Q1 2021 Henry Schein Inc Earnings Call

May 4, 2021

[music].

Good morning, ladies and gentlemen.

The Henry Schein, Inc. First quarter of 2021 conference call at this time all participants are in a listen only mode. Later, we will conduct a question or to answer session and instructions will follow at that time, if anyone should require assistance during the call. Please press the star keep all about zero on your Touchtone phone.

As a reminder, 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 results for the 2021 first quarter 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 to.

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 on forward looking statements as a result for 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 Henry Schein filings with the Securities and Exchange Commission, including 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 one.

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 financial performance of our business enable the comparison of financial results between periods, where certain items may vary independent.

Lee of 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 purposes and should not be regarded as a replacement for corresponding GAAP measures reconciliations between GAAP and non-GAAP.

Measures can be found on the supplemental information section of our Investor Relations website and in exhibit B of today's press release, which is available in the IR section of our website the.

The content of this conference call contains time sensitive information that is accurate only as of the date of the live broadcast may for 2021 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 question and a follow.

[noise] up during Q&A to allow as many listeners as possible to ask a question within the one hour that we have a lot of it for this call with that I would like to turn the call over to Stanley Bergman.

Thank you Katie.

Good morning, everyone.

Appreciate everyone calling in today.

We were obviously very pleased with it.

As an exceptional first quarter.

Net financial.

Actual performance.

2020.

Morning.

This is from comparable period last year.

So for first quarter of 2019.

Uh huh.

Good result.

Sure.

Based on excellent planning.

And execution across all of our businesses.

Our team really came through growth.

The movie.

Right.

Supply.

During 2020.

I know the first quarter.

For 2021.

We also delivered very strong operating margins for the quarter.

Ah well in markets in most geographies still face challenges due to the ongoing pandemic.

The overall global market recovery.

And on improving results.

Have continued.

Our positive momentum reflects the adaptive business model.

As I noted a deep commitment of team Schein members.

Across the board to our customers.

And in fact, the communities that we shouldn't.

Throughout these unprecedented times.

Henry Schein has remained focused on the safety of our team a bubble.

And yes, responding to our customers' needs.

Which were extremely varied across the world.

And wind up and down.

As dynamics change in an extremely dynamic.

Environment.

We have close growth 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 of this positions us well.

To continue to drive earnings growth.

And great value.

For the long run.

So the 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.

It assumed acquisition activity.

But a lot of activity going on.

Of course, no deal is completed until it's actually signed and inked.

We reported on.

In the first quarter of 2021, we closed five acquisitions.

Cross shop in on medical and technology and value added services business businesses.

Across basically the company the aggregate sales of nearly $140 million.

Reflecting our commitment to a balance strategy that supplements.

Solid organic growth with acquisition contributions.

In addition, during the first quarter, we resumed share repurchases.

Bottom line is that our solid cash flow.

Enables us to invest in our business.

Collecting our goal is to continue to deliver an attractive return on capital I would remind shareholders that route 26 years as a public company.

Reflecting.

Compounded annual growth.

On a 12%.

On a non-GAAP basis.

And an increase in <unk>.

Stock price.

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 on approximately 87 per cent a 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 a day remains bullish on the outlook for the dental profession in the months ahead.

As vaccinations likelihood that tipping point.

The <unk> also recently issued report after partnering with back to normal barometer to gain insights on customer sentiment related to dentistry.

The survey found that the vast majority of patients who have not already visits to dentists passed yet already to return.

As you know we also closely monitor for Henry Schein U S dental claims data.

As a directional indicator and we have a decent.

The amount of market share of that data on those claims processes right claims processed. This day to 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 on 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 kit as well as.

Electric procedures and of course not elected procedures.

As COVID-19 cases decline and more people are vaccinated.

Expect to see trafficked patient traffic to physician office offices, and ambulatory surgery centers normalized without much stress that we're not back to where we were with elective ambulatory surgical procedures.

Published on this and also the normal rates of explanations for.

Bye for our practitioners is somewhat down.

Since the volume.

Pediatric visits is down.

It's slowly catching up to the 2019 volume Henry.

Henry Schein has been deeply involved in efforts to promote more effective.

Participation of primary care physicians and other office based practitioners, including dentist 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.

Well on many states provide these practitioners with access to the vaccine and is extremely difficult and complex process for office space practitioners.

To receive an allotment of these vaccines and a presence only about a third of primary care physicians are able to offer the vaccines for the patients across the nation.

COVID-19 vaccination, if it's to get shots in the arms for the U S citizens have been quite extraordinary industrial.

We also recognize that the countries now and a race against the variance.

We continue to see equity challenges and the uptake of the vaccine and there continues to be high rates of vaccine hesitancy in some areas of the country. We also recognized that the nation will swiftly need to prepare for delivery of booster vaccines and yes pediatric vaccination.

Free Schein who's been working closely with the U S Department of health and human services for.

M a C D C.

Local authorities urging authorities to more effectively include primary care physicians and other office based practitioners as I noted including dentist.

By utilizing the existing and well established distribution network to deliver vaccines for these providers.

As part of this effort, we recently submitted the letter to the U S. How select committee on.

For Corona.

Crashes.

We firmly believe that primary care physicians are a vital resource from the COVID-19 explanation, if it because of the high level of trust they enjoy them on patients.

Standing a patient's health history, and personal circumstances and their physical presence in every community around the country.

The vast network of physicians and dentists from the U S can be immediately activated and of course literally overnight.

More effectively advocating and activating the cadre of health professionals, who are highly trusted leaders in their communities to vaccinate Americans through their practices.

Is critical at this moment in the country's vaccination if it's to help overcome the 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 faced shortages for these critical vaccines.

As equitable global access is crucial to ending the pandemic and the safety of the world's population, including Americans throughout wells with the work for the World Economic Forum and our partnership for the pandemic supply chain network Henry Schein has been working to support.

Kovacs, Inc.

International entity led by Sheppy coffee in the World Health organization and UNICEF.

To accelerate access to cook to the COVID-19 vaccine in low and middle income countries around the world.

So the business is in good shape, we continue to have very good momentum.

Been reporting on our results throughout this period in a little bit more detail than in the past.

And continues to be very optimistic.

The direction of the pandemic at the moment, although there are some setbacks from countries like India, and we are well positioned for continued to be well positioned to help combat the pandemic and at the same time increased shareholder value.

With that.

I'll hand, the call over to Steven to discuss our quarterly financial performance and then I'll provide some additional commentary on current business conditions and on market 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 reported on a GAAP basis and also on a non-GAAP basis.

Our Q1 2021 in Q1 2020 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 corporate sales category for Q1 debt represents prior year sales to KOL breakfast under the transit transitional services agreements, which concluded in the fourth quarter of 2020.

Turning now to our financial results total net sales for the quarter ended March 27th 2021, with $2 $9 billion, reflecting growth of 24 per cent compared with the prior period.

Internally generated sales were up 14, 9% in local currencies and again you could find on details of our sales performance contained in exhibit a of our earnings press release.

On a GAAP basis, our operating margin for the first quarter of 2021 was seven 9%, representing an increase of 70 basis points compared with the prior year.

On a non-GAAP basis, our operating margin was eight 4%, which was an increase of 104 basis points on a year over year basis, and it's important to note. We're really very pleased with our non-GAAP operating margin performance, which was the highest quarterly margin that we've achieved in the last five years.

Again, a reconciliation of GAAP operating margin to non-GAAP operating margin can be found in the supplemental information page on the investor relation page about website.

Turning to taxes, our reported effective tax.

Tax rate on a GAAP basis for the first quarter of 2021 was 25, 1%. This compares to 22, 4% GAAP effective tax rate for the first quarter of 2020.

On a non-GAAP basis, our effective tax rate was also 25, 1%.

And compares to the prior year of 22 five per cent.

A reconciliation of GAAP effective tax rate for non-GAAP effective tax rate is again included in the supplemental information page on the Investor Relations.

Site of our website.

We expect the effective tax rate to continue to be in the 25 per cent range, both on a GAAP and non-GAAP basis for the remainder for year and of course. This assumes no significant changes in tax legislation.

