Henry Schein, Inc.

Good morning, ladies and gentlemen, and welcome to Henry Schein's third 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 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 third quarter 2023. With me on today's call are Stanley Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein, and Ron South, Senior Vice President and Chief Financial Officer. Before we begin, I'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 a 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 Securities and Exchange Commission. and included in the risk factor section of those filings. In addition, all comments about the markets we serve, including end market growth rates and market share, are based upon the company's internal analyses and estimates. 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 Financials 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 the live broadcast, November 13, 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 Bergen.

Thank you, Graeme. Good morning, everyone. And thank you for joining us. Before reviewing our third quarter performance, I'd like to update investors on the cybersecurity incident that we discovered on Saturday, October 14th, primarily affecting some of our distribution businesses. That morning, we initiated our business continuity plan when we promptly took precautionary actions, including taking certain systems offline and other steps intended to contain the incident. which led to temporary disruption of some of our operations. The following week, our distribution centers were processing orders with temporary interim processes and were generally delivering orders to customers within one to two business days. In accordance with our business continuity plan, we activated a previously identified team of leading cybersecurity experts to assist in the investigation and recovery of the systems. and to advise us through this recovery process. Over the past weeks, we have worked to create a clean network in a controlled manner from the backup data we maintained. Our distribution businesses are now operational, and we are initiating our e-commerce platform early this week, and we're indeed hopeful that the website will come up tomorrow morning. We've also made significant progress resuming the high levels of service our customers have come to expect from us. Over the last week, orders from our distribution businesses were approximately 85 to 90% of what they were pre-incident. We expect orders to increase with the reactivation of our e-commerce platform. Of course, our field sales consultants and telesales representatives have deep relationships with our customers and our complementary software and other value-added services bring value that we believe continues to make us the best choice for our customers in the areas of services we provide. As a reminder, this incident mostly affected the operations of our North American and European dental and medical distribution businesses. Our distribution operations in Australia, New Zealand, Asia, and Brazil were generally not affected. Henry Schein 1, our practice management software, revenue cycle management, and patient relationship management business was not affected, and our manufacturing businesses and our equipment sales and service operations were mostly unaffected. We are now aware that a significant amount of information was obtained by an unauthorized third party in the cybersecurity incident. Account information for a limited number of suppliers was misused, and we have already separately addressed this with those impacted. More details have been posted on our Investor Relations website. We are continuing our investigation of the cybersecurity incident. In a moment, Ron will speak about the financial impact of the cybersecurity incident, which will affect our fourth quarter financial results. I would like to extend a heartfelt thanks to our customers as well as our suppliers and team members for their patience and the incredible support we've received from all of our constituents during this period. Our customers, our suppliers, and our team understand that a cyber incident could occur to any business and has been particularly prevalent in the healthcare arena over the last six months. Turning now to the third quarter. We're reporting solid financial results from the third quarter. We achieved good total sales growth and non-GAAP diluted EPS growth despite continued lower sales of PPE and COVID-19 tests. Our internal sales growth slowed in the third quarter due to some market softness in September as a result of general macroeconomic weakness as well as lower sales of PPE products and COVID tests. However, we believe that the dental and medical markets that we serve are relatively recession resilient. Sales of PPE products and COVID-19 test kits continue to decline, but at a lower rate compared to the earlier year. Increased customer demand for lower priced corporate brand merchandise and generic products along with growth of equipment technical service revenue also has helped our profitability this quarter. Profitability for the quarter benefited from our technology, value added services and dental specialty products as we continue towards our goal of achieving 40% of operating income from sales of high growth, high margin products. We are now more than halfway through our three-year BOLD Plus One strategic plan. Despite current macroeconomic conditions and the cybersecurity incident, we have confidence in the stability of the dental and medical markets and remain committed to our strategic priorities and long-term financial model, which includes high single-digit to low double-digit growth in operating income. Year-to-date, we have closed several strategic investments And just last month, we were pleased to announce the closing of the acquisition of Shield Healthcare, a business that distributes medical products to patients in their home, including continuous glucose monitoring. Overall, these acquired businesses are performing