Q3 2023 Henry Schein Inc Earnings Call

Good morning, ladies and gentlemen, and welcome to Henry Schein third quarter 2023 earnings conference call at.

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

As a reminder, this call is being recorded.

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

Thank you operator, and my thanks to each of you for joining us to discuss Henry Schein financial results for the third quarter 2023.

With me on today's call are Stanley Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein, and Ron <unk>, Senior Vice President and Chief Financial Officer.

Before we begin I'd like to state that certain comments made during this call will include information that is forward looking as you know risks and uncertainties involved in the company's business may affect the 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, Inc filings with the Securities and Exchange Commission.

Included in the risk factor section of those filings.

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

Today's 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 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 filing section of our Investor Relations website under the supplemental information heading.

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

The content of this conference call contains time sensitive information that is accurate only as of the date of the live broadcast November 13th 2023.

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 stomach.

Thank you Brad.

Good morning, everyone.

Thank you for joining us.

Before reviewing our third quarter performance.

I'd like to update investors on the cybersecurity incident.

On Saturday October 14th.

Primarily affecting some of our distribution businesses.

That morning, we initiated our business continuity plan, when we promptly cautionary actions, including taking certain systems offline.

Other steps intended to contain the incidence, which led to temporary disruption of some of our operations.

The following week, our distribution centers with processing orders with temporary interim processes.

Jimmy delivering orders to customers within one to two business days.

In accordance with our business continuity plan, we activated a previously identified team of leading cybersecurity expense.

And the investigation and recovery of the systems.

To advise us to rediscover recovery process.

Over the past weeks, we have worked to create a clean network in a controlled manner.

On the backup data we maintain.

Our distribution businesses are now operational and we are initiating our e-commerce platform early this week.

Indeed hopeful that the website will come up tomorrow morning.

We've also made significant progress resuming the high levels of service our customers.

From us.

Over the last week.

Orders from our distribution businesses were approximately 85% to 90% of what they were pre incident.

In order to increase with the reactivation of our E Commerce platform.

Of course, our field sales consultants and telesales representatives have deep relationships with our customers.

Complementary software and other value added services bring value.

We believe.

Continues to make us the best choice for our customers and the.

Areas of services, we provide.

As a reminder, this incident, mostly affected the operations of our North American and European dental and medical distribution businesses.

Our distribution operations in Australia, and New Zealand Asia, and Brazil, We're generally not affected Henry Schein, one practice management software revenue cycle management and patient relationship management business was not affected and our manufacturing businesses and our equipment sales and service operations well, mostly unaffected.

We are now is that a significant amount of information was obtained but authorized third party in the cyber security in the cyber security incident.

Bank account information for a limited number of suppliers was misused and we have already separately address this with those impacted.

More details have been posted on our Investor Relations website, we're continuing our investigation of the cybersecurity incident.

In a moment Ron will speak about the financial impact from the cybersecurity incident, which will affect.

Fourth quarter financial results.

I would like to extend a heartfelt thanks to our customers.

As well as our suppliers of team members for their patients and the incredible support we've received from all of our constituents during this period.

Okay, Miss our suppliers.

Our team understands that assignment.

The cyber incident could occur.

So any business and has been particularly prevalent in the health care arena over the last six months.

Turning now to the third quarter.

We're reporting solid financial results for the third quarter, we achieved good total sales growth and non-GAAP diluted EPS growth.

Five continued lower sales of PPE and COVID-19 tests.

Internal sales growth slowed in the third quarter due to some market softness in September as a result of general macroeconomic weakness as well as lower sales of PPE products of Covid tests.

However, we believe that the dental and medical markets that we serve are relatively recession resilient.

Sales of PPE products, and COVID-19 test kits continue to decline but at a.

Lower rate compared to the earlier yeah.

Increased customer demand for lower priced corporate brand merchandise and generic products, along with growth of equipment and technical service revenue or SaaS helped our profitability this quarter.

Profitability for the quarter benefited from our technology.

Value added services and dental specialty products as we continue towards our goal of achieving 40% of operating income from sales of high growth high margin products.

We are now more than halfway through our three plus one strategic plan.

Despite the current macroeconomic conditions and the cybersecurity incident, we have confidence in the stability of the dental and medical markets.

<unk> committed to our strategic priorities and long term financial model, which includes high single digit to low double digit growth in operating income.

Year to date, we've closed several strategic.

Vestments.

And just last month, we were pleased to announce the closing of the acquisition of shield Okay.

Business that distributes medical products to patients in the home including.

Continuous glucose monitoring overall.

These acquired businesses are performing well.

So let me turn to a review of our quarterly highlights from each of our business units beginning with dental distribution.

In North America dental offices generally remain busy.

Dental patient traffic somewhat slowed enough in September.

It seems to be the result of an increase in pension patient cancellations, which we believe will partially juice seasonal uptick of flu cases.

And COVID-19.

And our overall consumable merchandise sales, excluding PPE products reflected this.

Looking at our international dental business overall volumes of consumable merchandise held steady across the regions.

Sales of traditional.

Equipment in North America have largely reverted to pre pandemic levels with growth in mid digit mid single digits.

Dental equipment sales continued to be impacted by lower average selling prices.

And we expect this to normalize in the first quarter of 'twenty 'twenty four.

Equipment backlog was sequentially slightly higher and include a strong orders taken at D. S World.

Show held in September actually at the end of September 2012.

This increase reflects typical season that seasonality as we head into the fourth.

International dental equipment sales reflect the slowdown in sales of large equipment.

And this is the.

So in parts of the world outside of North America not everywhere.

Our equipment sales vary quarter to quarter of course, partially as a result of purchasing dynamics of large dsos.

But over the long term, we continue to expect equipment sales growth in the range of low to mid single digits.

Dentistry is undergoing a significant transition to integrated high Tech digital workflow.

Systems in the dental practice, Henry Schein is well positioned to be the brand of choice.

Customers who are seeking.

An integrated digital clinical workflow and we remain confident in the long term outlook for dental equipment in general.

Turning now to the dental specialties overall, we believe we continued to gain global market share during this quarter.

Our global implant business grew 40% predominantly through acquisitions by Horizon Camelot continues to perform outperform the market growing sales in the mid single digits acquisitions.

Acquisitions of biotech dental in France.

Sin.

ESI in Brazil are showing strong growth in implants and related products in their local markets.

Our value brand the dentist is also growing well.

This was offset by somewhat slower.

In fact slowing markets.

Slow market in North America.

The performance of our Endodontics business continued to be strong and the clearer line of segments about all the orthodontic business grew by double digits, albeit off a small base.

So we're optimistic about the long term growth prospects for the specialty markets as we can just continue to see adoption of.

Specialty procedures among general practitioners.

The growing adoption by Dsos of specialty pretty procedures.

And of course due to the macro trends of demographics.

We're also optimistic about the dental specialty products.

In 2024, as we have a robust new product line.

With upcoming launches in various geographies.

So we're really optimistic about our specialty businesses in 2024.

Driven by.

The macro demographic trends and robust new product and all.

Robust new product pipeline.

Yeah.

Let's now turn to our technology and value added services businesses.

We had excellent sales growth in our technology and value added service businesses driven by Henry the Henry Schein, One practice management software sales and by large practice sales the practice brokerage business we acquired.

At the close of this quarter.

Henry Schein one's growth continues to be driven by practice management software solutions and of course, particularly <unk> and Natalia.

Our cloud based solutions, which provides the opportunity for dental practices.

Great clinical workflow and it's very important throughout the dental office.

Once again, the customer base of cloud solutions increased by about 40% this quarter compared to prior year.

DSO accounts in particular are seeking integrated platforms, along with the tools that are enhanced by artificial intelligence.

In this connection we recently formed a DSO strategic Advisory Council.

Which is strategically focused on growing practice revenues and solving operational issues for large group practices. We of course have similar programs for midsized practices and for the smaller practices.

This advisory kind of service is provided by our field sales consultants.

During the third quarter, we introduced new features and upgrades, including the launch of lighthouse 360.

This new platform facilitates integrated patient communications reputation management and overall practice success.

This feature rich product includes online patient scheduling.

Digital customized foams.

Patient intake and payment reminders and more.

Schein one's goal is to continue to grow our practice management customer base and to increase the breadth of solutions offered to our existing customers.

Our priorities regarding software integration.

Critical to achieving this goal and we are well on our way towards an integrated clinical offerings.

Paul.

The clinical aspects of the <unk>.

This with a focus on specialty procedures as well.

Turning to our medical business.

Third quarter growth was in the low single digit.

So just excluding sales of PPE and COVID-19 testing similar to recent quarters.

This growth reflects high prior year comparison.

Sales growth and higher sales of lower price of priced products, including generics in corporate brands.

With the higher margins.

Yes.

Of note. We are now distributing COVID-19 vaccine that's vaccines, although we do not expect this low margin product category to have a significant impact on sales or profits.

In September we saw an uptick of sales and COVID-19 baskets, which we expect to continue into the fourth quarter.

So in summary, the underlying fundamentals of our core business.

<unk> solid.

We are executing ahead of schedule without 2022 'twenty 'twenty full boat plus months and.

So with that in mind, let me ask Ron to discuss the quarterly financial results and our full year guidance Ron Please.

Very good thank you Stanley and good morning, everyone.

As you May have seen on November 2nd we filed the notification with the SEC advising that we will not be filing our Q3 Form 10-Q.

So later in November.

This delay is related to our recent cyber security incident.

We were able to complete our consolidated income statement prior to Deactivating. Our systems. However, we have been delayed and completing our consolidated balance sheet and statement of cash flows, which we normally include as attachments to our earnings release. These statements will be available when our Q3 Form 10-Q is completed.

The third quarter non-GAAP financial results for 2023, and 2020 to exclude integration and restructuring costs.

Amortization expense of acquired intangible assets. This is detailed in exhibit b of today's press release.

Note that there are no effects on the cyber security yesterday on our Q3 results as of yesterday occurred in October.

With respect to sales growth in the quarter I will focus primarily on LCI sales growth.

Which is internally generated sales in local currencies compared with the prior year and excludes acquisitions.

Third quarter global sales of $3 $2 billion reflected of LCI sales decrease of one 2%.

However, when excluding sales of PPE products and COVID-19 test kits are LCI sales grew one 1%.

We sold $131 million of PPE products in the third quarter of this year, a decrease of approximately 19% year over year and.

We sold $44 million in COVID-19 test kits.

Kris of approximately 46% year over year.

Our GAAP operating margin for the third quarter of 2023 was six 3% or 52 basis point decline.

Paired with a prior year GAAP operating margin.

non-GAAP basis operating margin for Q3 was eight 1%.

A 12 basis point decline compared with the prior year non-GAAP operating margin.

