Q3 2022 Henry Schein Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to Henry Schein third quarter 2022 earnings conference call.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. Please press the star key followed by one on your Touchtone phone. If you would like to ask a question at the end of the call. If anyone should require operator assistance during the call. Please press the star key followed by zero on your Touchtone phone.
As a reminder, this call is being recorded.
I would now like to introduce you to your host for today's call Graham Stanley Henry Schein, Vice President of Investor Relations and strategic Financial Project Officer.
Thank you Sir Please go ahead Graham.
Thank you operator.
Thanks to each of you for joining us to discuss Henry Schein financial results for the third 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 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 message referred to in forward looking statements.
As a result, 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 analyses 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 key metrics used by management in operating our business.
These non-GAAP financial measures are presented study for information about a 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 November <unk> 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.
Finally, we have prepared slides summarizing our third quarter financial results. These also can be found in the Investor Relations section of our website.
Joined today's Q&A session. Please limit yourself to a single question and a follow up and with that I'd like to turn the call over to Stanley Bergman.
Thank you Brian .
Good morning, everyone and thank you everyone for joining us on this call today.
Our financial results for the third quarter of 2022.
Solid underlying growth across our business.
And actually most geographies.
We grew our non-GAAP diluted EPS compared with the third quarter of 2021 and this is despite the.
The significant currency headwinds and lower sales of PPE and Covid test kits.
Today, we are narrowing our 2022 non-GAAP diluted EPS guidance range, which reflects our confidence in the underlying strength and the stability of our business.
Overall, we feel very good about the outlook for the company.
We remain highly focused on delivering on our bolt plus one strategy.
Which we're happy to go into details during the Q&A period.
As we continue to increase the sustainable profitability of the business.
Importantly.
Mass market demands in both our dental and medical businesses are generally stable and actually have been this way for a while.
We continue to receive price increases from various suppliers with additional price changes towards the end of the second quarter.
The depth and breadth of the Henry Schein portfolio allows us to satisfy our customers needs and to offer alternative national brand and corporate brand products to price sensitive customers, thus positioning us to wholesale protect our gross profit.
Yes.
This is reflective.
But the deep and lasting relationship we have with our customers and our suppliers.
As we commented in previous quarters.
Market prices for gloves continued to decrease.
However, we believe at a reduced pace.
Our unit volume for gloves is relatively stable.
And this is driving lower sales and profits in pp in the PPE category remember the PP&E category is largely gloves.
Similarly sales and profit of Covid test kits have declined.
Compared to the prior year, but pricing and volume for these products is also stabilizing.
So generally.
The <unk> market.
Glass.
Has deflated.
Volumes definitely stable and Tess COVID-19 tests.
Relatively stable from <unk>.
<unk> point of view and a volume point of view.
Compared to the.
The previous year.
So.
We will of course provide further information on the whole PP&E and competitions.
Category, having said that.
Our business.
Excluding PP&E and Curtis did perform quite well as we will discuss in detail. During this call. So let me start by reviewing performance highlights for each of our business units, starting with the dental distribution business.
Internal growth in local currency, a global dental sales.
Excluding PPE.
It was good.
Consumable merchandise growth, excluding PP&E was solid and we are especially pleased with the excellent growth of our North American equipment business and continued strength in our global equipment order book, that's the backlog.
We had a strong growth in sales of traditional equipment during the third quarter.
We are also experiencing continuing good demand for high tech equipment.
Area, where Henry Schein is a global leader.
And this is because dental practices look to secure and maintain a competitive advantage and the product offering available in the space has expanded.
And that is practically something every dental practice.
So this growth.
It was largely driven by volume as were seeing new innovation in digital dental equipment come to market.
At somewhat lower average selling prices for the mark to market is significant.
Big opportunity.
Lots of units and we have a very good offering.
We believe that consumable merchandise sales growth in Europe was impacted this year.
Because of summer holidays, because of the summer holiday season.
As dental practitioners patients took more vacation days and pre in the previous year, but we also believe that our consumable merchandise growth.
In Europe will remain stable.
Leaning slightly positively on.
On the other side of the coin.
Other parts of the world.
International growth did benefit from ongoing strength in Australia, and New Zealand and Brazil.
Which was partially offset by continuing lockdowns in China, having said that our China business is relatively small compared to our total business.
Our North American equipment order book remains robust and continues to grow from last quarter and this is partly a result.
Quite a successful DS world from our point of view.
This event was held late in the third quarter compared to the previous year. When it was earlier and we saw continuing demand for intra oral imaging change side mills too.
<unk> digital.
Extra arrow imaging devices.
Three D printing with a number of other manufacturers too.
And of course, all the Cat line.
<unk> split.
Also from an order taking point of view.
Leading to probably a stronger we believe fourth quarter in.
A market that we are doing quite well in generally.
Lead times for additional equipment or reducing slightly.
Installations are still being affected by delays with dental office construction.
So we expect our demand and our sales in the equipment area to continue to be strong.
Our international equipment Order book is also solid.
So dental growth during the third quarter was aided by as investors know midway Midway dental acquisition.
Which strengthened our longstanding presence in the Midwest of the United States.