well. So let me turn to a review of our quarterly highlights from each of our business units, beginning with dental distribution. In North America, dental offices generally remain busy, However, dental patient traffic somewhat slowed in September. This seemed to be the result of an increase in patient cancellations, which we believe were partially due to the seasonal uptick of flu cases and COVID-19. And our overall consumable merchandise sales, excluding PPE products, reflected this. Looking at our international dental business, overall volumes of consumable merchandise held steady across the regions. Sales of traditional dental equipment in North America have largely reverted to pre-pandemic levels with growth in mid-single digits. Dental equipment sales continue to be impacted by lower average selling prices and we expect this to normalize in the first quarter of 2024. The equipment backlog was sequentially slightly higher and included strong orders taken at DS World show held in September, actually at the end of September of 2023. This increase reflects typical seasonality as we head into the fall. International dental equipment sales reflect a slowdown in sales in large equipment, and this is though in parts of the world outside of North America, not everywhere. Our equipment sales vary quarter to quarter, of course. partially as a result of purchasing dynamics of large DSOs. But over the long term, we continue to expect equipment sales growth in the range of low to mid single digits. Dentistry is undergoing a significant transition to integrated high tech digital workflow systems in the dental practice. Henry Schein is well positioned to be the brand of choice for our customers, who are seeking an integrated digital clinical workflow. And we remain confident in the long-term outlook for dental equipment in general. Turning now to the dental specialties. Overall, we believe we continue to gain global market share during this quarter. Our global implant business grew 40%, predominantly through acquisitions. BioHorizons Camelot continued to outperform the market growing sales in the mid-single digits. Our acquisitions of Biotech Dental in France and SIN, S-I-N in Brazil, are showing strong growth in implants and related products in their local markets. Our value brand, Medentis, is also growing well. This is offset by somewhat slower, in fact, slowing market, the slowing market in North America. The performance of our endodontic business continued to be strong, and the clear aligner segment of our orthodontic business grew by double digits, albeit of a small base. So we're optimistic about the long-term growth prospects for the specialty markets as we continue to see adoption of specialty procedures among general practitioners, the growing adoption by DSOs of specialty procedures, and of course due to the macro trends of demographics. We're also optimistic about the dental specialty products in 2024 as we have a robust new product line with upcoming launches in various geographies. So we are really optimistic about our specialty businesses in 2024 driven by the macro demographic trends, and our robust new product pipeline. Let's now turn to our technology and value-added services businesses. We had excellent sales growth in our technology and value-added service businesses driven by the Henry Schein 1 practice management software sales and by large practice sales, the practice brokerage business we acquired at the close of this quarter. Henry Schein 1's growth continues to be driven by practice management software solutions, and of course, particularly by Dentrix Ascend and Datali, our cloud-based solutions, which provides the opportunity for dental practices to integrate clinical workflow, and it's very important, throughout the dental office. Once again, the customer base of cloud solutions increased by about 40% this quarter compared to prior year. DSO accounts in particular are seeking integrated platforms along with the tools that are enhanced by artificial intelligence. In this connection, we recently formed the DSO Strategic Advisory Council, which is strategically focused on growing practice revenues and solving operational issues for large group practices. We, of course, have similar programs for mid-sized practices and for the smaller practices where this advisory kind of service is provided by our field sales consultants. During the third quarter, we introduced new features and upgrades, including the launch of Lighthouse 360. This new platform facilitates integrated patient communications, reputation management, and overall practice success. This feature-rich product includes online patient scheduling, digital customized forms for patient intake and payment reminders, and more. Henry Schein 1's goal is to continue to grow our practice management customer base and to increase the breadth of solutions offered to our existing customers. Our priorities regarding software integration are critical to achieving this goal, and we are well on our way towards an integrated clinical offering for the clinical aspects of the practice with a focus on specialty procedures as well. Turning to our medical business, third quarter growth was in the low single-digit digits excluding sales of PPE and COVID-19 test kits, similar to recent quarters. This growth reflects high prior year comparison sales growth and higher sales of lower priced products, including generics and corporate brands, albeit with higher margins. Of note, we are now distributing COVID-19 vaccines, although we do not expect this low margin product category to have a significant impact on sales or profits. In September, we saw an uptick of sales in COVID-19 test kits, which we expect to continue into the fourth quarter. So in summary, the underlying fundamentals of our core business remain solid. We are executing ahead of schedule with our 2022-2024 bold plus one plan. So with that in mind, let me ask Ron to discuss the quarterly financial results and our full year guidance. Ron, please.

