Q4 2020 Henry Schein Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the Henry Schein fourth quarter 'twenty 'twenty 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, if anyone should require assistance during the call. Please press the star key followed by zero on your touch.
The tone phone as a reminder of this call is being recorded I would now like to introduce your host for today's call Carolyn borders Henry Schein, Vice President of Investor Relations. Please go ahead Carolyn.
Thank you Regina and my thanks to each of you for joining us to discuss Henry Schein as results for the 2024th quarter and full year with me on the call today are Stanley Bergman Chairman of the Board and Chief Executive Officer of Henry Schein, and Steven Paladino, Executive Vice President and Chief Financial Officer before we begin.
I would like the state that certain comments made during this call will include information that is forward looking as you know risks and uncertainties involved in the company's business may affect the matters referred to in forward looking statements. As a result of the company's performance may materially differ from those expressed in or indicated by such forward looking statements.
These forward looking statements are qualified in their entirety by the cautionary statements contained in the Henry Schein filings with the Securities and Exchange Commission, including in the risk factors section of those filings.
In addition, all comments about the markets, we serve including end market growth rates and market share are based upon the company's internal analysis and estimates our conference call remarks will include both GAAP and non-GAAP financial results. We believe the non-GAAP financial measures provide investors with useful supplemental information about the fin.
Performance of our business enable the comparison of financial results between periods, where certain items may vary independently of the business performance and allow for greater transparency with respect to key metrics used by management in operating our business. These non-GAAP financial measures are presented solely for informational and comparative.
Of purposes, and should not be regarded as a replacement for corresponding GAAP measures reconciliations between GAAP and non-GAAP measures can be found in the supplemental information section of our Investor Relations website and in exhibit B of today's press release, which is available on the Investor Relations section of our website.
The content of this conference call contains time sensitive information that is accurate only as of the date of the live broadcast February 17th 'twenty 'twenty, one Henry Schein undertakes no obligation to revise or update any forward looking statements to reflect events or circumstances. After the date of this call. Please limit yourself to a single <unk>.
And the follow up during Q&A to allow as many listeners as possible to ask a question within the one hour we have a lot of it for this call with that said I would like to turn the call over to Stanley Bergman.
Good morning. Thank you tell them. Thank you all for participating in today's day.
Against the backdrop of the most challenging.
You know history due to the Covid pandemic.
With unprecedented human toll.
And economic impact worldwide, we were successful.
And supporting practices.
Please open the call emergency services.
And also assisting customers preparing to the stool practices the increased operating capacity as the.
The Striction E N.
Henry Schein unwavering focus on our customers along with all of resilience and agility.
The fourth quarter of total sales growth of 18, 6% cash.
The record total sales for the second half of 2020.
The end market.
Rebounding.
Our teams are working tirelessly to execute against that plan.
The commitment and sacrifice of team Schein members globally and wished the sincerely. Thank the team for their continued commitment the tea.
<unk> brings the Henry Schein each day.
Good day patient traffic has remained at the stable levels compared to the third quarter of 2020, even in countries experiencing more stringent lockdown rules with the exception of the U K to day the overlay of recovery is continuing.
Specifically in the United States. The latest survey data published by the American Dental Association from the U S shows the dental practices.
At the close to 80% of pre Covid patient volume, that's the patient traffic.
The patient volumes represent a slight increase over the past couple of months of 88, Sydney day by day.
Peter.
Which we believe is reasonably accurate Henry Schein U S. Dental claims data also show that patients continue to return for a broad set of okay procedures.
We also believe overall patient volumes in medical school at relatively stable levels. In fact, we are pleased to report net for the second quarter in a row of global medical business has achieved over $1 billion of quarterly sales.
Overtime of dental and medical customers, we believe.
Will we what we believe.
We'll experience patient traffic.
That will improve to pre COVID-19 levels.
We are pleased with all of non PPE and Covid related sales for the fourth quarter.
In both dental and medical in the United States and abroad.
But also expect P. P. M. COVID-19 related sales to continue to be elevated.
To continue at the elevated levels to support the standard of care.
Followed by practitioners.
So although we all.
Pleased with our.
Non P. P E sales and we did experienced significant increase in PPE and Covid related sales, we do expect.
That's P. P you know known and Covid.
The latest sales will continue at these elevated levels beyond.
The CF well beyond the <unk>.
End of <unk>, 'twenty 'twenty into 'twenty, one and beyond.
Despite this very difficult past year, we remain optimistic about our future and up the.
The financial position is strong.
We remain confident that Henry Schein is well positioned for future continued success given the breadth of our product services.
And supplier and team schein support across the global dental and medical markets.
Today, we will review the specifics of our financial results.
The key achievements in 2020 provide.
Provide our perspective on the states about end markets and speak to our strategic focus.
While providing guidance for 'twenty, one for 'twenty 'twenty one of course bearing in mind that we are still in the midst of of pandemic.
However, before Stephen office his remarks, I would like to clarify a point related to the impact of noncash nonrecurring intangible asset impairment charge of $18 million.
Just over $18 million that we announced the day. This impairment charge was recorded within operating expenses impacting our operating margins of about 57 basis points. It should of course be noted that cash impairment charge reduced both GAAP.
GAAP EPS of non-GAAP EPS by seven cents.
With that I'll ask Steven to discuss our quarterly and full year financial performance and then I'll provide some additional comments on the current business conditions, our markets and where we're heading.
Steven please.
Okay. Thank you Stanley and good morning to everyone. As we begin I'd like to point out that I will be discussing our results from continuing operations as we can.
On the GAAP basis, and also on the non-GAAP basis. Our Q4 2020 in Q4 of 2019 non-GAAP results exclude certain items that are detailed in exhibit b of today's press release and in the supplemental information section of our Investor Relations website.
Please note that we have again included of corporate sales category for Q4 that represents sales to cold buttress under the transitional services agreements that has now expired just shy of two years since the completion of the spin off of our animal health business the form co buses.
