Q1 2023 Henry Schein Inc Earnings Call

May 9, 2023

Good morning, ladies and gentlemen, and welcome to Henry Schein first quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. Please press the star key followed by one on your Touchtone phone. If you would like to ask a question at that time.

Anyone should require operator assistance during the conference. Please press the star key followed by zero on your Touchtone phone.

As a reminder, this call is being recorded.

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

Thank you Graham. Please go ahead.

Thank you operator, and my thanks to each of you for joining us to discuss <unk> financial results for the first quarter of 2023.

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

<unk>, South 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 masses 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, Inc filings with the Securities and Exchange Commission and included in the risk factors section of those filings.

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

Today's remarks will include both GAAP and non-GAAP financial results.

We believe that 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 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 are included in exhibit B of today's press release and can be found in the financials and filings section of our Investor Relations website under the supplemental information heading.

For additional financial information, please refer to our quarterly earnings presentation, and also posted on our Investor Relations website.

The contents of this conference call contains time sensitive information that secular it only as of the date of the live broadcast May nine 2023 Henry.

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, during 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. Thank you for joining us this morning.

We are most pleased to report very good financial results for the first quarter of 2023.

In line with expectations, we provided at the beginning of the year and.

And reflect the good earnings momentum in our underlying core businesses.

Market trend stays consistent with those we discussed during the previous quarters.

Conference call.

Compared to the fourth quarter of last year, where we saw a high number of flu cases pay.

Patient traffic to dental offices around the world.

And is at or nearing pre pandemic levels.

Patient traffic through the physician practices has also normalized.

As we anticipated our results continued to be impacted by decreasing sales of PPE products and Covid test kits.

Within the PPE credit categories the pricing is.

It was lower.

Again as we discussed.

At this stage has stabilized on a sequential basis.

COVID-19 test kits volume was lower excluding.

Excluding these product categories, we achieved strong internal growth companywide up six 3% in local currencies.

Our financial results were also adversely impacted by acquisition related expenses as well as foreign exchange.

With respect to acquisitions.

<unk> remains robust.

In early April we closed our acquisition of a minority of our majority stake in biotech dental.

Our business with a market leading portfolio of dental implants, they rely on us.

And we also recently announced our plans to enter the large Brazilian implant market with the acquisition of <unk> implant system, one of Brazil's leading manufacturers of dental implants.

And a complement to our successful resilient general dental consumables and equipment business.

And we also announced the acquisition of regional Health care group.

Entering the medical market in Australia, and New Zealand.

Leveraging our.

Dead on infrastructure in the region very successful business, we have today in the region.

I'll discuss these in more details in a moment.

Today, we are updating our non-GAAP diluted EPS guidance financial guidance for 'twenty two.

Three to include the impact of biotech or dental.

Acquisition of biotech.

The outlook for the underlying business is consistent with prior estimates.

Including expectations for operating income growth in the high single to low double digit percentage range when excluding the contribution from PPE products and Covid test kits and acquisition related expenses.

Now turn to review of the highlights from each of our business units.

Let's begin with dental dental distribution business.

Overall, the underlying fundamentals of our dental.

End markets remained solid.

Fueled by an aging global population low unemployment levels and global.

And a growing global awareness of healthcare benefits, a preventative care and oral hygiene.

First quarter dental sales growth, excluding PPE products.

<unk> stable patient flow.

For merchandise sales when excluding PPE products was very good.

Partially driven by lower merchandise sales comparison.

That was impacted by.

The highest level of flu cases.

And some COVID-19.

Omnicom COVID-19.

Our dental equipment sales was solid traditional equipment sales grew very well well digital equipment sales comprising a two D. Three D digital imaging mills.

Intra oral scanners.

Continued to be lower.

Then the previous year.

North America, the traditional equipment growth included some price increases introduced in the second half of last year as well as good growth in our parts and service business.

We've been focusing on this area for a while.

This growth was offset by a decrease at <unk>.

Decrease in sales of digital equipment.

The market for intra oral scan as healthy as.

As demonstrated by increased unit sales in the quarter.

As we commented last quarter, our sales decrease reflects declining average selling price for intra oral scanners.

Plus we also had a significant sale in the previous quarter.

Previous year.

Uh huh.

Status to a DSO.

Sales and other digital categories are lower and we believe are now normalized.

To the last year.

We also posted good sales growth in dental equipment in Europe .

International dental equipment price inflation has not been significant and the growth was supported by the equipment backlog, which is reverting to a more normalized level in Europe and also.

Parts and service business is doing quite well.

The biennial Ids show.

In Cologne and March was once again, a good event for Henry Schein and from a sales perspective.

The overall impact was consistent with previous ideas meetings.

Our global equipment order book, which is mainly comprised of traditional equipment remains robust.

And if.

Year over year.

Let's take a look and a bit more detail.

On a global dental specialties business.

Our global dental specialty products.

Sales growth increased from the fourth quarter.

