Henry Schein, Inc.

Good morning, ladies and gentlemen, and welcome to the Henry Schein Fourth Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the call, please press the star key followed by zero on your touch-tone phone. As a reminder, this call is being recorded. I would now like to introduce your host for today's call, Carolyn Borders. Henry Schein, Vice President of Investor Relations. Please go ahead, Carolyn.

Thank you, Regina, and my thanks to each of you for joining us to discuss Henry Schein's results for the 2020 fourth quarter and full year. With me on the call today are Stanley Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein, and Stephen Palladino, Executive Vice President and Chief Financial Officer. Before we begin, I would like to state that certain comments made during this call will include information that is forward looking. As you know, risks and uncertainties involved in the company's business may affect the matters referred to in forward looking statements. As a result, the company's performance may materially differ from those expressed in or indicated by such forward looking statements. These forward looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's filings with the Securities and Exchange Commission, including in the risk factors section of those filings. In addition, all comments about the markets we serve, including end market growth rates and market share, are based upon the company's internal analysis and estimates. Our conference call remarks will include both GAAP and non-GAAP financial results. We believe the non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business, enable the comparison of financial results between periods where certain items may vary independently of business performance, and allow for greater transparency with respect to key metrics used by management in operating our business. These non-GAAP financial measures are presented solely for informational and comparative purposes and should not be regarded as a replacement for corresponding GAAP measures. Reconciliations between GAAP and non-GAAP measures can be found in the supplemental information section of our investor relations website and in exhibit B of today's press release, which is available in the investor relations section of our website. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, February 17th, 2021. Henry Schein undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. please limit yourself to a single question and a follow-up during Q&A to allow as many listeners as possible to ask a question within the one hour we have allotted for this call. With that said, I would like to turn the call over to Stanley Bergman.

Good morning. Thank you, Carolyn. Thank you all for participating in today's call. Against the backdrop of a most challenging year in our history due to the COVID pandemic, With unprecedented human toll and economic impact worldwide, we were successful in supporting practices that were initially open for emergency services and also assisting customers preparing to restore practices to increased operating capacity as restrictions eased. Henry Schein's unwavering focus on our customers, along with our resilience and agility, enabled us to deliver fourth quarter total sales growth of 18.6%, capping off record total sales for the second half of 2020 as our end markets have rebounded. Our teams are working tirelessly to execute against our plans. We recognize the commitment and sacrifice of Team Shine members globally and wish to sincerely thank the team for the continued commitment the team brings to Henry Shine each day. Dental patient traffic has remained at stable levels compared to the third quarter of 2020, even in countries experiencing more stringent lockdown rules, with the exception of the UK. To date, the overall recovery is continuing. Specifically in the United States, the latest survey data published by the American Dental Association for the US shows that dental practices are at close to 80% of pre-COVID patient volumes. That's patient traffic. These patient volumes represent a slight increase over the past couple of months of ADA survey data, which we believe is reasonably accurate. Henry Schein's U.S. dental e-claims data also show that patients continue to return for a broad set of oral care procedures. We also believe overall patient volumes in medical are still at relatively stable levels, In fact, we are pleased to report that for the second quarter in a row, our global medical business has achieved over $1 billion in quarterly sales. Over time, our dental and medical customers, we believe, will experience patient traffic that will improve to pre-COVID-19 levels. We are pleased with our non-PPE and COVID-related sales for the fourth quarter, in both dental and medical in the United States and abroad, but also expect PPE and COVID-19-related sales to continue at the elevated levels to support standard of care followed by practitioners. So although we are pleased with our non-PPE sales, and we did experience significant increase in PPE and COVID-related sales, we do expect that PPE and COVID-related sales will continue at these elevated levels beyond this year, or beyond the end of 2020, into 2021 and beyond. So despite this very difficult past year, we remain optimistic about our future, and our financial position is strong. We remain confident that Henry Schein is well positioned for future continued success given the breadth of our products, services, and supplier and team Schein support across the global dental and medical markets. Today, we will review the specifics of our financial results, discuss key achievements in 2020, provide our perspective on the state of our end markets, and speak to our strategic focus while providing guidance for 2021, of course, bearing in mind that we are still in the midst of a pandemic. However, before Stephen offers his remarks, I would like to clarify a point related to the impact of non-cash, non-recurring intangible assets impairment charge of just over $18 million that we announced today. This impairment charge was accorded within our operating expenses impacting our operating margins by 57 basis points. It should, of course, be noted that this impairment charge reduced both GAAP EPS and non-GAAP EPS by 7 cents. With that, I'll ask Stephen to discuss our quarterly and full-year financial performance, and then I'll provide some additional comments on the current business conditions, our markets, and where we're heading. Stephen, please.