Moving on our GAAP net income from continuing operations attributable to Henry Schein for the first quarter of 2021 was $166.01 million or $1 16 per diluted share with.

This compares with the prior year GAAP net income from continuing operations of $135 million or <unk> 91 per diluted share.

Non-GAAP net income from continuing operations for the first quarter of 2021 was $177 $7 million for $1.24 per diluted share and this compares with the same non-GAAP net income from continuing operations.

On the first quarter of 2020 of $134 $1 million or <unk> 94 cents per diluted share.

To provide a little bit more detail amortization from acquired intangible assets for Q1, 2021 was $29 $7 million pre tax or approximately <unk> 13 per diluted share. This is up slightly from $26 $8 million or for the same 13 cents per diluted share.

The same period last year.

Also foreign currency exchange favorably impacted our Q1 'twenty one.

Diluted EPS EPS by approximately <unk> <unk> per share.

Let me now provide some detail on our sales results for the quarter, starting with global dental our global dental sales of $1 $8 billion grew 21 three per cent compared with the same period last year.

Internal sales growth of 13, 7% in local currencies.

Our global dental consumable merchandise internal sales increased by 13, 2% in local currencies in the first quarter.

And if you want to exclude PPE and COVID-19 related products. The sales increase was 10, 9%.

We experienced very solid dental consumable merchandise sales growth in the U S, Canada, Australia, and New Zealand, Brazil Asia and throughout most of Europe in Europe, we saw particular strength in France.

Netherlands, Belgium, Italy and to a lesser extent in Germany. However, the U K continued to experience lower sales as that country has just recently easing lockdown measures.

In North America, the dental internal sales growth in local currencies was 10, 9% and included 9.3 per cent and dental consumable merchandise for a six 9% when excluding P. P E and COVID-19 related products.

Our north American dental equipment sales.

Internal growth in local currencies was 17, 4% and was driven by 31, 6% internal sales growth.

In local currencies for high Tech equipment, and also strong growth in traditional equipment, which was 10, 6%.

Our international dental sales growth in local currencies was 17, 9% and included.

1919, 2% growth in dental consumable merchandise.

Which is 16, 7% growth when you exclude P P E and COVID-19 related products.

International dental equipment internal sales growth in local currencies was 12, 9% in Q1 and was driven by strength in France, Italy, Austria, as well as Australia and New Zealand.

And the Netherlands and Brazil.

We experienced 14, 8% internal sales growth in local currencies and traditional equipment in the international market and high Tech equipment grew 10, 3%.

Our global dental specialty revenue on the first quarter totaled $222 million and had internal growth of $18 three per cent in local currencies versus the prior year.

It was split between North America, which was up 19, 3% and internationally up 15, 7% so very strong growth.

Most of the globe.

Medical sales during Q1 with $993 million, which grew 24% compared for the same period last year, including internal sales growth of 22, 1% in local currencies that 22, 1%.

Includes 22, 4% increase in North America, and 12, 6% International.

Our medical sales results were driven by strong demand for PPE and COVID-19 related products. Excluding sales of these products global medical internal sales in local currencies was down six 8%, but this was.

<unk>, resulting from an extremely mild influenza season that impacted both diagnostics and consumable merchandise sales as well as lower pharmaceutical sales related to fewer patient office visits related to COVID-19.

We sold over $180 million of COVID-19 test kits.

In Q1.

Including some multi mm assay flu and COVID-19 combination test.

This compares with approximately $270 million and test kits in the fourth quarter.

That said, we expect COVID-19 test kits to decline somewhat primarily as a result of unit price erosion.

Turning to technology and value added service sales during.

During Q1 were $143 million, an increase of $8 four per cent compared with the prior year, including internal growth in local currencies of three 6%.

In North America, the internal sales growth was 4% driven.

Driven by the Henry Schein, Henry Schein, one business as well as strong financial services revenue, which benefited from double digit for equipment sales growth.

Internationally technology and value added service internal sales grew one one per cent compared with the prior year.

Again, the prolonged lockdown in the U K impacted our international business again this quarter.

As Stanley mentioned earlier, we view something about share repurchases in Q1 and purchased approximately one 3 million shares of common stock at an average price of $66.90.

For a total of $88 $7 million the.

The impact of this repurchase program on the first quarter EPS was immaterial.

At the end of the first quarter, Henry Schein had $112 $6 million.

Authorized and available for future repurchases of common stock.

Okay, turning to our balance sheet and cash flow, we have access to significant liquidity.

<unk> flexibility and financial stability, our operating cash flow from continuing operations for the first quarter was $63 3 million that compares to $78 $8 million from the first quarter of last year.

This modest year over year decrease was primarily due to higher working capital requirements, partially offset by increased net income.

As part of our previously disclosed restructuring initiative, we recorded a pre tax charge in Q1 of $2 $9 million or <unk> <unk> per diluted share. This is again, a charge related primarily to severance pay and facility closing costs and reflects opportunities to continue to reduce expenses and drive.

<unk> operating efficiencies and mitigate stranded costs.

Let me now conclude my remarks by updating our 2021 non-GAAP diluted EPS guidance at this point at this time, we are not providing GAAP diluted EPS guidance as we are unable to provide an accurate estimate of expenses related to the restructuring that I. Just mentioned, we are raising the guidance for 2021 non-GAAP diluted.

EPS from continuing operations attributable to Henry Schein, and now we expect that floor and it's important to note that as a floor.

Of the $3 70, and that compares to the previous floor that we had issued a $3 51.

Again remember this is not traditional guidance on when we typically give a range and this is really effectively the low end of the range on the floor and we hope to continue to update guidance as the year progresses.

Keep in mind that our guidance for 2021.

Non-GAAP diluted EPS attributable to Henry Schein is for continuing operations as well as completed or previously announced acquisitions, but does not include the impact of share repurchases on a.

Potential future acquisitions, if any or restructuring expense.

Guidance also.

Assuming that foreign exchange rates are generally consistent with current levels that the end markets remain stable and are consistent with current market conditions and of course does not assume any material adverse market conditions related to COVID-19.

Pandemic, so with that I'd like to turn the call back over to Stanley.

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 medical and dental supply chain equipment sales for service specialty businesses, Henry Schein, one and other value added services.

It allows our customers to leverage the combined value that would be offered through a unique approach to managing customer engagement.

Given our position as a large scale distributed to both dental and medical practitioners, we are uniquely positioned to deliver value to our large customers by leveraging best practices in customer engagement and support while realizing internal synergies across our distribution businesses.

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.

Really provides for 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 that.

The benefit for our customers that purchased broadly across both dental and medical product categories, such as Dsos for example, <unk> large group practices.

The government community health centers and other enterprise organizations is the most streamlined interface for formulary construction RFP management contract compliance analytics, and Yes Commission processing.

For example, a large DSO customers 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 our specialty offering like implants bone regeneration products orthodontics and endodontics.

All in combination with our distribution platform and the same applies to the Henry Schein, one software solutions, which could be 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.

We also benefit from our capabilities, our customers that address distribution and value added services needed from one source and for.

We believe that a number of our recent DSO wins were attributable to the unique value proposition offered by our one schein strategy.

No.

Spend a few minutes on the distribution side.

Looking more closely at our dental distribution.

First quarter dental performance.

<unk> experienced strong.

Strong sales growth in both North America, and on international markets, including significant growth in North North America dental equipment sales.

This is 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 Stephen 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 in oral surgery business. This was the largest of these three business units.

Including a day in our dental specialty business.

This implants in oral surgery business unit experienced solid double digit growth in the first quarter.

With significant contribution from buyer horizons and can block from specifically their implant lines.

Sales growth in the U S was driven by new product introductions gross.

Gross with DSO customers and also by a digital CAD Cam related solution for implant procedures.

New product launches included a progressive implant line across Europe, Canada, and more recently the U S.

As well as our tapered implant and nobody matrix reconstruction tissue solutions.

On the Endodontics side, just a brief notes in the first quarter.

