Henry Schein, Inc.

Good morning, ladies and gentlemen, and welcome to the Henry Schein Second Quarter 2021 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 touchtone 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's Vice President of Investor Relations Please go ahead, Carolyn.

Thank you, Regina. And thanks to each of you for joining us to discuss Henry Schein's results for the 2021 second quarter. With me on the call today are Stanley Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein, and Steven 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, August 3rd, 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 that we have allotted for the call. With that, I would like to turn the call over to Stanley Bergman.

Thank you, Carolyn. Good morning, everyone. And, of course, thank you very much for joining us today. We are most pleased to report record second quarter financial results as we continue to execute on our key strategies. Strengthening demand in the global dental and medical markets drove strong year-over-year increases in sales versus the prior year when a significant number of dental and medical practices suspended activity because of the COVID-19 pandemic. Notably, compared with pre-COVID-19 data, the environment of the second quarter of 2019 to be specific, Henry Schein's worldwide internal sales in local currencies increased by 15.2%. So if you go back to the second quarter of 2019, you will see that Henry Schein's worldwide internal sales growth in local currencies increased by 15.2%. in 2021, again compared to 2019. We are also pleased with operating margin expansion that reflects a favorable product mix as well as operating expense leverage. As we continue to invest in our business to supplement solid organic growth, we've completed several acquisitions during the second quarter of 2021 across the dental and technology and value-added services businesses with aggregate annual sales of approximately $60 million. Our capital allocation strategy also includes share repurchases as a means to deliver value to our shareholders. Stephen will provide greater detail on the approximately $113 million spent in the second quarter as part of our board-approved share repurchase authorization. While the number of new COVID cases has risen in certain geographies, To date, we have not seen a material impact on patient traffic. Rather, practice visits have continued to improve as offices are generally open. Data for the end markets we serve points to continued global improvements as economies recover across the globe. The most recent American Dental Association data shows current patient traffic at 88% of pre-pandemic levels, which we believe may under-represent volume in certain practices. We've also seen other industry survey reports that show practice volumes either consistent with or slightly better than pre-pandemic levels. I will also note that Henry Schein 1 billings associated with dental claims processing are currently above the 100% pre-pandemic levels, in line with increased restorative and dental specialty procedures which are driving greater practice purchases. So the overall global market recovery and our improving financial results have continued. We believe dental patient traffic in the U.S., Australia, and New Zealand is close to or above to 2019 levels, and we are also seeing improving patient traffic in Canada, Europe, Brazil, and Asia with higher numbers in certain specific European countries. That said, in markets in certain geographies continue to face challenges due to the ongoing pandemic. Patient traffic in the United States physician offices and ambulatory surgical centers is improving as we approach more normalized practice operations. With solid execution in the first half of 2021 and a favorable outlook for the remainder of the fiscal year, today we are raising our guidance for 2021 non-GAAP diluted EPS from continuing operations to be at or above $3.85. Let me stress, this is representing a floor for the fiscal 2021 year. So we continue to monitor any potential impact to our business as a result of COVID-19, particularly as certain US states and some international geographies are experiencing an uptick in diagnosed cases, especially among those unvaccinated. And we're, of course, optimistic that the vaccination rate will go up. With these opening comments, I'd like to hand the call over to Stephen to discuss our quarterly financial performance and provide more detail on our guidance. Then I'll be back to provide additional commentary on the current business conditions in our markets and our thoughts going forward. So, 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 operation on an as-reported GAAP basis and on a non-GAAP basis. Our second quarter non-GAAP results for 2021 and 2020 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 Q2 that represents prior year sales to CoBetris under the transitional services agreement. This concluded in the fourth quarter of 2020. While the agreement has ended, these sales are still reflected in the prior year comparative results. In addition to these comparisons with the prior year, I will also be comparing some key metrics with Q2 of 2019, given the height of impact of the pandemic on our business occurred in Q2 of 2020. So turning to our financial results, total net sales for the quarter ended June 26, 2021, with $3 billion, reflecting growth of 76.2% compared with the prior year period. Internally generated sales were up 65.5% in local currencies. And compared with the pre-pandemic second quarter of 2019, internal sales in local currencies increased 15.2%. The details of our sales performance are contained in Exhibit A of our earnings press release, which was issued earlier today. Note that on Exhibit A1, It also contains details of our sales performance compared with 2019. On a GAAP basis, operating margin for the second quarter of 2021 was 7.09%, reflecting an increase of 753 basis points compared with the prior year and an increase of 46 basis points compared with 2019. We are pleased with our operating margin performance in the second quarter. And on a non-GAAP basis, our operating margin of 7.21% increased by 671 basis points compared to the prior year, and an increase of 9 basis points versus 2019. You can find a reconciliation of our GAAP operating margin to non-GAAP operating margin also in the supplemental information page of our investor relations website. Turning to taxes. Our reported GAAP effective tax rate for the second quarter of 2021 was 23.4%. That compares with only a 5.9% GAAP effective tax rate for the second quarter of 2020. And on a non-GAAP basis, our effective tax rate was also 23.4%. Note that on the prior year, the non-GAAP effective tax rate was impacted by the pre-tax loss. A reconciliation of the GAAP effective tax rate to non-GAAP effective tax rate is available in the supplemental page, also on the investor relations page of our website. We expect the effective tax rate to continue in approximately the 25% range, both on a GAAP and non-GAAP basis for the remainder of the year. And of course, that assumes no changes in tax legislation. Moving on, GAAP net income from continuing operations attributable to Henry Schein for the second quarter of 2021. was $155.7 million, or $1.10 per diluted share. This compares with the prior year GAAP net loss from continuing operations of $11.4 million, or a loss of $0.08 per diluted share. On a non-GAAP basis, net income from continuing operations for the second quarter of 2021 was $157.3 million, or $1.11 per diluted share, and this compares to non-GAAP net income from continuing operations of $0.6 million, or really zero cents per diluted share, for the second quarter of 2020. Amortization from acquired intangible assets for Q2-21 was $30.1 million pre-tax, or approximately 13 cents per diluted share. This compares with $24.8 million pre-tax, or 11 cents per diluted share, in the same period last year. For the first half of 2021, amortization from acquired intangible assets was $59.8 million or 26 cents per diluted share. This compares with $51.6 million pre-tax or 23 cents per diluted share in the same period last year. I'll also note that foreign currency exchange positively impacted our Q2 2021 diluted EPS by approximately 3 cents per share. Let me now provide some detail on our sales results for the quarter. Our global dental sales of $1.9 billion increased 102.9% compared with the same period last year, with internal sales