We expect stranded costs related to the animal health spin off to be in the tens of $12 million range for 2021.
Turning now to our financial results total net sales for the quarter ended December 26, two.
$23 $2 billion, reflecting both the base two 6% compared with the prior year with internally generated sales up 17, 1% in local currencies, which was driven by sales of PPE or personal protective equipment as well as COVID-19 related products details of sales performance of contained.
The exhibit E about earnings press release press release issued earlier today.
On the GAAP basis, our operating margin for the fourth quarter of 2020 was five 7% representing a decrease of 164 basis points compared with the prior year.
On the non-GAAP basis, other operating margin of five 9% contracted by 146 basis points on the year over year basis again of reconciliation of GAAP operating margin to non-GAAP operating margin can be found in the supplemental information page on the Investor Relations page of our website.
Our operating margin was unfavorable unfavorably impacted by significant inventory adjustments associated with PPE and COVID-19 related products as well as lower supplier rebates and that was partially offset by lower expenses as a percentage of sales.
It's important to note, we do not expect any material inventory adjustments to continue into 'twenty and 'twenty one.
Our operating margin of Stanley said was also negatively impacted by 57 basis points due to a noncash nonrecurring Inc.
Tangible asset impairment charge recorded by Henry Schein, one of approximately $18 $1 million, which reduced both GAAP and non-GAAP EPS by <unk> <unk> per diluted share.
Turning to taxes, our reported GAAP effective tax rate for the fourth quarter of 2020 was 17, 3%. This compares with 22, 3% GAAP effective tax rate for the fourth quarter of 2019.
And on the non-GAAP basis, our effective tax rate was 17, 5%, which compares to a prior year non-GAAP effective tax rate of 22, 2%.
You can see a reconciliation of GAAP effective tax rate the non-GAAP effective tax rate again on our supplemental information page of <unk>.
On our website.
The slower effective tax rate in the fourth quarter of 2020 was favorably impacted by income tax resolutions from both the U S as well as internationally, which lowered the income tax expense by approximately $14 $6 million or 10 cents per diluted share.
Excluding this impact the effective tax rate would have been in the 26% range of both GAAP and non-GAAP.
Moving on from our GAAP net income from continuing operations attributable to Henry Schein for the fourth quarter of 2020 was $141 9 million or <unk> 99 per diluted share.
Compared with the prior year GAAP net income from continuing operations of $330 million or $2 25 per diluted share, but remember that included a net gain on the sale of equity investments of $1 27.
Our non-GAAP net income from continuing operations for the fourth quarter of 2020 was $143 $6 million of $1 per diluted share and this compares to the non-GAAP net income from continuing operations of $143 million or <unk> 97 per diluted share for the fourth quarter of last year.
Again, both our GAAP and non-GAAP net income for the fourth quarter was favorably impacted by the tax resolutions I just mentioned.
And unfavourably impacted by the one time.
I am in charge.
Our amortization of acquired intangibles for Q4, 2020 was $25 3 million pretax or <unk> 11 per diluted share. This excludes the nonrecurring the $18 $1 million impairment charge that we recorded from the current quarter and compares to $26 $9 million pre tax or 12 cents per diluted.
Would share the same period last year.
Similarly for the full year 2020 amortization from acquired intangibles was $102 $1 million pretax or <unk> 40 per diluted share.
This excludes the combined $23 million and noncash asset impairment charges that we recorded in Q1 as well as in the current quarter and compares to $105 9 million pretax or <unk> 46 cents per diluted share in 2019.
I'll also note that foreign currency.
<unk> had a very minor impact on our EPS the positively impacted Q4.
Diluted EPS by less than one.
Per share.
Let me now provide some detail on our sales results for the fourth quarter Global dental sales of $1 8 billion grew seven 2% compared with the same period last year with internal sales growth of five 1% in local currencies.
Global dental consumable merchandise internal sales increased by 10% in local currencies in the fourth quarter, and excluding PPE and Covid related products sales increase was 550%.
Note that the five zero percent quarterly.
Growth rate is among the highest that we've recorded of Henry Schein since 2017.
North American internal sales in local currencies declined declined <unk>, 7%, which included growth of five 3% from dental consumable merchandise.
All of 4%, excluding PPE and Covid related products from the 13, 2% decline in sales of dental equipment.
Our international dental internal sales growth in local currencies was 14, 2%, which included 16, 7% growth in sales of dental consumable merchandise sales.
Or 11, 4% when excluding P. P at PPE and Covid related products and six 8% growth in sales of international dental equipment.
Looking at dental consumable merchandise sales, we experienced very solid growth in the U S cash.
Canada, Australia, New Zealand, China, Brazil, and throughout most of Europe, We saw particular strength in France, and Germany, The Netherlands, Belgium, Austria, Italy and Poland.
However, the UK countries.
Continued to experience lower sales of that country has moved into a stricter lockdown.
Our north American dental equipment sales performance was impacted by a difficult prior year comparison, including the debt supply Sirona world event, moving to a virtual platform and production transitions as a key supplier exited traditional equipment categories.
In addition, we believe some practices potentially held off on your year end equipment purchases as U S tax incentives, maybe more of a favorable in 2021.
International Dental equipment sales growth in Q4 was driven by strength in Germany, Austria, France, as well as Australia, and New Zealand, we experienced high single digit internal sales growth in local currencies and traditional equipment and low single digit growth in high tech equipment internationally.
We continue to be encouraged by the extent of customer engagement and interest in equipment and technology investments currently both of our North America and international equipment backlogs of exhibiting growth year over year. Please keep in mind that backlog represents sales orders at the end of the quarter that had not been.
<unk>, but we also take a substantial amount of orders within the quarter that will drive our sales results for the current quarter.
Given our current perspective, we are optimistic about our north American as well as international dental equipment sales growth for the first quarter of 2021.
Our global dental specialty revenue in the fourth quarter totaled approximately $200 million with internal growth of two 2% in local currencies versus the prior year.
