Henry Schein, Inc.

Good morning, ladies and gentlemen, and welcome to Henry Schein's second quarter 2023 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 that time. If anyone should require operator assistance during the call, please press the star key followed by zero on your touchtone phone. As a reminder, this call is being recorded. And 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. Thank you. 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 2023. 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 factors section of those filings. In addition, all comments about the market we serve, including end market growth rates and market share, are based upon the company's internal analyses and estimates. Today's 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 are included in Exhibit B of today's press release and can be found in the Financial and filing section of our investor relations website under the supplemental information heading. For additional financial information, please refer to our quarterly earnings presentation also posted on our investor relations website. The content of this conference call contains time sensitive information that is accurate only as of the date of this live broadcast, August 7th, 2023. 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, 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, Graeme. Good morning, everyone, and thank you for joining us today. We are today reporting solid results for the second quarter, driven by our North American dental businesses, with strong equipment and steady general merchandise sales, and with continuing strength in sales of our technology and value-added services, our implants, biomaterials, and endodontic products. The underlying fundamentals in the U.S. dental market remain strong, and demand for dental services and customer confidence continues to improve, as, of course, evidenced by our by the ongoing investments our customers are making in their practices. In addition, we are seeing growing demand for our implant systems and endodontic products, as well as our integrated software and services solutions, which are generating strong growth by delivering greater efficiency and a better experience to our customers. In the alternate care market, that's the medical market, elective procedures are close to normal levels while second quarter visits to primary care physicians were down year over year, reflecting last year's higher visits to physician offices and urgent care centers as a result of the extended flu season last year. As expected, sales of PPE and COVID test kits continue to decline. However, we are now seeing a sales level of sequentially We're now seeing sales level off sequentially, and we expect the year-on-year impact to be much lower in the second half of 2023. When excluding these product categories, local currency internal sales growth for the company was 3.3%. In general, our North American dental business performed better than we expected at the start of the year, offset by some incremental COVID-related headwinds facing our medical businesses. as discussed earlier on. Our outlook reflects overall confidence in our business and in the markets we serve, and accordingly, we are affirming our non-GAAP diluted EPS financial guidance for 2023. Our financial results and guidance demonstrate the strength of the business, as discussed earlier, and continued advancement of our 2022-2024 bold plus one strategic plans. We are successfully executing key initiatives, the key initiatives actually in the plan, including expanding our specialty products and value-added services portfolio, optimizing our distribution businesses, leveraging key customer relationships, and driving digital transformation. Year-to-date, we have committed over a billion dollars to acquisitions that accelerate the implementation of our strategic plan. adding high growth, high margin products and services to our offering. With this clear focus, we believe we are well positioned to further enhance Henry Schein's leadership in the markets that we serve and to deliver long-term sustainable shareholder value. Among the larger transactions are our strategic partnership with Biotech Dental, which we closed in April, the acquisition of SIN Implant Systems, which we closed in July, and the recently announced acquisitions of Shield Healthcare and Large Practice Sales, which we expect to close in the third quarter. With these transactions, we have significantly expanded our implant, bone regeneration, and clear aligner product portfolio, digital workflow capabilities, presence in distributing products directly to the patient in the home care arena, and value-added services. Continuing our strategy of following the patient to provide healthcare services where it's being delivered, we expect our recently announced agreement to acquire Shield will create an offering with more than $300 million in annual revenue that distributes medical supplies across the United States directly to patients in their home. On completion of this acquisition, This business will be led by Adam Brees, who joined Henry Scheiner as Vice President General Manager, Home Care Medical Products, and has significant experience in this area. We are excited about the fundamentals of this market, which supports a growing aging demographic experiencing more chronic disease. Beyond added convenience to the patient, the trend of moving care to the home is expected to provide efficiency in the overall healthcare system. And most important, many of our customers have asked us to provide the service. We've been providing it in a moderate way up to now, but now we are committed to advancing our position in this market to support our customers who have requested us to move into the home care arena as a continuum of care. Our home care medical product offering will now include enteral, ostomy, incontinence, wound care, and diabetes products. And we plan to leverage our physician relationships, as noted earlier on, product distribution expertise, and corporate brand assortment to further grow this area. Also, for many years, we have had a successful practice transitions group dedicated to existing smaller and mid-sized dental practices. And our most enthusiastic about the acquisition of large practice sales, a leading transition advisory services business, which expands our capability to advise dental practices on larger practice transitions. Of course, being a service to our DSO customers as well. We are also advancing the integration of our dental digital workflow software with our practice management software to create a unique digital solution for dental practitioners. In this connection, we have asked Andrea Albertini CEO of our international distribution group, to lead the cross-company one-shine solution and accelerate out what we have internally called our three-click integrated software solution for our customers. This simplified open architecture process begins with the capture of any image from an intraoral scanner or 2D, 3D digital imaging unit through our practice management software. followed by the application of embedded artificial intelligence solutions to help in diagnosis, case acceptance, planning, and design, and ending with a direct connection to fabricate the prosthetic through either chair side mill, a 3D printer, or the transmission digitally of the file to the dental lab. Let me now turn to a review of the quarterly highlights from each business unit, beginning with the dental distribution. In North America, dental offices were generally busy, and this helped our second quarter dental merchandise grow, of course, excluding sales of PPE products. A driver in equipment sales was, of course, our broad equipment offering, which enabled our customers needing solutions to increase productivity to meet demand. And of course, drive up the efficiency of the practice and, of course, better clinical care. North American dental equipment sales are up double digits. Sales of traditional equipment continue to be strong, and we are pleased that sales of digital equipment returned to growth this quarter. Internationally, equipment sales were relatively flat to the prior year. The equipment backlog in North America has held steady, and our international equipment backlog is returning to pre-pandemic levels. Now, turning to our dental specialties. Sales of dental implants and biomaterials were key drivers in the second quarter, complemented by endodontics and clear aligner businesses. We are seeing implant demand increasing in North America, with sales of our BioHorizons Camelot premium implant delivering mid-single-digit growth, a sequential improvement versus the first quarter. Internationally, demand for implant systems remains very good. Generally, demand for implants continues to favor value-priced products. We believe that our Camelot Our BioRyzen's Camelot product offering is well positioned, but also the moving of demand for value-priced products is reflected in our double-digit growth achieved by our Medentus provider of dental implants and bone regeneration products. Looking at recent deals, our transaction with Biotech Dental brings a market-leading portfolio of dental implants at Clear Aligners to Henry Schein, and digital workflow software. SYN, on the other hand, that's SYN Implant Systems, provides us an entree into the large Brazilian implant market and complements our successful Brazilian general dental consumables and equipment business. Both Biotech and SIN offer high-quality implants at an attractive price. and we have the exciting opportunity of expanding these cost-competitive products to other geographies, including the United States, providing, of course, a more comprehensive offering and enabling us to be even more competitive in the implant and bone regeneration space. This quarter, growth in our endodontic business continued to be driven by our Brasler and Edge brands, in both North America and internationally. Our orthodontic business is making steady progress with our liner business, although this is still a relatively small component of our global revenues. We are seeing growing demand for our specialty products from DSOs, and that's specifically from our DSO customers. And recall we have a pretty decent market share in the DSO market. and we see continued adoption of specialty procedures among dental practitioners. We have grown our global implant bone regeneration and related products and services into over $800 million in revenue, and our specialty products to approaching $1.2 billion in revenue in the aggregate on an annualized basis. We now offer a broad range of premiums and value alternatives to North American and international practitioners. We expect dental specialty growth to accelerate in the second half of the year due to these acquisitions, but also due to year-over-year comparisons easing. Now, let's turn to the technology and value-added services business, where the largest component, of course, is Henry Schein I. Global growth in Henry Schein 1 is being driven by ongoing migration to our cloud-based practice management software solutions, Dentrix, Ascend, and Dentale, and by growth in our revenue cycle management business, resulting from increased patient traffic driving a higher volume of e-claims. Dentrix Ascend and Dentale grew to approximately 7,000 customers and this today represents approximately 40% year-over-year growth. Customers and prospective customers are particularly enthusiastic about incorporating our artificial intelligence solution into their practice management software product. We believe our embedded solution is certainly best in class. We've grown our technology and value-added services businesses into an almost $900 million revenue portfolio on an analyzed basis. In addition to Henry Schein's technology solutions, we now offer a broad range of value-added services through our businesses such as ESS, which provides revenue cycle management, and Unitas, providing advice on PPO agreements with insurance providers along with other services, including financial services, practice transitions, staffing services, education, and remote patient monitoring for office-based dental and medical practitioners. We expect the technology and value-added services sales growth will accelerate during the second half of the year. Turning now to the medical business. During the second quarter, our medical business achieved low single-digit growth, excluding PPE products and, of course, COVID-19 test kits. This compares with mid-double-digit growth last year. It's really important to understand that when results benefited from some late-season sales of point-of-care flu diagnostic tests. This year was a more typical flu season, and as a result, we had much lower sales of flu COVID-19 and multi-assay diagnostic and related products. Sales growth was also affected by the conversion of certain pharmaceuticals and other products to lower-priced generics and corporate brands, of course with a higher gross profit margin. This is a trend that is taking place throughout healthcare. Sales of medical equipment were relatively soft in the market. The market took a temporary pause to assess likely future demands. However, we have subsequently seen investment interest return in July. So in summary, the fundamentals of our core business remain solid, very good, and the team is executing well on our 2022 to 2024 BOLD Plus One strategic plan. With that, I'll turn the call over to Ron to discuss specifically relative to our quarterly financial results and provide full year guidance. Thank you. Ron, please.