growth of 87% in local currencies. Compared with Q2 2019, internal sales growth in local currencies was 12.1%. Global dental consumable merchandise internal sales increased by 90.5% in the second quarter of 2021 versus the same period last year, and excluding PPE and COVID-related products, the sales increased with 96.2. When comparing it to Q2 of 2019, internal sales growth in local currencies increased 13.7% or 7.9% excluding PPE and COVID-related products. We experienced broad-based consumer merchandise sales growth in both North America and in our international businesses, particularly in the US, Canada, Europe, Australia, and New Zealand, Brazil, and Asia, with solid overall sales growth compared to 2019. In Europe, we saw particular strength in dental consumable merchandise sales in France, Germany, Austria, Belgium, the Netherlands, Italy, Poland, and the UK. North American dental internal sales growth in local currencies was 105% compared with the prior year, and 9% compared with Q2 2019. North American dental consumable merchandise sales in local currencies increased 112% compared to Q2 2020, or 119% excluding PPE and COVID-related products. Again, however, compared with Q2 2019, this growth was 11.5% or 4.8% when excluding PPE and COVID-related products. Our North American dental equipment internal sales growth in local currencies was 82% versus Q2 2020 and 0.4% versus Q2 2019. Sales growth was modest compared with the second quarter of 2019, primarily reflecting delays with certain U.S. manufacturers of chairs, units, and lights, resulting in longer lead times to our customers. We also experienced softer CAD CAM sales growth compared to the same period in 2019, as we have seen more customers recently purchase scan-only solutions versus full chair-side solutions. Longer term, we believe a large number of these customers will ultimately by a full chairside system. At this time, we believe the potential impact to some U.S. traditional equipment sales resulting from the supply chain challenges will also affect the second half of 2021. Further, we believe that the Q4 impact will be greater than the Q3 impact as we expect to satisfy equipment orders with existing inventory as well as incoming inventory in the current quarter. At this time, though, it's important to note we are not experiencing any meaningful lead time challenges in high-tech equipment, including imaging, handpieces, and sterilizing equipment. Based on our view today, some traditional orders placed in Q4 for U.S. practices are more likely to be installed in the early part of 2022 due to the extended manufacturer lead times and construction delays at practices. Just as a reminder, we recognize sales for capital equipment orders at the time the equipment is installed versus when the order is placed or other times. International dental internal sales growth in local currencies was 64.9% versus Q2 2020, and 17% compared with Q2 2019. The international dental consumable merchandise internal sales in local currencies increased 64% versus Q2 2020, or 70% excluding PPE and COVID-related products. Comparing to Q2 2019, internal consumable merchandise sales growth in local currencies was 17.2% or 12.6% excluding PPE and COVID-related products. We also reported strong equipment growth in our international markets, mainly because there were no significant manufacturer delays. International dental equipment internal sales growth in local currencies was 66% compared to Q2 2020 and 16.6% compared with Q2 2019. We reported strong dental equipment growth internationally with particular solid performance in France, Italy, and Australia. Our global dental specialties revenue in the second quarter was $235 million. with internal growth of 91% in local currencies versus the prior year and growth of 14.0% versus 2019. Growth in North America was 119% year over year and 15.1% versus Q2 2019. Internationally, dental specialties internal sales growth in local currencies was also strong at 44.8% versus Q2 2020 and 11.5% versus Q2 2019. Growth was strong in each of our dental specialty categories, including implants, oral surgery, and orthodontics, with all three businesses doing well in both North America and internationally. Turning to our global medical sales during Q2, they were $904.8 million, an increase of 46.5%. compared with the same period last year, including an internal sales growth of 43.5%. Compared with Q2 2019, internal sales growth in local currencies increased 27.2%. The internal sales growth in local currencies increased 44% in North America compared with Q2 2021, and 27.1% compared to Q2 2019, while international sales increased 15.9% versus 2020. and 31.2% versus 2019. Our medical sales experienced broad-based growth compared to 2019, including growth in medical surgical equipment and laboratory product sales. Excluding PPE and COVID-related product contribution, global medical sales and local currencies increased 39% compared with 2020 and 7.8% compared with Q2 2019. I'll also note that we sold approximately 75 million in COVID-19 tests in the second quarter of 2021, and that includes multi-assay flu and COVID-19 combination tests. This compares with a higher number of $180 million in test sales in the first quarter of 2021. As we previously commented, we expected COVID-19 test sales to continue to moderate. And while our PPE sales in both our dental and medical businesses have declined since the onset of COVID-19, we expect demand to remain at elevated levels. Technology and value-added sales during Q2 were $152.1 million, an increase of 44.5% compared with the prior year, including internal growth of 33% in local currencies. Internal sales growth in local currencies increased 10.1% for the same period versus 2019. In North America, the technology and value-added services internal sales growth was 30% in local currencies and 10.6% versus 2019. Our Henry Schein I business performed well in the second quarter, as did our financial services businesses, which was driven primarily by practice transitions revenue. Internationally, the tech and valuated services internal sales increased 54% versus the prior year and 6.9% compared with 2019. We continue to repurchase common stock in the open market during the second quarter, buying approximately 1.5 million shares at an average price of $72.98 per share, and that totaled approximately $113 million for the quarter. The impact of the repurchase of these shares on our second quarter diluted EPS was immaterial. At the end of the second quarter, we had approximately $400 million authorized and available for future stock repurchases. Turning to our balance sheet and cash flow, we have access to significant liquidity, providing flexibility and financial stability. Operating cash flow from continuing operations for the second quarter of 2021 was $158.4 million. That compared to negative operating cash flow of $91.6 million for the second quarter of last year. This year-over-year increase was primarily due to increases in net income and lower investment in working capital. As part of our previously disclosed restructuring initiative, we recorded a pre-tax charge of $604,000 in Q2 21, and that did not have any significant impact on our earnings per share. I will now conclude my remarks by updating our 2021 non-GAAP diluted EPS guidance. At this time, we will not be providing GAAP diluted EPS guidance as we are unable to provide without unreasonable effort an estimate of costs related to the ongoing restructuring initiative, including the corresponding tax effect. Once again, We are raising our guidance for 2021 non-GAAP diluted EPS from continuing operations attributable to Henry Schein, which we now expect to be at or above $3.85. Bear in mind, this represents a floor for guidance. This compares with the previous guidance for non-GAAP diluted EPS, which was a floor of $3.70. Our guidance for 2021 non-GAAP diluted EPS attributable to Henry Schein It's from continuing operations as well as completed or previously announced acquisitions and does not include the impact of future share repurchases, potential future acquisitions, if any, or restructuring expenses. Guidance also assumes that foreign exchange rates are generally consistent with current levels and that end markets remain stable and are consistent with current market conditions. The guidance also assumes there are no material adverse market changes associated with COVID-19. With that summary, let me now turn the call back over to Stanley.