The split was one 7% growth in North America.
And three 1% internationally.
Our global dental implant growth in the fourth quarter was four 3%.
Our OIBDA for the topic sales decreased by 5% primarily due to the business interruption as we moved to a new district distribution center in Q4, as well as the supply of exiting the market, which resulted in the shift of orders through alternate suppliers, we expect to see a sequential improvement north of adopted sales from the first quarter of <unk>.
One of 21.
Turning now to global medical sales, they were up $1 $2 billion and growth of 48, 5% compared to the same period last year.
48, 2% of debt was in local currencies and included 47, 9% increase in North America and international sales growth of.
63, 1%.
Medical sales results were driven by continued strong demand for PPE and COVID-19 related products.
If you want to exclude the sales of these products the global medical internal growth in local currencies was approximately three 6%.
I'll also note that we sold approximately $270 million and Covid test in Q4, including some multi assay flu and COVID-19 combination tests. This was up from approximately $100 million in the third quarter. We believe solid Covid test sales growth is likely to continue.
While COVID-19 cases remain at relatively high levels, we are.
Also experienced double digit growth from sales of med surge products in Q4.
Turning to the technology and value added services of sales they were $138 $7 million from the fourth quarter, an increase of one 2% compared with the prior year Inc.
The decline in internally generated sales in local currencies of approximately <unk>, 7% in.
In North America second value added services internal sales growth was <unk>, 6% in local currencies.
And I'll note that the sales growth was impacted by transactional revenue associated with the lower number of patient visits compared to pre COVID-19 levels. We also faced the difficult prior year comparison that benefited that benefited hardware upgrades in the prior year as we help transition customers to address new operating.
System requirements.
We are very pleased with our solid sales growth from our <unk>.
<unk> cloud based software solutions as well as financial services.
Internationally type of technology and value added services internal sales declined by eight 4% in local currencies when compared to the prior year.
The prolonged lockdown in the U K significantly impacted this international business.
As we discussed during our Q1 earnings call of last May we temporarily suspended our share repurchase program as the means to preserve cash in response would be impacted of COVID-19 on our business operations and due to certain restrictions related to financial covenants covenants prior to the suspension of this program in 2020, we.
We repurchased approximately one 2 million shares at $61.
<unk> 49.
Average price.
Which represents a total of $73 $8 million from cash at the year end, we had approximately $201 million authorized and available for future stock purchases, but remember when we amended our credit facilities earlier. This year. We also agreed to restrict stock repurchases until we report our second quarter 2020.
The financial results.
Currently we have significant access.
Access to liquidity, providing flexibility and financial stability in this challenging environment.
Operating cash flow from continuing operations for the fourth quarter was $345 million compared to $295 million from the fourth quarter of last year.
This year over year increase was primarily due to higher net income in 2020.
After adjusting for the pre tax gain on the sale of equity investments from the prior year.
As part of our previously disclosed restructuring initiative, we recorded a pre tax.
Charge in Q4, 2020 of $4 $4 million of <unk> per diluted share. This charge, primarily relates to severance pay and facility closing costs and reflects opportunities to reduce expenses drive operating efficiencies and mitigated stranded costs.
We anticipate additional restructuring costs in 2021.
I'll now provide a quick review of the full year of 2020, and then move on to 2021 guidance. During 2020, we achieved total net sales of $10 1 billion up one 3% from 29.
From 2019, sorry, with internally generated sales of <unk>, 8% in local currencies and this is all despite the significant impact we saw earlier in the year regarding the Covid pandemic.
GAAP diluted EPS from continuing operations increased 41% largely impacted by COVID-19, and the net gain on sale of the equity of fish.
The investments in the prior year.
Non-GAAP EPS declined 15% due to the impact of COVID-19, and again, we're pleased with solid operating cash flow of the year of almost $600 million with cash funds.
Which funds our balanced approach to capital allocation.
Let me conclude my remarks on financial guidance at this time, we're not providing of 21 GAAP.
GAAP guidance since we are unable to provide an accurate estimate of expenses related to the ongoing restructuring initiatives.
However, given the wide range of analyst EPS estimates EPS estimates for the year, we see of benefit and providing a high level guidance.
As such we expect that our 2021 non-GAAP diluted EPS from continuing operations attributable to Henry Schein will be at or above 2019, non-GAAP diluted EPS from continuing operations, which was $3 51.
We believe this comparison to 2019 non-GAAP diluted EPS from continuing operations.
As appropriate given the COVID-19 impact on 2020 results I think it's very important to note that our guidance is not a range.
And it is not a specific.
EPS number.
In fact, what we're trying to show and what we're intending for this guidance of $3 51 at or above $3 51 to be a flow off of our guidance and not a specific guidance number so hopefully it's taken as such.
And keep in mind that guidance.
For 2021, non-GAAP EPS attributable to Henry Schein is for current operations as well as completed the previously announced acquisitions, but the does not include the potential for future acquisitions, if any as well as restricted restructuring expenses with share repurchases.
Our guidance also excludes assumes foreign exchange rates of the generally consistent with what.
With current levels and also assumes that the end markets remain stable and consistent with current market conditions.
Of course guidance does not assume any material market changes associated with COVID-19.
So with that summary, I'd like to turn the call back over the Stanley.
Thank you very much Steven.
I'd like to take a few minutes to discuss our strategic planning process.
We undertake eroding formal planning initiative every three years.
And we are currently in the midst of developing our 2022 to 2020 full strategic plan, which we believe will help us focus on optimizing the long term return on our investments and enable us to continue delivering value to our shareholders.
We had the food of close and I think the this is no the strategic planning process for one year as we focused on addressing the impact of COVID-19 today wed like to of a preview of our thinking around some key components of our strategic plan.
First the key element in our effort to growth closer to our customers is our one schein initiative, which is the unified go to market approach that enables practitioners to work Synergistically with Henry Schein supply chain.