The strength was driven by DSO cash to buy the DSO custom customer segment as.

As well as by the launch of several nickel titanium products.

Across the <unk> platform.

And the orthodontic market, we continued to see a steady improvement in both orthodontic case volume and revenue as dental practice patients volumes have improved.

While our reveal and it's Alex clearer line of business is currently a small portion of total dental sales. We believe this business will have a more meaningful contribution.

For growth.

Over the long term its 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 continue 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 continued to invest further in innovation as we develop an enhanced treatment solutions for these markets and.

And we expect patient volume across our dental business for continued to improve on.

Over time as infection rates.

Decline.

That's.

I think for global statement.

Yeah.

So, let's now focus a little bit on Henry Schein one.

This is highlighted within our technology and value added services business.

Business.

Henry Schein, one sales continued to improve towards pre pandemic 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 instruments, Inc.

<unk>, new <unk> imaging software tools for processing insurance remittances.

And calculating payment adjustments.

Marketing campaign enhancements for the lighthouse 360 platform and then online booking feature for our search for me, that's primarily an orthodontic business software.

For those websites.

Importantly, we are more closely aligning on Henry Schein, one and Henry Schein dental teams.

Through this through our Henry Schein.

One Schein program.

Bringing together Henry Schein, one and Henry Schein dental.

The 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.

Yeah.

Now the medical distribution business.

If you look at the performance for 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 prove 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 in which is as important as employers considered cost effective means for employee wellness.

Our plans offer employers diagnostic testing support PP&E and returned to wait to work consultation.

Overall, our solutions portfolio remains a focus beyond traditional medical supplies.

This includes a comprehensive telemarketing platform in the medical arena.

Cyber security solution for health care.

That we offer to physicians and medical practices.

And a digital diabetes care.

Cash initiative.

I'd like to point out that while <unk> 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 they relate 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 theres any questions we can handle them. Thank you.

At this time, if you would like to ask a question simply press star from up by the number one on your telephone keypad. Our first question will come from the line of Jeff Johnson with Baird. Please go ahead.

Yes.

Thank you. Good morning, guys can you hear me Okay. Yes. Just go ahead, great. Thank you Stanley. So I wanted to start first on your operating margin obviously, the 8% operating margin was a big improvement sequentially, but also relative to <unk>, both last year and even relative to 2019 for <unk>.

Steve when I look at kind of your floor guidance and I understand its floor, but it seems to imply operating margin maybe falls back down to the low sevens, maybe even a little bit below 7% over the balance of this year.

One help us understand the drivers of the <unk> improvement and then how to think maybe sequentially. The next few quarters on the operating margin line. Thank you.

Yes, Jeff Thanks for the question.

We had an extraordinary quarter and sales in Nashville.

Operating margin.

We continue to look at.

Driving expenses down, but we're not giving specific guidance on margins, but I think it's important to note. This is a five year high this operating margin of $8 40.

So I think it will moderate but we're not going to give specifics at this time on that.

We're continuing to look at reducing expenses some expenses will come back later in the year, we're estimating like travel like conventions and some other things.

But we're still very pleased and we still think long term, we have a significant opportunity to continue to expand operating margins annually.

Fair enough and maybe just as a quick follow up when I look at your dental business.

Steve or Stanley.

And look at kind of relative to 2019 and try to exclude the PPE.

Looks to me like your core dental revenue ex that P. P. E. On COVID-19 testing is probably up about 6% to 8% relative to <unk> 19. So.

Are we sustainably back to core dental being above 2019 levels was there something in one queue debt 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 thank you.

Yes first Jeff your estimate.

On growth is.

Pretty accurate.

For 2019.

I think that there's a couple of things that will will reduce sales growth a little bit on the Stanley mentioned PPE prices moderating, including COVID-19 test kits moderating, but we still feel that you know we'll have solid growth over 2019.

Because the market is continuing to improve again, 87% patient traffic in the U S. Hopefully that will continue to climb up so we're feeling pretty good.

About our sales growth in dental as well as medical for the balance of the year.

Thanks.

Thank you, Steve and let me just.

Add something a comment from a macro point of view J F.

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 are in the midst of a pandemic a pandemic is not finished we saw what we can see what's going on in India on a number of other parts for the kind of the world.

This could all come back so I don't want to.

B a negative cloud over on the dental industry performance.

Performance as a company.

But assuming things continue on.

Assuming we do not have any major setbacks because of COVID-19.

I remain extremely bullish about the dental market 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 who recognize this it'll be greater reimbursement for dentistry can't say, it's gonna 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 thats the basis under which Stephen gave guidance of 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 them.

Thank you Stanley.

Your next question will come from the line of Elizabeth Anderson with Evercore.

Hi, guys. Thanks, so much for the question. My first question would be on the implant market. It seems like you guys have I've noticed that you know I've seen uptake as we're coming out on hopefully the pandemic is that sort of just a reflection that was true.

Or is there do you see any kind of increasing competitive.

Of course, it is in the implant industry broadly, both maybe and maybe if you could comment both on Investor day.

And any particular geographies or product.

I would say in general it's a good question.

Thank you for that question.

Implant mountain markets have been pretty steady across the world remember.

Remember on.

Strength is in the U S and Canada and in Germany of course, we're active in a number of other countries, including.

Japan, some business of close on China, but in the market I mentioned that we are strong in our markets are pretty good.

But I would also say that we have been pretty Inc.

Pretty productive in those markets, we've gained market share and this has been going on now for quite a few years. So all of that.

Whereas the markets are strong we believe our market share has grown with a premium line, which is the buyer ryzen our catalog lines.

And with our discount line the Mega dental.

But then for us I mean, knowing full well that the.

The markets, we're in on not necessarily growing as fast for some of the developing world markets, but in the markets. We're in we're doing quite well.

Think that may be to some extent related to Henry Schein uniqueness in those markets, but overall on one can say that the implant markets are doing okay and that is our focus on more expensive dentistry right now.

Got it that's helpful and.

Can you talk about specifically some of your expectations.

For that in the medical business, maybe particularly on what you are assuming around new.

<unk> ended the fourth quarter, and then anything out in terms of change.

Changes to check COVID-19 vaccine.

Yes.

It's also the question on the medical side, our medical business has done well for several years.

In the base business, which is.

Consumables.

Generally pharmaceuticals.

And equipment.

There are a number of variables that are market.

<unk> for public health dependent.

First is vaccinations I'm not talking about the COVID-19 actually now I'm talking about general vaccinations.

The rate of visits to physician offices for the standard of explanations is down.

I expect.

And remember the focus for us in the vaccination area is the United States I expect as the COVID-19 rates go down more people will visit the doctor's office for the traditional vaccines and that's part of the business will grow once again, it's down quite a bit right now for.

Second relates to.

Flu the traditional flu.

We shipped to our traditional flu vaccines pretty early in the cycle in 2020, I think it was slightly above the previous year.

I think it is fair to say.

All things being equal unless something comes out in the fresh debt, it's not a good idea to have a traditional flu vaccine.

I expect that that will continue.

And the 2021 'twenty 'twenty two vaccine period flu vaccine periods, which is generally sometime between October August and October.

Then there's the flu tish.

The traditional flu test this is an area where they have been.

A significant issue.

And of course, it's good for the public because the traditional flu.

It was almost nonexistent this year. So we didn't sell many tisch, there's hardly showed any in fact.

And who knows where that's going to end up in 'twenty at the end of 'twenty. One early 'twenty two have to expect as people were less mesh.

Towards the end of the year as COVID-19 mitigates further debt there will be an increase in those tisch, and then back to 19 and 18 levels.

And then the other area. It was of course, the COVID-19 tish.

Price, especially we are focused on the point of care rapid tests.

I think that there will be a continued demand for those tests.

But the prices have come down substantially.

Both for the PCR and the antigen test.

So factoring all of that and you might have some volatility in our medical business, having said that the core business is doing quite well as procedures move from the acute care shifting into the physician's office into the ambulatory care centers.

And expect that this will recover as the.

On the public gets confidence in returning to the physician offices.