We continue to expect modest year over year growth through the first half of the year given the strong first half of 2022.

In client sales growth was driven by meaningful growth in our premium catalog product.

In Germany, Austria, and Switzerland, where we have out.

Biggest strongest market share in the category.

And we continue to achieve double digit growth and I'm, a dentist value plus long.

In North America, we are seeing an increase in dental specialty practices being acquired by larger Dsos importantly, we have excellent relationships with a growing number of DSO accounts and are committed to driving specialty product conversion.

At practices within those networks.

We also continue to see growing adoption specialty dental procedures amongst general dental practitioners and as demonstrated by enrollment and Henry Schein is continuing education courses.

These categories.

As mentioned earlier.

Recent highlights in our global dental specialty business.

Was the acquisition of a majority stake in biotech dental.

And the announcement of our entry into the Brazilian implant market.

Implant system.

Through the acquisition of the <unk> implant system.

Business.

Biotech they don't provide Henry Schein with a comprehensive integrated suite of planning and diagnostic software as well as our fast growing portfolio of dental implants and payroll loans.

Together these products resulted in revenue of approximately $100 million.

In 2022, we are particularly excited about bringing the biotech dental software products to our customers.

Along with our existing portfolio of practice management.

Great and clinical software, we will offer a seamless digital.

Workflow solution.

A growing number of customers worldwide very very exciting.

Last week, we announced a definitive agreement to acquire <unk>.

Plant system.

Which is one of Brazil's leading manufacturer of dental implants.

With revenues of approximately $60 million in 2022.

This agreement marks our planned entry into the large Brazilian implant market.

<unk> has been a very good growth market for Henry Schein, where.

Where we have brought good value to Brazilian dentists and dental.

<unk> over the last five or six years since we became active in that market.

Shouldn't recently expanded distribution of the value price.

Dental implants to include the United States in other geographies. We expect this transaction to close later this year subject to close regulatory approval.

Both the <unk> implant system and the biotech dental transactions represent progress they're making.

To advance our boat plus one strategy, which calls for us to focus on internal growth and of course business development activities on the high growth high margin opportunities.

Particularly with innovative products and services.

This quarter and the downtick business continued to grow nicely.

Nowadays throughout Breslin edge brands in North America.

Our orthodontic business is quite small.

Pleased with the continued positive development of our clear aligner business.

Particularly with Dsos.

So now let me turn to our technology and value added services business with the largest components as Henry Schein, one which had an excellent quarter.

Investing in growing these businesses a key pillar of our bulk class one strategic plan and we believe our customers are recognizing the advantages.

Technological innovation.

Bring to the marketplace.

Growth in North America continues to be driven by dentists and dental ascend cloud based solutions.

And customers upgraded from a easy dental products.

With the easy dental lifecycle ending later this year.

International growth was supported by then.

And then Charlie cloud based solutions for customers outside the United States, particularly in Australia, and New Zealand.

It was recently launched.

The number of customers on <unk>, and then Kelly visa our cloud based solutions has increased approximately 30% over the last year were very very pleased and excited with our customers moving to the cloud based to a cloud based solutions.

We also saw growth within our revenue cycle management insurance claims brought up with growth driven by the number of <unk> claims with process and enhanced functionality by electronic invoicing and reimbursed and solutions sales.

Sales of this product are strong indicators of the underlying markets.

As evidenced by higher by the higher number of each claim to be processed.

In short our practice management solutions provide a competitive advantage to our dental business.

<unk> integrated software is at the core of the Operatory and supports clinical workflow.

Clinical workflow, while improving practice efficiency.

Our catalyst management software also provides opportunities for us to sell products and solutions practice.

Digital devices.

<unk> generation handle and analytical software as well as a growing AI enhanced product portfolio.

Towards the end of the first quarter, we announced with full integration of <unk>.

AI powered by <unk> and.

AI into dentists are sitting.

This software automatically analyzes digital images identified and localized carriers a lot of tourists as the.

<unk>.

X rays and effective treatment recommendations.

Products.

This AI product offering has been well received.

Additionally, our new voice technology.

<unk> improved speed and efficiency for dentists, and hygienists, completing periodontal exams and clinical notes while it is still early in the launch we have already seen good adoption of this new AI driven solution and we are excited to extend our reach and support a dentist in providing the best possible patient care.

Yeah.

So in our medical business distribution business during the first quarter, our medical business achieved growth.

4%, excluding PPE products and COVID-19 test kits.

As I mentioned last quarter, we expect the internal sales growth.

Underlying medical business to continue to grow quite nicely.

That is a somewhat slower pace this year than last year given the prior year compares.

Comparison, starting from significant growth, we achieved last year.

We remain highly bullish also on our medical business unit sales for Covid tests, you're down significantly and within the PPE category dropped pricing has stabilized, albeit at a lower price than last year looking.

Looking at specific product categories, once again pharmaceutical and equipment sales were strong.

Sales of point of care diagnostic products decreased to some extent because.

Hi.

<unk>.