Okay, thank you, Stanley, and good morning to everyone. As we begin, I'd like to point out that I will be discussing our results from continuing operations as reported on a GAAP basis and also on a non-GAAP basis. Our Q4 2020 and Q4 2019 non-GAAP results exclude certain items that are detailed in Exhibit B of today's press release and in the supplemental information section of our investor relations website. Please note that we have again included a corporate sales category for Q4 that represents sales to Covetris under the transitional services agreements that has now expired just shy of two years since the completion of the spinoff of our animal health business to form Covetris. We expect stranded costs related to the animal health spinoff to be in the $10 to $12 million range for 2021. Turning now to our financial results, total net sales for the quarter ended December 26th 2020 were $3.2 billion, reflecting growth of 18.6% compared with the prior year, with internally generated sales up 17.1% in local currencies, which was driven by sales of PPE or personal protective equipment, as well as COVID-related products. Details of sales performance are contained in Exhibit E of our earnings press release issued earlier today. On a GAAP basis, our operating margin for the fourth quarter of 2020 was 5.7%, representing a decrease of 164 basis points compared with the prior year. On a non-GAAP basis, our operating margin of 5.9%, contracted by 146 basis points on a year-over-year basis. Again, a reconciliation of GAAP operating margin to non-GAAP operating margin can be found in the supplemental information page on the investor relations page of our website. Our operating margin was unfavorably impacted by significant inventory adjustments associated with PPE and COVID-related products, as well as lower supplier rebates, and that was partially offset by lower expenses as a percentage of sales. It's important to note we do not expect any material inventory adjustments to continue into 2021. Our operating margin, as Stanley said, was also negatively impacted by 57 basis points due to a non-cash, non-recurring, intangible asset impairment charge recorded by Henry Schein 1 of approximately $18.1 million, which reduced both GAAP and non-GAAP EPS by $0.07 per diluted share. Turning to taxes, our reported GAAP effective tax rate for the fourth quarter of 2020 was 17.3%. This compares with 22.3% GAAP effective tax rate for the fourth quarter of 2019. And on a non-GAAP basis, our effective tax rate was 17.5%, which compares to a prior year non-GAAP effective tax rate of 22.2%. You can see a reconciliation of GAAP effective tax rate to non-GAAP effective tax rate, again, on our supplemental information page on our website. This lower effective tax rate in the fourth quarter of 2020 was favorably impacted by income tax resolutions in both the U.S. as well as internationally, which lowered income tax expense by approximately $14.6 million, or 10 cents per diluted share. Excluding this impact, the effective tax rate would have been in the 26% range for both GAAP and non-GAAP. Moving on. Our gap net income from continuing operations attributable to Henry Schein for the fourth quarter of 2020 was $141.9 million, or $0.99 per diluted share. This compares with the prior year gap net income from continuing operations of $330 million, or $2.25 per diluted share. But remember, that included a net gain on a sale of equity investments of $1.27. Our non-GAAP net income from continuing operations for the fourth quarter of 2020 was $143.6 million, or $1 per diluted share, and this compares to the non-GAAP net income from continuing operations of $143 million, or $0.97 per diluted share, for the fourth quarter of last year. Again, both our GAAP and non-GAAP net income for the fourth quarter was favorably impacted by the tax resolutions I just mentioned. and unfavorably impacted by the one-time impairment charge. Our amortization of acquired intangibles for Q4 2020 was $25.3 million pre-tax, or 11 cents per diluted share. This excludes the non-recurring $18.1 million impairment charge that we recorded in the current quarter and compares to $26.9 million pre-tax, or 12 cents per diluted share, for the same period last year. Similarly for the full year 2020, amortization from acquired intangibles was $102.1 million pre-tax or 40 cents per diluted share. This excludes the combined $20.3 million in non-cash asset and payment charges that we recorded in Q1 as well as in the current quarter and compares to 105.9 million pre-tax or 46 cents per diluted share in 2019. I'll also note that foreign currency um had a very minor impact on our eps it positively impacted q4 diluted eps by less than one cent per share let me now provide some detail on our sales results for the fourth quarter global dental sales of 1.8 billion grew 7.2 percent compared with the same period last year with internal sales growth of 5.1 percent in local currencies global dental consumable merchandise Internal sales increased by 10% in local currencies in the fourth quarter. And excluding PPE and COVID-related products, sales increase was 5.0%. I'll note that this 5.0% quarterly growth rate is among the highest that we've recorded at Henry Schein since 2017. North American internal sales and local currencies declined 0.7%. which included growth of 5.3% in dental consumable merchandise or 0.4% excluding PPE and COVID-related products and the 13.2% decline in sales of dental equipment. Our international dental internal sales growth in local currencies was 14.2%, which included 16.7% growth in sales of dental consumable merchandise sales or 11.4% when excluding PPE and COVID-related products, and 6.8% growth in sales of international dental equipment. Looking at dental consumable merchandise sales, we experienced very solid growth in the US, Canada, Australia, New Zealand, China, Brazil, and throughout most of Europe. We saw particular strength in France and Germany, the Netherlands, Belgium, Austria, Italy, and Poland. However, the UK countries continue to experience lower sales as that country has moved into a stricter lockdown. Our North American dental equipment sales performance was impacted by a difficult prior year comparison, including the Dentsupply Sirona World event moving to a virtual platform and production transitions as a key supplier exited traditional equipment categories. In addition, we believe some practices potentially held off on year-end equipment purchases as U.S. tax incentives may be more favorable in 2021. International dental equipment sales growth in Q4 was driven by strength in Germany, Austria, France, as well as Australia and New Zealand. We experienced high single-digit internal sales growth in local currencies and traditional equipment and low single-digit growth in high-tech equipment internationally. We continue to be encouraged by the extent of customer engagement and interest in