Henry Schein, Inc.

Good morning, ladies and gentlemen, and welcome to the Henry Schein first quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session, and instructions will follow without time. If anyone should require assistance during the call, please press star key followed by zero on your touchstone's phone. As a reminder, this call is being recorded. I would now like to introduce your host for today's call, Graham Stanley, Henry Schein's Vice President of Investor Relations and Strategic Financial Project Officer. Please go ahead, Graham.

Thank you. Thank you. Thank you.

Excuse me, Graham. Can you speak a bit louder? You sound far from the phone.

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 to reflect the key metrics used by management in operating our business. These non-GAAP financial measures are presented solely for informational 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 Investigations section of our website. Lastly, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, May 3rd, 2022. Henry Schein undertakes no obligation to revise or update any forward-looking statements to cite 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 of your listeners as possible to answer a question within the one hour we have allotted for this call. We've updated the format of today's call with Stanley covering the business performance, followed by Ron's review of our financial results. We hope you find this format beneficial. And with that, I'd like to turn the call over to Stanley Bergen.

Thank you very much, Graham. Good morning, everyone. Thank you for joining us. Before we get into the details of today's call, I would like to take a moment to express my appreciation once again to Stephen Palladino, who retired last week after 35 years of outstanding service to Henry Schein, for the excellent execution of Stephen's succession plan and the smooth transition of his responsibility to Ron South. I'm certain that investors will appreciate working with Ron and Graham and as we continue to build our investor relations communications. Rana is joining us on today's call and will discuss details of our first quarter financial performance and full year guidance. So Rana will discuss that in a moment. At the start of the call, I would like to highlight that 2022 is off to a strong start with record first quarter financial results as we successfully execute on our 2022 to 2024 strategic plan. That sets out our winning proposition. Our winning proposition is that customers rely on us for an exceptional experience delivering differentiated solutions that make their practices more successful and improve patient outcomes. And our BOLD Plus One priorities, which we have discussed with investors in the past, is as follows. The B stands for building complementary software, specialty, and services businesses for high growth, operationalize one distribution to deliver exceptional customer experience, increased efficiency and sales growth and the L stands for one shine to broaden and deepen relationships with our customers that is with our entire product offering service offering and the D the drive stands for driving digital transformation for our customers and for Henry shine so our bold priorities will be executed in the context of the plus one aligning our key stakeholders, which are, of course, our suppliers, customers, shareholders, investors, and TeamShine members and society. Today, we are affirming our full year 2022 gap, diluted EPS guidance of $4.75 to $4.91, reflecting the solid growth and stability of our business. To emphasize, we are very, very excited about our 2022 to 2024 strategic plan, which started at the beginning of this year. And we believe we're on a very, very good trajectory in that regard. So let me comment on two topics that are on the minds of many investors. that being inflation and also global supply chain. We are continually monitoring the potential impact of inflation on our business. The impact generally varies by product category for both merchandise and equipment, and to an extent, it also varies by geography. We estimate that on balance, price inflation on our product offerings so far this year has been about 3%. Some of our manufacturing partners are currently implementing additional price increases, which obviously will, in all probability, impact that 3%. But so far, it's been about 3%. While we have generally been able to pass along these increases to our customers, we do seek to reduce supply increases wherever possible. Of course, we are aligned with our customers in that regard. Where customers wish to explore alternative sources of products because of these pricing pressures, we are typically able to offer various less expensive alternatives given our broad product assortment of national brands as well as our wide selection of Henry Schein corporate brands and own brand products. Our extensive offering to our customers provides many options and is an important differentiator for Henry Schein in the marketplace, given the extensive options that we uniquely offer, we believe, to our customers. The impact of inflation on our equipment business is significantly deferred. due to the lead times between confirmation of an equipment order by manufacturers and delivery of the equipment. So generally, we book orders in advance with our manufacturers for delivery at a future date. And that's generally at a confirmed price. So not much inflation in the first quarter. Some, of course, but not much on the equipment side. Inflation largely impacts the traditional equipment products, as average selling prices for digital equipment continues to decline, although somewhat modestly. Now, turning to the supply chain pressure on our business. Here, the situation is relatively stable, pretty similar to the fourth quarter. Of course, we continue to experience extended lead times for certain products, which are primarily impacting equipment. So on the consumable side, merchandise side, we generally have products, may not be every single product option in a particular category, but we have basically the products. And the lead time problems are, in fact, impacting our equipment deliveries. The recent lockdowns in China, we've received a lot of questions on that. are so far not having a significant supply chain impact on us, as most of our manufacturing partners are located outside the affected regions. And ports are largely operational from our point of view, with, of course, some delays. Now, this may be slightly different for specific suppliers of ours of finished goods. is actively managing these inflationary and supply chain matters, which are reflected in our financial guidance. Turning now to the Ukraine. Henry Schein has relatively low dental sales to customers and really no direct presence in either Ukraine or Russia. So the conflict itself is not directly impacting our business per se. Of course, it could impact our suppliers. Consistent to our longstanding commitment to humanitarian work and disaster relief, our team continues to support refugees and displaced persons in and from Ukraine, as we have done, for example, with refugees from Syria, other parts of the Middle East, and, of course, elsewhere. Our support is through the delivery of healthcare product donations in partnership with several of our suppliers and with international NGOs that we've worked with for a long time. And yes, in this case, through our local teams on the ground in Poland. And there are other on-the-ground teams that are working with us to provide these relief, support these relief programs, these humanitarian relief programs. So we're actively supporting refugees through managing of donations of products, clothing, and, yes, in some instances, money. We also are responding to those affected by natural disaster around the world, such as floods in Australia and last year in Germany, and continuing to work in advancing health equity. Advancing health equity has been a key component of Henry Schein's success for many, many years, Our goal is to advance access to oral care and, in many respects, to primary care as well. Turning now to the business review of recent accomplishments, starting with our dental distribution business. So the first quarter growth in our dental business was driven by strong global equipment sales as dentists continued to invest in their practices. And consumable merchandise sales recovered well during the second half of the quarter, in line with the decline of COVID-19 infection rates. So let me peel the onion a little bit more for you. In North America, we believe consumable merchandise sales were impacted by lower patient traffic in January as a result of COVID-19, but were progressively stronger in February and March. Sales were also impacted by lower sales of personal protective equipment. I'll refer to that, and Ron will refer to that, as PPE products for the rest of the call. This decline in patient traffic was primarily a result of appointment cancellations, staffing shortages, and some office closures given the spread of COVID. Although we believe patient traffic has now returned to the levels of early December 2021. We are seeing similar trends globally, but obviously today.