Diagnosis less yet this quarter.

We were also pleased to announce.

Our acquisition of regional Health Care Group in Australia, and New Zealand, both great markets that have contributed to the growth of our dental business through this acquisition, we were able to further leverage Australian and New Zealand infrastructure and expand our global medical products footprint.

In summary.

Underlying fundamentals of our call.

Sure.

And we are executing well as anticipated without boat plus one strategic plan.

So we're very comfortable with where we are.

Bullish about the business.

And as excited as we advance our boat plus one strategy with that in mind I will turn the call over to Ron to discuss our first quarter financial results.

Our full year guidance. Thank you very much everyone.

Thank you Stanley and good morning, everyone. As we begin I'd like to point out that I will be discussing our results as reported on a GAAP basis and also on a non-GAAP basis, our first quarter non-GAAP financial results for 2023, and 2020 to exclude restructuring cost as well as amortization expense.

Acquired intangible assets. This is detailed in exhibit B of today's press release.

With respect to sales growth our focus on LCI sales growth, which is internally generated sales in local currencies compared to the prior year and excludes acquisitions.

First quarter global sales of $3 $1 billion reflected in LCI sales decrease of three 7%. However, when excluding sales of PPE products and COVID-19 test kits.

LCI sales grew six 3%.

This sales growth benefited somewhat from the timing of our fiscal reporting calendar whereby the December 2021 holiday week was included in the first quarter of 2022, but Q1 2023 did not include a holiday week as it fell in the fourth quarter of 2022.

In the first quarter of 2023, we sold $149 million and PPE products, a decline of approximately 35% year over year and $52 million in COVID-19 test kits, a decline of approximately 80% year over year.

On a combined basis, PPE and COVID-19 test kits declined approximately 60%.

As a reminder, our first quarter sales in both PPE and COVID-19 test kits were especially strong last year.

Our GAAP operating margin for the first quarter of 2023 was five 7% a 196 basis point decline compared with the prior year GAAP operating margin our non-GAAP operating margin for Q1 of seven 7%, a 102 basis point decline compared with the prior year non-GAAP operating margin.

This decline was mainly a result of lower gross profit dollars from PPE and COVID-19 test kit sales, which helped to cover our fixed costs as well as higher acquisition related costs, partially offset by gross margin rate improvement.

First quarter 2023, GAAP net income was $121 million or <unk> 91 per diluted share.

This compares with prior year GAAP net income of $181 million or $1 30 per diluted share.

Our first quarter 2023, non-GAAP net income was $161 million or $1 21 per diluted share. This compares with prior year non-GAAP net income of $200 million or $1 44 per diluted share.

Several factors adversely impacted our GAAP and non-GAAP results. This quarter, specifically the contribution from PPE products and COVID-19 test kit sales to diluted EPS decreased by an estimated 24 cents per diluted share relative to the prior year period.

Acquisition related costs impacted diluted EPS by <unk> <unk> per diluted share this year compared with approximately one half cent per diluted share last year.

And note that these acquisition costs, our operating expenses that we do not add back for non-GAAP reporting purposes.

Additionally, foreign current exchange negatively impacted our first quarter diluted EPS by approximately <unk> <unk> versus the first quarter last year.

So turning to our first quarter sales results.

Global dental sales were $1 9 billion and LCI sales increased by 4%.

Excluding sales of PPE products LCI sales growth was seven 4%.

Global dental merchandise LCI sales increased by 4%, but increased by eight 4% when excluding PPE products.

We expected strong merchandise sales growth as last year's sales were impacted by the omicron variant and timing of the reporting calendar as I previously mentioned.

North American dental merchandise sales increased one 3% and by six 6% when excluding sales of PPE products.

International dental merchandise LCI sales increased by eight 1% or 11% when excluding sales of PPE products with strong sales growth in central Europe , Australia as well as in Brazil.

Global dental equipment LCI growth was three 9%.

We had strong LCI sales growth for traditional equipment and this was offset by a decrease in digital equipment LCI sales are.

Our north American dental equipment, LCI sales increased two 6% international equipment LCI sales increased by five 8% and were bolstered by tax incentives in Italy, and the UK, which ended this quarter and Australia, which are due to expire at the end of the second quarter.

Dental specialty products include implants bone regeneration materials orthodontic products and antibiotic products sales of these products were approximately $233 million in the first quarter with LCI growth of four 4%.

Global technology and value added services sales during Q1 were $191 million with LCI growth of six 5% sales.

Sales were again negatively impacted by a government contract, which expired early in the third quarter of 2022.

LCI sales growth was 12, 4% when adjusting for this contract.

In North America sales growth was driven by our practice management and revenue cycle management businesses growth internationally was driven by our <unk> cloud based solution.

Yeah.

Global medical sales during the first quarter were $971 million and LCI sales decreased 17, 1% due to lower sales of PPE products and COVID-19 test kits.

In North America, excluding sales of PPE products, and COVID-19 test kits LCI sales grew four 2%.