Thank you, Stanley, and good morning, everyone. I'll be discussing our results as a reporter on a GAAP basis and also on a non-GAAP basis. Our second quarter non-GAAP financial results for 2023 and 2022 exclude integration and restructuring costs and amortization expense of acquired intangible assets. This is detailed in exhibit B of today's press release. With respect to sales growth, I will focus on LCI sales growth, which is internally generated sales and local currencies compared to the prior year and excludes acquisitions. Second quarter global sales were $3.1 billion, or an LCI sales decrease of 0.2%. However, when excluding sales of PPE products and COVID-19 test kits, Our LCI sales grew 3.3%. We sold $138 million in PPE products in the second quarter of this year, a decrease of approximately 28% year over year. And we sold $26 million in COVID-19 test kits, a decrease of approximately 62% year over year. Our gap operating margin for the second quarter of 2023 was 6.5%. an 81 basis point decline compared with the prior year gap operating margin. On a non-gap basis, operating margin for the second quarter was 8.2%, a 14 basis point decline compared with the prior year non-gap operating margin. Excluding the impact from lower PPE and COVID-19 test kit sales, we estimate that non-gap operating margin expanded 27 basis points. Second quarter 2023 GAAP net income was $140 million or $1.06 per diluted share. This compares with prior year GAAP net income of $160 million or $1.16 per diluted share. Our second quarter 2023 non-GAAP net income was $173 million or $1.31 per diluted share. This compares with prior year non-GAAP net income of $179 million, or $1.30 per diluted share. These results were impacted by a decreased contribution from lower PPE and COVID-19 test kit sales, estimated to be 8 cents per diluted share relative to the prior year period. The foreign currency exchange impact on our second quarter EPS was immaterial. As Stanley mentioned, we have committed over a billion dollars in the acquisitions we have announced so far this year, with $250 million invested in equity investments and business acquisitions in the second quarter of this year. And we have subsequently signed agreements committing another $800 million. The increased capital deployment for acquisitions has impacted quarterly financial results more than in previous years. The second quarter 2023 GAAP and non-GAAP financial results included high acquisition activity that resulted in acquisition expenses of $6 million, or 4 cents per diluted share, which were offset by net acquisition-related fair value adjustments of $16 million, or 9 cents per diluted share, including a related remeasurement gain resulting from the purchase of a controlling interest of a previously held equity investment. This resulted in a net favorable impact of $10 million or 5 cents per diluted share for the quarter, as illustrated in Exhibit C to our press release. On a year-to-date basis, the favorable net impact of these acquisition expenses and acquisition-related fair value adjustments, including the related remeasurement gain resulting from the purchase of a controlling interest of a previously held equity investment, was only 1 cent per diluted share. We are confident that these strategic investments will drive enhanced growth and value creation over the long term as we accelerate the implementation of our 2022-2024 BOLD Plus One strategic plan. Turning to our second quarter sales results, global dental sales were $2.0 billion, and LCI sales increased by 2.0%. Excluding sales of PPE products, LCI sales growth was 3.7%. Global dental merchandise LCI sales increased by 0.7%, but increased by 2.8% when excluding PPE products. North America dental merchandise sales were flat compared to the prior year and grew 2.6% when excluding sales of PPE products, with good underlying growth offset by lower growth in our dental lab business as a result of digitalization and in our traditional orthodontics businesses. International dental merchandise LCI sales increased by 1.9% and by 3.2% when excluding sales of PPE products. Global dental equipment LCI growth was 6.4%. Our North America dental equipment LCI sales increased 9.8% as we continued to see strong sales growth for traditional equipment and sales of digital equipment in North America return to growth. International equipment LCI sales increased by 1.6%. Dental specialty products include implants, bone regeneration materials, orthodontic products, and endodontic products. Sales of these products were approximately $270 million in the second quarter, with growth of 15.7% driven by acquisitions and good implant sales in both North America and internationally, particularly in Austria, Switzerland, and in Germany. where we have a leading market position. Global technology and value added services sales during the second quarter were $193 million, with LCI growth of 5.5%. Sales were again negatively impacted by a government contract which expired early in the third quarter of 2022. LCI sales growth was 6.9% when adjusting for this contract. In North America, sales growth was driven primarily by our Dentrix Ascend practice management and revenue cycle management businesses. Growth internationally was driven by our Dentale cloud-based solution. Global medical sales during the second quarter were $950 million, and LCI sales decreased 5.3% due to lower sales of PPE products and COVID-19 test kits. In North America, excluding sales of PPE products and COVID-19 test kits, LCI sales grew 2.0% and were impacted by lower flu cases versus the prior year, which resulted in lower point-of-care diagnostic tests and related product sales. Keep in mind this was against a very difficult comparison, as LCI growth excluding PPE products and COVID-19 test kits grew 14.3% in the second quarter of 2022. Regarding stock repurchases, We repurchased approximately 638,000 shares of common stock in the open market during the second quarter, buying at an average price of $78.36 per share for a total of $50 million. At quarter end, we had approximately $365 million authorized and available for future stock repurchases. Turning to our balance sheet and cash flow, we continue to benefit from significant liquidity, providing our businesses with the financial flexibility and stability to execute on organic growth initiatives and strategic acquisitions while continuing to return capital to our stockholders. We further strengthened our balance sheet by reasonably extending the maturity date of our $1 billion revolving credit facility to July of 2028 and also closed on a new $750 million credit facility. Operating cash flow for the second quarter was $274 million compared with $157 million last year. primarily as a result of lowering inventory levels. Restructuring expenses in the second quarter were $18 million, or 10 cents per diluted share, and were incurred as part of our previously disclosed restructuring initiative. These expenses mainly relate to severance benefits and costs related to exiting facilities. We now expect restructuring activities to extend through 2024. Let me conclude my remarks with our 2023 financial guidance. At this time, we are still unable to provide estimates for costs associated with integration and restructuring for 2023. Therefore, we are not providing GAAP guidance. We are affirming our guidance for 2023 non-GAAP diluted EPS attributable to Henry Schein Inc. of $5.18 per share to $5.35 per share, which is now 1% to 4% compared with our 2022 non-GAAP diluted EPS of $5.38. five to 10 cents dilution from 2023 acquisitions, which is consistent with our prior guidance and has been updated to include second quarter results and the impact of all acquisitions that have been announced so far. The net impact of acquisition expenses and acquisition related fair value adjustments, including the related remeasurement gain resulting from the purchase of a controlling interest of a previously held equity investment is expected to be insignificant for 2023. and has been included in guidance. We expect these acquisitions to contribute to earnings growth beginning in 2024. It is important to recognize that we expect year-over-year growth in diluted EPS to be higher in the fourth quarter than in the third quarter of this year. Our guidance for 2023 assumes total sales growth of approximately 1% to 3% over 2022. As a reminder, our guidance reflects one less selling week in 2023 than 2022. Our sales growth reflects a larger decline in sales of COVID-19 test kits, which we now expect to decrease by approximately 70% to 80% from 2022 versus our previous guidance of a 65% to 70% decrease. Additionally, PPE product sales are expected to decrease about 25% to 30% versus our previous guidance of a decrease of 20% to 25%. Despite the expected lower PPE and COVID-19 test kit sales, the impact on 2023 non-GAAP diluted EPS from PPE products and COVID-19 test kits is still estimated to be 35 to 40 cents per share due to higher than anticipated gross margins on PPE sales relative to our original guidance. We are driving strong earnings momentum in our underlying core businesses, and we still expect non-GAAP operating income will grow in the high single-digit to low double-digit range when excluding the contribution from PPE products and COVID-19 test kit sales. We continue to expect non-GAAP operating margin contraction of 10 to 15 basis points from the 2022 non-GAAP operating margin of 8.2%. And this is largely a result of lower PPE products and COVID-19 test kit sales and profits. Our guidance reflects non-GAAP operating margin expansion when excluding income from PPE products in COVID-19 test kit sales. Our 2023 guidance includes higher interest expense than in 2022 and as a result of higher interest rates and borrowing levels. We also expect an effective tax rate for the year of the 23% range, assuming no changes in tax legislation. Our guidance is for current continuing operations as well as acquisitions that have been announced and does not include the impact of future share repurchases and potential future acquisitions. Guidance also assumes that foreign currency exchange rates are generally consistent with current levels and that end markets remain consistent with current market conditions. With that, I'll now turn the call back to Stanley.

Thank you, Ron. We're here to answer any questions which investors may have. So, Operator?

Thank you. 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. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. And the first question comes from the line of Elizabeth Anderson with Evercore ISI. Please proceed with your question.

Hi, guys. Thanks so much for the question. I have maybe one shorter-term question and one longer-term question. In terms of the shorter-term question, obviously the – fair value adjustment was new this quarter. And I just wanted to make sure I understood, was this something that you knew last quarter when you updated your guidance? Because I'm just trying to understand whether the core guidance moved down X that. And then for my longer term question, you know, it's obviously very interesting with you adding all these new capabilities and geographies in. How do we think about, like, for example, for SIN, like, how long that that might take or what your plans are in terms of bringing those implants into the United States? And then similarly, in terms of the medical, the ability to sort of push those sort of more broadly across the new products across your portfolio. Thank you so much.

Certainly, Elizabeth, I'll take the first question and Stanley will respond to your second question. So, The remeasurement gain was something we contemplated in our guidance. We didn't have a definite amount for it, just like we weren't sure how much our acquisition costs were going to be either. So ultimately, as we've kind of demonstrated in that exhibit to the press release, those amounts, once we realized the higher expenses and we also realized the net remeasurement gain, have largely offset on a year-to-date basis. So yes, our guidance does contemplate the effect of those items. Stanley, if you want to take the second question.

Thank you, Ron. Elizabeth, the SIN implants, not the whole line, but a significantly important part of the portfolio already approved in the U.S., are selling to some extent and are being well received by our particularly DSO customers where we, in fact, by coincidence last week, were able to land a pretty decent DSO that is interested in the SIN implant system. It puts us, the whole SIN transaction puts us in a very competitive position now because to some extent in the U.S. and maybe some other markets, although BioHorizons, Camlog is a premium product selling at a slightly lower price than some of the major brands, if not all of them, we still were missing a piece in our portfolio on the more economic side of implants, and now I believe we're well positioned with SIN, and I believe in the next year or so we will be able to also launch the biotech line in the United States. different market segments, but I think we're definitely in a very competitive position now and are actually starting to see some sales.

