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.

Thank you, Stanley, and good morning, everyone. Turning to our second quarter financial results, total net sales for the second quarter of 2022 were $3.0 billion, reflecting growth of 2.1% compared with the prior year period. Internally generated sales in local currencies, which I will refer to as LCI, increased 2.4%. And when excluding sales of PPE and COVID-19-related products, our LCI growth was 6.7%. As Stanley mentioned, prices for PPE products, and specifically for gloves, increased last year due to market volatility and supply chain disruptions. More recently, prices of gloves and COVID-19 test kits have declined. This pricing volatility, combined with the strong prior year sales comparison, is driving a year-over-year decline in sales of PPE and COVID-19 related products. Additional details of sales performance are contained in Exhibit A in our earnings press release issued earlier today. Operating margin for the second quarter of 2022 was 7.27%, representing an 18 basis point improvement compared with prior year GAAP operating margin. When compared with prior year non-GAAP results, operating margin improved by six basis points. Operating margin improvement was due to gross margin expansion, mainly as a result of an increase in sales of higher margin products. This was partially offset by higher operating expenses as a percent of sales, which grew as a result of increases in payroll and travel since our operations have generally returned to normal this year. Turning to taxes, our effective tax rate for the second quarter of 2022 was 23.8%. This compares with an effective tax rate of 23.4% for the second quarter of 2021 on a GAAP basis and 23.2% on a non-GAAP basis. GAAP net income attributable to Henry Scheinink for the second quarter of 2022 was $160 million or $1.16 per diluted share. This compares with prior year GAAP net income of $156 million or $1.10 per diluted share and prior year non-GAAP net income of $157 million or $1.11 per diluted share. Amortization from acquired intangible assets for the second quarter of 2022 was $31.3 million or 14 cents per diluted share. This compares with $30.1 million or 13 cents per diluted share for the same period last year. Foreign currency exchange negatively impacted our second quarter diluted EPS by approximately 3 cents versus the second quarter of last year. And at the current foreign exchange rates, we expect the impact to be more pronounced in the second half of the year as compared to the first half of the year. I'll now provide some detail on our second quarter sales results. Global dental sales of $1.9 billion declined 3.1% compared to the same period last year, with LCI sales down 0.3%. LCI sales growth, excluding PPE and COVID-19-related products, was 3.5%. Global dental consumable merchandise LCI sales declined 2.2%, but when excluding sales of PPE and COVID-19-related products, they increased 2.4%. global dental equipment LCI sales growth was 7.0%. North America dental LCI sales declined 1.1% compared to the prior year, primarily due to consumable merchandise LCI sales declining 3.5%. However, when excluding sales of PPE and COVID-19-related products, North American dental consumable merchandise LCI sales increased 2.2%. Consumable merchandise sales were impacted by lower patient traffic during the quarter, offset by price inflation. North America dental equipment LCI sales increased 8.1% compared with the second quarter of 2021, with good performance in both traditional and digital restoration categories. International dental LCI sales growth was 1.0% compared with the second quarter of 2021, driven by equipment LCI sales growth of 5.5%. The growth in equipment LCI sales was partially offset by a 0.3% decrease in international dental consumable merchandise LCI sales. However, these sales increased 2.7% when excluding sales of PPE and COVID-19 related products. Lower patient traffic, which we believe is a result of higher COVID-19 infection rates, resulted in lower consumable merchandise sales in parts of Europe and in Australia and New Zealand, as well as China because of the required lockdowns, and were offset by double-digit sales growth in Brazil. Our equipment backlog at our North America and international businesses remains strong. Sales of dental specialty products were approximately $242 million in the second quarter, with LCI growth of 6.6% compared with the prior year. Growth was particularly notable in North America for oral surgery products consisting of implants and bone regeneration products. Technology and value-added services sales during Q2 were $181 million, an increase of 18.1% compared with the prior year, including LCI growth of 10.8%. In North America, technology and value-added services LCI sales growth was 10.4%. This growth was broad-based with particular strength in our practice management business, including Dentrix and Dentrix Ascend. Internationally, technology and value-added services LCI sales increased 13.4% compared to the prior year, driven by performance in the United