Led by strong medical equipment, and pharmaceutical sales offset by lower point of care diagnostics revenue.

Keep in mind. This is against a difficult comparison as North American medical LCI sales growth, excluding PPE and COVID-19 test kits was approximately 15% in Q1 of 2022, driven by higher office visits related to the Omicron Varian.

Regarding stock repurchases, we repurchased approximately one 2 million shares of common stock in the open market during the first quarter buying at an average price of $81 70 per share for a total of $100 million.

Turning to our balance sheet and cash flow, we continue to benefit from significant liquidity, providing our businesses with the financial flexibility and stability to execute our organic growth initiatives and strategic acquisitions, while continuing to return capital to our stockholders.

Operating cash flow for the first quarter was $27 million compared with $93 million last year with the decrease primarily due to lower income from PPE and COVID-19 test kits as well as restructuring expenses incurred in the quarter.

Those restructuring expenses in Q1 were $30 million or <unk> 16 per diluted share and were incurred as part of our previously disclosed restructuring initiative. These expenses, mainly relate to severance benefits and costs related to the exit of facilities.

We expect to continue to record restructuring charges during the remainder of 2023.

Let me conclude my remarks, with our 2023 financial guidance at.

At this time, we are still unable to provide estimates for costs associated with integration and restructuring for 2023. Therefore, we are not providing GAAP guidance. We are updating our guidance for 2023, non-GAAP diluted EPS attributable to Henry Schein to a range of $5 18 to $5 35 per share.

Reflecting reflecting growth of negative four to negative 1% compared with our 2022 non-GAAP diluted EPS of $5 38.

This guidance now includes five to 10 cents of estimated dilution for the biotech dental acquisition, primarily due to acquisition accounting adjustments for inventory and integration related expenses our outlook for the remainder of the business remains consistent with our prior guidance.

Our guidance for 2023 assumes total sales growth of approximately 1% to 3% over 2022 with sales of COVID-19 test kits now expected to decline by approximately 65% to 70% from sales in 2022 as compared to our previous 2023 guidance of a decline of 35% to 40%.

Additionally, PPE product sales are expected to decline about 20% to 25% consistent with our original 2023 guidance.

Note that our sales growth guidance reflects one less selling week in 2023 and in 2022.

The impact on 2023, non-GAAP diluted EPS from lower sales of PPE products and COVID-19 test kits is still estimated to be 35 to 40.

We expect the impact of the steeper than anticipated decrease decreases in COVID-19 test kit sales in 2023 to be offset by slightly higher than anticipated gross margins on PPE sales relative to our original guidance.

These headwinds are anticipated to be largely offset by earnings momentum in our underlying core businesses and we expect non-GAAP operating income will grow in the high single digit to low double digit range when excluding the contribution from PPE products and COVID-19 test kit sales and acquisition related expenses.

We expect lower non-GAAP operating margin of 10% to 15 basis points below the 2022 non-GAAP operating margin of eight 2% and this was largely a result of lower PPE products and COVID-19 test kit sales and profits.

Our guidance reflects non-GAAP operating margin expansion when excluding income from PPE products, and COVID-19 test kit sales and acquisition related expenses.

Our 2023 guidance includes higher interest expense in 2022, as a result of higher interest rates and higher borrowings.

Along with higher minority interest from our higher growth businesses, such as Henry Schein one.

We also expect an effective tax rate in the 23% range, assuming no changes in tax legislation.

Our guidance for 2023 diluted EPS is for current continuing operations as well as completed acquisitions and does not include the impact of future share repurchases.

Other announced or potential future acquisitions or integration and restructuring expenses, while the recently closed biotech dental acquisition is now reflected within our guidance. Our recently announced acquisition of <unk> implant system is not.

Guidance also assumes a foreign currency exchange rates are generally consistent with current levels and that end markets remain consistent with current market conditions.

To summarize although we are updating our financial guidance for the year, we are maintaining expectations for the underlying business and continue to anticipate steady growth trends in both dental and medical markets.

And we do expect that the second quarter will continue to have some headwinds from PPE and COVID-19 test kits, but we do expect good income growth in the second half of the year as some of the year over year comparative already covered on this call should normalize with that I'll now turn the call back to Stan.

Thank you Ron.

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

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.

For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys and.

And we ask that you please limit yourself to one question and one follow up thank you.

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

Hey, there thanks, good morning, everyone.

Ron wanted to start on the margin performance in the quarter really a couple of entertain questions here.

Firstly, the gross margins hit a multiyear high in the first quarter, hoping you could expand upon maybe the drivers of the margin performance in the quarter, especially considering your higher margin high tech equipment sales were down year over year.

And then I'm sure there's questions out there regarding the lack of drop through from that gross margin upside.

Like some maybe above normal SG&A spend and is fixed cost absorption wasn't as great because of the PPE dynamics you mentioned.

Just wonder if you could talk about any other puts and takes that impacted SG&A spend in the quarter is really we think through gross and operating margin cadence for the rest of 'twenty three.