Excuse me, this is the operator. I apologize, but there will be a slight delay in today's conference. Please hold, and the conference will resume shortly.

Yeah, Lorena, both lines disconnected, the main line and the backup. I don't think that's a function of our phones. Yeah. Everything disconnected. Yes. Judge, we can hear you.

Please proceed.

Sorry, we had evidently the line disconnected, but let me continue. I think I know where we ended. So the decline in patient traffic was primarily the result of appointment cancellations staffing shortages, and some office closures given the spread of COVID, although we believe patient traffic has now returned to December 21 levels. I think I covered that already, and I think it went through. The global trends are somewhat varied depending on the region of the world. So lower sales of PPE products in the quarter were primarily as a result of lower glove sales. The glove market has been quite volatile for about a year. maybe a little longer, not much longer, 15 months. We expect glove pricing will be an increasing headwind for a few quarters since pricing peaked in the second quarter of last year. That's 21. Nevertheless, if you exclude PPE products, North American consumable merchandise internal sales growth in local currencies was quite solid, despite the softer start to the quarter. we gained momentum as the quarter progressed. This was supported by good growth in sales to new DSO accounts. Our North American dental equipment business had a very good quarter with strong sales in both traditional and digital categories, particularly in digital restorative restoration equipment. Our equipment order book in North America remained strong at the quarter end consistent with the backlog at the beginning of the quarter. So new orders continue to come in at a very nice rate. As commented early in the call, we did not see a significant impact from inflation on this quarter's equipment sales due to long lead times for equipment as we had largely locked in supplier prices for orders shift during the quarter. Our equipment results benefited from sales to some of our large DSOs as we believe that anticipation of further price increases also we believe that anticipation of further price increases is modestly providing some of the elevated demand we see today. It's not a huge impact but there are some orders coming in from customers who expect pricing to go up and would like to get in into the gate before the prices go up and not a huge impact but i'll nevertheless point that out to you we continue to experience supply chain issues for traditional equipment arising from component part shortage delays in office build-outs and renovations as well as longer lead times for digital imaging technology this is uh not that the product is not available it's just taking a little longer on the digital side to deliver our orders. Having said that, if a practitioner needs anything urgently, we of course will make sure that we supply both traditional equipment and digital imaging. We now expect these equipment delays will continue to be factored through the second half of the year and will provide further support for good equipment sales over the next few quarters. Bottom line is we remain bullish on the equipment market and especially the digital dental equipment product offering. And we expect to continue demonstrating good growth in the digital category, including intraoral scanners. And now, in the last period of time, the impact of digital 3D printing, we're starting to see that flow through as well, that demand to be of interest. We continue to look for innovative ways to add value to our customers, and last month we hosted Thrive Live in Las Vegas. This is a three-day dental educational conference that replaces the successful Dentrix Business for Dentistry Conference we have held in years prior to COVID. We designed this inaugural event to offer a learning path for every member of the dental office, from the front office staff to the hygienist, to the dentist themselves. So everyone from the staff hygienist all the way to the dentist participated in this conference. The program was designed for the various players in the office. We were able to select from over 50 CE credited courses led by more than 40 leading clinicians with a strong educational focus on digital technology and practice management solutions that Henry Schein has quite a bit of competency in advising our customers on. The customer feedback we received has been most positive, and while events like Thrive, at least from our point of view, position us to connect with our customers in deeper ways, and positions our team to help drive greater productivity and provide better clinical care in their practices. Educational type events like this provide great sales opportunities as well. Turning now to the international demo, our international equipment sales were also quite strong for the quarter. Our international consumable sales were impacted by similar trends as in North America, including lower PP&E and COVID-19-related product sales, and by decline in patient visits, particularly during the first half of the quarter. That said, compared to North America, the impact of COVID-19 was more pronounced internationally, especially in Europe. So let's peel the onion a bit more. In Europe, patient traffic picked up at varying paces as the quarter progressed, and COVID-19 restrictions were relaxed in certain