With higher gross profit margins offset by higher operating expenses, primarily acquisition related expenses.

Third quarter 2023, GAAP net income was $137 million or $1.05 per diluted share.

This compares with prior year, GAAP net income of $150 million or $1.09 per diluted share.

Our third quarter 2023, non-GAAP net income was $173 million or $1 32 per diluted share. This.

This compares with prior year non-GAAP net income of $177 million or a $1 29 per diluted share.

Details of acquisition expense and acquisition related adjustments for the quarter and year to date are included in exhibit C to our press release.

The foreign currency exchange impact on our third quarter EPS was immaterial.

Now turning to our third quarter sales results.

Global dental sales were $1 $9 billion and LCI sales decreased by 0.2% excluding sales of PPE products LCI sales growth for our global dental with 0.3%.

Global dental merchandise LCI sales increased by 0.3% or one 1% when excluding PPE products.

North American dental merchandise, it'll Ci sales decreased one 2% compared to the prior year and decreased 0.1% when excluding sales of PPE products.

International Ghetto merchandise LCI sales increased by two 9% and by three 2% when excluding sales for PPE products.

Global capital equipment, LCI sales decreased 2.0% with mid single digit growth in traditional equipment offset by lower digital equipment sales, reflecting lower intra.

For oral scanner prices as a result of new products introduced late last year.

Our north American dental equipment, LCI sales increased <unk>, 2%.

This was against a difficult comparison as north American dental equipment LCI growth was 12, 8% in the third quarter of 2022.

Internationally equipment LCI sales decreased five 9% compared to the prior year as a result of some macroeconomic uncertainty in Europe, which primarily impacted digital equipment sales.

Dental specialty products include implants bone regeneration materials.

Orthodontic products and empathetic products.

Sales of these products were approximately $268 million in the third quarter with reported growth of 25% driven by acquisitions.

Global technology and value added services sales during the third quarter were $210 million with OCI growth of nine 6%.

In North America sales growth was driven primarily by our <unk> practice management business growth internationally was driven by our <unk> cloud based solution.

Our technology and value added services and specialty products represented represented about 35% of total operating income in the third quarter.

Global medical sales during the third quarter of a $1 $1 billion and LCI sales decreased four 6% due to lower sales of PPE products and COVID-19 test kits.

North America, excluding sales of PPE products, and COVID-19 test kits LCI sales grew 1.0%.

This was against the typical comparison.

Ci growth, excluding PPE products and COVID-19 test kits grew nine 7% in Q3 of 2022.

Regarding stock repurchases, we repurchased approximately 660000 shares of common stock in the open market during the third quarter.

Hiring at an average price of $75 79 per share for a total of $50 million.

At quarter end, we had approximately $315 million authorized and available for future stock repurchases.

We continue to benefit from significant liquidity, providing our businesses with the financial flexibility and stability to execute on organic growth initiatives and strategic acquisitions, while continuing to return capital to our stockholders.

As we stated last quarter, we have committed over $1 billion through the acquisitions, we've announced so far this year with $417 million invested in business acquisitions that closed in the third quarter and $668 million invested year to date.

Restructuring expenses in the third quarter were $11 million or <unk> <unk> per diluted share and were incurred as part of our previously disclosed restructuring initiative.

These expenses, mainly related to severance benefits and costs related to exiting facility.

We still expect restructuring activities to extend through 2020.

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

At this time, we were still unable to provide estimates for costs associated with integration and restructuring for 2023 and expenses directly associated with the cyber security incident.

Therefore, we are not providing GAAP guidance.

We are updating guidance for 2023, our non-GAAP guidance to $4 43, a share to $4.71 a share reflecting a narrowing of the range of our guidance for 2023, non-GAAP diluted EPS for the underlying business to $5 18 to $5, 26% from $5.

535 that was previously communicated.

Collecting softening macroeconomic conditions.

An estimated $55 to 75 per share impact is due to business interruption from the recent cyber security incident.

As Stan mentioned, we believe that our teams have contained the cyber security incident, and we are mostly restored our operations.

Although we believe a significant portion of sales that had been disrupted while certain systems were offline for we estimate the percentage sales growth for the full year will be negatively impacted in the low to mid single digits a.

Our estimated fourth quarter impact of 55 to <unk> 75 per share does not include certain expenses directly associated with the cyber security incident as we expect to report these non-GAAP expenses in the fourth.

The financial impact does not include any future insurance claim recovery.

We expect to file an insurance claim of rising from this incident under our cyber insurance policy.

The final resolution is subject to ensure approval.

This policy has a $60 million after tax claim limit after a $5 million retention.

And any claim recovery will likely not be recognized until late 2024.

Our 2023 net sales are now expected to be 1% to 3% lower than 2022, net sales, which is an update from prior guidance of 1% to 3% sales growth.

This change in guidance, primarily reflects lower sales as a result of the cyber security incident, which as previously mentioned is expected to lower full year 2023 percentage sales growth in the low to mid single digit range.

As a reminder, our guidance also reflects one less selling week for 2023 and 2022.

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

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

Our guidance is for continuing for current continuing operations as well as acquisitions that have been announced and does not include the impact of future share repurchases and potential future acquisition as well as certain expenses directly associated with the cyber security incident.

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

We intend to introduce 2024 financial guidance, when reporting Q4 and full year financial results.

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

Thank you Ron.

I appreciate that.

Operator, we are ready to take any questions that 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 queue. You May press star two to remove a question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

One moment, while we pull for questions.

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

Hey, guys. Good morning, thanks for the questions.

Maybe the first one just high level what are you guys hearing from the customers.

The ordering frequency from our practice might be I don't know maybe roughly every two to three weeks so.

So some customers some customers might've been encountered the issues, yeah pretty pretty minimal number of time, maybe one time, possibly twice at most.

Have you guys heard regarding customer retention or do you think you don't have a better feel for that until the actual website is back up and running which seems to your prior point Tomorrow morning, and then I'll just ask a follow up.

This is John that that of course is a very important question.

We believe we are at this 85% to 90% floor.

Hum.

The larger customers that are more sophisticated from an it point of view.

Buying using either the e-commerce systems that we offer or workarounds I.

I would say that is even with the smaller customers.

The mid sized customers the smaller customers are relying on visits from the field sales consultants to collect the orders.

They were until recently and from a and from until the sales reps. So the funnel for doing that is not as wide as of course digital ordering.

So I think.

We will start seeing much more business from the smaller customers, which are a key part of our business has the website returns.

But.

We have very good relationships with our customers field sales consultants tremendous telesales connectivity and of course the value added services.

Generally we've not heard of customers, leaving us have customers made alternative decisions. Yeah of course, some of the buyers of pharmaceuticals couldn't wait for for example for controlled drugs, we expect our control drive system to be up relatively soon so I would say generally we.

Heartened by the support we've received from our customers.

John as you know.

Unfortunately, the cyber issues.

And health care have been quiet.

Quite prevalent in fact for the first six months of this year there were over 300 incidents in health care alone. So the customer base is quite quite attuned to this.

And obviously, it's going to be a lot of work.

Half of our field sales representatives in our chiller salespeople as well as our e-commerce team too.

Bring all the customers back and there will be some trailing I would imagine, but overall we remain quiet.

Enthusiastic about.

About the level of support we received and by the way not only from our customers, but the entire industry has been very very supportive of us.

That's great color, thanks Stanley for that and maybe I'll pivot Ron <unk> for the second question.

Any really high level thoughts around 2024, and not a specific number but just maybe just the construct should we think about it as sort of growth on the core underlying EPS of $5 22.

The revised mid point.

And then offset by call it the lag on the cyber security incident and on that second point I just wanted to make sure. The 55 to 75 <unk> hundred 43 cyber hit.

That's all call a decremental from lost sales I think you said no expenses in there that would be excluded from non-GAAP is there any promotional stuff in there I'm sorry last sort of question tack on how do we think about the exit impact for December because you know.

You talked about the top line impact for the quarter, but obviously December will likely be much lower than what you've experienced in October so any color on the cadence for the trailing throughout the fourth quarter. Thanks, guys.

Yeah. Thanks, Sean Yes, yes, you are.

Correct and that the $55 to 75.

We've called out as if Q4 impact is.

<unk> to business interruption impact it does not include the one time costs that we're incurring.

That are directly attributable to.

Reactivating the systems.

And right now it's our intent that when we reported Q4 results will be calling out those particular costs.

As part of our non-GAAP reconciliation.

In terms of run rate into 24.

That will be something that really is largely contingent on.

There is a level of business that we see with one way of being back up.

That is a very important turning point for us it's something we're very excited about.

In the organization this week and I think that.

We'll be we'll have greater intelligence in terms of what's happening with.

With customer retention.

With one went back up.

I do anticipate we will likely have some.

Where do you want to call them customer retention programs or promotions in the quarter that may put a little bit of pressure on.

On Q4 margins I Wouldnt expect it to be real significant but having said that we do want to show some appreciation to our customers and we do want to.

Make sure that we go into 2024 with a solid of a base of businesses that we can possibly have.

Yeah.

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

Hi, guys. Thanks, so much further question.

So as we think about the cyber security.

The web site backup.

Tomorrow, that's great to hear.

If we think about just sort of like the broader operations that support that is that something that you feel like is it also kind of in a similar place and obviously you would probably would put their website.

You know, having a ton of internal issues I just want to make sure. How you feel about sort of Nebraska. The systems that are supporting that ordering process and then sort of as we think about 2024, you obviously have the bold initiatives I just wanted to see if like given the cyber security situation or the current demand environment. How do you sort of think about that.

Conceptually whether there are places there you can accelerate cost cut.

Any color there would be helpful. Thank you.

Thank you Elizabeth and also to very very good questions.

So let me just provide one more time, the context, which I think we tried to communicate.

Our prepared remarks.

So we experienced the cyber security incidents, we got suspicious.

And what we did was a.

And our CTO made a brilliant move he brought the whole system down immediately.

He knew he was quite comfortable that our backups were good.

Backups have turned out to be very good and what we need to do now is turn on application by application.

Before you can turn on that application.

You have to do certain forensic work to make sure that they don't know sleepers in there and so that's what we've been doing.

I would say that at the moment other than the website.

We're more or less back to where we were there.

There are a few areas that require additional turning on.

Some involving invoicing some involving the returns function and the only area, we can't really supply right now because we're super cautious is on controlled drugs. So that we have in affiliates that was not impacted and they are shipping controlled drugs if need be we expect all of these areas and this is.

<unk> to be up and running this week there are some isolated areas, where we have challenges I would say that have less to do with the customer side. We have some parts of the world we have.

<unk> Ms systems that are not fully functional yet.

It's not impacting the customer because the <unk> system. The basic buying system is working has been with them for a while but it's just taken us a lot more human capital human resources, and receiving the products putting them away and picky.