It's really helpful. And then for Shields as well, that's sort of a similar timeline, and you can sort of push that across your broader portfolio later this year, or is that more of a, we should think about that as more of a 24 type of occurrence?

No, I think, you know, we acquired Prism about a year or so ago, two years ago, which was mostly an East Coast business with a relatively limited portfolio. Shields puts us into the West Coast with a broader portfolio. And Shields was missing the wound care offering that Prism had. So we believe we will create synergies relatively quickly. There are costs, of course, in integration. which we've taken into account in our guidance, mostly one-time costs. But I think in 24, we should be able to start adding accretion in a nice way. This has really been an area that our customers, our big IDN customers, have wanted us to perform, and we didn't undertake these kinds of services. We have one IDN in the New York area that we service in the home care area, but we didn't really have the full capabilities between these two acquisitions and another small one which we hope to announce soon. We will have a pretty good offering in products for the home and will be a great extension to our physician and urgent care business.

And the next question comes from the line of Brandon Vasquez with William Blair. Please proceed with your question.

Hi, everyone. Thanks for taking a question. Maybe first on one high-level question, just on the macro backdrop. Can you guys talk about where you're seeing some strengths and weaknesses in the environment today? I think maybe equipment looked pretty strong in the U.S., but maybe a little weaker international, and then consumables globally looked kind of stable, low single digits. So curious how all these segments on the dental side are playing out from the macro side.

Yes, thanks for that question. On the macro side in North America, I believe there is stability on the dental side. That's what our team believes in general. Consumables, patients are returning to the dental office. The data is not perfect, but if you look at the latest ADA survey, and some recent analyst reports and studies, it suggested that patient traffic picked up throughout the second quarter after the steady volumes in the first quarter of 23. And so we, of course, we had some volatility in the first quarter of 22. And so it appears that patient flow is good. July, from our point of view, was a good month. Our eClaims data also suggests that what I've just described is backed up, again, by eClaims data from Henry Schein 1. If you peel the onion a little bit further, at least from our point of view, implant sales continue to grow well in North America. The same for endodontics. Our small line of business is showing similar kinds of trends If you look at international, it's slightly more tepid in international. It's hard to tell because we're now in the summer months when Europe is largely closed. Having said that, we did suffer in the second quarter because of the strikes in France. I would say Germany is okay. We had pretty strong numbers in 2022 from a comp point of view, because we had the Sera trade-in in the second quarter of 2022. Patient traffic in Germany, which is our biggest market outside of the U.S., seems to be steady. There is somewhat of a staff shortage. But again, it's really hard to tell. This is the vacation month now, in July. August, and it's very hard to tell exactly what is happening in Europe, Germany, but from our checks, it's pretty steady. We don't see much of a deterioration at all. In fact, it could be on the positive side. So generally, dental and medical are okay. On the medical side, a little bit more We did have high comps last year, I think 15% almost growth. So the medical is not going to, as we did caution at the time, present that kind of growth going forward. There is some trading to more generic products, specifically on the pharmaceutical side. It doesn't impact the absolute dollar profits. But I think medical is at least with the ASC business is back to where it was before COVID. And I think if you take out the unusual visits that we experienced in the first half of last year because of flu, I think medical is pretty stable as well. I think on the other hand, I believe our market share is growing. On the specialty product side, again, I think we covered this in our call, and at least from our point of view, we don't see any major impact. From a unit's point of view, there is trading to lower-priced products, specifically from our DSO customers. But in general, our markets are stable, and I think we are quite comfortable at this moment. Our backlog on equipment year on year in North America is pretty substantial. similar to where it was at the end of last quarter and on the international side is building up again to pre-COVID levels so I would say stability all around that would be our view at this moment thank you perfect thank you very much one one and maybe one other quick one for Ron um you know we're trying to

Can you clarify, and you may have given this already on the call, but just to be clear, can you kind of talk about what EPS growth is in 23 and based on that guidance, X to PP&E COVID? And part of why I'm asking is just to make sure we understand what underlying dynamics are as we're kind of looking at our 2024 models where maybe PP&E and COVID sales can kind of stabilize and we can return to some more normalized growth rates. Thank you.

Yeah. Our full year guidance is still 518 to 535, and that includes an expected 35 to 40 cent headwind versus the prior year of impact on EPS from contributions from PPE sales and COVID-19 test kit sales. So that remains unchanged from a guidance standpoint. While we have adjusted the some of our revenue assumptions on those products because of the better than expected margins on the PPE sales. We haven't had to adjust the 35 to 40 cent expected headwind that was built into our original guidance.

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

Thank you. Good morning, guys. Stanley, maybe I would like to dig a little deeper on your North American comments. You know, consumables, you described that market as fairly stable. I think that fits with a lot of our survey data as well. The consumables number, though, did come down to 2.5% on an organic basis, ex-PPE. This quarter, last quarter, it was 6.5%. Do you think that's just the comps from the Omicron stuff in the first quarter last year that really helped inflate that first quarter number? Was there any change in pricing dynamics? Any other factors kind of bridging from the 6.5% first quarter to the 2.5% consumables growth in this quarter? Thanks.

That's a very good question, Jeff. Thanks for asking. I think you need to take the fourth quarter of 2022 in the first quarter of 23 and more or less average out because of the cut-offs. It leans a little bit higher in the first quarter, but it certainly wasn't 6.5% growth apples to apples. I think we've covered that in the past. I would also suggest that inflation in the consumable world the dental arena has muted. Maybe some products individually of certain brands have gone up. They're not necessarily sticking from the manufacturer pass-through. The manufacturers are not necessarily able to hold all these consumable price increases. At the same time, there is a movement towards corporate brand slash generics And some of the smaller brands are doing well where some of those manufacturers are prepared to keep prices or even reduce prices. So it's very hard on a one quarter basis to give you the perfect measurement of mix. But I would take into account the cutoffs for 22 for the fourth quarter. And I would take into account the fact that generally has been some deflation in merchandise prices. And I would say this is particularly coming from the larger DSOs and the mid-sized DSOs, who are today a lot more educated consumers than in the past. This is not really impacting our margin per se, the general mix of our margin to DSOs. So there's a lot of nuance in what I just said. Let's see what happens in the third and fourth quarter, but my sense is the trend that I just described is not going to change much.

All right. That was going to be my follow-up, Stanley. So is there more deflation to come or have we kind of taken that step down and you think we can hold steady from there? And then, Ron, just a follow-up on the non-recurring below the line. Well, I think it was above the line, actually, this quarter on the one-time gain. The 5% to 10% of dilution is unchanged today. That is on a gross amount. You're talking about a net then impact from acquisition activity being close to flat this year. If you had provided that net guidance last quarter, would that have also been flat? So essentially, you're not changing your gross or your net acquisition guidance for the year? I just want to understand that. Thank you.

Jeff, it's hard to tell, as maybe I wasn't clear, exactly what the impact is going to be of deflation, whether it's price reduction on specific branded products or switch to generic or other manufacturers for specific kinds of products. Yeah, I doubt we're in more than 100, 150 basis point swing, maybe 200, but I'm not sure it's much different to that. I don't think inflation is going to be significant in the dental consumable business. I think it may go down slightly to deflation, but we're in that range. Units are holding more or less steady. Of course, from our point of view, we're growing our specialty business, although the business may be growing, that doesn't have an impact really in a material way on our total sales of dental consumables because not material in the context of the whole consumable offering. Having said that, specialty products are impacting our margin in a positive way, and so are corporate brands and some of the smaller manufacturers.

And Jeff, to answer the second part of your question, The 5 to 10 cents that we referred to after the first quarter when we amended guidance was with specific reference to the expected dilutive effect during the year from biotech. We were holding that 5 to 10 cents, but it now is for all the acquisitions that we have announced so far this year. Apart from that, we have higher than expected acquisition expenses which are largely offset by the re-measurement gain that we recorded in the second quarter as well. So we kind of have set those aside and that was the purpose of Exhibit C to the press release so people could see the components of that and we're holding to the five to ten cents of delusion but now it captures all of the acquisitions that we have announced today.

And the next question comes from the line of Jason Bednar with Piper Sandler. Please proceed with your question.

Hey, good morning. Thanks for taking the questions. I'll actually follow up there on kind of the track that Jeff was going down. But, you know, maybe so, Ron, just maybe first starting on gross margins, I mean, those are still hanging around multi-year highs, despite what I think are maybe some inventory step-up costs from the biotech dental transaction. So could you quantify how much inventory step-up may have hit in the quarter in terms of hitting that gross margin and earnings? And then with absorbing the dilutive SIN transaction in your reaffirmed guidance today, can you give us some detail on how to think about what the dilution is from that deal that you're absorbing, even rough numbers? Is it a few pennies, a nickel, a dime, anything that would be helpful?

I'll start with the quantifiable one first. The step-up charge that we have, and it will be disclosed in the 10Q as well, in the second quarter for biotech was $2 million. So not a real significant effect on gross margin. In terms of SIN, it is absorbed within that 5 to 10 cents. There's also going to be a step up on SIM, but they don't turn their inventory as quickly, so we don't expect it to, you know, quarter to quarter have as dramatic of an effect. So, SIN, without kind of disclosing the, you know, the modeled dilution on that, I can tell you that it is absorbed within that $0.05 to $0.10.

Okay. And then on that $2 million, I guess just a quick follow-up there. Is that $2 million steady as we go forward for the next quarter or two for 3Q and 4Q, or does that need to move higher just as we think about how to model gross margins for the back half of the year?

I'm sorry, biotech, just to answer you quickly, biotech turns their inventory about twice a year. So we have about another quarter of that inventory step up left. So it'll be another 2 million in Q3, and then we'll be able to move on from that.

Got it. Perfect. And then as we think about the composition of the equipment backlog, you mentioned it's holding steady. but sounds like maybe that's starting to shift back towards high-tech equipment. Could you drill down into what areas of high-tech you're seeing that recovery leading? I would assume it's mostly in iOS, but just wondering if you're starting to see any better results out of digital imaging or anything on, you know, the milling or 3D printing side that's maybe influencing some of your comments today.