parts of Europe, and we expect these markets to continue to recover. We also expect the Australian market to start to recover, having reached a peak COVID-19 infection rate towards the end of the quarter. This should help the recovery of our consumer-publicized business in Europe and Australia in the future. billion businesses strong throughout the first quarter. Now, I think China impacted our business. Note, our growing Chinese business is still a relatively small part of our global dental business. These lockdowns also intensified during our fiscal second quarter, so they had little impact in the first quarter. I remind you, though, that we have a nice growing business in China, but it's not material in the relative size of Henry Schein, relative to our global consolidated sales. So turning to dental specialties and technology and value-added services. Sales of our dental specialty products were solid during the first quarter, specifically oral surgery, which consists of dental implants and bone regeneration products. In particular, sales of BioHorizons implants grew by double digits this quarter, executing well in North America, where this business is primarily focused and where the market for restorations continues to be quite strong. Camelot and Modena Dentist brands in Europe, primarily in Germany, also had quite a good quarter first quarter for the implants and the bone regeneration products in Europe. We have also had success selling our ACE bone regeneration products into the large DSO market. And this is another very good example of the L in our bold strategy, leveraging one shine strategic priorities. Now, Within our endodontics products offering, and endo business is also quite solid, we recently launched our Edge Pro Laser, which is actually off to quite a successful launch, having been well received at last week's AEA meeting here in the United States. We do believe that Edge Pro Laser offers outstanding cleaning, debridement, and disinfection, coupled with greater value compared with uh, competing products. Meanwhile, our priority in the orthodontic businesses are revealed clear aligner product line. In March, we completed the U S domestic launch of the studio pro core O product. That's the software. And we are now rolling out the software update globally. Um, the software features advanced treatment planning and visualization tools. Um, obviously I think, uh, Investors are aware that orthodontic sales were not great in the first quarter because of practices not being at full capacity as a result of COVID. So overall, our solid position in dental specialty products is built upon strong customer offerings, and our commitment to meaningful ongoing investment in R&D. There are questions on that. Happy to provide further color during the call. Turning to technology and value-added service sales, they're also increased by double digits during the first quarter in both North America and international. We believe Henry Schein 1 offers one of the broadest product offerings of dental practice management and related software and services and is the largest contributor sales in the sector of technology and value-added services. Growth within Henry Schein 1 continues to be driven primarily by recovery and patient traffic to dental offices, which generates demand for our revenue cycle management solutions and also by cloud-based solutions, our cloud-based solutions create flexibility, scalable services to drive practice efficiency, and yes, patient engagement too. As another example of our commitment to expanding our technology product offering, we have begun making our Jarvis analytic software product available to private mental practices, whereas previously the Jarvis software was available primarily to DSOs. Also within our value-added services business is our e-assist, business which provides revenue cycle management solutions for insurance reimbursements. We're quite pleased with the integration and performance of this business which we acquired last year. So now turning to our medical business where the global medical sales were excellent as we achieved further penetration into existing customer accounts. Internal sales growth in local currency if you exclude PPE and COVID-19 related products also continued to be strong. In the U.S., patient traffic to physician offices and alternate care sites, and that in particular in our case is the ambulatory surgical centers, was up consistently throughout quarter one versus the prior year. Sales of medical laboratory equipment were up double digits while demand for non-COVID points of care diagnostic tests was also quite strong. Sales of PPE products declined by double digits compared to the strong first quarter last year. As I mentioned earlier, we expect further pricing declines for gloves throughout the rest of the year, yet prices remain above pre-pandemic levels. Sales of COVID-19 tests were extremely strong during January, very strong, and declined sharply towards the end of the quarter. The future of these products is difficult to predict as we face the somewhat offsetting forces of new variants, spreading rapidly, spreading demand, along with increased availability of home tests on the other side, and many of which are being paid for by the government in the US. So that's a broad overview. Now Ron will give you more specifics on the financial results for the first quarter. So Ron, there you go. Thank you. Welcome to your first call.

