Henry Schein, Inc.

Good morning, ladies and gentlemen, and welcome to Henry Schein's third 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 operator 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 you to your host for today's call, Graham Stanley, Henry Schein's Vice President of Investor Relations and Strategic Financial Project Officer. Thank you, sir. 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 third quarter of 2022. With me on the call today are Stanley Bergman, 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 would 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, November 1st, 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. Finally, we have prepared slides summarizing our third quarter financial results. These also can be found in the investor relations section of our website. During today's Q&A session, please limit yourself to a single question and a follow-up. And with that, I'd like to turn the call over to Stanley Bergman.

Thank you, Graham. Good morning, everyone, and thank you, everyone, for joining us on this call today. Our financial results for the third quarter of 2022 reflect solid underlying growth across our business and actually in most geographies. We grew our non-GAAP diluted EPS compared with the third quarter of 2021, and this is despite the significant currency headwinds and lower sales of PPE and COVID test kits. Today, we are narrowing our 2022 non-GAAP diluted EPS guidance range, which reflects our confidence in the underlying strength and the stability of our business. Overall, we feel very good about the outlook for the company and remain highly focused on delivering on our bold plus one strategy, which we're happy to go into details during the Q&A period, and as we continue to increase the sustainable profitability of the business. Importantly, current market demands in both our dental and medical businesses are generally stable and actually have been this way for a while. We continue to receive price increases from various suppliers with additional price changes towards the end of the second quarter. The depth and breadth of the Henry Schein portfolio allows us to satisfy our customers' needs and to offer alternative national brand and corporate brand products to price-sensitive customers, thus positioning us to also protect our gross profit. This is reflective of the deep and lasting relationship we have with our customers and our suppliers. As we commented in previous quarters, market prices for gloves continue to decrease. However, we believe at a reduced pace, while our unit volume for gloves is relatively stable, and this is driving lower sales and profits in the PPE category. remember the PP&E category is largely gloves. Similarly, sales and profit of COVID test kits have declined compared to the prior year, but pricing and volume for these products is also stabilizing. So generally, the PP&E market on gloves has deflated, volumes are definitely stable, and tests, COVID-19 tests, are relatively stable from a pricing point of view and a volume point of view compared to the previous year. So we will of course provide further information on the whole PP&E and COVID test category. Having said that, our business excluding PP&E and COVID tests did perform quite well as we will discuss in detail during this call. So let me start by reviewing performance highlights for each of our business units, starting with the dental distribution business. Internal growth in local currency of global dental sales, excluding PPE, was good. Consumable merchandise growth, excluding PPE, was solid, and we were especially pleased with the excellent growth of our North American equipment business and continued strength in our global equipment order book. That's the backlog. We had a strong growth in sales of traditional equipment during the third quarter. We are also experiencing continuing good demand for high tech equipment, an area where Henry Schein is a global leader. And this is because dental practices look to secure and maintain a competitive advantage. And the product offering available in this space has expanded. And there is practically something for every dental practice. So this growth was largely driven by volume as we are seeing new innovation in digital dental equipment come to market at somewhat lower average selling prices. But the market is significant, big opportunity, lots of units, and we have a very good offering. We believe that consumable merchandise sales growth in Europe was impacted this year because of the summer holiday season, as dental practitioners and patients took more vacation days than in the previous year. But we also believe that our consumable merchandise growth in Europe will remain stable, leaning slightly positively. On the other side of the coin, other parts of the world International growth did benefit from ongoing strength in Australia, New Zealand, and Brazil, which was partially offset by continuing lockdowns in China, having said that, our China business is relatively small compared to our total business. Our North American equipment order book remains robust and continues to grow from last quarter, and this is partly a result of quite a successful DS world from our point of view. This event was held late in the third quarter compared to the previous year when it was earlier. And we saw continuing demand for intraoral imaging, chair side mills, 2D, 3D digital, extraoral imaging devices. 3D printing with a number of other manufacturers was too. And of course, all the CAD CAM lines did well also from an order taking point of view, leading to probably a stronger, we believe, fourth quarter in a market that we're doing quite well in generally. Lead times for additional equipment are reducing slightly, although installations are still being affected by delays with dental office construction. So we expect our demand and our sales in the equipment area to continue to be strong. Our international equipment order book is also solid. So dental growth during the third quarter was aided by, as our investors know, Midway dental acquisition, which strengthened our longstanding presence in the Midwest of the United States, provided dental customers of Midway with access to an expanded portfolio of solutions, and of course, a highly competitive pricing. Midway built an excellent reputation within the industry over the past 35 years, and the vision of senior executives at Midway strongly aligns with the Head & Shine commitment to helping dentists operate a more efficient