Those areas will come back I think in the next few weeks. So I think from a customer point of view.

Pretty reasonable shape today.

<unk>.

Yes, if a customer has an inquiry.

Certain purchases made some time ago, we may not be able to give an incident response, we may have to do some research through the backups, but in general.

Operationally actually we were doing quite well a couple of days after two days after the cyber incident.

The key here is to remember that our backups are pretty good shape.

And we feel very confident in.

The way, we are bringing up these systems one at a time.

Our team on the it side is remarkable on Vista, our consultants are just the best and we.

We feel pretty good that we are bringing up systems that are stable and we just have to go through the cycle, but I don't think we're talking about that long, but I'm not sure, but I'm quite sure that from a customer point of view other than the items I mentioned will.

We'll be in pretty good shape tomorrow, when they hopefully when the website comes up.

Okay.

I'll take the second half of your question I believe you were asking if in 2024 did I anticipate that we would be accelerating any cost cuts did I understand you properly.

Yes, that's what I was asking thank you, yes, I think that.

We will really go about our business in 2024 as we had originally planned.

As we said on the call we have $1 billion committed to acquisitions and typically in the year in the short term following acquisitions.

For synergy opportunities some of those acquisitions of Wil standalone businesses, but others to provide us with some synergy opportunities that we'll be able to implement over the course of 'twenty four and then just any other normal process that we would go through to identify cost efficiencies. So I don't I don't think this in the context of the cyber security incident.

Do we feel the need to go out and accelerate any type of cost savings in 'twenty four.

Got it thanks, so much.

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

Thank you. Good morning, guys can you hear me, Okay, Yes, Joe.

Alright, great. Thanks for taking the call so are the questions.

Let me ask two questions I guess, they're both kind of intertwined, but just so we level set all of us.

Exceptionally think about your outlook from here.

Hi.

First if we could just ignore the cyber for a second and I'm sure that's not possible and that'll be my follow up question, but if we ignore that for a second.

Third quarter general organic growth right around flattish levels on a global basis. The companywide one ish percent would those if you were counsel us on how to think about kind of our 2024 models would those be starting off point.

Recommend we think about conceptually, where we built kind of our organic ex cyber kind of growth rates into next year.

Suggest obviously, we've provided a lot of thoughts around us as of analysts have asked.

As the industry.

So in broad terms, we believe our business is relatively recession recession resilient.

If it goes down but it will come back.

Our north American dental consumable business as you correctly point out.

<unk> had flat internal growth.

We saw moderate softness in patient traffic in North America due to appointment cancellations.

Mostly.

<unk>.

In September.

It's hard to tell how long that has continued.

Similar in the first two weeks of October.

As Ah, but thereafter, obviously.

Because of the cyber incident, it's hard to project.

If you look at I'm talking with North American sales of traditional dental equipment have been largely have largely devoted to the pre pandemic levels.

And we think that's growth in the mid single digits.

Digital equipment sales continued to be impacted by lower average selling prices.

And it's hard to again.

Give you an absolute is when we expect this to normalize.

Sensors and that that's what I equipment people say it'll normalize sometime in the first quarter of next year.

If you look at our international business.

Overall volumes of consumable merchandise held steady across most regions.

Just adding to the international equipment sales.

Is a slowdown in large equipment.

And parts of the world, but there are also some unique reasoning for that.

In places for example, like in places like Australia, There was a tax incentive that ended.

So.

Yeah, I think there is some <unk>.

Caution.

Amongst our customers and in parts of the world because of the macroeconomic issue.

And parts of Europe.

I don't think it's necessarily that bad any one country.

Overall speaking I think health insurance is in the U S typically provided to employment.

It could be a lagging indicator.

So this could impact activities hard to tell.

And if it does it's probably mostly a higher.

And just.

I think we indicated that on the implant side in North America, we did see some softness on the premium side.

Outside the U S of course, you have countries, there's a lot more government payment to support.

So it's hard to give you.

An indication of really how.

Sure.

Fall down.

People's views would go of the.

The economy.

And impact on dentistry, but from the past it's never been significant.

Uh huh.

By the way, we are seeing similar trends between private practices and the large practices.

But of course.

<unk> sales.

For the Dsos are not as strong as they work given the cost of interest.

We also have to understand the DSO sales could be lumpy that was happening.

On patient traffic if you take a look at the Adi survey.

It does indicate some.

Yes.

Patient traffic slowness in the.

Third quarter, probably mostly in September.

There's an argument.

With that it is because of Oh.

The flu traditional flu Teva to COVID-19.

Impact.

And then you know.

But when you take a look at implants in Europe with over okay. So.

Theres not a definitive downward trend, but there is a little bit of caution at the margin and I think we are we are.

To take that position at least we have to plan for that.

Yeah. That's helpful. Thank you Stanley and so that kind of helps maybe level set us on the core assumptions Ron I guess my follow up then is as I see it and correct me if I'm wrong. There is three variables on the cyber that we need to think about heading into next year do you continue to run any kind of customer retention programs on the spending side do you have any kind of just.

Higher core spending on cyber security that you got to put in place here that you have to put in place that's going to structurally take the opex side higher and then three is there any kind of customer loss do you lose maybe one or 2% of revenue or something like that because not everybody comes back either for risk mitigating reasons or other reasons. So just any comment on kind of the two.

<unk> spending categories will those be higher next year and the customer retention I know, it's hard to predict but would it be safe to build in maybe just a little bit of bleed away a customer or do you think you'll get pretty much most of that back in 24. Thank you.

Sure, Jeff I think I'll kind of address the first item around customer retention and the third item of customer loss somewhat together.

<unk>.

I think we.

We'll have.

A.

Greater feel for that in the coming weeks.

As I was saying earlier.

The restoration.

The reactivation of our web site.

We will bring us much more intelligence in terms of of what their customer retention and what the potential for customer loss might be and as a result with the necessary investment may be two to recover some of that business and some of those customers.

And that will be taken into consideration when we communicated our 2020 for guidance.

<unk>.

In February of next year.

I think in terms of higher cyber spend.

Like everything else, we will assess where we think is what is the appropriate investment.

If we if we believe it's necessary.

Relative to.

Anything else, we will we will do that but I think right now we're still in the midst of.

Understanding the.

Cause of this the forensic investigation is ongoing and.

And we will invest accordingly, according to that if necessary if we if it's necessary to increase that investment.

Thank you and the next question comes from the line of John Stenzel with J P. Morgan. Please proceed with your question.

Good morning, guys. Thanks for taking my question I just wanted to talk about some of the swing factors that could move you from that 55 to 75 cents in the cyber security.

Headwind what are some of the factors that you can see that is it really just a time to ramp back up to 100%.

Pre pre.

Incident levels right is there anything else built in there that we should be thinking about it.

Yeah.

Yes, John.

I would say, there's really two primary things one being.

The absolute volumes of customers.

We have some customers who.

Only use website to order.

And while the web site's down they're not ordering and now that the websites up we expect a significant percentage of those customers to return.

To the extent that we have to that we want to provide incentives to those customers.

That kind of leads.

Leads us to the second factor that we've taken into consideration and that is the margins to the extent we have some discounting in the quarter that would show up in the gross margins. So I think those are the those are the areas that really.

Our impacting our models in terms of what we believe the Q4 impact will be we've run multiple scenarios and we've really kind of have triangulated to that 55% to 75 at this point.

We will gain much more intelligence over the coming weeks.

With the website up associated with that.

Great and then just on the kind of the 85% to 90% of our pre incident volumes.

Give us a kind of a sense quantitatively of how that's trended since you know that.

The 24th and onwards, when you were generally operational with that kind of increased week over week that being kind of static and then I guess you kind of intimated indicated there.

Big portion of this major speed people, who prefer to use the online.

Portal is that how you're thinking about.

The remaining customers, who were kind of havent havent been ordering with you.

Yes.

Sure.

We operated four weeks since we deactivated the system.

Obviously, the most significant impact was in <unk>.

Significant improvement in week, two that led into improvement in week, three and I would say week four was consistent with weak free in terms of the volumes that we were processing.

Hi.

I do think there is a.

Sealing that 85 to 90, where we are now that we can get through with one web app.

And and that will.

Like I was saying earlier, that's the intelligence we need to gather.

Over the next couple of weeks, when we see which customers have returned to us to close that that 85% to 90 to get it to 100.

That's really where we're operating right now.

Just to add to Ron's comment.

For a period of time.

The only way our customers good photo was that with US was through a field sales representative.

All through telesales.

A huge percentage.

Orders something like 70% of our orders come digitally that's.

That's the good news, we trained our customers that the best way to do business digitally.

The challenges that 70%.

<unk> had to go through our field representatives antenna sales.

That funnel was not.

Not large enough.

For a few weeks so.

Not all customers could buy through us as.

We expanded.

Digital ordering capability as a seal salespeople got more efficient ways in which to.

Into the orders and we have incredible work around that.

It came up very quickly, but for a period of time they went up there.

And the telesales team had limited capacity.

We were able to expand the tele sales teams capacity.

We had a model in place we have a procedure in place.

Actually it was tested during COVID-19 and literally overnight, we expanded the capacity.

The challenge was the funnels for a few days, we're not big enough to accept all the orders.

So.

Now we can accept the orders.

It'll be much more efficient with direct customer entry through the website.

And we expect that is going to result in customers.

Coming back.

Maybe go elsewhere.

Urgent products, but I think.

Uh huh.

A number of our customers.

Pacific has some of the smaller ones held out.

I think that will come back.

Give us the orders that maybe they were holding on to but it's going to take.

Some time through.

At the end of 'twenty the fourth quarter.

For us too.

Ensure that our systems are back to normal.

And.

In terms of the customers thinking.

Thank you and our next question comes from the line of Jason Bednar with Piper Sandler. Please proceed with your question.

Okay.

Okay.

Question sort of in the background noise.

Right.

I wanted to ask.

The 85% to 90% that you're talking about <unk> are there certain categories that have been slower to come back.

Were certain geographies, maybe bifurcate North American Mercury Europe demo versus medical anything there and then I'll, let them all of them.

I would say on balance it's spread out reasonably there are parts of the world way electronic ordering is not as large as say in the United States. So those customers are have been more comfortable ordering.

Through Telesales Representatives field sales representatives.

But it's more or less okay actually.

On average Europe is a little bit higher.

Without actually don't have all the systems, we have in the U S. So a doctor you can read anything into that.

This is a period.

When.

We started out with minimal systems on the first day and by the end of the third day. There are a lot of systems working and then as the months went by more and more systems came up so.

It's been a period of the customers adjusting to what's available some places that may be adjusted faster than others, but I don't think we can read anything into the first month of this incident.