Kingdom. During the second quarter, our technology and value-added services businesses, together with our dental specialty products, achieved total sales growth of 9.0% and LCI sales growth of 8.2%, slightly lower than our goal of double-digit growth for the full year. Global medical sales during the second quarter of 1.0 billion grew 10.3% compared to the same period in 2021. with LCI sales growth of 6.7% led by growth in point of care diagnostics. We sold approximately $68 million in COVID-19 test kits in the second quarter of 2022, including multi-assay flu and COVID-19 combination tests. This compares with approximately $75 million in test kit sales in the second quarter 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 LCI sales increased 13.6% compared to the second quarter of 2021. Regarding stock repurchases, we repurchased common stock in the open market during the second quarter, buying approximately 1.3 million shares at an average price of $81.42 per share. for a total of $110 million. The impact of the repurchase of shares on our second quarter diluted EPS was immaterial. As of the end of the second quarter, we had $90 million authorized and available for future share repurchases. 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 second quarter of 2022 was $157 million compared to the $159 million for the second quarter of last year. As Stanley mentioned, today we are announcing a company-wide restructuring plan that is focused on funding the priorities of the strategic plan and streamlining operations and other initiatives to increase efficiency. The company expects to record restructuring charges in 2022 and 2023. However, an estimate of the amount of these charges has not yet been determined. Any restructuring charges are expected primarily to include severance pay and facility-related costs. The expense savings realized from this plan are expected to mainly affect 2023 and beyond. 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 percent compared with our 2021 gap diluted EPS of $4.45 and growth of 5 to 9 percent compared with our 2021 non-gap diluted EPS of $4.52. With reference to the balance of the year, we currently anticipate higher EPS growth in Q4 than in Q3. We are revising our full year sales guidance and now expect sales growth of approximately three to 6% over 2021 versus our previously communicated expected sales growth of five to 8%. This change reflects adverse effects from foreign exchange rates and a decrease in anticipated sales of PPE and COVID related products, including COVID-19 test kits. Sales of COVID-19 test kits are now expected to decline 25 to 30% from 2021 versus a previously estimated decline of 15 to 25%. We continue to expect full-year 2022 operating margin expansion of 39 to 44 basis points over 2021 GAAP operating margin and expansion of 20 to 25 basis points over 2021 non-GAAP operating margin. Our guidance is for current as well as completed or previously announced acquisitions and does not include potential future acquisitions or restructuring expenses. Guidance also assumes that foreign currency exchange rates will remain generally consistent with current levels. However, additional headwinds from foreign currency exchange rates for the remainder of the year may further impact our sales and EPS. Guidance further assumes 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, Ron. Just a couple of very brief comments on senior leadership. A couple of updates. As of July 1st, Jerry Benjamin retired from Henry Schein as EVP and Chief Administrative Officer, and he stepped down from our board when his term expired in May. Jerry has been in the company for 34 years. He will be continuing as a consultant and was invaluable as we grew from a domestic mail-order business of a couple of hundred million dollars into global full-service products and services business with nearly 22,000 TeamShine members in operations in 32 countries. We were fortunate to have a deep bench, and with Jerry's retirement, Michael Ettinger became EVB and Chief Operating Officer, reporting to me. In addition to Michael's corporate affairs responsibility, responsibility as assumed, responsibility for HR, IT, and supply chain, where each of these three functions is led by highly competent, long-standing Henry Schein executives. Michael joined Henry Schein in 1994, serving most recently as Senior Vice President of Corporate Affairs. The creation of the CEO position is a result of the growing size, scope, and complexity of our operations, and I'm confident that Michael will be successful in his new role, together with the leadership in general of our business units, the five big business units, and the rest of the executive management team. Barry Alperin also retired from our board of directors at our annual stockholder meeting in May, and I would like to take this opportunity to thank Barry for his 26 years of exceptional service on our board, having joined in 1996, shortly after the company's initial public offering. So, operator, with those comments, I'm ready to answer any questions.