equipment and technology investments. Currently, both our North America and international equipment backlogs are exhibiting growth year over year. Please keep in mind that backlog represents sales orders at the end of the quarter that have not been shipped, but we also take a substantial amount of orders within the quarter that will drive our sales results for the current quarter. Given our current perspective, we are optimistic about our North American as well as international dental equipment sales growth for the first quarter of 2021. Our global dental specialty revenue in the fourth quarter totaled approximately $200 million with internal growth of 2.2% in local currencies versus the prior year. The split was 1.7% growth in North America and 3.1% internationally. Our global dental implant growth in the fourth quarter was 4.3%. Our orthodontic sales decreased by 5%, primarily due to business interruption as we moved to a new distribution center in Q4, as well as a supplier exiting the market, which resulted in a shift of orders to alternate suppliers. We expect to see a sequential improvement in orthodontic sales in the first quarter of 2021. Turning now to global medical sales, they were $1.2 billion and growth of 48.5% compared to the same period last year. 48.2% of that was in local currencies and included 47.9% increase in North America and international sales growth of 63.1%. Medical sales results were driven by continued strong demand for PPE and COVID-19 related products. If you were to exclude the sales of these products, the global medical internal growth in local currencies was approximately 3.6%. I'll also note that we sold approximately $270 million in COVID tests in Q4, including some multi-assay flu and COVID-19 combination tests. This was up from approximately $100 million in the third quarter. We believe solid COVID test sales growth is likely to continue while COVID cases remain at relatively high levels. We also experienced double-digit growth in sales of MedSurge products in Q4. Turning to technology and value-added services sales, they were $138.7 million in the fourth quarter, an increase of 1.2% compared with the prior year, including a decline in internally generated sales and local currencies of approximately 0.7%. In North America, tech and value-added services internal sales growth was 0.6% in local currencies. And I'll note that the sales growth was impacted by transactional revenue associated with the lower number of patient visits compared to pre-COVID-19 levels. We also faced a difficult prior year comparison that benefited hardware upgrades in the prior year as we helped transition customers to address new operating system requirements. We are very pleased with our solid sales growth from our Dentrix Ascend cloud-based software solutions as well as financial services. Internationally, technology-evaluated services internal sales declined by 8.4% in local currencies when compared to the prior year. The prolonged lockdown in the U.K. significantly impacted this international business. As we discussed during our Q1 earnings call last May, we temporarily suspended our share repurchase program as a means to preserve cash in response to the impact of COVID-19 on our business operations and due to certain restrictions related to financial covenants. Prior to the suspension of this program in 2020, we repurchased approximately 1.2 million shares at $61.49 average price. which represents a total of $73.8 million in cash. At the year end, we had approximately $201 million authorized and available for future stock purchases. But remember, when we amended our credit facilities earlier this year, we also agreed to restrict stock repurchases until we report our second quarter 2020 financial results. Currently, we have significant access to liquidity. providing flexibility and financial stability in this challenging environment. Operating cash flow from continuing operations for the fourth quarter was $345 million compared to $295 million for the fourth quarter of last year. This year-over-year increase was primarily due to higher net income in 2020 after adjusting for the pre-tax gain on the sale of equity investments in the prior year. As part of our previously disclosed restructuring initiative, we recorded a pre-tax charge in Q4 2020 of $4.4 million, or two cents per diluted share. This charge primarily relates to severance pay and facility closing costs and reflects opportunities to reduce expenses, drive operating efficiencies, and mitigate stranded costs. We anticipate additional restructuring costs in 2021. I'll now provide a quick review of the full year of 2020 and then move on to 2021 guidance. During 2020, we achieved total net sales of $10.1 billion, up 1.3% from 2019, with internally generated sales up 0.8% in local currencies. And this is all despite the significant impact we saw earlier in the year regarding the COVID pandemic. Gap diluted EPS from continuing operations increased 40.1%, largely impacted by COVID-19 and the net gain on sale of equity investments in the prior year. Non-gap EPS declined 15% due to the impact of COVID-19. And again, we're pleased with solid operating cash flow of the year of almost $600 million with cash funds, which funds our balanced approach to capital allocations. Let me conclude my remarks on financial guidance. At this time, we're not providing a 21 GAAP guidance since we are unable to provide an accurate estimate of expenses related to the ongoing restructuring initiative. However, given the wide range of analyst EPS estimates, EPS estimates for the year, we see a benefit in providing a high level guidance. As such, we expected our 2021 non-GAAP diluted EPS from continuing operations attributable to Henry Schein will be at or above 2019 non-GAAP diluted EPS from continuing operations, which was $3.51. We believe this comparison to 2019 non-GAAP diluted EPS from continuing operations is appropriate given the COVID-19 impact on 2020 results. I think it's very important to note that our guidance is not a range and is not a specific EPS number. In fact, what we're trying to show and what we're intending is for this guidance of 351 at or above 351 to be a flaw for our guidance and not a specific guidance number. So hopefully it's taken as such. And keep in mind that guidance for 2021 non-GAAP EPS attributable to Henry Schein is for current operations as well as completed or previously announced acquisitions. but that does not include the potential for future acquisitions, if any, as well as restructuring expenses or share repurchases. Guidance also assumes foreign exchange rates that are generally consistent with current levels and also assumes that the end markets remain stable and consistent with current market conditions. Of course, guidance does not assume any material market changes associated with COVID-19. So with that summary, I'd like to turn the call back over to Stanley.