Hi, Jason I think that the.

On the margin question.

And.

As you mentioned the specialty businesses, perhaps did not grow as much but they did grow and this is a year or.

Quarter, I should say where year over year, we actually had some contraction in reported sales so that growth still takes on a greater mix right. So.

We're getting the benefits of a greater mix from our specialty products and the growth that we experience on the technology and value added services side.

Mix is favorable to us.

To the gross margin I think to that.

Wow.

Within within the distribution sector, we tend to get slightly better gross margins and dental and the growth we had in <unk>.

Dental versus medical and the growth we had in dental versus medical I think also contributes to that to that particular.

Margin performance being as high as it was.

On SG&A I think that we have a fair number of expenses that are fixed so the operating margin itself is.

It's going to it's going to come down some as those gross profit dollars are lower from the lower contribution from PPE and Covid test kits.

That's that's what we're seeing primarily the drag on the operating margin I think from an SG&A standpoint, we had a we did have a little bit of an increase in costs.

But some of those are related to the acquisition cost.

That we incurred during the quarter.

Robust pipeline the nature of these transactions that we've been doing as you as you can see from the you know the last couple of implant transactions that we announced require a little more work on the acquisition side and so I think that.

That was a bit of a drag on SG&A as well.

Okay, Alright thats helpful.

Maybe I'll actually user response theres a bit of a segue to the next question is if we look at that guidance adjustment.

Modest reduction Youre, making today for EPS, you were pretty transparent with the.

The biotech deal was going to be dilutive.

Some of those onetime costs.

How should we think about the recognition of that headwind throughout the year that the higher cost inventory and inventory step up mostly flow through your model, but <unk> and <unk>.

And then I know the recent spin transaction is a bit smaller than biotech.

Maybe just to be clear, we should expect another one time impact from inventory step up once this deal closes and then can you confirm each of these deals are accretive in year, one when excluding these inventory accounting adjustments. Thank you.

Yes, so I'll start with kind of the effect of the inventory adjustments in your typical implant business will turn inventories to say a couple of times a year. So that means it's going to take us about six months to work through that inventory step up value that that will.

To be a drag on the gross margin for it for that period of time. So yes, Q2 Q3, as we worked through the inventory step up and we're still working on finalizing what that actual we have some estimates we don't have a final number on that inventory step up.

And in terms of.

The remainder part of biotech there are going to be some cost incurred this year that are.

What I am calling integration related costs, it's really we bought a company that has multiple sites multiple locations and it was a privately run business. So you have to spend some money to get it ready to be part of a public company right. So we're going to incur some expenses.

In that respect, but we do expect biotech to be accretive post 2023, we think once we get into 2024, it will definitely be accretive for us.

With reference to send the deal that we just announced that deal has not closed yet.

And it's going through the process of being reviewed by the Brazilian regulatory bodies. So we're not sure when that's going to close I think in our press release, we just basically said the latter half of 2023, because we don't have a strong estimate of when that will close. So we don't really know the effect on the current year.

Because again of that inventory step up that we will have to manage but we also believe said once we get through those inventory adjustments and.

And we get into and hopefully we can close it earlier in 'twenty three rather than later because then when we get into 2024, it should be accretive for us in 'twenty four as well.

Alright very helpful. Thank you.

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

Great. Good morning, Thanks for the questions.

Ron maybe just a clarification.

Have you sized the sales benefit of <unk>, not having not starting with that holiday week in terms of impact on the dental consumables business and then maybe more at a high level it sounds like.

Do you feel like patient demand has been pretty stable through the first quarter I guess kind of any any puts and takes that you're seeing from an end market standpoint, especially since some of the international consumables number in particular continued to look pretty strong.

Yes, I think I'll start with the fiscal calendar question, Nathan I think that.

It's probably it's worth a couple of points to us of growth in the quarter right. It can kind of vary market to market. It's it's more pronounced internationally than it is in the U S.

Some international markets, where dental practices.

Clothes that week between Christmas and new year's right. So you get you get very limited sales. So it's more pronounced in some markets and other but I think overall globally. It's worth probably a couple of points on that merchandise when I say a couple of points I'm talking about specifically on the on the dental merchandise number.

In terms of patient traffic I think we're seeing pretty steady patient traffic at this point I think it is a fairly normalized.

The market in that respect and that we're not seeing the fluctuations in it.

In patient traffic without hearing about this from our customers as much as we have historically, so I think that.

And I think that continued into April as well where patient traffic was fairly consistent with what we saw in the first quarter.

Great and then.

Can you talk maybe about how you expect the specialties business to trend throughout the year, because I think if I caught the number right. It was about 4% in the quarter. I think you had talked about maybe mid to high single digit growth for the year I know comparisons for that business get a little bit easier, but just from a demand for implants orthodontic procedures can you.

Just maybe talk about what youre seeing and how that you expect that to trend over the rest of the year. Thank you yes.