Provided dental customers' unmet.
Midway with access to an expanded portfolio of solutions and of course, a highly competitive pricing.
Midway built an excellent reputation within the industry over the past 35 years.
Inhibition of senior executives at midway strongly aligns with the Henry Schein commitment.
To helping dentists operate a more efficient practice.
While allowing a focus by the dentist on delivering high quality patient care.
We have successfully completed the integration relative recently of the Midwest Midway dental business distribution business and the condo dental.
We recently acquired in Switzerland that is on the distribution side is also largely completed from a integration point of view.
So we continue to invest in our dental specialty portfolio and add new customers.
Sales to DSO customers in the United States once again with good in the specialty areas and demonstrate success about one schein strategic initiative.
We are seeing some signs of economic caution in several specialty markets.
Regarding high in oral surgery.
Procedures.
I would not say this is the case as it relates to <unk> oral surgery.
There is some caution on the high inside of.
Implants.
And our.
Well <unk> business is relatively small and I'll cover that in a minute.
Certainly we believe that Henry Schein is well positioned to.
To capitalize on these shifts specifically in the oral surgery market market as we offer a full range of dental implant options at various price points. So we think on the unit side, we will continue to do well and also on the profit side.
So we had strong growth in our clear aligner business of course, let me remind those participating in today's call.
Our line of business is relatively small, but it is growing nicely and specifically with some dsos.
And again as I mentioned, we are seeing solid demand for our endodontics specialty products, which is driven by sales of new products, particularly our Triton irrigation solution.
<unk> edge pro laser system. Both of these have done well, but I would also say units of <unk> have.
I have done relatively well.
And so we believe that our dental specialty business is doing.
Quite well from a foundation point of view and we always need to look at comparable quarters and previous years trends et cetera.
I think the businesses.
Good shape.
Let's move on to the technology and value added services, our technology and value added services businesses had good underlying sales growth in the third quarter sales growth was impacted by the exploration of the <unk>.
Modestly profitable, but significant large government contract.
The largest business in this segment is Henry Schein, one so software business, which once again posted solid sales growth domestically and internationally driven by Identics practice management software.
<unk> ascent.
And entirely cloud based solutions.
During the quarter, we surpassed 5000 cloud based customers, adding more than 1000, new customers year to date and currently exceeding 100, new installations per month.
We have launched entirely across the United Kingdom and Australia.
Zealand is well over the past six months and remain on track to further geographic expansion in 2023.
<unk> has been growing its customer base by double digit percentages quarter to quarter, notably these cloud based practice management systems also drive traction for other Henry Schein, one solutions and therefore in fact stickiness to the entire Henry Schein portfolio.
We recently announced that <unk> was selected as the exclusive cloud based practice management system of small brands, a dental service organization of DSO organization with more than 700 locations.
Collecting the competitive advantage of this product offering.
So an important part of the bolt on strategic plan is to price to place greater emphasis on these high growth high margin products and services of course, no guarantees, but this is an area of focus for inorganic growth and we feel that we're on track to deliver on our expectations in that.
Area with <unk>.
Organic inorganic growth, although we will announce.
Once that any opportunities in that area or any.
Any deals in that area. Once those deals are closed and there is no certainty as to when that may be.
No.
Another bright spot in the organization and our performance with sales growth in local currencies in our medical business continued which continues to be excellent during the third quarter.
When excluding PPE Covid test kits, largely pricing issues PP&E related to gloves and.
Test kits.
Relating to demand for the test kits Bluetooth.
Ruth discussed on several calls in the past.
Patients were relatively in line on the <unk> specifically.
So.
We are continuing to deepen our relationships with existing large IDM customers.
A nicely growing our other medical businesses.
We are especially pleased with strong growth in our government sector.
And that excludes accounts and we continue to make solid progress in gaining business from independent physicians, although several years ago. This group reduced there is still reduce the number of independent physicians it as relatively stable group today, and we continue to gain market share within that group and.
Of course these smaller medical groups are also areas, where we're adding customers and market share we believe.
Our focus on equipment pharmaceutical products and point of care diagnostics remain bright spots in this business, although I must say the whole of the medical business is doing well.
And of course, the volatility of sales in COVID-19 test kits, which went down dramatically in earlier quarters has moderated.
But at a lower level of sales and on the PPE the lab side.
The volume is stable, but the pricing is still somewhat unstable or less but less volatile than we saw in earlier quarters.
Third quarter sales growth had a challenging prior year comparison.
When patient traffic to physician office. So this was bolstered by.
It was bolstered by a surge in that delta variance and that tough comparisons will continue in the fourth quarter.
We expect medical sales growth, excluding PP&E and tests to continue at healthy levels.
Volume gains.
Some price increases.
But generally growth and our market share in this area. This important area.
Both through Henry Schein.
Most experts are expecting a high co incidence high incidence of flu this year the illness in the United States due to winter experience in the southern Hemisphere.
We would expect strong flu season to drive patient visits to physician offices and in turn increased demand for the products, we provide specifically tests.
Traditional.
Point of care test.
The flu and other.
Diseases.
Including our multi USA COVID-19.