Thank you very much, Stephen. I'd like to take a few minutes to discuss our strategic planning process. We undertake a rolling formal planning initiative every three years, and we are currently in the midst of developing our 2022 to 2024 strategic plan, which we believe will help us focus on optimizing the long-term return on our investments and enable us to continue delivering value to our shareholders. We had deferred, of course, and I think the investors know this, our strategic planning process for one year as we focused on addressing the impact of COVID-19. Today, we'd like to offer a preview of our thinking around some key components of our strategic plan. First, a key element in our effort to grow closer to our customers is our One Shine initiative, which is a unified go-to-market approach that enables practitioners to work synergistically with Henry Schein's supply chain, equipment sales and service, and other value-added services, allowing our customers to leverage the combined value that we offer through a single program. Specifically, OneShine provides customers with streamlined access to our comprehensive offering of, of course, national brand products, Henry Schein private label and proprietary specialty products and solutions, including surgical, endodontic, and orthodontic products. In addition, customers have access to services, pretty wide range, probably the largest, we believe, in the marketplaces that we serve, including software and other value-added services. Ultimately, OneShine enables customers to benefit from the ability to enrich patient treatment options and outcomes and simplify business operations in addition to the opportunity to drive practice profitability. So looking more closely at our technology and value-added services and dental specialty businesses, let me start with a discussion on our technology and value-added services business, which comprises approximately $500 million of revenue, about 5% of Henry Schein's total sales in 2020. I would like to note that COVID-19 had a significant negative impact on this technology and value-added services business, at least from a sales point of view. Within the segment Henry Schein One, our dental software offering represents the lion's share of sales and is also one of the Henry Schein's highest margin businesses. One of our highest margin businesses is reflected in the Henry Schein One business. Our comprehensive suite of integrated dental software solutions reaches far beyond practice management software which is key to simplifying clinical and office-based processes in the physical office or in the cloud. So we go beyond the practice management software, which of course is quite effective and the leading systems in the world. We are also advancing patient demand generation with our expertise in websites, search engine optimization, patient reviews, and dental directories and dental savings plans. Our patient engagement solutions help practices communicate with patients engaged in market campaigns and facilitate online booking. And our revenue cycle management products facilitate insurance processing and patient payments. We believe that no other company offers a combined portfolio of products as broad and as extensive as Henry Schein 1 solutions, and that our expertise is fundamental to the capabilities that practitioners value as a resource to help drive practice success. We are delighted that Mike Baird has joined us as CEO of Henry Schein 1, taking over the role that John Cook, CEO of our global dental group, held on an interim basis. In his new role, Mike will work with leaders across Henry Schein 1, including our software businesses in North America, Europe, and the Asia-Pacific region, to continue promoting promotion of our industry-leading practice management, patient engagement, and patient demand creation solutions. His team will also continue to collaborate closely with Henry Schein Dental and our specialty businesses to help drive the OneShine offering to dental professionals around the world. Prior to joining Henry Schein One, Mike held several leadership positions in the healthcare information technology space and most recently served as president of health systems at American Well. During the fourth quarter, we launched a number of product enhancements for Henry Schein 1 solutions, including directory online booking, which is a self-scheduling solution for the WebMD directory, allowing prospective patients to book appointments online through the WebMD directory. Patient Engagement Live, which provides dental practice teams with access to real-time patient notifications. The Patient Engaged Mobile App, which enables practice functions on the go. Dentrix Ascend Pay and Dentrix Enterprise Pay, which integrate point-of-service card processing solutions for fast check-in, check-out processing after the procedure is completed. And Dentrix Ascend ERX, which is an integrated electronic prescribing solution that enables seamless electronically prescribing functionality with the Ascend practice management system. Our value-added services also includes Henry Schein Financial Services, which facilitates financing options, including equipment, technology financing and leasing, working capital loans, as well as patient finance and credit card options. Our business solutions offering, which is the third component in this group, offers a complete array of value-added services, and include technology as well as resources for improving key business functions that contribute to the successful business operations and clinical effectiveness of dental and medical practices. So that's our technology and value added service offering, which is described separately or reported separately in our financial statements. Let me now discuss our dental specialty business, which consists of dental implants and biomaterials for tooth replacement therapy, certain surgical pharmaceutical products, endodontics and rotary products, as well as orthodontic products. Comprising approximately 12% of our global dental sales, this business generated sales of approximately $700 million in 2020. Of course, we are quite pleased with these results given the COVID-19 challenges we experienced, which had a significant impact negative impact on 2020 sales, and particularly in the second quarter, although we did recover significantly and in fact did very well in the third and fourth quarter, in other words, the second half of the year. Given the proprietary designs and unique value proposition of these specialized products, our dental specialties businesses command a higher margin than most core dental products that we distribute. Through our expertise across the entire value chain, from research and development, production and distribution, to marketing, education, and value-added services offered through practitioners undertaking specialty products procedures, our customers benefit from our high pace of innovation and a comprehensive portfolio of specialty products and related value-added services. As a percentage of global dental specialty sales, implant, tooth replacement, bone regeneration, and oral surgery products represent the largest portion of dental specialty sales, with contributions from our BioHorizons, Camelot, Medentis, medical, asurgical, and southern anesthesia businesses. Over the past several quarters, we believe we have been among the leading companies in premium implant segment sales performance, including strong sales in biomaterials. We expect this trend to continue based on our continued innovative innovation and investment in portfolio expansion and value-added services. In addition, Medentis Medical, our value implant line, posted solid fourth quarter sales in the DACH region, which represents Medentis' largest region. The next largest piece in our specialties