Very good. Thank you, Stanley, and good morning, everyone. As you may have seen, on November 2nd, we filed a notification with the SEC advising that we will not be filing our Q3 Form 10Q until later in November. This delay is related to our recent cybersecurity incident. We were able to complete our consolidated income statement prior to deactivating our systems. However, we have been delayed in completing our consolidated balance sheet and statement of cash flows, which we normally include as attachments to our earnings release. These statements will be available when our Q3 Form 10Q is completed. The third 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. Note that there are no effects of the cybersecurity incident on our Q3 results as the incident occurred in October. With respect to sales growth in the quarter, I will focus primarily on LCI sales growth, which is internally generated sales in local currencies compared with the prior year and excludes acquisitions. The third quarter global sales of $3.2 billion reflected an LCI sales decrease of 1.2%. However, when excluding sales of PPE products and COVID-19 test kits, our LCI sales grew 1.1%. We sold $131 million in PPE products in the third quarter of this year, a decrease of approximately 19% year over year. And we sold $44 million in COVID-19 test kits, a decrease of approximately 46% year over year. Our gap operating margin for the third quarter of 2023 was 6.3%, a 52 basis point decline compared to the prior year gap operating margin. On a non-gap basis, Operating margin for Q3 was 8.1%, a 12 basis point decline compared with the prior year non-GAAP operating margin, with higher gross profit margins offset by higher operating expenses, primarily acquisition related expenses. Third quarter 2023 GAAP net income was $137 million, or $1.05 per diluted share. This compares with prior year GAAP net income of $150 million, or $1.09 per diluted share. Our third quarter 2023 non-GAAP net income was $173 million, or $1.32 per diluted share. This compares with prior year non-GAAP net income of $177 million, or $1.29 per diluted share. Details of acquisition expense and acquisition related adjustments for the quarter and year to date are included in Exhibit C to our press release. The foreign currency exchange impact on our third quarter EPS was immaterial. Now turning to our third quarter sales results. Global dental sales were $1.9 billion, and LCI sales decreased by 0.2%. Excluding sales of PPE products, LCI sales growth for global dental was 0.3%. Global dental merchandise LCI sales increased by 0.3% or 1.1% when excluding PPE products. North American dental merchandise LCI sales decreased 1.2% compared to the prior year and decreased 0.1% when excluding sales of PPE products. International dental merchandise LCI sales increased by 2.9% and by 3.2% when excluding sales of PPE products. Global dental equipment LCI sales decreased 2.0% with mid-single-digit growth in traditional equipment offset by lower digital equipment sales reflecting lower intraoral scanner prices as a result of new products introduced late last year. Our North America dental equipment LCI sales increased 0.2%. This was against a difficult comparison as North America dental equipment LCI growth was 12.8%, in the third quarter of 2022. International equipment LCI sales decreased 5.9 percent compared to the prior year as a result of some macroeconomic uncertainty in Europe, which primarily impacted digital equipment sales. Dental specialty products include implants, bone regeneration materials, orthodontic products, and endodontic products. Sales of these products were approximately $268 million in the third quarter, with reported growth of 25% driven by acquisitions. Global technology and value-added services sales during the third quarter were $210 million, with LCI growth of 9.6%. In North America, sales growth was driven primarily by our Dentrix Ascend practice management business. Growth internationally was driven by our Dentale cloud-based solutions. Our technology and value-added services and specialty products represented about 35% of total operating income in the third quarter. Global medical sales during the third quarter were $1.1 billion, and LCI sales decreased 4.6% 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 1.0%. This was against a typical comparison as LCI growth excluding PPE products and COVID-19 test kits grew 9.7% in Q3 of 2022. Regarding stock repurchases, we repurchased approximately 660,000 shares of common stock in the open market during the third quarter, buying at an average price of $75.79 per share for a total of $50 million. At quarter end, we had approximately $315 million authorized and available for future stock repurchases. 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. As we stated last quarter, we have committed over $1 billion to the acquisitions we have announced so far this year, with $417 million invested in business acquisitions that closed in the third quarter and $668 million invested year-to-date. Restructuring expenses in the third quarter were $11 million, or six 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 still expect restructuring activities to extend through 2024. Let me conclude my remarks with our 2023 financial guidance. At this time, we were still unable to provide estimates for costs associated with integration and restructuring for 2023 and expenses directly associated with the cybersecurity incident. Therefore, we are not providing GAAP guidance. We are updating guidance for 2023, our non-GAAP guidance, to $4.43 a share to $4.71 a share, reflecting A narrowing of the range of our guidance for 2023 non-GAAP diluted EPS for the underlying business to 518 to 526 from 518 to 535 that was previously communicated. Reflecting softening macroeconomic conditions, an estimated 55 to 75 cents per share impact is due to business interruption from the recent cybersecurity incident. As Stan mentioned, we believe that our teams have contained the cybersecurity incident and we have mostly restored our operations. Although we believe a significant portion of sales that had been disrupted while certain systems were offline were deferred, we estimate the percentage sales growth for the full year will be negatively impacted in the low to mid single digits. Our estimated fourth quarter impact of 55 cents to 75 cents per share does not include certain expenses directly associated with the cybersecurity incident as we expect to report these as non-GAAP expenses in the fourth quarter. The financial impact does not include any future insurance claim recovery. We expect to file an insurance claim arising from this incident under our cyber insurance policy, although final resolution is subject to insurer approval. This policy has a $60 million after-tax claim limit after a $5 million retention. and any claim recovery will likely not be recognized until late 2024. Our 2023 net sales are now expected to be 1 to 3 percent lower than 2022 net sales, which is an update from prior guidance of 1 to 3 percent sales growth. This change in guidance primarily reflects lower sales as a result of the cybersecurity incident. which, as previously mentioned, is expected to lower full-year 2023 percentage sales growth in the low to mid-single-digit range. As a reminder, our guidance also reflects one less selling week in 2023 than 2022. Our 2023 guidance includes higher interest expense than in 2022 as a result of higher interest rates and higher borrowing levels. We also expect an effective tax rate for the year in 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 as well as certain expenses directly associated with the cybersecurity incident. Guidance also assumes that foreign currency exchange rates are generally consistent with current levels and that end markets remain consistent with current market conditions. We intend to introduce 2024 financial guidance when reporting Q4 and full year financial results. With that, I'll now turn the call back to Stanley.