Anything specific.

<unk>.

Some products are more elective than others.

Uh huh.

The static products, where maybe product.

Relating to that.

Toothbrushes et cetera, and not necessary that urgent so.

We'll see how this materializes, but I don't think Jason I wish we could give you some conclusive information, but there's just too many puts and takes here.

To understand exactly.

Whether these trends.

Related to particular products or regions, let me remind you that our equipment business.

Whilst operational throughout this period did not have full support systems, but manually if a customer need and service they got it.

Not all the equipment orders that we received are being installed right now it will be a catch up in the next couple of months, we went into the period with a pretty decent.

Our backlog of equipment.

Partially driven by the very successful <unk> Sirona world.

So not all of that is the ship as fast as we would have wanted to.

Not because we don't have the ability to install new equipment, but simply because it's just a bit more inefficient given.

Given the fact that certain of our equipment systems, we're not running and we rely on a lot of manual systems.

Alright, Thats really helpful. Thanks for all the color and then as you think about a lot of them trying to tease out the exit rate, but things look like in 2024.

All of that 10% to 15% we were still operating below re cyber attack level any sense in light of that kind of 15%. How many of those customers that are now under contract with large accounts within dental and medical.

Have you practice management software in the <unk>.

Elements that would make it more sticky and really I think exemplifies our value add just because it seems a lot of the business that you expect to be well. Thank you.

Yes, Jason I think that we do have our larger customers.

Have.

Stuck with us through this which were very appreciative of that and so we don't expect any significant.

Attrition there.

The 85% to 90% on the ordering like I said before and as Stanley add it.

These are a lot of these are customers, who are don't rely on <unk> fees don't rely on our sales reps.

On the dental side and so I think that's really the run rate that we'll be looking to improve as we as we go into 'twenty, four and we'll be able to reflect.

Whatever our assumption there is in our 24 guidance when we provide them.

Thank you and our next question comes from the line of Nathan Rich with Goldman Sachs. Please proceed with your question.

Yeah.

Great. Thanks, very much for the questions.

Just wanted to follow up there on the cyber security incident have you had any issues with getting supply of product.

Recall, you mentioned something in the prepared remarks about.

Some supplier accounts just wondering if that's had any impact on inventory.

From a balance sheet perspective would you expect any impact on inventory levels in the near term or capital deployment in the near term just as you work through these issues.

Yes.

I think this is a good question Nathan.

We did.

Did not have <unk> operating for I can't remember what it was the first week.

We were buying.

<unk>.

On.

Historical data of about a month or so.

That system came up pretty quickly.

There was some.

Challenges in our receiving department because we didn't have the full software at a store on the receiving side, but.

But I would say other than maybe one or two to actually suppliers that have concerns about corrupting their systems.

Back electronically order and even those I can think of.

To that I was involved with.

<unk> removed any concerns they had.

And we've been buying product.

And the only way I will say that on some manufacturers, we went into the quarter with very good inventory.

For multiple reasons.

Essentially our suppliers have been very helpful.

We've gotten the product we need.

We may have slightly increased inventories in certain areas.

But Ron can address the balance sheet per se, but.

Essentially I have to say the support <unk> gotten from our manufacturers has been truly remarkable summer helped us drop shipments.

Maybe the first week or two so we wanted to lighten up.

Load in our warehouses, but it wasn't needed we just took that as a proportion.

Yes, Nathan just to add to Stanley's remarks.

I don't expect this to have a significant impact on our inventory levels.

The one area, we could see a little bit of impact and we baked some assumptions into our into our Q4 guidance on this is the.

Could reduce our rebates a little bit because our rebates are largely.

Primarily now, especially in North America, our sellout rebates as opposed to purchasing rebates so to the extent.

That we do not recover some of the sales in the fourth quarter could impact our rebates in the fourth quarter.

In terms of capital deployment.

I don't really see any any change the balance sheet is strong remains strong going into this incident is strong coming out of the incident I don't see any significant changes in how we're deploying capital as a result of this.

Great and if I could just follow up quickly.

Jeffs question earlier, just on the outlook for the dental business I think the revised revenue range Didnt really incorporate a significant impact from the macro environment and then I guess I was just wondering if we should interpret this as you know the variability that you saw whether it was patient traffic or equipment sales in certain international markets.

It just hasnt been significant enough to kind of change your view of the overall trajectory of the end market at this point.

Yes.

And I think if you think back to our Investor Day last February.

Okay.

For example, our dental assumption then was saved in the 2% to 4% range in terms of long term growth I think it's probably fair to say we're training it's closer to the lower end of that range and I think that in terms of dental specialties, which is included within our dental merchandise numbers that we provide.

As we mentioned in the prepared remarks, there have been some there is there is some softness in the in the end markets on implants, but I think it's probably pushing some of that dental specialty growth that we would like to get more towards the lower end of that range as well so.

I would suspect as we get.

As we sit down to try to finalize our 2024 numbers.

While we feel we still feel good in the long term about those growth trends, we could see 24 training.

That would be more towards the lower end of that range.

We have time for one last question coming from the line of Kevin Kelly Endo with UBS. Please proceed with your question.

Thanks, and thanks for getting my question and I appreciate it.

Prior to the cyber attack.

How much of your revenues typically went through the e-commerce platform.

Just broadly speaking.

I'm guessing it was more than 10% to 15% right yeah, I'm much more absolutely absolutely.

Okay.

Take Adi plus the web combined.

So essentially.

Electronics.

Type of ordering is in the 70% to 75% range.

Well I think the 85% to 90% on the orders were talking about it in kind of that missing 10% to 15%. We think is largely attributable to customers who exclusively ordered.

Electronically.

And did not have a rep. They didn't want to perhaps use multiple distributors.

Distributors and so because they didn't have a rep, who could assure that they were getting the product that they wanted they simply ordered from someone else.

I think that's the question is how.

How much of that business can we get back that's what we're working to get back.

Okay. That's helpful. I just wanted to understand the Venn diagram here, who we are talking about.

Other allow those others were able to through their wrap or otherwise, we're able to place orders through our telesales channel or their rep was able to make sure that their order got put it accurately and completely.

And I appreciate the commentary around the lower end that even sounds better than many of your peers have spoken publicly on the trends that we're seeing in October and November in the for the fourth quarter.

Sort of when asked Stanley. This question just big picture.

What do you think is actually driving the slowdown in demand in dental even if you guys aren't seeing it as acutely as maybe some of the other <unk>.

Because of the mix, probably because of your own positioning but.

How often have you seen this kind of.

Macro environment, how long do you think it last what do you think is causing it. This time just love to hear your take on that and how long do you think it last for.

Yes.

Yeah.

Good questions yet today.

Yeah.

The third quarter.

September in the U S. We saw.

Uh huh.

Sales of consumables going down.

This patient data from the 88.

But it's very hard to pinpoint exactly.

How much of that.

Amount going down was because of the switch.

Maybe some generics.

But.

How much was the result of price.

Systems, because prices have gone up a little bit of that in there how much was because of flu and COVID-19.

We're not talking about.

Many one hundreds of basis points, where at the margin here and to conclude anything from.

September and the first two weeks of October is very hard.

For us too.

Pinpoint.

The clear direction.

What we've seen in the past is.

The.

Sales of consumables may go down four quarters.

Doesn't last much longer than that.

And it's a strange recession.

It seems like.

On the one hand.

Sumit is resisting on the other hand.

Retail sales don't seem like a disaster and theyre not great.

But I think we're talking about at the margin in Europe.

Is government support so it's all going to be as elastic.

But there is a little bit of concern with geopolitical the geopolitical environment.

When we look at Germany, it's not terrible.

I'd say it has been on the equipment side.

Some resistance to the resistance to more expensive equipment and theres been a switch to less expensive equipment.

Doesn't really impact that much have such a huge impact on us.

Yes, the gross profit, maybe a little bit less but generally there's so many other variables on the equipment side.

That I can't say for sure that the trends in Europe on equipment.

Significantly impact our profitability of our equipment business in fact, it's more much more money to be made on the efficiency of our service network.

We're talking about at the margin here in terms of consumables equipment in North America.

The one area didn't caveat.

Finishing equipment is pretty stable.

The digital there is of course.

Switching to.

Some newer devices and lower price.

So there's some volatility there.

But there is also good demand for the digital equipment I'm talking about the Io devices.

The mills.

It's not 100% switch between mills.

And three D printing with a three D printing is doing very well.

Expect that at some point, we will see three D printing to be adopted by more.

<unk>.

I guess it wouldn't be necessarily.

Uh huh.

Sequential increase but there could be lumpiness in that so.

I'm, just giving you a number of factors to draw.

Conclusive.

Summation of all of that.

<unk>.

One one.

Consolidated numbers very difficult.

Give you but in my experience has been around a long time. These are.

Consumable.

Trends on the negative side don't last long.

And I'm talking about dental on the medical.

The demand is still pretty good in the ultimate care setting many more procedures moving from the hospital I Wouldnt really read anything into our specific growth for the quarter other than to take into account last year, we had almost.

I think not in a handful.

Almost 10% growth so you average it out.

Maybe 4% to 5% 5% to six.

So.

The business relatively stable, which is a good place to conclude the call.

So thanks for that question operator.

Let me just say a few things before we end.

The business in general we have good branding we are a good strategic plan.

Oh, it people and the team came through in a remarkable way.

At some point, we're going to have to deal with Cypress.

<unk> is.

As a country as it will it's one of the top concerns on Ceos list and.

And we're going to have to put much more money into law enforcement in this area.

Law enforcement has been extremely collaborative cooperative.

But this is a new area and.

It's not brand new but.

The number of attacks is increasing significantly each month.

And.

I think the way our team handled this.

Down the systems.

Backups working built it up application by application.

Verified that the data that was being put live.

Activated live was good.

And and was safe.

Just unfortunate it takes time, but.

But I think we dealt with it.

And a pretty expeditious way I believe from my heart.

Quality point of view great advisors.

The board that is quite experienced in this arena.

Two board members that have direct experience in this area.

Most have been advising us for several years.

And both plus one plant is still in place.

The.

Henry Schein, one continues to do very well expect the clinical workflow area to do very nicely.

Efficient intelligence I think will gain acceptance within the DSO movement in the not too distant future I think we have a winning product offering in that regard.

Equipment is stable.

Giving you our thoughts on consumables.

And.

We now just need to complete.

Bringing up <unk>.

All of our systems, and then ensuring that our recovery.

Customer point of view is executed well our sales force is ready to go into the field.

And two it advance.

Recovery and our chiller sales people are doing the same in our digital team.

We need to also activate customers from that point of view.

I think investors for your patients.

I wish we didn't have to go through this.

But the.

The organization came through an enormous weight and the support we've received from our customers and the industry has.

