Q2 2022 Henry Schein Inc Earnings Call

Okay.

Good morning, ladies and gentlemen, and welcome to Henry Schein second quarter 2022 earnings Conference call.

At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. Please press the star key followed by one by one on your Touchtone phone if he would like to ask a question at the end of the call.

If anyone should require assistance during the call. Please press the star key followed by zero on your Touchtone phone.

And as a reminder, this call is being recorded.

I would now like to introduce your host for today's call Grand Stanley Henry Schein, Vice President of Investor Relations and strategic Finance Financial Project Officer. Please go ahead Graham.

Thank you operator, and my thanks to each of you for joining us to discuss Henry Schein financial results for the second quarter of 2022.

With me on the call today are Stanley Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein.

And Ron <unk>, Senior Vice President and Chief Financial Officer.

Before we begin I'd 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 math as referred to in forward looking statements.

The company's performance may materially differ from those expressed in or indicated by such statements.

These forward looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein as filings with the Securities and Exchange Commission and included in the risk factor section of those filings.

In addition, all comments about the markets, we serve including end market growth rates and market share are based upon the company's internal analysis and estimates.

Our conference call remarks will include both GAAP and non-GAAP financial results. We believe the non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business enable the comparison of financial results between periods, where certain items may vary independently of business performance and allow for greater transparency with respect to <unk>.

<unk> 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 in the supplemental information section of our Investor Relations website and in exhibit B of today's press release, which is also available in the Investor Relations section of our website.

The contents of this conference call contains time sensitive information that is accurate only as of the date of the live broadcast August 2nd in 2022.

Henry Schein undertakes no obligation to revise or update any forward looking statements to reflect events or circumstances. After the date of this call.

Lastly, this quarter. We are also present prepared a presentation summarizing our second quarter financial results. This can also be found in the Investor Relations section of our website.

Please limit yourself to a single question and a follow up during.

During Q&A and with that I'd like to turn the call over to Stanley Bergman.

Thank you Graham.

Good morning, everyone. Thank you all for joining us.

Today, we are pleased to report record second quarter financial results.

Reflect the good underlying momentum in the business.

And execution on our strategies.

Sales were particularly strong in our technology and value added services businesses.

Our medical businesses.

Although there were some near term headwinds in the quarter due to COVID-19 infection rates among other factors our solid operational execution this quarter and our results demonstrate the strength of the underlying strength of the business.

In June we saw COVID-19 infection rates, which we believe contributed to that.

So there was rising COVID-19 infection rates, which you believe contributed to a decline in patient traffic.

This is particularly so in our dental business, we expect patient traffic to increase a day.

When the infection rates moderates and this is to some extent quite regional.

While we are maintaining our full 2022.

Full year guidance for EPS for 2022.

And Thats the guidance range.

475 to 491, we are adjusting our expectations for full year sales growth to reflect changes.

Which include continued strengthening of the U S dollar and declining demand for COVID-19 test kits.

The company's management team is laser focused on executing our board plus one 2022 to 2024 strategic plans and priorities.

Thereby providing our customers with an exceptional experience.

Delivering differentiated solutions.

Our customers' practice most practices more successful.

And improve patient outcomes leading to delivery.

Our financial goals as we've set out in 2022 to 2024 strategic plan.

We believe that the long term trends across our end markets.

Provide a solid platform for us to deliver on.

Goats.

In short Henry Schein remains well positioned to deliver consistent sustainable profit growth and to create value for our shareholders. As we have almost 28 years as a public company.

Before we turn to a business update and the progress we have made executing on our strategic growth initiatives.

I would like to touch on macro economic challenges.

In general and discuss Henry Schein its ongoing efforts to.

To be best positioned to succeed in this dynamic in.

The environment that we're now living through.

First.

Concerns with a potential economic downturn.

Given Henry Schein, <unk> broad portfolio of medical dental products and services.

We are an important partner to health care providers treating the patients and keeping community is healthy.

The market Center Schein serves have weathered past slowdowns quite well done.

The challenging economic times consumers continue to need services from office based health care practitioners, that's both medical and dental.

And from the alternate.

Health care sites.

That we service.

That said.

We are working to mitigate the future impact of any potential economic slowdown on our key stakeholders include.

Including advancing efficient and low cost supply chain solutions.

Practice management solutions in general.

Yeah.

Patient demand generation services and generally.

Those services that can help the practitioners operate a more efficient practice so that they can provide the best clinical care for.

For the patients.

We are announcing today a restructuring plan that is focused on funding the priorities of our strategic plan.

Other words moving resources to.

Two areas.

The areas, we want to focus on but at the same time streamlining operations and other initiatives to increase efficiency.

Ron will speak more about this topic in a moment.

Second we continue to work with our suppliers to limit the impact on inflation on price increases for product supplies as well as the cost of transportation of those goods.

During the second quarter, we estimate the price inflation for non PP&E merchandize from Brandon manager managed manufacturers, just ticked up to approximately 3% it could in fact be slightly lower.

We've I think done a good job working with our manufacturers on this end.

And the inflation impact on equipment sales.

No there was no other than non <unk> E merchandize.

The impact of inflation on our equipment sales was relatively insignificant.

Of course.

PP&E is significantly down because of the deflation and glass prices.

When customers Express.

This concerns.

We believe that given the breadth of our offering.

We are typically able to provide a lower cost of national brand solution.

Corporate brand alternative.