As you mentioned, we think the comps will get a little easier for for this natural specialty products in the back half of the year versus the first half of the year.

But even like within implants.

As we mentioned in the prepared remarks.

In Europe , we had double digit growth at implants, but.

In the U S. It was a much tougher comp last year. The U S had double digit growth in implants. So.

It was it was a tougher comp and we saw as a result, we saw lower growth.

Theyre endodontics products are still doing very well very very steady for us and and growing kind of in high single digits. So that's.

There are pockets of really really good performance and we think that as we as we progress into the back half of the year and those comps get easier, we expect that growth to become a little more robust.

Thanks very much.

And the next question comes from the line of a J Rice with credit Suisse. Please proceed with your question.

Hi, everybody.

First of all I would ask you about the.

Conference.

Cologne I know that's a big event.

Did you you mentioned last quarter that you will watch and see whether it had any impact on sales.

Does that is there any impact that you've seen in Q1 or do you think there'd be any spillover benefit in Q2, and then obviously you've got European market, where there's some concern about the economy did you walk away.

Any takeaways regarding the equipment market because what you picked up at the conference.

Yeah. Thank you.

The clone.

Show is good for us.

Remember, it's primarily focused on Germany, and Austria from a selling point of view.

And overall it was as good as previous years.

The equipment market in Europe is quite stable.

And.

There's a slight issue in France, it was a <unk>.

Strike in April , but that doesn't really have significant impact on the whole business.

Pull that out if it is but generally I would say the European.

International equipment market from our point of view is stable there are puts and takes in traditional equipment is.

A little bit better and there is some deflation in units pricing for the DS.

Dr products those are starting to be stable again and has some growth you can expect from.

Three D printing.

Generally the market is.

It's pretty stable now.

Okay, maybe just a follow up on the medical.

Ex the tests and PPE, you did about 4% a little better than 4%. This quarter is that what's sort of embedded in your expectations for the rest of the year I know there is this whole debate about people coming back to the health care system.

Et cetera, and maybe thats, adding some incremental demand are you seeing any of that do you think you might see more of that as we progress through the year.

Yes.

Yeah.

There are some device companies that.

We're much more impacted by the ups and downs.

We were only slightly impacted because there were a lot more visits.

Last year because of it.

Early part of the year.

Because of.

Where there was covered flu different kinds of flu, but we had pretty high comps then, but I think it starts getting better as the year goes by and our business continues to be steady when you really take out the tests I would say the PPE is.

We're pretty normalized now, but the test obviously for <unk> are going down and.

I don't know if that will continue we've tried to give your best guidance, but the medical business is quite stable and doing quite well actually growing nicely.

Okay. Thanks, a lot.

Okay.

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

Yes.

Thank you. Good morning, guys. Let me start I guess just to see if I can get any more color out of you Ron or Stanley on the specialty business, the four 5% growth in the quarter year over year.

Did that get the benefit the same two point benefit from the timing just wondering on that but more importantly, it sounded like you said I think Ron and Bill was up high single digits, if I kind of assume away the ortho business, which I know was growing in the clear aligner space, but it's still probably the smallest of the three would that put implants closer to flat year over year in the quarter, just trying to kind of gauge between those three.

Business lines within the specialty business. Thank you.

I think on the implant its really got to look at the kind of the specific markets like we were saying before in Europe .

Our implant business grew quite well and actually grew about double digits and in the U S.

Had growth, but it was much more tepid to that.

It was just a click.

Growth that we that we got in the U S.

But again the U S was coming off of I think a much tougher comp than what we had in Europe last year.

Sure.

Yes, Yes, Endo has been that's been steady I mean endo.

The quarter has been steady in that mid to high single digits or.

So ortho is really hard for us to pick out a trend. It's just a such a low base for us that we have had some.

We felt like we had very good growth and clear liners in the quarter.

Thats, mostly through our relationship with some dsos there.

But it's still off a very low base.

Alright, I guess just help me out here.

U S was kind of flat to up a bit in implants Europe up strongly I think you said upper single digits and Endo up high single digits I mean, your <unk> business in Germany, obviously number one number two player there it's a big business.

That means your global implants were somewhere at least kind of 3% to 4% and El high single digits, how does the whole specialty business end up just four four.

Can't reconcile that math.

Well I think that keep in mind implants are about 60% of that category right.

So they carry the most weight when when doing that math, while ortho, while they had decent sales ortho is about 10% of that category Adobe in the balance of the 30%. So I think that it's the youre right I mean, the implants and.

Had about a 3% to 4% global.

Sure.

Growth and then that tends to drive the overall number because of the weighting of them in the within the category.

Fair enough and then just one clarifying question on the model. So when you started excluding amortization at the start of this year on deals. You don't include don't exclude I'm, sorry, any kind of inventory step even if you have to go and do some restructuring yourself that stuff stays in your model. So those are costs.

On future deals that that wed assumed stay in the EPS, we don't exclude those just to clarify that.