Really been phenomenal. So thank you very much we'll be back.

With our fourth quarter numbers I believe that report.

Okay.

February mid February.

And I think our filings with the SEC.

Although an aspect of it has been delayed for a few weeks will be on time.

And thank you very much for your patience.

Yeah.

And ladies and gentlemen. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.

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Hmm.

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Good morning, ladies and gentlemen, and welcome to Henry Schein third 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, if anyone should require assistance during the call. Please press the star key followed by zero on your Touchtone phone.

As a reminder, this call is being recorded.

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

Thank you. Please go ahead Graham.

Thank you operator, and my thanks to each of you for joining us to discuss Henry Schein financial results for the third quarter 2023.

With me on today's call 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. This filings with the Securities and Exchange Commission and included in the risk factor section of those filings.

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

Today's 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.

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 also posted on our Investor Relations website.

The content of this conference call contains time sensitive information that is accurate only as of the date of the live broadcast November 13 2023.

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 Greg good morning, everyone.

And thank you for joining us.

Before reviewing our third quarter performance.

I'd like to update investors on the cyber security incident.

They were discovered on Saturday October 14th.

Similarly affecting some of our distribution businesses.

That morning, we initiated our business continuity plan when we promptly took cautionary actions.

Taking certain systems offline.

And other steps intended to contain the incidence, which led to temporary disruption of some of our operations.

The following week, our distribution centers, we're processing orders with temporary interim processes and with generally delivering orders to customers within one to two business days.

In accordance with our business continuity plan, we activated a previously identified team of leading cyber security experts.

And the investigation and recovery of the systems and to advise us through this recovery process.

Over the past weeks, we have worked to create a clean network in a controlled manner from the backup data we maintained.

Our distribution businesses are now operational and we are initiating our e-commerce platform early this week.

Indeed hopeful that the website will come up tomorrow morning.

We've also made significant progress resuming the high levels of service our customers have come to expect from us.

Over the last week orders from our distribution businesses were approximately 85% to 90% of what they were pre incident.

We expect orders to increase with the reactivation of our E Commerce platform.

Of course, our field sales consultants and tele sales representatives have deep relationships with our customers.

Our complementary software and other value added services bring value that we believe.

Continues to make us the best choice for our customers and the.

Areas of services, we provide.

As a reminder, this incident, mostly affected the operations of our North American and European dental and medical distribution businesses.

Our distribution operations in Australia, New Zealand Asia, and Brazil, we're generally not affected Henry Schein, one practice management software revenue cycle management and patient relationship management business was not affected and our manufacturing businesses and our equipment sales and service operations.

Mostly unaffected.

We are now is that a significant amount of information was obtained.

Unauthorized third party in the cyber security in the cyber security incident.

Account information for a limited number of suppliers was misused and we have already separately address this with those impacted.

More details have been posted on our Investor Relations website.

Continuing our investigation of the cyber security incident.

A moment, Ron will speak about the financial impact from the cybersecurity incident, which will affect.

Fourth quarter financial results.

I would like to extend that heartfelt thanks to our customers.

As well as our suppliers of team members for their patients and the incredible support we've received from all of our constituents during this period.

Our customers our suppliers.

And.

Our team understands that.

The cyber incident could occur.

So any business and has been particularly prevalent in the healthcare arena over the last six months.

Turning now to the third quarter.

We're reporting solid financial results for the third quarter, we achieved good total sales growth and non-GAAP diluted EPS growth. Despite continued lower sales of PPE and COVID-19 tests.

Our internal sales growth slowed in the third quarter due to some market softness in September as a result of general macroeconomic weakness as well as lower sales of PPE products with Covid tests.

However, we believe that the dental and medical markets that we serve are relatively recession resilient.

Sales of PPE products, and COVID-19 test kits continue to decline.

Lower rate compared to the earlier year.

Increased customer demand for lower priced corporate brand merchandise and generic products along with growth of equipment Technical service revenue also has helped our profitability this quarter.

Profitability for the quarter benefited from our technology.

Value added services in dental specialty products as we continue towards our goal of achieving 40% of operating income from sales of high growth high margin products.

We are now more than halfway through a three.

Plus one strategic plan.

Despite the current macroeconomic conditions and the cybersecurity incident, we have confidence in the stability of the dental and medical markets and remain committed to our strategic priorities and long term financial model, which includes high single digit to low double digit growth in operating income.

Year to date, we have closed several strategic investments.

And just last month, we were pleased to announce the closing of the acquisition of shield Okay.

That distributes medical products to patients in the hub, including continuous glucose monitoring overall.

These acquired businesses are performing well.

So let me turn to a review of our quarterly highlights from each of our business units beginning with dental distribution.

In North America dental offices generally remain busy.

Dental patient traffic somewhat slowed in September.

This seems to be the result of an increase in patient cancellations, which we believe was partially due to the seasonal.

Uptick of flu cases.

And COVID-19.

And our overall consumable merchandize sales, excluding PPE products reflected this.

Looking at our international dental business overall volumes of consumable merchandise held steady across the regions.

Yeah.

Sales of traditional.

Equipment in North America, largely reverted to pre pandemic levels with growth in mid digit mid single digits.

Dental equipment sales continued to be impacted by lower average selling prices.

And we expect this to normalize in the first quarter of 2024.

Equipment backlog was sequentially slightly higher and include a strong orders taken at DS World.

Show held in September actually at the end of September.

This increase reflects typical seasonal seasonality as we head into the fourth.

International dental equipment sales reflect the slowdown in sales a large equipment.

And this is up.

In parts of the world outside of North America not everywhere.

Equipment sales vary quarter to quarter of course, partially as a result, the purchasing dynamics of large dsos.

But over the long term, we continue to expect equipment sales growth in the range of low to mid single digits.

Dentistry is.

Undergoing a significant transition to integrated high Tech digital workflow.

Systems in the dental practice, Henry Schein is well positioned to be the brand of choice for our customers who are seeking an integrated digital clinical workflow and we remain confident in the long term outlook for dental equipment in general.

Turning now to the dental specialties overall, we believe we continued to gain global market share during this quarter our.

Our global implant business grew 40% predominantly through acquisitions.

<unk> continued to perform outperform the market growing sales in the mid single digits Act.

Acquisitions of biotech dental in France.

Soon.

<unk> in Brazil are showing strong growth in implants and related products in their local markets.

Our value brand the dentist is also growing well.

This was offset by somewhat slower.

In fact slowing market.

Slower markets in North America.

The performance of our Endodontics business continued to be strong and the clearer line of segments about offered with.

The <unk> business grew by double digits, albeit off a small base.

So we're optimistic about the long term growth prospects for the specialty markets as we continue to see adoption of specialty procedures among general practitioners.

The growing adoption by Dsos of specialty procedures.

And of course due to the macro trends of demographics.

We're also optimistic about the dental specialty products.

In 2024, as we have a robust new product line.

With upcoming launches in various geographies.

So we're really optimistic about our specialty businesses in 2024.

Driven by.

The macro demographic trends and robust new product roadmap.

Robust new product pipeline.

Let's now turn to our technology and value added services businesses.

We had excellent sales growth in our technology and value added service businesses driven by Henry the Henry Schein, One practice management software sales and by large practice sales the practice brokerage business we acquired.

At the close of this quarter.

Henry Schein one's growth continues to be driven by our practice management software solutions and of course, particularly <unk> and vitale.

Our cloud based <unk>.

<unk> solutions, which provides the opportunity for dental practices.

Integrate clinical workflow and it's very important throughout the dental office.

Today in the customer base of cloud solutions increased by about 40% this quarter compared to prior year.

DSO accounts in particular are seeking integrated platforms, along with the tools that are enhanced by artificial intelligence.

In this connection we recently Forbes DSO strategic Advisory Council.

Strategically focused on growing practice revenues and solving operational issues for large group practices. We of course have similar programs for midsized practices and for the smaller practices.

This advisory kind of service is provided by our field sales consultants.

During the third quarter, we introduced new features and upgrades, including the launch of lighthouse 360.

This new platform facilitates integrated patient communications.

Mutation management and overall practice success thus.

This feature rich product includes online patient scheduling digital customized forms.

Patient intake and payment reminders and more Henry.

Henry Schein one's goal is to continue to grow our practice management customer base and to increase the breadth of solutions offered to our existing customers our priorities regarding software integration.

Critical to achieving this goal and we are well on our way towards an integrated clinical offerings.

Paul.

The clinical aspects of the practice with a focus on specialty procedures as well.

Turning to our medical business.

Third quarter growth was in the low single digits.

So just excluding sales of PPE and COVID-19 testing similar to recent quarters.

This growth reflects high prior year comparison.

Sales growth and higher sales of lower price of priced products, including generics in corporate brands.

With the higher margins.

Yes.

Of note. We are now distributing COVID-19 vaccines vaccines, although we do not expect this low margin product category to have a significant impact on sales or profits.

In September we saw an uptick of sales had COVID-19 test kits, which we expect to continue into the fourth quarter.

So in summary, the underlying fundamentals of our core business.

<unk> solid.

We are executing ahead of schedule without 2022, 2020 full boat plus months man.

With that in mind, let me ask Ron to discuss the quarterly financial results.

Our full year guidance Ron please very good thank you Stanley and good morning, everyone.

As you May have seen on November 2nd we filed the notification with the SEC advising that we will not be filing our Q3 Form 10-Q until later in November.

This delay is related to our recent cyber security incident.

We were able to complete our consolidated income statement prior to Deactivating. Our systems. However, we have been delayed and completing our consolidated balance sheet and statement of cash flows, which we normally include as attachments to our earnings release. These statements will be available when our Q3 Form 10-Q is completed.

The third quarter non-GAAP financial results for 2023, and 2020 to exclude integration and restructuring cost and amortization expense of acquired intangible assets. This is detailed in exhibit b of today's press release.

Note that there are no effects on the cyber security yesterday on our Q3 results as of yesterday occurred in October.

With respect to sales growth in the quarter I will focus primarily on LCI sales growth.

Which is internally generated sales in local currencies compared with the prior year and excludes acquisitions.

Third quarter global sales of $3 $2 billion reflected at LCI sales decrease of one 2%.

However, when excluding sales of PPE products and COVID-19 test kits are LCI sales grew one 1%.

We sold $131 million of PPE products in the third quarter of this year, a decrease of approximately 19% year over year and.

We sold $44 million in COVID-19 test kits.

<unk> of approximately 46% year over year.

Our GAAP operating margin for the third quarter of 2023 was six 3% or 52 basis point decline.

Paired with a prior year GAAP operating margin.

On a non-GAAP basis operating margin for Q3 was eight 1% at.

