leans a little bit higher in the first quarter, but it certainly was a 6.5% growth of apples-to-apples. I think we have covered that in the past. I would also suggest that inflation in the consumable world, in the dental arena has muted. Maybe some products individually of certain brands have gone up. They are not necessarily sticky from the manufacturer pass-through. We are not -- the manufacturers are not necessarily able to hold all these consumable price increases. At the same time, there is a movement towards corporate brand/generics, and some of the smaller brands are doing well, where some of those manufacturers are prepared to keep prices or even reduce prices. So it’s very hard on a one quarter basis to give you the perfect measurement of mix. But I would take into account the cut-offs for 2022 for the fourth quarter and I would take into account the fact that generally there’s been some deflation in merchandise prices. And I would say this is particularly coming from the larger DSOs and the midsized DSOs who are to-date a lot more educated consumers than in the past. This is not really impacting our margin per se, the general mix of our margin to DSOs. So there’s a lot of nuance in what I just said. Let’s see what happens in the third quarter and fourth quarter. But my sense is the trend that I just described is not going to change much.

Stanley Bergman:

Jeff, it’s hard to tell, as I -- maybe I wasn’t clear, exactly what the impact is going to be of deflation, whether it’s price reduction on specific branded products or switch to generic or other manufacturers for specific kinds of products. Yeah, I doubt, we are in more than 100-basis-point, 150-basis-point swing, maybe 200-basis-point, but I am not sure it’s much different to that. So I don’t think inflation is going to be significant in the dental consumable business. I think it may go down slightly to deflation, but we are in that range. Units are holding more or less steady. Of course, from our point of view, we are growing our specialty business, although the business may be growing, that doesn’t have an impact really in a material way on our total sales of dental consumables because it’s not material in the context of the whole consumable offering. Having said that, specialty products are impacting our margin in a positive way and so our corporate brands and some of the smaller manufacturers.

Operator:

And the next question comes from the line of Jason Bednar with Piper Sandler. Please proceed with your question.

Ron South:

I will start with the quantifiable one first. The step-up charge that we have and it will be disclosed in the 10-Q as well, in the second quarter for Biotech was $2 million. So not a real significant effect on gross margin. In terms of S.I.N, it is absorbed within that $0.05 to $0.10. There’s also going to be a step-up on S.I.N, but they don’t turn their inventory as quickly. So we don’t expect it to quarter-to-quarter have as dramatic of an effect. So S.I.N without kind of disclosing the modeled dilution on that, I can tell you that it is absorbed within that $0.05 to $0.10.

Ron South:

Biotech…

Ron South:

I am sorry, Biotech -- just to answer you quickly, Biotech churns our inventory about twice a year. So we have about another quarter of that inventory step up left. So it will be another $2 million in Q3 and then we will be able to move on from that.

Ron South:

Yeah. We are very pleased with the equipment growth we had. I mean, North America equipment growth on an LCI basis of 9.8%, especially in this environment on some of the high-tech equipment traditional remains very high at -- our LCI in North America on traditional equipment was growth of 14.6% and that was with virtually no movement in the backlog. It’s almost identical from the beginning of the quarter to the end of the quarter. So it’s very indicative of ongoing strong demand for traditional equipment. On the high-tech side, we still have some headwinds on scanners, but it’s price related. We are getting good values on scanners, but the revenues are down, some on the scanners. We do have -- I think they are down 12.1% on, well, I am sorry, digital restoration sales were down 12.1%, but the scanner revenue is still down 40% for us year-over-year and that’s really a pricing matter. Having said that, on high-tech equipment, we did achieve very -- a little bit of growth. It’s single-digit, low single-digit growth, but we did get some high-tech growth, which we are pleased with and that’s coming from some growth really kind of across the Board. You mentioned a lot of the categories, some growth in mills, some growth in 3D printing. Those are all coming off relatively low basis, but nevertheless they are providing us with some growth and that’s helping the category.

Jon Block:

Great. Thanks, guys. Good morning. Maybe just the first question on dental specialties. I think the reported was up 15.7%. I don’t know if I missed it, but do you have a precise internal number for that division? And then just to go a little bit further down the road, how implant growth shook out within whatever that internal number was? Was it above overall internal below and just maybe your thoughts on ongoing share gains or implant share gains, pardon me, now that you have got some of those investments in the more robust implant portfolio to work with going forward? And then I will ask a shorter follow-up. Thanks.

Stanley Bergman:

Yeah. Jon, that was -- thank you for that question. If you look at just North America, sales of our BioHorizons Camlog premium implants, remember that -- it’s a premium implant at a slightly lower price than, perhaps, our competitors in the premium area, delivered mid-single-digit growth and that’s a sequential improvement versus the first quarter. Internationally, implant demand remains good. Remember, we have a very small business in China. Generally, demand for dental implants, again, favored the low price part. Although I must say, for BioHorizons Camlog, we did very well in our biggest market, which is Germany, Austria and Switzerland. But Medentis did very well also in Germany, which is on the lower end. So, overall, we are quite comfortable, actually, very excited about our growth in the implant business. Hard to tell you how we are doing compared to others. The data from the association that reports premium implant sales is not yet available for the second quarter. But my sense is we have gained market share, both in terms of units and in terms of euros, dollars. So as it relates to the competitiveness of our product line, Elizabeth asked a question earlier on, we were missing a piece in the lower end of the mix in North America. I believe S.I.N will enable us to be highly competitive in this area, specifically with DSOs, large ones and midsized ones. I just want to go back to the ID, the sensor DI question earlier on. I think we reported this time last year that our sales that include a large sale of DI equipment to substantial DSO and so if you take that out. The units are more or less returning to where they were and there still is some deflation, but not a significant amount. And on the DI side, it’s not really deflation relative to a particular brand, but there are lower priced brands that we are selling more of relative to the larger brands.

Stanley Bergman:

Yeah. It’s very hard to give you specifics. I think we are doing well in terms of units with our existing customers. We are gaining customers. But the whole area of visits unrelated to steady visits relative to urgi centers and normal type medical visits is hard to gauge, because of the impact of the seasonality of flu and we sell quite a bit of flu-related products, be it the test or the related products that go with the test. At the moment, it seems pretty steady. It’s -- I wouldn’t want to say this, really, I wouldn’t want you to view this in the wrong way, but COVID is growing a little bit. So people are going more to the physician offices to check things out. So July was a lot better. But you can’t draw conclusions. There was a lull in equipment sales. We had a lot of good inquiries in July. But it’s hard to give you a specific number. The impact of generic pharmaceuticals is quite a bit on the injectable side, not the vaccine side. We don’t sell many tablets and capsules, not our business. So overall, it’s a good business and whether it’s 3% or 5% or 6%, I don’t think that impacts the overall profitability in a meaningful way. There are so many puts and takes in our medical business. But we feel very good about our medical business and continue to believe that on a unit basis we are growing market share.

Nathan Rich:

Great. Thanks for fitting me in at the end. I will ask both upfront. First, I wanted to go back to the commentary around traditional equipment and the equipment backlog in North America stabilizing. It has obviously been coming down, I think, as we cycle through some of the supply constraints. I’d just be curious outlook for demand, though, how you are thinking about that over the balance of the year and what you are seeing with respect to kind of practice formation and remodels just in the current environment that we are in? And then, Ron, maybe a clarification on the margins, any commentary on the margin outlook between 3Q and 4Q, I guess, especially as it relates to potential timing of acquisition and expenses between those two quarters? Thank you.

Ron South:

And Nathan, just one thing to add on the backlog. The -- like I mentioned before, our backlog in North America has stayed pretty constant over the course of the quarter and we saw a very good sales growth. Yeah, I would -- quite frankly, I would like that backlog come down some, not just for the revenue lift it would give us, but it’s just better for our customers to reduce the timing of that backlog so they get their equipment more quickly and it increases capacity in the end market, quite frankly, for -- in those situations where that backlog is for equipment that is new to the business as opposed to replacement. So we would like for that backlog to come down. But right now, we still up in North America, we are experiencing a fairly consistent backlog. In terms of your question on Q3, Q4 margins, I do think that, especially at a gross margin level, we can continue at the levels we are at. I think that it’s indicative of the growing importance of the dental specialty products in our overall portfolio, as well as the growth in our technology business and I think we can continue with that as we get into the back half of the year. Of course, there’s always -- it’s a broad portfolio. There are things that can impact that. For example, Q4 tends to be a heavier quarter for equipment sales than other quarters and those sales tend to be at slightly lower margins than what our overall margin is right now. So that can bring down margins a little bit, but in exchange for the additional sales, we will clearly take that. So I don’t know -- I think that that’s -- my general expectation is we will be able to continue with the margins that we have seen in the first half of the year into the second half of the year.

Operator:

And ladies and gentlemen, that does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.

Operator:

Good morning, ladies and gentlemen, and welcome to Henry Schein's First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this call is being recorded. And now, I would like to introduce you to your host for today's call, Graham Stanley, Henry Schein's Vice President of Investor Relations and Strategic Financial Project Officer. Thank you, Graham. Please go ahead.

Stanley Bergman:

Thank you, Graham. Good morning, everyone. Thank you for joining us this morning. We are most pleased to report very good financial results for the first quarter of 2023 that are in line with expectations we provided at the beginning of the year, and reflect the good earnings momentum in our underlying core businesses. Market trends stayed consistent with those we discussed during the previous quarter's conference call compared to the fourth quarter of last year, where we saw a high number of flu cases patient traffic to dental offices around the world has recovered and is at or nearing pre-pandemic levels. Patient traffic through the physician practices has also normalized. As we anticipated, our results continued to be impacted by decreasing sales of PPE products and COVID test kits. Within the PPE credit category, the pricing focus was lower. Again, as we discussed, but pricing at this stage has stabilized on a sequential basis. COVID-19 test kits volume was lower. Excluding these product categories, we achieved strong internal growth companywide of 6.3% in local currencies. Our financial results were also adversely impacted by acquisition-related expenses as well as foreign exchange. With respect to acquisitions, our pipeline remains robust. In early April, we closed our acquisition of a majority stake in Biotech Dental a business with a market-leading portfolio of dental implants and clear aligners, and we also recently announced our plans to enter the large Brazilian implant market with the acquisition of S.I.N. Implant System, one of Brazil's leading manufacturers of dental implants and a complement to our successful resilient general dental consumables and equipment business. And we also announced the acquisition of Regional Healthcare Group entering the medical market in Australia and New Zealand and leveraging our dental infrastructure in the region very successful business we have today in the region. I'll discuss these in more details in a moment. Today, we are updating our non-GAAP diluted EPS guidance, financial guidance for 2023 to include the impact of Biotech Dental, the acquisition of Biotech Dental. The outlook for the underlying business is consistent with prior estimates, including expectations for operating income growth in the high single to low double-digit percentage range when excluding the contribution from PPE products and COVID test kits and acquisition-related expenses. Let me now turn to a review of the highlights from each of our business units. So let's begin with dental, the dental distribution business. Overall, the underlying fundamentals of our dental end markets remain solid, fueled by an aging global population, low unemployment levels and global -- and a growing global awareness of health care benefits of preventative care and oral hygiene. First quarter dental sales growth, excluding PPE products, reflect stable patient flow. Dental merchandise sales, when excluding PPE products, was very good, partially driven by lower prior year merchandise sales comparison that was impacted by the higher level of flu cases and some COVID -- Omicron COVID-19. Our dental equipment sales were solid. Traditional equipment sales grew very well, while digital equipment sales comprising of 2D, 3D digital imaging, mills, intra-oral scanners continued to be lower than the previous year. In North America, the traditional equipment growth included some price increases introduced in the second half of last year as well as good growth in our parts and service business. We've been focusing on this area for a while. This growth was offset by a decrease in sales of digital equipment. The market for intraoral scanners is healthy, as demonstrated by increased unit sales in the quarter. However, as we commented last quarter, our sales decrease reflects declining average selling price for intra-oral scanners, plus we also had a significant sale in the previous quarter -- in the previous year of scanners to a DSO. Unit sales in other digital categories are lower, and we believe are now normalized compared to the last year. We also posted good sales growth in dental equipment in Europe. International dental equipment price inflation has not been significant, and the growth was supported by the equipment backlog, which is reverting to a more normalized level in Europe and also, our parts and service business is doing quite well. The biennial IDS show in Cologne in March was once again a good event for Henry Schein. And from a sales perspective, the overall impact was consistent with previous IDS meetings. Our global equipment order book, which is mainly comprised of traditional equipment, remains robust and it's up year-over-year. Let's take a look in a bit more detail on our Global Dental Specialty business. Our Global Dental Specialty product sales growth increased from the fourth quarter. We continue to expect modest year-over-year growth to the first half of the year given the strong first half of 2022. Implant sales growth was driven by meaningful growth in our premium Camlog product line in Germany, Austria and Switzerland, where we have our biggest strongest market share in the category, and we continue to achieve double-digit growth in our Medentis value price line. In North America, we are seeing an increase in dental specialty practices being acquired by larger DSOs. Importantly, we have excellent relationships with a growing number of DSO accounts and are committed to driving specialty product conversion at practices within those networks. We also continue to see growing adoption of specialty dental procedures amongst general dental practitioners and as demonstrated by enrollment in Henry Schein's continuing education courses in these categories. As mentioned earlier, recent highlights in our Global Dental Specialty business was the acquisition of a majority stake in Biotech Dental and an announcement of our entry into the Brazilian implant market with S.I.N. Implant System -- through the acquisition of the S.I.N. Implant System business. Biotech Dental provides Henry Schein with a comprehensive integrated suite of planning and diagnostic software as well as a fast-growing portfolio of dental implants and Clear Aligners. Together, these products resulted in revenue of approximately $100 million in 2022. We are particularly excited about bringing the Biotech Dental software products to our customers, along with our existing portfolio of practice management software and clinical software we will offer a seamless digital workflow solution to a growing number of customers worldwide, very, very exciting. Last week, we announced a definitive agreement to acquire S.I.N. Implant System, which is one of Brazil's leading manufacturer of dental implants with revenues of approximately $60 million in 2022. This agreement marks our planned entry into the large Brazilian implant market. Brazil has been a very good growth market for Henry Schein, where we have brought good value to Brazilian dentists and dental laboratories over the last five or six years since we became active in that market. S.I.N. recently expanded distribution of the value price dental implants including United States and other geographies. We expect this transaction to close later this year, subject to, of course, regulatory approval. Both the S.I.N. Implant System and the Biotech Dental transactions represent progress we are making to advance our BOLD+1 strategy, which calls for us to focus internal growth and, of course, business development activities on the high-growth, high-margin opportunities and particularly with innovative products and services. This quarter, our endodontic business continued to grow nicely, primarily through our [ Brasseler and Edge brands in North America. Our orthodontic business is quite small, but we're pleased with the continued positive development of our Clear Aligner business, particularly with DSOs. So now let me turn to our Technology and Value-Added Services business, where the largest component, Henry Schein One, which had an excellent quarter. Investing in growing these businesses a key pillar of our BOLD+1 strategic plan and we believe our customers are recognizing the advantages in technological innovation that we bring to the marketplace. Growth in North America continues to be driven by Dentrix and Dentrix Ascend cloud-based solutions and customers upgraded from our Easy Dental product with the Easy Dental lifecycle ending later this year. International growth was supported by the entirely cloud-based solutions for customers outside the United States, particularly in Australia and New Zealand, where it was recently launched. The number of customers on Dentrix Ascend and Dentally, these are our cloud-based solutions, has increased approximately 30% over the last year. We are very, very pleased and excited with our customers moving to our cloud-based solutions. We also saw growth with our revenue cycle management insurance claims product with growth driven by the number of e-claims reprocessed and enhanced functionality by electronic invoicing and reimbursement solutions. Sales of this product are a strong indicator of the underlying markets as evidenced by the higher number of e-claims we processed. In short, our practice management solutions provide a competitive advantage to our dental business. Our highly integrated software is at the core of the operatory and supports clinical workflow while improving practice efficiency. Our practice management software also provides opportunities for us to sell products and solutions into the practice, including digital devices demand generation analytical software as well as our growing AI-enhanced product portfolio. Towards the end of the first quarter, we announced the full integration of Detect AI powered by Video Health and Bola AI into Dentrix Ascend. This software automatically analyzes digital images to identify and localized carriers allowing for faster evaluation of x-rays and effective treatment recommendation. Products -- this AI product offering has been well received. Additionally, our new voice technology feature improved speed and efficiency for dentists and hygienists when completing periodontal exams and clinical nodes. While it is still early in the launch, we have already seen good adoption of this new AI-driven solution, and we are excited to extend our reach and support dentists in providing the best possible patient care. So in our medical business, the distribution business, during the first quarter, our medical business achieved growth of 4%, excluding PPE products and COVID-19 test kits. As I mentioned last quarter, we expect the internal sales growth in our underlying medical business to continue to grow quite nicely, but at a somewhat slower pace this year than last year, given the prior year comparison resulting from significant growth we achieved last year. We remain highly bullish also on our medical business. Unit sales for COVID tests were down significantly. And within the PPE category, drug pricing has stabilized, albeit at a lower price than last year. Looking at specific product categories, once again, pharmaceutical and equipment sales were strong, while sales of point-of-care diagnostic products decreased to some extent because of the high flu diagnosis last year this quarter. We were also pleased to announce our acquisition of Regional Healthcare Group in Australia and New Zealand both growing markets that have contributed to the growth of our dental business. Through this acquisition, we will be able to further leverage our Australian and New Zealand infrastructure and expand our global medical products footprint. In summary, the underlying fundamentals of our core business remain solid, and we are executing well as anticipated with our BOLD+1 strategic plan. So we're very comfortable with where we are. We're bullish about the business and are excited as we advance our BOLD+1 strategy. With that in mind, I will turn the call over to Ron to discuss our first quarter financial results and our full-year guidance. Thank you very much, everyone.

Stanley Bergman:

Thank you, Ron. Graham, if we can now open the call to questions. We'll be happy to answer any questions investors may have.

Jason Bednar:

Hey there, thanks. Good morning, everyone. Ron, wanted to start on the margin performance in the quarter, really a couple entertaining questions here. First, the gross margins hit a multiyear high in the first quarter. Hoping you could expand upon maybe the drivers of the margin performance in the quarter, especially considering your higher-margin high-tech equipment sales were down year-over-year. And then I'm sure there's questions out there regarding the lack of drop-through from that gross margin upside looks like some maybe above normal SG&A spend and as fixed cost absorption wasn't as great because of the PPE dynamics you mentioned. Just wondering if you could talk about any other puts and takes that impacted SG&A spend in the quarter is really, we think, through gross and operating margin cadence for the rest of 2023?

Jason Bednar:

Okay. That's helpful. Maybe I'll actually use your response there as a bit of a segue to the next question. If we look at the guidance adjustment, modest reduction you're making today for EPS, you were pretty transparent with the Biotech deal that was going to be dilutive from some of those one-time costs. How should we think about the recognition of that headwind throughout the year does that higher cost inventory from inventory step-up, mostly flow through your model of the 2Q and 3Q. And then I know the recent S.I.N. transaction is a bit smaller than Biotech, but maybe just to be clear, we should expect another kind of one-time impact from inventory step-up once this deal closes? And then can you confirm each of these deals are accretive in year one when excluding these inventory accounting adjustments? Thank you.

Operator:

And the next question comes from the line of Nathan Rich with Goldman Sachs. Please proceed with your question.

Ron South:

Yes. I think I'll start with the fiscal calendar question, Nathan. I think that it's probably worth -- it's worth a couple of points to us of growth in the quarter, right? It can kind of vary market-to-market. It's more pronounced internationally than it is in the U.S. You do -- we had some international markets where dental practices, they close that week between Christmas and New Year's, right? So you get very limited sales. So it's more pronounced in some markets than others, but I think overall, globally, it's worth probably a couple of points on that merchandise. When I say a couple of points, I'm talking about specifically on the dental merchandise number. In terms of patient traffic, I think we're seeing pretty steady patient traffic at this point. I think it's a fairly normalized market in that respect in that we're not seeing the fluctuations in patient traffic. We're not hearing about this from our customers as much as we have historically. So I think that -- and I think that continued into April as well where patient traffic was fairly consistent with what we saw in the first quarter.

Ron South:

Yes. I mean as you mentioned, we think the comps will get a little easier for this dental specialty products in the back half of the year versus the first half of the year. But even like within implants, as we mentioned in the prepared remarks, in Europe, we had double-digit growth in implants. But in the U.S., it was a much tougher comp. Last year, the U.S. had double-digit growth in implants. So it was a tougher comp when we saw -- as a result, we saw lower growth there. Endodontic products are still doing very well; very steady for us and growing kind of in high-single-digits. So that's -- there are pockets of really, really good performance. And we think that as we progress into the back half of the year and those comps get easier, we expect that growth to become a little more robust.

A.J. Rice:

Hi, everybody. First, I thought I'd ask you about the conference in Cologne. I know that's a big event. Did you -- and you mentioned last quarter that you were watching to see whether it had any impact on sales? Does that -- is there any impact that you've seen in Q1? Or do you think there would be any spillover benefit in Q2? And then obviously, you've got a European market where there's some concern about the economy. Did you walk away with any takeaways regarding the equipment market because of what you picked up at the conference?