Influenza.
Diagnostic test kits.
So with that overview on our business I will turn the call over to Ron for more detailed review for more detailed review of our financial results Brian . Please.
Very good thank you Stanley and good morning, everyone.
As we begin I'd like to point out that I will be discussing our results as reported on a GAAP basis and on a non-GAAP basis.
Our third quarter non-GAAP financial results for 2022, and 2021 excludes certain items detailed in exhibit B of today's press release and in our supplemental information section of our Investor Relations website.
I will focus my comments on sales primarily to LCI sales and LCI growth, which is internally generated sales in local currency and excluding acquisitions compared with the same quarter in the prior year.
A detailed breakout of the components of our sales growth, including LCI growth is included in exhibit a of today's press release.
Our third quarter global LCI sales decreased two 4% versus the prior year.
However, when excluding sales of PPE and COVID-19 test kits are LCI sales grew six 8%.
Third quarter combined sales of PPE and COVID-19 test kits were $260 million lower than in the third quarter of the prior year.
Our GAAP operating margin for the third quarter of 2022% to 686%, a 23 basis point improvement compared with prior year GAAP operating margin.
Our non-GAAP operating margin for the third quarter was seven 8% to 55 basis point improvement compared with prior year non-GAAP operating margin.
Operating margin improvement was driven by gross margin expansion, mainly as a result of increased growth in sales of higher margin products.
Turning to taxes.
Our reported GAAP effective tax rate for the third quarter of 2022 was 22, 7%.
This compares with a 23, 9% GAAP effective tax rate for the third quarter of 2021 at.
On a non-GAAP basis, our effective tax rate for the quarter was 22, 8% and this compares with a prior year non-GAAP effective rate of 23, 9%.
Third quarter 2020 to GAAP net income was $150 million or $1 nine per diluted share. This.
This compares with prior year GAAP net income of $162 million or $1 15 per diluted share.
Our third quarter 2022, non-GAAP net income was $157 million or $1 15 per diluted share. This compares with prior year non-GAAP net income of $155 million or $1 10 per diluted share.
Amortization from acquired intangible assets for the third quarter was $31 6 million or <unk> 15 per diluted share.
This compares with $30 1 million or <unk> 13 per diluted share for the same period last year.
Foreign currency exchange.
It really impacted our third quarter diluted EPS by approximately <unk> <unk> versus the third quarter of last year.
I'll now provide some detail on our third quarter sales results.
Global dental third quarter sales were $1 $8 billion with OCI growth of one 2%.
<unk> growth excluding sales of PPE was five 8%.
Global dental consumable merchandise LCI sale.
Sales decreased by <unk>, 8%, but increased by five 1% when excluding PPE.
Global dental equipment OCI growth was 8%.
North American dental LCI sales decreased <unk>, 1% compared with the prior year, primarily due to a three 6% decrease in consumable merchandize LCI statement. However.
However, when excluding sales of PPE, North American dental consumable merchandise LCI growth was three 8%.
North American dental equipment, LCI sales increased 12, 8%, primarily driven by traditional equipment sales the equipment backlog in both our North America and international businesses remained strong.
International Dental LCI growth was three 3% driven by consumable merchandise OCI growth of three 9%.
Consumable merchandize LCI growth was six 9% when excluding sales of CPE and was driven by strength in Australia, New Zealand and Brazil.
International equipment LCI growth was one 4%, let me point out that this was against the tough comparable international equipment OCI growth in the third quarter of 2021 was 23, 9%.
Sales of dental specialty products were approximately $223 million in the third quarter with OCI growth of two 5% compared with the prior year.
Global technology and value added services sales during the third quarter were $176 million with LCI growth of four 2% compared with the third quarter of 2021.
Sales growth was impacted by the exploration of a government contract adjusting for this contract underlying OCI growth was eight 5%.
In North America technology and value added services LCI growth was two 5% and was seven 3% when adjusting for the impact of the government contract with strength in our revenue cycle management patient relationship management business solutions, and practice management businesses, including <unk> and <unk>.
<unk>.
Internationally technology and value added services LCI growth was 16, 5% driven by strength in the U K.
During the third quarter, our technology and value added services businesses together with our dental specialty products achieved total sales growth of <unk>, 8% and LCI sales growth of three 2%.
Global medical sales during the third quarter were $1 1 billion at LCI sales decreased eight 8% due to lower sales of PPE products and COVID-19 test kits.
In North America, LCI growth was nine 3% when excluding sales of PPE and COVID-19 test kit led by strong growth in sales of pharmaceuticals medical equipment and point of care diagnostic products we.
We sold approximately $81 million in COVID-19 test kits in the third quarter, including multi assay flu and COVID-19 combination test. This compares with approximately $207 million of test kits sold in the third quarter of 2021.
Regarding stock repurchases, we repurchased common stock in the open market during the third quarter buying approximately one 2 million shares at an average price of $76 42 per share for a total of $95 million.
The impact of the repurchase of shares on our third quarter diluted EPS was immaterial.
As of the end of the quarter, we had approximately $400 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 with the flexibility and financial stability to execute on our organic growth initiatives and strategic acquisitions, while continuing to return capital to our shareholders.