Thank you very much, Stephen. We believe Henry Schein's leadership positions in the global dental and medical distribution businesses serve as an excellent foundation to continue to expand our wide range of value-added solutions and services, as well as our specialty products for practitioners, including self-manufactured products. We are focused on gross profit growth, outpacing operating expense growth over the long term as we expand our mix of high margin products and leverage efficiencies across our business, in part through one shine and one distribution strategies. These strategies were discussed in the last call and happy to discuss them further on this call. We believe we remain on the path to achieving our increased long-term profitability goals. In fact, we are very pleased with the performance of the business all round. We do expect to build on our track record of continued EPS growth, compounded EPS growth, with our 103rd quarter as a public company. In fact, looking at results for 2020, our high margin businesses which are comprised of technology and value-added services, and the dental specialty businesses, represented approximately 12% of worldwide sales. It's already contributed over one-third of our GAAP and non-GAAP operating income. When looking at the components of our high-margin businesses, technology and value-added services, including Henry Schein I, comprised about 5% of worldwide sales in 2020 and approximately 15% of worldwide operating income. On the dental specialty side, this comprised about 7% of worldwide sales in 2020, along with approximately 20% of worldwide operating income. Let's go a little bit deeper into the dental distribution business. we delivered excellent dental revenue growth during the second quarter, driven by sales of both consumable merchandise and equipment, and more specifically, consumable merchandise sales in North America, and our international markets experienced double-digit growth compared with 2019. So both in North America and our international markets, we experienced double-digit growth, it's internal growth, during 2019. Stephen discussed the state of supply challenges for the U.S. traditional dental equipment business. We expect lead times to eventually normalize, and we'd like to stress that it is important to take a look at our equipment business over a few quarters and not one specific quarter. So, for example, in the North American market, our dental equipment local currency in the first quarter was 17.4% growth So it is important to look at the dental equipment growth over a couple of quarters, and we remain very optimistic and actually enthusiastic about our dental business, equipment business, in the United States, in Canada, that's our North American business, as well as globally. What we hear, and we continue to hear from dentists, is that practice revenues are are improving, and practitioners plan to invest in technology solutions that promote more accurate diagnoses and treatment planning, and of course, workflow efficiency. As noted in both North America and to some extent internationally, we are seeing stronger sales of stand-alone digital scanners versus the full chair-side systems, as dental and dental laboratories are carefully managing capital equipment purchases while still committing to investing in digital dentistry. I encourage investors to remain focused on the long-term prospects, in fact, even the medium-term prospects and trends that we believe will come from advancement of the digitalization of dentistry. So let's take a brief look at our dental specialties businesses, a category which is now has sales annualized at over $900 million. As Stephen noted, total global dental specialties performed extremely well with double-digit internal sales growth versus 2019 as we further penetrate these key dental specialty markets, both domestically and internationally. We also had a number of key strategic developments in each of our dental specialty product categories during the second quarter. Our implant and oral surgery businesses, which of course include bone regeneration products, implants and bone regeneration products, is the largest of our global dental specialty businesses, and we continue to deliver new solutions as we seek to increase share in key dental markets. For instance, in the U.S., we recently launched our Progressive COLOG implants with multi-unit prosthetics addressing the full arch market. We also expect to introduce our fusion implant solution to enhance our offering for the valued price segment to the implant market. This complements our line of Medentis value implants, which have been very successful, particularly in the duck region. Our implant strategy is focused on providing a broad set of solutions to address various customer pricing requirements while providing high quality clinical solutions. We believe we're in a unique spot of providing value. In other words, the price quality equation works well for dentists in many parts of the world, specifically in the U.S. and in Europe. a particular focus in the DACH region, but now also gaining a foothold in Asia as well. Each of these enhancements is underpinned by our investment in differentiated technologies for high-value, high-quality implant treatment. By the end of the year, we also plan to launch a new line of next-generation bone tissue augmentation material. Let me just now turn to the endodontic business. where growth in the second quarter was driven by a strong performance overall, but specifically with large accounts and sales in the international markets. Our core file and bioceramic portfolio continues to be well-received globally, with particular strength in North America and Europe. In the orthodontic market, we are pleased with our reveal clear aligner progress as we continue to enhance our platform and expand internationally. Today, we offer aligner solutions in 26 countries and continue to broaden reach with the recent launches in France, Poland, Ireland, Italy, and Spain. We are providing customers with flexibility in their choice of integrated solutions, reveal integrates with both 3Shape and PlanMaker scanners, and soon with the Densply Serona scanners. Looking ahead to enhancements in our clear aligner development, we are preparing to launch an update to our Studio Pro software in the