Henry Schein, Inc.

Good morning, ladies and gentlemen, and welcome to Henry Schein's second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please press the star key followed by one on your touchtone phone if you would like to ask a question at the end of the call. If anyone should require assistance during the call, please press the star key followed by zero on your touchtone phone. And 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, Operator, and my thanks to each of you for joining us to discuss Henry Schein's financial results for the second quarter of 2022. With me on the call today is Stanley Berkman, Chairman of the Board and Chief Executive Officer of Henry Schein, and Ron South, Senior Vice President and Chief Financial Officer. Before we begin, I'd like to state that certain comments made during this call will include information that'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 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 and included in the risk factor section of those filings. In addition, all comments about the markets we serve, including end market growth rates and market share, are based upon the company's internal analyses 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 also 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 2nd, 2022. Henry Schein undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Lastly, this quarter, we have also prepared a presentation summarizing our second quarter financial results. This can also be found in the investor relations section of our website. Please limit yourself to a single question and a follow-up during Q&A. And with that, I'd like to turn the call over to Stanley Berkman.

Thank you, Graham. Good morning, everyone, and thank you all for joining us. Today we are pleased to report record second quarter financial results that reflect a good underlying momentum in the business and execution on our strategies. Sales were particularly strong in our technology and value-added services businesses and our medical businesses. Although there were some near-term headwinds in the quarter due to COVID infection rates, among other factors, our solid operational execution this quarter and our results demonstrate the strength, the underlying strength of the business. In June, we saw COVID-19 infection rates, which we believe contributed to a So there was rising COVID-19 infection rates, which we believe contributed to a decline in patient traffic. This is particularly so in our dental business. We expect patient traffic to increase again when the infection rates moderate. And this is to some extent quite regional. While we are maintaining our full 2022 full year guidance for EPS for 2022, and that's the guidance range of 475 to 491, we are adjusting our expectations for full year sales growth to reflect changes which include continued strengthening of the US dollar and declining demand for COVID-19 test kits. The company's management team is laser focused on executing our BOLD Plus One 2022 to 2024 strategic plans priorities, thereby providing our customers with an exceptional experience, delivering differentiated solutions that make our customers' practices more successful, and improve patient outcomes, leading to delivery of our financial goals as we've set out in our 2022 to 2024 strategic plan. We believe that the long-term trends across our end markets provide a solid platform for us to deliver on our goals. In short, Henry Schein remains well positioned to deliver consistent, sustainable profit growth and to create value for our shareholders, as we have for almost 28 years as a public company. Before we turn to a business update, and the progress we have made in executing on our strategic growth initiatives. I would like to touch on macroeconomic challenges in general and discuss Henry Schein's ongoing efforts to be best positioned to succeed in this dynamic environment that we're now all living through. First, concerns with a potential economic downturn. Given Henry Schein's broad portfolio of medical and dental products and services, we are an important partner to healthcare providers treating their patients and keeping communities healthy. The markets Henry Schein serves have withered past slowdowns quite well. During the challenging economic times, consumers continue to need services from office-based healthcare practitioners, that's both medical and dental, and from the alternate healthcare sites. that we service. That said, we are working to mitigate the future impact of any potential economic slowdown on our key stakeholders, including advancing efficient and low-cost supply chain solutions and practice management solutions in general, such as patient demand generation services, and generally those services that can help the practitioner operate a more efficient practice so that they can provide the best of clinical care for their patients. We're announcing today a restructuring plan that is focused on funding the priorities of our strategic plan. In other words, moving resources to the areas we want to focus on, but at the same time streamlining operations and other initiatives to increase efficiency. Ron will speak more about this topic in a moment. Second, we continue to work with our suppliers to limit the impact on inflation on price increases for product supplies, as well as the cost of transportation of those goods. During the second quarter, we estimate the price inflation for non-PP&E merchandise from brand and