For traditional visits for their vaccinations.

And to the ambulatory surgical centers for elective surgery.

Okay, Great. That's super helpful. Thank you.

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

Great. Thanks, Good morning, guys.

So some of our recent channel checks, there's been some conjecture that over the past couple of quarters that the large debt on distributors are taking some market share back from smaller competitors in the U S market.

Driven by just more focus on greater expertise demand from distributor partners are no longer just buying on price, but also just from bundling of products tethered to the PPE orders.

So I guess the thing is once again trying to growing U S. Dental sales much faster than the market. Just curious if you are a little more thoughts around that whether your market share gains are coming from smaller competitors versus other sources.

Yeah, it's very difficult for people to give you a precise.

Information on where our sales are coming from.

But I could make a couple of general statements.

The first is that we believe that the high touch model is most appropriate for dentists.

We provide all the online capabilities that are normal.

Say a traditional online only.

Provide a provides when I say traditional these online providers.

I've not been around debt many years, but whatever they can offer in terms of online purchasing.

We can offer our prices are competitive for customers.

Net essentially use us as a primary.

Hum supplier.

On recent investment in TD is she.

Confirms that if customers want to buy only from an online supplier it's available.

If it's software day, we're doing okay in sales I.

I don't see a huge switch.

Overnight to any one.

Sector, whether its traditional or it's.

On line only.

The long run I believe that Ah.

Customers will appreciate the work that full service does.

Dsos, obviously are a little bit more sophisticated buyers they understand that.

This whole idea of consumables equipment specialty products and the operating of Henry Schein one altogether.

Is a compelling offering.

I think the part of the market debt relates to.

Just count per.

Purchasing in quotes not necessarily at a discount price, but perceived discount will continue.

To be there at similar rates, maybe it'll move a few percentage one way or the other but from a Henry Schein point of view I feel confident that we will continue to gain overall market share and not on the dental businesses. We have had as we have for decades.

And but I don't see massive shifts one way or the other.

Of course PP&E.

It was a unique situation.

I know from Henry Schein point of view, we were extremely conservative with.

With the quality and the regulatory process that we went through on each P. P. Any product we sold I'm not sure that was the case amongst every much for the rest of the distribution channels.

Whether it was full service.

Yeah.

Digital only I just don't know, but we are very very conservative and they were products probably that we could have bought and sold that we refused to do based on how standard so that may move some product to different channels.

Okay. That's helpful. Just one quick follow up question on guidance.

I think we all recognize that the $3.70 EPS number at the floor, but with $1 20 for posted in <unk> you'd have to have EPS fall back down into the 80 to 85 range on average over the next three quarters for EPS and up you know somewhere around that floor.

Does conservatism around the pandemic, but just sequentially is there anything you know any one or two things we should focus on on the most of that would cause EPS to go down sequentially in Q versus the trends just posted in <unk>.

Well Steve.

You're right, it's a flow, but remember also I think Q1 the estimates.

For the quarter.

For low compared to the full year estimates.

I think a lot of analysts assumed a significant increase.

Going forward than estimates and that's why.

It's such a big beat in Q1, but we.

We don't see anything structurally changing.

Going forward, you know I don't want to give specific guidance for Qs two three and for but structurally we see you know the market and the business, though are faring well.

And again, it's a floor, so hopefully, we'll do better than that flow.

Okay perfect. Thanks.

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

Thanks, guys. Good morning, stellar Stephen maybe just a first one equipment results in dental we're big in the quarter and it can be lumpy you guys had called that out in the past, but last quarter. I think you alluded to a solid pipeline or backlog and we sort of saw that manifest I'd argue in the first quarter numbers. So maybe if you could just comment on how the backlog for equipment.

Looks as you guys go into the second and third quarters that'd be great and then I've just got a quick follow up is.

Uh huh.

Our backlog is pretty good.

Of course, our customers really on investing in their practices. This is not only by the way in North America, but internationally.

So as of now our backlog is pretty strong and.

Just remember that the sales that the backlog only represents.

A portion of what's expected to ship in the.

Second quarter Theres, a portion of equipment sales that will not be in the backlog that it just generated each day, but generally the backlog has been pretty good enough for a couple of quarters.

And there's a significant desire by practitioners in the United States, Canada, and the rest of the world invest in their practices.

Okay, Great and then maybe you said for follow up.

Steven just to push you a little bit more on the gross margin details I mean gross margins were huge in the quarter. They were up I believe over 300 bps sequentially can you give a little bit more color on what we should attribute.

Sequential improvement to in other words is it a big move in the margins on PPE is it underlying is it mix shift just how we should sort of think through that and maybe how sustainable. This is going forward. Thanks guys.

Yeah, John I think the gross margins improved for a few reasons one is mix.

But to lower inventory adjustments and we've had a.

Previously, which is something we talked about that we would have lower inventory adjustments.

And I do think that a.

Going forward, let's say for mix changes.

We feel good about the gross margin level from where it's at.

Thanks, guys.

Right.

Your next question comes from the line of John Kreger with William Blair.

Hi, Thanks, very much Stan I think you mentioned at the beginning of the call that you made five acquisitions during the quarter, assuming I heard that right can you just elaborate on what you bought and thinking about the rest of the year.

Alright, as you had more around kind of pushing into new geographies, adding scale in existing geographies or or maybe going after new brands, just maybe help us understand where your priorities are right.

All right John.

On the acquisitions that we've made there relatively small.

Small sales not a huge amount of capital put to work.

And so I'm not sure we are.

I didn't even have whole information with me right now, but that's it.

Really all over the entire platform small acquisitions throughout the platform.

As to the future.

We will continue to invest as you note and expanding our distribution business around the world, Yes, there will be some geographic expansion.

But the big focus is on.

[laughter] excuse me value added services.

Anything we can invest in that makes sense.

To help our customers operate a more efficient practice, so that they can provide for the better clinical care would be on that list.

Our specialty.

On a product businesses both for Nike.

On a geographic expansion and a little bit more tonnage.

In that regard, but also to add additional features to our product lines.

And Henry Schein, one to expand on that platform.

I think that is another area of rates.

Great interest to us.

So it's really.

Across the board of course, we never know when the deals will close.

We have a history of adding felt that for them and supplementing our internal growth.

On the equity position growth for 30 years with.

And at the moment, we don't see any massive acquisition, but it's a consistent.

Addition of businesses across the platform in each of our business growth.

That's helpful. Thank you and then one quick follow up and over the past share you've called out supply chain disruptions and shortages how did those standard at this point.

At this very moment.

We can get anything we really want.

You don't necessarily have.

If every brand in the quantities that we would like.

But I would say that in general.

<unk> ability of.

All of them from Asia.

All the products, we need there are some manufacturers that have not fully come back yet.

Matching our purchase orders with the shipments.

I would say that most of the manufacturers have an issue in one way or another.

I don't think we felt necessary the disruption that you may read about in the paper as it relates to certain <unk>.

Semiconductors or whatever.

<unk> chips.

But they are.

There are some manufacturers.

Well I would say across the board there are manufacturers that don't can't ship everything we want but generally.

We can gift products in every category.

We may have to substitute.

And that requires a lot of discussion with customers I think this is one of the reasons why.

Dennis and physicians appreciate full service distributors, because we can provide the guidance on dislocations in the marketplace, having said that I still remain very concerned for the global PP&E structure, it's not fully worked out yet providing subsidies to build a factory in the U S.

It doesn't mean that those factories are going to be operational when the prices return to.

Pre COVID-19.

Competitive per.

What you're seeing U S versus global pricing. So right now were okay, but there is a lot of work to be done on the global PP&E and other inputs.

Apply chain matters.

Thanks, so much.

Yeah.

Your final question will come from the line of Nathan Rich with Goldman Sachs.

Hi, Good morning, Thanks for squeezing me in I'll ask both my questions upfront I wanted to go back to the PPE and COVID-19 related revenues.

I think you know across dental and medical in the first quarter were about $370 million.