Thank you, Ron. Appreciate that. Operator, we are ready to take any questions that investors may have.

Thank you, sir. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star 2 to remove a 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 while we poll for questions. And the first question comes from the line of John Block with Stifel. Please proceed with your question.

Hey, guys. Good morning. Thanks for the questions. Maybe the first one, just high level, Stanley, what are you guys hearing from the customers? The ordering frequency from a practice might be, I don't know, maybe roughly every two to three weeks. So some customers might have encountered the issues a pretty minimal number of times, maybe one time, possibly twice at most. What have you guys heard regarding, call it customer retention, or do you think you don't have a better feel for that until the actual website is back up and running, which seems to your prior point, tomorrow morning, and then I'll just ask a follow-up.

Yes, sir, John. That, of course, is a very important question. We believe we're at this 85% to 90% floor. The larger customers that are more sophisticated from an IT point of view are buying using either the e-commerce systems that we offer, or workarounds. I would say that is even with the smaller customers, the mid-sized customers. The smaller customers are relying on visits from the field sales consultants to collect the orders, or they were until recently, and from the telesales reps. So the funnel for doing that is not as wide as, of course, digital ordering. So I think we will start seeing much more business from the smaller customers, which are a key part of our business, as the website returns. But, you know, we have very good relationships with our customers, the field sales consultants, tremendous telesales connectivity, and, of course, the value-added services. Generally, we've not heard of customers leaving us. Have customers made alternative decisions? Yeah, of course, some of the buyers are pharmaceuticals. couldn't wait, for example, for controlled drugs. We expect our controlled drug system to be up relatively soon. So I would say generally we are heartened by the support we've received from our customers. John, as you know, unfortunately, cyber issues in healthcare have been quite prevalent. In fact, the first six months of this year, there were over 300 incidents in healthcare alone. So the customer base is quite attuned to this and obviously it's going to be a lot of work on behalf of our field sales representatives and our telesales people as well as our e-commerce team to bring all the customers back. There will be some trailing, I would imagine, but overall we remain quite enthusiastic about the level of support we receive. And by the way, not only from our customers, but the entire industry has been very, very supportive of us.

That's a great color. Thanks, Stanley, for that. And maybe I'll pivot, Ron, to you for the second question. Any really high-level thoughts around 2024? And not a specific number, but just maybe just the construct. Should we think about it as sort of growth on the core underlying EPS of 522, you know, the revised midpoint? And then offset, I call it the lag hit on the cybersecurity incident. And on that second point, I just want to make sure the 55 to 75 cent 4Q23 cyber hit, that's all called decremental from lost sales. I think you said no expenses in there. That would be excluded from non-GAAP. Is there any promotional stuff in there? Sorry, and last sort of question tack on. How do we think about the exit impact for December? Because You talked about the top line impact for the quarter, but obviously December would likely be much lower than what you've experienced in October. So any color on the cadence or the trailing throughout the fourth quarter? Thanks, guys.

Yeah, thanks, John. Yes, you're correct in that the 55 to 75 cents that we've called out as Q4 impact is attributable to business interruption impact. It does not include... the one-time costs that we are incurring that are directly attributable to reactivating the systems. Right now, it's our intent that when we report the Q4 results, we'll be calling out those particular costs as part of our non-GAAP reconciliation. In terms of run rate into 24, That will be something that really is largely contingent on the level of business that we see with OneWeb being back up. That is a very important turning point for us. It's something we're very excited about in the organization this week. And I think that we'll have greater intelligence in terms of what's happening with customer retention. with OneWeb back up. I do anticipate we will likely have some, what do you want to call them, customer retention programs or promotions in the quarter that may put a little bit of pressure on Q4 margins. I wouldn't expect it to be real significant, but having said that, we do want to show some appreciation to our customers and we do want to make sure that we go into 2024 with as solid of a base of businesses that we can possibly have.

And the next question comes from the line of Elizabeth Anderson with Evercore ISI. Please proceed with your question.

Hi, guys. Thanks so much for the question. So as we think about the cybersecurity, you said the website's back up. tomorrow. That's great to hear. Now, if we think about just sort of like the broader operations that support that, is that something that you feel like is also kind of in a similar place? And obviously you probably wouldn't put the website up if it were, you know, having a ton of internal issues. So I just want to make sure how you feel about sort of the rest of the systems that are supporting that ordering process. And then sort of as we think about 2024, you obviously have the bold initiative I just wanted to see if, like, given the cybersecurity situation or the current demand environment, how you sort of think about that conceptually, whether there are places there you can accelerate cost cuts, any color there would be helpful. Thank you.

Thank you, Elizabeth. Again, also two very, very good questions. So let me just provide one more time the context, which I think we try to communicate our prepared remarks today. So we experienced the cybersecurity incident. We got suspicious. And what we did was, and our CTO made a brilliant move. He brought the whole system down immediately. He knew it was quite comfortable that our backups were good. So our backups have turned out to be very good. And what we need to do now is turn on application by application. Before you can turn on that application, You have to do certain forensic work to make sure that there are no sleepers in there. And so that's what we've been doing. I would say that at the moment, other than the website, we're more or less back to where we were. There are a few areas that require additional turning on, some involving invoicing, some involving the returns function, and the only area we can't really supply right now because we're super cautious is on controlled drugs, although we have an affiliate that was not impacted and they are shipping controlled drugs if need be. We expect all of these areas, and this is expected, to be up and running this week. There are some isolated areas where we have challenges. I would say they have less to do with the customer side. We have some parts of the world where we have WMS systems that are not fully functional yet. It's not impacting the customer because the E3 system, the basic buying system is working, has been working for a while, but it's just taking us a lot more human capital, human resources in receiving the products, putting them away, and picking. Those areas will come back, I think, in the next few weeks. So I think from a customer point of view, we're in pretty reasonable shape today. Yeah, if a customer has an inquiry on certain purchases made some time ago, we may not be able to give an instant response. We may have to do some research through the backups. But in general, operationally, actually we were doing quite well a couple days after, two days after the cyber incident. The key here is to remember that our backups are in pretty good shape and we feel very confident in the way we're bringing up these systems one at a time. Our team on the IT side is remarkable. Our consultants are just the best. And we feel pretty good that we are bringing up systems that are stable, and we just have to go through the cycle. But I don't think we're talking about that long. But I'm quite sure that from a customer point of view, other than the items I mentioned, we'll be in pretty good shape tomorrow, hopefully when the website comes up.