U.S., which will bring advanced treatment planning and visualization tools that help dentists effectively scan and treat patients with a launch internationally in 2022. We are currently expanding our DDX practice to lab workflow platform with integration between Ortho2 and our Dentrix practice management software that will stream, reveal clear aligner integration, and enhance practice efficiency. We also expect this integration will be available for our Dentrix Ascend cloud-based software solution by the end of the year. In addition, this summer, we will begin supplementing our manufacturing of aligners with a new North American manufacturing facility to ensure even faster delivery times to dentists in the United States. And we are also working with Henry Schein 1 and dentalplans.com to expand promotion of Reveal clear aligners to patients. The dental plans direct-to-consumer platform is quite effective. Our global dental specialties businesses are seeing continued strength in high-acuity procedures across many of our key markets, in addition to traditional oral care procedures. Let me now turn to the technology and value-added services business. Sales continued to improve from early days of the pandemic when patient traffic was hardest hit. During the quarter Henry Schein won, the largest contributor to sales in this business reported record high quarterly revenue. In particular, we saw solid growth across the board with the Dentrix Enterprise, Dentrix Ascend, DemandForce, DentalPlans.com solutions. We are focused on migration to the cloud and our cloud-based solutions to create flexibility and scalable services. In the second quarter of 2021, we recorded solid growth in the adoption of Dentrix Ascend our cloud offering versus the second quarter of 2020, and quite a bit compared to 2019 second quarter, too. In fact, sales of Ascend increased faster than traditional dentric sales when compared with both periods. We continue to invest in analytics and patient marketing solutions to drive practice efficiency and patient engagement. and we continue to enhance our revenue cycle management capabilities. A key priority for Henry Schein 1 is to tightly integrate solutions so that practices have a unified solution suite and can simplify customer relations with Henry Schein. We are seeing that our customers have expanded the use of Henry Schein 1 patient engagement and communication technologies. Let me reflect. on our recently announced acquisitions related to expanding our integrated value added services offering. We are extremely excited about the prospects of our eAssist, Jarvis Analytics, and Dentale businesses. eAssist Dental Solutions is a developer of key leading virtual dental billing outsource services that will advance our mission to offer best in breed solutions to help dental practices operate more efficiently and profitability. Jarvis develops comprehensive business analytic tools to help dental practices leverage data to diagnose problems, strengthen decision-making, and improve business performance, particularly well-received amongst ESOs, but also now growingly amongst the midsize and smaller practices. Dentali is a cloud-based practice management company that offers an extensive suite of programs and services internationally that enable dental professionals to be more efficient and to improve their ability to deliver high-quality care to patients. Turning now to the performance of our medical business during the second quarter, we were pleased with a strong double-digit internal sales growth in local currencies, Trends in the physician, ambulatory, surgery center, alternate care, and home care markets all continue to improve. We believe our medical sales continue to outpace market growth. Please take a look at these sales, excluding COVID-type products. The internal growth of almost 8% is reflective of our growth in this market. As expected, sales of COVID test products have continued to decline, although let me point out that in July we did see a boost in demand. In the second quarter, infection rates, as I'm sure everyone on this call understands, generally subsided, and pricing also declined accordingly. But we are seeing somewhat of a reversal of that trend. Our reduction in sales of tests, COVID tests in particular, the other tests that we sell are all doing quite well. It was partially offset by sales of PP&E products, as well as other consumable and merchandise equipment to our medical customers. Generally, this business is doing quite well. We continue to expand our medical business beyond core distribution with differentiated solution offerings that service the low-acuity segments of the market, which, of course, is the most cost-effective setting for delivery of health care. Our outlook for PPE and demand in both dental and medical businesses remains unchanged. PPE sales have moderated from levels in the height of the pandemic, yet we expect demand to remain at elevated levels. While pricing will continue to moderate, we believe unit sales will be driven by new healthcare protocols that we do not expect will revert to lower pre-pandemic levels. We remain quite comfortable that from a unit point of view, our PPE sales will continue to remain at elevated levels. Before we end this call, I'd like to comment briefly on our progress with environmental, social, and governance initiatives that we're undertaking, so-called ESGs, an area of focus for Henry Schein now for decades, actually. It just wasn't called ESG when we started with these kinds of initiatives well over three decades ago. In May, we issued our latest annual sustainability report. Among a number of newly disclosed goals, we discussed our plans for compliance with global reporting initiative with the GRIs, and the Sustainability Accounting Standard Board in 2022. The next couple of years, we also plan to report in line with the task force on climate-related financial disclosure and to establish a science-based target. Recently, we hosted a panel with a number of ESG investors and analysts, also supply chain experts, and we participated in a panel hosted by IR Magazine discussing our work towards a diverse and inclusive workforce. You can find videos of these events as well as our CSIR report on our website. So, operator, we are ready to answer investor questions. Please. Thank you.