A.J. Rice:

Okay. Maybe just a follow-up on the medical ex the test in PPE, you did about 4% -- a little better than 4% this quarter. Is that what's sort of embedded in your expectations for the rest of the year? I know there's this whole debate about people coming back to the health care system, et cetera, and maybe that's adding some incremental demand? Are you seeing any of that? Do you think you might see more of that as we progress through the year?

Operator:

And the next question comes from the line of Jeff Johnson with Baird. Please proceed with your question.

Ron South:

I think on the implant, it's really -- you got to look at the kind of the specific markets. Like we were saying before, in Europe, our implant business grew quite well, actually grew about double-digits. And in the U.S. we had growth, but it was much more tepid than that. It was just a click of growth that we got in the U.S. But again, the U.S. was coming off, I think, a much tougher comp than what we had in Europe last year. Yes, endo has been -- that's been steady. I mean endo quarter-to-quarter has been steady in that mid to high-single-digits. Ortho is really hard for us to pick out a trend. It's just such a low base for us that we have had some -- we felt like we had very good growth in Clear Aligners in the quarter. That's mostly through our relationship with some DSOs there, but it's still off a very low base.

Ron South:

Well, I think that keep in mind; implants are about 60% of that category, right? So they carry the most weight when doing that math. And while ortho -- while they had decent sales, ortho is about 10% of that category, endo being the balance of 30%. So I think that it's the -- you're right. I mean, the implants had about a 3% to 4% global growth, and then that tends to drive the overall number because of the weighting of them in the -- within the category.

Ron South:

Yes. Well, let's clarify your question, though, because inventory step-up will be -- is very different from restructuring, right? So to the extent we have to incur restructuring costs in our transactions, as we incur those restructuring costs, we will add them back. Inventory step-up, we will reference inventory step-up. So people are aware of the impact it will have on earnings, but we are not adding back inventory step-up as a non-GAAP adjustment, nor are we adding back the costs we incur when doing our deals. We see it as an integral part of our business, acquisitions is a very important part of our strategy and the costs we incur doing the deals, we do not add back of non-GAAP adjustments. But when we have a quarter such as this quarter, when we have an unusually high volume of acquisition expenses, we want to make sure we reference it, so people understand the impact it has on operating income as it is a component of operating expense.

Ron South:

You're welcome.

Operator:

And the next question comes from the line of Jon Block with Stifel. Please proceed with your question.

Stanley Bergman:

A very good question. I'm glad that was asked. Yes. I think the year-over-year pricing on intraoral scanners and iOS has stabilized. When you look at our numbers, you will see that iOS sales and units went up quite nicely in the first quarter. What was down was the DSO business because we had some significant sales in iOS in the first quarter of 2022. So I would say the iOS units are good, the pricing has stabilized. And I think the mills now have also stabilized. Of course, the 3D printing is being viewed at as an option. But I think we've gotten back some momentum in the mills and expect to do well with the 3D printing for the remainder of the year as well.

Ron South:

It's more the latter. It's more that we pick up a little bit of additional acquisition growth. But I think that the -- we still think the core underlying business can grow kind of mid-single-digit in sales up towards approaching high-single-digits in sales.

Elizabeth Anderson:

Hi guys, thanks so much for the question and all the details. I appreciate what you -- all the details that you're giving us on sort of the equipment growth in the different categories. It was nice to see on a stack basis that the equipment comps actually improved sequentially. Can you talk about sort of -- for people who are worried about kind of like that continued demand environment? Can you talk about sort of how the backlog stands? I know you've given us some helpful details on that in the past? And then also sort of how has the environment been if we think about the end of the quarter and maybe into April, if you can comment?

Elizabeth Anderson:

Okay. And sorry. And just in terms of the comment of how sort of the end of March, if you can comment on April, trended sort of post some of the recent financial turmoil?

Elizabeth Anderson:

Oh, sorry. So I was just talking about if you could comment on sort of the demand environment in equipment. If we think about the end of March post the start of some of the financial turmoil and if you could talk about April as well, if that's possible?

Operator:

And the next question comes from the line of Kevin Caliendo with UBS. Please proceed with your question.

Ron South:

Kevin, when you say benefit in Q1, can you be more specific which benefits?

Ron South:

Oh, the calendar benefit, okay.

Ron South:

No, I don't think -- I think the balance of the year should be -- other than the fact that our Q4 this year will be 13 weeks versus 14 weeks last year, right? But outside of that, I don't expect the calendar to have a significant effect on the cadence. I do think where you could see some lumpiness still in our quarterly numbers is that the headwinds that we are dealing with as it relates to PPE and COVID test kits are more pronounced in the first half of the year than they are in the second half of the year and most pronounced in the first quarter as was evidenced by the $0.24 headwind we reported this quarter. But that headwind will be greater, just the math of it is that, that headwind will be greater in the second quarter than it is in the third and the fourth quarter. So we'll continue to have a little bit of a hill to climb in Q2 that we think levels off for us as we get into Q3 and Q4.

Ron South:

The backlog is principally standard equipment, right? So it's chairs, units and lights, and we really kind of analyze it more sequentially what was it at the beginning of the quarter versus the end of the quarter. And that's what I was saying before that the North American equipment backlog remains -- it did come down some over the course of the quarter, but it's higher than where it was last year at the end of the first quarter. So it's still a fairly healthy backlog and well higher than where the kind of backlog levels we had prior to the pandemic. Internationally is kind of the same story. We're seeing a bit of a work down quarter-to-quarter. But their backlog versus last year's first quarter is also a little lower. And that's how it differs from North America.

Stanley Bergman:

And we also think that the digital side from a pricing point of view has stabilized, and we're seeing good growth on the units.

Brandon Vazquez:

Hi, thanks for taking the question. I'll just ask both of them upfront since they're somewhat related. The first is just you guys have obviously been more acquisitive, curious if there's any notable pipeline or -- sorry, any notable gaps in your portfolio that you're kind of focused on going forward from an M&A standpoint? And the follow-up kind of related question is, as you become more acquisitive and I'm looking at Biotech Dental, for example, there might be areas where you have a little bit of overlap in portfolio, right? You have a Reveal and now you have another Clear Aligner. What's kind of the thought process do you kind of keep both of those running separately? Do you combine them into one brand greater efficiency as it grows? Curious your thoughts on integrating businesses like that. Thanks.

Operator:

We have time for one last question coming from the line of Erin Wright with Morgan Stanley. Please proceed with your question.

Stanley Bergman:

Yes. That's a good question also. Our DSO business remains a good grower. It's pretty stable. We've continued to add DSOs specifically in the mid-market area. A couple of our larger DSO customers have made some good acquisitions and taken us along and included our -- the purchases of products from us. I think we're making good progress on the specialty side in the DSO world. Of course, on the equipment side, it can be lumpy. I mentioned earlier on that on the iOS side, we had a very good significant sale in the first quarter of last year. So it impacted us in terms of units a bit. That will occur. I don't think we've lost any, I'm sure we've lost some smaller ones, but I think, on the big side, we're doing well. And on the midsized ones we're gaining as well customers. So overall, it's a growing business. And of course, the goal is to advance the high-growth, high-margin products, specifically our software, where I think we are appreciated and our additional value-added services. So the growth continues quite nicely is pretty stable, and we have very good relations with our large and midsized DSOs.

Operator:

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a great day.

Operator:

Good morning, ladies and gentlemen, and welcome to Henry Schein's Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions]. And as a reminder, this call is being recorded. I would now like to introduce your host for today's call, Graham Stanley, Henry Schein's Vice President of Investor Relations and Strategic Financial Project Officer. Please go ahead, Graham.

Stanley Bergman:

Good morning, and thank you, Graham, and thank you all for calling in today. We closed our 2022 with a very good fourth quarter in which we continue to execute effectively on our 2022 to 2024 strategic plan goals, achieving strong growth in earnings for the fourth quarter and, of course, for the full year of 2022, despite the macroeconomic concerns and of course, the foreign exchange headwinds. We overcame significant headwinds from lower sales of PPE products and COVID-19 test kits. Our sales were affected by a decline in sales of PPE products and COVID-19 test kits. Excluding sales of PPE products and COV19 test kits, and taking out the 53rd sales week for 2022, we achieved very good internal growth of 5% in local currencies, that's internal. There was a negative impact on dental visits for seasonal flu and COVID-19 last quarter. And this was both in North America and internationally. So dental visits were down because of the impact of flu, both the seasonal and the COVID. On the other hand, this was offset by a positive impact at least from a product sales point of view of visits to our physician customers. We experienced growth in each of our business units across the board. And overall, we generated some financial results for the quarter, reflective, I think, of a stable market -- in the markets that we serve. So we made excellent progress in advancing our 2022 to 2024 BOLD+1 strategic plan. So first year of the plan was '22, where we advanced our one distribution strategy to enhance the customer experience and improve operational efficiency, very important, by creating our North American distribution group led by Brad Connett, and our international distribution group led by Andrea Albertini. We had good results across the board, both in North American distribution and in our international distribution group. We strengthened our dental position with national DSOs One new accounts and have an excellent success with our technology solution and specialty products within the national DSO segment. And on the medical side, we did expand our position with IDNs and large group practices. On the digital side, the BOLD plan calls for a significant effort in this area. We created our global digital team, including the appointment of experienced veterans in this area

Stanley Bergman:

Thank you, Ron. We have about 20 minutes -- over 20 minutes to answer questions. Sorry, the call was that long, but there's a lot going on. We're highly confident in the business. And the business ex PPE and COVID tests is doing quite well, even though there are challenges from a macro point of view. Having said that, I think we've got great momentum in the business and look forward to answering any questions. Operator?

Jeffrey Johnson:

Ron, maybe I wanted to start just on the COVID testing kit and PPE guidance. When I look at kind of the EPS impact this year, it seems like it's dropping through in a decremental margin in the mid, if not upper teens level. I think over the last couple of years, those have been contributing positively, kind of those have been flowing through or at least kind of you guys have signaled that those were dropping through kind of a corporate-wide margin rate. So why -- it makes some sense, I guess, when you're losing some of that inflated top line growth if there's a deleveraging impact there, but dropping through at that mid- to upper teens decremental margin seems a lot bigger than I would have expected. So any comments you can make there?

Jeffrey Johnson:

Yes. Understood. And then, historically, you guys have provided organic growth guidance, revenue guidance, you did last year anyway, I guess, prior to that, not necessarily. A lot of moving parts this year with the selling week -- 1 less selling week, the PPE updates, obviously, some acquisition contribution. If I look at that 1 to 3, we're kind of calcine that at maybe a 3% to 6% organic guidance ex all that noise. And if I assume medical and tech VA a little above that, dental in kind of that low to mid-single digits, as those kind of all at least ballpark we should be thinking about as we're setting up our models for 2023?

Jeffrey Johnson:

Dental a little below and medical above. Is that the way to kind of think about that?

Operator:

And the next question comes from the line of Elizabeth Anderson with Evercore ISI.

Stanley Bergman:

Yes, Elizabeth, very good questions. We did take a dip on visits in dentistry. And it was both in the United States and Europe, and the rest of the world wasn't so bad, of course, China was in the fourth quarter. And it is down a bit. And so -- and there's been a recovery in January, quite nice recovery. It is down a bit from 2019 in the United States. Hard to get data outside of the United States. But we are not 100% back to where we were. But the dip that we experienced in the fourth quarter has mostly, if not all, recovered. And at least from what we can tell from the first 40 days or so of the year and probably hearing from our customers, we're back to where we were in about the third quarter. so correspondingly, on the medical side, there was an increase in visits. People had flu and they wanted to confirm that it wasn't COVID. So we experienced some growth in that respect in terms of flu tests. And you can see that information from the flu test manufacturers, a lot of them are providing that information. But again, we expect in January, February that the visits were relatively back to where they were before in the third quarter, say, before these -- the flu. So the businesses are relatively stable now, and we had a temporary dip in dental visits and I think, a bubble a little bit in medical. But on average, you average the amount, if you look at our internal growth, local currency is about 5% internal growth for the company. So -- and I think all things being equal, perhaps will be a little bit better in the first quarter. Hard to tell, but it's looking quite positive for the first 40 days of the year.

Stanley Bergman:

As it relates to international or Europe in particular, because we are the international in China and the other countries kind of cancel out although there's a bit of a positive impact in Brazil where we have a big market share -- but not big market share -- big business, I would say, big decent market share, too. I would say the trends were very, very similar. Of course, our medical business not material in Europe. So I would exclude that. It might even shift, we can give you data on that because it's so diffuse. But our dental business had similar trends to the United States and therefore to North America. What was your second question, sorry?

Stanley Bergman:

I'll have Ron answer the guidance question. I'm not sure whether the first 40 days really carried through for the full year or don't. Ron?

Stanley Bergman:

But when you flow through everything, Elizabeth, I think you -- we're pretty comfortable with our budget for this year, which contemplates, at the end of the day, high single-digit to low double-digit operating income growth when excluding PPE and COVID covet. So I think if you can see through the PPE and COVID, you see the business is pretty solid, and that's actually better performance than we've had in the past. And I still think that the whole management of this PPE and COVID tests, where we put the accelerator down generated over $2 billion or so in sales and pretty good profits has paid off because our customers are understanding that they can rely on Schein during challenging times and that the products we sell are generally or compliance with regulations and very often, they were buying products during this COVID period that had regulatory issues and so -- and quality issues. So I think the strategy has played out well in terms of focus on PPE and tests. And at the same time, we garnered quite a bit, I think, of core business, and that's reflected in our expectations for '23 in terms of growth of operating income.

Jason Bednar:

Maybe Stanley, I will start with you. A lot going on here, as you said. But maybe with the outlook, you got 1% to 3% of the top line. I know Jeff was digging in there on the organic growth. Core EBIT growing upper single, low double digits. It implies some pretty nice core margin expansion, and that would seem to fit with the historical trend line of the business. But maybe double click in on Jeff's question there. Wondering if you could comment a bit further on how you see the core dental consumables and equipment lines performing in 2023 in North America and International? And then are the drivers of the core margin expansion implied in your guide? Are those more growth or operating that you're willing to comment there?

Ronald South:

And Jason, with reference to your question on operating margin, yes, I do think that -- like we said, we believe operating income is growing in the high single digits, low double digits when excluding the drag from PPE and COVID test kits. And yes, that should imply kind of a pro forma operating margin expansion, as you inferred. I think it's a -- really shows that the benefits of having the kind of broad product portfolio we have of not just being a distributor but also having the specialty products, also having being in the medical business, also being in the technology business that we can we can continue to kind of offset some of these market conditions that have adversely affected us a little bit, whether it be in PPE or COVID test kits with the balance of the business.

Ronald South:

It's -- given that the product mix aspect of it would be primarily gross margin driven

Jonathan Block:

Ron, maybe just going on a similar path, the high single digit to low double digit 2023 non-GAAP EBIT growth for the core business. Can you talk to how much that benefits from the restructuring in the back part of 2022? I know you guys usually do restructuring. Just seems a little bit bigger than normal. And when we think about going forward, more importantly, is the high single digit to low double digit, a good representation of the business longer term once the PPE, COVID headwinds abate? And then maybe in the interest of time, I'll just ask both upfront. Stanley, on the implant side, the dental specialties, I know you guys had a very difficult comp. But I think just -- maybe in the back part of '23, implants might be flattish, call it, in to which '22 year-over-year to throw a dart. Just would love your thoughts on how that compares to market growth? And if you feel like you guys are still taking share there?

Operator:

The questioner has dropped off. The next question comes from the line of...

Operator:

Our next question comes from the line of Nathan Rich with Goldman Sachs.

Stanley Bergman:

Yes. On the side, on the scanners, I don't think we've seen the bottom yet in terms of mix change. I think the pricing relative to particular manufacturers may have stabilized. But there are entrants into this market that have very good products that perhaps we didn't even sell much of in the past that we're not carrying and selling. So it's more of a mix to lower-priced products rather than deflation of a particular manufacturer's existing products, although there could be some of that. As it relates to -- and by the way, I think we estimate about 20% to 25% of in the developed world have 1 of these devices, and we think that's going to be standard of care within the next couple of years. So we're very optimistic about units in that area And also these newer entrants that we're working with are doing quite well with us. As it relates to the manufacturer that has a supply chain issue, it's not a public company. I can't talk about it, but they have a new product. It's actually on the upper end that has done quite well. And that just goes to a little bit of a contradiction to what I said early on. For manufacturers that have unique technology, there is a demand for paying more, but that's not generally for the whole market. The whole market, the 75% of people that don't have a device, they're interested more in a lower-priced product that has enough features for them. But the one that some back order is on the higher end of features, and we don't expect that to resolve for 3 quarters.

Kevin Caliendo:

Can you quantify in any way the impact of the 3D printing that you called out in the release and on the call? Like in terms of numbers and market share and the like, -- because I know you've talked about it in the past, but I think this is the first time really called it out in the press release is impacting the business. And just as a follow-up, all this, and I appreciate all the color on the inventories and the equipment and IOS and the like. But your backlog grew in 3Q, and you believe you said it grew sequentially through the quarter. What is the expectation for equipment sales? And where does your backlog sit now relative to where you were at the end of 3Q?

Kevin Caliendo:

And if I can ask, Ron, a really quick follow-up. I just wasn't sure if I heard. Is the guidance include or exclude Dental Biotech? And what was the impact of that?

Stanley Bergman:

Okay, everyone Thank you very much for calling in. The message I think we want to communicate, I know we want to communicate is that our core business is in good shape. We expect decent internal growth rates, local currency, of course, in 2023, we'll cover this in more in detail at our Investor Day. We expect our internal growth -- sorry, our operating income to continue to grow quite nicely, high single digits, low double digits. And bottom line is the business is in good shape in markets that are doing well. There are nuances that need to be understood. We're happy to deal with that and further detail at the Investor Day. So if anyone wants to reach out, Graham, on the Investor Relations side, he'd be happy to provide further clarity on our remarks. So thank you very much. And hopefully, we'll see everyone on the call at our Investor Day in New York City, the following week. Thank you very much.

Operator:

Good morning, ladies and gentlemen, and welcome to Henry Schein’s Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session [Operator Instructions] And as a reminder, this call is being recorded. I would now like to introduce your host for today’s call, Graham Stanley, Henry Schein, Vice President of Investor Relations and Strategic Financial Project Officer. Thank you, sir. Please go ahead, Graham.