Yeah, you know, we're very pleased with the equipment growth we had. I mean, you know, North America equipment growth on an LCI basis of 9.8%. especially in this environment on some of the high-tech equipment, traditional remains very high. Our LCI in North America on traditional equipment was growth of 14.6%, and that was with virtually no movement in the backlog. It's almost identical from the beginning of the quarter to the end of the quarter. So it's very indicative of ongoing strong demand for traditional equipment. On the high-tech side, we still have some headwinds on scanners, but it's price-related. We're getting good values on scanners, but the revenues are down some on the scanners. We do have, I think they're down 12.1%. Well, I'm sorry, digital restoration sales were down 12.1%, but the scanner revenue is still down 40% for us. year over year, and that's really a pricing matter. Having said that, on high-tech equipment, we did achieve a little bit of growth. It's low single-digit growth, but we did get some high-tech growth, which we're pleased with. And that's coming from some growth really kind of across the board. You mentioned a lot of the categories, some growth in mills, some growth in 3D printing, Those are all coming off relatively low bases, but nevertheless, they're providing us with some growth, and that's helping the category.

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

Great. Thanks, guys. Good morning. Maybe just the first question on dental specialties. I think the reported was up 15.7. I don't know if I missed it, but do you have a precise internal number for that division? And then to just go a little bit further down that road, how implant growth shook out within whatever that internal number was. Was it above overall internal below? And just maybe your thoughts on ongoing share gains or implant share gains, pardon me, now that you've got some of those investments in the more robust implant portfolio to work with going forward. And then I'll ask a shorter follow-up. Thanks.

Certainly. I think with reference to our specialty growth, we've kind of elected to stick to total sales growth in order to be consistent with the message we had around specialties in our investor day. So we're focusing on total sales growth as opposed to LCI sales growth. We think it's more reflective of our strategy for that portfolio of products. We remain very bullish on implant sales I think that we've gotten, we had growth in North America as well as internationally on implant systems. And so dantic sales on the specialty side remain very strong for us, both inside and outside the U.S. Stanley, anything you wanted to, you know, add on the specialty side?

Yeah, John, that was a, thank you for that question. If you look at just North America, sales of our BioHorizons Camelot Premium implants, remember that it's a premium implant at a slightly lower price than perhaps our competitors in the premium area. Delivered mid-single-digit growth, and that's a sequential improvement versus the first quarter. Internationally, implant demand remains good. Remember, we have a very small business in China. Generally, demand for dental implants, again, favor the low-price part. Although I must say for BioHorizons Camlog, we did very well in our biggest market, which is Germany, Austria, and Switzerland. But Medenta split very well also in Germany, which is on the lower end. So overall, we're quite comfortable, actually very excited about our growth in the implant business. Hard to tell you how we're doing compared to others. The data... from the association that reports premium implant sales is not yet available for the second quarter. But my sense is we have gained market share, both in terms of units and in terms of euros, dollars. So as it relates to the competitiveness of our product line, Elizabeth asked the question earlier on, we were missing a piece in the lower end of the mix in North America. I believe SIN will enable us to be highly competitive in this area, specifically with DSOs, large ones and midsize ones. I just want to go back to the ID, the sensor DI question of earlier on. I think we reported this time last year, that our sales did include a large sale of DI equipment to substantial DSO. And so if you take that out, the units are more or less returning to where they were. And there still is some deflation, but not a significant amount. And on the DI side, it's not really deflation relative to a particular brand. but there are lower-priced brands that we're selling more of relative to the larger brands.

That was helpful. Thank you. And maybe I'll try to ask a tight second question. Just for medical, you know, XPP and COVID was up 2%, and I know flu was a year-over-year headwind, but just the past couple quarters, that's come up a little shy versus our expectations. I know you talked about the long-term thoughts at the analyst day, but in the more intermediate term, is there a way that we should Think about that division, maybe just over the balance of 23. You know, you're still standing on a couple comps maybe, but maybe just talk to us on how you see that unfolding for the balance of 23, again, ex-PPE COVID. Thanks.

Yeah, it's very hard to give you specifics. I think we're doing well in terms of units with our existing customers. We are gaining customers, but the whole area of visits is, unrelated to steady visits relative to urgent centers and normal-type medical visits is hard to gauge because of the impact of the seasonality of flu. And we sell quite a bit of flu-related products, be it the tests or the related products that go with the test. At the moment, it seems pretty steady. I wouldn't want to say this really, I wouldn't want you to view this in the wrong way, but COVID is growing a little bit, so people are going more to the physician offices to check things out. So July was a lot better, but you can't draw conclusions. There was a lull in equipment sales. We had a lot of good inquiries in July. But it's hard to give you a specific number. The impact of generic pharmaceuticals is quite a bit on the injectable side, not the vaccine side. We don't sell many tablets and capsules, not our business. So overall, it's a good business. And whether it's 3% or 5% or 6%, I don't think that impacts the overall profitability in a meaningful way. There are so many puts and takes in our medical business, but we feel very good about our medical business and continue to believe that on a units basis, we're growing market share.

We have time for one last question coming from the line of AJ Rice with Credit Suisse. Please proceed with your question.

Hello, AJ. Your line is live.

Okay, our final question will come from the line of Nathan Rich with Goldman Sachs. Please proceed with your question.

Great. Thanks for fitting me in at the end. I'll ask both up front. First, I wanted to go back to the commentary around traditional equipment and the equipment backlog in North America stabilizing. It has obviously been coming down, I think, as we cycled through some of the supply constraints. I'd just be curious on the outlook for demand, though, how you're thinking about that over the balance of the year and what you're seeing with respect to kind of practice formation and remodels just in the current environment that we're in. And then, Ron, maybe a clarification on the margins. Any commentary on the margin outlook between 3Q and 4Q, I guess especially as it relates to, you know, potential timing of acquisition expenses between those two quarters? Thank you.

So, Nathan, on the equipment, I believe that demand is quite good and steady. Some of the larger DSOs continue to invest There may have been a bit of a pause a few months ago when some of these DSOs that were perhaps highly leveraged were looking to determine whether they really should invest or not. But there is a demand for dental care, and I believe that our bigger DSOs are growing. Two of them had some operational issues, which I think are largely behind them. But I believe that they are investing. I'm talking about the largest size. And the mid-size are growing as well. The smaller practitioners, not so much. But overall, I would say the demand for traditional equipment is there. On the digital side, the DI scanners are growing in terms of units. to some extent, movement to the lower price units, but not discounting of any particular unit in a material way. It's just a switch as more people look at this area. Very important to realize the high comp we had in one area, in the DI area last year. We disclosed that on our call. And the mills, I would say, are steadying. There's a demand. It's not as hot as it was. SERAC trade-up could help a bit. And 3D printing is quite hot. Just to go back a little bit, you know, if you look at our numbers in general, we're a big player on the dental lab side. There is a movement away from consumables into digitalization. So that movement is also impacting to some extent the sales of consumables and resulting in an increase in equipment. But overall, I think our equipment backlog in the United States, which is pretty similar to what it was at the end of last quarter, I think is indicative of the desire of dentists to invest in their practices, to make the practices more efficient and provide better digital outcomes. A nice way to even look at that is, another way is to look at the investment in AI We have, and it relates primarily to our Henry Schein One software, where we have, I believe, the most integrated solution, embedded AI in our software, and the units of those are growing there. This is all tied to the desire of practitioners to invest in the practice. So I think the market is stable to growing And international is quite complex. There are different issues in different countries. But in the countries where there is large government support, like Germany, from our point of view, it's stable, although there is a shortage of dentists. And hopefully France will sort itself out after Labor Day. The rest of the markets are stable. There's some ups in Australia because of a little bit of incentives for this quarter. Brazil is pretty stable. And overall, Canada is stable. So I would say the dental markets are pretty stable, solid overall.

And Nathan, just one thing to add on the backlog. Like I mentioned before, our backlog in North America has stayed pretty constant over the course of the quarter, and we saw very good sales growth. I would, quite frankly, I would like for that backlog to come down some, not just for the revenue lift it would give us, but it's just better for our customers to reduce the timing of that backlog so they get their equipment more quickly and it increases capacity in the end market, quite frankly, in those situations where that backlog is for equipment that is new to the business as opposed to replacement. So we would like for that backlog to come down, but right now we still, in North America, we're experiencing a fairly consistent backlog. In terms of your question on Q3, Q4 margins, I do think that, you know, especially at a gross margin level, we can continue at the levels we're at. I think that it's indicative of the growing importance of the dental specialty products in our overall portfolio, as well as the growth in our technology business. And I think we can continue with that as we get into the back half of the year. Of course, there's always, you know, It's a broad portfolio. There are things that can impact that. For example, Q4 tends to be a heavier quarter for equipment sales than other quarters. And those sales tend to be at slightly lower margins than what our overall margin is right now. So that can bring down margins a little bit. But in exchange for the additional sales, we'll clearly take that. So I don't know. I think that that's my general expectation is we'll be able to to continue with the margins that we've seen in the first half of the year into the second half of the year.

So, thank you. I know we've gone over eight minutes over a lot of time. Thank you everyone for calling in. Again, we're very pleased with the progress we're making in the business, both the core business, our specialty businesses, our software businesses. The markets are steady. lots of ins and outs, subtle points, but generally we're comfortable with where we are today. We've reaffirmed guidance. Sorry about the complexity on PPE and tests and the acquisitions, expenses, and related costs, and income generated in that area. But this will, I think, we will try to make it clearer for our investors, make it as simple as possible. for the remainder of the year, but I think next year should be a relatively clean year, and hopefully you will see that our confidence in the business is justified. So thank you all for calling in. Of course, Graham and Ron are available to speak with investors over the next days, and thank you for calling in. We remain confident in our team. Thank you to the team for the tremendous work that has been undertaken as we come out of the other side of COVID and implement our strategic plan. So thank you all and have a great remainder of summer. Thank you very much.

Ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day. Thank you.