A 12 basis point decline compared with the prior year non-GAAP operating margin with higher gross profit margins offset by higher operating expenses, primarily acquisition related expenses.

Third quarter 2023, GAAP net income was $137 million or $1.05 per diluted share.

This compares with prior year GAAP net income of $150 million for $1.09 per diluted share.

Our third quarter 2023, non-GAAP net income was $173 million or $1 32 per diluted share.

This compares with prior year non-GAAP net income of $177 million or a one.

$1 29 per diluted share.

Details of acquisition expense and acquisition related adjustments for the quarter and year to date are included in an exhibit to our press release.

The foreign currency exchange impact on our third quarter EPS was immaterial.

Now turning to our third quarter sales results.

Global dental sales were $1 9 billion.

At LCI sales decreased by 0.2% excluding sales of PPE products LCI sales growth for our global dental was 0.3%.

Global dental merchandise LCI sales increased by 0.3% or one 1% when excluding PPE products.

North American dental merchandise sales decreased one 2% compared to the prior year and decreased 0.1% when excluding sales of PPE products.

International Kessel merchandise LCI sales increased by two 9% three 2% when excluding sales for PPE products.

Global capital equipment, LCI sales decreased 2.0% with mid single digit growth in traditional equipment offset by lower digital equipment sales, reflecting lower intra.

Oral scanner prices as a result of new products introduced late last year.

Our north American dental equipment, LCI sales increased <unk>, 2%.

This was against a difficult comparison as north American dental equipment LCI growth was 12, 8% in the third quarter of 2022.

Internationally equipment, LCI sales decreased five 9% compared to the prior year.

As a result of some macroeconomic uncertainty in Europe, which primarily impacted digital equipment sales.

Dental specialty products include implants bone regeneration materials, orthodontic products and empathetic products.

Sales of these products were approximately $268 million in the third quarter with reported growth of 25% driven by acquisitions.

Global technology and value added services sales during the third quarter were $210 million with OCI growth of nine 6%.

In North America sales growth was driven primarily by our <unk> practice management business growth internationally was driven by our <unk> cloud based solution.

Our technology and value added services and specialty products represented represented about 35% of total operating income in the third quarter.

Global medical sales during the third quarter of $1 $1 billion and LCI sales decreased four 6% due to lower sales of PPE products and COVID-19 test kits.

North America, excluding sales of PPE products, and COVID-19 test kits LCI sales grew 1.0%.

This was against a difficult comparison.

Ci growth, excluding PPE products and COVID-19 test kits grew nine 7% in Q3 of 2022.

Regarding stock repurchases, we repurchased approximately 660000 shares of common stock in the open market during the third quarter.

Hiring at an average price of $75 79 per share for a total of $50 million.

At quarter end, we had approximately $315 million authorized and available for future stock repurchases.

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.

As we stated last quarter, we have committed over $1 billion to the acquisitions, we have announced so far this year with $417 million invested in business acquisitions that closed in the third quarter and $668 million invested year to date.

Restructuring expenses in the third quarter were $11 million or <unk> <unk> per diluted share and were incurred as part of our previously disclosed restructuring initiative.

These expenses, mainly related to severance benefits and costs related to exiting facility.

We still expect restructuring activities to extend through 2024.

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

At this time, we were still unable to provide estimates for costs associated with integration of restructuring for 2023 and expenses directly associated with the cyber security incident.

Therefore, we are not providing GAAP guidance.

We are updating guidance for 2023, our non-GAAP guidance to $4 43, a share to $4 71, a share reflecting a narrowing of the range of our guidance for 2023, non-GAAP diluted EPS for the underlying business to $5 18 to $5, 26% from $5.

535 that was previously communicated.

Collecting softening macroeconomic conditions.

An estimated $55 to 75 per share impact is due to business interruption from the recent cyber security incident.

As Stan mentioned, we believe that our teams have contained the cyber security incident, and we are mostly restored our operations.

Although we believe a significant portion of sales that had been disrupted while certain systems were offline where deferred we estimate the percentage sales growth for the full year will be negatively impacted in the low to mid single digits.

Our estimated fourth quarter impact of 55 to 75 per share does not include certain expenses directly associated with the cyber security incident as we expect to report these non-GAAP expenses in the quarter.

The financial impact does not include any future insurance claim recovery.

We expect to file an insurance claim of rising from this incident under our cyber insurance policy. Although final resolution is subject to ensure approval.

This policy has a $60 million after tax claim limit after a $5 million retention.

And any claim recovery will likely not be recognized until late 2024.

Our 2023 net sales are now expected to be 1% to 3% lower than 2022, net sales, which is an update from prior guidance of 1% to 3% sales growth.

This change in guidance, primarily reflects lower sales as a result of the cyber security incident, which as previously mentioned is expected to lower full year 2023 percentage sales growth in the low to mid single digit range.

As a reminder, our guidance also reflects one less selling week for 2023 and 2022.

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

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

Our guidance is for continuing for current continuing operations as well as acquisitions that have been announced and does not include the impact of future share repurchases and potential future acquisition as well as certain expenses directly associated with the cyber security incident.

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

We intend to introduce 2024 financial guidance, when reporting Q4 and full year financial results.

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

Thank you Ron.

I appreciate that.

Operator, we are ready to take any questions that 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 queue. You May press star two to remove a question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

One moment, while we poll for questions.

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

Hey, guys. Good morning, thanks for the questions.

Maybe the first one just high level what are you guys hearing from the customers.

The ordering frequency from our practice might be I don't know maybe roughly every two to three weeks.

So some customers some customers might've been encountered the issues, yeah pretty pretty minimal number of time, maybe one time, possibly twice at most.

Have you guys heard regarding customer retention or do you think you don't have a better feel for that until the actual website is back up and running which seems to your prior point Tomorrow morning, and then I'll just ask a follow up.

This is John that that of course is a very important question.

We believe we are at this 85% to 90% floor.

Hum.

The larger customers that are more sophisticated from an it point of view.

Buying using either the e-commerce systems that we offer or workarounds I.

I would say that is even with the smaller customers.

The mid sized customers the smaller customers are relying on visits from the field sales consultants to collect the orders.

They were until recently and from.

And from a tail of sales reps. So the funnel for doing that is not as wide as of course digital ordering.

So I think.

We will start seeing much more business from smaller customers, which are a key part of our business as the website returns.

But.

We have very good relationships with our customers our field sales consultants.

Tremendous telesales connectivity and of course the value added services generally we've not heard of customers, leaving us have customers made alternative decisions. Yeah of course, some of the buyers of pharmaceuticals Couldnt wait for for example for controlled drugs, we expect our control drive system to be up.

Tivoli soon so I would say generally.

Uh huh.

Heartened by the support we've received from our customers.

John as you know.

Unfortunately.

Labor issues.

And health care have been.

Quite prevalent in fact for the first six months of this year there were over 300 incidents in health care alone. So the customer base is quite quite attuned to this.

Obviously, it's going to be a lot of work.

On behalf of our field sales representatives, and our Taylor salespeople as well as our e-commerce team too.

Bring all the customers back and there will be some trailing I would imagine, but overall, we remain quite enthusiastic.

About the level of support we've received and by the way not only from our customers, but the entire industry has been very very supportive of us.

That's great color, thanks Stanley for that and maybe I'll pivot Ron <unk> for the second question.

Any really high level thoughts around 2024, and not a specific number but just maybe just the construct should we think about it as sort of growth on the core underlying EPS of $5 22.

Advisement Boyd.

And then offset by call it the lag on the cyber security incident and on that second point I just want to make sure the $55 to 75, <unk> hundred 23 cyber hit that.

Thats all call a decremental from lost sales I think you said no expenses in there that would be excluded from non-GAAP is there any promotional stuff in there sorry last sort of question tack on how do we think about the exit impact for December because.

You talked about the top line impact for the quarter, but obviously December would likely be much lower than what you've experienced in October so any color on the cadence for the trailing throughout the fourth quarter. Thanks, guys.

Yeah. Thanks, Sean Yes, Yes, you are correct in that the 55% to 75 that we've called out as if Q4 impact is attributable to business interruption impact. It does not include the one time costs that we're incurring.

That are directly attributable to.

Reactivating the systems.

And right now, it's our intent that.

When we report the Q4 results will be calling out those particular costs.

As part of our non-GAAP reconciliation.

In terms of run rate into 24.

That will be something that really is largely contingent on.

The level of business that we see with <unk> being back up.

That is a very important turning point for us it's something we're very excited about it.

And the organization this week and I think that.

We will be we will have greater intelligence in terms of what's happening.

With customer retention with that with one went back up.

I do anticipate we will likely have some.

Where do you want to call them customer retention programs or promotions in the quarter that may put a little bit of pressure on on Q4 margins I wouldnt expect it to be real significant but having said that we do want to show some appreciation to our customers and we do want to.

Picture that we go into 2024 with a solid base of business as we can possibly have.

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

Hi, guys. Thanks, so much further question.

So as we think about the cyber security.

The website backup.

Tomorrow, that's great to hear.

Now if we think about just sort of like the broader operations that support that is that something that you feel like it is also kind of in a similar place and obviously you would probably would put their website.

We're having a ton of internal issues I just want to make sure how you feel.

That sort of Nebraska, the systems that are supporting that ordering process.

Then sort of as we think about 2024, you obviously had the bold initiatives.

I just wanted to see if like given the cyber security situation or the current demand environment how are you.

Think about that conceptually, whether there are places where you can accelerate cost cut.

Any color there would be helpful. Thank you.

Thank you Elizabeth and also to very very good questions.

So let me just provide one more time, the context, which I think we tried to communicate.

Oh.

Paired remarks.

So we experienced the cyber security incidents, we got suspicious.

And what we did was.

And our CTO made a brilliant move he brought the whole system down immediately.

He knew he was quite comfortable that our backups were good.

Backups have turned out to be very good and what we need to do now is turn on application by application.

Before you can turn on that application.

You have to do certain forensic work to make sure that there are no sleepers in there and so that's what we've been doing.

I would say that at the moment other than the website.

We're more or less back to where we were.

There are a few areas that require additional turning on.

Some involving invoicing some involving the returns function and the only area, we can't really supply right now because we're super cautious is uncontrolled drug. So that we have in affiliates that was not impacted and they are shipping controlled drugs if need be we can.

All of these areas and this is expect to be up and running this week. There are some isolated areas, where we have challenges I would say that have less to do with the customer side. We have some parts of the world we have.

W. EMS systems that are not fully functional yet.

It's not impacting the customer because the <unk> system. The basic buying system is working has been working for a while but it's just taken us a lot more human capital human resources, and receiving the products putting them away and picky.

Those areas will come back.

I think in the next few weeks, so I think from a customer point of view, we're in pretty reasonable shape today.

Yes, if a customer has an inquiry.