Stanley Bergman:

Thank you, Graham. Good morning, everyone, and thank you everyone for joining us on this call today. Our financial results for the third quarter of 2022 reflects solid underlying growth across our business and actually most geographies. We grew our non-GAAP diluted EPS compared with third quarter 2021 and this is despite the significant currency headwinds and lower sales of PPE and COVID test kits. Today, we are narrowing our 2022 non-GAAP diluted EPS guidance range, which reflects our confidence in the underlying strength and the stability of our business. Overall, we feel very good about the outlook for the company and remain highly focused on delivering on our both plus one strategy, which we’re happy to go into details during the Q&A period and as we continue to increase the sustainable profitability of the business. Importantly, current market demands in both our dental and medical businesses are generally stable and actually have been this way for a while. We continue to receive price increases from various suppliers, with additional price changes towards the end of the second quarter. The depth and breadth of the Henry Schein portfolio allows us to satisfy customer’s needs, and to offer alternative national brand and corporate brand products to price sensitive customers, thus positioning us to also protect our gross profit. This is reflective of a deep and lasting relationship we have with our customers and our suppliers. As we commented in the previous quarters, market prices for gloves continue to decrease. However, we believe at a reduced pace, while our unit volume for gloves is relatively stable, and this is driving lower sales and profits in the PPE category. Remember, the PPE category is largely gloves. Similarly sales and profit for COVID test kits have declined compared to the prior year. But pricing and volume for these products is also stabilizing. So generally, the PP and E market on gloves has deflated. Volumes are definitely stable. And test, COVID-19 tests are relatively stable from a pricing point of view and the volume point of view compared to the previous year. So we’ll of course, provide further information on the whole PP and E and COVID test category. Having said that, our business excluding PP and E and COVID tests did perform quite well as we will discuss in detail during this call. So let me start by reviewing performance highlights for each of our business units starting with the dental distribution business. Internal growth in local currency of global dental sales, excluding PPE was good. Consumable merchandise growth, excluding PP and E was solid and we were especially pleased with the excellent growth of our North American equipment business and continued strength in our global equipment order book. That’s the backlog. We have a strong growth in sales of traditional equipment during the third quarter. We are also experiencing continuing good demand for high tech equipment, an area where Henry Schein is a global leader and this is because dental practices look to secure and maintain a competitive advantage and the product offering available in the space has expanded and there is practically something for every dental practice. So this growth was largely driven by volume. As we’re seeing new innovation in digital dental equipment come to markets at somewhat lower average selling prices. But the market is significant. Big opportunity, lots of units and we have a very good offering. We believe that consumable merchandise sales growth in Europe was impacted this year because of summer holiday, because of the summer holiday season, as dental practitioners and patients took more vacation days than the previous year. But we also believe that our consumable merchandise growth in Europe will remain stable, leaning slightly positively. On the other side of the coin, other parts of the world in international growth could benefit from ongoing strengths in Australia, New Zealand and Brazil, which was partially offset by continuing lockdowns in China having said that our China business is relatively small compared to our total business. And North American equipment order book remains robust and continues to grow from last quarter and this is partly a result of quite a successful DS from our point of view. This event was held late in the third quarter compared to the previous year when it was earlier and we saw continuing demand for intra oral imaging chair side mills, 2D, 3D digital, extra oral imaging devices, 3D printing with a number of other manufacturers too and of course, all the CAT CAM lines work that well also from an audit taking point of view leading to probably a stronger than believe fourth quarter in a market that we’re doing quite well in generally. Lead times for additional equipment are reducing slightly. For the installations are still being affected by delays within office construction. So we expect our demand and our sales in the equipment area to continue to be strong. Our international equipment order book is also solid. So dental growth during the third quarter was aided by as investors know Midway dental acquisition, which strengthened our long standing presence in the Midwest of the United States, providing dental customers of Midway with access to an expanded portfolio of solutions. And of course, a highly competitive pricing. Midway builds an excellent reputation within the industry over the past 35 years and the vision of senior executives at Midway strongly aligns with the Henry Schein commitment to helping dentists operate a more efficient practice while allowing a focus by the dentist on delivering high quality patient care. We have successfully completed the integration relatively of the Midway dental business distribution business and the Condor dental that we recently acquired in Switzerland, that is on the distribution side is also largely completed from a integration point of view. So we continue to invest in our dental specialty portfolio and add new customers. Sales to DSO customers in the United States once again was good in the specialty areas and demonstrate success of our one shine strategic initiative. We are seeing some signs of economic caution in several specialty markets regarding high end oral surgery procedures. I would not say this is the case as relates to endodontic. Oral Surgery is some caution on the high end side of implants. And our orthodontic business is relatively small in a minute. But importantly, we believe that Henry Schein is well positioned to capitalize on these shifts, specifically in the oral surgery market as we offer a full range of dental implant options at various price points. So we think on the unit side, we will continue to do well and also on the profit side. So we had strong growth in our clear aligner business. Of course, let me remind those participating in today’s calls our aligner business is relatively small, but it is growing nicely and specifically with some DSOs. And again, as I mentioned, we are seeing solid demand for our endodontic specialty products, which is driven by sales of new products, particularly Triton irrigation solution and our EdgePRO laser system. Both of these have done well. But I would also say units of endo have done relatively well. And so we believe that our dental specialty business is doing quite well from a foundation point of view and we always need to look at comparable quarters in previous years trends etc and I think the business is in pretty good shape. Let’s move on to the technology and value added services. Our technology and value added services businesses had good underlying sales growth in the third quarter. Sales growth was impacted by the exploration of the modestly profitable but significant large government contracts. The largest business in the segment is Henry Schein owned software business, which once again posted solid sales growth domestically and internationally driven by our Dentrix practice management software it and Dendrix Ascend and entirely cloud based solutions. During the quarter, we surpass 5000 cloud based customers, and in more than 1,000 new customers year-to-date, and currently exceeding 100 new installations per month. We have launched entirely across the United Kingdom and in Australia, New Zealand as well over the past six months and remain on track to further geographic expansion in 2023. Ascend has been growing its customer base by double digit percentages, quarter-to-quarter. Notably, these cloud based practice management systems also drive traction for other Henry Schein owned solutions and for effect stickiness to the entire Henry Schein portfolio. We recently announced that Dentrix Ascend was selected as the exclusive cloud based practice management system of small brands, a dental service organization a DSO organization, with more than 700 locations, reflecting the competitive advantage of this product offering. So an important part of the BOLD one strategic plan is to press to place greater emphasis on these high growth, high margin products and services. Of course, no guarantees. But this is an area of focus for inorganic growth. And we feel that we’re on track to deliver on our expectations in that area with inorganic growth, although we will announce that any opportunities in that area or any deals in that area once those deals are closed, and there’s no certainty as to when that may be. So another bright spot in the organization in our performance, the sales growth in local currencies and our medical business continued, which continued to be excellent during the third quarter when excluding PPE and COVID tests kits largely pricing issues, PPE related to gloves, and tests kits just relating to demand for the test kits which we’ve discussed on several calls in the past, our expectations were relatively in line on the test kits, specifically. So we are continuing to deepen our relationships with existing large IDM customers, while nicely growing our other medical businesses. We are especially pleased with strong growth in our government sector of schools accounts and we continue to make solid progress in gaining business from independent physicians although several years ago this group reduced. There is still at the reduced the number of independent physicians, it is relatively stable group today. And we continue to gain market share within that group. And post admitting the smaller medical groups are also areas where we’re adding customers and market share we believe. Our focus on equipment, pharmaceutical products and point of care diagnostics remain bright spots in this business, although I must say the whole of the medical business was doing well. Of course, the volatility of sales in COVID-19 test kits which went down dramatically in earlier quarters has moderated but the post at a lower level of sales and on the PP and E glove side the volume is stable, but the pricing is still somewhat unstable but less volatile than we saw in earlier quarters. Third quarter sales growth had a challenging prior year comparison, when patient traffic to physician office says was bolstered by surge in Delta variants, and that tough comparisons will continue in the fourth quarter. Yet we expect medical sales growth excluding PP and E and tests to continue at healthy levels, reflecting volume gains, some price increases but generally growth in our market share in this area, this important area for growth for Henry Schein. Most experts are expecting a high coincidence, the high incidence of flu this year. The illness in the United States due to winter experience in the southern hemisphere. We would expect strong flu season to drive patient visits to physician offices, and in turn increased demand for a host of products we provide specifically tests, the traditional point of care test for flu and other diseases including a multi COVID-19 influenza diagnostic test kits. So with that overview on our business, I will turn to the call over to Ron, for more detailed review of our financial results. Ron, please.

Stanley Bergman:

Thank you, Ron. So before we open the call to questions, I would like to take a moment to note the passing of our board director, Diane Rico in August. Diane was an internationally known authority on aesthetic and restorative dentistry, as well as an early pioneer in digital dentistry. She served on our board since 2014 and brought a valuable perspective to Henry Schein. And was a wonderful human being. I would also like to spotlight that early last month Henry Schein was named to Fortune magazine’s annual Change the World list. We recognized for our leadership initiatives to advance health equity for individuals with disability, and in particular our engagement with our key stakeholders in support of this work. Our CSR report, which was released in mid August, aligned with two of the most common disclosure standards FASB, GRI. This is important milestone as we prioritize transparency and accountability in our ESG work. So in conclusion, while there are a number of external factors at play, specifically as it relates to PP and E, and test kits, and FX our BOLD plus one strategy remains our North Star. And our team is executing according to plan. As a result, we feel very good about our position in the markets we serve and generally, the team’s focus on priorities and delivery. So with that review of our third quarter financial results and some commentary on our future I like to open the call to questions. Operator, please.

Jeff Johnson:

Thanks. Good morning, guys. Can you hear me okay? Good morning, and congratulations on the quarter. I guess a two part question. They’re not really connected. But I want to shove both of them together because I do want to ask both questions. But the first one Ron just on the gross margin up 110 basis points year-over-year. Could you help us bridge how much FX was weighing on that gross margin versus how much maybe price increases in the lower PPE and COVID testing might be offsetting and helping? Those are the three big variables outside of just kind of normal operations that I think we’re all trying to understand what the impact is on the gross margin side. And then if I go back to our September health care conference, Stanley, I think you and Ron had made the comment that I think you and Ron had made the comment that you would provide at least some framework for 2023. I’m not really hearing a lot of that. And I know and markets are a little uncertain right now. But if I look at the street, around the street as modeling 6% EPS growth next year, we’re admittedly closer to flat year-over-year in our model just can you help us kind of peg between where the streets at that 6%, where maybe I’m modeling closer to plant just how to think about maybe the ups or downs from either of those numbers? Thanks.

Stanley Bergman:

Jeff, let me just highlight. We can’t give guidance now. But in general, we’re feeling pretty good about our core businesses. That is our distribution businesses in the United States globally. Our specialty businesses, although I would say in the implant field, there is a greater demand at this moment for the lower priced also, premium implants and software businesses and other value added service businesses. Having said that, the price of PPE, namely, primarily gloves is highly volatile, although we think of stabilizing and test kits, we think have stabilized from the latter the last few quarters. But I think it wouldn’t be appropriate right now to provide guidance for 2023 taking into account the volatility in PP and E and I wish we could do more, but I think it would be irresponsible to try to predict those areas.

Elizabeth Anderson:

Hi, guys, thanks so much for the question. Stanley I think you sort of alluded to and in Jeff’s question a little bit. But if we think about sort of October and sort of the beginning of the Q2 results, how would you say the trajectory compares to the third quarter? And then just in general, on the overall visibility of the business now right now, obviously, one question many investors have been asking is, has there been ex-COVID and each, like broader changes and how you sort of think about the visibility of the business right now. Thanks.

Operator:

Our next question comes from the line of Brandon Vazquez with William Blair. Please proceed with your question.

Stanley Bergman:

Well, when you say investments, let me deal with the M&A side. As I noted earlier on, deals are not done until they are signed and announced. But we have a view that we wish to spend $300, $400 million a year on M&A. We’ve done approximately that on average. Some years it’s been a lot higher. Last year was a bit higher. During COVID, it was a bit lower. But we want to do, we want to continue to invest in M&A at that kind of a rate. The pipeline is relatively full. Specialty products is an area of focus. We’ve already announced two fold ins on the distribution side. But I would say it’s the high margin high growth areas that we’re most interested in. it doesn’t mean we will not continue to fold in businesses, expand our geography on the distribution side. Again we remain quite optimistic in that the pipeline is full. But we can’t commit to closing anything. As it relates to investments in the business, I would ask Ron, to cover that. We have specific areas where we’re focusing on reducing expenses but other areas where we going to move investments towards that we believe will impact the long term, sustainable profits of the business. Ron on the investment the business, your thoughts?

Operator:

And our next question comes from the line of A.J. Rice with Credit Suisse. Please proceed with your question.

Stanley Bergman:

So good question. There all been good actually. Let me begin with the end. We did see some national brands some a bunch of increases at the end of the second quarter by some manufacturers. And I would say that there’s a growing awareness amongst our customer base of manufacturers that have increased significantly, multiple times, and those that have held their prices back. So there’s a much more acute understanding of price increases in the marketplace now than I would say, six months ago, two or three quarters ago. There’s nothing, in very little that is so unique in dentistry, that a customer can move from one manufacturer to another. Obviously, certain brands provide more comfort, as brands generally do. Statements generally make about branding than other brands. So generally, we’ve been able to pass on price increases and manufacturers have not been supportive of that. In other words, they may not want to recognize the chargeback. It’s very rare. I can’t think of too many manufacturers, but that’s not a good. It’s generally the norm in medicine. It’s been the case in medicine for two decades. There are a couple of well, one, maybe one or so manufacturers that are in dentistry that are having an issue with that. But generally we’re able to pass them along and were we not meant I would say the customers are working with us and where there isn’t a national brand option we do offer our private brand and some customers look to private brands in any event. So it’s not a crisp answer in that is not one shoe that fits all. But generally we’re able to move price increases along. And the suppliers are understanding where manufacturers are going further than others, that there are options, whether it’s with other national brands, big ones, smaller ones, or our private brand. So I believe we have very good relations with our customers, with most of our suppliers, and a managing to this in a rather effective way. Our margins, gross profit has done okay. It’s not only because of this particular issue that we describe, but it’s also a movement towards a higher growth, higher margin businesses.

Stanley Bergman:

Yes, I think we mentioned our order book is stronger the end of this quarter, was stronger at the end of this quarter the last quarter. It’s a combination of areas. Some of it is the CAD CAM to large extent, the digital side was because the -- meeting was in a different quarter. That’s to some extent, not a large extent, but some of it. So generally because we did have a pretty strong quarter, both here in the U.S. by the way, international relative was held back a bit in the percentages because of prior numbers. But generally the quarter was good. And the buildup went up. Again, some of it because of then supply will moving around. But in general, it’s good. On the traditional equipment, if a customer really needed something we could supply them. If there wasn’t a rush, we asked them to wait. I would say the challenge was U.S. traditional. I would say that the manufacturers in that two major manufacturers in lights. One has not had any back order issues now for a while believe they treat us with the priority. And the other one also treats us very well that improve the capacity but it’s still backlogged. The bigger issue is less availability of the products and more the delays in the sites of installation whether is I think, in line with the general economy, labor shortage, delays by contractors and so we haven’t been able to necessarily deliver. But I think these are all marginal issues because generally equipment from our point of view is strong. Some extent is probably from gaining market share. But in general our equipment business here in the United States and globally is quite strong.

Jon Block:

Great, thanks, guys. And good morning. Appreciate the time. And maybe just two quick questions. First, on the dental consumable side. It seems like your LCI growth premium between specialty and basic consumables ex-PPE has compressed and Stanley I think you talked about some implant headwinds. Should we expect that call it that ratio compression, I guess to continue in coming quarters and if so, why Stanley? Is that just sort of teasing out some shifts going on in the dental industry of maybe that move back to call a bread and butter dentistry or more hygiene dominating the chair versus higher end procedures and then I’ve got a quicker follow up and equipment. Thanks.

Jon Block:

And maybe just a follow up. And I’ll try to push you a little bit. Your dental equipment, comments and continue to, I think be pretty upbeat overall on dental equipment. And that’s contrary at least just to arch axe and it’s telling your conviction that this is true, call it end user demand is not a function of a catch up from the supply issues of six to 12 months ago. And do you think that equipment strength continues into 2023? Thanks for your time, guys.

Operator:

And our next question comes from the line of Erin Wright with Morgan Stanley. Please proceed with your question.

Stanley Bergman:

Yes. That’s also another good question. We don’t get many questions on the medical business which we think is a great franchise. We’re doing very well with IDNs. Now IDNs generally use other map distributors, big, big hospital distributors for their hospital acute care needs. But for the ultimate care needs, the physician practices primary but other ultimate care sectors other than long term care which we are not in generally, we are viewed as an important player. We don’t win every contract, but we win a lot. It’s based on our service, our relationship with suppliers, efficient charge-back systems that we have in place with suppliers that work very well with us on that side of the house, where there’s been charge-backs for example, in place for years as a way of doing business and we just do it very well on the ultimate care side, particularly the for physician side. So with the large IDNs too many new ones, we have won a few in the last few years, but that have switched that often. Having said that, there’s a growing part of the IDN business that’s moving from the acute care setting into the ultimate care specifically, physician ASC side of the provider side. And we do well with that. We also made a comment that our other medical businesses are doing well. Government business we do quite well in that area. We have some unique businesses in that area. And they’re not huge, but they’re doing well. We’ve also indicated that our sports medicine, there are parts of the EMS business that we’re in that dwell podiatry the smaller practices, the smaller group practices, these are all areas where we have folks directly focused on these businesses that are doing well. So I think we do well in this marketplace. We have scale. And we have sophisticated supply chain. I’m not sure if anyone does it better than us from a logistics point of view, combining med surg, pharmaceuticals, equipment, installation, the whole package all in one from one distributor with formularies charge-backs that really work very well.

Ron South:

No. Hi Erwin, it’s Ron. I would say that it’s more the latter from what you just said. We’re not anticipating any other significant changes in the market. We’re just trying to better digest what’s happening on PPE and the COVID-19 test kits. I mean, we’re happy with how the business is doing. We’re happy with the quarter. We faced a $260 million revenue headwind this quarter in terms of decreased revenues in PPE and COVID test kits and in grew EPS from, non-GAAP EPS from $1.10 to $1.15. So, we’re happy with the core business, but we need to get it, we want to better understand the whole dynamics of what’s happening with PPE and COVID test kits we’ll be able to provide, I think detail that will be helpful to people when we include 2023 financial guidance with our Q4 earnings release.

Jason Bednar:

Hey, good morning. Thanks for squeezing me in here. And congrats on the results today. Yes I’ll go with a two partner here. And I’ll just ask both of them upfront, they’re both follow ups to prior questions. So maybe with the forward looking question here, and I’ll take a different cracker than what Jeff did on 2023. Are you willing to commit at all to earnings growth for next year? Or is there any I guess any reason to think operating margins don’t expand in 2023 given the restructuring that you have underway? And then building on Jon Block’s question, if we’re thinking about the sales contribution, shifting maybe on the margin away from the more profitable specialty areas, those parts of the business softening up a little bit, it sounds like. Can you reconcile or fill the gap and how profitability and margin expansion is still remaining that solid as you see it for 2022 in spite of this dynamic, thank you.

Stanley Bergman:

We still highly bullish about high growth, high margin businesses. There may be some volatility as Ron indicated, but generally, the oral surgery business is a good one. We believe growing our market share globally. And endo is very strong. Obviously, some volatility in brackets, and aligners seem, with a small for us seem to be also positive area. But I wouldn’t read any anything into one or two or three quarters. I think we’ve shown that long term our businesses are growing and we expect commitments to add in organic growth to that.

Stanley Bergman:

Thank you, operator. Thank you, everyone, for your participation. I think we’ve said it a couple of times today, many times, we have confidence in our core businesses. We just don’t know the degree of volatility in the PP and E, primarily gloves, and the COVID test area, the rapid test area. But excluding that we feel strength, stability. We are feeling good about our dental consumable businesses around the world, the equipment business. We are feeling good about our medical business and our value added services businesses recovered specialty. So obviously, we’re in a volatile times. But we’re also focusing on our expenses as we’ve announced in the past relative to our restructuring and this is something Henry Schein has gone through many times in the past, have a good management team in place, focused on the priorities at the center, which is a BOLD plus one initiative. So with that in mind, thank you all again for calling in. We’ll speak to you at the beginning of mid February, the longer period, mid February, but I think we’ll be at a couple of conferences will be two or three conferences. Right. And, again, if anyone has any specific questions, please feel free to reach out to Ron, to Graham and Ron and thank you very much. Since we won’t have another one of these calls, have a safe holiday season and thank you very much for your interest in Henry Schein.

Operator:

Good morning, ladies and gentlemen, and welcome to Henry Schein's Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session [Operator Instructions] And as a reminder, this call is being recorded. I would now like to introduce your host for today's call, Graham Stanley, Henry Schein, Vice President of Investor Relations and Strategic Financial Project Officer. Please go ahead, Graham.

Stanley Bergman:

Thank you, Graham. Good morning, everyone, and thank you all for joining us. Today, we are pleased to report record second quarter financial results that reflect a good underlying momentum in the business and execution on our strategies. Sales were particularly strong in our technology and Value-Added Services businesses and our Medical businesses. Although there were some near-term headwinds in the quarter due to COVID infection rates, among other factors, our solid operational execution this quarter, and our results demonstrate the strength -- the underlying strength of the business. In June, we saw COVID-19 infection rates, which we believe contributed to a -- so there was a rising COVID-19 infection rates, which we believe contributed to a decline in patient traffic. This is particularly so in our dental business. We expect patient traffic to increase again when the infection rates moderate, and this is, to some extent, quite regional. While we are maintaining our full 2022 full year guidance for EPS for 2022, and that's the guidance range of $4.75 to $4.91, we are adjusting our expectations for full year sales growth to reflect changes, which include continued strengthening of the US dollar and declining demand for COVID-19 test kits. The company's management team is laser focused on executing our BOLD+1 2022 to 2024 strategic plan priorities, thereby, providing our customers with an exceptional experience, delivering differentiated solutions that make our customers practices more successful and improved patient outcomes, leading to delivery of our financial goals, as we've set out in 2022 to 2024 strategic plan. We believe that the long-term trends across our end markets provide a solid platform for us to deliver on our goals. In short, Henry Schein remains well-positioned to deliver consistent, sustainable profit growth and to create value for our shareholders as we have for almost 28 years as a public company. Before we turn to a business update and the progress we have made in executing on our strategic growth initiatives, I would like to touch on macroeconomic challenges in general and discuss Henry Schein's ongoing efforts to be best positioned to succeed in this dynamic environment that we're now all living through. First, concerns with a potential economic downturn. Given Henry Schein's broad portfolio of medical and dental products and services, we are an important partner to health care providers treating their patients and keeping communities healthy. The market Henry Schein serves have weathered past slowdowns quite well. During the challenging economic times, consumers continue to need services from office-based health care practitioners, it's both medical and dental and from the alternate health care sites that we service. That said, we are working to mitigate the future impact of any potential economic slowdown on our key stakeholders, including advancing efficient and low-cost supply chain solutions and practice management solutions in general, such as patient demand generation services and generally those services that can help the practitioner operate a more efficient practice, so that they can provide the best of clinical care for their patients. We're announcing today a restructuring plan that is focused on funding the priorities of our strategic plan, in other words, moving resources to the areas we want to focus on, but at the same time, streamlining operations and other initiatives to increase efficiency. Ron will speak more about this topic in a moment. Second, we continue to work with our suppliers to limit the impact on inflation on price increases for product supplies, as well as the cost of transportation of those goods. During the second quarter, we estimate the price inflation for non PP&E merchandise from brand manufacturers to have ticked up to approximately 3%, it could in fact be slightly lower. We've -- I think done a good job working with our manufacturers on this. And the inflationary impact on equipment sales, in other words, other than non-PP&E merchandise. The impact of inflation on our equipment sales was relatively insignificant. Of course, on PP&E is significantly down, because they've got the deflation in glove prices. When customers express price concerns, we believe that given the breadth of our offering, we are typically able to provide a lower-cost national brand solution or corporate brand alternative, allowing us to maintain our margins, but also helping our customers deal with inflation. So -- with the impact of inflation on their practices. So third, while global supply chain pressures have been relatively stable over the past three quarters, our product portfolio, which we believe is the industry's broadest. Once again, affords us a competitive edge, as it is more easily enables substitutions when a particular product or brand is in short supply. We continue to expect that supply chain issues for traditional equipment will impact sales through the year-end. That said, the situation appears to be stable and probably improving, with some of our suppliers, particularly on the traditional side, will expand their capacity and are now providing us with much better service than three or four months ago. And I say better service, I'm talking about on fill rates. Our strong order book on the equipment side across the board, actually, in all product categories globally -- and that backlog continues to grow and do well, supports good equipment sales over the next few quarters. Fourth, Henry Schein is well positioned to manage rising interest rates. Our low level of borrowings means that our interest expense is not significantly affected by interest rate changes. And at the same time, most of our current debt is at a fixed interest rate. The primary area of our business that could be impacted is Dental equipment, as those purchases are typically financed. Having said that, it's important to bear in mind that interest rates are still relatively low from a historical context. And our equipment order book remains strong and is tending to get stronger. Last, regarding -- and this is last of our macro trends, regarding the shortage of labor and skills, Henry Schein has always been an attractive place for talent to build a career. The team Schein values and philosophy is an attractive place for talent. Of course, we are continuously evaluating and supporting our pool of human capital to make sure we would say our existing personnel while attracting those skills we need. We believe our internal talent pool is better than ever and will be instrumental in Henry Schein executing on our growth plans. Talking about growth plans, our strategic plan addresses how we will stay ahead of the fundamental shifts affecting our customers. There's a significant amount of change taking place in the dental and medical professionals, professions, and we are addressing these plans through our strategic -- these dynamics through our strategic plan. These plans include the goal to accelerate the adoption of digital technology not only within the company, but also helping our customers digitalize and there's a great pressure on our customers to digitalize in their practice, and we're providing excellent handholding consulting services and, of course, an excellent offering of digital products to help our customers advance the digitalization of their practices. So in this connection, yesterday, we announced three new senior executive strategic roles designed to further enable us to fulfill our strategic plan. We are forming three new teams led by experienced leaders, actually exceptional leaders, who will work together to advance digital technology to create an exceptional customer experience with Henry Schein and accelerate the development of new and complementary technologies and platforms, of course, as I noted to drive efficiency in our customers' practices while positioning them to provide better quality of care, but at the same time also to drive efficiency within Henry Schein. We expect this will enable our sales team and customers to collaborate together to harness this technology. These three teams we've set up, each one led by an outstanding executive will enable our sales teams to provide even better connectivity to our customers as our customers go through this massive change in running their practices driven through digitalization of the management systems and of course, the clinical support. The first is Leigh Benowitz, who has been named Senior Vice President and Chief Global Digital Transformation Officer. Leigh, a member of our Executive Management Committee is reporting to Chris Pendergast, our Chief Technology Officer. Leigh will be responsible for enabling the delivery of digital sales by developing our e-commerce infrastructure capabilities and we'll continue to lead the implementation of our global e-commerce platform, GEP, which is well underway, and Leigh has played a key role in getting us to where we are and will lead us to the successful implementation of GEP. Leigh is the terrific executive. There is a press release that was issued this morning talking about these Leigh’s – Leigh and Trinh, I'll speak about it in a minute and another press release about Mark Hillebrandt, and I think you'll read those, and you'll understand why these three executives are so important to the future of Henry Schein, and at the same time, appreciate what they've done and what they're going to do. The second is Trinh Clark, who has been named Senior Vice President and Chief Global Customer Experience Officer, also a member of our Executive Management Committee. And Trinh reports to Brad Connett, CEO of our North American Distribution Group. Trinh will be responsible for designing, developing and implementing a consistent customer experience and brand marketing strategy globally. Well, the strategy to a large extent are developed and Trinh will take it down to much more detail and be responsible for implementation and working with the entire organization on driving consistent customer experience, branding, of course, given the change in the environment from a technology point of view. Trinh will also continue to lead our technology enablement and strategic marketing teams in North America. And finally, Mark Hillebrandt has been named Vice President and Chief Digital Revenue Officer, also reporting to Brad. Mark will be responsible for engaging customers online through our e-commerce platform to drive digital transactions, while also securing a healthy pipeline of digitally sourced teams -- leads -- sorry, digital source leads and new prospects to be delivered to our field sales organization. Mark has done a pretty -- has done a very good job in setting us up with respect to digital leads, making shopping experience from a digital point of view much better. And in that context, working closely with our sales organization who in the end are responsible for driving sales and through our consultative selling methodology that's worked so well for the company. We're also making very good progress on our one distribution strategy contained in our strategic plan. In other words, operationalizing one distribution, dental medical. In May, we announced the appointment of Dirk Benson as Chief Commercial Officer of our North American Distribution Group. Dirk joined Henry Schein following a distinguished career with Medline Industries. Also reporting to Brad Connett, Dirk is responsible for the entire dental and medical distribution group's, customer-facing organization in the US, focused on helping us to advance our goal of exceptional customer experience, increasing efficiency and sales growth in these businesses. So that's a little bit about the implementation of our strategies. So let me pivot a little bit now to provide some color on the performance of each of our business units, starting with our dental distribution business. The second quarter growth in our global dental business, once again was driven by strong global equipment sales as dentists continue to invest in their practices, consumable merchandise internal sales growth in local currencies, excluding PP&E and COVID-19 related products and Ron will give specifics, was impacted by an increase in patient appointment cancellations and staff shortages, which we believe were related to COVID-19 infection rates. Lower sales of PP&E products in the quarter were mainly a result of the decline in glove prices. Glove prices reached a peak at the end of the second quarter 2021 and have been coming down deflation. And so, we expect pricing will continue to be a headwind for the next quarter or two, albeit to a much lesser extent. So we had these factors taking place in the second quarter, impacting our dental distribution, internal growth rates. One, of course, was the appointment, cancellations and staff shortages and the second is deflation with respect to glove prices. Now internal sales growth in our North American Dental Equipment business, as noted earlier, reflects continued demand in both traditional and digital restoration categories, both of them. Our equipment results also benefited from sales to some of our larger DSO accounts, we expect we'll continue to be investing in their practices. And as I noted earlier on, our equipment order book remains solid. Our International Equipment sales were strong to similar trends. Two fast-growing areas in digital dentistry are digital restorations and that's the traditional scanners, the chairside, CAD/CAM, et cetera, and a rapidly growing new area, which is 3D printing. Based on significant investments we have made in both of these areas over the years and our strong relationship with our suppliers, we believe we offer our customers a differentiated digital product offering across multiple brands. And we expect these categories will continue to grow well for us into the future. We have, of course, a goal of continuing to expand our geographic footprint and we recently announced the acquisition of Condor Dental. Condor Dental services, dental general practitioners, specialists and laboratories in Switzerland. The one market we don't have a strong general presence, although, we served the Swiss dental market since 2004 through Camlog, our leading oral surgery business, and Condor Dental expands our presence in this market, with a full service dental distribution offering. Now turning to dental specialty and technology value-added services. I'd like to touch upon the progress we are making with our goal of building complementary high-growth, software, services and specialty products and the shift in our corporate profit contribution to these higher-margin products. We are -- we have invested in good properties. We expect to continue to invest heavily in this area. We have great management teams and are very enthusiastic about the potential. So our high-margin technology value-added services and specialty products are growing at a good pace and now represent about 40% of our total sales, but more important, 36% of our total operating income. Of course, there's no way to determine exactly which quarter these numbers will go up, but we're quite confident that we have a team in place that will drive these high-margin businesses with in-demand products towards a greater percent of our operating income. So if we just look at the sales of our Dental Specialty products, they were very solid during the second quarter and were driven by BioHorizons' oral surgery products in North America. This was partially due -- and by the way, in Germany, which is a big market for us in the implants, COVID was quite serious in the third and second quarter, but actually seems to have picked up again in July. This was partially due to – BioHorizons' growth was partially due the growth of our national DSO customers, but also across the customer landscape, including midsize and smaller practices as we are seeing implants becoming adopted as a standard procedure in overall dental care. And I think we have outstanding marketing materials, sales force and, of course, backed up with great products. So we expect this trend to support continued growth. In this connection, we are pleased to announce the partnership between BioHorizons, Camlog and struck here plus [ph] tissue membrane. This product has demonstrated positive qualities for tissue regeneration, and we are excited to be able to further differentiate our offering in this area to our customers. BioHorizons-Camlog has exclusive global rights to this product in the dental field and a long-term supply agreement with AutoCell [ph], and we expect to launch the product towards the end of the third quarter. Within our endodontic products offering, we showed good growth and have been quite successful and actually quite excited with our recently launched EdgePRO irrigation laser. In the second quarter, we had good new console sales, and we're starting to see sales of consumables from our first placements in the first quarter. But it's good to see the positive feedback from customers and how well this product is being received in the marketplace. We're very, very excited about this technology. Our priority in the orthodontic business is the Reveal Clear Aligner product. Sales in wires and brackets were not very strong in the second quarter. I think this is a market issue. Having said that, we've had quite a bit of success with our Reveal Clear Aligner, specifically in the DSO market, the launch of our Studio Pro 4.0 software is giving the Reveal Aligner business quite a boost. So we remain quite enthusiastic about our three specialty areas that is oral surgery, implant bone regeneration products. Our endodontic business and our orthodontic business specifically as it relates to the Reveal Clear Aligner offering. So now Technology Value-Added Services, we are pleased with the growth in our Technology and Value-Added Services businesses. We once again, North America and International sales increased by double-digit percentages. Henry Schein own sales growth accelerated compared to the prior year growth, and we are seeing healthy demand from our national DSO accounts for these solutions, but also add for the Dentrix Ascend and Dentally cloud-based solutions, some are going to DSOs, but general reception from GPs and specialists, small and midsized practices is also very good. Both generally entirely showed solid increases in the number of users. In fact, one -- Henry Schein One added more than 400 new cloud customers during the second quarter. Meanwhile, our total number of cloud customers is up 20% over the past six months, which demonstrates good momentum within this part of the business, again, the movement of digitalization towards the cloud. We continue to invest in product development and customer service. And these impact -- these investments that impact the second quarter margins. We believe these investments are providing a solid growth driver for the business. There are other services in this area that we report on, financial services, a number of other publication, services, et cetera. But we are particularly pleased with the poor performance of ESS, the revenue cycle management solution that we acquired last June, a great complement to the business, in fact, helping our field sales consultants, provide better consulting services, more relevant consulting services to our customers on the dental side. Turning to our medical business. This business has performed well over many years and again, had another excellent quarter with double-digit internal growth in local currencies when excluding PP&E and COVID-19-related products. During the second quarter, we had strong sales in point-of-care diagnostic tests, including flu tests as well as generic drugs and equipment, which is all a good sign. Patient traffic was bolstered by higher numbers of visits for seasonal influenza, which is a departure from prior years when the flu season typically ends during the first quarter. Ambulatory surgical centers are still not up to where they were pre-COVID, but I think we're moving in the right direction. Having said that, the rest of the business is very solid in the medical arena. So with that overview of our business and the environment, in which we operate. I will now ask Ron for a more detailed review of our financial results. Thank you. Ron, please.

Stanley Bergman:

Thank you, Ron. Just a couple of very brief comments on senior leadership. A couple of updates. As of July 1st, Gerry Benjamin retired from Henry Schein as EVP and Chief Administrative Officer and he stepped down from a Board when his term expired in May. Gerry has been in the company for 34 years. He will be continuing as a consultant and was an invaluable as we grew from a domestic mail order business of a couple hundred million dollars into global full service products and services business with nearly 22,000 team Henry Schein members and operations in 32 countries. We are fortunate to have a deep bench, and with Gerry’s retirement Michael Ettinger became EVP and Chief Operating Officer, reporting to me. In addition to Michael's Corporate Affairs responsibility, responsibility has assumed, responsibility for HR, IT and supply chain with each of these three functions is led by highly competent, long standing Henry Schein executives. Michael joined the Henry Schein in 1994, serving most recently as Senior Vice President of Corporate Affairs. The creation of the CEO position is a result of growing size, scope and complexity of our operations. And I'm confident that Michael will be successful in his new role, together with the leadership in general about business units, four to five big business units and the rest of the executive management team. Barry Alperin also retired from our Board of Directors at our Annual Stockholder Meeting in May. And I would like to take this opportunity to thank Barry for his 26 years of exceptional service and our board, having joined in 1996 shortly after the company's initial public offering. So operator with those comments, we’re free to answer any questions.

Jason Bednar:

Hey, good morning. Thanks for taking our questions. Stanley, if I could start on the patient staff absenteeism you referenced in impacting dental patient volumes. Is there any way you can quantify what you think that impact may have been in the quarter? I think you said it was mostly a regional impact. But could you compare those regions that were less impacted to those that saw the volume effects? And then, is it the real time trends that you're seeing with patient volumes that gives you the confidence here today to anticipate a patient volume recovery here in the second half of the year?

Jason Bednar:

Okay. No, that's helpful. Appreciate that, Stanley. And then, Stanley or Ron, just on the guide, reaffirming the guide here today. Great to see you stick with the outlook of extending non-GAAP operating margins here 20 to 25 basis points. Given where we're at year-to-date, that does imply a decent step higher here in the second half of the year in order to hit that guide. So the margin comps do get easier, so that helps. But maybe can you speak to the margin visibility you have in terms of cost controls versus how much of that margin expansion that’s in the guide is volume growth or business mix dependent?

Jason Bednar:

All right. Very helpful. I’ll hop back in queue. Thanks, guys.

Andrew Brackmann:

Hi, guys. Good morning. Thanks for taking the question. Stanley, I want to go back to the comments you made in the prepared remarks around some of the customers, I guess, pushing back on pricing increases and your ability to sort of find alternative solutions. I guess just broadly speaking, is this something that, I guess, the majority of your customers are asking for at this point, and we should start to be thinking about sort of a multi-quarter revenue headwind associated with that, or is this less of the majority at that point? Thanks.

Andrew Brackmann:

Okay. Thanks for that. That's helpful. And then I guess just on the staffing commentary around sort of dental, now recognizing, I guess, this could be a little bit longer of a headwind than we might be anticipating here. Can you just sort of talk about some of the longer-term opportunities that this dynamic might sort of create for Schein with your expansion into some of the services and technologies -- and maybe, I guess, just part of that, can you talk about some of the specific investments that you're going to be making here throughout the balance of 2022? Thanks for the questions.

Operator:

Thank you. Our next question comes from the line of Jon Block with Stifel. Please proceed with your question.

Stanley Bergman:

Yes. It's a very good question. I believe equipment is going counterintuitive to the way one would think in a challenged economy. Traditional equipment is doing well. I think -- the consumer is expecting dentists to have a good-looking modern chair and the dentists are understanding this. So they're investing in their practices. I would say, the whole restorative area is doing extremely well. That's the digital restorations particularly, whether it's scanners, full chairside and now, of course, 3D printing. All of these are in demand and specifically as it relates to interoperability with some of our software, this is all boding well. I would say, the imaging side, the units are relatively strong, not great. 2D/3D, it's not terrible, but there is some inflation in that area. And there are some shortages in terms of chips, they're holding back availability. I wouldn't say it's critical and there's options to move from one brand to the other. So what I just said to you is not a North American issue only opportunity, but this is global, where our equipment demand continues to be good. The whole traditional equipment supply chain issue was a US, North American issue, not a European issue at all. And so, on both the traditional equipment side and the restore -- digital restoration side, demand is very good in this country, North America, Canada and globally. We're quite --

Stanley Bergman:

-- and 3D printing is also a newly emerging opportunity. So we're very optimistic about our equipment business.

Ron South:

Well, I would say, at the operating margin level, with PPE, we're still getting -- well, let's first talk about gross margin. With PPE, we're getting, I would say, a gross margin that we're happy with. I think what happens is that, as that pricing of PPE goes down, it obviously results in a lower sales number. So it puts a little bit of strain on operating margin to the extent we have fixed costs as operating expenses. I think COVID test kits, we are seeing a little bit of pressure on pricing there, but we have seen some stability in that -- in the demand for COVID test kits. We had a fairly consistent run, kind of, weekly run rate in the back half of the second quarter that has continued into July and then I think it has perhaps even improved slightly in July. So -- and that's all taken into consideration when we provide the guidance on that number. But I do think that -- from a gross margin standpoint, kind of going back to your original question, we feel like we're getting a good gross margin on PPE. But at those lower sales dollars, it does put a little bit of pressure on the operating margin.

Jeff Johnson:

Thank you. Good morning, guys. I've got some background noise here, so I'll just ask two questions and then go back on mute. But first question, just on the North American consumables growth rate this quarter. Stanley, I think you're talking about some COVID headwinds during the period. You had Omicron headwinds last quarter as well. So how do you just bearing out the impact of COVID versus some of the inflationary pressures and just consumer pressures we've seen here over the last couple of quarters or last couple of months, what gives you the confidence that it's COVID not macro? And then number two, I know you're doing a great job trying to hold pricing in line for your customers. I think your customers absolutely appreciate that in our checks anyway. How are you thinking about pricing maybe into 2023? It might be early, but I know manufacturers are struggling given that dental fees haven't gone up for quite a while on how much they might be able to ratchet pricing up again next year. Thank you.

Operator:

And our next question comes from the line of Erin Wright with Morgan Stanley. Please proceed with your question.

Stanley Bergman:

Yes. I mean I would say that one reason we stayed with the $0.16 range is because of that macro uncertainty that you've referenced. I think that we've kind of played out different scenarios, whether it be in terms of additional inflation, whether it be from additional geopolitical concerns and we did fall within that range of guidance that we provided. So it is taken into consideration for the balance of the year that there could be further deterioration, but we feel like we have the plans in place to try to mitigate that.

Operator:

We have time for one last question coming from the line of A.J. Rice with Credit Suisse. Please proceed with your question.

Stanley Bergman:

So I think you're referring specifically to the ambulatory surgical centers. We were close to 2019 numbers. I can't remember a couple of quarters back. We've gone back a little bit. But generally, ASCs are quite strong. And we are gaining market share in that area for sure. We have a lot to offer. I think ASCs are also looking at ensuring that the supply chain is efficient that they're not having too much wastage product, exploration dates on product issues, and we help for those kinds of things. So I would say, overall, that's a good area. But we're in a number of alternate sites, whether it's oncology, renal centers. And for us, these markets are all doing quite well. I do believe having said that there probably is going to be some pent-up demand for elective surgery in the ASC space that will go to market. I think people will want these procedures. And so as COVID that take us down here in the United States.

Stanley Bergman:

That's a very good question. There's a clear understanding amongst all the office space practitioners, small to the largest that efficiency is critical. They're going to face reimbursement pressure to some extent, they're facing and now. I think for them, in many respects, labor costs have increased more than reimbursement. So they're turning to our sales force for advice and how to manage the practice and, of course, how to ensure that their clinical standards increase with access to the latest technology. And on the dental side, digitalization, the biggest one is the DI, the scanners in the prosthetic field. I don't know what the number is, but is because it's not clear. But I have to imagine it's still half the dentists in the developed world are still doing manual impressions. So there's a huge opportunity in that regard to convert practices using manual impression to digital impression. The whole movement of impressions to the lab and digital manufacturing of crowns and bridges in the lab is a big opportunity for us. We're a significant player in the lab space. I think we're the largest provider of laboratory products in the world. So as that moves digitally, that's a huge opportunity for us. It has been very good to us in the last year or two, but lots of opportunity in that regard. The practice management arena, the movement from -- towards a cloud-based technology from a security point of view, from a practice management point of view, the digitalization of more of the practice presents a significant amount of opportunity on the practice management side. The interoperability, connectivity between devices and practice management software is a big opportunity. Actually, that's both dental and medical. The movement to 3D printing is starting to get some good momentum. You'll hear more from us in that regard. Actually, hopefully, in the next week or two, we'll have some announcements there. So we're very excited about this on the dental side, the digitalization. And on the medical, just simply, the capital equipment that we're selling, refining practices, replacing non-digital equipment with digital equipment for diagnostics, for other activities. So generally, a more efficient digitalized practice is what practitioners are looking, seeking guidance from our field sales force for and our field sales force is much more capable today of satisfying these needs, because we've got lots of tools in their bags. More information on that, I think, Graham or Ron can provide, I'm happy to connect you with our teams -- our business teams, but simply because of time now, we've got to probably end the call. So we’re very exited about it.

Stanley Bergman:

That's a very, very good question. And plays to the opportunity for Henry Schein going forward.

Operator:

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.

Operator:

Good morning ladies and gentlemen. And welcome to the Henry Schein First Quarter 2022 Earnings Conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer and instructions will follow at that time. [Operator Instructions] I would now like to introduce your host for today's call. Graham Stanley, Henry Schein Vice President of Investor Relations, and Strategic Financial Project Officer. Please go ahead Graham.

Operator:

Excuse me, Graham. Can you speak a bit louder? You sound far from the phone.