Allowing us to maintain our margins, but also helping our customers deal with inflation.

So with.

So the impact on fashion on the practices.

While our global supply chain pressures have been relatively stable over the past three quarters.

Product portfolio, which you believe is the industry's broadest once again affords us a competitive edge.

Is it more easily.

Easily enables substitution when a particular product or brand is in short supply.

We continue to expect that supply chain issues.

For traditional equipment.

Will impact sales through the year end.

That said the situation appears to be stable.

Probably improving.

But some of our suppliers.

Typically on the traditional side will be expanded capacity and are now providing us with much better service than three or four months ago.

Better citizen something about on fill rates.

Our strong order book.

On the equipment side.

Across the board actually in all product categories globally.

And that <unk>.

Backlog continues to grow and do well.

Supports good equipment sales over the next few quarters.

Fourth.

Henry Schein is well positioned to manage rising interest rates.

Our low level of borrowings means that our interest expense.

It is not significantly affected by interest rate changes.

And at the same time most of our current debt.

Is that a fixed interest rate.

The primary area of our business that could be impacted he is dental equipment as those purchases typically finance.

Said that it's important to bear in mind that.

Interest rates are still.

Relatively low.

From a historical context.

And our.

Our equipment order book.

<unk> strong.

And it's tending to get stronger.

Less.

Regarding this is less of a macro.

<unk>.

Regarding the shortage of labor skills, Henry Schein has always been an attractive place for talent to build the Korea.

The team Schein values and philosophy.

Is an attractive place.

For talent.

Of course, we are continuously value, adding supporting a pool of human capital to make sure we retain.

Our existing personnel, while attracting those skills we need.

We believe our internal talent pool is better than ever.

And will be instrumental in here.

Henry Schein executing on our growth.

Plants.

Talking about growth plans, our strategic plan addresses how.

We will stay ahead of the fundamental shifts affecting our customers.

Is there a significant amount of change taking place in the dental and medical professionals Professor.

Professions.

And we are addressing these plants to our strategic these dynamics through our strategic plan.

These plans include the goal to accelerate the adoption of digital technology.

Not only within the company.

But also helping our customers digitalize and Theres, a great pressure on our customers to digitalize.

In their practice and we are providing excellent.

Handholding.

Consulting services and of course.

An excellent offering of digital products to help our customers advance.

Utilization of the practices.

So in this connection.

Yesterday, we announced three new senior executive.

Strategic roles designed to further enable us to sell our strategic plan.

We are forming three new teams.

Led by experienced leaders actually exceptional leaders, who will work together to advance.

Digital technology.

Great and exceptional customer experience with Henry Schein and accelerate the development of new and complementary.

Technologies and platforms.

Of course, as I noted too.

Drive efficiency in our customers' practices, while positioning them to provide better quality of care, but at the same time also to drive efficiency within Henry Schein.

We expect this will enable our sales team and customers to collaborate together to have harnessed this technology.

Three.

Teams, we've set up each one led by an outstanding executive.

We will enable our sales teams.

To provide even better.

Connectivity to our customers as our customers go through this massive change.

In running their practices driven through.

Centralization.

All of that.

Management systems and of course that clinical support.

Yeah.

The first is lead Benowitz.

Who has been named senior Vice President and Chief Global Digital transformation Officer.

Lee the member of our Executive Management Committee.

As reporting to Chris pennant gas.

Our Chief Technology Officer.

Lee will be responsible for enabling the delivery of digital sales by developing our e-commerce infrastructure capabilities.

And we will continue to lead the implementation of our global E Commerce platform get which is well underway and Lee has played a key role in getting us to where we are and will lead us to the successful implementation of get Lee is a terrific executive there is.

The press release that was issued this morning talking about these two.

Yeah.

And I'll speak about in a minute and another press release about Mark Hello, Brad and I think you'll read those and you'll understand why these three executives are so important to the future of Henry Schein.

And at the same time depreciate what.

They've done I don't know if they're going to do.

The second is chip Clark, who has been named senior Vice President and Chief Global customer experience officer.

Also a member of our Executive Management Committee.

And reports the bread cannot see of our North American distribution grid group.

Jim will be responsible for designing developing and implementing it.

Consistent consistent customer experience and brand marketing strategy globally, well the strategy, it's to a large extent are developed and well.

Take them down so much.

More detail and be responsible for implementation and working with the entire organization.

On driving consistent customer experience brand and of course <unk>.

Given the change in the environment.

From a technology point of view.

Trend will also continue to lead our technology enablement to strategic marketing teams in North America.

And finally, Mark Hello, Brian has been named Vice President and Chief Digital revenue Officer.

Also reporting to Brett.

Mark will be responsible for engaging customers.

Online through our e-commerce platform to drive digital transactions, while also securing a healthy pipeline of digitally sourced teams.

Sorry did you could source leads and new prospects to be delivered to our field sales organization.

Mark has done a pretty has done very good job in setting us up well.

With respect to digital leads.

Shopping experience from a digital point of view much better.

And in that context, working closely with our sales organization, who in the end.

Possible for driving sales through a consultative selling methodology.

So well for the company.

Uh huh.

We're also making very good progress.

An hour.

One distribution.

Strategy contained in our strategic plan.

Words operated operationalize it one distribution.

Medical.

In May we announced the appointment of Dr. Benson as Chief commercial officer of our North American distribution group.

Just join Henry Schein following.

Distinguished career with Medline industries.

Reporting to pad connect.