At this time, if you'd like to ask a question, simply press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of John Krieger with William Blair. Please go ahead.

Hi, thanks very much, Stan and Steve. Maybe, Steve, can you just talk a little bit about gross margins? Very nice improvement year over year, but I know it's still down from the levels of a couple years ago. What are your thoughts about how that metric trends in the second half and your ability to kind of get back to that close to 31% level? Thanks.

Yeah, John, we do believe that there is opportunity for a little bit of gross margin expansion. We did have some small inventory adjustments during the quarter, and I think everyone knows that supply of rebates is also lower than norm. So I would see an opportunity for some modest gross margin expansion for the balance of the year. And that will be driven, you know, by the elimination, again, of – inventory adjustments completely as well as a favorable mix as the higher gross margin businesses are growing faster than the others.

That's great, thanks. And then can you just clarify the supply chain challenges you talked about in basic equipment? So that's hurting North America but not Europe, is that correct? And why would that be?

Yeah, I'll start and then maybe Stanley will want to add some comments to that. So the manufacturers that we're buying from in North America are generally different for traditional equipment than internationally. So the delays that we're seeing from the traditional manufacturers of chairs, delivery units, and lights are impacted in North America and not internationally because of that. You know, it's hard to tell, John, how long this will take to – to be rectified by the manufacturers. It's related to raw materials that they're buying. We did say that we expected to continue for the second half of this year, but it's really hard to tell. Stanley, do you want to add any more color to that?