Stanley Bergman:

Thank you very much, Graham. Good morning, everyone. Thank you for joining us. Before we get into the details of today's call, I would like to take a moment to express my appreciation once again to Steven Paladino, who retired last week after 35 years of outstanding service to Henry Schein. For the excellent execution of Steven succession plan and the smooth transition of his responsibility to Ronald South. I'm certain that investors will appreciate working with Ron and Graham and as we continue to build our Investor Relations communications. Ron is joining us on today's call and we'll discuss details of our first quarter financial performance and full-year guidance. So Ron will discuss that in a moment. At the start of the call. I would like to highlight that 2022 is off to a strong start. With record first-quarter financial results as we successfully execute on our 2022 to 2024 strategic plan that sets out our winning proposition. Our winning proposition is that customers rely on us for an exceptional experience delivering differentiated solutions that make their practices most successful and improve patient outcomes. Our bold plus one priorities, which we have discussed with in the past, is as follows. The B stands for building complementary software, specialty, and services businesses, for high growth. Operational one Distribution to deliver exceptional customer experience, increased efficiency and sales growth. And the L stands for one Schein to broaden and deepen relationships with our customers that is with our entire product offering -- service offering. And the D, the drive, stands for driving digital transformation for our customers and for Henry Schein. So our [Indiscernible] priorities will be executed in the context of the plus one. Aligning our key stakeholders, which of course, our suppliers, customers, shareholders, investors, and Team Schein members and society. Today we are affirming our full year 2022 GAAP diluted EPS guidance of $4.75 to $4.91, reflecting the solid growth and stability of our business. To emphasize, we're very, very excited about our 2022 to 2024 strategic plan. Which started at the beginning of this year. We believe we're on a very, very good projectory in that regard. So let me comment on two topics that are on the minds of many investors. That being inflation and also Global supply chain. We are continually monitoring the potential impact on inflation -- of inflation on our business. The impact journey varies by product category for both merchandise and equipment. And to an extent it it also varies by geography. We estimate that on balance, price, inflation on our product offering. So far this year has been about 3%. Some of our manufacturing partners are currently implementing additional price increases, which obviously will in all probability impact that 3%, but so far it's been about 3%. While we have generally been able to pass along these increases to our customers, we do seek to reduce supply increases wherever possible. Of course, we are aligned with our customers in that regard. Where customers wish to explore ultimate alternative sources of products because of these pricing pressures, we are typically able to offer various, less expensive alternatives given our broad product assortment of national brands, as well as our wide selection of Henry Schein corporate brands and owned brand products. Our extensive offering to our customers provides many options and is an important differentiator for Henry Schein in the marketplace given the extensive options that we uniquely offer we believe to our customers. The impact of inflation on our equipment business is significantly deferred due to the lead times between confirmation of an equipment order by manufacturers and delivery of the equipment. Generally, we book orders in advanced with our manufacturers for the liberty in delivering at a future date and that's generally at a confirmed price. So not much inflation in the first quarter, some of course, but not much on the equipment side. In addition, inflation largely impacts the traditional equipment products, as average selling prices for digital equipment continues to decline, although somewhat modestly. Now, turning to the supply chain pressure on our business. Here, the situation is relatively stable, pretty similar to the fourth quarter. Of course, we continue to experience extended lead times for certain products, which are primarily impacting the equipment. On the consumable side, merchandise side, we generally had products. May not be every single product option in a particular category, but we have basically the products. And the lead time problems are in fact impacting our equipment deliveries. The recent lockdowns in China, we've received a lot of questions on that, are so far not having a significant supply chain impact on us as most of our manufacturing partners are located outside the effected regions and ports are largely operational from our point-of-view with, of course, some delays. Now, this may be slightly different for specific suppliers of ours of finished goods. Our team is actively managing these inflationary and supply chain matters, which are reflected in our financial guidance. Turning now to the Ukraine. Henry Schein has relatively low dental sales to customers and really no direct presence in either Ukraine or Russia. So the conflict itself is not directly impacting our business per se. Of course, it could impact our suppliers, consistent with our longstanding commitment to humanitarian work and disaster relief, our team continues to support refugees and displaced persons in and from Ukraine. As we have done, for example, with refugees from Syria, other parts of the Middle East and of course elsewhere. Our support is through the delivery of healthcare product donations in partnership with several of our suppliers and with international NGOs that we've worked with for a long time. And yes, in this case, through our local teams underground in Poland. And there are other on the ground teams that are working with us to provide these relief -- support these relief programs, these humanitarian relief programs. We're actively supporting refugees through managing of donations, products, clothing and yes, in some instances money. We also are responding to those affected by natural disaster around the world, such as floods in Australia, and last year in Germany, and continuing to work in advancing health equity. Advancing health equity has been a key component of Henry Schein's success for many, many years. That goes to advance access to oral care and, in many respects, to primary care as well. Turning now to the business review of recent accomplishments. Starting with our dental distribution business. The first quarter growth in our dental business was driven by strong global equipment sales, as dentists continued to invest in their practices. And consumable merchandise sales recovered well during the second half of the quarter in line with the decline of COVID-19 infection rates. Let me peel the onion a little bit more for you. In North America, we believe consumable merchandise sales were impacted by lower patient traffic in January as a result of COVID-19, but we are progressively stronger in February and March. Sales were also impacted by lower sales of Personal Protective Equipment, I'll refer to that and Ron will refer to that as PPE products for the rest of the call. This decline in patient traffic was primarily a result of appointment cancellations, staffing shortages, and some office closures given the spread of COVID. Although we believe patient traffic has now returned to the levels of early December 2021. We are seeing similar trends globally, but obviously,

Unidentified Analyst:

We are lowering both line's disconnected mainline and the backup. I don't think that's a function of our foundries.

Unidentified Analyst:

Everything disconnected.

Stanley Bergman:

Just sorry. We had the [Indiscernible] the line disconnected, but let me continue on where we ended. So the decline in patient traffic was primarily the result of the appointment cancellation, strapping shortages, and some office closures given the spread of COVID, although we believe patient traffic has now returned to December 21 level, I think I covered that already, and I think it went through. The global trends are somewhat vary depending on the region of the world. So lower sales of PPE products in the quarter were primarily as a result of lower glove sales. The glove market has been quite volatile for about a year, maybe a little longer, not much longer, 15 months. We expect glove pricing will be an increasing headwind for a few quarters since pricing peaked in the second quarter of last year. That's 2021. Nevertheless, if you exclude PPE products, North American consumable merchandise, internal sales growth in local currencies was quite solid. Despite the softer stock to the quarter, we gained momentum as the quarter progressed. This was supported by good growth in sales to new DSO accounts. Our North American dental equipment business had very good quarter with strong sales in both traditional and digital categories. Now, particularly in digital restorative restoration equipment, our equipment order book in North America remains strong at the quarter-end, consistent with the backlog at the beginning of the corner. So new orders continue to come in at a very nice rate. As commented early in the call, we did not see a significant impact from inflation on this quarter's equipment sales due to long lead times for equipment, as we had largely lacked in supplier prices for orders shipped during the quarter. Our equipment results benefited from sales to some of our large DSOs. As we believe that anticipation of further price increases. Also, we believe that anticipation of further price increases is modestly providing some of the elevated demand we see today. It's not a huge impact. [Indiscernible], as some orders coming in from customers who expect pricing to go up and would like to get in the gate before the prices go up. Not a huge impact, but I'll nevertheless, point that out for you. We continue to experience supply chain issues for traditional equipment, arising from component port shortage delays in office build-outs and reservations, as well as longer lead times with digital imaging technology. This is -- not that the product is not available, it's just taking a little longer on the digital stride to deliver our orders. Having said that, if a practitioner needs anything urgently, we of course, we'll make sure that we supply both traditional equipment and digital imaging. We now expect these equipment delays will continue to be factors through the second half of the year and will provide further support for good equipment sales over the next few quarters. In fact, bottom line is we remain bullish on the equipment market and especially the digital dental equipment product offering. We expect to continue demonstrating good growth in the digital category, including intraoral scanners. Now, in the last period of time, the impact with digital 3D printing, we're starting to see that flow through as well, net demand to be of interest. We continue to look for innovative ways to add value to our customers. Last month, we hosted thrive lives in Las Vegas. This was a three-day dental educational confidence that it replaces with successful ten clicks business of dentistry conference we have held in years prior to COVID we designed its inaugural event to offer a learning path for every member of the dental office from the front office after the hygiene in the dentist -- including dentist themselves. So everyone from the staff, [Indiscernible] all the way to [Indiscernible] participating in this conference. And the programs which is designed for the various players in office. We were able to select from over 50 sea credited courses led by more than 40 leading commissions with a strong educational focus on digital technology and practice management solutions that Henry Schein has quite a bit of competency in advising our customers on. The customer feedback we received as the most positive and got advance [Indiscernible] thrive at least from our point of view position us to connect with our customers in deeper ways, and positions our team to help provide greater productivity and provide better clinical care and practices. Educational top events like this provide great sales opportunities as well. Turning now to the international DEMP to international [Indiscernible] Our international equipment sales were also quite strong for the quarter. Our international consumable sales were impacted by similar trends as North America, including lower PPE and COVID -19 related products sales. And by the decline as patient visits, particularly during the first half of the quarter. That said, compared to North America, the impact of COVID-19 was more pronounced internationally, especially in Europe. So let's peel the onion a bit more in Europe. Patient traffic picked up at very paces as the quarter progressed and COVID-19 restrictions were relaxed in certain parts of Europe, and we expect these markets to continue to recover. We also expect the Australian market to start to recover having reached the peak, COVID-19 session rate towards the end of the quarter. This should help or cut about similar guys in Europe, straighter in our Billion business are strong throughout first quarter. Balance in China impact our business. Notes are growing Chinese businesses still relatively. It's still a relatively small part of our Global Dental business. These lockdowns also intensified during our fiscal second quarter. They had little impact in the first quarter. I remind you though, it's we had a nice growing business in China, but it's not material in the relative concept about the relative size of Henry Schein relative to AECOM, our Global consolidated sales. Pertaining to Dental Specialties and Technology and Value-Added Services. sales about Dental Specialty products was solid during the first quarter. Specifically, oral surgery, which consists of dental implants ACE bone regeneration products. In particular sales of by Horizons, Implants grew by double-digit this quarter. Executing well in North America, with these businesses primarily focused and with the markets for restorations continues to be quite strong. Our Camlog and Merck Dentist brands in Europe, primarily in Germany, also had quite a good first quarter for the implants and bone regeneration products in Europe. We have also had success selling ACE bone regeneration products into the large DSO market. And this is another very good example of the health all in our bold strategy leveraging one Schein strategic priorities. Now, within our endodontics products offering and our businesses also quite solid. We recently launched our age pro laser, which is actually off to quite a successful launch, having been well-received at next week's meeting here in United States. We do believe that Ace Bone is upstanding cleaning, debridement, and disinfection, coupled with greater value compared with competing products. Meanwhile, our priority in the orthodontic business as I reveal clear aligner product line. In March, we completed the U.S. domestic launch of the [Indiscernible] for product next to software, and we are now rolling out the software update globally. Software features, advanced treatment planning and realization tools. Obviously, I think investors are away that orthodontic sales were not great in the first quarter. Because of practices not being at full capacity as a result of COVID. Overall, our solid position and Dental Specialty products is built upon strong customer offering and our commitment to meaningful, ongoing investments in R&D. If there are questions on that, happy to provide further color during the call. Turning to Technology and Value-Added Service sales, they also increased by double-digits during the first quarter, in both North America and international. We believe Henry Schein One offers one of the broadest product offerings of dental practice management and related software and services, and is the largest contributor sales in the sector of technology and value added services. Growth within Henry Schein One continues to be driven primarily by recovery in patient traffic to dental offices, which generates demand for our revenue cycle management solutions, and also by cloud-based solutions, our cloud-based solutions, that [Indiscernible] flexibility, scalable services to drive practice efficiency, and yes, patient engagement too. As another example of our commitment to expanding our technology product offering, [Indiscernible] got making our job as analytic software products available to private [Indiscernible] practices, whereas previously, the job's software was available primarily to DSOs, Also within our value-added services business is eAssist business which provides revenue cycle management solutions for insurance reimbursements. We're quite pleased with the integration and performance of this business which we acquired last year. So now turning to our Medical business, where the Global Medical sales were excellent as we achieved further penetration into existing customer accounts. Internal sales growth in local currency, if you exclude PPE and COVID-19 related products, also continued to be strong. The U.S. patient traffic to physician offices and ultimate care sites and that in particular in our cases, the ambulatory surgical centers was up consistently throughout quarter one versus the prior year. Sales of medical laboratory equipment were up double-digits while demand for non - COVID point-of-care diagnostic test was also quite strong. Sales of PPE products declined by double-digits compared to the strong first quarter last year. As I mentioned earlier, we expect further pricing declines for gloves throughout the rest of the year, it prices to remain above pre -pandemic levels. Sales of COVID-19 tests were extremely strong during January, very strong and declined shortly towards the end of the quarter. The future of these products are difficult to predict as we face the somewhat offsetting forces of new variance spreading rapidly, trading demand, along with increased availability in hotels from the other side and many of which of the paid for by the government in the U.S. So that's a broad overview, now, Ron, will give you more specifics on the financial results for the first quarter? So Ron, there you go. Thank you. And welcome to your first call.

Stanley Bergman:

Thank you very much, Ron, unfortunate the beginning part of our call with Graham made his introductory remarks. We're not sort of broadcast to our participants. There was a problem versus Operator and intervention the call got disconnected. I think my remarks and Ron's are fully picked up. Graham. You may want to repeat maybe a remarks, please, Graham. Thank you.

Stanley Bergman:

Thank you very much, Graham. Operator, please refer the questions, open the line for questions. Thank you.

Jeff Johnson:

Thank you, guys. Just two quick ones maybe and then I'll get back in queue. Stanley, could you give us any update maybe just on April trends that you're seeing in the specialty dental area, the general dental area and medical? And then Ron, just for you from a guidance standpoint on the 5% to 8% revenue growth, I think a lot of us just look at organic growth for Schein. It tends to be a very consistent metric in your business. Could you just give us how we should be thinking about maybe organic growth given that you do a lot of acquisitions and currency obviously is a big impact this year. Thanks, guys.

Ronald South:

So Jeff, if you recall, our original sales guidance was 6% to 8% and the components of that included about 0.4 acquisitions and a point for the 53rd week this year. So that left us with about 4% to 6% of internal growth, whether it be the price increases or from increased volumes. I think we were taking down the sales growth of 5% to 8% and that extra point we're taking off the floor. There is really a combination of what we're seeing in trends in the COVID test kits, as we said, for expecting those sales be 15% to 25% lower than last year versus our original guidance of 10% lower and also the FX headwinds. You can kind of do that math and say, the internal number, now be something that's closer to say 3.5% to 5.5% or 6% in terms of the internal number that we're still aiming for for this year. I don't know. Hopefully that acceptably.

Operator:

Our next question comes from the line of Jason Bednar from Piper Sandler. Your line is open. Please go ahead.

Stanley Bergman:

But I'd say your estimate on the COVID test kits to the FX are pretty reasonable. And that's really -- those are really the components. There's not offsetting items that were [Indiscernible]

Ronald South:

I think a couple of areas. In a COVID test kits the $250 million in the quarter, and while we're taking down the full year on COVID test kits, I don't think we didn't expect to do quite that well in the first quarter with a test kits sales. I think also, we're really happy with our gross margins in the dental business. In spite of some of the pressure we're feeling on gloves, we still did fairly good on the margins there. And then of course the equipment. The equipment came in much better than what we had originally expected. And as we said on the call, we remain bullish on equipment. So I think all those things when combined, guide us to a good place on the quarter. There's other things I would acknowledge that we did well on effective tax rate, we did well in a few other areas, but I think that between the good margins that we experienced in dental, not just in gloves, but in non-PPE sales as well, helped us out for the first quarter.

Operator:

Our next question comes from the line of Justin Lin, from William Blair. Your line is open. Please go ahead.

Stanley Bergman:

I think generally strong, a visit to dentist point-of-view, taking into account COVID -impacted locations. I think generally, we're in positive territory from visits dentist, from what we can tell, the higher end procedures remained quite strong with some specialty products at the high end, sleep quite. The strong at the moment, we're more respect to where we were in December of 202’1 posts. You never know where this variant is going to have an impact. Right now, though we did have pretty bad January from a business point of view, and February, March started getting better April looking okay. I think [Indiscernible] to stable leading pasture.

Graham Stanley:

I would reveal a line of business is relatively small and growth is impacted by new accounts, particularly some DSOs that have not taken on the [Indiscernible] line. I don't think our sales are much of an indication. Although obviously, in the first part of the first quarter, visits or elective procedures were down. It came back again. But I'm not sure we're the right party to give you an indication of the market in general. Suffices to say, we remain quite bullish for our reveal line. Having said that, it's a very small business, relatively small business compared to the market.

Graham Stanley:

Our next question comes from the line of Elizabeth Anderson from Evercore ISI. Your line is open. Please go ahead.

Stanley Bergman:

Our medical business focuses on the ultimate key areas, mostly physician offices. With our independent or part of a group or in fact, a large part of it is with the medical practices are owned by IDNs. We also have businesses that focus on the government. And we have businesses that focus on smaller ambulatory surgical centers. And we have businesses that focus on provide us such as renal treatment centers and cancer centers. That's -- we do not serve as the long-term care in a way, nor the acute care area, and obviously not the drugstore. So that's really our business. And the net area, we have been gaining market share for a decade. Just very good execution. I would say that all this continues to point to gain market share. Obviously the PPE and the tests the spot numbers sometimes magnified and sometimes you reduce our underlying business performance. But essentially within that particular part that I described, we continue to gain market share. We do add some new products, but we should contribute. I would say, including better way we entered the homecare space in small way and would expand that. But I'm not sure if that contributed at all to the internal growth as miss the acquisition growth. So overall, the business is just gaining market share.

Ronald South:

Yeah. We're dealing with wage inflation, like everybody is right. And our normal cadence of salary increases as the company goes into effect people one, so we will see an increase in payroll costs going forward. That is taken into consideration when we talk about operating expenses and our plant operating expense, expansion for the margin expansion.

Elizabeth Anderson:

Got it. Okay, thanks.

Nathan Rich:

Hi. Good morning. Thanks for the questions. I'll ask them both upfront. I guess, maybe on the dental equipment business, it seems like you're seeing longer lead times and you expect those kind of delays to continue through the second half of the year, but you had a strong first quarter from a revenue standpoint and it doesn't sound like the outlook for dental equipment, at least on the revenue side has changed this year. Can you maybe just talk about how you've been able to work through the supply issues, and also where you're still seeing, just in terms of demand for CapEx from practices? And then just a quick follow-up for Ron. It looks like the seasonality of earnings this year is a little bit different than what you've seen historically. And so I guess should we think about kind of earnings towards the back half of the year as closer to what the go-forward run rate of the business will be, one PPE normalizes some of these equipment supply issues resolve. It will just be helpful to get your color on what the back half of the year means for the longer-term go-forward. Thank you.

Nathan Rich:

Thanks very much.

Justin Wang:

Hello. This is Justin Wang stepping in for Mike. Thank you so much for the question. We were wondering if you could provide any color on implant trends in the U.S. as well as OUS and how you've seen these carry into April, as well as your expectations for Q2. Thank you very much.

Operator:

And this concludes today's conference call. Thank you for participating. You may now disconnect. Have a great day.

Operator:

Good morning, ladies and gentlemen and welcome to the Henry Schein Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today’s call, Graham Stanley, Henry Schein’s Vice President of Investor Relations and Strategic Financial Project Officer. Please go ahead, sir.

Stanley Bergman:

Thank you, Graham. Good morning, everyone and of course, thank you for all joining us. Let me take this opportunity to thank Team Schein for the team’s extraordinary effort over the past 2 years. Despite the impact of the global COVID-19 pandemic, we are pleased to report excellent full year 2021 financial results, including an outstanding fourth quarter that exceeded our expectations. Our fourth quarter results were driven by strong internal sales growth in local currencies of 6.3%, when excluding sales of personal protection equipment or PPE and COVID-19 related products as well as prior year sales to Covetrus under the transition agreement and acquisition growth of 4.3%, while also reporting operating margin expansion of 30 basis points. So, we are pleased with our sales results and we are pleased with our operating margin expansion. We have updated our 2022 financial guidance based on this latest view of our businesses. Steven will provide additional details on that topic in a moment. We have also completed a strategic review recently of our businesses and we are excited to recently present an updated 2022 to 2024 strategic plan to our board. We update our strategic plan generally every 3 years. The 2022 to 2024 strategic plan was very well received by our board. The updated guidance reflects the execution of two key strategic priorities contained in the strategic plan

Ron South:

Thank you, Steve, and it’s great to be speaking with all of you this morning. I’m honored and excited to be stepping into the role of Henry Schein’s CFO. I have worked closely with Steve for more than a dozen years, and I’m looking forward to working with Olga, Graham and the entire Henry Schein global finance team. To underscore what Stanley said, I expect a smooth transition into my new position. Steve has been a tremendous steward of Henry Schein’s finances during several decades of impressive growth and expansion. I look forward to continuing his legacy of transparency, coupled with fiscal responsibility. You’ll be hearing more from me when we report our Q1 financial results in early May. But in the meantime, it’s great to be joining the team on today’s call. Now I’d like to turn the call back to Stanley.

Operator:

Thank you so much. [Operator Instructions] Your first question comes from the line of Matt Miksic from Credit Suisse. Your line is open.

Stanley Bergman:

Sure. And I will ask – thank you for the question. I’ll ask Steven to respond to those. Before I do that, I somehow glossed over. I don’t know why I missed this in the script. But Brad Connett, a 25-year veteran at Henry Schein, runs our North American distribution businesses, that’s dental and medical, all pursuant August 2021 reorganization. I have no idea where I missed that, but good people are checking on what I say. So Steven, please. Hello. Steven?