But I would imagine that kind of run rate coming out of the quarter as last just given your comments around pricing. So Steve I don't know if you can maybe help us think about how much pricing has come down recently as we think about sort of the right run rate for PPE and COVID-19 testing over the balance of the year.

And can you also remind us what the margin is on those products and how you would expect margins to change as the sales volume is moderate over the balance of the year. Thank you very much.

Sure Nathan.

So.

On PPE.

Pricing you know it depends on the product category from some product categories.

On declining you know relatively significantly, namely the COVID-19 tests.

And others are kind of really just normalizing a bit.

I would say, though that we continue to expect the <unk>.

Margins for COVID-19.

PPE products to be.

Similar to the average margins that we have on the business group, whether it's dental and medical.

So we see the margins continuing but the sales price may come down the sales may come down even though the units for state probably hot.

Okay.

At this time I will turn the conference back over to management for any closing remarks. Thank you operator. Thank you all for calling in thank you for the good questions.

I appreciate the interest.

As we've been saying for a long time, we really are confident.

In our core business and the additions we've added our foundation.

Our strategy of focusing on high touch service.

Dental and medical.

Services, the variety of consumables equipment, and pharmaceuticals that we sell supplemented with a specialty medical and dental products.

Our software offerings through Henry Schein one.

And she had a small operating in the medical world.

As well as our value added services. So we're optimistic that we will continue to deliver good internal growth rates supplemented by.

Acquisitions, adding more to our platform.

Driving up sales.

For a margin.

And EPS, we're committed as Steven noted two continuing to buy back stock.

In moderation as we have for many years, a good way to return capital to yeah.

Share holders and the tax advantage way and so the team is morale is high leave the management team on each about businesses is very good net corporate.

So thank you for your interest.

And.

<unk>.

We'll have some meetings with investors over the next few days for two weeks.

Happy to answer further questions. So thank you very much and if you have any questions. Please reach out to Kevin.

Kevin voters to Steven directly from that'd be happy to answer your questions. So thank you very much.

Ladies and gentlemen that will conclude today's call. Thank you all for joining you may now disconnect.

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Good morning, ladies and gentlemen on the Henry Schein first quarter 2021 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.

You touched on phone as a reminder, 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.

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 for 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 Henry Schein filings with the Securities and Exchange Commission, including 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 on 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 financial performance of our business enable the comparison of financial results between periods, where certain items may vary independently of <unk>.

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 purposes and should not be regarded as a replacement for corresponding GAAP measures reconciliations between GAAP and non-GAAP measures.

It can be found on the supplemental information section of our Investor Relations website.

And in exhibit B of today's press release, which is available in the IR section of our website.

Up during Q&A to allow as many listeners as possible to ask a question within the one hour that we have a lot of it for this call with that I would like to turn the call over to Stanley Bergman.

Thank you Carrie.

Good morning, everyone.

Appreciate everyone calling in today.

We were obviously very pleased with what we view as an exceptional first quarter.

Net financial a global financial performance for the year 2021.

This is from comparable period.

Yeah.

So this is for first quarter of 2019.

Uh huh.

Good result.

<unk>.

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.

No the first quarter of 2021.

We also delivered very strong operating margins for the quarter.

Ah well in markets in most geographies still face challenges due to the ongoing pandemic.

The overall global market recovery.

And on improving results.

Have continued.

Our positive momentum reflects the adaptive niche about business model.

And as I noted a deep commitment of team Schein members.

Across the board to our customers and for.

For the communities that we serve.

Throughout these unprecedented times.

Schein has remained focused on the safety of our team a bubble.

And yes, responding to our customers' needs.

Which were extremely varied across the world.

And went up and down.

As dynamics change and an extremely dynamic.

Environment.

We have close drove 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 of this positions us well.

To continue to drive earnings growth.

Great value over the long run.

Ah study way in which we've driven the business for decades.

It 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.

There are a lot of activity going on.

Of course, no deal is completed until it's actually signed and Inc.

We're going to be reported on.

In the first quarter of 2021, we closed five acquisitions.

Across our dental medical and technology and value added services business businesses.

Across basically the company with the aggregate sales of nearly $140 million.

Reflecting our commitment to a balance strategy that supplements.

Solid organic growth.

With acquisition contributions.

In addition, during the first quarter, we resumed share repurchases.

Bottom line is that our solid cash flow.

Enables us to invest in our business.

Afflicting our goal is to continue to deliver an attractive return on capital I would remind shareholders that we went to our 26 year as a public company roughly.

Reflecting.

Compounded annual growth.

<unk> of 12%.

On a non-GAAP basis.

And an increase in <unk>.

Stock price of similar number over this period.

From a compounded annual growth basis.

For two.

Turning 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 per cent a 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 a day remains bullish on the outlook for the dental profession in the months ahead.

As vaccinations likely hit that tipping point.

The idea also recently issued report after partnering with back to normal barometer to gain insights on customer sentiment related to dentistry.

The survey found that the vast majority of patients who have not already visits to dentists passed yet already to return.

As you know we also closely monitor for Henry Schein U S dental E claims data.

As a directional indicator and we have a decent.

In addition on 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.

Electric procedures and of course not elected procedures.

As COVID-19 cases decline and more people are vaccinated, we expect to see trafficked patient traffic to physician office offices, and ambulatory surgery centers normalized without much stress that we're not back to where we were with elective ambulatory surgical procedures.

Published on this and also the normal rate for vaccinations.

Bye for our practitioners is somewhat down.

Since the volume, including pediatric visits is down, but it's slowly catching up to the 2019 volume.

Henry Schein has been deeply involved in efforts to promote more effective.

Participation of primary care physicians and other office based practitioners, including dentist in many states.

Who 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 complex process for office space practitioners.

To receive an allotment of these vaccines and a presence only about a third of primary care physicians are able to offer the vaccines for their patients across the nation.

COVID-19 vaccination efforts to get shots in the arms of the U S citizens have been quite extraordinary industrial.

We also recognize that the countries now and a race against the variance.

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.

Schein who's been working closely with the U S Department of health and human services FEMA CDC.

Local authorities urging authorities to more effectively include primary care physicians and other office based practitioners as I noted including dentist.

By utilizing the existing and well established distribution network to deliver vaccines for these providers.

As part of this effort, we recently submitted a letter to the U S. How select committee on.

For Corona.

Crashes.

We firmly believe that primary care physicians are a vital resource from the COVID-19 explanation if it.

Because of the high level of trust they enjoy them on patients.

Understanding a patients health history, and personal circumstances and their physical presence in every community around the country.

The vast network of physicians and dentists from the U S can be immediately activated and of course literally overnight.

More effectively advocating and activating the cadre of health professionals, who are highly trusted leaders in their communities.

Actionaid Americans through their practices.

This is critical at this moment in the country's explanation if it's to help overcome the hesitancy to address at risk populations reduced health inequities and ultimately ensure more patients vaccinated.

At the same time more must be done to help other countries that face shortages of these critical vaccines is equitable global access is crucial to ending the pandemic.

And the safety of the world's population, including Americans throughout World with the work for the World Economic Forum and our partnership for the pandemic supply chain network, Henry Schein has been working to support them.

<unk> International entity led by Sheppy coffee in the World Health organization and UNICEF.

To accelerate access to cut through the COVID-19 vaccine in low and middle income countries around the world.

So the business is in good shape, we continue to have very good momentum.

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 they are some setbacks from countries like India, and we are well positioned for continued to be well positioned to help combat the pandemic and at the same time increased shareholder values value with that.

I'll hand, the call over to Steven to discuss our quarterly financial performance and then I'll provide some additional commentary on current business conditions and on market 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 reported on a GAAP basis and also on a non-GAAP basis.

Our Q1 2021 in Q1 2020 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.

Turning now to our financial results total net sales for the quarter ended March 27, 2021, with $2 $9 billion, reflecting growth of 24 per cent compared with the prior period.

Internally generated sales were up 14, 9% in local currencies and again you could find on details of our sales performance contained in exhibit a of our earnings press release.

On a GAAP basis, our operating margin for the first quarter of 2021, what seven 9%, representing an increase of 70 basis points compared with the prior year.