Very good. Thank you, Stanley, and good morning, everyone. So turning now to our record first quarter financial results, total net sales for the quarter ended March 26, 2022, with $3.2 billion, reflecting growth of 8.7% compared to the prior year period. Internally generated sales were up 7.7% in local currencies, and when excluding sales of PPE and COVID-19-related products, internal growth in local currencies was 8.9%. As Stanley mentioned, prices for PPE products, and specifically gloves, increased last year due to market volatility and supply chain disruptions. More recently, prices of these products, along with COVID-19 test kits, have declined. This pricing volatility, combined with a strong Q1 prior year sales comparison, is driving a year-over-year decline in sales of PPE and COVID-19 related products. Details of sales performance are contained in Exhibit A in our earnings press release issued earlier today. Operating margin for the first quarter of 2022 was 7.7%, representing a decrease of 17 basis points compared with the prior year GAAP operating margin. When compared with prior year non-GAAP results, operating margin decreased 71 basis points. Operating margin contraction was due to higher operating expenses, primarily as a result of increases in payroll, commissions, and travel and entertainment since most of our operations have returned to normal this year. Year-over-year contraction was also due to the unusually high operating margin in the first quarter of last year. Turning to taxes, our effective tax rate for the first quarter of 2022 was an even 24%. This compares with an effective tax rate of 25.1% for the first quarter of 2021 on both a GAAP and a non-GAAP basis. Gap net income attributable to Henry Schein for the first quarter of 2022 was $181 million, or $1.30 per diluted share. This compares with prior year gap net income of $166 million, or $1.16 per diluted share, and prior year non-gap net income of $178 million, or $1.24 per diluted share. Amortization from acquired intangible assets for Q1 2022 was $32.2 million pre-tax or 14 cents per diluted share. This compares with $29.7 million pre-tax or 13 cents per diluted share in the same period last year. And foreign currency exchange negatively impacted Q1 2022 diluted EPS by approximately one cent. I'll now provide some detail on our sales results for the first quarter. Global dental sales of $1.8 billion increased 2.2% compared to the same period last year, with internal sales growth of 3.5% in local currencies. Global dental consumable merchandise internal sales increased 1.3% in local currencies and excluding sales of PPE and COVID-19 related products, internal sales in local currencies increased 4.7%. Global dental equipment internal sales growth in local currency was 11.9%. North America dental internal sales growth in local currencies was 4.8%, which was driven by especially strong performance in equipment, which internally grew 13.2% compared with the prior year period, with strong performance in both traditional and digital categories. This growth also comes off a difficult comp as Q1 2021 internal equipment sales growth in local currencies was 17.4%. North America dental consumable merchandise internal sales in local currencies increased 2.6% compared with Q1 2021, or 7.3% when excluding sales of PPE and COVID-19 related products. International dental internal sales growth in local currencies was 1.8% compared with the first quarter of 2021, when we had an exceptionally strong sales quarter with internal sales growth of 17.9% in local currencies. International dental consumable merchandise internal sales in local currencies decreased 0.5% compared with the first quarter of 2021 and increased 1.3% when excluding sales of PPE and COVID-19-related products. Sales were impacted by an increase in COVID infections, especially in January and February. This sales growth is also against a difficult comp, as the internal sales growth in the prior year was 19.2% in local currencies. International dental equipment internal sales growth in local currencies was 10.1%, and this is also against a difficult first quarter 2021 comp, and such growth was 12.9% in local currencies. Sales of dental specialty products were approximately $236 million in the first quarter, with internal growth of 7.2% in local currencies compared with Q1 2021, when we had an