Sure, Stephen. Thank you, John. A very important question. Let me just be clear that this relates to one sector and relates to U.S. manufacturers, three in particular. are manufacturers of units, chairs, and lights. Firstly, we are seeing strong demand for general equipment, or equipment in general. And these particular manufacturers of these chairs, units, and lights are experiencing significant demand, firstly because of the elevated demand, but also because a manufacturer in this particular sector left the market. We are not experiencing any significant shortages in terms of supply on imaging equipment. In fact, we're doing okay in particular with 2D. There is no issue with delivery of CAD-CAM equipment at all, whether it's for scanners or the mills. And there are no issues with hand pieces, for example, sterilizers. available, may not be every brand and every quantity, but generally that's fine. Again, I do want to stress that when looking at equipment sales, please take a couple of quarters into account and don't look at one quarter in particular. And as I pointed out, this is a U.S. issue. Canada seems to be doing okay, and Europe is fine too. And our Australian and New Zealand business, which is quite active in equipment, also has an adequate source of product.

Thank you.

Your next question comes from the line of Jeff Johnson with Baird.

Thank you. Good morning, guys. Maybe one clarifying question, one question on guidance. Steve, just for clarification purposes, I think you gave a global medical organic growth versus 2Q19 XPPE in the same international dental consumables versus 2Q19 XPPE. Did you give that for North America dental consumables, just the organic growth versus two years ago XPPE? That number would be helpful.

Yeah, let me see if I have it handy. I don't think I did give it on the call. You know what? I don't have the exact number, Jeff, but the medical international business is very small. So it's very similar, the global number, to the North American number. but I don't have the specific number handy.

Yeah, I'm sorry. Steve, I was asking North American Dental Consumables, organic, ex-PPE.

Oh, North American Dental Consumables. Yeah, I think we did say that.

I heard a 9% number. I thought that was with PPE, though. Maybe I misheard.

Yeah, let me check. I thought you were referring to medical, so it's my mistake. Sorry.

Hold on.

Yes, so the North America, North America compared to Q2 2019, the total was 11.5%, and excluding PPE and COVID-related products was 4.8%.

That's all of North American dental or North American consumables?

That's consumables only. Yeah.

Okay.

Thank you.

Yep. And just kind of understanding guidance. So, you know, Steve, if I look at the first half of this year, you're up 40% or even more than 40% relative to the first half of 19. It sounds like structurally you expect PPE revenues this year to stay higher. even though they are coming down here a little bit sequentially, higher than past years. Dental seems like it's bounced back. You've got organic growth versus two years ago, both dental and medical. But your second half guidance, I understand it's a floor, but it implies kind of a 20% decline versus the second half of 19. And conceptually, I can't wrap my mind around how you could get anywhere close to it being down, let alone down 20%. So understanding that the floor is Can you just kind of help us understand why you're setting the floor at what seems to be a level that would suggest a pretty significant fall-off versus the second half of 19?

Well, we're not really projecting a significant fall-off. But, you know, there's a lot of uncertainties, a lot of moving parts. You know, similar to what we did in Q1, we gave a floor that we increased. We increased it 15 cents this quarter. I think there's opportunity for us with the momentum of the business to do much better than the floor. But right now, again, because of all the uncertainties, that's the way we're approaching it, Jeff. We see very good momentum in the business, but there's still a fair amount of uncertainty, so that's why we're preparing it the way we are. And hopefully if things continue, you'll see us continue to raise the floor if things continue well.

Fair enough. Thank you.

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

Thanks, guys. Good morning. I'm actually going to pick up where Jeff left off and maybe just take a different crack at it. The 385 you mentioned, a floor, but let me just sort of deconstruct it a little bit. It implies a 2H21 op margin of of mid-5% or so. You did high 7% in one age. And to John Krieger's question, you mentioned, you know, maybe stable gross margins are even higher. So you sort of run through the math, Steve. It implies op-backs of 24.5% in the back half of 21 pre-pandemic. it wasn't even that high, and that's off of a lower revenue base. So I know it's a lot to throw at you in moving parts, but just, you know, direction. Can you elaborate on if the GMs are flat to up in the back half, why would we see sort of such an amount of deleverage in the OpEx line, especially, you know, relative to pre-pandemic levels? And then I promise my follow-up will be shorter.

That's okay, John. Yeah, so I think you're looking at it the wrong way. We're not saying we're going to hit the floor. we expect to be ahead of that. So to do all your analytics at the floor, I think, is the wrong approach. What we just haven't said is how much above the floor we expect to be, and we haven't done that because, again, of all the uncertainties that are out there. So, again, I would caution you not to do the analysis the way you're doing it and just to take the floor as the balance of the year because we do expect to be above the floor, but we just haven't quantified how much at this point.

Okay, fair enough. That's on us. So maybe just to pivot, Stanley or Stephen, inflationary costs, anything that you're seeing on a labor perspective, and if so, are you able to pass that through and your ability to pass that through real time if that is something that you are experiencing? Thanks for your time, guys.