Operating cash flow for the third quarter was $98 million compared with $211 million last year with the decrease primarily due to an increase in working capital driven by timing of accounts payable.
With reference to restructuring as part of our previously disclosed integration and restructuring initiative, we recorded a pre tax charge in the third quarter of $10 million or <unk> per diluted share.
This plan focuses on the strategic plan and streamlining operations and other initiatives to increase efficiency.
The company expects to continue to record integration and restructuring charges for the remainder of 2022 and in 2023.
Whenever an estimate of the amount of these charges is not yet been determined.
The restructuring and integration charges are expected to primarily include severance pay and facility related costs.
The expense savings from this plan are expected to be realized mainly in 2023 and beyond.
Turning to 2022 financial guidance.
As we are now.
Unable to provide estimates at this time for costs associated with integration and restructuring for the remainder of the year. We are not providing GAAP guidance also our guidance for the balance of 2022 were completed or previously announced acquisitions and does not include potential future acquisitions or integration and restructuring expenses.
Guidance also assumes that foreign currency exchange rates will remain generally consistent with current levels. However, additional headwinds from foreign currency exchange rates may further impact our sales and EPS.
On a non-GAAP basis, we are narrowing our diluted EPS guidance range to $4 79 to $4 87, reflecting growth of 6% to 8% compared with our 2021 non-GAAP diluted EPS of $4 52.
This includes 10 cents adverse impact from foreign exchange rates versus 2021.
We also continue to expect full year 2022, non-GAAP operating margin expansion of 20 to 25 basis points over 2021, non-GAAP operating margin.
We are revising our full year sales guidance and now expect sales growth of approximately one five to two 5% versus our previous guidance for sales growth of 3% to 6%, which mainly reflects a strengthening U S dollar and lowered PPE sales.
We continue to expect 2022 full year sales of COVID-19 test kits to be 25% to 30% lower than in 2021.
In 2022 full year sales of PPE are expected to decrease 30% to 35% from 2020.
2022 full year sales of PPE and COVID-19 test kits combined are expected to be approximately 30% lower than full year sales in 2021.
This trend of lower sales may continue in the coming year versus 2022.
We do expect to continue to achieve gross margins on these products that are generally consistent with our dental and medical businesses.
Despite these meaningful market related headwinds, we continue to be confident in the strength of our underlying businesses.
And we are taking additional time to finalize our view of the overall effect that PPE pricing and COVID-19 test kits volume for next year.
As we have seen in 2022. This is a meaningful impact on our business and we want to ensure we give it appropriate consideration along with ongoing analysis of macroeconomic trends.
We intend to issue 2023 financial guidance with our fourth quarter earnings results.
With that I'll now turn the call back to Stan.
Thank you Ron.
Before we open the call to questions I would like to take a moment to note the passing.
About board director Dianne Ricoh in August .
Dan Wilson.
Internationally known authority on a static and restorative dentistry.
As well as an early pioneer in digital dentistry.
She served on our board since 2014.
Brought a valuable perspective to Henry Schein.
It was a wonderful human being.
I would also like to spotlight that early last month, Henry Schein was named to Fortune magazine's annual change the World list.
We were recognized for our leadership initiatives to advance health equity.
Individuals with disabilities.
And in particular, our engagement with our key stakeholders.
In support of the Swift.
Our CSR report, which was released in mid August aligned with two of the most common disclosure standards.
FASB.
<unk>.
This is an important milestone as we prioritize transparency and accountability in our ESG.
So in conclusion.
While there were a number of external factors at play spin.
Specifically as it relates to PP&E and test kits and.
And FX.
Both plus one strategy remains our north star.
And our team is executing according to plan.
As a result, we feel very good about.
Our position in the markets we serve.
And generally the team is focused on priorities and delivering.
So with that review of our third quarter financial results and some commentary on our future I'd now like to open the call to questions operator. Please.
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.
<unk> 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 for.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Our first question comes from the line of Jeff Johnson with Baird. Please proceed with your question.
Okay.
Thanks. Good morning, guys can you hear me, Okay, yes pretty well.
Alright.
Well good morning, congratulations on the quarter.
I guess, a two part question and Theyre, not really connected but I want to shove both of them together because I do want to ask both questions.
The first one Ron just on the gross margin up 110 basis points year over year could you help US bridge, how much FX was weighing on that gross margin versus how much maybe price increases in the lower PPE and COVID-19 testing might be offsetting and helping those are the three big variables outside of just kind of normal operations that I think.
We're all trying to understand what the impact is on the gross margin side and then if I go back to our September healthcare conference.
Manley I, Thank you and Ryan It made the comment that you would provide at least some framework for 2023 I'm not really hearing a lot of that and I know end markets are a little uncertain right now, but if I look at the street around the street is modeling, 6% EPS growth next year were admittedly closer to flat year over year in our model.
Just can you help us kind of pegged between where the street's at about 6%, where maybe I'm modeling closer to flat just how to think about maybe the ups or downs from either of those numbers. Thanks.
Well, Jeff I'll start with your gross margin question first I think that.