On a non-GAAP basis, our operating margin was eight 4%, which was an increase of 104 basis points.

On a year over year basis, and it's important to note. We're really very pleased with our non-GAAP operating margin performance, which was the highest quarterly margin that we've achieved in the last five years.

Again, a reconciliation of GAAP operating margin to non-GAAP operating margin can be found in the supplemental information page on the investor relation page about website.

Turning to taxes, our reported effective tax.

Tax rate on a GAAP basis for the first quarter of 2021 was 25, 1%. This compares to 22, 4% GAAP effective tax rate for the first quarter of 2020.

On a non-GAAP basis, our effective tax rate was also 25, 1%.

And can pass through the price of 22 five per cent.

A reconciliation of GAAP effective tax rate for non-GAAP effective tax rate is again included in the supplemental information page on the Investor Relations.

Site of our website.

We expect the effective tax rate to continue to be in the 25 per cent range, both on a GAAP and non-GAAP basis for the remainder of per year and of course. This assumes no significant changes in tax legislation.

Moving on our GAAP net income from continuing operations attributable to Henry Schein for the first quarter of 2021 was $166.01 million or $1 16 per diluted share. This.

This compares with the prior year GAAP net income from continuing operations of $135 million or <unk> 91 per diluted share.

On the first quarter of 2020 of $134 $1 million on 94 cents per diluted share.

Share in the same period last year.

Also foreign currency exchange favorably impacted our Q1 'twenty one.

Diluted EPS by approximately <unk> <unk> per share.

Internal sales growth of 13, 7% in local currencies.

Our global dental consumable merchandise internal sales increased by 13, 2% in local currencies in the first quarter.

And if you want to exclude PPE and COVID-19 related products. The sales increase was 10, 9%.

Meadowlands, Belgium, Italy and to a lesser extent in Germany. However, the U K continued to experience lower sales as that country has just recently easing lockdown measures.

In North America, the dental internal sales growth in local currencies was 10, 9% and included 9.3 per cent and dental consumable merchandise or six 9% when excluding PPE and COVID-19 related products.

Our north American dental equipment sales.

Internal growth in local currencies was $17 four per cent and was driven by 31, 6% internal sales growth in local currencies for high Tech equipment and also strong growth in traditional equipment, which was 10, 6%.

Our international dental sales growth in local currencies was 17, 9% and included.

<unk> 19 from 19, 2% growth in dental consumable merchandise.

Which is 16, 7% growth when you exclude PPE and COVID-19 related products.

International dental equipment internal sales growth in local currencies was 12, 9% in Q1 and was driven by strength in France, Italy, Austria, as well as Australia, and New Zealand, and the Netherlands and for yourself.

We experienced 14, 8% internal sales growth in local currencies from traditional equipment in the international market and high Tech equipment grew 10, 3%.

Our global dental specialty revenue on the first quarter totaled $222 million and had internal growth of 18, 3% in local currencies versus the prior year. The broth was split between North America, which was up 19, 3% and internationally up 15, 7% so very strong growth.

Across the globe.

Global medical sales during Q1 with $993 million, which grew 24 per cent compared for the same period last year, including internal sales growth of 22, 1% in local currencies.

At 22, 1% includes.

Includes $22 four per cent increase in North America, and 12, 6% internationally.

In part, resulting from an extremely mild influenza season that impacted both diagnostics and consumable merchandise sales as well as lower pharmaceutical sales related to fewer patient office office visits.

Related to COVID-19.

We sold over $180 million of COVID-19 test kits in Q1 income.

Including some multi assay flu and COVID-19 combination test.

This compares with approximately $270 million and test kits in the fourth quarter.

That said, we expect COVID-19 test kits to decline somewhat primarily as a result of unit price erosion.

Turning to technology and value added service sales.

During Q1 were $143 million, an increase of $8 four per cent compared with the prior year, including internal growth in local currencies of three six per cent.

In North America, the internal sales growth was 4% driven.

Driven by the Henry Schein, Henry Schein, one business as well as strong financial services revenue, which benefited from double digit equipment sales growth.

Internationally technology and value added service internal sales grew one one per cent compared with the prior year.

Again, the pull up prolonged lockdown in the U K impacted our international business again this quarter.

As Stanley mentioned earlier, we view something about share repurchases in Q1 and purchased approximately one 3 million shares of common stock at an average price of $66.90 for a total of $88 $7 million the.

<unk> of this repurchase program on the first quarter EPS was immaterial.

At the end of the first quarter, Henry Schein had $112 $6 million authorized and available for future repurchases of common stock.

Okay, turning to our balance sheet and cash flow, we have access to significant liquidity.

Provide flexibility and financial stability, our operating cash flow from continuing operations for the first quarter was $63.3 million that compares to $78 $8 million from the first quarter of last year.

This modest year over year decrease was primarily due to higher working capital requirements, partially offset by increased net income.

Operating efficiencies and mitigate stranded costs.

On the EPS from continuing operations attributable to Henry Schein and now we expect that floor and it's important to note. It's a flaw.

Of the $3 70, and that compares to the previous floor that we had issued a $3.51 again remember this is not traditional guidance on when we typically give a range and this is really effectively the low end of the range on a floor and we hope to continue to update guidance as the year progresses.

Keep in mind that our guidance for 2021 non-GAAP diluted EPS attributable to Henry Schein is for continuing operations as well as completed or previously announced acquisitions, but does not include the impact of share repurchases on a potential future acquisitions, if any or restructuring expenses.

Guidance also excludes <unk>.

Is that foreign exchange rates are generally consistent with current levels that the end markets remain stable and are consistent with current market conditions and of course does not assume any material adverse market conditions related to COVID-19.

On a pandemic so with that I'd like to turn the call back up with the standard.

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 medical and dental supply chain.

Sales of surface specialty businesses, Henry Schein, one and other value added services.

Allows our customers to leverage the combined value that would be offered through a unique approach to managing customer engagement.

Given our position as a large scale distributed to both dental and medical practitioners.

Are uniquely positioned to deliver value to our large customers by leveraging best practices in 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 referred to it internally.

So we have.

Sorry, one distribution sorry, we have one schein.

Really provides for 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 that.

The benefit for our customers that purchased broadly across both dental and medical product categories, such as Dsos for example, Ibm's large group practices.

Dsos benefit from our ability to deliver our specialty offering like implants bone regeneration products orthodontics and endodontics.

All providing customers with a unique experience.

Through one schein.

And through efficiencies internally through one distribution.

We also benefit from our capabilities, our customers that address distribution and value added services needed from one source and for.

We believe that a number of our recent DSO wins were attributable to the unique value proposition offered by our one schein strategy.

No.

Spend a few minutes on the distribution side.

Looking more closely at our dental distribution.

First quarter dental performance.

<unk> experienced a strong.

Strong sales growth in both North America, and on international markets, including significant growth in North North America dental equipment sales.

This is 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.

Our specialty businesses, how does this fit in.

As Stephen 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.

Implants in oral surgery business. This was the largest of these three business units.

Including a day in our dental specialty business.

This implants in oral surgery business unit experienced solid double digit growth in the first quarter.

With significant contribution from by Horizon, and Kembla from there specifically their implant lines.

Sales growth in the U S was driven by new product introductions.

Gross with DSO customers and also by a digital CAD Cam related solution for implant procedures.

New product launches included a progressive implant line across Europe, Canada, and more recently the U S.

As well as on tapered implant and know that matrix reconstruction tissue solutions.

On the Endodontics side, just a brief notes in the first quarter.

The strength was driven by DSO cash to buy the DSO custom customer segment as.

As well as by the launch of several nickel titanium products.

Across the <unk> platform.

And the orthodontic market, we continue to see a steady improvement in both orthodontic case volume and revenue as dental practice patients volumes have improved.

While I'll reveal and it's Alex clear Aligner business is currently a small portion of total dental sales. We believe this business will have a more meaningful contribution.

For growth.

Over the long term its 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 for 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 and enhance treatment solutions for these markets and.

And we expect patient volume across our dental business for continued to improve.