On the inflation side, we have experienced some inflation on branded supplier products. Of course, you do. material shortages and increase in labor. We've seen some price increases in PP&E products, although those seem to be moderating now. Our private label is seeing some price inflation. We expect that this will moderate. Companies are getting back into full swing, have a lot of Over time, they're incurring to catch up. So I think there's going to be some inflation. I think it's going to moderate, number one. Number two is we are passing a lot of this on to our customers, but where we see this as a short-term issue, we're not doing that. So we're not super worried, but there is some pressure here due to the supply chain and not quite being back to where it was in 2019. Container costs are up. As I said, overtime is being incurred by manufacturers. So I don't think it's alarming at this point. And if it were sustained, we would, of course, pass it on to our customers, but also work with manufacturers to contain this increase in costs.

Thanks, Elie.

Your next question comes from the line of Jason Bednar with Piper Sandler.

Hey, good morning. Thanks for taking the questions here. You know, Stan and Steve, you mentioned a belief that the shifting demand to scan-only options in the high-tech equipment side or the CAD CAM side and how you expect those units to upgrade to full CAD CAM capabilities in the future. Is that an indicator you're selling predominantly one manufacturer scanner over another or more a reflection of how you see the market evolving over time? And then do you sense the demand from dentists? Is it all being influenced by product positioning and promotions being offered by those manufacturers?

That's a very good question. There is clearly a shift to digital dentistry. We've called this out for years now. I'm not saying it is at standard of use to use a scanner, but it's close to it. And I think in certain practices, mid- value practices, say, and higher value practices. I think the public is expecting scan only. They've heard about scan only from friends and relatives. So we're moving clearly in that direction. There's still a huge number of dentists that don't have scanners, and there are also a number of dentists that have scanners that have an older version. So there is quite a movement towards scanners. And I think dentists are investing in these scanners right now. We are comfortable that these scanners will at some point turn into full chairside, including CAD-CAM, in other words, adding a mill, maybe a couple of quarters out, because dentists have a lot to spend money on now. But clearly the Chairside, clearly the scanner is getting a lot of focus now, and I think it's going to be the case for the foreseeable future. And the full mill program will also gain momentum. Now, we, of course, sell a number of major brand scanners and are growing with all our major brand scanners. There are one or two, one in particular that has a significant two actually market share from our point of view. They're all doing well. And there are fewer manufacturers of the machines, the chair side mills. And I think the market share relative between the one and the other of the two major ones who sell is about stable. The other area where we're seeing quite a bit of activity is with dental labs. We are the largest provider of dental laboratories products in the world, and labs are clearly digitalizing as well. So we're quite optimistic about this category, and I wouldn't read anything into this particular quarter. This particular quarter, we happen to have a very strong quarter in scanners, but I wouldn't view that as any kind of negative outlook on full chair-side mills, systems with mills.

All right, that's really great color Stanley appreciate that. Just maybe one really quick follow up on the supply chain challenges you're referencing the basic equipment side. I mean, this really sounds as you framed it up like a market wide issue at the manufacturer level in terms of sourcing materials, which would suggest that businesses simply just, you know, slipping into future quarters for you and others. But I guess just to clarify and to make sure I mean, is there at all business that's moving to competitive distributors?

No, no, no, no, no. On the contrary, our equipment business was very strong. Our backlog both in the United States or in North America and internationally is very strong. As I noted, there's one manufacturer that left the market in chairs, units, and lights. That capacity had to be filled. Plus, there is a demand in product. Dennis are investing in their practices, and so I see this as a demand increase coupled with a void that had to get filled, in particular with chairs, units, and lights. But I wouldn't need anything else beyond that, and we are very, very comfortable with our equipment business, which is doing quite well with small practices, mid-sized practices, and, of course, with the DSOs that are also investing heavily. So I want to read more into that than that. I'm referring to chairs, units, lights doing well, the imaging doing well, in particular the 2D. And on CAD-CAM, at least for this last quarter, the scanners did well compared to the full. But I think overall the full will also pick up. And in Europe, we are not experiencing these supply chain issues. and our equipment business is quite strong, again, with backlog, good backlogs in both the domestic and global markets. The equipment business is doing quite well.

Okay, that's all kind of what I figured. Really appreciate it. Thanks.

Your next question comes from the line of Stephen Valliquette with Barclays.

Great, thanks. Good morning, Stan and Steve. Thanks for taking the question. A couple things. I guess first, it's kind of hard to think back to Q2 2019 for the dental industry. It feels like eons ago. But just regarding the international dental equipment growth of 16.6% this quarter versus 2Q19, it seems like a pretty strong number given that 2Q19 was likely a tough comparison with the IDS trade show occurring in March of that year. I recall that Europe was strong in the second quarter of 19. I think Brazil was a drag for some reason. I just wanted to get your quick thoughts on that comparison. And also related to IDS, with the trade show set to resume in September of this year, are you assuming the normal bump in international dental equipment sales in 4Q21, or could it be more watered down just given the potential impact of COVID on the trade show dynamics? Thanks.