He is responsible for the entire dental and medical distribution groups customer facing organization in.

In the U S.

Focused on helping us to advance our goal of exceptional customer experience.

Increased efficiency in sales growth.

In these businesses.

So that's a little bit about each.

Implementation of our strategies, So let me pivot.

It's a little bit now.

Provide some color on the performance of each of our business units.

Starting with our dental distribution business.

Oh, the second quarter growth.

Dental business once again was driven by strong global equipment sales.

As dentists continue to invest in their practices.

Consumable merchandise internal sales growth in local currencies, excluding pp any COVID-19 related products.

Ron will give specifics was impacted by an increase in patient appointment cancellations and staff shortages, which we believe were related to COVID-19 infection rates.

Lower sales of PPE any products in the quarter.

We're mainly a result of the decline in gas prices.

Crop prices reached.

We reached a peak at the end of the second quarter two.

2021.

And they've been coming down.

Deflation.

And so we expect pricing will continue to be a headwind for the next quarter or two.

To a much lesser extent so we had these two.

Factors, taking place in the second quarter impacting on dental distribution.

Internal growth internal growth rates one of course.

Let's see.

Appointment cancellations in staff shortages and the second is deflation with respect to glass prices.

No.

Internal sales growth in <unk>.

North American dental equipment business.

As noted earlier reflects continued demand in both traditional and digital restoration categories both of them.

Our equipment results also benefited benefited from sales to some of our larger DSO accounts.

We'll continue to be investing in their practices.

As I noted earlier on equipment order book remains solid.

International equipment sales were strong too similar trends.

Two fast growing areas in digital dentistry.

Digital restorations.

And that's the traditional.

Yeah scanners.

Chase side, Cadcam et cetera.

And.

Rapidly growing new area, which is three D printing.

Based on significant investments we have made in both of these areas over the years.

And our strong relationship with our suppliers, we believe we offer our customers a differentiated digital product offering.

Multiple brands.

And we expect these categories will continue to grow well for us into the future.

We have of course, the goal of continuing to expand our geographic footprint.

We recently announced the acquisition of condo dental.

Colorado Dental services dental general practitioners specialists and laboratories in Switzerland.

The one market, we don't have a strong.

General presence, although with surface was dental market since 2004 through catalog, a leading oral surgery business.

And kind of dental expands our presence in this market with a full service digital distribution offering.

Now turning to dental specialty.

Technology value added services.

I'd like to touch upon the progress we are making with our goal of building complementary high growth software services and specialty products.

And the shift in our corporate profit contribution to these higher margin products.

We have invested in good properties.

We expect to continue to invest heavily in this area.

Great management teams.

And.

A very enthusiastic about the potential.

So how high margin technology value added services and specialty products.

Growing at a good pace.

And now represent about 40% of our total sales, but more important 36% of our total operating income.

Of course.

There's no way to determine exactly which quarter. These numbers will go up but we're quite confident that we have a team in place that will drive.

These high margin businesses.

With in demand products towards a greater.

Our operating income.

So if we just look at the sales of our dental specialty products.

They were.

Very solid during the second quarter.

Driven by by arises oral surgery products in North America.

This was partially due and by the way in Germany, which is a big market for us in the implants covered was quite serious in.

In the second quarter, but actually seems to have picked up again in July .

This was partially due so.

<unk> growth was partially due to the growth of our national DSO customers, but also across the customer landscape, including mid size and smaller practices as we are seeing implants, becoming.

Adopted as a standard procedure overall dental care and I think we have outstanding.

Marketing materials, Salesforce and of course backed up with great products.

We expect this trend to support continued growth.

In this connection we are pleased to announce the partnership between by Ryzen Gameloft.

So on the stretcher plus tissue membrane.

This product has demonstrated positive qualities for chip for tissue regeneration.

And we are excited to be able to further differentiate our offering.

To our customers.

Ryzen Chemlawn highest exclusive global rights to this product in the dental field and a long term supply agreements with both ourselves and we expect to launch the product towards the end of the third quarter.

Within our product offering we showed good growth.

And have been quite successful.

Actually quite excited without recently launched edge probe irrigation laser.

In the second quarter, we had good new console sales.

And we're starting to see sales of consumables from our first placements in the first quarter.

But it's good to see the positive feedback from <unk> customers and how will this product is being received in the marketplace.

We're very very excited about this technology.

Our priority in the orthodontic business is the reveal clear aligner product sale.

Sales in wires and brackets.

Not very strong in the.

Second quarter I think this is a market issue, having said that we've.

We've had quite a bit of success without reveal clearer line of product.

Specifically in the DSO market.

The launch of our studio Pro 4.0 software is giving the reveal a lot of business quite a boost.

So we remain quite enthusiastic about all three specialty areas that is oral surgery implants bone regeneration products.

Our <unk> business.

And our orthodontic business, specifically as it relates to.

Revealed clear aligner offering.

So now.

Technology value added services.

We are pleased with the growth in our technology and value added services businesses. We once again, North America and international sales increased by double digit percentages Henry.

Henry Schein, one sales growth accelerated compared to the prior year growth.

And we are seeing healthy demand from our national DSO accounts for these solutions, but also I might add for the dentist is said and done totally cloud based solutions.

Summit going into Dsos, but general reception from GPS and specialists smaller mid sized practices is also very good.

Both.

Dental ascend.

And then colleagues showed.

<unk> increases the number of users in fact, one Henry Schein, one added more than 400, new cloud customers during the second quarter.