Especially given our portfolio you've got a kind of a broad mix of change of products. Net obviously is going to impact that gross margins. So we did see some benefit from some of the higher margin products, we did see.
I think some benefits in the third quarter on merchandise primarily.
And then nine PPE area, obviously, because gloves were down in pricing.
But from from inflation that we estimate to be in kind of net 3% to 4% range.
Benefiting there as well so I think that gave us a little bit of a lift on the gross margin versus last year.
In terms of 2023.
As you mentioned Theres a lot of a lot of different moving parts as we kind of work too and look to 2023, we just considered it to be prudent at this point in time too.
To provide guidance with our Q4 release, so that we can.
Better understand the dynamics of the PPE market, what's happening with COVID-19 test kits.
These are all things that have a significant influence on our on our income so.
When we provide our fourth quarter earnings release, we'll provide 2023 guidance at that point in time.
Understood. Thank you.
Jeff Let me just highlight.
Can't give guidance now.
But in general we're feeling pretty good about our core businesses.
That is our distribution businesses in the United States globally.
Our specialty businesses.
I would say in the implant field.
There is a greater demand at this moment for the lower priced well.
Premium implants.
Uh huh.
Software businesses and other value added services businesses, having said that the.
Yes.
PP&E, namely primarily gloves is highly volatile, although we think it's stabilizing.
And tissue, which we think have stabilized from the last few quarters, but I think it wouldn't be appropriate right now to provide guidance.
For 2023.
Taking into account the volatility in PP&E and fish.
Wish we could do more but I think it would be irresponsible to try to predict those areas.
And our next question comes from the line of Elizabeth Anderson with Evercore ISI. Please proceed with your question.
Hey, guys. Thanks, so much for the question Sandy.
Really I think you sort of alluded to it and in Jeff's question, a little bit, but if we think about sort of.
Our total burn sort of at the beginning of the <unk> result, how would you say the trajectory compared to the third quarter and then just in general on the overall visibility of the business right.
Right now obviously one question. Many investors have been asking is have you been ex COVID-19 any like rod or changes and how you sort of think about the visibility of the business right now yes.
Yes, I think that's together with Jeff's question is the coal, which we conduct.
And I think we're quite comfortable look uptake of dental consumable merchandise internal sales growth.
Excluding PP&E.
The relatively consistent with the third quarter and Thats both.
In North America and internationally.
It's a relatively stable.
Of course, what we can.
<unk>.
We just don't have visibility on the price of platts.
And that could swing it a number of directions, having said that I think it's better to look at the core business and we will breakout for you.
Sales of these.
These clubs clubs ending.
Okay.
Categories, and so youll be able to figure out.
How are we doing in the core business.
You're saying that that is pretty stable. We gave you and actually is doing quite well. He gave you sales excluding those items and executing.
Foreign exchange Foreign exchange and Ralph will give you the number.
Have an impact in all three quarters.
Sure.
<unk> in our guidance that we've reached a stable foreign exchange, which is of course.
Reflective of very strong dollar in the markets that we serve.
Yeah.
If it wasn't clear I'm happy to give you more.
Charity or Ron can do that now as it relates to that.
Still by the way and medical also it could take up PPE and test.
October was more or less in line with the third quarter as well.
And.
Global technology and value added services sales not that material, but.
In the scheme of Henry Schein, but the profits seem to be stable as well.
From the third quarter so.
Patient traffic.
It's very hard to get precise.
If you take a look at the Ada survey and.
We don't know 100% slicks.
Recent analyst reports suggest.
Analysts report suggests that patient traffic has slowed modestly since the end of August .
Some of them were reading between 3% to 4% if you take the Ada in analyst reports into account.
Okay.
And.
That's according to certain analysts, perhaps reading at the Ada report.
Translates into approximately 6% below pre pandemic levels net.
Claims data also suggests that volume is down approximately 3% to 4% compared to the previous year.
And so that is down from where it was going into the year.
And Additionally, as survey identifies that there's a growing number of dentists in the U S that are concerned with.
These shortages, particularly the hygienist or the hygienist not material it is effective.
Having a problem getting dental systems.
And so there is a concern with satisfying the traffic.
Uh huh.
But if you look at our U S dental merchandise and everything I've said now relates to the U S.
Taking a look at our U S merchandise sales.
We're growing if you take out PP&E by about 4% and holding steady.
Our inflation expectations.
We had expectations.
Expectations, our view is that we had 3% to 5% product inflation.
And so that means our volume.
Relatively flat.
Yeah.
We are seeing a slowdown as I mentioned in the implant business.
Business.
So if a strong.
2000 and.
'twenty one.
So.
The business is basically stable. We believe we are gaining some market share can prove it to you.
The earnings power of the business.
I think has positive upside in that we are working.
Working on managing expenses and moving towards higher margin.
Earnings.
Ah.
So that's sort of basically the U S side.
Outside of the U S.
It seems pretty stable as well countries are different.
But it seems relatively stable that's a long answer.
But.
You cut through it all it's relatively stable with us being optimistic on the positive side.
Moving PP&E on the dental side, and removing PPE and test on the medical side and that relates to both domestic and international.