Elizabeth, I'll take the second half of your question. I believe you were asking if in 2024, did I anticipate that we would be accelerating any cost cuts? Did I understand you properly?

Yes, that's what I was asking. Thank you.

Yes, I think that we will really go about our business in 2024 as we had originally planned. As we said on the call, we have a billion dollars committed to acquisitions and typically In the short-term following acquisitions, we look for synergy opportunities. Some of those acquisitions will stand alone as businesses, but others do provide us with some synergy opportunities that we'll be able to implement over the course of 24. And then just any other normal process that we would go through to identify cost efficiency. So I don't think this, in the context of the cybersecurity incident, do we feel a need to go out and accelerate any type of cost savings in 24. No.

Got it. Thanks so much.

You're welcome.

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

Thank you. Good morning, guys. Can you hear me okay?

Yes, Jeff.

All right, great. Thanks for taking the call. So what are the questions? So, you know, let me ask two questions. I guess they're both kind of intertwined, but just so kind of we level set all of us on how to conceptually think about your outlook from here. You know, first, if we could just ignore the cyber for a second, and I'm sure, you know, that's not possible, and that'll be my follow-up question, but if we ignore that for a second, your third quarter dental organic growth right around flattish levels on a global basis, the company-wide, you know, one-ish percent. Would those, if you were counseling us on how to think about kind of our 2024 models, would those be starting off points, you know, that you would recommend we think about conceptually and where we build kind of our organic ex-cyber kind of growth rates into next year?

So Jeff, obviously we've provided a lot of thought around this, as have analysts and as has the industry. So in broad terms, we believe our business is relatively recession resilient. If it goes down a bit, it will come back. Our North American dental consumable business, as you correctly point out, had flat internal growth. We saw moderate softness in patient traffic in North America due to appointment cancellations, mostly in September. It's hard to tell how long that has continued. It was similar in the first two weeks of October, but thereafter, obviously, because of the cyber incident, it's hard to project. If you look at, I'm talking North America now, sales of traditional dental equipment have largely reverted to the pre-pandemic levels. And we think that's growth in the mid-single digits. Digital equipment sales continue to be impacted by lower average selling prices. And it's hard to again give you an absolute as when we expect this to normalize. My sense is, and that's what our equipment people say, it will normalize sometime in the first quarter of next year. If you look at our international business, overall volumes of consumer-built merchandise held steady across most regions. If you project that into the international equipment sales, there is a slowdown in large equipment in parts of the world, but there are also some unique reasoning for that. In places like Australia, there was a tax incentive that ended. So I think there is some caution amongst our customers in parts of the world because of the macroeconomic issue in parts of Europe. I don't think it's necessarily that bad in any one country. Overall speaking, I think health insurance is, in the US, typically provided through employment. Could be a lagging indicator. So this could impact activities. Hard to tell. And if it does, it's probably mostly higher end procedures. I think we indicated that on the implant side in North America, we did see some softness on the premium side. Outside the US, of course, you have countries with a lot more government payment or support. So it's hard to give you an indication of really how far down people's views would go of the economy having an impact on dentistry. But from the past, it's never been significant. By the way, we are seeing similar trends between private practices and the large practices. But of course, equipment sales for the DSOs are not as strong as they were, given the cost of interest. But we also have to understand that DSO sales could be lumpy. They always have been. On patient traffic, if you take a look at the ADA survey, It did indicate some patient traffic slowness in the third quarter, probably mostly in September. There's an argument that it's because of the flu, traditional flu, COVID-19 impact. But then, you know, you go and you take a look at implants in Europe where they were okay. There's not a definitive downward trend, but there is a little bit of caution at the margin, and I think we have to take that position. At least we have to plan for that.

That's helpful. Thank you, Stanley. And so that kind of helps maybe level set us on the core assumptions. Ron, I guess my follow-up then is, as I see it, and correct me if I'm wrong, there's three variables on the cyber that we need to think about heading into next year. Do you continue to run any kind of customer retention programs on the spending side? do you have any kind of just higher core spending on cyber security that you got to put in place here that you have to put in place that's going to structurally take the opex side higher and then three is there any kind of customer loss do you lose you know maybe one or two percent of revenue or something like that because not everybody comes back either for risk mitigating reasons or other reasons so Just any comment on kind of the two spending categories? Will those be higher next year? And the customer retention, I know it's hard to predict, but would it be safe to build in maybe just a little bit of bleed away of customer, or do you think you get pretty much most of that back in 24? Thank you.