Matt Miksic:

That’s great. Thank you.

Jeff Johnson:

Thank you. Good morning all and Steve, just want to say thanks for all the guidance and insight. I think it’s been almost 20 years you and I have known each other, so that will be missed and congrats on the retirement. Let me ask a two-part question, I guess on gross margin. The first part, just what’s the algorithm for the 20 basis points to 25 basis points of operating margin expansion this year? Is it hold gross margin and leverage operating expense in 2022 and going forward? Can we expect any kind of gross margin improvement off these levels? Just thinking more on the gross line rather than operating margin. Any updates there you can provide?

Jeff Johnson:

Yes. Alright. That’s helpful. And then maybe one follow-up just on that margin comment. Can specialty and technology and value-add, can that hold kind of the 20% operating margin leverage going forward? And when I think about double-digit growth for those two businesses, it seems like each year that should throw out kind of 10 basis points to 20 basis points of operating margin improvement right there. So, is the algorithm then kind of hold margin in the rest of the business and get the margin benefit of that mix shift to those higher-margin products? Is that kind of the other way to think about the algorithm? And just again, can those businesses hold that 20% margin? Thanks.

Jeff Johnson:

Thank you.

Operator:

Your next question comes from the line of Nathan Rich from Goldman Sachs. Your line is open.

Steven Paladino:

Sure. I will take the last part of your question first since it’s a little bit easier. The inflation really should not have any significant impact on margins, because really, what we are trying to do is maintain margins with the price increases that we have seen and we expect to continue to see. So, there is really not a margin per se opportunity, although there is a gross profit dollar slight opportunity because if the margin – same margin on a slightly higher selling price will add to that. So, I think that, that’s not really driving it. It’s driving dollars, but not margin. And what was the second part of your question, Nathan?

Steven Paladino:

Remember, the restructuring that we completed in 2021 really wasn’t all that significant. I am trying to put out a number. For the year, it was $7.9 million. Typically, our restructuring has a 12-month to 18-month payback, so the impact, something less than that $7.9 million. But remember, some of the reasons for doing the restructuring is for us to also free up dollars to continue to invest for our future growth.

Steven Paladino:

Sure, yes. So, the two larger DSO contracts that were awarded during 2021, we now have on-boarded those customers, so those are flowing through our sales numbers in Q4. We still should have an annualized impact in 2022, but much more modest, because we have been seeing a lot of those sales already in 2021. With respect to DSO contracts, we probably always have one or two every year that is coming up for renewal. We don’t have them all a bunch stuffed in one particular year like we did many years ago. We feel very good with our relationships with DSO customers. We feel like we serve them really well. Our pricing is very sharp. So, we feel good about the renewals. But there is always one or two every year.

Steven Paladino:

Okay.

John Kreger:

Hi. Thanks very much. Steve, what I would really like to ask you is for your sort of favorite Schein anecdote, but that’s probably not appropriate for this call. Maybe instead, I wanted to ask about the technology and value-added services. It seems like the growth you reported in the quarter is a lot higher than normal. Can you just talk about what drove that? And what’s the sort of sustainable level of growth you guys are shooting for from that segment?

John Kreger:

Great. Thank you. And then…

John Kreger:

Thanks Stan. One quick follow-up, we hear broadly that dentists’ and doctors’ practices are really struggling with staffing themselves. From your perspective, do you guys have an offering maybe within the technology business to sort of help lessen that strain that your customers are facing right now?

Operator:

Your next question comes from the line of Jason Bednar from Piper Sandler. Your line is open.

Steven Paladino:

Yes, maybe I will kick off. So, I think that the bulk of the price increases that we were expecting have come through already. There may be – there is a few manufacturers who have done more than one price increase, but the bulk have come through. But if inflation continues at this rate, I guess it’s possible that more could come through going forward. From a customer perspective, look, there is always – whenever prices go up, there is always a little bit of pushback, but I think customers understand that we are in a highly inflationary environment. It’s not just us that are raising prices, it’s really across the board. And I think that helps that people have awareness of inflation going on. But there is always a little pushback, but it’s certainly very manageable, and we think that we will be successful in passing through those price increases. Even though it’s unfortunate, we would prefer not to, but we are getting price increases so we just kind of have to pass it through to the end user.

Jason Bednar:

Alright. Very helpful. And then just as a quick follow-up on capital allocation and really maybe more a question for Ron. Ron, in our conversations, I have gotten the sense that your views are very much aligned with what we have seen from how Henry Schein has operated historically and how Steve’s managed the financials during his tenure. But there is a lot of capacity on the balance sheet. So, I guess it would just be helpful to hear your philosophy regarding leverage and how you see the balance of M&A and share repo moving forward? Thanks.

Jason Bednar:

Great. Thank you.

Elizabeth Anderson:

Hi guys. Thanks so much. And Steve, it’s obviously been great, so congratulations on your retirement. Maybe from a question perspective, one thing that obviously caught my attention was sort of when you were talking about the lower average sales numbers or sales pricing in terms of the equipment side, could you go into a little bit more detail about what’s driving that? Is it sort of a new product suite? Is it people switching from complete chairside solutions to just control scanners? Any additional details there would be super helpful. Thanks.

Elizabeth Anderson:

That makes sense. And maybe just as a quick follow-up on the implant side. A number of the major implant manufacturers have announced new products or sort of revamped or future revamps that are coming to their product portfolio. I was just wondering if you could comment on sort of demand in that environment and the relative competitive levels there and sort of pricing as well, if that’s sort of providing a unique opportunity for you.

Elizabeth Anderson:

Thanks. That was helpful.

Graham Stanley:

Yes. That was our last question so we can conclude now.

Operator:

This concludes today’s conference call. Thank you all for joining. You may now disconnect.

Operator:

Good morning, ladies and gentlemen, and welcome to the Henry Schein Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this call is being recorded. I would now like to introduce your host for today's call, Graham Stanley, Henry Schein's Vice President of Investor Relations and Strategic Financial Project Officer. Please go ahead, Graham.

Stanley Bergman:

Thank you very much, Graham, and congratulations on your appointment as Head of our Investor Relations. And of course, thank you for all you've done for the company over the last dozen plus years. So good morning to everyone, and thank you for joining us. Really, really happy today to report record third quarter financial results, driven by a keen focus on execution by the team. And the team has done a remarkable job since the virus -- the pandemic started back in March of 2020. And of course, there was a steady patient traffic pattern during this quarter, which also contributed to the very good and actually the excellent results. And we have excellent momentum across the entire company. So if we compare the results of sales a year ago, Henry Schein's worldwide internal sales that's in local currencies increased a robust 7.2%. But what's really important, if you exclude the sales of PP&E and COVID-19-related products, results are up 6.3%. That's the internal sales growth in local currencies. We believe that patient traffic was generally similar to the previous quarter for our dental customers, that's in the United States and globally, small adjustments in different parts of the world, but not material. And definitely, the pattern is improving for our medical customers. We mentioned in previous calls that business to physician offices had gone down compared to '19 and definitely in ambulatory surgical centers as well. We see this traffic as increasing again. In mid-September, we announced important changes to our senior distribution business leadership structure. And let me comment on these changes before I review the third quarter performance for each of our business groups or actually Steven will do that first and then I'll provide additional comments later. We have been pursuing an umbrella strategy which we internally refer to as One Distribution as part of the continuous operational improvement of Henry Schein as a company. More tightly the strategy of One Distribution more tightly integrates the management of our distribution businesses globally. Our newly announced structure, which we've been working on for about 18 months, seek to harness the benefits of consolidating the management of Henry Schein Dental and Medical distribution businesses in 2 regions, 2 geographies

Stanley Bergman:

Thank you very much, Steven. So let's provide some thoughts on each of our businesses. Third quarter dental revenue growth was solid, as you heard. Overall gains in consumable merchandise and equipment sales in North America and international markets reflect the continuing recovery. And as noted, this is coupled with key focus on execution by Team Schein. North American dental consumable merchandise internal growth in local currencies with and without PP&E and COVID-19-related products also was quite solid in the third quarter. Consumable merchandise sales continue to improve, which we believe was bolstered by a steady flow of patient traffic. Here in the U.S., the most recent American Dental Association data shows patient traffic is currently at about 90% of pre-pandemic levels, and Henry Schein One billings associated with general claims processing are, once again, about 100% and of pre-pandemic levels, a little over. These statistics are similar to those we reported in the second quarter, and we believe the market to be sequentially stable dropping slightly through improvement. Similar kind of data around the world, some countries are a little ahead, some a little behind, but on balance, pretty stable on the dental side. You may recall that many of the international markets we serve posted a quick recover in sales and consumable merchandise in the third quarter of last year when we recorded at that time, record sales. This comparison resulted in slightly lower sales growth than we have seen in prior quarters. Most markets are back to normal, as I noted, with some modest weakness in the UK, although it is better. And in Australia and New Zealand for a very short period of time to the main cities were on lockdown. But the market -- the lockdown has been largely lifted and Australian and New Zealand are back to normal right now. But we had a dip in the third quarter. Last quarter, we discussed some of the delivery and installation delays facing the U.S. traditional dental equipment business. Overall, our equipment business is performing very well and equipment demand is strong as demonstrated by the third quarter sales, we are reporting today. We expect the impact of those delays to be pronounced in the fourth quarter with manufacturing lead times returning to normal towards the second half of next year. As such, the traditional equipment manufacturers' delays along with delays in office construct are creating some timing differences in our reported sales between quarters. Again, these manufacturing delays are primarily impacting delivery and installation of traditional equipment in North America, namely the U.S. Canada is quite stable. Manufacturers seem to be able to provide us with adequate product, although we do have longer installation times even in Canada, but not as bad as in the U.S. That said, dentists continue to invest in technology solutions that promote more accurate diagnosis and treatment planning as well as workflow efficiency. This is really important. Dentists are focusing on digitalization of their practices. We remain extremely bullish about the future of digital dentistry and the long-term prospects and trends we believe will flow from advancements in the digitalization of dentistry. Among the dental equipment highlights each year is the Dentsply DS World, which took place at the end of September in Las Vegas, right at the end of the quarter. This event was virtual in 2020. So it was exciting for Henry Schein to be on site and meeting in person once again with current and prospective customers. We are very pleased with the results from the show, which did have somewhat of a modest positive impact on our sales in the third quarter, but we expect much more of an impact in the fourth quarter. It's important to note that DS will features high technology equipment, and we believe the supply chain challenges I discussed do not generally at the delivery and installation of these products here in the United States. So we expect the good results from the equipment side, specifically digital and other Dentsply products to flow through in the fourth quarter with a challenge remaining on the traditional chairs, units and lights, which are manufactured largely in the United States by other manufacturers who fill the slack from one of our large manufacturers exiting the market last year. Now, look, we've received lots of questions on -- and comments have been written about pricing for dental, merchandise and equipment. So we expect that prices may increase for certain items in the near term as some manufacturers work through a scarcity of raw materials as well as higher transportation and labor costs. Unfortunately, this can result in higher pricing for our customers as we typically pass on these increases. However, what's very important, and we're communicating this to our customers, Henry Schein is committed to working with our suppliers to improve supply chain efficiencies and to limit these price increases as best we can and to alerting our customers to upcoming price changes. We are doing all we can to mitigate this inflationary impact resulting from raw material shortages, higher transportation issues, mitigate that for our customers. So now turning to the dental specialties. Sales of our dental specialty products performed extremely well during this quarter with double-digit internal sales growth in local currencies versus the prior year. Remember, the prior year, we did have good sales in the specialty category as well. So this is pretty good compounding. Approximately 2/3 of our dental specialties revenues are from our oral surgery implant-based tooth replacement products business. That includes the implants and the bone regeneration products. Our success share is driven largely by our premium value Horizons and Camlog implants and bone regeneration lines, where we also saw strong growth versus the prior year. Our leadership position in the oral surgery, that's both an implant and bone regeneration market as well as endodontic and orthodontics includes both proven solutions and a commitment to delivering new solutions as we further penetrate key dental specialty markets. At any given time, we have a number of product launches underway, which typically takes us 12 to 18 months for a full rollout. The pipeline was rich and remains rich, and we continue to bring exciting new products to market in all 3 categories. During the third quarter, we launched our Progressive CONELOG implants with multiunit prosthetics addressing the full Arch market in North America. And during the fourth quarter, we expect to launch our Fusion implant solution to enhance our offering of the value price segment of the implant market. Our priority in orthodontics is our reveal clear aligner with global reach now into more than 2 dozen countries. In the U.S., we are in the process of launching an update to our software, Studio Pro 4.0, which features advanced treatment planning and visualization tools. We expect to launch the software in certain international markets next year. So overall, we're very pleased with the performance of our Dental business globally, our dental specialty businesses, and we'll talk now about our medical distribution business. Turning now to our Medical business. Internal sales growth in local currencies for the third quarter was, once again, very strong. But what's important to recognize the strength was in terms of growth was strong both measured with and without sales of PPE and COVID-19 related products. Trends in the physician office, ambulatory surgery center, alternate care markets, as noted in my opening remarks are all quite positive. We believe traffic in U.S. physician offices and ambulatory surgery centers is generally improving, as we approach more normalized practice operations for elective procedures that were deferred over the past 18 months, although we're still not back to normal, but the trend is good. We also have increased the number of accounts we serve. I think the Medical Group has done a very good job in expanding accounts and also penetrating existing accounts. Sales of COVID-19-related products should be lumpy, as you know, all year, with strength in the first quarter falling off in the second quarter and picking up again in the third quarter, pretty lumpy, as noted. In addition, pricing for COVID tests has also declined quite a bit. These volatile sales trends reflect the unpredictable spread of the Delta variant with upticks in cases and testing services being seen between quarters and within various geographies. We continue to expect price volatility for COVID-19 test to continue. This year's third quarter also included the sale of flu diagnostic products, whereas a year ago, we sold very few of these tests. In fact, we are selling the combination flu COVID-19 test to our physician office-based customers to help differentiate these 2 viruses that result in somewhat overlapping symptoms. Tests are important in the office-based practitioner environment in the office, although as noted, the volatility of the particular price per unit can be quite sharp. We are optimistic, I would say, extremely optimistic about the future of our medical group as medical procedures continue to move to alternate care settings, coupled with our belief that we are well positioned to continue to grow our market share. Also, as noted, elective procedures that patients have put off for 18 months are now being scheduled. But putting that even aside, I think the structural market shift from the acute care setting to the physician office and the ultimate care setting, particularly the ambulatory surgical center, is something that is moving in our direction, and we are well positioned to process this new business that is emerging. So one closing remark regarding our distribution businesses. As we have previously discussed, we believe we have entered a new normal for the use of personal protected products, excuse me, by both dental and medical practitioners. We envisage demand for PP&E products continuing at an elevated level for the foreseeable future driven by new health care protocols. We do not expect that the demand -- the unit demand for PPE will revert to pre-pandemic usage levels. However, we expect price volatility for PP&E products to continue. So now looking at the performance of our Technology and Value-Added Services businesses during the quarter, Henry Schein One, the largest contributor to the sales in this segment once again recorded record high quarterly revenue. As Steven noted, we saw solid North American sales growth in Dentrix's technical support. That's the support we provide to our existing customers. And really exciting, our Dentrix Ascend Cloud Solutions business is growing. Remember, historically, the systems we sold, we would book a sale for the product and the total value of the software we sold would be recognized as a sale. Now the Dentrix Ascend cloud solution is subscription-based software, which means it's a continuous reoccurring revenue, and this is doing very well. Dentrix Ascend is doing well with small customers, midsize customers and growingly now with some of the larger DSOs. Also, our software excellent business excellence business in the UK had a good quarter. The software business in the UK had challenges while the UK dentists were in lockdown or largely on lockdown. We continue to focus on the migration to the cloud and our cloud-based solutions to create flexible, scalable services to drive practice efficiency and patient engagement and a more stable recurring revenue stream, as I noted, for these services. Short term may impact sales in that we do not book the full sale of the software upfront, but this recurring revenue is really very good business. And growingly the percentage of our business in the reoccurring revenue part of field of the total Henry Schein One sales is growing. So overall sales growth was accelerated also by acquisitions we made over the past year in software analytics in particular. And in particular, the services offered by Jarvis are being well received by our customers. This is a great business that takes data, a lot of it from our Dentrix systems and provides analytics to customers, small and large customers. Lastly, our Practice Services businesses are key components of the value added we provide our customers. And we were especially pleased with the strong growth this quarter, also driven by incremental investment that practices are making in their businesses. We are expanding the range of practice solutions or part of the strategic thinking we've shared with our investors. In this connection, we acquired eAssist Dental Solutions late in the second quarter, and I'm really happy to report that this virtual dental outsourced billing business is performing well. It's been well received by our customers. And of course, the goal is to reduce the administrative effort required of our customers for their collections. I'd like to spend the closing part of my remarks on ESG, environmental, social and governance. As we've discussed during past quarterly calls, environmental, social and governance, or ESG is an area of important focus for Henry Schein and an important topic all of us as we find new and innovative ways to create shared value for society as well as for our company, our businesses and for our investors. I think it is quite clear as we emerged on COVID and hopefully, we're starting the emerging part now, certainly in the developed world but it's clear that the business of business is no longer only business and the private sector has an important role to play in addressing the critical issues that face the world. This was expected our business now more than ever. But let me stress, although we didn't call it ESG, ESG has been part of the Henry Schein DNA for decades, as we balance the needs of our customers, suppliers, investors, society at large and the well-being of our team members. To that end, we continue to engage our more than 21,000 Team Schein members as ESG champions to advance the ESG efforts as we find new and innovative ways to create shared value for society as well as for company. Henry Schein is committed already. I think our shareholders should be aware of this, to reporting in accordance with GRI and SASB standards next year in 2022. We've also committed to issuing our initial task force on climate-related financial disclosures report next year, and we will set science-based targets. With specific respect now to the environmental side, we aim to operate more efficiently and reduce our carbon footprint as well as working towards our goal to achieve net zero global emissions by 2050. Of course, this will be gradual towards that date, gradual and cumulative. We participate in the World Economic Forum Alliance of CEO Climate Leaders and have signed the business ambition for 1.5 centigrade and the race to zero campaign, the 1.5°C and the race to zero campaign, which seeks to catalyze leadership and tangible action from the private sector for a healthy, resilient zero carbon recovery and we will continue to do our part for a healthier planet. Again, these are areas that Henry Schein has been committed to for a long time, but we're now disclosing and visualizing what we're doing. Regarding our work under social or Team Schein members, our team shine members are our, of course, greatest asset. We are committed to creating a culture of wellness including very important mental health, which has become a big issue during COVID, providing our team with resources, education and hosting open dialogues, which allow for a meaningful connection on related topics. We have what we referred to internally as a holistic approach to diversity and inclusion, D&I, recognizing that D is important, but ears very important, maybe more important, inclusive part that encompasses talent, culture, marketplace and society, increasing the representation of underrepresented groups, including women in leadership roles, and pay equity are a particular area of focus for us as is providing access to the health care service to historically underrepresented populations. We have been, again, committed to this for a long time. We have a longstanding commitment to pandemic and disaster preparedness and response and helping to build a stronger, more resilient healthcare supply chain. And this was manifested in our being a founding member and private sector lead for the pandemic supply chain network. Happy if any investor has questions on that to provide more information. The PSCN network, I think, played an important role during COVID and is ready to continue to help with pandemic preparedness. Our commitment to ethical corporate governance starts with our largely independent and diverse Board of Directors and our nominating and governance committee, who provide oversight over our ESG programs. In addition, Team Schein members in partnership with our customers, suppliers and NGO partners drive a culture of ethics and compliance through our team shine values, worldwide business standards and global supplier code of conduct. So that's a lot. But I think it's important to understand that we are committed to ESG have been committed to alignment with the needs of society, doing well by doing good, as Benjamin Franklin referred to over 200 years ago. We've been committed to that for decades and believe that this is one of the reasons why we, as a company, have provided increased shareholder value each year for decades. So with that in mind, Steven and I are ready to answer any particular questions that investors may have.

John Kreger:

Can you just elaborate a little bit more on the One Distribution plan? Does that mean you're going to move to sort of a shared footprint across your distribution networks? And is that going to be global? And I'll just ask my follow-up now and get off. The second question, Steve, is for you. I think the guidance implies a little bit of a sequential step down in earnings. Should we think about that as just because of basic equipment being lower? Or is there something else going on in Q4?

Steven Paladino:

Okay. I'll tackle the second part of your question, John. So Q4 guidance. First, I'll note that our guidance is up, for the year, quite significantly. Remember, we gave a floor of $3.85 for the full year, and now we're at $4.27to $4.35. But specific to Q4, we wanted to consider a few things that I'll enumerate. One is North American equipment and availability of product. We have estimates for product being delayed into 2022. But there was still a little bit of volatility and uncertainty as to exactly how much product we'll get in Q4 for North America. And this is really the traditional equipment. So we're being conservative there. We also have seen a fair amount of volatility on 2 product items that we're trying to be a little bit conservative on. One is COVID test kits. You can see it's been jumping around. We had a very strong Q3. But we do expect COVID test kits to moderate -- sales to moderate a bit in Q4 as well as PPE pricing. We do expect PPE pricing to also moderate a bit in Q4. So there's some conservatism built into the Q4 numbers. I'll also note that if you compare the EPS to the EPS of last year, remember, last year, we had that tax settlement that was $0.11 per share, and that obviously was nonrecurring. And finally, I'll say because there's been some notes and thought on inflationary. Obviously, any price inflationary items are fully considered, both in our 2021 and 2022 guidance.