Over time as infection rates.

Decline.

That's.

I think the global statement.

Yeah.

So, let's now focus a little bit on Henry Schein one.

This is highlighted within our technology and value added services business.

Business.

Henry Schein, one sales continued to improve towards pre pandemic 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 Hansman, Inc.

<unk>, new <unk> imaging software tools for processing insurance remittances.

And calculating payment adjustments.

Marketing campaign enhancements for the lighthouse 360 platform and then online booking feature for our search for me, that's primarily an orthodontic business software.

For those websites.

Importantly, we are more closely aligning on Henry Schein, one and Henry Schein dental teams.

Through this through our Henry Schein.

One Schein program.

Bringing together Henry Schein, one and Henry Schein dental.

On the Henry Schein dental teams to promote bundled solutions aimed at improving customer experience for.

Tension and most importantly practice efficiency.

And this is of course, primarily through digital integration.

Okay.

Now the medical distribution business.

If you look at the performance for 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 in which is as important as employers considered cost effective means for employee wellness.

Our plans offer employers diagnostic testing support PP&E and returned to wait to work consultation.

Overall, our solutions portfolio remains a focus beyond traditional medical supplies.

This includes a comprehensive telemarketing platform in the medical arena.

The security solution for health care.

That we offer to physicians and medical practices.

On a digital diabetes care.

Cash initiative.

New best practices as they relate 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 theres any questions we can handle them. Thank you.

At this time, if you would like to ask a question simply press star for what by the number one on your telephone keypad. Our first question will come from the line of Jeff Johnson with Baird. Please go ahead.

Yes.

Thank you Scott Good morning, guys can you hear me Okay. Yes, Jeff go ahead, great. Thank you Stanley. So I wanted to start first on your operating margin obviously, the 8% operating margin was a big improvement sequentially, but also relative to <unk>, both last year and even relative to 2019 for <unk>.

Steve when I look at kind of your floor guidance and I understand its floor, but it seems to imply operating margin may be fall back down to the low sevens, maybe even a little bit below 7% over the balance of this year.

Wanted to help us understand the drivers of the <unk> improvement and then how to think maybe sequentially. The next few quarters on the operating margin line. Thank you.

Yeah, Jeff Thanks for the question.

We had an extraordinary quarter in sales and that drove the operating margin.

We continue to look at.

Driving expenses down, but you know, we're not giving specific guidance on margins, but I think it's important for Nokia. This is a five year high this operating margin of $8 40.

So I think it will moderate but we're not going to give specifics at this time on that will.

We're continuing to look at reducing expenses some expenses will come back later in the year, we're estimating like travel like conventions and some other things.

But we're still very pleased and we still think long term, we have a significant opportunity.

To continue to expand operating margins annually.

Fair enough and maybe just as a quick follow up when I look at your dental business, It's Steve.

Steve or Stanley and look at kind of relative to 2019 and try to exclude the PPE.

It looks to me like your core dental revenue ex that PPE and COVID-19 testing is probably up about 6% to 8% relative to <unk> 19, so are.

Yes first Jeff your estimate.

On growth is.

Pretty accurate.

For 2019.

We will have solid growth over 2019.

Because the market is continuing to improve again, 87% patient traffic in the U S. Hopefully that will continue to climb up so we're feeling pretty good.

About our sales growth in dental as well as medical for the balance of the year.

Thanks, Craig Thank you Steven let me just.

Add something a comment from a macro point of view Geoff.

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 a pandemic is not finished we saw what we can see what's going on in India on a number of other parts for the kind of the world.

This could all come back so I don't want to.

B a negative cloud over on the dental industry performance.

Performance as a company.

But assuming things continue on.

Assuming we do not have any major setbacks because of COVID-19.

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 thats the basis under which Stephen gave guidance of 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.

Thank you Stanley.

Your next question will come from the line of Elizabeth Anderson with Evercore.

Hi, guys. Thanks, so much for the question on my suspicion would be on the implant market. It seems like you guys have I noticed that you know I've been uptake as we're coming out on hopefully the pandemic is that true. There's just a reflection that was true.

On the there do you see any free and increasing competitive.

Of course, there's in the implant and distribute broadly close maybe and maybe if you could comment both on Investor day.

Uh huh.

And any particular geographies or product.

I would say in general it's a good question.

Thank you for that question.

Implant mountain market have been pretty steady across the world remember.

Remember our strength is in the U S and Canada.

And in Germany of course, we're active in a number of other countries, including.

Japan, some business of close on China, but in the markets I mentioned that we are strong in the markets are pretty good.

But I would also say that we have been pretty Inc.

Pretty productive in those markets, we've gained market share and this has been going on now for quite a few years. So our.

Whereas the market saw strong we believe our market share has grown with a premium line.

Which is the by ryzen our catalog lines.

And with our discount line the Mega dental.

But then for us I mean, knowing full well that.

<unk>.

Are the markets, we're in on not necessarily growing as fast for some of the developing world markets, but in the markets. We're in we're doing quite well I.

I think that may be to some extent related to Henry Schein uniqueness in those markets, but overall on one can say that the implant markets are doing okay and that there is a focus on more expensive dentistry right now.

Got it that's helpful and can you talk about specifically some of your expectations.

Throughout the year for that are in the medical business, maybe particularly on what you are assuming around.

In the fourth quarter, and then anything else in terms of.

Changes to check COVID-19 vaccine.

Yes, all good.

So good question on the medical side, our medical business has done well for several years.

In the base business, which is.

Consumables.

Generally pharmaceuticals and.

And equipment.

There are a number of variables that are market.

<unk> for public health dependent.

First is vaccinations I'm not talking about the COVID-19 actually now I'm talking about general vaccination.

The rate of visits to physician offices for the standard of explanations is down.

I expect.

Second relates to.

Flu the traditional flu.

We shipped to our traditional flu vaccines pretty early in the cycle in 2020, I think it was slightly above the previous year.

I think it is fair to say.

All things being equal unless something comes out in the fresh debt, it's not a good idea to have a traditional flu vaccine.

I expect that that will continue.

And the 2021 'twenty 'twenty two vaccine period flu vaccine periods, which is generally sometime between October August and October.

Then there's the flu tish.

Ah the traditional flu test this is an area where they have been.

A significant issue.

And of course, it's good for the public because the traditional flu.

It was almost nonexistent this year. So we didn't sell many tisch, there's hardly sold any in fact.

And who knows where that's going to end up in 'twenty at the end of 'twenty. One early 'twenty two have to expect as people were less mesh are going towards the end of the year as COVID-19 mitigates further debt there will be an increase in those tisch and then back too.

19, and 18 levels.

And then the other area. It was of course, the COVID-19 tish.

Are the price cut, especially we are focused on the point of care rapid tests.

I think that there will be a continued demand for those tests.

But the prices have come down substantially both for the PCR and the antigen tissue. So factoring all of that and you might have some volatility in our medical business, having said that the core business is doing quite well as procedures move from the acute care shifting into the physician's Office Inc.

For the ambulatory care centers.

And expect that this will recover as the.

On the public gets confidence in returning to the physician offices.

For traditional visits for their vaccinations.

And to the ambulatory surgical centers for elective surgery.

Okay, Great. That's super helpful. Thank you.

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

Great. Thanks, Good morning, guys.

So some of our recent channel checks, there's been some conjecture that over the past couple of quarters that the large then on distributors are taking some market share back from smaller competitors in the U S market.

Driven by just more focus on greater expertise demand from distributor partners and no longer just buying on price, but also just from bundling of products tethered to the PPE orders.

Yeah, it's very difficult for you could give you precise.

Information on where our sales are coming from.

But I can make a couple of general statements.

The first is that we believe that the high touch model is most appropriate for dentists.

We provide all the online capabilities that are normal.

Say a traditional online only.

Ill provide a provides when I say traditional these online providers.

I've not been around debt many years, but whatever they can offer in terms of online purchasing.

We can offer our prices are competitive for customers.

Net essentially use us as a primary.

Hum supplier.

On recent investment in TD is she.