Sure, Jeff. I think I'll kind of address the first item around customer retention and the third item, customer loss, somewhat together. And I think we will have a – greater feel for that in the coming weeks. As I was saying earlier, the restoration of or the reactivation of our website will bring us much more intelligence in terms of of what that customer retention and what the potential for customer loss might be, and as a result, what the necessary investment may be to recover some of that business and some of those customers. And that will be taken into consideration when we communicate our 2024 guidance in February of next year. I think in terms of higher cyber spend, Like everything else, we will assess what is the appropriate investment. If we believe it's necessary relative to anything else, we will do that. But I think right now we're still in the midst of understanding the cause of this. The forensic investigation is ongoing. And we will invest accordingly, according to that, if necessary. If it's necessary to increase that investment, we will.

Thank you. And the next question comes from the line of John Stenzel with JP Morgan. Please proceed with your question.

Good morning, guys. Thanks for taking my question. I just want to talk about some of the swing factors that could move you from the $0.55 to the $0.75. in the cybersecurity headwind. What are some of the factors that you could see? Is it really just a time to ramp back up to 100% of like pre-incident levels? Is there anything else built in there that we should be thinking about as we look at that?

Yeah, John. I would say there's really two primary things, one being the absolute volumes of customers that we have some customers who only use the website to order. And while the website's down, they're not ordering. And now that the website's up, we expect a significant percentage of those customers to return. To the extent that we have to, that we want to provide incentives to those customers, that kind of leads us to the second factor that we've taken into consideration, and that is the margins. To the extent we have some discounting in the quarter, that would show up in the gross margins. So I think those are the areas that really are impacting our models in terms of what we believe the Q4 impact will be. We've run multiple scenarios, and we really kind of have triangulated to that $0.55 to $0.75 at this point. We'll gain much more intelligence over the coming weeks with the website associated with that.

Great. And then just on the kind of the 85 to 90% of pre-incident volumes, you know, can you give us kind of a sense qualitatively of how that's trended since, you know, that, you know, think the 24th and onwards when you were generally operational with that kind of increased week over week? Has that been kind of static? And then I guess you kind of indicated there that a big portion of this may just be people who prefer to use the online portal. Is that how you're thinking about – the remaining customers who kind of haven't been ordering with you?

Yeah, you know, so we were, you know, we've operated four weeks since we deactivated the system. You know, obviously the most significant impact was in week one. We saw significant improvement in week two that led into improvement in week three, and I would say week four was consistent with week three in terms of the volumes that we were processing. You know, I do think there is a a ceiling on that 85 to 90 where we are now that we can get through with one web up. Like I was saying earlier, that's the intelligence we need to gather over the next couple of weeks when we see which customers have returned to us to close that 85 to 90 to get it to 100. So that's really where we're operating right now.

Just to add to Ron's comment, For a period of time, the only way our customers could order with us was through a field sales representative or through telesales. A huge percentage of our orders, something like 70% of our orders, come digitally. That's the good news. We trained our customers that the best way to do business is digitally. The challenge is that 70% of orders had to go through our field representatives and telesales. that funnel was not large enough for a few weeks. So not all customers could buy through us. As we expanded our digital ordering capability, as our salespeople got more efficient ways in which to enter the orders, and we have incredible workarounds that came up very quickly, but for a period of time they were not there. And the telesales team had limited capacity. Of course, we were able to expand the telesales team's capacity. We had a model in place. We have a procedure in place that actually was tested during COVID. And literally overnight, we expanded the capacity. The challenge was the funnels for a few days were not big enough to accept all the orders. So now we can accept the orders. It will be much more efficient with direct customer entry through the website, and we expect that is going to result in customers coming back who had to maybe go elsewhere for urgent products. But I think a number of our customers, specifically some of the smaller ones, held out, and I think they will come back and give us the orders that maybe they were holding on to. But it's going to take some time through the end of the fourth quarter for us to ensure that our systems are back to normal in terms of the customer's thinking.

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

I wanted to ask, of the 85% to 90% that you're talking about, are there certain categories that have been slower to come back or certain geographies, maybe North America versus Europe or general versus medical, just anything there, and then I'll have a follow-up.

I would say, on balance, it's spread out reasonably. There are parts of the world where electronic ordering is not as large as, say, in the United States. So those customers have been more comfortable ordering through telesales representatives or field sales representatives. But it's more or less OK. Actually, on average, Europe is a little bit higher, although they actually don't have all the systems we have in the US. So I don't think you can read anything into that. This is a period. when we started out with minimal systems on first day and by the end of the third day we had a lot of systems working and then as the month went by more and more systems came up so it's been a period of the customers adjusting to what's available some places maybe adjusted faster than others but I don't think we can read anything into the first month of this incident anything specific yeah and You know, some products are more elective than others. Aesthetic products or maybe products relating to, like, toothbrushes, et cetera, they're not necessarily that urgent. So we'll see how this materializes, but I don't think, Jason, I wish we could give you some conclusive information, but there's too many puts and takes here to understand exactly whether these trends are related to particular products or regions. Let me remind you that our equipment business was operational throughout this period, did not have full support on systems, but manually for customer need and service, they got it. Not all the equipment orders that we received are being installed right now. There will be a catch up in the next couple of months. We went into the period with a pretty decent backlog of equipment. partially driven by the very successful dense biocerona world. So not all of that has been shipped as fast as we would have wanted to, not because we don't have the ability to install new equipment, but simply because it's just a bit more inefficient, given the fact that certain of our equipment systems were not running and we were relying on a lot of manual systems.