business is our endodontic products, which includes Brasler Dental, our Henry Schein branded endodontic ranges, and other products, as well as national brand products. We continue to invest in enhancing our selling capabilities and R&D around our endodontic platform, and we believe we have gained market share in key markets. Last, on the specialty side, our orthodontic business is comprised of sales from Ortho II, Ortho Technology, and our Reveal clear liner businesses. Although our orthodontic sales, and specifically our clear aligner sales, represent the smallest dental specialty business, part of our specialty business sales continue to grow, and we expect that trend to continue as we invest in enhancing the user experience through sales, marketing, and manufacturing innovation, including with our software solutions. On this group, the specialty group in general, we continue to make progress in penetrating private practices, the mid-market, and DSO customers that value the precision, quality, and expertise that we deliver through our dental specialty solutions, in part due to our OneShine initiative. So now let me just address PPE and COVID testing for a minute, and COVID-19 tests and other related products. In both the dental and medical markets, we expect we will continue to see sales of PPE and COVID-19 related products at elevated levels compared to pre-COVID-19 levels. We continue to firm up global sources of supply and have begun to utilize alternate domestic manufacturers to meet our customer supply needs. We are very pleased and proud, in fact, of the way we handle the whole PPE and testing availability of products during 2020 when we had our extensive activities in seeking product, flew product in from around the world, ensured that our customers had adequate PPE products and test products as well, costing us a lot of money to do this, but well worth it from a customer service and satisfaction point of view. At this time, we believe that most dental and medical practices are able to access adequate supply of PPE, including face shields, masks, gowns, and thermometers. The exceptions continue to be where the market is experiencing supply constraints for particular products, such as nitrile gloves, medical wipes, and more recently, syringes and needle inventory to support vaccine rollout. We believe we have adequate availability for our current customer base and should be able to satisfy our customers' needs as we have during most of 2020. Now, let me turn to M&A for a moment. On the acquisition side, although we suspended M&A activities from March through the summer, we closed nine acquisitions with aggregate sales of almost $300 million and and deployed nearly $200 million in capital. These transactions are expected to be slightly diluted in their first year and quite accretive thereafter. In the new year, we announced the acquisition of Prism Medical Products. This transaction expands our U.S. medical business beyond our core base of office-based physicians and into the home health market. Specifically, home medical supplies is a natural extension of our focus on the continuum of care delivery model. With revenues of $52 million for the 12 months ended September 30th, 2020, PRISM serves a broad network of nationally affiliated and independently operated wound care clinics as well as specialist practices. We believe this acquisition will allow us to move closer to the patient. It also strengthens our relationship with physicians who prescribe home medical supplies. I would like to take a moment to address our investments in technology and business intelligence to enhance current e-commerce, digital marketing, and customer engagement tools that in turn help our team succeed in the market, providing, of course, greater customer satisfaction. Marketing automation, customer insights and analytics, personalization technologies, and customer experience management tools are just a few of the many areas in which we have made considerable advancement in recent years, Consistent with our broad digital strategy, these investments leverage best-of-breed technologies to ensure we provide a rich customer experience, adaptable as customers' needs evolve. As part of supporting our customers through every step of their buying journey, we are focused on advancing our global e-commerce platform for dental and medical, which we internally refer to as GEP, G-E-P. Successful implementation of current and future GEP investments will enable Henry Schein to remain the destination of choice over the long term for healthcare providers and suppliers. Keep in mind that we are early in the process of planning and implementing long-term phases, the long-term phases of GEP, market by market. The long-term phases of GEP will be rolled out beginning of 2022 and continue through 2024. We have a great team in place, And consistent with our history of rolling out advancements in the IT space on a consistent, reliable basis, we are extremely enthusiastic about the GEP investments. Again, we look forward to keeping you apprised of our evolving strategic plans as we enhance the breadth of our solutions and services offerings and look to deliver continued long-term value to our stakeholders. Which takes me to a short discussion on ESG. I'd like to comment on the significant work that Henry Schein has undertaken over the years in this area, and particularly this past year, to enhance our longstanding commitment to environmental, social, and governance, or as is known, ESG initiatives. In 2019, we embarked on a journey to evolve our ESG disclosure with a goal of reporting on appropriate global reporting initiatives, also known as GRI standards. We've had a broad, cross-functional team working with our business and corporate teams on goals and targets for carbon dioxide, energy, waste, supply chain, diversity and inclusion, safety, employee training, volunteering, and community impact. Our diversity inclusion work has always been a part of our core values, and we have helped drive this conversation for more than two decades. Building on our Women's Leadership Network employee resource group, We have added three additional employee resource groups this year, or last year, including our Black Legacy Professionals, Pride and Allies, and Latin ERGs. We were pleased to earn 100% on the Human Rights Campaign Foundation's annual assessment of LGBTQ workplace equality and be named to Fortune's World Most Admired Companies list for the 20th consecutive year. ranking actually first in our category for the last couple of years. With the support of Henry Schein Senior Management and oversight by the Nominating and Governance Committee of the Board of Directors, our ESG program reflects our long history as a purpose-driven, higher ambition company that integrates our sense of purpose in the way we operate our business. Last, let me just report on our Board of Directors. We recently announced changes as Paul Bronze and Shira Goodman will not stand for reelection at our 2021 stockholder meeting. We thank, of course, Paul and Shira for their many years of service and valued contributions to the Henry Schein Board. At the same time, we welcome our newest board members, Muhammad Ali and Deborah Derby. Muhammad has extensive experience with successful technology transformation and DEB brings broad operational, strategic, and senior leadership experience with public companies. The addition of these directors complements the skill and experience of our current board, and we are confident that the collective set of leaders will provide valuable perspectives as we continue to execute our strategy. So I realize that was a lot, but there's a lot going on at Henry Schein, so now we're happy to open the to any Q&A or any questions that investors may have, and we will answer them. Thank you.