Jeffrey Johnson:

Steve, maybe following up on your last point there. I mean you talked about these price increases in dental and your efforts to maybe hold those in check. But can you talk about your ability to pass those price increases from the manufacturers through to your end users? I know you've alluded to it a couple of times. But we hear that you've raised rates here in the last few weeks, may or may not be able to fully pass price increases through to your end customers. So just on both those topics would be helpful.

Jeffrey Johnson:

All right. That's helpful. And just a quick follow-up. Just -- you talked about dental volumes kind of globally and in North America being fairly stable. We're 1 month into 4Q. How was October? And just any color on a very high level on kind of -- are you still seeing that stability here at mid the fourth quarter?

Operator:

The next question will come from Jon Block with Stifel.

Steven Paladino:

Yes. The gross profit, first of all, we had a significant increase in the gross profit year-over-year and that was primarily driven by lower inventory adjustments. I would say it's a little bit of mix. And the second thing I would point to in impacting the gross margin is pricing on PPE products. PPE products continue to have pricing declines. So while -- it's not as big an impact on margins, it does impact the absolute dollars as well as the mix because it is now not contributing as much to the mix. So it's primarily mix, Jon. And we do think that these pricing issues in PPE will be behind us, certainly during Q4. They've moderated a lot in Q3, but there still seems to be a little bit more to go. And going forward, we expect -- our goal is also to continue to drive towards higher-margin businesses, those technology and specialty sales products, which carry a higher margin. And the goal is to help improve the margin with a positive mix shift.

Stanley Bergman:

Yes, Jon, our strategy on M&A continues to be the same, namely to add products to our -- businesses to our distribution platform, parts of the world where we're not as strong as we would like to be. And at the same time, advancing our specialty areas, namely software, the specialty products area and services. And maybe multiples to increase to some extent. But there's lots of opportunity for us to create synergies and to bring new value-added services to our customer base. So we remain quite optimistic about the M&A area. Obviously, there's no deal until there's a deal. And our pipeline remains quite full. Having said that, again, we cannot commit to any particular quarter. And I think you heard from Steven's guidance that there's nothing in these numbers for M&A that is not announced.

Jason Bednar:

Steve, I'd like to start with you on a couple of items related to guidance. First, I'd be curious in your level of confidence here today and margin expansion for the business next year and really trying to take into account the items that were impacting here real time in the quarter with respect to things like business mix and a step-up in stock comp. And how we should be thinking about those items when it comes to operating margins for '22? And then also kind of within that guidance discussion, do you have an estimate on what the currency headwind you're assuming in earnings growth guidance for next year?

Jason Bednar:

Yes. Sorry, no, I think you did. I mean, it was -- really trying to get the confidence in margin expansion for next year, but I think you did there. And then just coming back to one other point you were making there, Steve, just on hitting on the basic equipment challenges here near term, but it also sounds like this issue, before it's fully resolved, it may be extend a bit deeper into '22 than what you were alluding to a few months ago. I guess just at a high level, is there a point where you'd look to maybe procure product from elsewhere, bring in some international suppliers? I guess, just anything you can proactively do on your end to help mitigate this challenge from really dragging on deep into '22?

Stanley Bergman:

Yes. Thank you, Steven. Jason, we are talking about traditional equipment in the United States, chairs, units, lights. All the other equipment is readily available and chairs, units and lights are available outside of the United States. So we're dealing with a particular situation where a significant manufacturer of ours exited the chairs, units and lights market. Other manufacturers have scaled up their capacity. This also happened simultaneously with an increase in demand for equipment, traditional equipment, whether it's a direct result of our gaining market share or actually practitioners and/or practitioners investing in their practice. This business will not be lost. Coincidentally, there is a delay in construction. I think this is a general economy issue. So even if we had the equipment, there would be several practices, quite a few that would not be ready to take them. So I don't think this is a need to add additional chairs, units and lights manufacturers to our mix. We're very happy with the major manufacturers that supply us with these products here. It's not an international -- or non-U.S. issue where the manufacturers in general are providing us with product. And it certainly doesn't impact products like imaging, digital equipment, et cetera. There, we're experiencing a steady flow of product. Perhaps we can't get everything we want right away, but we're not talking about significant delays. So in general, we are happy with our manufacturers of equipment. We don't have our own private brand equipment line. We do not intend to have that for the large equipment. And so we are happy that our major manufacturers will supply us with the equipment we need. On the consumable side, there is some dislocation. And there, we are moving some product around. If a manufacturer can't give us what we need, we'll move it to another manufacturer. But overall, equipment will be satisfied, and we expect, even with the increase in demand, for us to be back to normal as we're hearing -- as we've been given this information by manufacturers mid-next year. So Steven, I think we are 7 minutes over, but we went a little bit on with the prepared remarks, which I apologize to the participants. But let me just end by saying thank you very much for calling in. Thank you for spending a few more minutes with us than was scheduled. As you can tell from our prepared remarks and from the answers, we remain extremely optimistic about our business, feel there is great momentum across the board, whether it's dental, medical, our specialty businesses, our value-added services in the software arena, the various kinds of services that we sell, that we build for all of these are going well. Of course, there are always challenges. This is not an easy time. Supply chain disruption is there. There's no doubt about it. And -- but we're working through these issues. Our team is committed. There were lots questions or lots of writings about the stability of our sales force. It's as stable as it's ever been. We are slightly moving the sales force around to more specialty features, featured salespeople. But generally, we did implement a new compensation program in the U.S. for our dental program -- dental sales people, relatively well received. We did not lose people because of that. There's lots and lots -- it's been written, lots of rumors. Bottom, bottom line, we have 3,500 field sales representatives, consultants around the world, of which well over -- almost 3,000 are in the North America, the other -- the rest are -- sorry, half in North America and half internationally. We are pretty stable in this area. And I'm quite optimistic that our sales organization remains highly motivated.

Operator:

Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect.

Operator:

Good morning, ladies and gentlemen, and welcome to the Henry Schein Second Quarter 2021 Conference Call. [Operator Instructions]. I would now like to introduce your host for today's call, Carolynne Borders, Henry Schein's Vice President of Investor Relations. Please go ahead, Carolynne.

Stanley Bergman:

Thank you, Carolynne. Good morning, everyone. And of course, thank you very much for joining us today. We are most pleased to report record second quarter financial results as we continue to execute on our key strategies. Strengthening demand in the global Dental and Medical markets drove strong year-over-year increases in sales versus the prior year when a significant number of dental and medical practices suspended activity because of the COVID-19 pandemic. Notably, compared with pre-COVID-19 data, environment of the second quarter of 2019 to be specific, Henry Schein's worldwide internal sales in local currencies increased by 15.2%. So if you go back to the second quarter of 2019, you will see that Henry Schein's worldwide internal sales growth in local currencies increased by 15.2% in 2021, again, compared to 2019. We are also pleased with operating margin expansion that reflects a favorable product mix as well as operating expense leverage. As we continue to invest in our business to supplement solid organic growth, we completed several acquisitions during the second quarter of 2021 across the dental and Technology and Value-Added Services businesses with aggregate annual sales of approximately $60 million. Our capital allocation strategy also includes share repurchases as a means to deliver value to our shareholders. Steven will provide greater detail on the approximately $113 million spent in the second quarter as part of our Board-approved share repurchase authorization. While the number of new COVID cases has risen in certain geographies, to date, we have not seen a material impact on patient traffic. Rather, practice visits have continued to improve as offices are generally open. Data for the end markets we serve points to continued global improvements as economies recover across the globe. The most recent American Dental Association data shows current patient traffic at 88% of pre-pandemic levels, which we believe may underrepresent volume in certain practices. We've also seen other industry survey reports that show practice volumes either consistent with or slightly better than pre-pandemic levels. I will also note that Henry Schein One billings associated with dental claims processing are currently above the 100% pre-pandemic levels, in line with increased restorative and dental specialty procedures which are driving greater practice purchases. So the overall global market recovery and our improving financial results have continued. We believe dental patient traffic in the U.S., Australia and New Zealand is close to or above to 2019 levels. And we are also seeing improving patient traffic in Canada, Europe, Brazil and Asia, with higher numbers in certain specific European countries. That said, end markets in certain geographies continue to face challenges due to the ongoing pandemic. Patient traffic in the United States physician offices and ambulatory surgical centers is improving as we approach more normalized practice operations. With solid execution in the first half of 2021 and a favorable outlook for the remainder of the fiscal year, today, we are raising our guidance for 2021 non-GAAP diluted EPS from continuing operations to be at or above $3.85. Let me stress, this is representing a floor for the fiscal 2021 year. So we continue to monitor any potential impact to our business as a result of COVID-19, particularly as certain U.S. states and some international geographies are experiencing an uptick in diagnosed cases, especially among those unvaccinated. And we're, of course, optimistic that the vaccination rate will go up. With these opening comments, I'd like to hand the call over to Steven to discuss our quarterly financial performance and provide more detail on our guidance. Then I'll be back to provide additional commentary on the current business conditions in our markets and our thoughts going forward. So Steven, please.

Stanley Bergman:

Thank you very much, Steven. We believe Henry Schein's leadership positions in the global Dental and Medical distribution businesses serve as an excellent foundation to continue to expand our wide range of value-added solutions and services as well as our specialty products for practitioners, including self-manufactured products. We are focused on gross profit growth, outpacing operating expense growth over the long term, as we expand our mix of high-margin products and leverage efficiencies across our business, in part through One Schein and One Distribution strategies. These strategies were discussed in the last call and happy to discuss them further on this call. We believe we remain on the path to achieving our increased long-term profitability goals. In fact, we are very pleased with the performance of the business all around. We do expect to build on our track record of continued EPS growth, compounded EPS growth, with our 103rd quarter as a public company. In fact, looking at results for 2020, our high-margin businesses, which are comprised of Technology and Value-Added Services and the dental specialties businesses, represented approximately 12% of worldwide sales. It's already contributed over 1/3 of our GAAP and non-GAAP operating income. When looking at the components of our high-margin businesses, Technology and Value-Added Services, including Henry Schein One, comprised about 5% of worldwide sales in 2020 and approximately 15% of worldwide operating income. On the dental specialty side, this comprised about 7% of worldwide sales in 2020, along with approximately 20% of worldwide operating income. Let's go a little bit deeper into the dental distribution business. We delivered excellent dental revenue growth during the second quarter, driven by sales of both consumable merchandise and equipment and, more specifically, consumable merchandise sales in North America. And our international markets experienced double-digit growth compared with 2019. So both in North America and our international markets, we experienced double-digit growth, internal growth during 2019. Steven discussed the state of supply challenges for the U.S. traditional dental equipment business. We expect lead times to eventually normalize and would like to stress that it is important to take a look at our equipment business over a few quarters and not 1 specific quarter. So for example, in the North American market, our dental equipment local currency in the first quarter was 17.4% growth. So it is important to look at the dental equipment growth over a couple of quarters. And we remain very optimistic and actually enthusiastic about our dental business, the equipment business, in the United States, in Canada, that's our North American business as well as globally. What we hear and we continue to hear from dentists is that practice revenues are improving and practitioners plan to invest in technology solutions that promote more accurate diagnoses and treatment planning and, of course, workflow efficiency. As noted in both North America and, to some extent, internationally, we are seeing stronger sales of stand-alone digital scanners versus the full chairside systems as dentists and dental laboratories are carefully managing capital equipment purchases while still committing to investing in digital dentistry. I encourage investors to remain focused on the long-term prospects, in fact, even the medium-term prospects and trends that we believe will come from advancement of the digitalization of dentistry. So let's take a brief look at our dental specialties businesses, a category which now has sales annualized at over $900 million. As Steven noted, total global specialty - dental specialties performed extremely well with double-digit internal sales growth versus 2019 as we further penetrate these key dental specialty markets, both domestically and internationally. We also had a number of key strategic developments in each of our dental specialty product categories during the second quarter. Our implant and oral surgery businesses, which of course, include bone regeneration products, implants and bone regeneration products is the largest of our global dental specialty businesses, and we continue to deliver new solutions as we seek to increase share in key dental markets. For instance, in the U.S., we recently launched our progressive Camlog implants with multiunit prosthetics addressing the full-arch market. We also expect to introduce our Fusion implant solution to enhance our offering for the value price segment to the implant market. This complements our line of Medentis value implants which have been very successful, particularly in the DACH region. Our implant strategy is focused on providing a broad set of solutions to address various customer pricing requirements while providing high-quality clinical solutions. We believe we're in a unique spot of providing value. In other words, the price quality equation works well for dentists in many parts of the world, specifically in the U.S. and in Europe, a particular focus in the DACH region, but now also gaining a foothold in Asia as well. Each of these enhancements is underpinned by our investment in differentiated technologies for high-value, high-quality implant treatment. By the end of the year, we also plan to launch a new line of next-generation bone tissue augmentation material. Let me just now turn to the endodontic business, where growth in the second quarter was driven by a strong performance overall, but specifically with large accounts and sales in the international markets. Our core file and bioceramic portfolio continues to be well received globally, with particular strength in North America and Europe. In the orthodontic market, we are pleased with our Reveal Clear Aligner progress as we continue to enhance our platform and expand internationally. Today, we offer aligner solutions in 26 countries and continue to broaden reach with the recent launches in France, Poland, Ireland, Italy and Spain. We are providing customers with flexibility in their choice of integrated solutions. Reveal integrates with both 3Shape and Planmeca scanners and soon with the Dentsply Sirona scanners. Looking ahead to enhancements in our clear aligner development. We are preparing to launch an update to our Studio Pro software in the U.S., which will bring advanced treatment planning and visualization tools that help dentists effectively scan and treat patients, with a launch internationally in 2022. We are currently expanding our DDX practice to lab workflow platform with integration between Ortho2 and our Dentrix practice management Software that will stream Reveal Clear Aligner integration and enhance practice efficiency. We also expect this integration will be available for our Dentrix Ascend cloud-based software solution by the end of the year. In addition, this summer, we will begin supplementing our manufacturing of aligners with the new North American manufacturing facility to ensure even faster delivery times to dentists in the United States. And we are also working with Henry Schein One and DentalPlans.com to expand promotion of Reveal Clear Aligners to patients. The DentalPlans' direct-to-consumer platform is quite effective. Our global dental specialties businesses are seeing continued strength in high-acuity procedures across many of our key markets in addition to traditional oral care procedures. Let me now turn to the Technology and Value-Added Services business. Sales continued to improve from early days of the pandemic when patient traffic was hardest hit. During the quarter, Henry Schein One, the largest contributor to sales in this business reported a record-high quarterly revenue. In particular, we saw solid growth across the board with the Dentrix Enterprise, Dentrix Ascend, Demandforce, DentalPlans.com solutions. We are focused on migration to the cloud and our cloud-based solutions to create flexibility and scalable services. In the second quarter of 2021, we recorded solid growth in the adoption of Dentrix Ascend, our cloud offering, versus the second quarter of 2020 and quite a bit compared to 2019 second quarter, too. In fact, sales of Ascend increased faster than traditional Dentrix sales when compared with both periods. We continue to invest in analytics and patient marketing solutions to drive practice efficiency and patient engagement, and we continue to enhance our revenue cycle management capabilities. A key priority for Henry Schein One is to tightly integrate solutions so that practices have a unified solution suite and can simplify customer relations with Henry Schein. We are seeing that our customers have expanded the use of Henry Schein One patient engagement and communication technologies. Let me reflect on our recently announced acquisitions related to expanding our integrated Value-Added Services offering. We are extremely excited about the prospects of our eAssist, Jarvis Analytics and Dentally businesses. eAssist Dental Solutions is a developer of key leading virtual dental billing outsourced services that will advance our mission to offer best-in-breed solutions to help dental practices operate more efficiently and profitability. Jarvis develops comprehensive business analytic tools to help dental practices leverage data to diagnose problems, strengthen decision-making and improve business performance, particularly well-received amongst DSOs, but also now growing amongst the midsize and smaller practices. And Dentally is a cloud-based practice management company that offers an extensive suite of programs and services internationally, that enable dental professionals to be more efficient and to improve the ability to deliver high-quality care to patients. Turning now to the performance of our Medical business during the second quarter. We were pleased with the strong double-digit internal sales growth in local currencies. Trends in the physician, ambulatory, surgery center, alternate care and home care markets all continue to improve. We believe our medical sales continue to outpace market growth. Please take a look at the sales. Excluding COVID-type products, the internal growth of almost 8% is reflective of our growth in this market. As expected, sales of COVID test products have continued to decline. Although let me point out that in July, we did see a boost in demand. In the second quarter, infection rates, as I'm sure everyone on this call understands, generally subsided and pricing also declined accordingly. But we are seeing somewhat of a reversal of that trend. Our reduction in sales of tests, COVID tests in particular, the other tests that we sell are all doing quite well. It was partially offset by sales of PP&E products as well as other consumable and merchandise equipment to our medical customers. Generally, this business is doing quite well. We continue to expand our Medical business beyond core distribution with a differentiated - with differentiated solution offerings that service the low-acuity segments of the market, which of course, is the most cost-effective setting for delivery of health care. Our outlook for PPE demand in both Dental and Medical businesses remains unchanged. PPE sales have moderated from levels in the height of the pandemic, yet we expect demand to remain at elevated levels. While pricing will continue to moderate, we believe unit sales will be driven by new health care protocols that we do not expect will revert to lower pre-pandemic levels. We remain quite comfortable that from a unit point of view, our PPE sales will continue to remain at elevated levels. Before we end this call, I'd like to comment briefly on our progress with environmental, social and governance initiatives that we're undertaking, so-called ESG, area of focus for Henry Schein now for decades actually. It just wasn't called ESG when we started with these kinds of initiatives well over 3 decades ago. In May, we issued our latest annual sustainability report. Among a number of newly disclosed goals, we discussed our plans for compliance with Global Reporting Initiative, with the GRI, and the Sustainability Accounting Standard Board in 2022. The next couple of years, we also plan to report in line with the Task Force on Climate-Related Financial Disclosures and to establish our science-based target. Recently, we hosted a panel with a number of ESG investors and analysts, also supply chain experts, and we participated in a panel hosted by IR Magazine discussing our work towards a diverse and inclusive workforce. You can find videos of these events as well as our CSR report on our website. So operator, we are ready to answer investor questions, please. Thank you.

John Kreger:

Maybe, Steve, can you just talk a little bit about gross margins? Very nice improvement year-over-year, but I know it's still down from the levels of a couple of years ago. What are your thoughts about how that metric trends in the second half and your ability to kind of get back to that close to 31% level?

John Kreger:

That's great. And then can you just clarify the supply chain challenges you talked about in basic equipment? So that's hurting North America but not Europe? Is that correct? And why would that be?

Stanley Bergman:

Sure, Steven. Thank you, John. A very important question. Let me just be clear that this relates to 1 sector and relates to U.S. manufacturers, 3 in particular, manufacturers of units, chairs and lights. Firstly, we are seeing strong demand for general equipment or equipment in general. And these particular manufacturers of these chairs, units and lights are experiencing significant demand, firstly, because of the elevated demand, but also because a manufacturer in this particular sector left the market. We are not experiencing any significant shortages in terms of supply on imaging equipment. In fact, we're doing okay in particular with 2D. There is no issue with delivery of CAD/CAM equipment at all, whether it's the scanners or the mills. And there are no issues with handpieces, for example. Sterilizers, available, may not be every brand in every quantity. But generally, that's fine. Again, I do want to stress that when looking at equipment sales, please take a couple of quarters into account and don't look at 1 quarter in particular. And as I pointed out, this is a U.S. issue. Canada seems to be doing okay. And Europe is fine, too. And Australia and New Zealand business, which is quite active in equipment, also has an adequate source of product.

Jeffrey Johnson:

Maybe two qualifier. One clarifying question, one question on guidance. Steve, just for clarification purposes. I think you gave a global Medical organic growth versus 2Q '19 ex PPE and the same international dental consumables versus 2Q '19 ex PPE. Did you give that for North America dental consumables? Just the organic growth versus 2 years ago ex PPE. That number would be helpful.

Jeffrey Johnson:

Yes. I'm sorry, Steve, I was asking North American dental consumables organic ex PPE.

Jeffrey Johnson:

I heard a 9% number. I thought that was with PPE though. Maybe I'd misheard.

Jeffrey Johnson:

4.8%. That's all of North American dental or North American consumables?

Jeffrey Johnson:

Yes. And just kind of understanding guidance. So Steve, if I look at the first half of this year, you're up 40% or even more than 40% relative to the first half of '19. It sounds like structurally, you expect PPE revenues this year to stay higher, even though they are coming down here a little bit sequentially higher than past years. Dental seems like it's bounced back. You've got organic growth versus 2 years ago, both Dental and Medical. But your second half guidance, I understand it's the floor, but it implies kind of a 20% decline versus the second half of '19. And conceptually, I can't wrap my mind around how you could get anywhere close to it being down, let alone down 20%. So understanding that's the floor, can you just kind of help us understand why you're setting the floor what seems to be a level that would suggest a pretty significant falloff versus the second half of '19?

Operator:

Your next question comes from the line of Jon Block with Stifel.