I can't give you a crisp answer those are the puts and takes.
Thanks, so much I appreciate it.
Okay.
Our next question comes from the line of Brandon Vazquez with William Blair. Please proceed with your question.
Hi, Brian Thanks for taking the question.
In terms of profitability you know, there's a lot of macro headwinds that are uncertain here and I can appreciate it's hard to put a finer point on those but how do you guys think about balancing investments in future growth and kind of balancing those near term headwinds to deliver some profitability and EPS. So what are what are some key investments youll continue to put capital into.
<unk> of what happens in kind of the trajectory.
Trajectory of things, you can't change and where areas that you can pull back on spend.
Well when you say investments.
Let me deal with the M&A side as I noted earlier.
Deals are not done.
Until they sign and announce.
But we have.
<unk> that we wish to spend $3 $400 million a year.
On M&A, we've done approximately that on average some years, it's been a little higher than it was a bit higher during COVID-19. It was a bit lower but we want to do we want to continue to invest in M&A at that kind of a range.
The pipeline is relatively full.
Specialty products is an area of focus.
We've already announced two.
Fold ins on the distribution side.
But I would say, it's a high margin high growth areas that we're most interested in doesn't.
It doesn't mean, we will not continue to fold in.
Businesses will expand our geography on the distribution side.
Again, we remain quite optimistic and the pipeline is full but we can't commit to closing anything.
As it relates to investments in the business I would ask Ron to cover that we have specific areas, where we're focusing on reducing expenses expenses, but other areas, where we go into.
Move investments towards that we believe will impact the long term sustainable profits of the business run on the investment in the business your thoughts yes.
Brandon part of this restructuring initiative, we have in places too.
Give us an opportunity to redirect some some investment internally in the business to those areas, where we see greater opportunities for growth greater opportunities for for higher profitability.
So thats part of it but we're also.
I mentioned.
In the prepared remarks, we have $400 million authorized for share repurchases and we will expect that to continue to be an important part of our capital allocation going forward as well.
So.
Part of this is <unk>.
Share buyback together with.
I think kind of targeted M&A as Stanley pointed out plus also.
Some reallocation of internal investment as we proceed through 2023.
And our next question comes from the line of a J Rice with credit Suisse. Please proceed with your question.
Oh, hi, everybody. Thanks for the question I wondered if.
Maybe to expand a little bit about your comments on.
Inflation and I know in the prepared remarks, you talked about seeing some price increases at the end of the quarter are you still able generally to pass those along or are you seeing any.
Significant shifts toward your a good national brand or your corporate brand.
As an offset to those inflationary pressures and maybe also as.
As you progress through the year is is the trend.
But inflationary increases been pretty steady throughout the year I know year to year, it's up but.
Steady throughout the year or you've seen it build over the course of the year.
Okay. So good question.
Good actually let.
Let me begin with the end.
Did see from National brands some bulk.
A bunch of increases at the end of the second quarter.
By some manufacturers.
And I would say that there is a growing.
Awareness amongst our customer base.
All of the manufacturers that have increased significantly.
Simple times.
And those that have held the prices back.
So there's a much more acute understanding of price increases in the marketplace now and I would say six months ago, two or three quarters ago.
It does.
Nothing very little that is so unique in dentistry.
Customer can move from one manufacturer to another obviously certain brands provide more comfort as well.
Branch generally do.
Statements concerning make about branding than.
And then other brands.
So.
Generally we've been able to pass on.
Price increases.
We manufacturers have not been supportive of that.
In other words they may not.
Want to recognize the charge back that's.
Very rare I can't think of too many manufacturers, but that has not occurred it's generally the known in medicine. It's been the case in medicine for two decades.
A couple of well one maybe one or so of manufacturers that are.
In dentistry that are having an issue with that but generally we're able to pass them, along and where we're not.
I would say the.
Sure.
Our customers are working with us.
And Ah.
Where there isn't a national brand option.
We do offer our private brand.
Some customers looked private brand any of it.
So it's not a crisp answer and that is not one shoe that fits all but generally we're able to move price increases along.
And.
The suppliers are understanding where manufacturers are going further than others that there are options, whether it's with other national brands Big one smaller ones.
Private brand.
So.
I believe we have very good relations with our customers with most of our suppliers and are managing through this in a rather effective way.
Bob.
Our margins gross profit has done okay.
Not only because of this particular issue that we described but it's also a movement towards higher growth higher margin businesses.
Okay.
Okay, maybe just a follow up on the comment you made that lead times on the equipment side are starting to improve a little bit does that change the dynamic in the marketplace where there.
Potential customers that just said look it's a long lead time, so I'm not going to order now, but may now start to order or does it does it affect the sales process and then the other way.
Yes.
I think we mentioned our order book is strong at the end of this quarter was strong at the end of this quarter than last quarter.
It's a combination of areas.
Some of it is the CAD cam to large extent the digital side was because the sirona.
Since flash Sirona.
We will be meeting was in a different quarter.
That's to some extent not a large extent that some of it so.
So generally.
Because we did have a pretty strong quarter. Both here in the U S by the way international relative.