practice while allowing a focus by the dentists on delivering high-quality patient care. We have successfully completed the integration relatively quickly of the Midway dental business, distribution business, and the Condor Dental business, that we recently acquired in Switzerland that is on the distribution side is also largely completed from an integration point of view. So we continue to invest in our dental specialty portfolio and add new customers. Sales to DSO customers in the United States once again were good in the specialty areas and demonstrate success of our one-shine strategic initiative. We are seeing some signs of economic caution in several specialty markets regarding high-end oral surgery procedures. I would not say this is the case as it relates to endodontics, but in oral surgery, there is some caution on the high-end side of implants. And our orthodontic business is relatively small. I'll cover that in a minute. But importantly, we believe that Henry Schein is well positioned to capitalize on these shifts, specifically in the oral surgery market, as we offer a full range of dental implant options at various price points. So we think on the unit side, we will continue to do well, and also on the profit side. So we had strong growth in our clear aligner business. Of course, let me remind those participating in today's calls, A line of business is relatively small, but it is growing nicely and specifically with some DSOs. And again, as I mentioned, we are seeing solid demand for our endodontic specialty products, which is driven by sales of new products, particularly our Triton irrigation solution and our Edge pro-laser system. Both of these have done well, but I would also say units of endo have done relatively well. And so we believe that our dental specialty business is doing quite well from a foundation point of view, and we always need to look at comparable quarters in previous years, trends, et cetera. And I think the business is in pretty good shape. Let's move on to the technology and value-added services. Our technology and value-added services businesses had good underlying sales growth in the third quarter. sales growth was impacted by the expiration of a modestly profitable but significant large government contract. The largest business in the segment is Henry Schein 1, a software business, which once again posted solid sales growth domestically and internationally, driven by our Dentrix practice management software and our Dentrix Ascend and entirely cloud-based solutions. During the quarter, We surpassed 5,000 cloud-based customers and in more than 1,000 new customers year-to-date and currently exceeding 100 new installations per month. We have launched entirely across the United Kingdom and in Australia, New Zealand as well, over the past six months and remain on track to further geographic expansion in 2023. Ascend has been growing its customer base by double-digit percentages quarter-to-quarter, Notably, these cloud-based practice management systems also drive traction for other Henry Schein 1 solutions and for, in fact, stickiness to the entire Henry Schein portfolio. We recently announced that Dentrix Ascend was selected as the exclusive cloud-based practice management system of Smile Brands, a dental service organization, a DSO organization, with more than 700 locations, reflecting the competitive advantage of this product offering. So an important part of the Bold One strategic plan is to place greater emphasis on these high-growth, high-margin products and services. Of course, no guarantees, but this is an area of focus for inorganic growth, and we feel that we're on track to deliver on our expectations in that area with inorganic growth, although we will announce that any opportunities in that area or anything any deals in that area once those deals are closed and there's no certainty as to when that may be. So another bright spot in the organization in our performance of sales growth in local currencies and our medical business, which continued to be excellent during the third quarter when excluding PPE and COVID test kits, largely pricing issues, PP&E related to gloves, and test kits just relating to demand for the test kits, which we've discussed on several calls in the past, our expectations were relatively in line on the test kits specifically. So we are continuing to deepen our relationships with existing large IDN customers while nicely growing our other medical businesses. We are especially pleased with strong growth in our government sector athletic schools accounts, and we continue to make solid progress in gaining business from independent physicians. Although several years ago this group reduced, there is still a reduced number of independent physicians. It is a relatively stable group today, and we continue to gain market share within that group. And, of course, these smaller medical groups are also areas where we're adding customers and market share, we believe. Our focus on equipment, pharmaceutical products, and point of care diagnostics remain bright spots in this business, although I must say the whole of the medical business was doing well. And of course, the volatility of sales in COVID-19 test kits, which went down dramatically in earlier quarters, has moderated, but of course, at a lower level of sales. And on the PP&E, the glove side, The volume is stable, but the pricing is still somewhat unstable or less volatile than we saw in earlier quarters. Third quarter sales growth had a challenging prior year comparison when patient traffic to physician offices was bolstered by a surge in Delta variants, and that tough comparison will continue in the fourth quarter. Yet we expect medical sales growth, excluding PPE and tests, to continue at healthy levels, reflecting volume gains, some price increases, but generally growth in our market share in this area, this important area for growth for Henry Schein. Most experts are expecting a high coincidence, the high incidence of flu this year, the illness in the United States, due to winter experience in the southern hemisphere. We would expect strong flu season to drive patient visits to the physician offices and, in turn, increase demand for a host of products we provide, specifically tests, the traditional point-of-care tests for flu and other diseases, including our multi-assay COVID-19 influenza diagnostic test kits. So with that overview on our business, I will turn the call over to Ron for more detailed review of our financial results. Ron, please.