Meanwhile, our total number of cloud customers is up 20%.

For the past six months, which demonstrates good momentum in this part of the business again, the movement to digitalization towards the cloud.

We continue to invest in product development and customer service.

And these impact these investments that impact the second quarter margins. We believe these investments are providing a solid growth driver for the business.

There are other services.

This area.

We report on.

Financial services, a number of other publication serve.

<unk> etcetera, but we are particularly pleased with the poor performance of E. S.

Yes.

The revenue cycle management solution.

That we acquired last June .

A great complement to the business in fact, helping our field sales consultants provide better.

Consulting services more relevant consulting services.

Customers on the dental side.

Turning to our medical business. This business has performed well.

Over many years.

And again had another excellent quarter with double digit internal growth in local currencies, when excluding PP&E and COVID-19 related products.

During the second quarter, we had strong sales at point of care diagnostic tests include.

Including flu tests as well as generic drugs and equipment, which is all a good sign.

Patient traffic.

Was bolstered by high numbers of visits for seasonal influenza.

Which is the departure from prior years, when the flu season, typically and during the first quarter.

I wonder if his surgical centers.

Not up to where they were.

Pre COVID-19, but I think we're moving in the right direction, having said that the rest of the business is very solid in the.

Medical arena, so with that overview of our business and the environment that we operate.

Now as Ron for a more detailed review of our financial results. Thank you Rob Please.

Thank you Stanley and good morning, everyone.

Turning to our second quarter financial results total net sales for the second quarter of 2022 or $3.01 billion.

<unk> growth of two 1% compared with the prior year period.

Certainly generated sales in local currencies, which I'll refer to as LCI increased two 4%.

And when excluding sales of PPE and COVID-19 related products, our OCI growth was six 7%.

As Stanley mentioned prices for PPE products, and specifically for gloves.

Kris last year due to market volatility and supply chain disruptions.

More recently prices of gloves, and COVID-19 test kits have declined.

This pricing volatility combined with the strong prior year sales comparison is driving a year over year decline in sales of PPE and COVID-19 related products.

Additional details on sales performance are contained in exhibit a in our earnings press release issued earlier today.

Operating margin for the second quarter of 2022 was seven 7%, representing an 18 basis point improvement compared with prior year GAAP operating margin.

When compared with prior year non-GAAP results operating margin improved by six basis points.

Operating margin improvement was due to gross margin expansion.

Mainly as a result of an increase in sales of higher margin products.

This was partially offset by higher operating expenses as a percent of sales, which grew as a result of increases in payroll and travel since our operations have generally returned to normal this year.

Turning to taxes, our effective tax rate for the second quarter of 2022 was 23, 8%.

This compares with an effective tax rate of 23, 4% for the second quarter of 2021 on a GAAP basis, and 23, 2% on a non-GAAP basis.

GAAP net income attributable to Henry Schein, Inc. For the second quarter of 2022 was $160 million or $1 16 per diluted share.

This compares with prior year GAAP net income of $156 million or $1 10 per diluted share in prior year, non-GAAP net income of $157 million or $1 11 per diluted share.

Amortization from acquired intangible assets for the second quarter of 2022 was $31 3 million or <unk> 14 per diluted share. This compares with $30 1 million or <unk> 13 per diluted share for the same period last year.

Foreign currency exchange negatively impacted our second quarter diluted EPS by approximately <unk> <unk> versus the second quarter of last year.

And at the current foreign exchange rates, we expect the impact to be more pronounced in the second half of the year as compared to the first half of the year.

I'll now provide some detail on our second quarter sales results.

Global dental sales of $1 9 billion declined three 1% compared to the same period last year with LCI sales down 0.3%.

LCI sales growth, excluding PPE and COVID-19 related products was three 5%.

Global dental consumable merchandise LCI sales declined two 2%, but when excluding sales of PPE and COVID-19 related products increased two 4%.

Global dental equipment LCI sales growth was seven zero per cent.

North America dental LCI sales declined one 1% compared to the prior year.

Primarily due to consumable merchandise LCI sales declining three 5% how's.

However, when excluding sales of PPE and COVID-19 related products, North American dental consumable merchandise LCI sale increased two 2%.

Consumable merchandize sales were impacted by lower patient traffic during the quarter offset by price inflation.

North American dental equipment, LCI sales increased eight 1% compared with the second quarter of 2021 with good performance in both traditional and digital restoration categories.

International Dental LCI sales growth was 1.0% compared with the second quarter of 2021, driven by equipment LCI sales growth of five 5%.

The growth in equipment LCI sales was partially offset by a <unk>, 3% decrease in international dental consumable merchandise LCI sales.

However, these sales increased two 7% when excluding sales of PPE and COVID-19 related products.

Lower patient traffic, which we believe is a result of higher COVID-19 infection rates.

Noted in lower consumable merchandise sales in parts of Europe .

And in Australia, and New Zealand.

Well as China because of the required lockdowns and were offset by double digit sales growth in Brazil.

Our equipment backlog in North America, and international businesses remained strong.

Sales of dental specialty products were approximately $242 million in the second quarter.

OCI growth of six 6% compared with the prior year.

Growth was particularly notable in North America for oral surgery products.

Assisting of implants and bone regeneration products.

Technology and value added services sales during Q2 were $181 million, an increase of 18, 1% compared with the prior year, including LCI growth of 10, 8%.

In North America technology and value added services LCI sales growth was 10, 4%.