Held back a bit in the percentages because of prior year numbers.
The quarter was good and the.
Buildup went up again some of it because of.
Vince.
Moving around.
But in general it's good.
On the traditional equipment.
Customer really needed something we could supply them.
So it wasn't a rush, we asked them to wait.
I would say.
The challenge was use traditional.
I would say that.
The manufacturers in that too.
Two major manufacturers and chairs units and lights.
<unk> has not had any backorder issues now.
While I believe.
Treat us with the priority.
And the other one also treats us very well.
<unk> improved the capacity.
But it's still backlog.
The bigger issue is less availability of the products and more the delays in the sites.
Of installation, where there is I think in line with the general economy.
Labor shortage delays by contractors.
And so we haven't been able to necessarily deliver.
But I think these are all marginal issues because generally equipment from our point of view is strong.
Some extend its probably from gaining market share.
But in general I equipment business here in the United States.
And globally is quite strong.
Okay, great. Thanks, a lot.
Our next question comes from the line of Jon Block with Stifel. Please proceed with your question.
Great. Thanks, guys and good morning, I appreciate the time and maybe just two quick questions first on the dental consumable side. It seems like your LCI growth premium between specialty and basic consumables ex PPE.
Has compressed and Stanley I think you talked about some.
Implant headwinds should we expect that call it that ratio compression I guess to continue.
In coming quarters, and if so why Stanley is that just sort of teasing out some shifts going on in there.
The dental industry of maybe that move back to call, our bread and butter dentistry or more hygiene dominating the chair versus higher end procedures, and then I've got a quicker follow up on equipment.
Hard to tell we haven't seen the data yet on worldwide sales of implants is some data available.
We havent seen a report yet, but my sense is the units and oral surgery have not gone down significantly maybe slightly.
But there is a greater interest in.
The lower priced implants.
And it's a little bit strange and that the actual cost of implants is insignificant compared to the procedure, but I guess Dennis in certain markets are looking at that.
We are still optimistic about the oral surgery business very optimistic.
The market is stable and because we continue to do well.
In parts of Europe , and the United in North America.
On implants.
And I think the low priced units gain.
Our business in that area is doing very well.
So.
We're also dealing with high comps the quotas previous 21 was very high comps very hard numbers.
Sure.
I wouldn't draw any specific conclusions as to the strength of those businesses.
From our point of view I think they are pretty.
Pretty solid.
And on the other side, our <unk> business has done very well.
Our traditional wires and brackets business, although it's very small has not done well, but our liners have done well limitations to say with a very small market share, but we have a couple of DSO contracts that.
They work almost exclusively with us.
Got it got it very helpful and maybe just a follow up and I'll try to push you a little bit your dental equipment comments. They continue to I don't know I.
I think be pretty upbeat overall dental equipment and that's contrary at least just to our checks and interestingly. Your conviction that this is true call. It end user demand, it's not a function of a catch up from the supply issues of six to 12 months ago and do you think that equipment strength continues into 2023.
For your time guys.
We're talking about at the margin are relatively small percentages, one way or the other but generally I think the business is solid.
Also do well with Dsos globally on the equipment side I think that helps.
Capabilities I think on installation.
Cable to bring up many new dsos practices on one day.
By practices, our group of practices, we're able to help to install new equipment relatively quickly we will.
Very well with our suppliers.
Not all but most of our suppliers on the equipment side to view us as a great way to markets. So there's a lot of factors in there, but I would say.
At least.
For the foreseeable future our dental conviction is pretty good.
I can't comment on the rest of the market.
There are many players with some private players even the public players don't disclose exactly what's going on.
Again, the chairs units and lights is largely <unk>.
Largely private companies and so it's very hard to give you a comparison to the market, having said that we do feel comfortable without it.
Equipment growth.
As I sit here.
November one 2022.
Okay. Thanks for the time.
And our next question comes from the line of Erin Wright with Morgan Stanley . Please proceed with your question.
Great. Thanks, I have a quick question on the medical segment with what's driving the high single digit growth I guess with a little bit slower than what we saw in the first half, but that's excluding the COVID-19 related dynamics.
What's the sustainability of this growth are you seeing market share gains or what are some of the factors driving that thanks.
Yes.
Also another good question, we don't get many questions on the medical business, which we think is a great franchise.
We're doing very well with idms ideas generally use other Matt distributors.
Big Hospital distributors for their hospital acute care needs.
But for the.
Alternate kidney physician practices, primarily but other alternate set.
Sectors other than.
Long term care, which were not in generally.
We're viewed as an important player.
We don't want every contract that we win a lot it's based on our service.
Our relationship with suppliers efficiently chargeback systems that we have in place with suppliers that worked very well with us on that side.
The house has been charge backs for example in place for years.
Way of doing business and we just do it very well.
On the ultimate care sites side, particularly.
Particularly the physician side, so with the large idms.
We don't want too many new ones. We have won a few in the last few years, but that on switch that often having said that there is a growing part of the IBM business that moves moving from the acute care setting into this alternate care specifically physicians ASC.
Side of the provider provider side, and we do well with it. We also made a comment that our other medical businesses are doing well government business, we do quite well in that area.