Thank you. Hello. Thank you. Thank you. Thank you. Thank you. music music

Good morning, ladies and gentlemen, and welcome to Henry Schein's second quarter 2023 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 that time. If anyone should require operator assistance during the call, please press the star key followed by zero on your touchtone phone. As a reminder, this call is being recorded. And 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. Thank you. 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 2023. 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 factors section of those filings. In addition, all comments about the market we serve, including end-market growth rates and market share, are based upon the company's internal analyses and estimates. Today's 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 are included in Exhibit B of today's press release and can be found in the Financial and Filings section of our Investor Relations website under the Supplemental Information heading. For additional financial information, please refer to our quarterly earnings presentation, also posted on our Investor Relations website. The content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, August 7th, 2023. 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, 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, Graeme. Good morning, everyone, and thank you for joining us today. We are today reporting solid results for the second quarter, driven by our North American dental businesses with strong equipment and steady general merchandise sales. And we're continuing strength in sales of our technology and value-added services, our implants, biomaterials, and endodontic products. The underlying fundamentals in the U.S. dental market remain strong, and demand for dental equipment services and customer confidence continues to improve, as, of course, evidenced by the ongoing investments our customers are making in their practices. In addition, we are seeing growing demand for our implant systems and endodontic products, as well as our integrated software and services solutions, which are generating strong growth by delivering greater efficiency and a better experience to our customers. In the alternate care market, that's the medical market, elective procedures are close to normal levels, while second quarter visits to primary care physicians were down year over year, reflecting last year's higher visits to physician offices and urgent care centers as a result of the extended flu season last year. As expected, sales of PPE and COVID test kits continue to decline. However, we are now seeing sales level off sequentially, and we expect the year-on-year impact to be much lower in the second half of 2023. When excluding these product categories, local currency internal sales growth for the company was 3.3%. In general, our North American dental business performed better than we expected at the start of the year, offset by some incremental COVID-related headwinds facing our medical business, as discussed earlier on. Our outlook reflects overall confidence in our business and in the markets we serve, and accordingly, we are affirming our non-GAAP diluted EPS financial guidance for 2023. Our financial results and guidance demonstrate the strength of the business, as discussed earlier, and continued advancement of our 2022-2024 BOLD Plus One strategic plan. We are successfully executing key initiatives, the key initiatives actually in the plan, including expanding our specialty products and value-added services portfolio, optimizing our distribution businesses, leveraging key customer relationships, and driving digital transformation. Year to date, we have committed over a billion dollars to acquisitions that accelerate the implementation of our strategic plan, adding high-growth, high-margin products and services to our offering. With this clear focus, we believe we are well-positioned to further enhance Henry Schein's leadership in the markets that we serve and to deliver long-term, sustainable shareholder values. Among the larger transactions are our strategic partnership with Biotech Dental, which we closed in April, the acquisition of SIN Implant Systems, which we closed in July, and the recently announced acquisitions of Shield Healthcare and Large Practice Sales, which we expect to close in the third quarter. With these transactions, we have significantly expanded our implant bone regeneration and clear line of product portfolio, digital workflow capabilities, presence in distributing products directly to the patient in the home care arena, and value-added services. Continuing our strategy of following the patient to provide healthcare services with us being delivered, we expect our recently announced agreement to acquire Shield will create an offering with more than $300 million in annual revenue that distributes medical supplies across the United States directly to patients in their home. On completion of this acquisition, this business will be led by Adam Brees, who joined Henry Scheiner's Vice President General Manager Home Care Medical Products and has significant experience in this area. We are excited about the fundamentals of this market, which supports a growing aging demographic experiencing more chronic disease. Beyond added convenience to the patient, the trend of moving care to the home is expected to provide efficiency in the overall healthcare system. And most important, many of our customers have asked us to provide the service. We've been providing it in a moderate way up to now, but now we are committed to advancing our position in this market to support our customers who have requested us to move into the home care arena as a continuum of care. Our home care medical product offering will now include enteral, ostomy, incontinence, wound care, and diabetes products. And we plan to leverage our physician relationships, as noted earlier on, product distribution expertise, and corporate brand assortment to further grow this area. Also, for many years, we have had a successful practice transitions group dedicated to existing smaller and mid-sized dental practices. And I'm most enthusiastic about the acquisition of Large Practice Sales, a leading transition advisory services business, which expands our capability to advise dental practices on larger practice transitions. Of course, being of service to our DSO customers as well. We are also advancing the integration of our dental digital workflow software with our practice management software to create a unique digital solution for dental practitioners. In this connection, we have asked Andrea Albertini, CEO of our international distribution group, to lead the cross-company OneShine solution and accelerate out what we have internally called our three-click integrated software solution for our customers. This simplified open architecture process begins with the capture of any image from an intraoral scanner or 2D, 3D digital imaging unit through our practice management software, followed by the application of embedded artificial intelligence solutions to help in diagnosis, case acceptance, planning, and design, and ending with a direct connection to fabricate the prosthetic through either chair-side mill, a 3D printer, or the transmission digitally of the file to the dental lab. Let me now turn to a review of the quarterly highlights from each business unit, beginning with the dental distributions. In North America, dental offices were generally busy, and this helped our second quarter dental merchandise grow, of course, excluding sales of PPE products. A driver in equipment sales was, of course, our broad equipment offering, which enabled our customers needing solutions to increase productivity to meet demand, and, of course, drive up the efficiency of the practice and, of course, better clinical care. North American dental equipment sales are up double digits. Sales of traditional equipment continue to be strong, and we are pleased that sales of digital equipment returned to growth this quarter. International equipment sales were relatively flat to the prior year. The equipment backlog in North America has held steady, and our international equipment backlog is returning to pre-pandemic levels. Now, turning to our dental specialties. Sales of dental implants and biomaterials were key drivers in the second quarter, complemented by our endodontics and clear aligner businesses. We are seeing implant demand increasing in North America with sales of our BioHorizons Camelot premium implant delivering mid-single digit growth, a sequential improvement versus the first quarter, Internationally, demand for implant systems remains very good. Generally, demand for implants continues to favor value-priced products. We believe that our Camelot, our BiRisens Camelot product offering is well-positioned, but also the moving of demand for value-priced products is reflected in our double-digit growth achieved by our mid-dentist provider of dental implants and bone regeneration products. Looking at recent deals, our transaction with Biotech Dental brings a market-leading portfolio of dental implants at clear aligners to Henry Schein and digital workflow software. SYN, on the other hand, that's SYN Implant Systems, provides us and entree into the large Brazilian implant market and complements our successful Brazilian general dental consumables and equipment business. Both Biotech and SIN offer high-quality implants at an attractive price, and we have the exciting opportunity of expanding these cost-competitive products to other geographies, including the United States. providing, of course, a more comprehensive offering and enabling us to be even more competitive in the implant and bone regeneration space. This quarter, growth in our endodontic business continued to be driven by our Brasler and Edge brands in both North America and internationally. Our orthodontic business was making steady progress with our liner business, although a although this is still a relatively small component of our global revenues. We are seeing growing demand for our specialty products from DSOs, and that's specifically from our DSO customers. And recall we have a pretty decent market share in the DSO market. And we see continued adoption of specialty procedures among dental practitioners. We have grown our global implant bone regeneration and related products and services into over $800 million in revenue and our specialty products to approaching $1.2 billion in revenue in the aggregate on an annualized basis. We now offer a broad range of premium and value alternatives to North American and international practitioners. We expect Dental specialty growth accelerated in the second half of the year due to these acquisitions, but also due to year-over-year comparisons easing. Now, let's turn to the technology and value-added services business, where the largest component, of course, is Henry Schein 1. Global growth in Henry Schein 1 is being driven by ongoing migration to our cloud-based practice management software solutions, Dentrix, Ascend, and Dentale, and by growth in our revenue cycle management business, resulting from increased patient traffic, driving a higher volume of e-claims. Dentrix, Ascend, and Dentale grew to approximately 7,000 customers, and this today represents approximately 40% year-over-year growth. Customers and prospective customers are particularly enthusiastic about incorporating our artificial intelligence solution into their practice management software product. We believe our embedded solution is certainly best in class. We've grown our technology and value-added services businesses into an almost $900 million revenue portfolio on an annualized basis. In addition to Henry Schein's technology solutions, we now offer a broad range of value-added services through our businesses such as ESS, which provides revenue cycle management, and Unitas, providing advice on PPO agreements with insurance providers along with other services, including financial services, practice transitions, staffing services, education, and remote patient monitoring services. for office-based dental and medical practitioners. We expect the technology and value-added services sales growth will accelerate during the second half of the year. Turning now to the medical business. During the second quarter, our medical business achieved low single-digit growth, excluding PPE products and, of course, COVID-19 test kits. This compares with mid-double-digit growth last year. It's really important to understand that when results benefited from some late-season sales of point-of-care flu diagnostic tests. This year was a more typical flu season, and as a result, we had much lower sales of flu COVID-19 and multi-assay diagnostic and related products. Sales growth was also affected by the conversion of certain pharmaceuticals and other products to lower-priced generics and corporate brands, of course with a higher gross profit margin. This is a trend that is taking place throughout healthcare. Sales of medical equipment were relatively soft in the market. The market took a temporary pause to assess likely future demands. However, we have subsequently seen investment interest return in July. So in summary, the fundamentals of our core business remain solid, very good, and the team is executing well on our 2022 to 2024 BOLD Plus One strategic plan. With that, I'll turn the call over to Ron to discuss specifically relative to our quarterly financial results and provide full year guidance. Thank you. Ron, please.