This growth was broad based with particular strength in our practice management business, including <unk> and <unk>.

Internationally technology and value added services LCI sales increased 13, 4% compared with the prior year driven by performance in the United Kingdom.

During the second quarter, our technology and value added services businesses together with our dental specialty products achieved.

Achieved total sales growth of 9.0%.

<unk> sales growth of eight 2% slightly lower than our goal of double digit growth for the full year.

Global medical sales during the second quarter of 1.0 billion grew 10, 3% compared to the same period in 2021.

Lci's LCI sales growth of six 7% led by growth in point of care diagnostics.

We sold approximately $68 million in COVID-19 test kits in the second quarter of 2022, including multi USA flu and COVID-19 combination test. This compares with approximately $75 million and test kit sales in the second quarter of 2021.

We expect continued volatility in sales of test kits for the remainder of the year.

Excluding sales of PPE and COVID-19 related products.

Global Medical LCI sales increased 13, 6% compared to the second quarter of 2021.

Regarding stock repurchases, we repurchased common stock in the open market during the second quarter buying approximately one 3 million shares at an average price of $81 42 per share for a total of $110 billion.

The impact of the repurchase of shares on our second quarter diluted EPS was immaterial.

As of the end of the second quarter, we had $90 million authorized and available for future share repurchases.

Turning to our balance sheet and cash flow, we continue to benefit from significant liquidity, providing our businesses flexibility and financial stability.

Operating cash flow for the second quarter of 2022 was $157 million compared with $159 million for the second quarter of last year.

As Stanley mentioned today, we are announcing a companywide restructuring plan that is focused on funding the priorities of the strategic plan and streamlining operations and other initiatives to increase efficiency.

The company expects to record restructuring charges in 2022 and 2023, however, our estimate of the amount of these charges has not yet been determined.

Any restructuring charges are expected primarily to include severance pay and facility related costs.

The expense savings realized from this plan are expected to mainly affect 2023 and beyond.

Turning to 2022 financial guidance I will conclude my remarks by noting that we are affirming our 2022 full year GAAP diluted EPS guidance range of $4 75 to $4 91.

Reflecting growth of 7% to 10% compared with our 2021 GAAP diluted EPS of $4 45, and growth of 5% to 9% compared with our 2021 non-GAAP diluted EPS of $4 52.

With reference to the balance of the year, we currently anticipate higher EPS growth in Q4 than in Q3.

We are revising our full year sales guidance and now expect sales growth of approximately 3% to 6% over 2021 versus.

Versus our previously communicated expected sales growth of 5% to 8%.

This change reflects adverse effects from foreign exchange rates and a decrease in anticipated sales of PPE and COVID-19 related products, including COVID-19 test kits.

Sales of COVID-19 test kits are now expected to decline, 25% to 30% from 2021 versus a previously estimated decline of 15% to 25%.

We continue to expect full year 2022 operating margin expansion of 39 to 44 basis points over 2021, GAAP operating margin expansion of 20 to 25 basis points over 2021, non-GAAP operating margin.

Our guidance is for current as well as completed or previously announced acquisitions and does not include potential future acquisitions or restructuring expenses.

Guidance also assumes a foreign currency exchange rates will remain generally consistent with current levels. However, additional headwinds from foreign to foreign currency exchange rates for the remainder of the year may further impact our sales and EPS.

Guidance further assumes that end markets remain stable and consistent with current market conditions and that there are no material adverse market changes associated with COVID-19.

With that I'll now turn the call back to Stanley. Thank.

Thank you Ron.

Just a couple of very brief comments on senior leadership.

A couple of updates as of July 1st Gerry Benjamin retired from Henry Schein, as EVP and Chief administrative officer.

And he stepped down from our board when his term expires in May <unk>.

<unk> has been at the company for 34 years.

We will be continuing as a consultant.

And was it was invalid, but as we grew from a domestic mail order business.

A couple of hundred million dollars.

It's a global full service products.

And services business with nearly 22000 team Schein members.

Operations at 32 countries.

We are fortunate to have a deep bench and with Jerry's retirement, Michael Lynton BK.

Became EVP and Chief operating officer reporting to me. In addition to Michael's Corporate affairs responsibilities responsibility has assumed responsibility for HR and supply chain with each of these three functions is led by highly company competent longstanding Henry Schein executives.

Yes.

Michael joined the Henry Schein in 1994, serving most recently as senior Vice President of corporate Affairs.

Creation of the CLO position is the result of growing the growing size.

<unk> operations and I am confident that Michael will be successful new Ro together with the leadership in general of our business units before the five big business units and the rest of the executive management team.

Barry also retired from our board of directors at our annual stockholder meeting in May and I would like to take this opportunity to thank Barry <unk>.

26 years of exceptional service on our board having joined the 1996 shortly after the company's initial public offering so operator with those comments.

Answer any questions.

Okay.

Thank you Sir we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.

And for participants using speaker equipment, it may be necessary to pick up your handset before pressing any star keys.

One moment, please while we poll for questions.

Our first question comes from the line of Jason Bednar with Piper Sandler. Please proceed with your question.

Hey, good morning, Thanks for taking our questions.

Stanley if I could start on the patient and staff absenteeism, you referenced is impacting dental patient volumes is there any way you can quantify what you think that that impact may have been in the quarter. I think you said it was mostly a regional impact but could.

Could you compare.