manufacturers to have ticked up to approximately 3%. It could, in fact, be slightly lower. We've, I think, done a good job working with our manufacturers on this. And the inflationary impact on equipment sales, in other words, other than non-P&E merchandise, the impact of inflation on our equipment sales was relatively insignificant. Of course, on PP&E, it was significantly down. because of the deflation in glove prices. When customers express price concerns, we believe that given the breadth of our offering, we are typically able to provide a lower-cost national brand solution or corporate brand alternative, allowing us to maintain our margins, but also helping our customers deal with inflation. So, with impact on flesh and on their practices. So third, while global supply chain pressures have been relatively stable over the past three quarters, our product portfolio, which we believe is the industry's broadest, once again affords us a competitive edge, as it more easily enables substitutions when a particular product or brand is in short supply. We continue to expect that supply chain issues for traditional equipment will impact sales through the year end. That said, the situation appears to be stable and probably improving with some of our suppliers, particularly on the traditional side, who have expanded their capacity and are now providing us with much better service than three or four months ago. When I say better service, I'm talking about on full rates. Our strong order book on the equipment side across the board, actually, in all product categories and globally. And that backlog continues to grow and do well. Supports good equipment sales over the next few quarters. Fourth, Henry Schein is well positioned to manage rising interest rates. A low level of borrowings means that our interest expense is not significantly affected by interest rate changes. And at the same time, most of our current debt is at a fixed interest rate. The primary area of our business that could be impacted is dental equipment, as those purchases are typically financed. Having said that, it's important to bear in mind that interest rates are still relatively low from a historical context. And our equipment order book remains strong and is tending to get stronger. Last, regarding, and this is the last of our macro trends, regarding the shortage of labor and skills, Henry Schein has always been an attractive place for talent to build a career. The team Schein values and philosophy is an attractive place for talent. Of course, we are continuously evaluating, supporting our pool of human capital to make sure we retain our existing personnel while attracting those skills we need. We believe our internal talent pool is better than ever and will be instrumental in Henry Schein executing on our growth plans. Talking about growth plans, our strategic plan addresses how we will stay ahead of the fundamental shifts affecting our customers. There's a significant amount of change taking place in the dental and medical professions, and we are addressing these plans through our strategic, these dynamics through our strategic plan. These plans include the goal to accelerate the adoption of digital technology, not only within the company, but also helping our customers digitalize and there's a growing pressure on our customers to digitalize in their practice and we're providing excellent hand-holding consulting services and of course an excellent offering of digital products to help our customers advance the digitalization of their practices. So in this connection, yesterday we announced three new senior executive strategic roles designed to further enable us to fulfill our strategic plan. We are forming three new teams led by experienced leaders, actually exceptional leaders, who will work together to advance digital technology to create an exceptional customer experience with Henry Scheid and accelerate the development of new and complementary technologies and platforms. Of course, as I noted, too, drive efficiency in our customers' practices while positioning them to provide better quality of care, but at the same time also to drive efficiency within Henry Schein. We expect this will enable our sales team and customers to collaborate together to harness this technology. These three teams we've set up, each one led by an outstanding executive, will enable our sales teams to to provide even better connectivity to our customers as our customers go through this massive change in running their practices driven through digitalization of their management systems and, of course, their clinical support. The first is Lee Benowitz, who has been named Senior Vice President and Chief Global Digital Transformation Officer. Lee, a member of our Executive Management Committee, is reporting to Chris Pendergast, our Chief Technology Officer. Lee will be responsible for enabling the delivery of digital sales by developing our e-commerce infrastructure capabilities and will continue to lead the implementation of our global e-commerce platform, GEP, which is well underway, and Lee has played a key role in getting us to where we are and will lead us to the successful implementation of GEP. Lee is a terrific executive. There is a press release that was issued this morning talking about these. Lee and Trina I'll speak about in a minute, and another press release about Mark Hillibrand, and I think you'll Read those, and you'll understand why these three executives are so