Thank you, Stanley, and good morning, everyone. I'll be discussing our results as a reporter on a GAAP basis and also on a non-GAAP basis. Our second quarter non-GAAP financial results for 2023 and 2022 exclude integration and restructuring costs and amortization expense of acquired intangible assets. This is detailed in exhibit B of today's press release. With respect to sales growth, I will focus on LCI sales growth, which is internally generated sales and local currencies compared to the prior year and excludes acquisitions. Second quarter global sales were $3.1 billion, or an LCI sales decrease of 0.2%. However, when excluding sales of PPE products and COVID-19 test kits, Our LCI sales grew 3.3%. We sold $138 million in PPE products in the second quarter of this year, a decrease of approximately 28% year over year. And we sold $26 million in COVID-19 test kits, a decrease of approximately 62% year over year. Our gap operating margin for the second quarter of 2023 was 6.5%. an 81 basis point decline compared with the prior year gap operating margin. On a non-gap basis, operating margin for the second quarter was 8.2%, a 14 basis point decline compared with the prior year non-gap operating margin. Excluding the impact from lower PPE and COVID-19 test kit sales, we estimate that non-gap operating margin expanded 27 basis points. Second quarter 2023 GAAP net income was $140 million or $1.06 per diluted share. This compares with prior year GAAP net income of $160 million or $1.16 per diluted share. Our second quarter 2023 non-GAAP net income was $173 million or $1.31 per diluted share. This compares with prior year non-GAAP net income of $179 million, or $1.30 per diluted share. These results were impacted by a decreased contribution from lower PPE and COVID-19 test kit sales, estimated to be 8 cents per diluted share relative to the prior year period. The foreign currency exchange impact on our second quarter EPS was immaterial. As Stanley mentioned, we have committed over a billion dollars in the acquisitions we have announced so far this year, with $250 million invested in equity investments and business acquisitions in the second quarter of this year, and we have subsequently signed agreements committing another $800 million. The increased capital deployment for acquisitions has impacted quarterly financial results more than in previous years. The second quarter 2023 GAAP and non-GAAP financial results included high acquisition activity that resulted in acquisition expenses of $6 million, or 4 cents per diluted share, which were offset by net acquisition-related fair value adjustments of $16 million, or 9 cents per diluted share, including a related remeasurement gain resulting from the purchase of a controlling interest of a previously held equity investment. This resulted in a net favorable impact of $10 million or 5 cents per diluted share for the quarter, as illustrated in Exhibit C to our press release. On a year-to-date basis, the favorable net impact of these acquisition expenses and acquisition-related fair value adjustments, including the related remeasurement gain resulting from the purchase of a controlling interest of a previously held equity investment, was only 1 cent per diluted share. We are confident that these strategic investments will drive enhanced growth and value creation over the long term as we accelerate the implementation of our 2022-2024 BOLD Plus One strategic plan. Turning to our second quarter sales results, global dental sales were $2.0 billion, and LCI sales increased by 2.0%. Excluding sales of PPE products, LCI sales growth was 3.7%. Global dental merchandise LCI sales increased by 0.7%, but increased by 2.8% when excluding PPE products. North America dental merchandise sales were flat compared to the prior year and grew 2.6% when excluding sales of PPE products, with good underlying growth offset by lower growth in our dental lab business as a result of digitalization and in our traditional orthodontics business. International dental merchandise LCI sales increased by 1.9% and by 3.2% when excluding sales of PPE products. Global dental equipment LCI growth was 6.4%. Our North America dental equipment LCI sales increased 9.8% as we continued to see strong sales growth for traditional equipment and sales of digital equipment in North America return to growth. International equipment LCI sales increased by 1.6%. Dental specialty products include implants, bone regeneration materials, orthodontic products, and endodontic products. Sales of these products were approximately $270 million in the second quarter, with growth of 15.7% driven by acquisitions and good implant sales in both North America and internationally, particularly in Austria, Switzerland, and in Germany. where we have a leading market position. Global technology and value added services sales during the second quarter were $193 million, with LCI growth of 5.5%. Sales were again negatively impacted by a government contract which expired early in the third quarter of 2022. LCI sales growth was 6.9% when adjusting for this contract. In North America, sales growth was driven primarily by our Dentrix Ascend practice management and revenue cycle management businesses. Growth internationally was driven by our Dentali cloud-based solution. Global medical sales during the second quarter were $950 million, and LCI sales decreased 5.3% due to lower sales of PPE products and COVID-19 test kits. In North America, excluding sales of PPE products and COVID-19 test kits, LCI sales grew 2.0% and were impacted by lower flu cases versus the prior year, which resulted in lower point-of-care diagnostic tests and related product sales. Keep in mind this was against a very difficult comparison, as LCI growth excluding PPE products and COVID-19 test kits grew 14.3% in the second quarter of 2022. Regarding stock repurchases, We repurchased approximately 638,000 shares of common stock in the open market during the second quarter, buying at an average price of $78.36 per share for a total of $50 million. At quarter end, we had approximately $365 million authorized and available for future stock repurchases. Turning to our balance sheet and cash flow, we continue to benefit from significant liquidity, providing our businesses with the financial flexibility and stability to execute on organic growth initiatives and strategic acquisitions while continuing to return capital to our stockholders. We further strengthened our balance sheet by reasonably extending the maturity date of our $1 billion revolving credit facility to July of 2028 and also closed on a new $750 million credit facility. Operating cash flow for the second quarter was $274 million compared with $157 million last year. primarily as a result of lowering inventory levels. Restructuring expenses in the second quarter were $18 million, or 10 cents per diluted share, and were incurred as part of our previously disclosed restructuring initiative. These expenses mainly relate to severance benefits and costs related to exiting facilities. We now expect restructuring activities to extend through 2024. Let me conclude my remarks with our 2023 financial guidance. At this time, we are still unable to provide estimates for costs associated with integration and restructuring for 2023. Therefore, we are not providing GAAP guidance. We are affirming our guidance for 2023 non-GAAP diluted EPS attributable to Henry Schein Inc. of $5.18 per share to $5.35 per share, which is down 1% to 4% compared with our 2022 non-GAAP diluted EPS of $5.38. and includes the previously announced 5 to 10 cents dilution from 2023 acquisitions, which is consistent with our prior guidance and has been updated to include second quarter results and the impact of all acquisitions that have been announced so far. The net impact of acquisition expenses and acquisition-related fair value adjustments, including the related remeasurement gain resulting from the purchase of a controlling interest of a previously held equity investment, is expected to be insignificant for 2023 and has been included in guidance. We expect these acquisitions to contribute to earnings growth beginning in 2024. It is important to recognize that we expect year-over-year growth in diluted EPS to be higher in the fourth quarter than in the third quarter of this year. Our guidance for 2023 assumes total sales growth of approximately 1% to 3% over 2022. As a reminder, our guidance reflects one less selling week in 2023 than 2022. Our sales growth reflects a larger decline in sales of COVID-19 test kits, which we now expect to decrease by approximately 70 to 80% from 2022 versus our previous guidance of a 65 to 70% decrease. Additionally, PPE product sales are expected to decrease about 25 to 30% versus our previous guidance of a decrease of 20 to 25%. Despite the expected lower PPE and COVID-19 test kit sales, the impact on 2023 non-GAAP diluted EPS from PPE products and COVID-19 test kits is still estimated to be 35 to 40 cents per share due to higher than anticipated gross margins on PPE sales relative to our original guidance. We are driving strong earnings momentum in our underlying core businesses, and we still expect non-GAAP operating income will grow in the high single digit to low double digit range when excluding the contribution from PPE products and COVID-19 test kit sales. We continue to expect non-GAAP operating margin contraction of 10 to 15 basis points from the 2022 non-GAAP operating margin of 8.2%. and this is largely a result of lower PPE products and COVID-19 test kit sales and profits. Our guidance reflects non-GAAP operating margin expansion when excluding income from PPE products and COVID-19 test kit sales. Our 2023 guidance includes higher interest expense than in 2022, and as a result of higher interest rates and borrowing levels. We also expect an effective tax rate for the year of the 23% range, assuming no changes in tax legislation. Our guidance is for current continuing operations as well as acquisitions that have been announced and does not include the impact of future share repurchases and potential future acquisitions. Guidance also assumes that foreign currency exchange rates are generally consistent with current levels and that end markets remain consistent with current market conditions. With that, I'll now turn the call back to Stanley.

Thank you, Ron. We're here to answer any questions which investors may have, so operate it.

Thank you. 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. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. And the first question comes from the line of Elizabeth Anderson with Evercore ISI. Please proceed with your question.

Hi, guys. Thanks so much for the question. I have maybe one shorter-term question and one longer-term question. In terms of the shorter-term question, obviously the – fair value adjustment was new this quarter. And I just wanted to make sure I understood, was this something that you knew last quarter when you updated your guidance? Because I'm just trying to understand whether the core guidance moved down X that. And then for my longer term question, you know, it's obviously very interesting with you adding all these new capabilities and geographies in. How do we think about, like, for example, for SIN, like, how long that that might take or what your plans are in terms of bringing those implants into the United States? And then similarly, in terms of the medical, the ability to sort of push those sort of more broadly across the new products across your portfolio. Thank you so much.

Certainly, Elizabeth, I'll take the first question and Stanley will respond to your second question. So, The remeasurement gain was something we contemplated in our guidance. We didn't have a definite amount for it, just like we weren't sure how much our acquisition costs were going to be either. So ultimately, as we've kind of demonstrated in that exhibit to the press release, those amounts, once we realized the higher expenses and we also realized the net remeasurement gain, have largely offset on a year-to-date basis. So yes, our guidance does contemplate the effect of those items. Stanley, if you want to take the second question.

Thank you, Ron. Elizabeth, the SIN implants, not the whole line, but a significantly important part of the portfolio already approved in the U.S., are selling to some extent and are being well received by our particularly DSO customers where we, in fact, by coincidence last week, were able to land a pretty decent DSO that is interested in the SIN implant system. It puts us, the whole SIN transaction puts us in a very competitive position now because to some extent in the U.S. and maybe some other markets, although BioHorizons, Camlog is a premium product selling at a slightly lower price than some of the major brands, if not all of them, we still were missing a piece in our portfolio on the more economic side of implants, and now I believe we're well positioned with SIN, and I believe in the next year or so we will be able to also launch the biotech line in the United States. different market segments, but I think we're definitely in a very competitive position now and are actually starting to see some sales.