The equipment sales and service and other value added services, allowing our customers to leverage the combined value that we offer through a single program specifically one schein provides customers with streamlined access to our comprehensive offering of of course national brand products, Henry Schein private label and proprietary.
<unk> specialty products and solutions, including surgical endodontics orthodontic products.
In addition customers have access to services pretty wide range, probably the largest we believe in the marketplaces that we serve including our suffering and other value added services.
Ultimately.
One schein enables customers to benefit from the ability to enrich patient treatment options and outcomes and simplify the business operations. In addition to the opportunity to drive practice profitability.
So looking more closely at our technology and value added services and dental specialty businesses, Let me start with a discussion on our technology and value added services business, which comprises of approximately $500 million of revenue about 5% of Henry Schein to total sales in 2020.
I would like to note that COVID-19 had a significant negative impact on the technology and value added services business.
At least from a sales point of view.
Within the segment of Henry Schein, one our dental software offering represents the lion's share of sales and it's also one of the Henry Schein.
Highest.
The margin businesses one of our large.
Our highest margin businesses.
Reflected in the Henry Schein one business.
Our comprehensive suite of integrated dental software solutions reaches far beyond practice management software, which is key to simplifying Clint.
Clinical and office space processes in the physical office.
All in the cloud.
So we go beyond the practice management software, which of course is quite effective and are the leading <unk>.
Systems in the World. We are also advancing patient demand generation with our expertise in website search engine optimization patient abusing dental directories and dental savings plans.
Our patient engagement solutions helped practices communicate with patients engaged in market campaigns and facilitate online bookings and our revenue cycle management products facilitate insurance processing of patient payments. We believe that no. Other company offers of combined portfolio of products is broad.
As extensive as Henry Schein, one solutions and and that our expertise is fundamental to the capabilities the petition of value as a resource to help drive practice success.
We are delighted that Mike bid has joined us as CEO of Henry Schein, one taking over the role that John Cook.
So of our dental of a global dental group held on an interim basis.
In his new role Michael of work with leaders across Henry Schein, one, including our software businesses in North America, Europe, and the Asia Pacific region to continued.
Promotion of our industry, leading practice management patient engagement and patient demand creation solutions is team will also continue to collaborate closely with Henry Schein dental and our specialty businesses to help drive one schein.
The one schein offering to dental professionals around the world prior to joining Henry Schein, one Mike held several leadership positions in the healthcare information technology space and most recently served as president of health systems at American wealth.
During the fourth quarter, we launched the number of product enhancements for Henry Schein, one solutions, including directory online booking which is self scheduling solution.
The Webmd directory alive prospective patients to book appointments online through the Webmd directory.
Patient engagement line, which provides dental practice teams with access to real time patient notification the patient engage mobile app, which enables practice functions on the go to influx of sin pay and the interest enterprise pay which integrate point of service card processing solutions for the fastest.
Check in check.
Check out processing.
At the after the procedure is completed and then send E Rx, which is an integrated electronic prescribing solution that enables seamless electronically prescribing functionality with the practice management system.
Our value added services also includes Henry Schein financial services, which facilitates financing options, including equipment technology financing and leasing working capital loans as well as patient finance and credit card options.
Our business solutions, offering which is the third component in this.
In this group.
All of us.
The complete array of value added services.
And include technology, as well as resources from improving key business functions that contribute to the successful business operations of clinical effectiveness of dental and medical practices.
So that's out of technology.
And value added service offering which is described separately.
Reported separately in our financial statements, let me now discuss our dental specialty business, which consists of dental implants of biomaterials for tooth replacement therapy certain share surgical.
[laughter] pharmaceutical products, endodontics, and rotary products as well as orthodontic products.
Comprising approximately 12% of our global dental sales.
This business generated sales of approximately 700.
$100 million in 2020 of course, we are.
We're quite pleased with these results given the COVID-19.
<unk> is an experienced which had a significant.
The negative impact on 2020 sales and particularly in the second quarter.
We did recover significantly in the affected very well in the third and fourth quarter for the put in other words, the second half of the yet given.
Given the propriety of proprietary designs of new unique value proposition of the specialized products of dental.
Specialties businesses command the higher margin.
The most co of dental products that we distribute.
Through our expertise across the entire value chain from research and development production and distribution to marketing education and value added services offered by the.
The practitioners undertaken of specialty products and procedures.
Our customers benefit from our high pace of innovation and a comprehensive portfolio of specialty products and related value added services.
As a percentage of global dental specialty sales.
Implant.
Tooth replacement bone regeneration in oral surgery products represent the largest portion of dental specialty sales with contributions from our buyer horizons catalog, the dentist medical surgical and southern anesthesia businesses.
Over the past several quarters, we believe we have been among the leading companies in premium implant segment sales performance.
The strong sales of biomaterials, we expect the strength to continue based on our continued innovative.
The innovation and investment and portfolio expansion and value added services. In addition, the dentist medical our value.
Valley implant line posted solid fourth quarter sales in the dark region, which represents the dentist largest region.
The next.
Largest piece in our specialties businesses that business.
And the <unk> products, which includes rustler dental our Henry Schein brand in the Endodontics ranges and other products as well as national brand products, we continue to invest in enhancing our selling capabilities and the R&D around our in the daunting platform and but we believe we have gained market share.
In key markets.
Less.
On the specialty side, our orthodontic business is comprised of sales from ASO to ASO technology, and our reveal clearer line of businesses.
Although our orthodontic sales and specifically a clearer line of sales represent the smallest dental specialty business part.
Part of our specialty business sales continued to growth and we expect that trend to continue as we invest in enhancing the user experience of sales marketing and manufacturing innovation, including without software solutions.
On the script the specialty group in general we continue to make progress in penetrating private practices, the mid market and DSO customers that value of the precision quality and expertise that we deliver through our dental specialty solutions and part due to our one schein initiatives.
So now let me just address of PPE and Covid testing for a minute.
The Covid related COVID-19 tests and other related products.