Yeah. I don't have any specific projections in front of me. I don't know if Stephen does or whether we disclose this kind of information. But generally, two things. One is please understand that equipment sales can be lumpy, number one. But number two is dental equipment purchases and demand in the markets we're in is quite solid. You do reference Brazil. We did exit a part of the equipment market in Brazil Essentially, we defocused certain manufacturers and have added other manufacturers. That was a one- or two-quarter issue. And our Brazil equipment, although not significant in the context of Henry Schein as a company, is doing quite well. But overall, I would say our equipment market is doing well. Dentists are investing in their practices. They want their practices to look and feel modern, Interest rates are helpful. Of course, when you look at all these numbers, you have to take into account tax situations. Who knows exactly what is going to be the tax situation for the fourth quarter of 2021 in the United States. But generally, I would look at the trend and the trend for equipment sales domestically. Canada makes up North America and internationally is quite solid. all around, and this particular supply chain issue will be dealt with, and these are quality manufacturers who will deal with the issue, and I expect to continue to see solid equipment growth in all categories going forward.

Okay. All right. Great. Thanks.

We have time for one last question from the line of Nathan Rich with Goldman Sachs.

Hi, good morning. Thanks for the question. Maybe Steve, to start, did M&A or FX have a significant impact on operating margins in the quarter? And then bigger picture, I mean, there's been, you know, looking at the last two quarters, a bit of volatility in the operating margin. And just how are you thinking about that trend for the back half of the year? Any thoughts you could kind of provide as we think about how to model that line would be helpful. And then Stanley, maybe turning to you, you highlighted the double-digit growth in North America consumables as well as international markets versus 2019. It'd be great to get your thoughts on what you think momentum will look like on the two-year basis in the back half of the year. And it sounds like there's still room for international markets to improve. I'd wonder if you could comment just on how far below baseline we still are in Europe and Asia. Thanks a lot for the questions.

Yeah, I'll answer the first question, then I'll turn it back to Stanley. Nathan, for the acquisition impact on Q2 negatively impacted our operating margin by 16 basis points. And I think people, just to remind people, the quarter you do acquisitions, you have deal costs, which drags the earnings down. Plus, typically, we don't get synergies immediately. It takes us generally a few quarters to get synergies and to improve the profitability of the acquired companies. But the impact was negative 16 basis points for the quarter.

So the question on our international business, I think the international dental markets are quite strong. Germany has been strong throughout this period. We did have a little bit of retraction there. But overall, it's quite strong. It's our biggest market in Europe, parallel in size and scope to our Canadian business. And it's quite solid. Implants have done exceptionally well during this period of time. It's very important to us, very profitable. I believe sell more implants in Germany than anyone else. Our prices are reasonable, by the way. And France has been solid. Italy and Spain recovered. UK is still in the process of recovering. Other markets, like the Netherlands, are okay. But we're not fully back in terms of visits, 100% back to where we were in 2019, I think, There are certain markets we are. We're close, but compared to the US where we think the patient visits are on average a little higher than 19, the data from the ADA doesn't contemplate exactly the right measurements for practices that are over 100% compared to 19 visits. Brazil has a high COVID rate, but we're particularly doing well. And Australia and New Zealand is pretty stable. But I would say in all these markets, there's still room to go to get back to 19 outside of the U.S. And Henry Schein clearly is gaining market share. We've been working very hard in Europe for a long time and believe we have an outstanding management team in Europe and internationally. as well. In Asia, we're growing. In Australia, New Zealand, and of course, Brazil, all with very good management team. I said very stable and dynamic and excellent management team, which is driving our consumables and equipment business, as well as our technology businesses. Our medical business is relatively small outside of the U.S., but is growing, added to management over there and investing in the business. So Overall, we're quite optimistic about our international business. Carolyn, so is that it?

Yes, Stan, we're ready for closing remarks.

Okay. Thank you, Carolyn. Thank you, Stephen. Thank you all for participating. I think you got the tone of the call, and that is we feel very good with the progress we're making. Our strategies... are being implemented. I wouldn't say every strategy is exactly the speed we want, but there are parts of the business that are exceeding expectations. And we're very optimistic about the future. I believe we have a very good management team in place. The strategies are good. We are putting the final touches to our 2022 to 2024 strategic plan. I would say more or less in line with what we've been focused on for the past few years. Of course, we had, like everyone, a bump in the road in 2020. But I would say largely recovered from that, although I think it is important, as Stephen outlined, to be aware that we are in the midst of a pandemic. So once that concern dissipates, I think we can even be more optimistic. But overall, the business is doing well. We're performing on our strategies. Management is highly motivated. The team in general is motivated. And the dental markets have recovered to a very large extent. And the medical market's almost there. So we believe that the growth in the alternate care sites, from our point of view, is the right place to be. And that's what we're focused on. And we're putting our capital to work I think in an intelligent way, splitting it between investments and stock repurchase. The business is throwing off a lot of cash. So quite optimistic, and thank you for your interest. Of course, Stephen and Carolyn would be happy to answer specific questions. I think our investor website has more information as well. So thank you, and look forward to an update three months from now. Thank you.

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