Thank you, sir. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing any star keys. One moment, please, while we poll for questions. Our first question comes from the line of Jason Bednar with Piper Sandler. Please proceed with your question.

Hey, good morning. Thanks for taking our questions. Stanley, if I could start on the patient and staff absenteeism you referenced as impacting dental patient volumes, is there any way you can quantify what you think that impact may have been in the quarter? I think you said it was mostly a regional impact, but could you compare those regions that were less impacted to those that saw the volume effects? And then is it the real-time trends that you're seeing with patient volumes that gives you the confidence here today to anticipate a patient volume recovery here in the second half of the year?

Yeah, Jason, that's a number that we're constantly trying to figure out. It's very difficult because this COVID is going in waves, rolling waves. You know, the good news is I don't think we're going to have to wait too long. July in the United States, we still saw heavy absenteeism cancellations in the beginning part, maybe the first three weeks. And most recently, The last few weeks, it's gotten better. But there is still some cancellation activity and shortages. But it's being mitigated to some extent. I think we can expect that to increase in the rest of the quarter. Internationally, it's really very regionally dependent. Last quarter, Germany was really heavily hit. And in July, since this is a call a public call with all our investors, I can report on this, July was exceptional. Brazil was exceptional. Australia and New Zealand, although relatively small, it's gotten worse because last year, this time, the rates were quite good. China, it's not material to the whole of Indochina, but generally has stabilized. Having said that, there are lockdowns for three, four, five days in specific locations. So my expectation is This is going to iron itself out in the third quarter, although there's no way to tell. It also seems like this COVID, I speak to several people in different countries in Europe, doesn't seem to be as serious. People get sick, small symptoms, and they generally come out of it within 8 to 10, 12 days. So that's all I can give you. I wish I could give you more.

Okay. No, that's helpful. I appreciate that, Stanley. And then Stanley or Ron, on the guide, reaffirming the guide here today, you know, great to see you stick with the outlook of expanding non-GAAP operating margins here at 20 to 25 basis points. You know, given where we're at year to date, that does imply a decent step higher here in the second half of the year in order to hit that guide. So the margin comps do get easier, so that helps, but Maybe can you speak to the margin visibility you have in terms of cost controls versus how much of that margin expansion that's in the guide is volume, growth, or business mix dependent?

Well, I think, you know, if you look at, you know, kind of the expansion of gross margin in Q2, that's largely driven by, you know, product mix. That's largely driven by, you know, greater growth in some of our dental specialty products and our technology businesses. And so we're projecting that we can continue that kind of favorable mix going forward. This also requires us to very carefully manage our operating expenses in the back half of the year, and we are acutely aware of that. But those are really the primary drivers as we look at product mix and ongoing kind of vigilance over operating expenses in the back half of the year in order to achieve that operating margin expansion.

All right. Very helpful. I'll head back in queue. Thanks, guys.

Our next question comes from the line of Andrew Brackman with William Blair. Please proceed with your question.

Hi, guys. Good morning. Thanks for taking the question. Stanley, I want to go back to the comments you made and the prepared remarks around some of the customers, I guess, pushing back on price increases and your ability to sort of find alternative solutions. I guess just broadly speaking, is this something that I guess the majority of your customers are asking for at this point, and we should start to be thinking about sort of a multi-quarter revenue headwind associated with that, or is this less of the majority at that point? Thanks.

Yeah, so I don't think it's across the board. Having said that, we have to be competitive. And so we can switch customers if particular manufacturers are want to stick with their price increases, we have options. And customers are looking at those options. Obviously, the mid-sized customers and some of the bigger DSOs, national DSOs, are much more, if you will, educated consumers. So they can see that on one product versus another, one manufacturer versus another, there are options. And I was quite clear in my remarks indicating And I don't think this will impact margin, but could impact sales in the sense that customers are moving maybe to lower priced products for the same function, functionally the same, lower price. And in some instances, obviously, the margin will be better. We're not pushing our private brand, but where we're in a competitive situation, We will push a private brand. Margins are pretty good. There's been some inflation on them. Private brand, but we're also in a pretty good position to work with our manufacturers. So what I'm saying generally, we can manage through this. Our margins will be good. I think we're providing excellent value-added services to our customers in this regard. What I'm excluding, of course, is PP&E, where there's deflation, and generic and other pharmaceuticals where those move in different directions to the general market. In all of those areas, I think we are maintaining and, in fact, we likely will grow our gross profit.