In both of the dental and medical markets. We expect we will continue to see sales of PPE and COVID-19 related products at elevated levels.
Page of pre COVID-19 levels.
We've continued to firm up global sources of supply and have begun to utilize alternative domestic manufacturers to meet our customer supply needs.
We are very pleased.
Pleased and proud of in fact of the way, we handle the whole PPE and testing.
<unk> ability of products during 2020.
When we win.
Her extensive activities and seeking product.
Our flu product in from around the world ensure that our customers had adequate PPE products and tissue products as well.
<unk> us a lot of money to do this but well worth it from a customer service and satisfaction of point of view.
At this time, we believe that most dental and medical practices are able to access adequate supply of PPE, including face shields masks gowns and thermometers.
The exceptions continue to be where the market is experiencing compliant supply constraints from particular products, such as nitrile gloves medical wipes and more recently syringes and needles inventory to support the vaccine. The rollout. We believe we have adequate availability for our current customer base.
And should be able to satisfy our customers' needs as we have.
During the most of 2020.
Now, let me turn to M&A for a moment.
On the acquisition side.
Although we suspended the M&A activities from March through the summer, we closed nine acquisitions of Eric of sales of almost $300 million and deployed nearly $200 million from capital.
These transactions are expected to be slightly dilutive in the first year and quite accretive thereafter.
In the new year, we announced the acquisition of prison medical products. This transaction expense our U S medical business beyond the core base of office based physicians and into the home health market, specifically home medical supplies.
There is a natural extension of our focus on the continuum of care delivery model.
With revenues of $52 million from the 12 months ended September 30 of 2020 prison serves a broad network of nationally affiliated and independent of the operated wound care clinics as well as specialist practices. We believe this acquisition will allow us to move closer to the patients. It also strengthens our relationship with physician.
Who prescribed of medical supplies.
I would like to take a moment to address.
Our investments in technology and business intelligence to enhance current E commerce digital marketing of customer engagement tools to help our teams succeed in the market.
Providing of course greater customer satisfaction.
The marketing automation customer insights and analytics.
Personalization technologies and customer experience management tools are just a few of the many areas in which we have made.
Suitable advancement in recent years.
Consistent with our broad digital strategy. These investments leverage best of breed technology to ensure we provide a rich customer experience.
<unk> as customers' needs evolve.
As part of supporting our customers through every step of the buying journey we are focused.
Our global E Commerce platform for dental and medical which we internally refer to as gift GE Pete.
Successful implementation of current and future.
Uh huh.
<unk> investments will enable the Henry Schein to remain the destination of choice over the long term for health care providers from suppliers keep in mind that we are early in the process of planning and implementing long term phases. The long term phases of gift market by market. The long term phase of gift will be rolled out beginning of 2002.
92, and continue through 2024, we are of great team in place and consistent with our history of rolling out advancements in the space on a consistent and reliable basis. We are extremely enthusiastic about the GAAP investments again, we look forward to keeping you apprised of our <unk>.
The strategic plans as we enhance the breadth of our solutions and services offerings and look to deliver continued long term value too.
Stakeholders.
Which takes me to of short discussion on ESG.
I would like to comment on the significant work that Henry Schein has undertaken over.
Over the years in this area and particularly this past year to enhance our long standing commitment to environmental social and governance.
Of note ESG initiatives.
In 2019, we embarked on the journey to evolve our ESG disclosure.
With the goal of reporting on appropriate global reporting initiative also known as <unk> standards.
We've had a broad cross functional team working with our business of corporate teams from goals and targets of carbon dioxide energy waste the waste supply chain diversity and inclusion safety employee training voluntary and community impact.
Our diversity inclusion work.
<unk> has always been a part of our core values.
And we have helped drive this conversation from more than two decades.
Building on our women's leadership network employee resource group, we have added three additional employee resource groups. This year.
Last year, including our Black legacy professional pride and allies and Latin EOG.
We were pleased to earn 100% on the human rights campaign Foundation's annual assessment of LGBTQ workplace equality and the name.
To fortune's world's most admired companies list for the 20th consecutive year.
The ranking actually first in our category for the last couple of years with the support of Henry Schein Senior management and oversight of the nominating and governance Committee of the board of directors.
ESG program reflects our long history as a purpose driven higher ambitions company that integrates our sense of purpose and the way we operate our business.
Last let me just report on our board of directors.
We recently announced changes as Paul brands ensure of Goodman will not stand for reelection at our 2021 stockholder meeting.
We think of course, Paul and share.
There are many years of service and valued contributions to the Henry Schein Board.
At the same time, we will come our newest board members Mohamad Ali.
And Deborah Derby Mohamad has extensive experience with successful technology transformation and Deb brings broad operational strategic and senior leadership experience with public companies.
The addition of these directors complements the skill and experience of our current board and we are confident that the collect the set of leaders will provide valuable valuable perspectives as we continue to execute our strategy.
I realize that was a lot, but there's a lot going on at Henry Schein.
So now we're happy to open.
The flow to any Q&A.
For any questions.
<unk> may have and we will answer thank you.
That's the only behind two basket question simply press Star followed by the number one on your telephone keypad. We ask that you. Please limit your questions to one and one follow up our first question will come from the line of Jeff Johnson with Baird.
Thank you good morning, guys.
Two questions if I could this morning first just Steve on 2021 guidance I understand that Youre not you really never do I guess provide revenue guidance I'd still be interested in hearing maybe how youre thinking about your core ex PPE and Covid product revenue is in dental and medical do they get back to 2019 levels this year or how to think about that and given the addition.
PPE and Covid revenues in 'twenty, one versus 19, it seems like your 'twenty, one EPS guidance, if I were to get down to that $3 51 level. Your margins have to be down something like 60, 70 basis points versus 19 is that a fair ballpark of thing to get down to that $3 51 level. Thanks.
Yeah. Thanks for the question Geoff So again I just want to make sure people understand that the guidance that we gave.
Is the floor.