At this time, if you'd like to ask a question, simply press star followed by the number one on your telephone keypad. We ask that you please limit your questions to one and one follow-up. Our first question will come from the line of Jeff Johnson with Baird.

Thank you. Good morning, guys. Two questions, if I could, this morning. First, just, Steve, on 2021 guidance, I understand that you're not and you really never do, I guess, provide revenue guidance. I'd still be interested in hearing maybe how you're thinking about your core ex-PPE and COVID product revenues in dental and medical. Do they get back to 2019 levels this year or how to think about that? And given the additional PPE and COVID revenues in 21 versus 19, it seems like your 21 EPS guidance, if I were to get down to that

351 level your margins have to be down something like 60 70 basis points versus 19 is is that a fair ballpark to think to get down to that 351 level thanks yeah thanks for the question uh jeff so again i just want to make sure people understand that the guidance that we gave is the floor you know we've debated quite quite honestly whether to give guidance or not this quarter But leading up to the quarter with investor meetings, we were getting lots of questions on guidance, and we felt giving a floor was beneficial rather than giving nothing and having that total uncertainty out there. So please take it as the floor. You know, the other point I want to make before I directly answer your questions, Jeff, is that, you know, people seem to look at, as you are, the non-PPE core sales growth. And I think it's important to note that, you know, if you look at North American dental consumables as an example, you know, that growth was, I think it was 0.4% excluding PPE products. But that's given patient traffic is down 20% to 80%. So that's, I think, a good number considering that. And the other thing that's important to note is that we believe that PPE and COVID-related products will continue to be strong going forward. It will represent really the new standard of care for practitioners. So I wouldn't look at those revenues as non-recurring. I would look at them as recurring. But given that, you know, the growth in our sales, excluding PPE to specifically answer your question, really is directly related to the continued improvement in the underlying market, having that patient traffic grow from, you know, 80% to a higher number. Given that we're not making predictions on that, it's hard really to specifically answer, but that's the correlation that we're looking for. Also, I would say that, you know, while we're not giving specific margin items, you know, we did note at least a couple of things in the call that negatively impact margin. One is stranded costs that we did say will be $10 to $12 million for the current year for 2021. And we, you know, Stanley did describe our investments in GEP or GEP that's also included in that guidance. So, you know, I think as the year goes on, Jeff, we'll try to give, you know, even greater guidance, but we really felt that doing at least a floor for guidance was better than doing nothing.

Yeah, understood, and that's helpful, Steve. Thanks. And maybe just as a quick follow-up, you know, you guys haven't officially confirmed your return to supplying Heartland Dental at the start, I guess, of April at the start of the 2Q. Our checks seem to suggest that is going to happen, though. So, one, can you confirm that? And then, two, as we think about the moving parts, I know you've supplied them even over the last few years with some consumables products, some technology products. there might be a change going on on the implant side of that relationship a bit. But as I put all that in the blender, do we think of Heartland adding maybe a couple hundred basis points to your North American dental revenue growth over the next three quarters, the last three quarters of this year? Thanks.

Yeah, so maybe I'll start and Stanley could jump in. So, you know, first, yes, we can confirm that we've won the Heartland contract. We typically don't provide details on customer activity, so that's why we didn't put out a press release, and we don't intend on putting out a press release. But in direct response to your question, we can confirm that we have won the award. There's a transition period, so we still haven't started shipping product to Heartland. It'll be later in the quarter. But given, again, that we don't provide specific customer activity, I'm going to limit it to that, Stanley, unless you have any other commentary.

I think that is correct, Stephen. We have had a relationship with Heartland for decades, ranging from supporting their software needs, practice management needs, and other software applications that we provide, In addition, we do provide certain specialty products to Heartland. We have done that for a while. And we continue to expect to grow that relationship, as well as, I might add, other relationships in the DSO space and in the medical world on the IDN space. But we made a decision some years back to not report every time we add a new account. I think this becomes very complex and difficult. So the bottom line is we do expect to continue to grow our business with large accounts in dental and medical. Thank you.

Our next question will come from the line of Glenn Santangelo with Guggenheim.

Yeah, thanks. Good morning. Thanks for taking my questions. Hey, I just want to follow up on the questions regarding the guidance. You know, Stan, if I heard your comments, you pointed to the ADA survey suggesting that volumes – in North America seem to be at 80% pre-pandemic levels. And I'm just trying to reconcile that to a consumable number that Steve just pointed out, you know, was up 0.4. I mean, just thinking about volumes being down 20% and your consumable numbers sort of being up, how do you sort of reconcile those two? And then, you know, I'll ask my follow-up up front. As we think about the $3.51 floor, does that just kind of assume no change in visit behavior? So, you know, if we continue to monitor these ADA surveys as kind of like a baseline, we're assuming no meaningful improvement from those levels in that 351? I guess that also assumes that the elevated sort of medical sales continue, as you just suggested, Steve, to kind of is also embedded in that $3.51. Sorry, I know there was a lot there to unpack, but I'll leave it there. Yeah.

The question you're asking is key, and I think we should provide some clarity. Sometimes it's hard to do good. And the bottom line is the analyst estimates are all over the place. So what we decided to do was to provide a floor. That's by no means guidance in the traditional sense. We're not providing ranges, as Stephen noted. It's a floor, number one. Number two is we do expect the visits to physicians and to dentists to continue to grow. We do expect, therefore, that our consumable business will grow, go back to 90 levels and grow a little bit above that too. The same with our specialties and, of course, our software and other value-added services. We do expect Henry Schein's Programs in general, OneShine, the way in which our sales organization relates to our customers, all of that to continue to perform well. Having said that, we are in the midst of a pandemic, and so it's hard to provide solid guidance in the sense that we offered in 2019 and before. So we decided to give a floor, which we're pretty comfortable with, Actually, we're quite optimistic about the business. And if we just had a look at 2000 in the first quarter and we had to stop things now, I would say we're very optimistic. Having said that, we can't tell where this pandemic is going to head. No one can tell. And just like a year ago, we cautioned investors about the pandemic. We're doing the same now, although we're a little bit more confident today than we were in February and March of 2020. What we're saying is we're comfortable with the floor, the guidance we've given. We just can't give ranges. And, yes, we believe our consumable business, our equipment business, our software business, our specialty businesses are all poised to do well. And if the music stopped today, we think we'd have a very good 2021. But, again, we can't tell where this is heading. I must say, though, that as one goes to the east and then comes west, Things are getting better. Our Asia businesses are pretty much back to normal, doing quite well. Asia Pacific, Europe is okay, except for the UK, where hopefully the reimbursement of Dennis will encourage reimbursement for Dennis to see more patients again. And in the U.S., it's pretty stable, both in dental and medical. And we're hopeful that the 80% will start going back to normal to the to the 2019 levels as the year goes by. But exactly in which quarter, it's very hard to tell. All I can say is we are and we continue to be very optimistic about our business and are very pleased with the performance so far this year.