Steven Paladino:

That's okay, Jon. Yes. So I think you're looking at it the wrong way. We're not saying we're going to hit the floor. We expect to be ahead of that. So to do all your analytics at the floor, I think, is the long approach. What we just haven't said is how much above the floor we expect to be, and we haven't done that because, again, of all the uncertainties that are out there. So again, I would caution you not to do the analysis the way you're doing it and just to take the floor as the balance of the year, because we do expect to be above the floor, but we just haven't quantified how much at this point.

Stanley Bergman:

Yes. On the inflation side, we have experienced some inflation on branded supplier products, of course, due to raw material shortages and increase in labor. We've seen some price increases in PP&E products. Well, those seem to be moderating now. Our private label is seeing some price inflation. We expect that this will moderate. Companies are getting back into full swing, have a lot of overtime they're incurring to catch up. So I think there's going to be some inflation. I think it's going to moderate, number one. Number two is we are passing a lot of this on to our customers. But where we see this as a short-term issue, we're not doing that. So we're not super worried, but there is some pressure here due to the supply chain not quite being back to where it was in 2019. Container costs are up. As I said, overtime is being incurred by manufacturers. So I don't think it's alarming at this point. And if it were sustained, we, of course, pass it on to our customers, but also work with manufacturers to contain this increase in costs.

Jason Bednar:

Stan and Steve, you mentioned the belief that the shifting demand to scan-only options in the high-tech equipment side, on the CAD/CAM side, and how you expect those units to upgrade to full CAD/CAM capabilities in the future. Is that an indicator you're selling predominantly 1 manufacturer scanner over another or more a reflection of how you see the market evolving over time? And then do you sense the demand from dentists is at all being influenced by product positioning and promotions being offered by those manufacturers?

Jason Bednar:

All right. That's really great color, Stanley. Appreciate that. Just maybe one really quick follow-up on the supply chain challenges you were referencing on the basic equipment side. I mean this really sounds, as you framed it up, like a market-wide issue at the manufacturer level in terms of sourcing materials, which would suggest that business is simply just slipping into future quarters for you and others. But I guess just to clarify and to make sure, I mean has there been at all business that's moving to competitive distributors?

Operator:

Your next question comes from the line of Steven Valiquette with Barclays.

Stanley Bergman:

Yes. I don't have any specific projections in front of me. I don't know, Steven, whether we disclose this kind of information. But generally, 2 things. One is please understand that equipment sales can be lumpy, number one. But number two is dental equipment purchases and demand in the markets we're in is quite solid. You do reference Brazil. We did exit a part of the equipment market in Brazil. Essentially, we defocused certain manufacturers and have added other manufacturers. That was a 1- or 2-quarter issue. And our Brazil equipment are now, although not significant in the context of Henry Schein as a company, is doing quite well. But overall, I would say our equipment market is doing well. Dentists are investing in their practices. They want their practices to look and feel modern. Interest rates are helpful. Of course, when you look at all these numbers, you have to take into account tax situations. Who knows what exactly what is going to be the tax situation at the end of the - for the fourth quarter of 2021 in the United States? But generally, I would look at the trend and the trend for equipment sales domestically, Canada, mix up. North America and internationally is quite solid all around. And this particular supply chain issue will be dealt with. And these are quality manufacturers who will deal with the issue. And I expect to continue to see solid equipment growth in all categories going forward.

Nathan Rich:

Maybe Steve to start, did M&A or FX have a significant impact on operating margins in the quarter? And then bigger picture, I mean there's been, looking at the last 2 quarters, a bit of volatility in the operating margin. And just how are you thinking about that trend for the back half of the year? Any thoughts you could kind of provide as we think about how to model that line would be helpful. And then Stanley, maybe turning to you. You highlighted the double-digit growth in North America consumables as well as international markets versus 2019. It would be great to get your thoughts on what you think momentum will look like on the 2-year basis in the back half of the year. And it sounds like there's still room for international markets to improve. I wonder if you could comment just on how far below baseline we still are in Europe and Asia.

Stanley Bergman:

So the question on our international business. I think the international dental markets are quite strong. Germany is - has been strong throughout this period, that have a little bit of retraction there. But overall, it's quite strong. It's our biggest market in Europe. Parallels in size and scope to our Canadian business. And it's quite solid. Implants have done exceptionally well during this period of time. It's very important to us. Very profitable. We, I believe, sell more implants in Germany than anyone else. Our prices are reasonable, by the way. And France has been solid. Italy and Spain recovered. U.K. is still in the process of recovering. Other markets like the Netherlands are okay. But we are not fully back in terms of visits, 100% back to where we were in 2019. I think there are certain markets we are. We're close. But compared to the U.S. where we think the market - the patient visits are, on average, a little higher than '19, the data from the ADA doesn't contemplate exactly the right measurements for practices that are over 100% compared to '19 visits. Brazil is - has a high COVID rate, but we're particularly doing well. And Australia and New Zealand is pretty stable. But I would say in all these markets, there's still room to go, to get back to '19 outside of the U.S. And Henry Schein clearly is gaining market share. We've been working very hard in Europe for a long time and believe we have an outstanding management team in Europe and internationally as well. In Asia, we're growing, in Australia and New Zealand and, of course, Brazil. All with a very good management team, I'd say very stable and dynamic and excellent management team, which is driving our consumables and equipment business as well as our technology businesses. Our Medical business is relatively slow - small outside of the U.S., but is growing, added to management over there and investing in the business. So overall, we're quite optimistic about our international business. Carolynne, so is that it?

Stanley Bergman:

Okay. Thank you, Carolynne. Thank you, Steven. Thank you all for participating. I think you've got the tone of the call, and that is, we feel very good with the progress we're making. Our strategies are being implemented. I wouldn't say every strategy is exactly the speed we want. But there are parts of the business that are exceeding expectations. And we're very optimistic about the future. I believe we have a very good management team in place. The strategies are good. We are putting the final touches to our 2022 to 2024 strategic plan. I would say more or less in line with what we've been focused on for the past few years. Of course, we had, like everyone, a bump in the road in 2020. But I would say largely recovered from that. Although I think it is important, as Steven outlined, to be aware that we are in the midst of a pandemic. So once that concern dissipates, I think we can even be more optimistic. But overall, the business is doing well. We're performing on our strategies. Management is highly motivated. The team, in general, is motivated. And the dental markets have recovered to a very large extent. And the medical markets, almost there. So we believe that the growth in the ultimate care sites, from our point of view, is the right place to be, and that's what we're focused on. And we're putting our capital to work, I think, in an intelligent way, splitting it between investments and stock repurchase. The business is throwing off a lot of cash. So quite optimistic, and thank you for your interest. Of course, Steven and Carolynne would be happy to answer specific questions. I think our investor website has more information as well. So thank you, and look forward to an update 3 months from now. Thank you.

Operator:

Good morning, ladies and gentlemen, and welcome to the Henry Schein First Quarter 2021 Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today’s call, Carolynne Borders, Henry Schein’s Vice President of Investor Relations. Please go ahead, Carolynne.

Stanley Bergman:

Thank you, Carolynne. Good morning, everyone. I appreciate everyone calling in today. We’re obviously very pleased with what we view as an exceptional first quarter for our financial -- our global financial performance for the year 2021 versus the comparable period last year, but also versus the first quarter of 2019. These good results are based on excellent planning and execution across all of our businesses. Our team really came through for our customers, for our investors, for our suppliers during 2020 and now the first quarter of 2021. We also delivered very strong operating margins for the quarter. While end markets in most geographies still face challenges due to the ongoing pandemic, the overall global market recovery and our improving results have continued. Our positive momentum reflects the adaptiveness of our business model and, as I noted, a deep commitment of Team Schein Members across the board to our customers and, in fact, the communities that we serve. Throughout these unprecedented times, Henry Schein has remained focused on the safety of our team above all and, yes, responding to our customers’ needs, which were extremely varied across the world and went up and down as dynamics changed in an extremely dynamic environment. We, of course, continued to drive innovation across the platform. We gained market share, enhancing our margin and, yes, focused on optimizing our cost structure as we have for many years. We believe all this positions us well to continue to drive earnings growth and create value over the long run. Our steady way in which we’ve driven the business for decades remains very much intact with very good momentum. In line with improving end market conditions, in the fourth quarter of 2020, we resumed acquisition activity. We have a lot of activity going on. Of course, no deal is completed until it’s actually signed and inked and will then be reported on. In the first quarter of 2021, we closed 5 acquisitions across our Dental, Medical and Technology and Value-Added Services businesses, across basically the company with the aggregate sales of nearly $140 million, reflecting our commitment to a balanced strategy that supplements solid organic growth with acquisition contributions. In addition, during the first quarter, we resumed share repurchases. The bottom line is that our solid cash flow enables us to invest in our business, reflecting our goal to continue to deliver an attractive return on capital. I will remind shareholders that we’re into our 26th year as a public company, reflecting compounded annual growth of 12% on a non-GAAP basis and an increase in stock price of a similar number over this period on a compounded annual growth basis. Now returning to the current moment. The latest survey data published by the American Dental Association for U.S. -- for the U.S. shows that dental practices are approximately 87% of pre-COVID-19 patient volume, a data point that continues to improve, and we are experiencing improvements throughout the system, specifically in the U.S. The ADA remains bullish on the outlook for the dental profession in the months ahead as vaccinations likely hit a tipping point. The ADA also recently issued a report of partnering with Back to Normal Barometer to gain insights on customer sentiments related to dentistry. The survey found that a vast majority of patients who have not already visited dentists this past year are ready to return. As you know, we also closely monitor Henry Schein U.S. Dental eClaims data as a directional indicator. And we have a decent amount market share of that data -- of those claims processes -- claims processed. This data continues to show that patients are returning to practices for a broad set of oral care procedures and, most recently, including the hygiene arena. In addition, our medical customers have been resilient throughout this pandemic, and we are committed to helping our practitioners, both dental and medical, ensure patients can safely return to routine care as well as elective procedures and, of course, nonelective procedures. As COVID-19 cases decline and more people are vaccinated, we expect to see traffic -- patient traffic to physician offices and ambulatory surgery centers normalized, although I must stress that we’re not back to where we were with elective ambulatory surgical procedures. There’s a lot published on this. And also the normal rate of vaccinations by our practitioners is somewhat down since the volume, including pediatric visits, is down. But it’s slowly catching up to the 2019 volumes. Henry Schein has been deeply involved in efforts to promote more effective participation of primary care physicians and other office-based practitioners, including dentists in many states, who are allowed to administer the vaccination, and we are committed to driving vaccination rates nationwide with a particular focus on office-based practitioners. While many states provide these practitioners with access to the vaccine, it is extremely difficult and a complex process for office-based practitioners to receive an allotment of these vaccines. And at present, only about 1/3 of primary care physicians are able to offer the vaccine to their patients across the nation. COVID-19 vaccination efforts to get shots in the arms of the U.S. citizens have been quite extraordinary thus far. However, we also recognize that the country is now in a race against the variants. We continue to see equity challenges in the uptake of the vaccine, and there continues to be high rate of vaccine hesitancy in some areas of the country. We also recognize that the nation will swiftly need to prepare for delivery of booster vaccines and, yes, pediatric vaccination. Henry Schein has been working closely with the U.S. Department of Health and Human Services, FEMA, CDC, state and local authorities urging authorities to more effectively include primary care physicians and other office-based practitioners, as I noted, including dentists, by utilizing the existing and well-established distribution network to deliver vaccine to these providers. As part of this effort, we recently submitted the letter to the U.S. House Select Committee on the corona crisis. We firmly believe that primary care physicians are a vital resource in the COVID vaccination effort because the high level of trust they enjoy amongst patients, the understanding of patients’ health history and personal circumstances and their physical presence in every community around the country. The vast network of physicians and dentists in the U.S. can be immediately activated and, of course, literally overnight, more effectively advocating -- activating the cadre of health professionals who are highly trusted leaders in their communities to vaccinate Americans through their practices. This is critical at this moment in the country’s vaccination efforts to help overcome hesitancy, to address at-risk populations, reduce health inequities and ultimately ensure more patients are vaccinated. At the same time, more must be done to help other countries that face shortages of these critical vaccines, as equitable global access is crucial to ending the pandemic and the safety of the world’s population, including Americans. Through our work with the World Economic Forum and our partnership with the Pandemic Supply Chain Network, Henry Schein has been working to support COVAX, the international entity led by CEPI, Gavi and the World Health Organization and Unicef to accelerate access to the COVID vaccine in low and middle-income countries around the world. So the business is in good shape. We continued to have very good momentum. We’ve been reporting on our results throughout this period in a little bit more detail than in the past, and continued to be very optimistic with the direction of the pandemic at the moment, although there are some setbacks in countries like India. And we are well positioned -- continued to be well positioned to help combat the pandemic and at the same time increase shareholder value. With that, I’ll hand the call over to Steven to discuss our quarterly financial performance, and I’ll provide some additional commentary on current business conditions and our markets. Steven, please.

Stanley Bergman:

Thank you, Steven. Last quarter, we discussed our One Schein initiative, which is a unified go-to-market approach that enables practitioners to work synergistically with Henry Schein’s medical and dental supply chain, equipment sales and service, specialty businesses, Henry Schein One, and other value-added services. This allows our customers to leverage the combined value that we offer through a unique approach to managing customer engagement. Given our position as a large-scale distributor to both dental and medical practitioners, we are uniquely positioned to deliver value to our large customers by leveraging best practices and customer engagement and support while realizing internal synergies across our distribution businesses through common functions, processes and systems. We refer to these activities internally and related external and -- we refer to these activities and related external and internal benefits as One Schein. That’s how we refer to it internally. So we have -- sorry, One Distribution, sorry. We have One Schein, which really provides the customers with a unique experience, and One Distribution, which focuses on our internal infrastructure so that we can provide our customers with a unique experience. The benefit for our customers that purchase broadly across both dental and medical product categories, such as DSOs, for example, IDNs, large group practices, the government community health centers and other enterprise organizations is a more streamlined interface for formulary construction, RFP management, contract compliance, analytics and, yes, commission processing. For example, a large DSO customer will benefit from our expertise and resources addressing challenges that we have already solved for the medical customers such as onboarding new practices, promoting formulary compliance, rebate negotiations and efficient order processing. DSOs benefit from our ability to deliver a specialty offering like implants, bone regeneration products, orthodontics, endodontics, all in combination with our distribution platform. And the same applies to Henry Schein One software solutions, which can be combined with the distribution offering, consumables equipment, our specialty products, all providing customers with a unique experience through One Schein and through efficiencies internally through One Distribution. They also benefit from our capabilities, our customers, that address distribution value-added services needed from one source. In fact, we believe that a number of our recent DSO wins were attributable to the unique value proposition offered by our One Schein strategy. Now let’s spend a few minutes on the distribution side, looking more closely at our Dental distribution. Our first quarter Dental performance experienced, of course, strong sales growth in both North America and our international markets, including significant growth in North America dental equipment sales versus the fourth quarter of 2020. We experienced broad-based sales growth in North America and international dental consumable merchandise as the dental end markets have continued to improve. So now, let’s take a brief look at our specialty businesses. How does this fit in? As Steven noted, our global dental specialties generated double-digit year-over-year sales growth as we further penetrated these key specialty markets, both domestically and internationally. We also had a number of key strategic developments in each of these product categories. Our implants and oral surgery business, this is the largest of these 3 business units, including in our dental specialty business. This implants and oral surgery business unit experienced solid double-digit growth in the first quarter with significant contribution from BioHorizons and CAMLOG from specifically their implant lines. Sales growth in the U.S. was driven by new product introductions, growth with DSO customers, and also by a digital CAD/CAM related solution for implant procedures. New product launches include our progressive implant line across Europe, Canada and more recently, the U.S., as well as our Tapered Pro implant and NovoMatrix reconstruction tissue solutions. On the endodontic side, just a brief note. In the first quarter, the strength was driven by DSO -- by the DSO customer segment as well as by the launch of several nickel titanium products across the endo platform. In the orthodontic market, we continued to see a steady improvement in both orthodontic case volume and revenue, as dental practice patient volumes have improved. While our Reveal and SLX Clear Aligner business is currently a small portion of total dental sales, we believe this business will have a more meaningful contribution to growth over the long term. It’s steady progress. We have expanded to offer Reveal in over 20 international markets, including recent launches in France and Poland, and we anticipate launching in several additional markets this year, including Ireland, Italy and Spain. Importantly, we continued to invest in advancing our orthodontic treatment software, including scanner integration, delivery -- delivering an intuitive solution that streamlines case submissions, clinical reviews and treatment tracking. We continue to invest further in innovation as we develop an enhance treatment solutions for these markets. And we expect patient volume across our Dental business to continue to improve over time as infection rates decline. That’s, I think, a global statement. So let’s just now focus a little bit on Henry Schein One. This is highlighted within our Technology and Value-Added Services business. Henry Schein One sales continued to improve towards prepandemic levels and our investment in R&D and our teams continue to make good progress in the area of our Henry Schein One business. In the first quarter of 2021, we introduced a number of new products, enhancements, including new Dentrix imaging software, tools for processing insurance remittances and calculating payment adjustments, marketing campaign enhancements for the Lighthouse 360 platform and an online booking feature for our Sesame, that’s primarily an orthodontic business software for those websites. Importantly, we are more closely aligning our Henry Schein One and Henry Schein Dental teams through the -- through our Henry Schein -- through our One Schein program, bringing together Henry Schein One and Henry Schein Dental teams to promote bundled solutions aimed at improving customer experience, retention and most importantly, practice efficiency. And this is, of course, primarily through digital integration. Now the Medical distribution business. If you look at the performance of the Medical distribution business, you will see why we are pleased with the strong double-digit sales growth in the first quarter. This was driven by PP&E and COVID-19 test sales. Similar to the dental end markets, we expect the physician ambulatory surgical center, alternate care home health markets to improve over time as infection levels abate and patient volumes normalize. We also have a focus on workplace health and sports medicine on both of those segments in the U.S., which is as important as employers consider cost-effective means for employee wellness. Our plans offer employers diagnostic testing support, PP&E and return-to-work consultation. Overall, our solutions portfolio remains a focus beyond traditional medical supplies. This includes a comprehensive telemarketing platform in the medical arena, a cybersecurity solution for health care that we offer to physicians and medical practices, and a digital diabetes care initiative. I’d like to point out that while PP&E sales have begun to moderate from recent quarterly growth levels in both Dental and Medical, both sides of the house, we anticipate that PP&E sales will remain at elevated levels as dentists and physicians implement new standards of care, new best practices as related to infection control. And so we do see this demand for PP&E products to continue, although there will be pricing deflation in several areas, but the units will continue to be relatively strong. So now, operator, if there’s any questions, we can handle them. Thank you.

Jeff Johnson:

Can you hear me okay?

Jeff Johnson:

Great. So I wanted to start first on your operating margin. Obviously, the 8% operating margin was a big improvement sequentially, but also relative to 1Q, both last year and even relative to 2019’s 1Q. Steve, when I look at kind of your floor guidance, and I understand it’s floor, but it seems to imply operating margin maybe falling back down to the low 7s, maybe even a little bit below 7% over the balance of this year. Just, one, help us understand the drivers of the 1Q improvement and then how to think maybe sequentially the next few quarters on the operating margin line?

Jeff Johnson:

Fair enough. And maybe just as a quick follow-up. When I look at your Dental business, Steve or Stan, and look at kind of relative to 2019 and try to exclude the PPE, it looks to me like your core dental revs ex that PPE and COVID testing is probably up about 6% to 8% relative to 1Q ‘19. So are we sustainably back to core dental being above 2019 levels? Was there something in 1Q that might be a little bit of a head fake there? Just how to think about the next few quarters, again, knowing that you’re not guiding on revenue either? Are we sustainably above kind of the ‘19 levels of core dental?

Stanley Bergman:

Thank you, Steven. Let me just add something, a comment from a macro point of view, Jeff. We’re feeling pretty good about the global dental market. It’s bounced back, particularly strong in some of the specialty areas, at least in our business. The only caution we have to add is, we’re in the midst of a pandemic. The pandemic is not finished. We saw what -- we can see what’s going on in India and a number of other parts of the world. This could all come back. So I don’t want to be a negative cloud over the dental industry or our performance as a company. But assuming things continue, assuming we do not have any major setbacks because of COVID, I remain extremely bullish about the dental markets. In particular, there is a growing understanding amongst payers that there’s a direct correlation between good oral care and good health care. I expect that governments around the world will recognize this. It will be greater reimbursement for dentistry. Can’t say it’s going to be next quarter. But I think we can continue to be relatively bullish about the dental market with one big footnote. No one knows where this virus is going. And that’s the basis under which Steven gave guidance at a floor. And we just can’t give guidance on the upside because we just don’t know where this virus is going to take us. The virus will, at some point, be over though.

Elizabeth Anderson:

My first question would be on the implant market. It seems like you guys have noticed that, obviously, an uptick as we’re coming out of, hopefully, the pandemic. Is that sort of just a reflection of the return of volumes? Or do you see any kind of increasing competitive sources in the implant industry broadly, both -- maybe if you could comment both on this sort of -- any particular geographies or products?

Elizabeth Anderson:

Got it. That’s helpful. And can you talk about specifically some of your expectations throughout the year for the -- in the Medical business, maybe particularly on what you’re assuming around flu in the fourth quarter? And then anything else in terms of changes to COVID vaccines?

Operator:

Your next question comes from the line of Steven Valiquette with Barclays.