Unique businesses in that area and they're not huge but they are doing well.
We've also indicated that our sports medicine.
Parts of the.
The EMS business that we're in that do well podiatry.
The smaller practices the smaller group practices. These are all areas, where we have.
<unk> directly focused on these businesses that are doing well so.
I think we do well in this marketplace, we have scale and we have sophisticated supply chain I'm not sure. If anyone does what you eat better than us from a logistics point of view, combining med surge pharmaceuticals equipment installation.
The whole package only one from one distributor.
With formularies charge backs that really work very well.
Okay. Thanks, and then on 2023.
There is limited visibility on PPE and test kits and also the macro kind of heading into 2023, but are there other factors that could be limiting your visibility. There for instance are there upcoming changes in DSO or manufacturing contract that would impact your ability to provide guidance into 2023 now like or do you anticipate that that is a fair.
Fairly normal environment next year from a customer or manufacturer relationship standpoint.
No Hi, Ed It's Rod I would say that it's more of a ladder from what you just said, it's we don't we're not anticipating any any other significant changes in the market. We're just trying to better digest, what's happening on PPE and <unk>.
COVID-19 test kits.
We're happy with how the business is doing where we're happy with the quarter.
We faced a $260 million revenue headwind this quarter in terms of decreased revenues and PPE and Covid test kits.
And grew EPS from our non-GAAP EPS from $1 10 to $1 15, So we're happy with the core business, but we need to get it we want to better understand the whole dynamics of.
Of what's happening.
With PPE and corporate test kits, and we will be able to provide.
I think detail that will that will be helpful to people when we.
Include 2023 financial guidance with our Q4 earnings release.
Okay got it that's fair thank you.
Thank you we have time for one last question coming from the line of Jason Bednar from Piper Sandler. Please proceed with your question.
Hey, good morning, Thanks for squeezing me in here and congrats on the results today.
Yes, I'll go with a two parter here and I'll just ask both of them upfront.
Follow ups to prior questions.
So maybe with the forward looking question here and I'll take it a different different crack here than what Jeff said on 2023.
Are you willing to commit at all of the earnings growth for next year or is there any I guess any reason to think operating margins don't expand in 2023, given the restructuring that you have underway.
And then building on Jon Block's question.
If we're thinking about the sales contribution shifting maybe on the margin away from the more profitable specialty areas those parts of the business softening up a little bit it sounds like.
Can you reconcile or fill the gap on how profitability and margin expansion is still remaining a solid as you see it for 2022.
In spite of this dynamic thank you.
Yes, Jason regarding 2023, like I said, we'll be providing.
Plenty of details around.
Our 2023 financial guidance with our Q4 earnings release, So I think at this point in time.
We're not prepared to provide anything directional.
With reference to your question on the kind of dental margins and the influence of of specialty products I think something to keep in mind is that.
The specialty products are likely going to have or historically may have a little more volatility in there.
And their growth versus merchandize merchandize.
Can fluctuate a few points year over year, while specialty products might have a little greater.
Volatility then that Stanley said, we had a pretty good growth last year in the third quarter of the specialty products. So youre right in terms of.
This particular quarter, maybe theres, a little more kind of.
I'm not sure what the right word is but how the margins kind of come together, but.
But I don't know if we're to the point of saying that is going to be kind of a long term trend here.
Okay fair enough. Thanks, Ron.
We still have.
Highly bullish about our high growth high margin businesses and it may be some volatility as Rob indicated but generally.
The oral surgery business is a good one.
We believe we are growing our market share globally.
And <unk>.
<unk> very strong also.
Also.
Obviously, some volatility in wires and brackets.
And align ISG, although small for us seem to be.
Positive paradigm.
But.
I wouldn't read anything into one or two or three quarters. I think we've shown that long service businesses are growing.
We expect.
Commitments.
Two.
And.
Inorganic growth to that.
Okay.
Great. Thank you I would like to turn the floor back over to Stanley Bergman for any closing comments.
Thank you operator, thank you everyone for your participation I think.
So there's a couple of times today many times.
We have confidence.
In our core businesses.
We just don't know the degree of volatility in the <unk>.
<unk>.
Primarily gloves and the Covid test area rapid test area.
But excluding that.
Feel strength stability.
We're feeling good about.
Still consumable businesses around the world.
The equipment business.
Feeling good about our medical business.
Our <unk>.
You added services.
Businesses recovered specialty.
So.
Obviously, we are in volatile times.
But we're also focusing on.
Our expenses.
We announced in the past relative.
Restructuring.
And.
This is something Henry Schein has gone through many times in the past.
Good management team in place focused on the priorities at.
At the center of which is a bulk plus one initiative.
With that in mind.
Again for calling in.
We'll speak to you.
Beginning of.
Mid February .
February outs the longer period.
With February but I think it will be at a couple of conferences will it be two or three conferences Jim right.
Again, if anyone has any specific questions.
Please feel free to reach out to Graeme to restaurant right and wrong.
Thank you very much.
Since we won't have another one of these calls have a safe holiday season.
Thank you very much for your interest in Henry Schein.
Okay.
Yeah.
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