Okay, thanks for that. That's helpful. And then I guess just on the staffing commentary around sort of dental, you know, recognizing I guess this could be a little bit longer of a headwind than we might be anticipating here. Can you just sort of talk about some of the longer-term opportunities that this dynamic might sort of create for Shine with your expansion into some of the services and technologies? And maybe, I guess, just part of that, can you talk about some of the specific investments that you're going to be making here throughout the balance of 2022? Thanks for the questions.

That's a very good question, actually. I expect that no one has a crystal ball, but I expect the dental staffing to emerge closer to 2019. within the next few months. Maybe it lingers into the fourth quarter. I don't think so. There is an issue still with hygienists. They feel very uncomfortable. It goes back to COVID. It's an important part of prevention of the business. But if we can get the dentist back to full complement, they'll just have to handle a lot more of the hygiene and have to work a little bit longer hours. Having said that, there's a lot of technology out there to make the practice of dentistry more productive. You know, the movement from impression material to scanners to implementing systems like Ascend drive practice efficiency. I think also the PP&E use in the practice was a little bit more intense in terms of doubling up in the amount of time Dennis spent on PP&E, masking and gloving and wearing his coats and things, that's become more efficient. So I think the production per practice is likely to go up as well. Now as the value added services, this is key for us, these strategies, whether it's revenue cycle management, demand generation, a business that provides insurance coverage of discounted insurance, all sorts of activities as it relates to education, seminars, publications, and the like. We're driving different services that really increase the efficiency of the practice while facilitating better clinical care. And this has been a key strategy for years. We will invest more in it but I think we quoted eAssist, which is a business that focuses on revenue cycle management, significantly in demand, highly profitable, and highly appreciated by dentists. Jarvis, which provides information on dental practice indexes and KPIs. All of these things are in demand, and the biggest issue, or the biggest opportunity of all, is our field sales consultancy. are today much more appreciated for their consulting services than pre-COVID. During COVID, a number of practitioners bought product that wasn't good, didn't necessarily have the most efficient technology in the practice, and so our consultants are being consulted on these items. Of course, providing good advice, but at the same time providing great stickiness.

Thank you.

Our next question comes from the line of John Block with Stiefel. Please proceed with your question.

Thanks, guys. Good morning. Stanley, maybe just the first on the dental equipment outlook. You know, you seemed, I thought, bullish last quarter. And I got the feeling maybe equally as bullish this quarter. You know, you talked about solid orders and a strong backlog. I'd just love to get your thoughts. Is that sort of a fair takeaway? And maybe if so... Do you expect the equipment outlook to hold up well into the back part of 22, even in arguably of what's quickly becoming or supposedly becoming a weaker overall environment?

Yes, it's a very good question. I believe the equipment is going counterintuitive to the way one would think in a challenged economy. Traditional equipment is doing well, I think. The consumer is expecting dentists to have a good-looking modern chair, and the dentists are understanding this, so they're investing in their practices. I would say the whole restorative area is doing extremely well. Digital restorations particularly, whether it's scanners, full chair side, and now of course 3D printing. All of these demand and specifically as relates to interoperability with some of our software this is all boding well I would say the imaging side the units are relatively strong not great 2d 3d it's not terrible but there is some inflation in that area and there are some shortages in terms of chips that are holding back availability, I wouldn't say it's critical, and there's options to move from one brand to the other. So what I just said to you is not a North American issue only opportunity, but this is global where our equipment demand continues to be good. The whole traditional equipment supply chain issue was a U.S.-North American issue, not a European issue at all. And so on both the traditional equipment side and the digital restoration side, demand is very good in this country, North America, Canada, and globally. Got it. Sorry, Stanley. And 3D printing is also a newly emerging opportunity. So we're very optimistic about our equipment business.