exceptionally strong sales quarter with internal sales growth of 18.3% in local currencies. This quarter, growth was strong in our oral surgery category, which consists of implants and bone regeneration products. Technology and value-added services sales during Q1 were $179 million, an increase of 23.4% compared to the prior year, including internal growth of 11.1% in local currencies. In North America, technology and value-added services internal sales growth was 10.3% in local currency. This growth was driven by our practice management business, the strong growth from Pentrix and Ascend. Our revenue cycle management business also exhibited solid revenue growth. Internationally, technology and value-added services internal sales increased 15.7% in local currencies compared with the prior year. This growth was driven by a strong performance in the UK, which benefited from a favorable comparison to the prior year when the lockdown was just beginning to ease. During Q1, our technology and value-added services businesses, together with our dental specialty products, achieved total sales growth of 13.1% and internal sales growth in local currencies of 8.7%. And this total sales growth is in line with our double-digit growth goal for the fall year. Global medical sales during Q1 of $1.2 billion grew 18.3% compared to the same period in 2021, with internal sales growth of 14.7% in local currencies led by growth and COVID test kits and other point-of-care diagnostics. We sold approximately $250 million in COVID-19 test kits in the first quarter of 2022, including multi-assay flu and COVID-19 combination test kits. This compares with approximately $180 million in test kits in Q1 of 2021. We expect continued volatility in sales of test kits for the remainder of the year. Excluding sales of PPE and COVID-19 related products, global medical internal sales on local currencies increased 14.5% compared with Q1 of 2021. Regarding share repurchases, we did not repurchase any shares of Henry Schein stock during the first quarter because we had a 10B51 plan that did not result in any shares being repurchased during the quarter. We intend to put in place an additional plan that is effective as of tomorrow, May 4th. As of the end of the first quarter, Henry Schein had $200 million authorized and available for future share repurposes. This program remains a core pillar of our balanced capital allocation strategy, which also includes ongoing disciplined investment to support organic growth and strategic acquisitions. Turning to our balance sheet and cash flow, We continue to benefit from significant liquidity, providing our businesses flexibility and financial stability. Operating cash flow for the first quarter of 2022 was $93 million, compared to $63 million for the first quarter of last year. Turning to 2022 financial guidance, I will conclude my remarks by noting that we are affirming our 2022 full-year gap-diluted EPS guidance range of $4.75 to $4.91, reflecting growth of 7% to 10% compared to our 2021 GAAP diluted EPS of $4.45 and growth of 5% to 9% compared with our 2021 non-GAAP diluted EPS of $4.52. We expect 2022 full-year sales growth of approximately 5% to 8% over 2021 versus our previously communicated expected sales growth of 6% to 8%. This change primarily reflects the latest foreign exchange rates and a decrease in sales of COVID-19 test kits. As Stanley mentioned earlier, the future demand for test kits is difficult to predict. However, given recent trends, we now estimate sales of COVID-19 test kits to be 15% to 25% lower than 2021, as opposed to the 10% decline we had previously communicated. We continue to expect full-year 2022 operating margin expansion of 20 to 25 basis points over the 2021 non-GAAP operating margin and expansion of 39 to 44 basis points over the 2021 GAAP operating margin. Our guidance is for current as well as completed or previously announced acquisitions and does not include the impact of fee-for-share repurchases, potential future acquisitions, or restructuring expenses, if any. Guidance also assumes that foreign currency exchange rates will remain generally consistent with current levels, that end markets will remain stable and consistent with current market conditions, and that there are no material adverse market changes associated with COVID-19. With that, I'll now turn the call back to Stanley.