Those regions that are less impacted to those that saw the volume effects and then is it the real time trends that youre seeing with patient volumes that gives you the confidence here to date anticipated patient volume recovery here in the second half of the year.

Yes, Jason.

Number.

Constantly trying to figure out it's very difficult because this is this COVID-19 is going in waves rolling waves.

The good news is that I think we will have to wait too long.

July in the United States.

We still saw heavy absenteeism can.

Installations in the beginning part makes the first three weeks and most recently the last few weeks, it's gotten better.

But there is still some cancellation activity.

Uh huh.

Shortages.

But it's being mitigated to some extent I think we can expect that to increase in the.

Rest of the quarter.

Internationally it's.

Really very regionally dependent.

Last quarter, Germany was really heavily hit and in July .

Since this is a public call with all of our investors.

Brought on this July was exceptional.

<unk> was exceptional.

Failure in New Zealand with a relatively small it's gotten worse because last year at this time the rates were quite good.

China is not material to the whole of Henry Schein, but generally stabilized having said that there are lockdowns for 345 days in specific locations.

My expectation is this is going to iron itself out in the third quarter. Although there is no way to tell it also seems like this COVID-19.

I'll speak to several people in different countries in Europe .

Seem to be a serious people get six small symptoms and they generally come out of it within eight to 10 to 12 days.

So all I can give you I wish I could give you more.

Okay.

That's helpful. I appreciate that Stanley and then.

Stanley or Ron just on the guide reaffirming the guide year to date.

Stick with the outlook of expanding non-GAAP operating margins for 2025 basis points.

Given where we're at year to date that does imply a decent step higher here in the second half of the year in order to hit that guide.

So the margin comps do get easier so that helps but maybe can you speak to the margin visibility you have in terms of cost controls versus how much of that margin expansion. That's in the guide, it's volume growth or business mix dependent.

Well I think if you look at.

We kind of be expansion of gross margin in Q2, that's largely driven by product mix, that's largely driven by greater growth in our some of our dental specialty products and our technology businesses.

And so.

<unk>.

We're projecting that we can continue that that kind of favorable mix going forward.

This also requires us to very carefully manage our operating expenses in the back half of the year and there is we are acutely aware of that but that's those are the really the primary drivers as we look at product mix and ongoing vigilance over operating expenses in the back half of the year in order to improve to achieve that operating.

Margin expansion.

Alright, very helpful. I'll hop back in queue. Thanks, guys.

Our next question comes from the line of Andrew Brachman with William Blair. Please proceed with your question.

Hi, guys. Good morning, Thanks for taking the question.

Stanley I wanted to go back to the comments you made in the prepared remarks around some of the customers I guess pushing back on price increases in your ability to sort of find alternative solution.

Yes, just broadly speaking is this something that I guess the majority of your customers are asking for at this point and we should start to be thinking about sort of a multi quarter revenue headwind associated with that or is it less the majority at that point. Thanks.

So I.

I don't think it's.

Across the board, having said that we have to be competitive.

So.

We can switch customers if particular manufacturers.

With the price increases we have options.

And customers are looking at those options.

Asleep mid sized customers and some of the and the bigger Dsos national gives us much.

Much more.

If you will educated consumers. So they can see that on one product versus another one manufacturer versus another there are options and I was quite clear in my remarks, indicating.

I think this will impact margin, but.

Could impact.

Sales.

In the sense that.

Customers are moving maybe to lower priced products to the same function.

Essentially the same lower price.

And in some instances obviously.

Margins will be better.

Pushing our private brand at wherever in a competitive situation.

We will push our private brand margins are pretty good there's been some inflation on them.

Private brands, but we're also in a pretty good position to work with our manufacturers, so what I'm, saying generally.

We can manage through this our margins will be good I think we provided excellent value added services to our customers in this regard.

Excluding of course is.

PP&E with as deflation.

Generic and other pharmaceuticals, where those different directions to the general market and all of those areas. I think we are maintaining and in fact, we likely will grow our gross profit.

Okay. Thanks for that that's helpful. And then I guess just on the staffing commentary around sort of dental recognizing I guess this could be a little bit longer of a headwind than we might be anticipating here can you just sort of talk about some of the longer term opportunities that this dynamic might sort of create for schein with your expansion into some of the services and <unk>.

Technology, and maybe I guess, it's just part of that can you talk about some of the specific investments that you are going to be making here throughout the balance of 2022. Thanks for the question. It's a very good question actually.

No one has a crystal ball, but expect the dental staffing to emerge closer to 2019 within the next few months, maybe it lingers into the fourth quarter I don't think so there is an issue still with.

Hi, Jonas.

Feel very uncomfortable.

It goes back to Covid.

It's an important part of prevention of the business, but if we can get the.

Dennis back to full complement.

Just had to handle more of the hygiene have to work a little bit longer hours, having said that there's a lot of technology out there to make the practice of dentistry more productive.

The movement from impression material.

Scanners.

Two implementing systems lack the sin.

Drive practice efficiency I think also.

<unk>.

PP&E use in the practice.

It was a little bit more intense.

In terms of doubling up in the amount of time.

Dennis.

Spent on.

PP&E.

<unk>.

Coats and things that's become more efficient so I think the production per practice is likely to go up as well.

As the value added services. This is key for us the strategies, whether its revenue cycle management demand generation business that provides insurance coverage of discounted insurance.

All sorts of activities as it goes as it relates to education.

Seminars publications and the like.

We are driving.

Different services.