Really helpful. And then for Shields as well, that's sort of a similar timeline, and you can sort of push that across your broader portfolio later this year, or is that more of a – we should think about that as more of a 24 type of occurrence?

No, I think – you know, we acquired Prism about a year or so ago – two years ago, which was mostly an East Coast business with a relatively limited portfolio. Shields puts us into the West Coast with a broader portfolio. And Shields was missing the wound care offering that Prism had. So we believe we will create synergies relatively quickly. There are costs, of course, in integration. which we've taken into account in our guidance, mostly one-time costs. But I think in 24, we should be able to start adding accretion in a nice way. This has really been an area that our customers, our big IDN customers, have wanted us to perform. And we didn't undertake these kinds of services. We have one IDN in the New York area that we service in the home care area, but we didn't really have the full capabilities. Between these two acquisitions and another small one, which we hope to announce soon, we will have a pretty good offering in products for the home and will be a great extension to our physician and urgent care business.

And the next question comes from the line of Brandon Vasquez with William Blair. Please proceed with your question.

Hi everyone. Thanks for taking a question. Maybe first on one high level question, just on the macro backdrop. Can you guys talk about where you're seeing some strengths and weaknesses in the environment today? I think maybe equipment looked pretty strong in the US, but maybe a little weaker international and then consumables globally looked kind of stable, low single digits. So curious how all these segments on the dental side are playing out from the macro side.

Thanks for that question. On the macro side in North America, I believe there is stability on the dental side. That's what our team believes in general. Consumables, patients are returning to the dental office. The data is not perfect, but if you look at the latest ADA survey, and some recent analyst reports and studies. It suggested that patient traffic picked up throughout the second quarter after the steady volumes in the first quarter of 23. And so we, of course, we had some volatility in the first quarter of 22. And so it appears that patient flow is good. July, from our point of view, was a good month. Our eClaims data also suggests that what I've just described is backed up, again, by eClaims data from Henry Schein 1. If you peel the onion a little bit further, at least from our point of view, implant sales continue to grow well in North America. The same for endodontics. Our small aligner business is showing similar kinds of trends If you look at international, it's slightly more tepid in international. It's hard to tell because we're now in the summer months when Europe is largely closed. Having said that, we did suffer in the second quarter because of the strikes in France. I would say Germany is okay. We had pretty strong numbers in 2022 from a comp point of view because we had the Sera trade-in in the second quarter of 2022. Patient traffic in Germany, which is our biggest market outside of the U.S., seems to be steady. There is somewhat of a staff shortage. But again, it's really hard to tell. This is the vacation month now, July. August, and it's very hard to tell exactly what is happening in Europe, Germany, but from our checks, it's pretty steady. We don't see much of a deterioration at all. In fact, it could be on the positive side. So generally, dental and medical are okay. On the medical side, a little bit more We did have high comps last year, I think 15% almost growth. So the medical is not going to, as we did caution at the time, present that kind of growth going forward. There is some trading to more generic products, specifically on the pharmaceutical side. It doesn't impact the absolute dollar profits. But I think medical is at least with the ASC business is back to where it was before COVID. And I think if you take out the unusual visits that we experienced in the first half of last year because of flu, I think medical is pretty stable as well. I think on the other hand, I believe our market share is growing. On the specialty product side, again, I think we covered this in our call, and at least from our point of view, we don't see any major impact. From a unit's point of view, there is trading to lower-priced products, specifically from our DSO customers. But in general, our markets are stable, and I think we are quite comfortable at this moment. Our backlog on equipment year on year in North America is pretty substantial. Similar to where it was at the end of last quarter and on the international side is building up again to pre-COVID levels. So I would say stability all around. That would be our view at this moment.

Thank you.

Perfect.

Thank you very much. And maybe one other quick one for Ron. You know, we're trying to... Can you clarify, and you may have given this already on the call, but just to be clear, can you kind of talk about what EPS growth is in 23 and based on that guidance, X to PP&E COVID? And part of why I'm asking is just to make sure we understand what underlying dynamics are as we're kind of looking at our 2024 models where maybe PP&E and COVID sales can kind of stabilize and we can return to some more normalized growth rates. Thank you.

Yeah. Our full year guidance is still 518 to 535, and that includes an expected 35 to 40 cent headwind versus the prior year of impact on EPS from contributions from PPE sales and COVID-19 test kit sales. So that remains unchanged from a guidance standpoint. While we have adjusted the some of our revenue assumptions on those products because of the better than expected margins on the PPE sales. We haven't had to adjust the 35 to 40 cent expected headwind that was built into our original guidance.

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

Thank you. Good morning, guys. Stanley, maybe I would like to dig a little deeper on your North American comments. You know, consumables, you described that market as fairly stable. I think that fits with a lot of our survey data as well. The consumables number, though, did come down to two and a half percent on an organic basis. XPPE this quarter, last quarter was six and a half percent. Do you think that's just the comps from the Omicron stuff in the first quarter last year that really helped inflate that first quarter number? Was there any change in pricing dynamics? Any other factors kind of bridging from the 6.5% first quarter to the 2.5% consumables growth in this quarter? Thanks.

That's a very good question, Jeff. Thanks for asking. I think you need to take the fourth quarter of 2022 in the first quarter of 23 and more or less average out because of the cut-offs. It leans a little bit higher in the first quarter, but it certainly wasn't 6.5% growth apples to apples. I think we've covered that in the past. I would also suggest that inflation in the consumable world the dental arena has muted. Maybe some products individually of certain brands have gone up. They're not necessarily sticking from the manufacturer pass-through. The manufacturers are not necessarily able to hold all these consumable price increases. At the same time, there is a movement towards corporate brand slash generics And some of the smaller brands are doing well where some of those manufacturers are prepared to keep prices or even reduce prices. So it's very hard on a one quarter basis to give you the perfect measurement of mix. But I would take into account the cutoffs for 22 for the fourth quarter. And I would take into account the fact that generally has been some deflation in merchandise prices. And I would say this is particularly coming from the larger DSOs and the mid-sized DSOs, who are today a lot more educated consumers than in the past. This is not really impacting our margin per se, the general mix of our margin to DSOs. So there's a lot of nuance in what I just said. Let's see what happens in the third and fourth quarter, but my sense is the trend that I just described is not going to change much.

All right, that was going to be my follow-up, Stanley. So is there more deflation to come, or have we kind of taken that step down, and you think we can hold steady from there? And then, Ron, just a follow-up on the non-recurring below the line there. Well, I think it was above the line, actually, this quarter on the one-time gain. The 5% to 10% of dilution is unchanged today. That is on a gross amount. You're talking about a net then impact from acquisition activity being close to flat this year. If you had provided that net guidance last quarter, would that have also been flat? So essentially, you're not changing your gross or your net acquisition guidance for the year? I just want to understand that. Thank you.

Jeff, it's hard to tell, as maybe I wasn't clear, exactly what the impact is going to be of deflation, whether it's price reduction on specific branded products or switch to generic or other manufacturers for specific kinds of products. Yeah, I doubt we're in more than 100, 150 basis point swing, maybe 200, but I'm not sure it's much different to that. So... I don't think inflation is going to be significant in the dental consumable business. I think it may go down slightly to deflation, but we're in that range. Units are holding more or less steady. Of course, from our point of view, we're growing our specialty business, although the business may be growing, it doesn't have an impact really in a material way on our total Sales of dental consumables is because not material in the context of the whole consumable offering. Having said that, specialty products are impacting our margin in a positive way, and so are corporate brands and some of the smaller manufacturers.

And Jeff, to answer the second part of your question, The 5 to 10 cents that we referred to after the first quarter when we amended guidance was with specific reference to the expected dilutive effect during the year from biotech. We were holding that 5 to 10 cents, but it now is for all the acquisitions that we have announced so far this year. Apart from that, we have higher than expected acquisition expenses which are largely offset by the re-measurement gain that we recorded in the second quarter as well. So we kind of have set those aside and that was the purpose of Exhibit C to the press release so people could see the components of that and we are holding to the five to ten cents of delusion but now it captures all of the acquisitions that we have announced today.

And the next question comes from the line of Jason Bednar with Piper Sandler. Please proceed with your question.

Hey, good morning. Thanks for taking the questions. I'll actually follow up there on kind of the track that Jeff was going down. But, you know, maybe, so Ron, just maybe first starting on gross margins, I mean, those are still hanging around multi-year highs, despite what I think are maybe some inventory step-up costs from the biotech dental transaction. So could you quantify how much inventory step-up may have hit in the quarter in terms of hitting that gross margin and earnings? And then with absorbing the dilutive SIN transaction in your reaffirmed guidance today, can you give us some detail on how to think about what the dilution is from that deal that you're absorbing, even rough numbers? Is it a few pennies, a nickel, a dime, anything that would be helpful?

I'll start with the quantifiable one first. The step-up charge that we have, and it will be disclosed in the 10Q as well, in the second quarter for biotech was $2 million. So not a real significant effect on gross margin. In terms of SIN, it is absorbed within that 5 to 10 cents. There's also going to be a step up on SIM, but they don't turn their inventory as quickly, so we don't expect it to, you know, quarter to quarter have as dramatic of an effect. So, SIN, without kind of disclosing the, you know, the modeled dilution on that, I can tell you that it is absorbed within that $0.05 to $0.10.

Okay. And then on that $2 million, I guess just a quick follow-up there. Is that $2 million steady as we go forward for the next quarter? quarter or two for 3Q and 4Q, or does that need to move higher just as we think about how to model gross margins for the back half of the year?

I'm sorry, biotech, just to answer you quickly, biotech turns their inventory about twice a year. So we have about another quarter of that inventory step up left. So it'll be another 2 million in Q3 and then we'll be able to move on from that.

Got it. Perfect. And then as we think about the composition of the equipment backlog, you mentioned it's holding steady. but sounds like maybe that's starting to shift back towards high-tech equipment. Could you drill down into what areas of high-tech you're seeing that recovery leading? I would assume it's mostly in iOS, but just wondering if you're starting to see any better results out of digital imaging or anything on, you know, the milling or 3D printing side that's maybe influencing some of your comments today.

