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.