Thanks, Stanley. Great call. And maybe as a quick follow-up, Ron, for you, Any color on the decrementals for the COVID tests and PPE, you know, just in terms of a way to think about that at the op margin level? And then just do we have to actually start thinking about them differently with the way that COVID tests have rolled over? Any color there? Thanks, guys.

Well, I would say at the operating margin level, you know, with PPE, we're still getting – well, let's first talk about gross margin. With PPE, we're getting, you know, I would say a gross margin that we're happy with. I think what happens is that as that pricing of PPE goes down, it obviously results in a lower sales number. So it puts a little bit of strain on operating margin to the extent we have fixed costs as operating expenses. I think COVID test kits, we are seeing a little bit of pressure on pricing there, but we have seen some stability in the demand for COVID test kits. We had a fairly consistent kind of weekly run rate in the back half of the second quarter that has continued into July, and if anything, has perhaps even improved slightly in July. And that's all taken into consideration when we provide the guidance on that number. But I do think that, you know, from a gross margin standpoint, kind of going back to your original question, we feel like we're getting a good gross margin on PPE, but at those lower sales dollars, it does put a little bit of pressure on the operating margin.

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

Thank you. Good morning, guys. And I've got some background noise here, so I'll just ask two questions and then go back on mute. But first question, just on the North American consumables growth rate this quarter. Stanley, I think you're talking about some COVID headwinds during the period. You had Omicron headwinds last quarter as well. So how do you ferret out the impact of COVID versus some of the inflationary pressures and just consumer pressures we've seen here over the last couple of months? What gives you the confidence that it's COVID, not macro. And then number two, I know you're doing a great job trying to hold pricing in line for your customers. I think your customers absolutely appreciate that in our checks anyway. How are you thinking about pricing maybe into 2023? It might be early, but I know manufacturers are struggling given the dental fees haven't gone up for quite a while on how much they might be able to ratchet pricing up again next year. Thank you.

Yeah, Jeff, as I noted earlier on, it's very hard to really identify how much of a dampening impact we had as a result of COVID. But my sense, just listening to our salespeople, having gone to a couple of conferences, spending time with customers, is that there are several hundred basis points on the consumable side that are related to this dampening because of COVID. I expect that that will improve the rate, that the rate of infection will, as it improves, will drive visits back to the office. And that's not only the U.S., but globally, I think. The impact of inflation, I'm actually a little bit surprised with the fact that we've been able to keep our rates I quoted a 3% number. I think it's actually less in the non-private label, in the non-glove, PP&E area. So the volumes are there, and inflation doesn't seem to be too bad. How this drives, where this ends up, in the fourth quarter or even 2023 is hard to tell. We are not getting huge pushback on pricing from our point of view, but we're being asked about different brand options. And I think manufacturers are going to have to think this through. I know they're doing that now. And again, I'm talking about consumables. So it's hard to see how much the inflation rate is really going to be towards the end of the fourth quarter, the beginning of the first But it doesn't look like we've seen with other products in the general economy.

And our next question comes from the line of Aaron Wright with Morgan Stanley. Please proceed with your question.

Hey, this is Justin Wang filling in for Aaron. We were wondering what is embedded in your guidance as it relates to potential macro pressures. Is there a risk to guidance from here if we see tougher macro backdrop, or is this an element that's already been baked into your guide? Thank you very much.

Yeah, I mean, I would say that, you know, one reason we stayed with the 16-cent range is because of that macro uncertainty that you've referenced. I think that, you know, we've kind of played out different scenarios, whether it be in terms of additional inflation, whether it be from additional geopolitical concerns, and we did fall within that range of guidance that we provided. So it is taken into consideration for the balance of the year that there could be further deterioration, but we feel like we have the plans in place to try to mitigate that.

Great. Thank you very much.

We have time for one last question. Coming from the line of AJ Rice with Credit Suisse, please proceed with your question.

Hi, everybody. Just two questions. First, can you just comment on what you're seeing in the medical side? I know you're focused on the alternate side area. We're hearing mixed things about how procedure volumes progressed and how much that was impacted by COVID. But alternatively, it sounds like there's a flow out of hospitals into some of those alternate sites and maybe they'd be above pre-pandemic levels. And I'm just curious what you're seeing.