Debated quite quite honestly, whether to give guidance or not this quarter.
But leading up to the quarter with Investor meetings, we were getting lots of questions on guidance and we felt giving a floor.
Was beneficial.
Rather than giving nothing and having that total uncertainty out there. So please take it as the floor.
The other point I want to make the quite directly answer your questions. Jeff is that people seem to look at as you are the non PPE core sales growth and I think it's important to note that if you look at North American dental consumables as an example.
Growth was I think it was <unk>, 4% excluding.
PPE products, but that's given patient traffic is down 80% of down 20% to 80%. So that's a I think a.
A good number considering that and the other thing Thats important to note is that we believe that PPE and COVID-19 related products will continue to be strong going forward.
It will represent really the new standard of care for practitioners. So I wouldn't look at those revenues as nonrecurring I would look at them as recovery.
But given that.
The growth of an hour.
Sales, excluding PPE to specifically answer your question really is directly related to the continued improvement in the underlying market, having that patient traffic growth from <unk>.
80% to a higher number.
Given that we're not making predictions on that it's hard really to specifically answer the back that's the correlation that we're looking for.
Also I would say that while we're not giving specific margin.
Items, we did note at least a couple of things in the call that negatively impact margin.
One is stranded costs that we did say will be $10 million to $12 million for.
For the current year for 2021.
And Stanley did describe our investments.
J P GAAP.
Also included in that guidance. So I think as the year goes on Jeff What we'll try to give you even greater guidance, but we really felt that doing at least the flow off the guidance was better than doing nothing.
Yeah understood and that's helpful. Steve Thanks, and maybe just as a quick follow up you guys haven't officially confirmed your returned to supplying heartland dental at the start.
Of the April at the start of the <unk> our.
Our checks seem to suggest that is going to happen now. So one can you confirm that and then two as we think about the moving parts I know you've supplied them even over the last few years with some consumables products. Some technology products there might be of change going on on the implant side of that relationship a bit but as I put all of that in the blender do we think of heartland, adding maybe a couple of hundred basis.
Points to your North American dental revenue growth over the next three quarters at the end of the last three quarters. This year. Thanks.
Yes.
So maybe I'll start and Stanley code.
Jump in.
So the.
The first.
Yes, we can confirm that we've won the heartland contract.
We typically don't provide details on customer activity. So thats why we didnt put a press release from we don't intend on putting out a press release.
But in direct response to your question, we can confirm that we have one of the.
Award there's.
There is the transition period, so we still haven't started shipping.
Product of Heartland it'll be later.
In the quarter.
But given again that we don't provide specific customer activity I'm going to limit it to that Stanley unless you have any other.
The commentary I think that is correct Stephen.
We have had a relationship with heartland for decades.
Ranging from.
Supporting the software needs practice management needs and other.
Software applications that we provide in addition, we do provide certain specialty products to heartland, we have done that for a while.
And we continue to expect.
To grow that relationship as well as I might add other relationships in the DSO space.
<unk>.
In the medical World on the idea of space, but we made decisions from years back to not report every time, we add of new accounts I think the becomes very complex and.
So the bottom line is we do expect continued to grow our business with large accounts in dental and medical.
Thank you.
Our next question will come from the line of Glenn Santander flow with Guggenheim.
Yes, thanks, and good morning, Thanks for taking my questions.
I just wanted to follow up on the questions regarding the guidance.
Dan If I heard your comments you pointed to the Aviate survey suggests the net volumes in North America seem to be at 80% pre pandemic level of kind of just trying to reconcile that to of consumable number that Steve just pointed out was up the 0.4, I mean, just thinking about volumes being down 20% and your consumable.
Number of short of being up how do you sort of reconcile those two and then.
I'll ask my follow up of upfront as we think about the $3 51 floor is that just kind of assume no change in visit behavior. So.
We continue to monitor these anda surveys is kind of like of baseline, we're assuming no meaningful improvement from those levels and that $3 51, I guess that also assumes that the elevated sort of medical sales continue.
As you just suggested Steve the kind of <unk> is also embedded in the $3 51, sorry, I know there was a lot there the unpack, but I'll leave it there.
The question, you're asking is key and I think.
We should provide some clarity sometimes it's hard to do good.
And the bottom line is the.
Analyst estimates of all over the place so what we decided to do.
Was to provide a flow that's by no means guidance in the traditional sense, we're not providing ranges of Stephen noted its a flow.
The number one number two is we do expect the.
The visits to physicians and to dentist the continued to growth we.
We do expect therefore debt our.
Consumable business.
We'll grow.
Well go back to 90 levels and grow a little bit above debt to the same with our specialty and of course, our software and other value added services.
We do expect Henry Schein.
Grams in general one schein, the way in which our sales organization.
As it relates to our customers all of that to continue.
Perform well.
Having said that we are in the midst of a pandemic and so it's hard to provide solid guidance in the sense that we offered in 2019 before and before.
So we decided to give a floor.
Which we're pretty comfortable with actually we're quite optimistic about the business.
And if we just had to look at 2000 in the first quarter and we had of stop things now outside of a very optimistic having said that we can't tell where the pandemic is going to hit no. One can sell and just like a year ago. We cautioned investors about the pandemic, we're doing the same now although.
So a little bit more confidence today than we were in February and March of 2020, what we're saying is we're comfortable with the bottom of the flow of the guidance. We've given we just can't give ranges.
Yes, we believe our consumable business our equipment business, our software business of specialty businesses are all poised to do well and if the music stopped today, we think we'd have a very good 2021, but again, we can't tell where this is heading I must say, though that as one of those to the east and the incomes wished.
Things are getting better our Asia businesses are pretty much back to normal doing quite well Asia Pacific Europe is okay, except for the U K.
Hopefully the.
The reimbursement of Dennis will encourage reimbursement for Dennis the sheep more patients again and in the U S. It's pretty stable growth in dental and medical and we are hopeful that the 80% will start getting back to normal to the.