Certain purchases made some time ago, we may not be able to give an incident response, we may have to do some research through the backups, but in general.

Operationally actually doing.

Doing quite well a couple of days after two days after the cyber incident. The key here is to remember that our backups are pretty good shape and we feel very confident in.

The way, we are bringing up these systems one at a time.

Our team on the IC side is remarkable on Vista.

Our consultants are just the best and we.

We feel pretty good that we are bringing up systems that are stable and we just have to go through the cycle, but I don't think we're talking about that long, but I'm not sure, but I'm quite sure that from a customer point of view other than the items I mentioned.

We'll be in pretty good shape tomorrow, when they hopefully when the website comes up.

Okay.

I'll take the second half of your question I believe you were asking if in 2024 did I anticipate that we would be accelerating any cost cuts did I understand you properly.

Yes, that's what I was asking thank you, yes, I think that.

We will really go about our business in 2024 as we had originally planned.

And as we said on the call we have a $1 billion committed to acquisitions and typically in the year in the short term following acquisitions.

For synergy opportunities some of those acquisitions of both standalone businesses, but others to provide us with some synergy opportunities that we'll be able to implement over the course of 'twenty four and then just any other normal.

<unk> that we would go through to identify cost efficiencies. So I don't I don't think this in the context of the cyber security incident, do we feel a need to go out and accelerate any type of cost savings in 'twenty four.

Got it thanks, so much.

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

Thank you. Good morning, guys can you hear me, Okay, Yes, Jeff.

Alright, great. Thanks for taking the call so are the questions.

So let me ask two questions I guess, they're both kind of intertwined, but just so we level set all of us.

Conceptually think about your outlook from here.

Hi.

First if we could just ignore the cyber for a second and I'm sure that's.

Not possible and that'll be my follow up question is like if we ignore that for a second.

Third quarter general organic growth right around flattish levels on a global basis. The company wide one ish percent would those if you were accounts made us on how to think about kind of our 2024 models would those be starting off point.

Recommend we think about <unk>.

Conceptually, where we built our organic ex cyber kind of growth rates into next year.

So Jeff obviously, we provided a lot of thoughts around us as of analysts have asked.

As the industry.

So in broad terms, we believe our business is relatively recession recession resilient.

If it goes down a bit it will come back.

Our north American dental consumable business as you correctly point out.

Had flat internal growth.

We saw moderate softness in patient traffic in North America due to appointment cancellations.

Mostly.

In September.

It's hard to tell how long that has continued.

It was similar in the first two weeks of October.

As Ah, but thereafter, obviously.

Because of the cyber incident, it's hard to project.

If you look at total.

North American sales of traditional dental equipment have been largely have largely devoted to the pre pandemic levels.

And we think thats growth in the mid single digits.

Uh huh.

Digital equipment sales continued to be impacted by lower average selling prices.

And it's hard to again.

Give you an absolute is when we expect this to normalize.

Our sense is that that's what I equipment people say it'll normalize sometime in the first quarter of next year.

If you look at our international business.

Overall volumes of consumable merchandise held steady across most regions.

To project that into the international equipment sales.

There is a slowdown in large equipment.

And parts of the world, but there are also some unique reasoning for that.

In place for example places like Australia, there was a tax incentive that ended.

So.

Yes, I think there is some caution.

Amongst our customers and then parts of the world because of the macroeconomic issue.

In parts of Europe.

I don't think it's necessarily that bad any one country.

So overall speaking I think health insurance is in the U S typically provided through employment.

Could be a lagging indicator.

So this could impact activities hard to tell.

And if it does it's probably mostly higher.

And Steve just.

We indicated that on the implant side in North America, we did see some softness on the premium side.

Outside the U S of course, you have countries. There is a lot more government payment to support.

So it's hard to give you.

An indication of really how.

Sure.

Fall down.

People's views would go of the AR.

The economy having.

Having an impact on dentistry, but from the past it's never been significant.

Uh huh.

By the way, we are seeing similar trends between private practices and the large practices.

Of course, our equipment sales.

So the Dsos are not as strong as they were up given the cost of interest.

But.

We also have to understand the DSO sales could be lumpy that was happening.

On patient traffic if you take a look at the Ada survey.

It did indicate some.

Yes.

Patient traffic slowness in the.

Third quarter, probably mostly in September.

There's an argument that it's because of.

The flu traditional flu Teva to COVID-19.

Impact.

And then you know.

But when you take a look at implants in Europe with over Okay. So there's not a definitive downward trend, but there is a little bit of caution at the margin and I think we will have to take that position at least we have to plan for that.

Yeah. That's helpful. Thank you Stanley and so that kind of helps maybe level set us on the core assumptions Ron I guess my follow up then is as I see it and correct me if I'm wrong. There is three variables on the cyber that we need to think about heading into next year do you continue to run any kind of customer retention programs on the spending side do you have any kind of just.

Higher core spending on cyber security that you got to put in place here that you have to put in place that's going to structurally take the opex side higher and then three is there any kind of customer loss do you lose maybe one or 2% of revenue or something like that because not everybody comes back either for risk mitigating reasons or other reasons. So just any comment on kind of the two.

Spending categories will those be higher next year and the customer retention I know, it's hard to predict but would it be safe to build in maybe just a little bit of bleed away a customer or do you think you'll get pretty much most of that back in 24. Thank you.

Sure, Jeff I think I'll kind of address the first item around customer retention and the third item of customer loss somewhat together.

I think we will have.

<unk>.

Greater feel for that in the coming weeks.

As I was saying earlier.

The restoration of the reactivation of our website.

<unk> will bring us much more intelligence in terms of of what their customer retention and what the potential for customer loss might be and as a result with the necessary investment may be two to recover some of that business and some of those customers.

And that will be taken into consideration when we communicated our 2020 for guidance.

In February of next year, I think in terms of higher cyber spend.

Like everything else, we will assess where we think is the what is the appropriate investment.

If we if we believe it's necessary relative.

Relative to <unk>.

Anything else, we will we will do that but I think right now we're still in the midst.

Of understanding.

The cause of this the forensic investigation is ongoing and.

And we will invest accordingly, according to that if necessary if we if it's necessary to increase that investment.

Thank you and the next question comes from the line of John Stenzel with J P. Morgan. Please proceed with your question.

Good morning, guys. Thanks for taking my question I just wanted to talk about some of the swing factors that could move you from that 55 to 75 cents in the cyber security <unk>.

Headwind what are some of the factors that you can see is it really just a time to ramp back up to 100%.

Pre pre.

Incident levels.

Is there anything else built in there that we should be thinking about it.

Yeah.

Yes, John.

I would say, there's really two primary things one being the.

The absolute volumes of customers.

That we have some customers who.

Only use website to order.

And while the web site's down they're not ordering and now that the websites up we expect a significant percentage of those customers to return.

To the extent that we have to that we want to provide incentives to those customers.

That kind of.

Leads us to the second factor that we've taken into consideration and that is the margins to the extent we have some discounting in the quarter that would show up in the gross margins. So I think those are the those are the areas that really.

Our impacting our models in terms of what we believe the Q4 impact will be we've run multiple scenarios and we've really kind of have triangulated to that 55% to 75 at this point.

We will gain much more intelligence over the coming weeks.

With the website up associated with that.

Great and then just on the kind of the 85% to 90% of our pre incident volumes.

You give us a kind of a sense quantitatively of how that's trended since you know that.

The 24th and onwards, when you were generally operational with that kind of increased week over week that being kind of static and then I guess you kind of intimated indicated there.

Big portion of this major speed people, who prefer to use the online.

Portal is that how youre thinking about.

The remaining customers, who were kind of havent havent been ordering with you.

Yes.

We've operated four weeks since we deactivated the system.

Obviously, the most significant impact was in <unk>.

Significant improvement in week, two that led into improvement in week, three and I would say week four was consistent with weak free in terms of the volumes that we were processing.

Hi.

I do think there is a.

Our ceiling on that 85% to 90, where we are now that we can get through with one web app.

And that will.

Like I was saying earlier, that's the intelligence we need to gather.

Over the next couple of weeks, when we see which customers have returned to us to close that that 85% to 90 to get it to 100.

That's really where we're operating right now.

Just to add to Ron's comment.

For a period of time.

The only way our customers could order was that with US was through a field sales representative.

All through telesales.

A huge percentage of our.

Orders, something like 70% of our orders come digitally.

That's the good news, we trained our customers that the best way to do business digitally.

The challenges that 70%.

Our board has had to go through our field representatives antenna sales.

That funnel was not.

Not large enough for a few weeks so.

Not all customers could buy through us as.

We expanded.

Digital ordering capability.

<unk> salespeople got more efficient ways in which to.

And to the orders and we have incredible workarounds.

It came up very quickly, but for a period of time that were not there.

And the telesales team had limited capacity.

We were able to expand the tele sales teams capacity.

We had a model in place we have a procedure in place.

I actually was tested during COVID-19 and literally overnight, we expanded the capacity.

The challenge was the funnels for a few days, we're not big enough to accept all the orders.

So.

Now we can accept the orders.

It'll be much more efficient with direct customer entry through the website.

And we expect that is going to result in customers.

Coming back.

Maybe go elsewhere.

Urgent products, but I think.

Uh huh.

A number of our customers.

Some of the smaller ones held out.

I think that will come back.

<unk>.

Give us the orders that maybe they were holding on to it.

It's going to take.

Some time.

Through the end of the fourth quarter for.

For us too.

Ensure that our systems are back to normal.

In terms of the customers thinking.

Thank you and our next question comes from the line of Jason Bednar with Piper Sandler. Please proceed with your question.

Hey, Thanks for taking my question.

I wanted to ask.

85% to 90% that you're talking about <unk> are there certain categories that have been slower to come back.

Were certain geographies, maybe bifurcate North America, virtually Europe panel versus medical anything there and then I'll have a bottom.

I would say on balance it's spread out reasonably there are parts of the world way electronic ordering is not as large as say in the United States. So those customers are have been more comfortable ordering.

So tell us sales representatives field sales representatives.

But it's more or less okay actually.

On average Europe is a little bit higher.

Without actually don't have all the systems, we have in the U S. So I don't think you can read anything into that this is a period.

When.

We started out with minimal systems on first day and by the end of the third day with a lot of systems working and then as the months went by more and more systems came up so.

It's been a period of the customers adjusting to what's available some places maybe adjusted faster than others, but I don't think we could read anything into the first month of this incident.

Anything specific.

And.

Some products are more elective and others.

Yes.

The static products, where maybe product.

Relating to your liking.

Toothbrushes et cetera, they don't necessary that urgent so we'll see how this materializes, but I don't think Jason I wish we could give you some conclusive information, but there's too many puts and takes here.

To understand exactly.