important to the future of Henry Schein, and at the same time, appreciate what they've done and what they're going to do. The second is Trin Clark, who has been named Senior Vice President and Chief Global Custom Experience Officer, also a member of our Executive Management Committee. And Trin reports to Brad Kinnett, CEO of a North American distribution group. CRIN will be responsible for designing, developing and implementing a consistent customer experience and brand marketing strategy globally. Well, these strategies to a large extent are developed and CRIN will take them down to much more detail and be responsible for implementation and working with the entire organization on driving consistent customer experience, branding, of course, given the change in the environment from a technology point of view. Twin will also continue to lead our technology enablement and strategic marketing teams in North America. And finally, Mark Hillerbrand has been named Vice President and Chief Digital Revenue Officer, also reporting to Brad. Mark will be responsible for engaging customers online through our e-commerce platform to drive digital transactions while also securing a healthy pipeline of digitally sourced leads and new prospects to be delivered to our field sales organization. Mark has done a very good job in setting us up with respect to digital leads, making shopping experience from a digital point of view much better, and in that context, working closely with our sales organization, who in the end are responsible for driving sales and through our consultative selling methodology that's worked so well for the company. We're also making very good progress on our one distribution strategy contained in our strategic plan In other words, operationalizing one distribution, dental medical. In May, we announced the appointment of Dirk Benson as chief commercial officer of our North American distribution group. Dirk joined Henry Schein following a distinguished career with Medline Industries. Also reporting to Brad Kinnett, Dirk is responsible for the entire dental and medical distribution group's customer-facing organizations. in the US, focused on helping us to advance our goal of exceptional customer experience, increasing efficiency and sales growth in these businesses. So that's a little bit about the implementation of our strategies. So let me pivot a little bit now to provide some color on the performance of each of our business units, starting with our dental distribution business. The second quarter growth in our global dental business once again was driven by strong global equipment sales as dentists continue to invest in their practices. Consumable merchandise internal sales growth in local currencies excluding PP&E and COVID-19 related products and Ronald Gibbs specifics was impacted by an increase in patient appointment cancellations and staff shortages, which we believe were related to COVID-19 infection rates. Lower sales of PP&E products in the quarter were mainly a result of the decline in glove prices. Glove prices reached a peak at the end of the second quarter, 2021, and have been coming down, deflation. And so we expect pricing will continue to be a headwind for the next quarter or two, albeit to a much lesser extent. So we had these two factors taking place in the second quarter impacting our dental distribution, internal growth rates. One, of course, was the appointment cancellations and staff shortages. And the second is deflation with respect to glove prices. Internal sales growth in our North American and Delhi equipment business, as noted earlier, reflects continued demand in both traditional and digital restoration categories, both of them. Our equipment results also benefited from sales to some of our larger DSO accounts, who we expect will continue to be investing in their practices. And as I noted earlier on, our equipment order book remains solid. Our international equipment sales were strong too, similar trends. Two fast-growing areas in digital dentistry are digital restorations, and that's the traditional scanners, the chair side, cat cam, et cetera, and a rapidly growing new area, which is 3D printing. Based on significant investments we have made in both of these areas over the years and our strong relationship with our suppliers, we believe we offer our customers a differentiated digital product offering across multiple brands, and we expect these categories will continue to grow well for us into the future. We have, of course, a goal of continuing to expand our geographic footprint And we recently announced the acquisition of Condor Dental. Condor Dental services dental general practitioners, specialists, and laboratories in Switzerland. The one market we don't have a strong general presence, although we've served the Swiss dental market since 2004 through Camelot, our leading oral surgery business. And Condor Dental expands our presence in this market with a full-service dental distribution offering. Now turning to dental specialty and technology value added services. I'd like to touch upon the progress we are making with our goal of building complementary high growth software services and specialty products and the shift in our corporate profit contribution to these higher margin products. We have invested in good properties. We expect to continue to invest heavily in this area. We have great management teams and are very enthusiastic about the potential. So our high-margin