Yeah, you know, we're very pleased with the equipment growth we had. I mean, you know, North America equipment growth on an LCI basis of 9.8%. especially in this environment on some of the high-tech equipment, traditional remains very high. Our LCI in North America on traditional equipment was growth of 14.6%, and that was with virtually no movement in the backlog. It's almost identical from the beginning of the quarter to the end of the quarter. So it's very indicative of ongoing strong demand for traditional equipment. On the high-tech side, we still have some headwinds on scanners, but it's price-related. We're getting good values on scanners, but the revenues are down some on the scanners. We do have, I think they're down 12.1%. Well, I'm sorry, digital restoration sales were down 12.1%, but the scanner revenue is still down 40% for us. year over year, and that's really a pricing matter. Having said that, on high-tech equipment, we did achieve a little bit of growth. It's low single-digit growth, but we did get some high-tech growth, which we're pleased with. And that's coming from some growth really kind of across the board. You mentioned a lot of the categories, some growth in mills, some growth in 3D printing, Those are all coming off relatively low bases, but nevertheless, they're providing us with some growth, and that's helping the category.

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

Great. Thanks, guys. Good morning. Maybe just the first question on dental specialties. I think the reported was up 15.7. I don't know if I missed it, but do you have a precise internal number for that division? And then to just go a little bit further down that road, how implant growth shook out within whatever that internal number was. Was it above overall internal below? And just maybe your thoughts on ongoing share gains or implant share gains, pardon me, now that you've got some of those investments in the more robust implant portfolio to work with going forward. And then I'll ask a shorter follow-up. Thanks.

Certainly. You know, I think with reference to our specialty growth, I mean, we've kind of elected to stick to total sales growth in order to be consistent with the message we had around specialties in our investor day. So we're focusing on total sales growth as opposed to LCI sales growth. We think it's more reflective of our strategy for that portfolio of products. You know, we remain very bullish on implant sales. I think that we've gotten, we had growth in North America as well as internationally on implant systems. Entodontic sales on the specialty side remain very strong for us both inside and outside the U.S. Stanley, anything you wanted to add on the specialty side?

Thank you for that question. If you look at just North America, sales of our BioHorizons Camlock Premium implants, remember that it's a premium implant at a slightly lower price than perhaps our competitors in the premium area. Delivered mid-single-digit growth, and that's a sequential improvement versus the first quarter. Internationally, implant demand remains good. Remember, we have a very small business in China. Generally, demand for dental implants, again, favor the low price part. Although I must say for BioHorizons Camlog, we did very well in our biggest market, which is Germany, Austria, and Switzerland. But Medenta split very well also in Germany, which is on the lower end. So overall, we're quite comfortable, actually very excited about our growth in the implant business. Hard to tell you how we're doing compared to others. The data... from the association that reports premium implant sales is not yet available for the second quarter. But my sense is we have gained market share, both in terms of units and in terms of euros, dollars. So as it relates to the competitiveness of our product line, Elizabeth asked the question earlier on, we were missing a piece in the lower end of the mix in North America. I believe SIN will enable us to be highly competitive in this area, specifically with DSOs, large ones and mid-sized ones. I just want to go back to the ID, the sensor DI question of earlier on. I think we reported this time last year that our sales did include a large sale of DI equipment to substantial DSO. And so if you take that out, the units are more or less returning to where they were. And there still is some deflation, but not a significant amount. And on the DI side, it's not really deflation relative to a particular brand. but there are lower-priced brands that we're selling more of relative to the larger brands.

That was helpful. Thank you. And maybe I'll try to ask a tight second question. Just for medical, you know, XPP and COVID was up 2%, and I know flu was a year-over-year headwind, but just the past couple quarters, that's come up a little shy versus our expectations. I know you talked about the long-term thoughts at the analyst day, but in the more intermediate term, is there a way that we should Think about that division, maybe over the balance of 23, you know, you're still standing on a couple comps maybe, but maybe just talk to us on how you see that unfolding for the balance of 23, again, ex-PPE COVID. Thanks.

Yeah. It's very hard to give you specifics. I think we're doing well in terms of units with our existing customers. We are gaining customers, but the whole area of visits, unrelated to steady visits relative to urgent centers and normal-type medical visits is hard to gauge because of the impact of the seasonality of flu. And we sell quite a bit of flu-related products, be it the tests or the related products that go with the test. At the moment, it seems pretty steady. I wouldn't want to say this really, I wouldn't want you to view this in the wrong way, but COVID is growing a little bit, so people are going more to the physician offices to check things out. So July was a lot better, but you can't draw conclusions. There was a lull in equipment sales. We had a lot of good inquiries in July. But it's hard to give you a specific number. The impact of generic pharmaceuticals is quite a bit on the injectable side, not the vaccine side. We don't sell many tablets and capsules, not our business. So overall, it's a good business. And whether it's 3% or 5% or 6%, I don't think that impacts the overall profitability in a meaningful way. There are so many puts and takes in our medical business, but we feel very good about our medical business and continue to believe that on a units basis, we're growing market share.

We have time for one last question coming from the line of AJ Rice with Credit Suisse. Please proceed with your question.

Hello, AJ. Your line is live.

Okay, our final question will come from the line of Nathan Rich with Goldman Sachs. Please proceed with your question.

Great. Thanks for fitting me in at the end. I'll ask both up front. First, I wanted to go back to the commentary around traditional equipment and the equipment backlog in North America stabilizing. It has obviously been coming down, I think, as we cycled through some of the supply constraints. I'd just be curious on the outlook for demand, though, how you're thinking about that over the balance of the year and what you're seeing with respect to kind of practice formation and remodels just in the current environment that we're in. And then, Ron, maybe a clarification on the margins. Any commentary on the margin outlook between 3Q and 4Q, I guess especially as it relates to, you know, potential timing of acquisition expenses between those two quarters? Thank you.

So, Nathan, on the equipment, I believe that demand is quite good and steady. Some of the larger DSOs continue to invest. There may have been a bit of a pause a few months ago when some of these DSOs were perhaps highly leveraged, were looking to determine whether they really should invest or not. But there is a demand for dental care, and I believe that our bigger DSOs are growing. Two of them had some operational issues, which I think are largely behind them. But I believe that they are investing. I'm talking about the largest size. And the mid-size are growing as well. The smaller practitioners, not so much. But overall, I would say the demand for traditional equipment is there. On the digital side, the DI scanners are growing in terms of units. to some extent, movement to the lower price units, but not discounting of any particular unit in a material way. It's just a switch as more people look at this area. Very important to realize the high comp we had in one area, in the DI area last year. We disclosed that on our call. And the mills, I would say, are steadying. There's a demand. It's not as hot as it was. SERAC trade-up could help a bit. And 3D printing is quite hot. Just to go back a little bit, if you look at our numbers in general, we're a big player on the dental lab side. There is a movement away from consumables into digitalization. So that movement is also impacting to some extent the sales of consumables and resulting in an increase in equipment. But overall, I think our equipment backlog in the United States, which is pretty similar to what it was at the end of last quarter, I think is indicative of the desire of dentists to invest in their practices, to make the practices more efficient and provide better digital outcomes. A nice way to even look at that is, another way is to look at the investment in AI We have, and it relates primarily to our Henry Schein 1 software, where we have, I believe, the most integrated solution, embedded AI in our software, and the units of those are growing there. This is all tied to the desire of practitioners to invest in the practice. So I think the market is stable to growing And international is quite complex. There are different issues in different countries. But in the countries where there is large government support, like Germany, from our point of view, it's stable, although there is a shortage of dentists. And hopefully France will sort itself out after Labor Day. The rest of the markets are stable. There's some ups in Australia because of a little bit of incentives for this quarter. Brazil is pretty stable. And overall, Canada's stable. So I would say the dental markets are pretty stable, solid overall.

And Nathan, just one thing to add on the backlog. Like I mentioned before, our backlog in North America has stayed pretty constant over the course of the quarter, and we saw very good sales growth. I would, quite frankly, I would like for that backlog to come down some, not just for the revenue lift it would give us, but it's just better for our customers to reduce the timing of that backlog so they get their equipment more quickly and it increases capacity in the end market, quite frankly, in those situations where that backlog is for equipment that is new to the business as opposed to replacement. So we would like for that backlog to come down, but right now we still, in North America, we're experiencing a fairly consistent backlog. In terms of your question on Q3, Q4 margins, I do think that, you know, especially at a gross margin level, we can continue at the levels we're at. I think that it's indicative of the growing importance of the dental specialty products in our overall portfolio as well as the growth in our technology business. And I think we can continue with that as we get into the back half of the year. Of course, there's always, you know, it's a broad portfolio. There are things that can impact that. For example, Q4 tends to be a heavier quarter for equipment sales than other quarters, and those sales tend to be at slightly lower margins than what our overall margin is right now. So that can bring down margins a little bit. But, you know, in exchange for the additional sales, we'll clearly take that. So I don't know if, you know, I think that that's my general expectation is we'll be able to to continue with the margins that we've seen in the first half of the year until the second half of the year.

So, thank you. I know we've gone over eight minutes over a lot of time. Thank you everyone for calling in. Again, we're very pleased with the progress we're making in the business, both the core business, our specialty businesses, our software businesses. The markets are steady. lots of ins and outs, subtle points, but generally we're comfortable with where we are today. We've reaffirmed guidance. Sorry about the complexity on PPE and tests and the acquisitions, expenses, and related costs, and income generated in that area. But this will, I think, we will try to make it clearer for our investors, make it as simple as possible. for the remainder of the year, but I think next year should be a relatively clean year, and hopefully you'll see that our confidence in the business is justified. So thank you all for calling in. Of course, Graham and Ron are available to speak with investors over the next days, and thank you for calling in. We remain confident in our team. Thank you to the team for the tremendous work that has been undertaken as we come out of the other side of COVID and implement our strategic plan. So thank you all and have a great remainder of summer. Thank you very much.

Ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.