Clarify what your question, though because inventory step up will be is very different from restructuring right. So to the extent, we have to incur restructuring costs at our transactions as we incur those restructuring costs, we will add them back inventory.

The inventory step up we will reference inventory step up so people are aware of the impact it will have on earnings, but we are not adding back inventory step up as a non-GAAP adjustment nor are we adding back the the costs, we incur when doing our deals we see as an integral part of our business acquisitions as a.

A very important part of our strategy and the costs, we incur doing the deals we do not add back of non-GAAP adjustments, but when we have a quarter such as this quarter. When we have an unusually high volume of acquisition expenses, we want to make sure. We referenced just so people understand the impact that has on operating income as it is a.

Ponant of operating expense.

Yes, that's very helpful. Thank you.

Jeff just to be clear.

North American implants sale.

Sales were flattish and that's because we had significant growth.

Last year.

Our.

Implant business.

Outside of the United States outside North America.

High single digit growth.

Thank you Stan.

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

Thanks, guys good morning.

Stanley maybe for you just any more details on the U S High Tech.

Equipment environment, I know you had some commentary but maybe.

At a high level, what's working well and less well and then that pricing pressure on iOS.

Im just curious I feel like that's been going on for a couple of quarters now so I get it it's a year over year headwind, but.

Has that stabilized of late.

And is it starting to level off the pricing pressure more Q over Q.

Very good question that was asked yes, I think the year over year.

Pricing.

Intra oral scanners on iOS.

Stabilized.

When you look at our numbers.

You will see that iOS sales and units.

Went up quite nicely.

In the first quarter.

It was down.

Was the DSO business, because we had some significant sales in iOS in the first quarter of 2022.

I would say the.

IOS units are good the pricing has stabilized.

And I think.

The mills now have also stabilized.

Of course the <unk>.

<unk> printing is being viewed that as an option.

But I think we've gotten back some momentum in the milling and the mills.

And expect to do well with the three D printing for the remainder of the as well.

Great. Thanks for that color and then the second one is just a quick clarification Ron.

The revenue guide unchanged I believe reported so COVID-19 comes down I don't know your exact FX assumption biotech comes in sometimes there's other small little deals, but I guess just to clarify did anything change organic maybe to help offset the COVID-19 sales.

Step down or is that just biotech and some other nickels and dimes. Thanks guys.

It's more it's more of the latter.

It's more that we pick up a little bit of additional acquisition growth.

But I think that the.

We still think the core underlying business can grow kind of mid mid single digit and sales.

Up towards approaching high single digits and sales.

Thanks, guys.

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

Hi, guys. Thanks, so much for the questions and all the detail.

Appreciate that.

Details that youre, giving us on sort of the equipment growth in the different categories and it was nice to see on a stack basis.

Bank comps actually improved sequentially.

Can you talk about sort of it for people who are worried about kind of like that continue didn't demand environment can you talk about sort of how the backlog stands I know you've given us some helpful details on that in the past.

And then also sort of how is the environment there and if we think about the end of the quarter and maybe into April if you can comment.

Yes, certainly Elizabeth I think.

With reference to the backlog I mean during the quarter, we actually saw.

Hey.

A bit of a tick down in backlog sequentially, but the backlog at the end of the first quarter. This year is still greater than the backlog at the end of the year last year and is still quite a bit higher than the backlog levels. We had pre pandemic and that is principally traditional equipment right and so that's helping with the <unk>.

<unk> and gives us I think.

Some some optimism in terms of our of our ability to continue to sell traditional equipment at pretty good growth rates going forward and Thats in North America internationally, we've seen the backlog come down a little bit.

And but it's still is ahead of pre pandemic levels. So while the backlogs were working down a little bit more internationally. There is still a fairly healthy backlog there.

Okay, and sorry, and just in terms of the comments of how sort of the engine margin. If you can comment on April trended sort of post some of the recent financial turmoil.

You said I'm, sorry, I didn't quite understand what you said at the beginning of that Elizabeth.

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

I think that the trends we have in April have been really a continuation of what we saw in the first quarter I wouldn't say there's been anything.

That's coming out of the financial markets, that's been a significant disruptor to them.

Got it thank you so much.

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

Thanks.

In the context of just the cadence if you had this.

Benefit in Q1 is there any fall off at the end of the year or anything else, we should contemplate in just thinking about cadence.

In terms of earnings for the year any any color or guidance you can provide us.

Kevin when you say benefit in Q1 can you be more specific with you I'm sorry, the council of the calendar benefit the calendar benefit. Okay is there any falloff in Q4 or anything that we should think about the rest of the year from a calendar perspective that might be off.

Good morning.

The balance of the year should be other than the fact that our Q4. This year will be 13 weeks versus 14 weeks last year, but outside of that I don't expect the calendar to have a significant effect on on the cadence I do think where you could see.

Some lumpiness still in our at our quarterly numbers as that.

The.