Yeah, let me just add one thing, Glenn, on one of your questions. You know, you asked, well, if patient traffic is 80% and you're up 0.4% ex-PPE, you know, what's the reconciliation? And remember, it's patient traffic that the ADA measures. It's not procedures. And we do believe that part of the reason why is that there's a higher acuity of procedures being done today than typically. um so there's more tooth restorations there's more implants there's more again of the higher procedures that generally cause a higher level of consumable products things like trophies and general examinations as a percentage of the total procedures is not as high so that so the the type of procedure being done is helping us with that and just to quickly add on one of your questions. We're really not assuming much market improvement in that floor guidance because, again, we would not know when to assume it, and there's still a lot of uncertainty on when it improves. So there is potential upside if the market improves quicker because we really don't have that in our guidance at this point.

Okay. Thanks for all the comments.

Okay.

Your next question comes from the line of John Block with Steeple.

Thanks, guys. Good morning. Maybe I'll ask both mine up front in the interest of time, sort of one for each of you. Stephen, for the gross margin pressure of roughly 300 bps year over year, is there a way to think about what's attributable to inventory and adjustments and lower supplier rebates? Because I think most of that, per your commentary, is unlikely to reoccur in full if you would in 2021. And, Stanley, for you, just some thoughts on dental equipment in 2021. You know, it's always a volatile product line, but how do you see demand shaking out this year? And then what about priorities or preferences from the dentist? In other words, you know, what's their highest demand equipment items considering the COVID backdrop? Thanks, guys.

Stephen, you want to go first? Sure. So, John, you know, we haven't given specifics on the supply of rebates and the inventory adjustments yet. So we just don't feel it's appropriate to go there. But you're right in that a lot of that negative margin is not expected to reoccur in 2021. Now, supplier rebates are a little bit fuzzy now because setting targets in this environment is difficult. So we're trying to be conservative in our outlook with that. But the inventory adjustments I can't say there'll be zero, but there'll be much less than what we've seen in the last quarter or two. So hopefully that helps you.

Just to add on to what Stephen said, on the PPE adjustments, we made a decision in April to respond to the government's request to move, as we were part of the HHS, before that the FEMA task force, And we responded by literally emptying our warehouses and providing PPE to hospitals in hotspots. These are not our normal customers. I'm not talking about a lot of money in terms of sales, but we had to replenish this product at higher prices, including significant freight costs. We made a decision as a company to provide PPE products to our customers at as low a price as we could possibly do that. And so at the end of the day, we provided, I believe, great customer satisfaction while following through on the government's call, and I'm referring to the United States, for a request to empty our warehouses on PPE and send it to those areas, those hotspots that were the most challenged. This did have an impact on our 2020 margins for PPE and in general. But as Stephen said, I think that is largely behind us, but I do believe the history books will tell. We made the right decisions from a morality point of view, and we are a higher ambitions company, and we made the right decision from our customer's point of view, number one. Number two, on equipment. We had almost a perfect storm at the end of 2020 in North America. This particular situation did not occur outside of North America, where we did experience good consumable, by the way, and, of course, equipment growth. In the United States, and I'm not referring to Canada now, but specifically relating to the United States, we do report our North American numbers, but in the United States, for equipment, dense placerona world went virtual, which has been historically a terrific opportunity for us to generate business. We believe that we will generate that business largely in the first quarter and to some extent in the third quarter. We had a key supplier of traditional equipment exit the market and that product that was ordered from that supplier through us, of course, could not be satisfied fully by the existing manufacturers who have brought their production up to speed and we expect, again, for that to be satisfied in the second and third quarter. And then there's the whole issue of whether dentists should have purchased equipment in the fourth quarter or not. Given that their incomes were largely down, being that 80% of dentists in the United States were out of their practices in the second quarter, their earnings were not great. And with the expectation that tax rates will go up in 2021, there was quite a bit of deferment of purchases of equipment from the fourth quarter to the first quarter. Taking that all into account, I think we are quite optimistic about our North American equipment business. U.S. business, Canada was a little bit different. It was good in general because these variations, these perfect storm variations did not apply in Canada. As to the areas of sales that we expect, I think the traditional business chairs, units, lights, as reported in prior quarters, is still an area where dentists are investing. I would say that the imaging area is an area, although pricing, as we've said in the past, has come down somewhat. And yes, the whole area of DI and chair-side full milling of crowns and bridges will all be areas where we expect decent growth in 21 and beyond. So, Karen, do we have more time for questions? I think we're running out of time. But we can go over a little bit since there's a lot going on.

Yes, Stan, we'd like to take another question. Thank you.

Our next question will come from the line of John Krieger with William Blair.

Hi. Thanks very much. Stan, maybe to go back to some of your strategic planning comments, can you just give us a sense about as you guys get more stability in the business and sort of look beyond COVID, where you're most interested in expanding? For example, any interest in sort of taking medical more aggressively beyond the U.S.? Maybe new technologies or new specialty brands? Just give us a sense about where you'd really like to expand in the next few years.