So I think you're referring specifically to the ambulatory surgical centers. We were close to 2019 numbers. I can remember a couple of quarters back. We've gone back a little bit, but generally ASCs are quite strong. And we are gaining market share in that area for sure. We have a lot to offer. I think ASCs are also looking at ensuring that the supply chain is efficient, that they're not having too much wastage of product, expiration dates of product issues. And we help with those kinds of things. So I would say, overall, that's a good area. But we're in a number of alternate sites, whether it's oncology, renal, and for us, these markets are all doing quite well. I do believe having said that there probably is going to be some pent up demand for elective surgery in the ASC space that will go to market. I think people will want these procedures as soon as COVID tapers down here in the United States.

Okay. And, Stanley, in your prepared remarks, you mentioned that you're helping your clinicians deal with key changes in dental and medical professions. And I know you called out specifically digitization in their work. I wondered if you would expand a little more on what you're referring to and some of those key changes that they're dealing with and how that impacts your business down the road.

That's a very good question. There's a clear understanding amongst all the office-based practitioners, small to the largest, that efficiency is critical. You know, they're going to face reimbursement pressure, to some extent they're facing it now. I think for them, in many respects, labor costs have increased more than reimbursement. So they're turning to our sales force for advice on how to manage the practice and of course how to ensure that their clinical standards are increased with access to the latest technology. And on the dental side, digitalization, the biggest one, is the DI, the scanners in the prosthetic field. I don't know what the number is because it's not clear. But I have to imagine that still half the dentists in the developed world are still doing manual impressions. So there's a huge opportunity in that regard. to convert practices using manual impression to digital impression. The whole movement of impressions to the lab, the digital manufacturing of crowns and bridges in the lab is a big opportunity for us. We're a significant player in the lab space. I think we're the largest provider of laboratory products in the world. As that moves digitally, that's a huge opportunity for us. It has been very good to us in the last year or two, but lots of opportunity in that regard. The practice management arena, the movement towards a cloud-based technology from a security point of view, from a practice management point of view, the digitalization of more of the practice presents a significant amount of opportunity on the practice management side. The intraoperability connectivity between devices and practice management software is a big opportunity. Actually, that's both dental and medical. The movement to 3D printing is starting to get some good momentum. You'll hear more from us in that regard. Actually, hopefully in the next week or two, we'll have some announcements there. So we're very excited. about this on the dental side, the digitalization, and on the medical, just simply the capital equipment that we're selling. We're finding practices replacing non-digital equipment with digital equipment for diagnostics, for other activities. So generally, a more efficient digitalized practice is what practitioners are looking, seeking guidance from our field sales force for And our field sales force is much more capable today of satisfying these needs because we've got lots of tools in their bags. More information on that, I think Graham or Ron can provide. I'm happy to connect you with our teams, our business teams. But, you know, simply because of time now, we've got to probably end the call. So we're very excited about that.

Thanks a lot.

That's a very, very good question and plays to the, opportunity for Henry Schein going forward. So, with that in mind, I want to thank everyone for calling. We are most enthusiastic about where we are. We think our bold Plus One 2022 to 2024 strategic plan is going to play out well for us, even with a contracted economy. And we're on the way to implementing These goals, we'll talk about it at a future call. Of course, a key part of that is to drive efficiency. As we drive efficiency in all of our distribution businesses, as one distribution, one shine, the notion of selling a package of products to a customer rather than one or two products or services is working well. And, of course, our high-margin technology, value-added services, and specialty products are growing at a good pace. So we're very happy with our senior team in general. I think the team's doing very well, and the organization is motivated to support our senior team and our management in general. The long-term trends for our markets are good, so we believe we're servicing a very solid market with a great plan and a great team. So with that, I thank you for calling. If you have any questions, please feel free to reach out to Graham Stanley on Investor Relations or Ron directly. Then if Graham's contacts are on the website, it's graham.stanley.com and Ron is...

Ronald.South.

And please feel free to reach out. And if people want to speak to me, go to those channels too. Again, thank you very much for calling. A lot's going on in the business, and we remain excited as we have for decades. Thank you very much.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.