That's really helpful to make sure I call her. And then as we think about, I think a lot of people are trying to tease out the exit rate, what things look like in 2024, part of that 10% to 15% where you're still operating below free cyber attack levels, any sense of that 10% to 15%, how many of those customers are you know, under contract, like large accounts within dental or medical or have your practice management software and just, you know, put the elements that would make it more sticky and really, I think, exemplify how a value-add distributor really entertains a lot of the business like you expect you will. Thank you.

Yeah, Jason, I think that we do have, you know, our larger customers have, you know, really stuck with us through this, which we're very appreciative of that. And so we don't expect any significant attrition there. You know, the 85% to 90% on the ordering, like I said before and as Stanley added, a lot of these are customers who don't rely on FSCs, don't rely on our sales reps on the dental side. And so I think that's really the run rate that we'll be looking to improve as we go into 24 and we'll be able to reflect whatever our assumption there is in our 24 guidance when we provide them.

Thank you. And our next question comes from the line of Nathan Rich with Goldman Sachs. Please proceed with your question.

Great. Thanks very much for the questions. I just wanted to follow up there on the cybersecurity incident. Have you had any issues with getting supply of product? I recall you mentioned something in the prepared remarks about some supplier accounts. Just wondering if that's had any impact on inventory. And from a balance sheet perspective, would you expect any impact on inventory levels in the near term or capital deployment in the near term just as you work through these issues?

Yes, Chase. I think this is a good question, Nathan. We did not have E3 operating for, I can't remember what it was, the first week. So we were buying based on historical data of about a month or so old. That system came up pretty quickly. There were some challenges in the receiving department because we didn't have the full software is stored on the receiving side. But I would say other than maybe one or two, actually, suppliers that had concerns about corrupting their systems were back electronically ordering. Even those, I can think of two that I was involved with, quickly removed any concern they had. And we've been buying product in an orderly way. I will say that on some manufacturers, we went into the quarter with very good inventory. for multiple reasons. But essentially, our suppliers have been very helpful. We've gotten the product we need. We may have slightly increased inventories in certain areas. But Ron can address the balance sheet per se. But essentially, I have to say, the support we've gotten from our manufacturers has been truly remarkable. Some have helped us with drop shipments. Maybe in the first week or two, we felt we wanted to lighten up our load in our warehouses, but it wasn't needed. We just took that as a precaution.

Yeah, you know, Nathan, just to add to Stanley's remarks, I don't expect this to have a significant impact on our inventory levels. The one area we could see a little bit of impact, and we've baked some assumptions into our Q4 guidance on this, the it could reduce our rebates a little bit because our rebates are largely are primarily now especially in North America our sellout rebates as opposed to purchasing rebate so to the extent that we do not recover some of the sales in the fourth quarter could impact our our rebates in the fourth quarter in terms of capital deployment I don't really see any change. The balance sheet is strong, remains strong going into this incident. It's strong coming out of the incident. I don't see any significant changes in how we're deploying capital as a result of this.

Great. And if I could just follow up quickly, I think it was Jeff's question earlier just on the outlook for the dental business. I think the revised revenue range didn't really incorporate a significant impact from the macro environment. And I guess I'm just wondering if we should interpret this as the variability that you saw, whether it was patient traffic or equipment sales in certain international markets just hasn't been significant enough to kind of change your view of the overall trajectory of the end market at this point.

Yeah, Nathan, I think if you think back to our investor day last February, for example, our dental assumption then was, say, in the 2% to 4% range in terms of long-term growth. I think it's probably fair to say we're trending closer to the lower end of that range. And I think that in terms of dental specialties, which is included within our dental merchandise numbers that we provide, as we mentioned in the prepared remarks, there have been some There is some softness in the end markets on implants that I think is probably pushing some of that dental specialty growth that we would like to get more towards the lower end of that range as well. So I would suspect as we sit down to try to finalize our 2024 numbers, while we still feel good in the long term about those growth trends, we could see 24 trending to something that would be more towards the lower end of that range.

We have time for one last question coming from the line of Kevin Caliendo with UBS. Please proceed with your question.

Thanks, and thanks for getting my question, and I appreciate it. How much prior to the cyber attack, how much of your revenue typically went through the e-commerce platform, just broadly speaking? I'm guessing it was more than 10% to 15%, right?