Really increased efficiency the practice, while facilitating better clinical care.

This has been a key strategy for years, we will invest more in it but I think we quoted <unk> assist which is.

The business that focuses on revenue cycle management significantly and demand highly profitable and highly appreciated by a dentist Jarvis which provides information on dental practice.

Indexes.

One of these things on demand and the biggest issue or the biggest opportunity to bowl is our field sales consultants.

Much more appreciated.

<unk> services than pre Covid.

During Covid a number.

Practitioners bulk product that wasn't good.

Didn't necessarily have the most efficient technology in their practice and so our consultants have been consulted on these items of course.

Providing good advice, but at the same time, providing great stickiness.

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

Thanks, guys. Good morning Stanley maybe just the first on the dental equipment outlook you seemed.

As a bullish last quarter and I got the feeling maybe equally bullish this quarter can you talk about solid orders and a strong backlog I just love to get your thoughts is that sort of a fair takeaway and maybe if so do you expect the equipment outlook to hold up well into the back part of 'twenty, two even and arguably of what's.

You know quickly, becoming or supposedly becoming a weaker overall environment.

Yes.

Very good question I believe equipment scarring counter intuitive.

By the way one would think in a challenging economy.

Traditional equipment is doing well.

I think.

The consumer is expecting Dennis to have a good looking modern chair.

And Dennis understanding so they're investing in their practices.

I would say the whole restorative area is doing extremely well.

That's the digital restorations, particularly.

Whether it's.

Scanners.

Chair side.

And now of course three D printing.

All of these.

<unk> demand.

And.

Specifically as it relates to <unk>.

Profitability with some of our software this is all boding well.

I would say the imaging side units are relatively strong.

Great.

<unk>.

Not terrible.

But there is some inflation in that area and there are some shortages in terms of chips.

Back availability I wouldn't say, it's critical and these options to move from one brand to the other so but I would just say to you is not a north American issue only opportunity, but this is global where our equipment demand continues to be good the whole traditional equipment supply chain issue was a use.

North American issue.

European issue at all.

So.

On both the traditional equipment side and the.

Restore digital restoration side.

Demand is very good in this country, North America, Canada and globally.

Alright got it.

And <unk> sorry.

And three printing is also.

Emerging opportunity.

Very optimistic about our equipment business.

Thanks, Great color and maybe as a quick follow up Ron for you any color on the Decrementals for the Covid tests and PPE just in terms of a way to think about that at the op margin level and then just do we have to actually start thinking about them differently with the way that COVID-19 tests have rolled over any any color. There. Thanks guys.

I would say at the operating margin level with PPE, we're still getting what let's first of all about gross margin with PPE, we're getting.

I would say a gross margin that we're happy with.

I think what happens is that as that pricing of PPE goes down. It obviously results in a lower sales number so it puts a little bit of strain on operating margin to the extent, we have fixed costs as operating expenses.

I think Covid test kits, we are seeing a little bit of pressure on pricing there.

But we have seen some stability in that.

And the demand for Covid test kits, we had a fairly consistent run kind of weekly run rate in the back half of the second quarter that has continued into July and have been ending or perhaps even improved slightly in July .

So that's all taken into consideration when we provide the guidance on that number but I do think that.

From a gross margin standpoint current kind of going back to your original question we feel.

We feel like we're getting a good gross margin on PPE, but at those lower sales dollars. It does put a little bit of a.

Pressure on the operating margin.

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

Thank you good morning, guys I've got some background noise here. So I'll just ask two questions and then go back on mute.

First one just on the.

The North American consumable growth rate this quarter Stanley I think youre talking about the COVID-19 headwinds during the period, yet omicron headwinds last quarter as well. So how do you fare. It out then the impact of Covid versus some of the inflationary pressures and just consumer pressures. We've seen here over the last couple of quarters or last couple of months. What gives you the confidence that it did not.

Macro.

And then number two I know you're doing a great job trying to hold pricing in line for your customers I think your customers absolutely appreciate that Jack.

Any like how are you thinking about pricing may be into 2023, it might be early but I know manufacturers are struggling given the dental fees haven't gone up for quite a while.

They might be able to ratchet pricing up again next year. Thank you.

Jeff.

Noted earlier on it's very hard to read.

Identify how much of a dampening impact we had as a result of COVID-19.

But my sense, just listening to our salespeople, having gone to a couple of conferences.

Spending time with customers.

Is that.

There are several hundred basis points on the consumable side that are related to this.

Dampening because of Covid.

That that will.

Improve.

The rate.

At the rate of.

No.

Infection.

Well as it improves we'll drive.

With respect to the office.

And that's not only in the U S, but globally I think.

Hey.

Impact of inflation, I mentioned, a little bit surprised with the fact that we've been able to keep our rates.

Quoted 3% number I think it's actually less.

In the non.

Private label in the lawn.

Uh huh.

Glove PP&E area.

So.

The volumes are there.

And inflation doesn't seem to be too bad.

How it goes and how this drives.

This ends up in the fourth quarter or even 2023, it's hard to tell.

We are not getting huge pushback on pricing from our point of view, but.

We're being asked about different brand options and I think manufacturers are going to have to think through I know they are doing that now.

And again I'm talking about consumables, so it's hard to see.

How much inflation rate is really going to be towards the end of the fourth quarter at the beginning of the first.

But it doesn't look like.

We've seen other with other products in the general economy.