Whether these trends.

Related to particular products or regions, let me remind you that our equipment business.

Whilst operational throughout this period did not have full support systems, primarily for customer needs and service they got it.

Not all the equipment orders that we've received are being installed right now it will be a catch up in the next couple of months, we went into the period was a pretty decent.

Our backlog of equipment.

Partially driven by the very successful densify Sirona world.

So not all of that is being shipped as fast as we would have wanted to.

Not because we don't have the ability to install new equipment, but simply because it's just a bit more inefficient given.

Given the fact that certain of our equipment systems, we're not running and we rely on a lot of manual systems.

Alright, Thats really helpful. Thanks for all that color and then as you think about a lot of people trying.

Trying to tease out the exit rate.

It looked like in 2024.

10% to 15%, but we are still operating below brief hybrid back level any sense of like kind of 15% how many of those customers are now under contract.

On track like large accounts within dental and medical.

Have you practice management software.

Elements that would make it more sticky and really I think the.

Finally, our value added distributor remains attainable.

It seems a lot of the business.

Thank you.

Yes, Jason I think that we do have our larger customers.

I'll have really stuck with us through this which were very appreciative of that and so we don't expect any significant.

Christian there.

The 85% to 90% on the ordering.

I said before and as Stanley added.

These are a lot of these are customers who are don't rely on fsp's don't rely on our sales reps.

On the dental side and so I think that's really the run rate that we will be looking to improve as we as we go into 'twenty, four and we'll be able to reflect.

Whatever our assumption there is in our 24 guidance when we provide them.

Thank you and our next question comes from the line of Nathan Rich with Goldman Sachs. Please proceed with your question.

Great. Thanks, very much for the questions.

Just wanted to follow up there on the cyber security incident have you had any issues with getting supply of product.

Recall, you mentioned something in the prepared remarks about.

Some supplier account just wondering if that's had any impact on inventory.

From a balance sheet perspective would you expect any impact on inventory levels in the near term our capital deployment in the near term just as you work through these issues.

Yes.

This is a good question Nathan.

We.

It did not have <unk> operating for I can't remember what it was the first week.

We're buying.

Yeah.

On.

Historical data of about a month or so.

System came up pretty quickly.

There was some.

Challenges in our receiving department because we didn't have the full software stored on the receiving side.

But I would say other than maybe one or two to actually suppliers that had concerns about corrupting this systems.

Back electronically ordering even those.

To that I was involved with quickly removed any concerns they had.

And we've been buying product.

And the only way I will say that on some manufacturers, we went into the quarter with very good inventory.

For multiple reasons.

Essentially.

Our suppliers have been very helpful.

We've gotten the product we need.

We may have slightly increased inventories in certain areas.

But Ron can address the balance sheet per se, but.

Essentially all I have to say the support <unk> gotten from our manufacturers.

Truly remarkable summit helped us drop shipments.

Maybe the first week or two and felt that we wanted to lighten up.

Load in our warehouses, but it wasn't needed we just took that as a proportion.

Yes, Nathan just to add to <unk> remarks.

Don't expect this to have a significant impact on our inventory levels.

One area, we could see a little bit of impact and we baked some assumptions into our into our Q4 guidance on this is the key.

Could reduce our rebates a little bit because our rebates are largely.

Our primarily now, especially in North America, our sellout rebates as opposed to purchasing rebates. So to the extent that we do not recover some of the sales in the fourth quarter could impact our rebates in the fourth quarter.

In terms of capital deployment.

I don't really see any any change the balance sheet is strong remains strong going into this incident is strong coming out of the incident I don't see any significant changes in how we're deploying capital as a result of this.

Great and if I could just follow up quickly.

Jeffs question earlier, just on the outlook for the dental business I think the revised revenue range Didnt really incorporate a significant impact from the macro environment and then I guess I was just wondering if we should interpret this as you know the variability that you saw whether it was patient traffic our equipment sales in certain international markets.

Is it just hasnt been significant enough to kind of change your view of the overall trajectory of the end market at this point.

Yes.

I think if you think back to our Investor Day last February.

Okay.

For example, our dental assumption then was saved in the 2% to 4% range in terms of long term growth I think it's probably fair to say, we're trading closer to the lower end of that range and I think that in terms of dental specialties, which is included within our dental merchandise numbers that we provide.

As we mentioned in the prepared remarks, there have been some there is there is some softness in the in the end markets on implants, and I think it's probably pushing some of that dental specialty growth that we would like to get more towards the lower end of that range as well so.

I would suspect as we get.

As we sit down to try to finalize our 2024 numbers.

We feel we still feel good in the long term about those growth trends, we could see 24 training.

Something that would be more towards the lower end of that range.

We have time for one last question coming from the line of Kevin Kelly Endo with UBS. Please proceed with your question.

Thanks, and thanks for getting my question and I appreciate it.

Prior to the cyber attack.

How much of your revenue is typically went through the e-commerce platform.

Just broadly speaking.

I'm guessing it was more than 10% to 15% right, yes, absolutely absolutely.

Okay.

Take Adi plus the web combined.

So essentially.

Electronics.

Type of ordering is in the 70% to 75% range.

Hi.

Well I think the 85 to 90 I think orders were talking about it in kind of that missing 10% to 15%. We think is largely attributable to customers who exclusively ordered.

Electronically.

<unk> did not have a rep. They didn't want to perhaps use multiple distributors.

Distributors and.

So because they didn't have a rep, who could assure that they were getting the product that they wanted they simply ordered from someone else.

That's the question is how much of that business can we get back that's what we're working to get back.

Okay. That's helpful. I just wanted to understand the bend diagram here.

Yes.

It will allow those others were able to through their wrap or otherwise, we're able to place orders through our telesales channel or the rep was able to make sure that their order got put it accurately and completely.

And I appreciate the commentary around the lower end that even sounds better than many of your peers have spoken publicly on the trends that we're seeing in October and November for the fourth quarter.

I sort of wanted to ask family. This question just big picture.

What do you think is actually driving the slowdown in demand in dental even if you guys aren't seeing it as acutely as maybe some of the other.

Probably because of the mix, probably because of your own positioning but.

How often have you seen this kind of <unk>.

Macro environment, how long do you think it last what do you think is causing it. This time just love to hear your take on that and how long do you think it last for.

Yes.

Good questions yet.

Yes.

Sure.

The third quarter.

September in the U S. We saw.

Uh huh.

Sales of consumables going down.

This patient data from the Ada.

But it's very hard to pinpoint exactly.

How much of that.

The amount going down was.

Because of the switch.

Maybe some generics.

But how.

How much was the result of price.

Systems, because prices have gone up a little bit of that in there how much was because of flu and COVID-19.

We're not talking about <unk>.

Many one hundreds of basis points, we are at the margin here and to conclude anything from.

September and the first two weeks of October is very hard.

For us too.

Pinpoint.

The clear direction.

What we've seen in the past is.

The.

Sales of consumables may go down four quarters.

It doesn't last much longer than that.

And it's a strange recession.

It seems like.

On the one hand.

Consumer is resisting on the other hand.

Retail sales don't seem like a disaster.

Great.

I think we're talking about at the margin.

In Europe.

Is government support so it's all going to be as elastic.

But there is a little bit of concern with geopolitical the geopolitical environment.

When we look at Germany, it's not terrible.

I would say it has been on the equipment side, some resistance to resistance to more expensive equipment and theres been a switch to less expensive equipment.

It doesn't really impact that much have such a huge impact on us.

Yes, the gross profit, maybe a little bit less but.

But generally there's so many other variables on the equipment side.

That I can't say for sure that the trends in Europe on equipment.

Secondly impact our profitability of our equipment business in fact, it's more much more money to be made on the efficiency of our service network.

We're talking about at the margin here in terms of consumables equipment in North America.

The one area didn't caveat.

Finishing equipment is pretty stable.

The digital there is of course.

Switching to.

Some newer devices and lower price.

So there's some volatility there.

But there is also good demand for the digital equipment I'm talking about.

The Io devices.

The mills.

It's not 100% switch between mills.

And three D printing, although three D printing is doing very well.

Expect that at some point, we will see three D printing to be adopted by more.

<unk>.

Okay, what would be necessary.

Uh huh.

Sequential increase but there could be lumpiness in that so.

Im just giving you a number of factors to draw.

<unk>.

Summation of all of that.

<unk>.

One one.

Consolidated numbers is very difficult to give you but in my experience has been around a long time. These.

Consumable.

Trends on the negative side don't last long.

And I'm talking about dental on the medical.

The demand is still pretty good in the ultimate care setting many more procedures moving from the hospital I Wouldnt really read anything into our specific growth for the quarter other than to take into account last year, we had almost.

I think not in a handful.

Almost 10% growth so you average it out.

Maybe 4% to 5% 5% to six.

So.

The business relatively stable, which is a good place to conclude the call.

So thanks for that question operator.

Let me just say a few things before we end.

The business in general we have good branding we are a good strategic plan.

Ah.

Our people and the team came through in a remarkable way.

At some point, we're going to have to deal with Cypress.

<unk>.

As a country as it will it's one of the top concerns on Ceos list and.

And we're going to have to put much more money into law enforcement in this area.

Law enforcement has been extremely collaborative cooperative.

But this is a new area and Uh huh.

Brand new but.

The number of attacks is increasing significantly each month.

And.

I think the way our team handled this.

Down the systems.

Backups working built it up application by application.

Verified that the data that was being put lives.

Activated live was good.

And.

And was safe.

Just unfortunate it takes time.

But I think we dealt with it.

Yeah.

Pretty expeditious way.

Believe from my heart.

Quality point of view.

Advisors.

Evan.

That is quite experienced in this arena too.

Two board members that have direct experience in this area that of course have been advising us for several years.

And both plus one plans are still in place.

Okay.

Henry Schein, one continues to do very well.

The clinical workflow area to do very nicely artificial intelligence I think will gain acceptance within the DSO movement not too distant future I think we have a winning product offering in that regard.

Equipment is stable.

Giving you our thoughts on consumables.

And.

We now just need to complete.

Bringing up <unk>.

All of our systems, and then ensuring that our recovery.

From a customer point of views executed well our sales force is ready to go into the field.

And.

At advance.

Recovery in our chiller sales people are doing the same in our digital team.

I wanted to also activate the customers from that point of view.

I think investors for your patients.

I wish we didn't have to go through this.

But the.

The organization come through an enormous way and the support we've received from our customers and the industry has.

Really been phenomenal. So thank you very much we will be back.

With our fourth quarter numbers I believe report end of.

Okay.

February mid February.

And I think our filings with the SEC.

Although an aspect of it has been delayed for a few weeks will be on time.

Thank you very much for your patience.

Okay.

Ladies and gentlemen. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.