Thank you very much, Ron. Unfortunately, the beginning part of our call with Graham made his introductory remarks. were not fully broadcast to our participants. There was a problem with the operator, and then eventually the call got disconnected. I think my remarks and Ron's were fully picked up. Graham, you may want to repeat some of your remarks. Please, Graham.

Thank you. Sure. Thank you, Stan. So I'd just like to state that certain comments made during this call would include information that's 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 Cheung's filings with the Securities and Exchange Commission, included in the risk factors section of those filings. In addition, all comments about the markets we serve, including end-market growth rates and market share, based upon the company's internal analyses and estimates. So with that, I'll call back to Stanley, because I think everybody heard the rest of the statements at the beginning. Thank you, Stanley. Thank you very much, Graham.

So, operator, please refer the questions, open the line for questions. Thank you.

You're welcome. And as a reminder, to ask a question, you will need to press star, then the number one on your touchstone telephone. To withdraw your Request, you may price the pound or hash key. Please stand by while we compile the Q&A list. We have our first question comes from the line of Jeff Johnson from Baird. Your line is open. Please go ahead.

Thank you, guys. Just two quick ones, maybe, and then I'll get back in queue. But just, Stanley, could you give us any update maybe just on April trends that you're seeing in the specialty dental area, the general dental area, and medical? And then, Ron, just for you, from a guidance standpoint on the 5% to 8% revenue growth, I think a lot of us just look at organic growth for Shine. It tends to be a very consistent metric in your business. Could you just give us kind of how we should be thinking about maybe organic growth, given that you do a lot of acquisitions and currency obviously has a big impact this year? Thanks, guys.

Thank you, John. Jeff, I mean, thank you, Jeff. Equipment sales remained strong in April with internal sales growth at double-digit numbers. As we indicated, we expect, at least at this moment, equipment sales to remain strong for the balance of the year. Now, in North America, we're particularly encouraged by the non-PPE sales in April. However, PPE sales were lower than prior due to the lower price of gloves. So the pricing of gloves has had quite a bit of an effect. Therefore, while underlying growth is good, ex-PP&E, the general PPE, excluding gloves, is pretty good. Overall, digital merchandise, internal sales growth in local currencies. So if you take out the PP&E, it's okay. It's pretty good. Now, international, so that was about North America. If you look at our international components, again, PPE is having quite a bit of an impact, particularly gloves. But We're quite encouraged because from a European point of view, most of the markets now are back in full swing, major markets that we're in. Also, Australia reached a peak towards the end of the quarter, last quarter, and they're back in business again. We're continuing the nice growth experience in Australia for a while. For whatever reason, Brazil continues to be very good. It doesn't seem to have been impacted at all in the first quarter and continues to be strong in April. Now, we've seen quite a bit of disruption, as you can tell from the newspapers, of course, particularly in Shanghai. But I think now other parts of the country, even Beijing, although I don't think there's a total lockdown, So our China sales are impacted in April. Having said that, please remember China is relatively immaterial in the context of our $12.5 or so billion business. And on medical, very similar results primarily here in North America where our medical business is. And it continues to have very, very good growth. non-COVID-related products, excluding diagnostics and the PP&E. So, Ron, can you provide the color on what you took into account in coming up with your guidance?

So, Jeff, if you recall, our original sales guidance was six to eight percent and the components of that included about a point for acquisition and a point for the 53rd week this year so that left us with about four to six percent of you know internal growth whether it be price increases or from increased volume um i think that you know we're taking down the sales growth to five to eight percent and that that Richard D'Alli, MD, Extra point we're taking off the floor. There is really a combination of what we're seeing in trends in the COVID test is, as we said, Richard D'Alli, MD, We're expecting those sales be 15 to 25% lower than last year versus our original guidance 10% lower and also the ethics headwinds. So, you know, you can kind of do that math and say, you know, so the internal number now be something that's closer to saying you know, three and a half to five and a half or 6% in terms of the internal number that we're still aiming for this year. I don't know. Hopefully that makes sense for you.

It does. Thank you.

Our next question comes from the line of Jason Bednar from Piper Sandler. Your line is open. Please go ahead.

Hey, good morning. Interesting questions. A couple from us. Just actually wanted to first come back on the on the top line guide there, uh, the point there, just, just to confirm coming to the bottom end of that guide, um, coming to a hundred basis points lower. So now five date reported for the year, it looks like 50 basis points of that is COVID test kits. So just to confirm that the balance of that is, is just that facts are, I guess, are there any other good guys or bad guys kind of within that revenue guidance that we should be considering, whether it's, you know, glove pricing or anything else that's playing out here, just as we think through some of those mechanics.

No, I'd say your estimate on the COVID test to the FX are pretty reasonable. And that's really, those are really the components. There's not, you know, offsetting items that we're applying. Okay.

All right. Perfect. And then, Just thinking through how the first quarter played out, I mean, our earnings came in significantly better than how you were communicating it back in February. I think the original guide was for earnings to be slightly lower on a year-over-year basis. Can you talk about where the outperformance came versus expectations? Was it a quicker recovery in the top line and core trends in dental and medical, better expense control? I guess you beat the street by over a dime, so I guess where did that outperformance come from in your eyes?