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

Hey, this is Justin Wang filling in for Erin we are wondering what's embedded in your guidance as it relates to potential macro pressures is there a risk to guidance from here. If we see tougher macro backdrop or is this an element that has already been baked into your guide. Thank you very much.

Yes, I mean, I would say that.

One reason, we stayed with the 16th set range is because of that macro uncertainty that you've referenced.

I think that.

We've kind of played out different scenarios.

Whether it be in terms of additional inflation, whether it be from additional.

Geopolitical concerns and.

We did fall within within that range of guidance that we provided so.

It is taken into consideration.

For the balance of the year that there could be.

Further deterioration, but we feel like we have the plans in place to try to mitigate that.

Great. Thank you very much.

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

Hi, everybody.

Just two questions first can you just comment on what Youre seeing in the medical side I know you're focused on the ultimate side area.

Mixed things about how procedure volumes progressed, and how much that was impacted by COVID-19, but alternatively, it sounds like Theres a blowout.

Hospitals into some of those alternate sites or maybe they would be above pre pandemic levels, but I'm just curious what you are seeing.

So I think youre, referring specifically to the ambulatory surgical centers.

Hum.

Close to 2019 numbers.

I can't remember a couple of quarters back gone back a little bit.

But generally afcs.

Are quite strong.

And we are gaining market share in that area for sure. We have a lot to offer I think AFC is also looking at ensuring that the supply chain as efficient.

But they're not having too much wastage of product expiration dates of product issues and we help with those kinds of things. So I would say overall, that's a good area, but we're in a number of alternate sites whether it's.

I apology renal.

Energy centers.

And.

For us these markets are all doing quite well.

I do believe having said that it probably is going to be some pent up demand for elective surgery.

In the ASC space.

That will.

Go to market I think.

People want these procedures as soon as Covid.

It tapers down here in the United States.

Okay.

Sterling Euro prepared remarks, you mentioned.

Ah you're helping.

Your clinicians deal with key changes in dental and medical professions, and I know you called out specifically digitization.

And their work.

I wondered if you would expand a little more on which what you're referring to in some of those key changes that they're dealing with and how that impacts your business down the road. That's a very good question.

<unk>.

There is a clear understanding amongst all the office space practitioners small to the largest that efficiency is critical.

They're going to face reimbursement pressures to some extent that basically now.

I think.

With them.

In many respects labor costs have increased more than reimbursement.

So then turning to our Salesforce.

So now to manage their practice.

And of course, how to.

Ensure that the clinical standards increased with access to the latest technology and on the dental side.

The biggest one is the.

D I the scanners in the prosthetic field.

I don't know what the number is but.

Because it's not clear.

Imagine that still has to Dennis.

In the developed world are still doing manual impressions.

So there's a huge opportunity in that regard to convert.

Practices unit using manual impression to digital impression the whole movement.

Sure.

Impressions to the lab.

Digital manufacturing.

Crowds and bridges in the lab is a big opportunity for us we're a significant player.

In the lab space I think we're the largest provider of laboratory products in the world So as that moves digitally.

The huge opportunity for us it has been very good to us in the last year or two but lots of opportunity in that regard.

The practice management arena the movement.

From.

Towards a cloud based technology from a security point of view from a practice management point of view.

The digitalization of more of the practice presents a significant amount of opportunity on the practice management side.

The interoperability connectivity between devices and practice management software is a big opportunity.

Thats, both dental and medical the movement to three D printing is starting to get some good momentum youll hear more from us in that regard actually hopefully in the next week or two we'll have some announcements. There. So were very excited about this on the dental side, the digitization and on the medical just simply the.

Capital equipment that we're selling.

Uh huh.

Refining practices, replacing.

Non digital equipment with digital equipment.

For diagnostics for other activities so generally.

More efficient digitalized practice.

Is what practitioners are looking seeking guidance from our field sales force and our sales field sales force is much more capable today of satisfying those needs because we've got lots of tools in their bags.

More information on that I think Graham or Ron can provide and happy to connect you with.

Uh huh.

Our teams and our business teams, but simply because its time now it's going to probably end the call. So.

Thanks, a lot that's a very very good question and place to the opportunity for Henry Schein going forward.

So.

With that in mind I want to thank everyone for calling.

We are most enthusiastic about where we are.

We think bold plus one 2000 22024 strategic plan.

Going to play out well for us even with the.

Contracted economy.

And we are underway to implementing.

These goals.

Talk about it.

Future call.

Of course, a key part of that is to drive efficiency.

As we drive efficiency in all of our distribution businesses as one distribution.

One sign that notion of.

Selling a package of products to a customer rather than one or two products or services is working well.

And of course, our high margin technology value added services and specialty products.

Boeing at a good pace. So we're very happy with our senior team in general.

The team is doing very well and the organization is motivated to support our senior team and our management digital.

The long term trends for our markets are good so we believe the RIN.

We're servicing a very solid market with a great plan and a great team.

So with that I. Thank you for calling if you have any questions. Please feel free to.

Reach out to DRAM spending on Investor relations of run directly.

That's great.

<unk> contracts are on the website.

It's Graeme stand Greg Sterling.

And Randolph Stanley Henry Schein Dot com.

<unk> thoughts then at Henry Schein, Dot Com and Rod as Ronald Ronald.

Interesting I brought on staff.

Please feel free to reach out.

And if people want to speak to me go through those channels too.

Thank you very much for calling.

Lots going on in the business and we remain excited as we have for decades. Thank you very much.

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

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