Sure. John, thank you. Very good question. Of course, we want to continue to grow our traditional distribution business globally. And that's dental, where we are in most of the developed world. and in some markets in the developing world. The developing world is growing in that area in the oral care area. So we will expand our footprint. We will drive efficiency in that business and expect to increase our margins in general on the distribution side, both in dental, as I noted now, in dental, but also we are expanding our medical business abroad. We did not focus on our international medical business until about a year ago, 18 months ago, because we had so much going on in the U.S. But we have taken our small medical business in Europe, added resources to it, and we'll be adding more resources to it in the future and expect, of course, the medical distribution business to go beyond the U.S. and Europe, expanding in Canada, where it's very small today, and in other markets. At the same time, specialty products will be important for us, In dental, we expect to continue to grow. We've done very well in implants. We've done very well in endodontics. And we have a very good foundation in orthodontics. We had a peculiar fourth quarter, again, a perfect storm. We had a manufacturer exiting that market, and so we had to replace those products from elsewhere. And we had a move in our distribution center around the end of the year. That will all catch up. And so those are the areas we want to invest in, expanding our specialty platforms around the world. Of course, Henry Schein One is a huge opportunity for Henry Schein. We're investing in that area. We're very, very pleased to see the pickup in SaaS products, in cloud-based products. Of course, it does impact sales, but in the long run, it's a very profitable business. and we've done very well with our SAS product. We're investing in that too. And then when it comes to medical devices, we expect to expand in that area, in specialty devices. We already are a player in orthodontic sores, sorry, orthopedic sores, and expect to increase that platform as well. So I think it's about global expansion in our core business, in our specialty businesses, adding to those platforms that we have, and also in the technology areas. So we have our dental distribution, our medical distribution, our practice management technology and other value-added services platforms, and, of course, our specialty products. All of these are areas where there's great opportunity, and strategic planning, John, as you know, is not necessarily about what you can do but what you want to prioritize on. So we have a lot of options. Very excited. We have the best management team, I would say, in the company's history from a capabilities point of view of expanding these various platforms we've developed and are very excited about the future.

Very helpful. Thank you.

We have time for one last question. Our final question will come from the line of Jason Bednar with Piper Sandler.

Yeah, good morning. Thanks for the questions. I want to touch on some of the stronger pieces from the quarter here to close things out, and I'll ask them both up front. The international dental consumables core growth is really strong. Stanley, I know you talked about that. But just what are your confidence in this momentum persisting going forward and to what extent there's maybe some kind of demand that's supporting some of this growth versus core growth being reflective of maybe rising demand in some of these international markets? And then just pivoting also to medical and the COVID testing revenue, $270 million is a big number for the quarter. But curious how you're factoring in price adjustments that are expected from the manufacturers in this market and future testing volumes, just really how you're planning for these cross-currents this year. Thank you.

There are two very good questions. Again, a lot of good questions on this call, I might add. So international, we continue to expect our international business to grow. Internal growth, of course, we will add some acquisition growth, as we've done in the past. It's hard to predict a quarter increase. I think one has to look at the trend for several quarters. But over several quarters, I think we are quite confident that we will grow our consumable and equipment businesses outside of North America, including Canada as part of the U.S., as part of our North American numbers. So I think it's fair to say we expect to grow our global consumables and equipment business in a particular area. are very enthused about our international business. On the testing, so we had a shortage of, believe it or not, even with these good numbers, of tests in the point-of-care quick test arena. We believe the testing is now, there's more testing available to us. The DPAs have, I wouldn't say been completely satisfied, but there's more product available for us than in the past. and I'm referring to COVID testing, but also other tests, flu tests, et cetera. So I think it's fair to say that the price of these tests will come down because the larger machines that were used in the earlier stage will be replaced. Those tests, a large number of those tests will be replaced by SNAP tests with a lower cost per test. Having said that, the demand for tests is likely to grow in our view, and in particular, they'd be more available for our channel, which is the office-based practitioner environment and the workplace health environment. So, in general, we think with the opening up availability, the price coming down, but at the same time, the demand growing, we expect to have a good 2021 in tests. Of course, there's no way we can talk about any specific numbers because we don't know exactly, but we built in our plans a fair amount of PPE sales and of testing sales. So these are two growth areas for us that will grow as compared to 2019. Thank you for that question, and thank you for all the questions.

I'll hand the conference back over to Mr. Bergman for any concluding remarks.

Yes, thank you, operator. Thank you all. I'm sorry we went over today, but there was a lot in this call that we wanted to cover, a lot of unusual situations. Bottom line is we're quite optimistic about the future. Of course, no one can predict exactly where the virus is heading, although I think it's fair to say we will not go into a situation again where dental practices will be closed down and physician practices and ambulatory surgical centers will be closed down. If it gets worse, the virus, I think there'll be more precautions, but I can't see a total lockdown as occurred in the second quarter. Of course, as our investors know, we powered down significantly in the second quarter and powered up very quickly in the third quarter. This did cost us a lot. It certainly probably cost us a little bit of market share, but I think we've gained that back and some more. So overall, I would say we did the right things in 2021 from a cash preservation point of view, taking care of our team as the number one priority. And of course, in parallel with that, ensuring that our customers' service needs were taken care of, while at the same time, in particular, ensuring that PPE was made available to our customers at reasonable prices. Of course, the prices went up significantly, but we kept prices to a large extent within the range of what it cost us, rather than passing on unusual profits that we could have gained, and I think this will pay off in the long run with trust from our customers, and in the end, I think Henry Schein has come out of this COVID period as a much stronger company in terms of brand recognition and appreciation of what full service does in the dental and medical market for our customers. So with that in mind, I have to say we're pretty optimistic about the future, although we are in this pandemic environment. Our plans will be finalized. There's a wide array of opportunities. We are operating right now under an interim refresh plan for 2021, but by the end of this year, we will firm up the key areas of focus and I think we will in turn do well for our investors. We feel very comfortable. I will end with this comment. This year is our 25th year as a public company. We've had EPS compounded annual growth at a rate of 12% and stock appreciation at a rate of 12% during this period. We are a company that provide stability, and we believe that we're in good markets with a great team. Thank you very much, everyone, for participating in this call today.

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