Well, I think, you know, a couple of areas, right? You know, so like I said, you know, COVID test kits, the $250 million in the quarter. And while we're taking down the full year on COVID test kits, I don't think we, you know, we didn't expect to do quite that well in the first quarter with the test kit sales. I think also we, you know, we're really happy with our gross margins in the dental business. I think that In spite of some of the pressure we're feeling on gloves, we still did fairly good on the margins there. And then, of course, equipment. Equipment came in much better than what we, I think, had originally expected. And as we said on the call, we remain bullish on equipment. So I think all those things, when combined, got us to a good place on the quarter. There's other things. I'll acknowledge that we did well on effective tax rate. We did well. you know, in a few other areas. But I think that we are, you know, between the good margins that we experience in dental, not just in gloves, but in non-PPE sales as well, you know, you're really kind of helped us out for the first quarter.

All right. Very helpful. Thanks, Ron.

Our next question comes from the line of Justin Lin from William Blair. Your line is open. Please go ahead.

Hi, good morning. Thank you for taking my questions. First of all, can you talk about your dental market spending growth outlook for 2022 and beyond? Do you think the elevated spending per visit levels from 20 and 21 can persist, or are you seeing a decline already?

I think generally from a visitor dentist point of view, taking into account COVID impacted locations. I think generally, we're in positive territory from visits for dentists. From what we can tell, the high-end procedures remain quite strong. In other words, some specialty products at the high end seem quite strong. But at the moment, we're more or less back to where we were in December of 21. Of course, you never know where this variant is going to have an impact. But right now, although we did have a pretty bad January from a business point of view, and February, March started getting better, April looking okay, I think we're actually stable, leading possible.

Got it. Thank you. And, you know, the line was a big surprise last week. And I'm just wondering, any visibility on your end regarding sort of the declining consumer sentiment that, you know, some of these companies are seeing, maybe especially around your, I know it's a small part still, but your reveal clear liner business?

I would, you know, I would reveal a line of businesses relatively small Our growth is impacted by new accounts, particularly from DSOs that have now taken on the VLI. So I don't think our sales are much of an indication, although obviously in the first part of the first quarter, visits for elective procedures were down. It came back again. But I'm not sure we're the right party to give you an indication of the market in general. Suffice it to say, we remain quite bullish for our reveal line, having said that, it's a very small business, a relatively small business compared to the market.

Okay, that's fair. Thank you very much.

Our next question comes from the line of Elizabeth Anderson from Evercore ISI. Your line is open. Please go ahead.

Hi, guys. Thanks so much for the question. I was wondering if you could provide some additional detail on the North American medical account penetration. Was that sort of broadly expanding your range of products into certain clients? Was that sort of share gain wins versus peers? Any additional details there you could provide would be super helpful.

Yeah. Elizabeth, our medical business focuses on the ultimate care area, mostly physician offices, whether they are independent or part of a group or in fact a large part of it is where the medical practices are owned by IDNs. We also have businesses that focus on the government. We have businesses that focus on smaller ambulatory surgical centers, And we have businesses that focus on providers such as renal treatment centers and cancer centers. We do not service the long-term care in a material way, nor the acute care area, and obviously not the drugstore. So that's really our business. And in that area, we have been gaining market share for, oh, that's a decade. Just very good execution. I would say that... All this continues to point to gaining market share. Obviously, the PP&E and the test, the spot numbers sometimes magnify, sometimes reduce underlying business performance. But essentially, within that particular pond that I described, we continue to gain market share. We do add some new products which contribute, but I would say including, by the way, we entered the home care space in a small way, and we'll expand that. But I'm not sure if that contributed at all to the internal growth, especially acquisition growth. So overall, the business is just gaining market share.

Got it. That's very helpful. And Ron, maybe one for you. As we think about the cadence of OPEC spend going forward for the rest of the year, can you help us think through the puts and takes of the increase in wages and some of the other labor-type costs that you called out versus some of the ongoing impacts of the cost-cutting plans that you guys have put into place?

Yeah, you got me. we're dealing with wage inflation like everybody is, right? And our normal cadence of salary increases as a company goes into effect people want. So we will see an increase in payable costs going forward that is taken into consideration when we talk about operating expenses and our planned operating expense expansion or the margin expansion, I should say.

Unfortunately, we had to put in place a freight surcharge. We've done this in the past to deal with increased cost of utilities. But generally, our customers have accepted that as their requirement.

Got it. Okay, thanks.

Our next question comes from the line of Nathan Rich from Goldman Sachs. Your line is open. Please go ahead.