Confirms that if customers want to buy only from an online supplier it's available.

If the software the we're doing okay in sales I.

I didn't see a huge switch.

Overnight to any one.

Sector, whether its traditional or it's.

On line only.

Over the long run I believe that.

Customers will appreciate the work that full service does.

Dsos, obviously are a little bit more sophisticated buyers they understand that.

This whole idea of consumables equipment specialty products and the operating of Henry Schein one altogether.

Is a compelling offering.

I think the part of the market debt relates to.

Just count purchased.

Purchasing in quotes not necessarily at a discount price, but perceived discount will continue to.

To be there at similar rates, maybe it'll move a few percentage one way or the other but from a Henry Schein point of view I feel confident that we will continue to gain overall market share.

Dental business is we have had as we have for decades.

And but I don't see massive shifts one way or the other.

Of course PP&E.

It was a unique situation.

I know from Henry Schein point of view, we were extremely conservative with.

With the quality and the regulatory process that we went through on each P. P. A neat product we sold I'm not sure that was the case amongst every much for rest of the distribution channels.

Whether it was from service.

Yeah.

Digital only I just don't know, but we are very very conservative and they were products probably that we could have bought and sold and we refuse to do based on how standard so that may move some product to different channels.

Okay. That's helpful. Just one quick follow up.

Question on guidance.

So I think we all recognize that the $3.70 EPS number at the floor, but with $1 20 for posted in <unk> you'd have to have EPS fall back down into the 80 to 85 range on average over the next three quarters for EPS and up you know somewhere around that floor.

And just conservatism around the pandemic, but just sequentially is there anything you know any one or two things we should focus on on the most of that would cause EPS to go down sequentially in <unk> versus the trends just posted in <unk>.

Well Steve.

You're right, it's a flow, but remember also I think Q1 the estimates.

For the quarter.

Low compared to the full year estimates.

I think a lot of analysts assumed a significant increase.

Going forward than estimates and that's why.

It's such a big beat in Q1, but we.

We don't see anything structurally changing.

Going forward, you know I don't want to give specific guidance for Qs two three and for but structurally we see the market and the business still are faring well.

And again, it's a floor, so hopefully, we'll do better than that flow.

Okay perfect. Thanks.

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

Thanks, guys. Good morning, stellar Stephen maybe just a first one equipment results in dental we're big in the quarter and it can be lumpy you guys on called that out in the past, but last quarter. I think you alluded to a solid pipeline or backlog and we sort of saw that manifest I'd argue in the first quarter numbers. So maybe if you could just comment on how the backlog for equipment.

Looks as you guys go into the second and third quarters that'd be great, but I've just got a quick follow up.

Uh huh.

Our backlog is pretty good.

Of course, our customers really on investing in their practices. This is not only by the way in North America, but internationally.

So as of now our backlog is pretty strong and.

Just remember that the sales if the backlog only represents.

A portion of what's expected to ship in the.

Second quarter Theres proportion of equipment sales that will not be in the backlog that it just generated each day, but generally the backlog has been pretty good enough for a couple of quarters.

And there's a significant desire by practitioners in the United States, Canada, and the rest of the world invest in their practices.

Okay, Great and then maybe just as a follow up.

Sequential improvement to in other words isn't a big move in the margins on PPE is it underlying is it mix shift just how we should sort of think through that and maybe how sustainable. This is going forward. Thanks guys.

Yeah, John I think the gross margins improved for a few reasons one is mix.

But to lower inventory adjustments and we've had.

Previously, which is something we talked about that we would have lower inventory adjustments.

And I do think that.

Going forward, let's say for mix changes.

We feel good about the gross margin level and where it's at.

Thanks, guys.

Right.

Your next question comes from the line of John Kreger with William Blair.

All right John.

On the acquisitions that we've made there relatively small.

Small sales not a huge amount of capital put to work.

And so I'm not sure we don't even have the whole information with me right now but.

Really all over the entire platform small acquisitions throughout the platform.

As to the future.

We will continue to invest as you note and expanding our distribution business around the world, Yes, there will be some geographic expansion.

But the big focus is on.

Excuse me value added services.

Anything we can invest in that makes sense.

To help our customers operate a more efficient practice, so that they can provide better clinical care would be on that list.

Our specialty.

On product businesses, both in terms of geographic.

Geographic expansion and a little bit more tonnage.

In that regard, but also to add additional features to our product lines.

And Henry Schein, one to expand on that platform.

I think that is another area of.

Great interest to us.

So it's really.

Across the board of course, we never know when the deals will close.

We have a history of adding felt that for supplementing our internal growth with equity position growth for 30 years, it's worth.

And at the moment, we don't see any massive acquisition, but it's a consistent.

Addition of businesses across the platform in each of our business growth.

That's helpful. Thank you and then one quick follow up and over the past year, you've called out supply chain disruptions from shortages how did those standard at this point.

At this very moment.

We can get anything we really want.

You don't necessarily have.

Every brand in the quantities, we would like.

But I would say that in general there's availability of.

All of them from H well all the products, we need there are some manufacturers that have not fully back yet.

Matching our purchase orders with the shipments.

I'd say that most manufacturers have an issue in one way or another.

I don't think we felt necessary disruption that you may read about in the paper as it relates to certain semiconductors or whatever.

Chips.

But.

There are some manufacturers.

Well I would say across the board there are manufacturers that can ship everything we want but generally.

We can gift products in every category.

We may have to substitute.

And that requires a lot of discussion with customers I think this is one of the reasons why.

Dennis from physicians appreciate full service distributors, because we can provide the guidance on dislocations in the marketplace, having said that I still remain very concerned for the global PP&E structure, it's not fully worked out yet providing subsidies to build the factory in the U S.

It doesn't mean that those factories are going to be operation on when the prices return to pre COVID-19.

Competitive purchasing U S versus global pricing.

So right now we are okay, but theres a lot of work to be done on the global PP&E and other inputs.

Supply chain matters.

Thanks, so much.

Your final question will come from the line of Nathan Rich with Goldman Sachs.

Hi, Good morning, Thanks for squeezing me in I'll ask both my questions upfront I wanted to go back to the PPE and COVID-19 related revenues.

You know across dental and medical in the first quarter were about $370 million, but.

And can you also remind us what the margin is on those products and how you would expect margins to change as the sales volume is moderate over the balance of the year. Thank you very much.

Sure.

Nathan so.

On PPE.

Pricing it depends on the plot of categories from some product categories.

On declining you know relatively significantly, namely the COVID-19 tests.

And others are kind of really just normalizing a bit.

I would say, though that we continue to expect the <unk>.

Margins for COVID-19.

PPE products to be <unk>.

The average margins that we have in the business group, whether it's dental and medical.

So we see the margins continuing but the sales price may come down the sales may come down even though the units for state probably hot.

At this time I will turn the conference back over to management for any closing remarks. Thank you operator. Thank you all for calling in thank you for the good question. So I appreciate the interest.

As we've been saying for a long time.

We really are confident.

In our core business and the additions we've added our foundation.

Our strategy of focusing on high touch service.

Dental and medical.

This is the variety of consumables equipment and pharmaceuticals that we sell supplemented with a specialty medical and dental products.

Our software offerings through Henry Schein one.

And on a small operating in the medical World.

As well as.

Our value added services so.

We're optimistic that we will continue to deliver good internal growth rates supplemented by.

Acquisitions, adding more to our platform.

Driving up sales.

Operating margin.

And EPS, we're committed as Steven noted two continuing to buy back stock.

In moderation as we have for many years, a good way to return capital to all.

Share holders and the tax advantage way and so the team is morale is high leave the management team on each of our businesses is very good net corporate.

So thank you for your interest.

And.

<unk>.

We'll have some meetings with investors over the next few days for two weeks.

To answer further questions. So thank you very much and if you have any questions. Please reach out to Kevin.

Kevin voters to Steven directly from that would be happy to answer your questions. So thank you very much.

Ladies and gentlemen that will conclude today's call. Thank you all for joining you may now disconnect.

Q1 2021 Henry Schein Inc Earnings Call

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