technology, value-added service, and specialty products are growing at a good pace and now represent about 14% of our total sales, but more important, 36% of our total operating income. Of course, there's no way to determine exactly which quarter These numbers will go up, but we're quite confident that we have a team in place that will drive these high margin businesses with in-demand products towards a greater percent of our operating income. So if we just look at the sales of our dental specialty products, they were very solid during the second quarter. and were driven by BioHorizon's oral surgery products in North America. This was partially due, and by the way, in Germany, which is a big market for us in the implants, COVID was quite serious in the second quarter, but actually seems to have picked up again in July. This was partially due, so BioHorizon's growth was partially due through growth of our national DSO customers, but also across the customer landscape, including midsize and smaller practices, as we are seeing implants becoming adopted as a standard procedure in overall dental care. And I think we have outstanding marketing materials, sales force, and, of course, backed up with great products. So we expect this trend to support continued growth. In this connection, we are pleased to announce the partnership between BioHorizons, Camelog, and OrthoCell on the Strathia Plus tissue membrane. This product has demonstrated positive qualities for tissue regeneration, and we are excited to be able to further differentiate our offering in this area to our customers. BioHorizons, Camelog now has exclusive global rights to this product in the dental field, and a long-term supply agreement with OrthoCell. And we expect to launch the product towards the end of the third quarter. Within our endodontic products offering, we showed good growth and have been quite successful and actually quite excited with our recently launched Edge Pro irrigation laser. In the second quarter, we had good new console sales. And we're starting to see sales of consumables from our first placements in the first quarter. But it's good to see the positive feedback from customers and how well this product is being received in the marketplace. We're very, very excited about this technology. Our priority in the orthodontic business is the Reveal Clear Aligner product. Sales and wires and brackets were not very strong in the second quarter. I think this is a market issue. Having said that, we've had quite a bit of success with our Reveal clear aligner product, specifically in the DSO market. The launch of our Studio Pro 4.0 software is giving the Reveal aligner business quite a boost. So we remain quite enthusiastic about our three specialty areas, that is oral surgery, implants, bone regeneration products, our endodontic business, and our orthodontic business, specifically as it relates to the Reveal Clear Aligner offering. So now, technology and value-added services. We are pleased with the growth in our technology and value-added services businesses, where once again, North America and international sales increased by double-digit percentages. Henry Schein 1 sales growth accelerated compared to the prior year growth, and we are seeing healthy demand from our national DSO accounts for these solutions, but also, I might add, for the Dentrix Ascend and Datali cloud-based solutions. Some are going into DSOs, but general reception from GPs and specialists, smaller, mid-sized practices, is also very good. Both General Ascend and entirely showed solid increases in the number of users. In fact, Henry Schein 1 added more than 400 new cloud customers during the second quarter. Meanwhile, our total number of cloud customers is up 20% over the past six months, which demonstrates good momentum within this part of the business. Again, the movement of digitalization towards the cloud. We continue to invest in product development and customer service, And these investments did impact the second quarter margins. We believe these investments are providing a solid growth driver for the business. There are other services in this area that we report on, financial services, a number of other publication services, et cetera. But we are particularly pleased with the poor performance of ESSIS, the revenue cycle management solution that we acquired last June, a great complement to the business, in fact, helping our field sales consultants provide better consulting services, more relevant consulting services to our customers on the dental side. Turning to our medical business, this business has performed well over many years and again had another excellent quarter with double-digit internal growth in local currencies when excluding PP&E and COVID-19 related products. During the second quarter, we had strong sales in point of care diagnostic tests, including flu tests, as well as generic drugs and equipment, which is all a good sign. Patient traffic was bolstered by high numbers of visits for seasonal influenza, which is a departure from prior years when the flu season typically ends during the first quarter. Ambulatory surgical centers are still not up to where they were pre-COVID, but I think are moving in the right direction. Having said that, the rest of the business is very solid in the medical arena. So with that overview of our business and the environment in which we operate, I will now ask Ron for a more detailed review of our financial results. Thank you. Ron, please.