The treat the to the 2019 level levels as the year goes by but exactly in which quarter. It's very hard to tell all of per se. As we are and we continue to be very optimistic about our business and are very pleased with the performance. So far this year.
Yes, let me just add one thing.
Glenn on one of your questions.
You asked well patient traffic is 80% and you're up 4% ex PPE whats the reconciliation reconciliation.
And remember the patient traffic.
The other.
Meshes.
Not procedures and we do believe that part of the reason why is that Theres a higher acuity.
Procedures being done today than typically.
So theres more tooth restorations, there's more implants, there's more of.
Again of the higher procedures that generally.
Was a higher level of consumable products.
Things like trophies in general examinations now as a percentage of the total procedures as is not as high so that so the type of procedure being done is helping us with that and just to quickly add on one of your questions. We're really not assuming.
The much market improvement and that floor guidance.
Because again, we would not know went to.
Assume it and there's still a lot of uncertainty on one of the improves so there is potential upside if the market improves quicker.
Because we really don't have that in our guidance at this point.
Okay. Thanks for all of the comments.
Your next question comes from the line of Jon Block with Stifel.
Alright, Thanks, guys. Good morning, maybe I'll ask both might of fraud in the interest of time sort of one for each of you Stephen.
Stephen for the gross margin pressure of roughly 300 bps year over year is there a way to think about what's attributable to inventory adjustments and lower supplier rebates because I think most of that are you.
Your commentary is unlikely to reoccur in full if you would in 2021 and so just some thoughts on dental equipment in 2021, it's always a volatile product line, but how do you see demand shaking out this year and no one about priorities of our preferences from the dentist in other words.
What's their highest demand of equipment items, considering the COVID-19 backdrop. Thanks guys.
Excuse me one of us this Chuck.
So John.
We haven't given specifics on the supply of rebates and the inventory adjustments.
So we just don't feel it's appropriate to go there, but youre right in that a lot of that.
The negative margin.
<unk> is not expected to reoccur in 2021, the supplier rebates, so a little bit fuzzy now because of setting targets in this environment is difficult.
So we're trying to be conservative in our outlook with that.
But the inventory adjustments I can't say there'll be zero, but there'll be much more much less than what we've seen in the last quarter of it too. So hopefully that helps you.
Just to add onto what Stephen said on the.
PPE adjustments, we made the decision in April two.
Respond to the government's request to move as we were part of the.
HHS for that the.
FEMA Task force.
And we responded by literally emptying out of warehouses, and providing PPE to hospitals and hotspots ease of not a normal customers I'm not talking about a lot of money.
In terms of sales, but we had to replenish the product.
At higher prices, including significant freight costs, we made the decision as a cash as a company to provide PPE products to our customers.
At as lower price as we could possibly do that.
And so at the end of the day, we provided I believe great customer satisfaction, while following through on the the government's coal and I'm, referring to the United States.
The request of MTI warehouses of PPE and send it to those areas. Those hotspots that were the most challenged the did have an impact on our 2020 margins for PPE and in general, but as Stephen said I think that is largely behind us, but I do believe the.
The history books will tell we made the right decisions from the morality point of view.
We are the highest ambitions company and we've made the right decision from our customers' point of view number one.
Number two on equipment, we had almost the perfect storm at the end.
Of.
The 2020 in North America. This particular situation did not occur outside of North America.
<unk> experienced good consumable by the way and of course equipment growth.
In the United States.
I'm not referring to Canada, now specifically rate relative to the United States. We do report on North America numbers, but in the United States for equipment.
Dense plus Sirona World went virtual.
Which has been historically the <unk>.
Terrific opportunity for us to generate business, we believe that we will generate debt business largely in the first quarter and some expense in the third quarter.
We had a key supplier of traditional equipment exit the market.
And that product.
That was ordered by debt from net supplier through us of course.
Could not be satisfied fully by the existing manufacturers with both the production up the speed and we expect the gain for that to be satisfied in the second and third quarter.
And then there's the whole issue of where the debt.
Should of purchased equipment in the fourth quarter or not given that the incomes were largely down in that 80% of dentists in the United States were out of practice in the out of the practices in the second quarter. The earnings were not great and with expense expectation that tax rates will go up in two.
'twenty one it was quite of bit of deferments of the purchases of equipment from the fourth quarter to the first quarter.
Taking that all into accounts I think we are quite optimistic about our north American equipment business U S business, Canada was a little bit different it was good in general because of these variations of this perfect storm variations did not apply in Canada.
As to the.
The areas of sales that we expect I think the traditional business.
The units lights as reported in prior quarters is still an area of dentists are investing I would say that the imaging area is an area or the pricing as we've said in the past has come down somewhat and yes, the whole area of D and.
And share side.
The milling of crowds of bridges will all the areas, where we expect decent growth in 'twenty, one and beyond.
The calendar.
Kind of do we have any do we have more time for questions I think the running out of time, but we can.
Go over a little bit since there is a lot going on.
Yes, there was like no. Other question. Thank you.
Our next question will come from the line of John Kreger with William Blair.
Hi, Thanks, very much Stan.
Maybe you could go back to some of your strategic planning comments can you just give us a sense about as you you guys get more stability in the business and sort of look beyond Covid, where you're most interested in expanding for example, any interest in sort of taking medical more aggressively beyond the U S mail.
Maybe new technologies.
Of our new specialty brands, just give us a sense about where you would really like to expand in the next few years.
Sure John Thank you very good question.
Of course, we want to continue to grow our traditional distribution business globally.
And Thats dental where we are in most of the developed world.
And in some markets in the developing world the developing world is growing in that area in the auto care Arena. So we will expand our footprint.
We will drive efficiency in that business.
And expect to increase our margins in general on the distribution side.
Both in dental as I noted now in dental, but also we are expanding our medical business abroad. We.
We did not focus on our international medical business until about a year ago 18 months ago, because we had so much going on in the U S. But we have taken a small medical business in Europe added resources to it and we'll be adding more resources to it in the future unexpected of course, the medical distribution business to go.