The headwinds that we are dealing with as it relates to PPE and Covid test kits are more pronounced in the first half of the year than they are in the second half of the year and most pronounced in the first quarter as was evidenced by the 24 headwind we reported this quarter, but that headwind will be greater just just the math of it is that.

That headwind will be greater in the second quarter than it is third and the fourth quarter. So we will we will continue to have.

A little bit of a hill to climb in Q2 that we think levels off for us as we get into Q3 and Q4.

And just a follow up on the backlog question.

If I just want to make sure I understand this backlog, but quarter over quarter flat or down on the equipment side.

That would be related to core equipment or digital equipment like how should we how should we think about that the backlog is principally standard equipment right. So its chairs units and lights.

And we really kind of analyze it more sequentially what was it at the beginning of the quarter versus the versus the end of the quarter and that's what I was saying before that the north North American equipment backlog.

It remains it did come down some over the course of the quarter, but it's higher than where it was last year at the end of the first quarter. So it's still a fairly fairly healthy backlog and well higher than where the kind of backlog levels. We had prior to the pandemic internationally is kind of the same story, we are seeing a bit of a worked.

Down quarter to quarter, but there their backlog versus last year's first quarter is also a little lower and that's how it differs from North America.

Got it thank you very much.

So I think that the.

Digital side from a.

A pricing point of view has stabilized and we're seeing good growth on the units.

Thank you.

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

Alright, Thanks for taking the question I'll just ask both of them upfront concern somewhat related. The first is just you guys have obviously been more acquisitive curious if there's any notable pipeline. We're sorry any notable gaps in your portfolio that you are kind of focused on going forward from an M&A standpoint, and the follow up kind of related question is.

As you become more acquisitive in looking at potential for example, there might be areas, where you have a little bit of overlap in portfolio right. You have a reveal and now you have another clear liner what's kind of the thought process you kind of keep both of those running separately do you combine them into one brand.

Efficiency as it grows curious your thoughts on integrating businesses. Thanks.

Brendan Thank you for the question.

As we indicated early on our pipeline remains quite good.

Bold strategic plan calls for us to continue to advance those businesses that are high margin high growth through organic growth and through acquisition growth.

There are parts of the portfolio that we could add two of course.

I don't think we have much overlap.

But we are very much committed to advancing a high growth high margin businesses.

And.

There is no deviation from that.

And that quite clearly.

Investor Day.

We are executing.

As it relates relates to brand alignment I think we've always been pretty good at that.

We will over time aligned brands.

Done that with catalog and by Ryzen, I think quite well, we never lost any business when we aligned the brands we have a combined.

By Horizon Camlar brand today.

And in many parts of the World certainly all the big markets in a few parts of the world.

Each of the particular brands is distributed through different distributors, we may keep it but generally in the big market keep them separate in the big markets. We're aligning headline for the last two or three years and a single brand we will keep both.

Our line of brands going to go through different markets.

But I would imagine over time, we will align brands, but more important we are aligning the.

Production the.

All the administrative activity, which should be accretive of course, so we're very very careful with brand alignment we've done a good job of that over the years and will continue to do that.

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

Okay. Thanks, I just have one question here on the DSO side and.

Are there any anticipated changes in DSO relationships in the 2023 guide and have you been or have you been performing across the DSO market segmenting and any any growth rates you can give us across that segment that you're seeing and anything to call out there. Thanks.

Yeah. That's a good question also our DSO business remains a good grower.

Pretty stable we've continued to add.

DSO specifically in the.

Mid market area, coupled with our larger DSO customers have made some good acquisitions in <unk>.

Us alone.

Uh huh.

Oh.

The purchases of products from US I think we're making good progress on the specialty side and the DSO will.

Of course on the equipment side it can be lumpy.

You mentioned early on that on the iOS side, we had a very good significant sale.

In the first quarter of last year, so it impacted us in terms of units.

Will occur I don't think.

We've lost any I'm sure we've lost some smaller ones, but I think on the big side.

Doing well.

And on the midsize ones, we're gaining as well customers. So overall, it's a growing business and of course the goal is to advance the high gross margin products specifically.

Software.

Well I think we appreciate it.

And our additional value added services. So the growth continues quite nicely, it's pretty stable and we're very good relations with our large and midsize dsos.

Okay. So.

Thank you everyone for calling in.

I realize there are couple of complexities in this quarter, but if you peel out the PPE and the tests.

And you.

Understand that the accounting.

Regime for acquisitions of inventory step up.

It takes those.

Those.

Fences relating to the step up.

And runs through the operating.

Income.

Against operating income Likewise, some M&A expenses.

Run through operating income if you take all of that out Youll see our core business is doing quite well good internal sales growth.

Gross profit is doing quite well using it a bit higher all in accordance with our strategic plan.

And I think you will see that the business is quite stable, we anticipate operating income to continue to grow as.

Ron outlined in our guidance and we're happy with the business. So of course, if you have questions Graham.

And Ron are available.

And we're optimistic about the business.

I appreciate.

Q1 2023 Henry Schein Inc Earnings Call

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