Yeah, much more. Oh, absolutely, absolutely, Kevin. If you take EDI plus the web combined, so essentially electronics type of ordering, it is in the 70% to 75% range. I think the 85% to 90% on the orders we're talking about and kind of that missing 10% to 15% we think is largely attributable to customers who exclusively ordered electronically and did not have a rep. They didn't want a rep. They perhaps used multiple distributors. And so because they didn't have a rep who could assure that they were getting the product that they wanted, they simply ordered from someone else. So I think that's the question is, how much of that business can we get back? That's what we're working to get back.

Okay, that's helpful. I just wanted to understand the Venn diagram here, who we were talking about.

Yep. A lot of those others were able to, through their rep or otherwise, were able to place orders through our telesales channel, or their rep was able to make sure that their order got put in accurately and completely.

I appreciate the commentary around the lower end. That even sounds better than many of your peers who have spoken publicly on the trends that they're seeing in October and November for the fourth quarter. I sort of want to ask Stanley this question, this big picture. What do you think is actually driving the slowdown in demand in dental, even if you guys aren't seeing it as acutely as maybe some of the others, probably because of mix, probably because of your own positioning? But how often have you seen this kind of macro environment? How long do you think it lasts? What do you think is causing it this time? Just love to hear your take on that and how long do you think it lasts for?

Yeah, so many good questions here today. The third quarter, September in the US, we saw sales of consumables going down. There's patient data from the ADA. But it's very hard to pinpoint this exactly. How much of that amount going down was because of a switch to maybe some generics, a little bit. How much was the result of price resistance? Because prices have gone up. There's a little bit of that in there too. How much was because of flu and COVID? We're not talking about many hundreds of basis points. We're at the margin here. And to conclude anything from September and the first two weeks of October is very hard for us to pinpoint a clear direction. What we've seen in the past is the sales of consumables may go down for quarters, but doesn't last much longer than that. And it's a strange recession. It seems like, on the one hand, The consumer is resisting. On the other hand, retail sales don't seem like a disaster. They're not great. But I think we're talking about at the margin. In Europe, there is government support, so it's not going to be as elastic. But there is a little bit of concern with the geopolitical environment. Although when we look at Germany, it's not terrible. I would say there's been, on the equipment side, some resistance to more expensive equipment, and there's been a switch to less expensive equipment. It doesn't really have such a huge impact on us. The gross profit may be a little bit less, but generally there's so many other variables on the equipment side that I can't say for sure that the trends in Europe on equipment are going to significantly impact our profitability of our equipment business. In fact, there's much more money to be made on the efficiency of our service network. So we're talking about at the margin here in terms of consumables, equipment in North America is the one area I didn't cover yet. Traditionally, equipment is pretty stable. The digital, there is, of course, switching to some newer devices at a lower price. So there's some volatility there. But there's also good demand for the digital equipment. I'm talking about the I.O. devices. On the mills, it's not a 100% switch between mills and 3D printing, although 3D printing is doing very well. I expect that at some point we will see 3D printing be adopted by more DSOs. It won't be necessarily a sequential increase, but there could be lumpiness in that. So I've just given you a number of factors to draw a conclusive summation of all of that, or a conclusive one consolidated number is very difficult to give you. But in my experience, been around a long time, trends on the negative side don't last long and I'm talking about dental on the medical the demand is still pretty good in the ultimate care setting many more procedures moving from the hospital I wouldn't read anything into our specific growth for the quarter other than to take into account last year we had almost I think 9.5 or almost 10% growth so you average it out maybe 4% to 5%, 5% to 6%. So the business is relatively stable, which is a good place to conclude the call. Is that correct? So thanks for that question, operator. Let me just say a few things before we end. The business in general, we have good branding. We have a good strategic plan. Our IT people and the team came through in a remarkable way. at some point, we're going to have to deal with cyber threats as a country, as a world. It's one of the top concerns on CEOs' lists, and we're going to have to put much more money into law enforcement in this area. Law enforcement has been extremely collaborative, cooperative, but this is a new area, and it's not brand new, but The number of attacks is increasing significantly each month. And I think the way our team handled it, brought down the systems, the backups were working, built it up application by application, verified that the data that was being put live, activated live, was good and was safe. It just unfortunately takes time. But I think we dealt with it in a pretty expeditious way, I believe, from a high quality point of view. Great advisors. We have a board that is quite experienced in this arena. Two board members that have direct experience in this area that, of course, have been advising us for several years. And our bold plus one plans are still in place. Henry Schein 1 continues to do very well. Expect the clinical workflow area to do very nicely. Artificial intelligence I think will gain acceptance within the DSO movement in the not too distant future. I think we have a winning product offering in that regard. Equipment is stable. I've given you our thoughts on consumables and we now just need to complete bringing up all of our systems and then ensuring that our recovery from a customer point of view is executed well, our sales force is ready to go into the field and to advance our recovery and our telesales people are doing the same and our digital team are ready to also activate customers from that point of view. So I thank investors for your patience. I wish we didn't have to go through this, but the organization came through in an enormous way, and the support we've received from our customers in the industry has really been phenomenal. So thank you very much. We'll be back with our fourth quarter numbers, I believe, report end of February?

Mid-February.

Mid-February. And I think our filings for the SEC, although an aspect of it has been delayed for a few weeks, will be on time. And thank you very much for your patience.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.