Beyond the U S and.
In Europe, expanding in Canada, which is very small today and in other markets.
At the same time specialty products will be important for us.
In dental we expect to continue to growth we've done very well in implants, we've done very well in endodontics and we have a very good foundation and orthodontics, we had a peculiar fourth quarter again, the perfect storm, we had of manufacturer exiting debt markets and so we had to replace that.
Are those products from elsewhere, and we had a net.
Move in our distribution center around the end of the year that.
That of all catch up and so those of the areas we want to invest in.
Expanding our specialty platforms around the world of course of Henry Schein, one is a huge opportunity for Henry Schein, we're investing in that area. We're very very pleased to see the pickup in.
The SaaS products in cloud based products of course, it does impact sales, but in the long run it's a very profitable business and we've done very well with our SaaS product, we're investing in that suite.
And then when it comes to.
Medical devices, we expect to expand in that area and specialty devices.
We are the player in orthodontics sores of sorry.
The PD <unk> and expect to increase net platform as well.
So I think it's about global expansion in our core business and our specialty businesses, adding to those platforms that we have and also in the technology areas. So we have our dental distribution of medical distribution.
Our practice management technology and other value added services platforms.
And of course, our specialty products. All of these are areas, where there is great opportunity and strategic planning John as you know is not necessarily about what you can do but what you want to prioritize zone. So we have a lot of options very excited we have the best management team I would say in the Companys history.
From a capabilities of point of view of expanding these various platforms. We've developed and are very excited about the future.
Very helpful. Thank you.
We have time for one last question. Our final question will come from the line of Jason Bednar with Piper Sandler.
Yeah. Good morning, thanks for the questions.
One of touching some of the stronger pieces from the quarter here to close things out in the last from both upfront the international dental consumables core growth was really strong Stanley I know you talked about that but just one of your confidence in this momentum persistent going forward and to what extent, there's maybe some kind of demand that supporting some of this growth.
So as you know core growth being reflective of maybe rising demand in some of these international markets and then just you know the pivoting also related to medical line of Covid testing revenue 270 millions of big number for the quarter, but curious how you're factoring in price adjustments that are expected from the manufacturers in this market and future testing volume just really of how you're planning for these cross currents of this year. Thank you.
There are two very good questions I've got a lot of good questions on this call them out of it. So international we continue to expect international business to grow.
Internal growth of course, we will add some acquisition growth as we've done in the past.
It's hard to predict the quota I think one has to look at the trend for several quarters, but over several quarters. I think we are quite confident that we will grow our consumable and equipment businesses outside of North America, including Canada.
Out of the U S.
So as part of our North America numbers. So I think it's fair to say, we will we expect to grow our global consumables and equipment business and in particular are very enthused about our international business.
On the testing so we had a shortage of believe it or not even with these good numbers of tissue in the point of care.
The quick test arena.
We believe the testing is now.
There's more testing available to us.
Of the Ppas.
I wouldn't say being completely satisfied but there is more product available for us than in the past.
And I'm, referring to the Covid testing, but also other tests, new tests et cetera.
So.
I think it's fair to say that the price of these tests will come down because the larger machines that we used in the earliest stage will be replace those tests a lot of.
Large number of the test will.
We will be placed by snap tests with the lower cost per test, having said that the demand for test is likely to growth in our view and in particular the would be more available for our challenge channel, which is the office space the practitioner environment in the workplace health environment. So in general we think.
With the opening up of available availability, the price coming down but at the same time of the demand growing.
We.
To have a good 2021 percentage of course Theres no no way we can.
Talk about any specific numbers, because we don't know exactly but we built in our plans the fair.
The amount of PPE sales and of our.
Testing sales.
So these are two growth areas for us that will grow as compared to 2019.
Thank you for that question and thank you for all the questions.
I'll hand, the conference back over to Mr. Bergman for any concluding remarks.
Yes. Thank you operator, thank you all I'm sorry, we went over today, but there was of luck in this call that we wanted to cover a lot of unusual situations.
Bottom line is we are quite optimistic about the future.
Of course, no one can.
Predict exactly where the virus is hitting although I think it's fair to say, we will not go into the situation again with dental practices will be closed down and physician practices and ambulatory surgical centers will be closed down.
If it gets worse the virus I think there'll be more precautions, but I can't see it close to the.
Total lockdown as occurred in.
The second quarter of course, as our investors know, we powered down significantly in the second quarter and powered up very quickly.
In the third quarter this debt.
Cost us a lot.
Certainly probably cost us a little bit of market share, but I think we've gained that back and some more so overall I would say.
Did the right things in 2021 from a cash preservation point of view, taking care of our team as the number one priority.
And of course in parallel with that ensuring that our customers service needs would taken care of while at the same time in particular, ensuring the PPE was made available to our customers.
At reasonable prices of course, the prices went up significantly, but we kept prices to a large extent within the range of what it cost us rather than passing on the unusual profit. So we could of gain and I think the payoffs in the long run with trust from our customers and in the end I think the Henry.
Schein has come out of this.
Covid period.
As of as much stronger company in terms of brand recognition and appreciation of what full service does.
In the dental and <unk>.
Medical market for our customers so with that in mind I have to say, we're pretty optimistic about the future. Although we are in the pandemic environment.
Plans will be finalized is a wide array of opportunities.
We are operating right now under interim refresh plan for 2021, but by the end of this year, we will firm up the key areas of focus and I think we.
She will in turn.
Do well for our investors, we feel very comfortable I will end with the comments.
The share is up 2015 years of public company we've.
Had EPS compounded annual growth at a rate of 12% and stock appreciation at the rate of 12% during this period.
The company that provides stability.
And we believe that we're in good markets with a great team. Thank you very much everyone for participating in this call today.
Ladies and gentlemen that will conclude today's call. Thank you all for joining and you may now disconnect.
Yeah.
Okay.
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