Hi, good morning. Thanks for the question. I'll ask them both up front. I guess maybe on the dental equipment business, it seems like you're seeing longer lead times, and you expect those kind of delays to continue through the second half of the year. But you had a strong first quarter from a revenue standpoint, and it doesn't sound like the outlook for dental equipment, at least on the revenue side, has changed this year. So can you maybe just talk about how you've been able to work through the supply issues and also what you're still seeing, you know, just in terms of demand for CapEx from practices. And then just a quick follow-up for Ron. You know, it looks like the seasonality of earnings this year is a little bit different than what you've seen historically. And so I guess, you know, should we think about kind of earnings towards the back half of the year as closer to what the go-forward run rate of the business will be, you know, once kind of PPE normalizes, you know, some of these equipment supply issues resolve? It'd just be helpful to get your color on kind of what the back half of the year means for the longer-term go-forward. Thank you.

Yeah, so... Well, two very good questions. First of all, the demand for dental equipment, both traditional and digital, has been quite strong actually since the early part of the time we practices went back after COVID. So I guess from the second quarter of third quarter, post third quarter of 2020. So it's done pretty well. demand is there is one particular challenge and that is on the chairs units and lights that part of traditional business we had a big supplier exit the markets and the other two major suppliers plus three or four other smaller ones have had a challenge keeping up with our demand because we were a big customer of the business that closed down on the chairs, units, and lights side of the business. The capacity has increased. We certainly can provide equipment, additional equipment, to any customer urgently needs it. Having said that, the demand continues to grow, supply increases, but there's still a bit of an imbalance. We don't see at the moment the time when this demand for traditional equipment will significantly reduce. That is the view as of this very moment. On the digital side, demand continues to grow. Digital dentistry is growing rapidly. We have a number of suppliers providing us with product. They all, to one extent or another, some challenges in providing satisfying demand, though some are far less challenged than others. And the demand is doing, and we continue to sell a lot, with a slight buildup in the backlog in that regard. And then it's related to the suppliers having parts, trips, challenges. So the market is stable. There is a problem in satisfying all of our purchase orders. And the demand is good. So dentists are investing in their practices. I might add the same is on the medical side. So practitioners are generally investing in their practices. We have a good selection. We're getting good manufacturer support. Dental, medical, domestic, and globally is quite strong.

And regarding your question on seasonality, I'll say it's a very good question, and it's a very difficult question to answer. You're right. Historically, there were some seasonal trends. They were somewhat nuanced, but there were some seasonal trends to our business. And I think, you know, As we went into the pandemic and are coming out of the pandemic, a lot of that dynamic has changed. And I think that there are so many different factors, whether they be COVID test kits, pricing of PPE, demand for PPE, the days of kind of predicting increased sales in the fourth quarter for equipment, tax incentives, equipment purchasing are difficult now. So I think, admittedly, our sales, our earnings are probably going to be a little choppier than they have been historically, and that's really just driven by the dynamics of the market in which we're operating right now.

Thanks very much.

We have time for one last question coming from the line of Mike from Credit Suisse. Your line is open. Please go ahead.

Hello. This is Justin Wang stepping in for Matt. Thank you so much for the question. We were wondering if you could provide any color on implant trends in the U.S. as well as OUS and how you've seen these carry into April as well as your expectations for Q2. Thank you very much.

Yes, implant trends continue to be quite strong. As I noted, the higher end of industry seems to be doing quite well. Our strength, of course, is in North America and in Europe. Of course, we have a presence in Asia, but we're not as large in those markets. So on a global basis, the Asian markets and some of the developing world markets are growing at a faster rate. than the European, and we're particularly strong on Germany, and the US markets. So in the markets we're in, I think we're doing OK. I believe we're gaining market share. But from a global point of view, there are other markets that are growing faster that we're not really in, although I would imagine those other markets would have a setback because of sales in China Russia and Eastern Europe. So overall, I think from our point of view, the markets are continuing to be quite good and we continue to gain market share with a number of very important introductions of products in the specialty areas, implants, a little bit bone generator, regeneration, endo, and of course the reveal line. So thank you. So thank you. Unfortunately, sure. We have to end the call. We're a few minutes over, but we had this interruption. It was beyond our control. Thank everyone for the interest. We changed the format, and if you have feedback, a little bit on the format or on the press release. Hopefully it's more concise, satisfied our investor needs, but we very much would appreciate any input from our investors. As you can tell, we remain bullish about the business. We're quite happy with our 2022 to 2024 strategic plan. We're making very good progress. I think we have an outstanding management team behind the plan. And generally, I think our bold plus one strategy will increase shareholder value in a nice consistent way as we've done for years. the past 100 plus quarters as a public company. Thank you for your interest. Feel free to reach out to Graham or to Ron. Look forward to seeing people and speaking to people at future conferences next month. Have a great summer. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect. Have a great day.