Henry Schein, Inc.

Good morning, ladies and gentlemen, and welcome to Henry Schein's fourth 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 the end of the call. If anyone should require operator assistance during the call, please press the star key followed by zero on your touchtone phone. 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 fourth quarter and the full year of 2023. With me on today's call is 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. Risks and uncertainties involved in the company's business may affect the matters referred to in forward-looking statements, and 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 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 comparisons 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 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, February 27th, 2024. 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, Graham. Good morning, everyone, and thank you for joining us. We are rather pleased with our performance in the fourth quarter and for the full year of 2023. which was in line with our expectations and reflects a solid recovery from last year's cybersecurity incident. Our fourth quarter financial results included strong growth in our technology and value-added services businesses and in global sales of implants and biomaterials, largely driven by acquisitions and were negatively impacted by higher-than-usual acquisition-related expenses and adjustments. As we discussed last quarter, the cyber incident primarily affected our dental and medical distribution businesses in North America and Europe. These distribution businesses recovered well in the second half of the quarter. The revenue impact from the incident was at the low end of our expectations, and the earnings impact was at the high end, largely due to the success of our promotion activity, which drove sales and customer retention. Overall, we feel good about the pace of our recovery, driven by our durable customer loyalty and strong relationships our field sales consultants, our telesales representatives, and service technicians have with our customers around the world. And of course, coupled with our most effective direct marketing and customer care capabilities, which includes a very strong e-commerce presence, particularly on social media. Today, our North American and international distribution businesses are experiencing merchandise sales that are running below the pre-cyber security incident levels, and we estimate that the incident is currently having a low single-digit percentage headwind to our merchandise sales growth, with some episodic customers not fully returned yet. We are doing a lot of work in this area, and we expect the residual impact to be short-term and diminish over the first half of the year through our sales and marketing programs, and as I noted, including our digital marketing. The 2024 guidance we are introducing today reflects our continued confidence in the stability of the underlying markets we serve, our recovery efforts from the cybersecurity incident, and the execution of our strategic plan. For 2024, while we expect to have some short-term residual impact from the cybersecurity incident, we believe we will continue to strengthen our leading market positions. The markets we serve are expected to grow towards the lower end of the ranges we set out at our investor day last year, and we also expect some remaining impact from lower year-over-year PPE pricing, primarily impacting sales growth in the first quarter or the first third of the year. We are also introducing adjusted EBITDA guidance as we believe this provides investors with an additional metric that reflects the performance of the business as we pivot to higher growth, higher margin products and services. We believe we are well positioned to grow the business in line with our financial goals of high single digit to low double digit operating income and earnings per share by continuing to execute on our BOLD Plus One strategic plan. So let me now turn to a review of our quarterly highlights from each of our business units beginning with the dental distribution business. In North America, we believe patient traffic to dental office picked up in November and December. Although in January, illness and weather impacted cancellations, but this has improved in February. We've seen in our medical business that point of care diagnostic sales are also strong, indicating that flu visits to medical doctors are elevated as a result of this year's late flu season, and which adversely impacted dental patient traffic. We expect the effect on patient traffic from the flu season to normalize by the end of March. International markets remain steady and consistent with third quarter. Regarding North America and international dental equipment, there was a decline in sales both in traditional and digital equipment. Equipment sales is very important. reflect a redeployment of our field sales consultants as well as our equipment sales specialists during the cybersecurity incident to focus on addressing immediate customer needs rather than initiating and processing new equipment orders, resulting in moving sales into the first quarter of 2024. Digital equipment sales also reflected year-over-year lower prices of intraoral scanners, but we expect to see good demand for intraoral scanners to continue and the impact of these price declines to be less significant going forward. We've had a lot of questions on this, but we expect equipment sales to be supported by the investment plans of many of our DSO customers who have these plans in place and have continued to expand their operations. And this not only applies to the national DSOs, but to many of the regional DSOs too, who are investing in their practices, both from an equipment point of view and a software point of view. The impact of lower global equipment sales was partially offset by overall good growth in our global equipment technical services. Our technical services capability is a strategic advantage for us, as we believe we provide excellent response times and high quality service for our customers. We are known for this globally. Now, let's turn to the global dental specialty businesses or products. Turning to the global dental specialty products, we believe we continue to increase our global market share in implants and biomaterials this quarter as we believe for the full year of 2023. We believe the implant markets we serve in the aggregate were generally flat in the fourth quarter against the 22 sales. Against that backdrop, and I'm referring to the market in general, by the way, against that backdrop, our global implant and biomaterial sales grew by quite a bit more than 30%. mainly due from acquisitions, but also some internal growth. We posted significant growth in the European, Latin American, and Asian markets, mainly from the biotech acquisition in France and the SYN acquisition in Brazil, along with above market share growth in our leading BioRisens Camelot brand in Europe, primarily in Germany, while we had low single-digit growth in our U.S. implant sales. As a result of the cyber incident, our endodontic sales growth slowed somewhat last quarter. Our orthodontic sales were also impacted by the cyber incident and by the expiration of the motion product patents earlier this year. To address this, we launched a replacement product this quarter which is being well received in the marketplace. We remain highly optimistic about the growth in our dental specialty products in 2024, as we have a robust pipeline of product innovations planned across various geographies in the first half of the year, and we expect sales growth to continue to outpace the market growth. Let's turn now to our technology and value-added services business. Excellent sales growth was driven by Henry Schein 1, with most core products posting double-digit gains including our practice management software, revenue cycle management, analytics, and our AI solutions. As we have seen all year, Henry Schein 1 growth was driven by Dentrix Ascend and entirely cloud-based solutions. The customer base of cloud solutions continued to grow well and increased by about 36% compared with the start of the year. We launched a number of digital clinical workflow solutions for our customers, including AI technologies, to provide our customers with highly effective diagnostic solutions. During the fourth quarter, we worked with one of the largest DSOs to introduce their AI solution. We are pleased to now have over 1,000 users subscribing to these solutions. Product enhancements introduced last quarter, including Remote scheduling and payments are also contributing to growth. Claims eligibility and patient relationship management features will be areas of significant focus during 2024. We continue to see strong interest and good growth in Dentrix Ascend from our DSO customers, and we recently announced two new large multi-site Dentrix Ascend accounts. Turning to our medical business, growth during the fourth quarter was also impacted by the cybersecurity incident. In addition, the late flu season also negatively impacted point of care diagnostic sales and patient visits, which were down versus the prior year. However, the late flu season is driving higher quarter one sales. Our new $300 million plus home care platform grew sales in high single digits during the quarter, with this market segment continue to grow faster than the overall health care market. Finally, in late December, we announced that we signed an agreement to acquire a majority interest in TriMed, which marks our entry into the upper and lower extremity segment of the growing orthopedic market, this being a complement to our Brasler saws and blades business, which is also doing quite well. This transaction, the TriMed investment, fills a need, particularly for our ambulatory surgical center and orthopedic specialist customers who expect to leverage our customer relationships and our contractual expertise to grow the business. We expect to close this transaction later this quarter. Concurrently, we entered into a strategic relationship with Extremity Medical a medical device company focused on developing complementary products for bone infusion, fixation, and motion prevention treatments. So, in summary, we are executing well against our BOLD Plus One strategic plan, and we made significant progress, very pleased with us, on our strategic priorities during 2023. We did complete a number of strategic acquisitions, investing almost a billion dollars supportive of our 2022 to 2024 strategic plan. These acquisitions are growing well in the high single digits to low double digit percentages. And we are on track to achieve our goal of generating 40% of our operating income from sales of our high growth, high margin products and services. And we estimate that we would only have to be slightly below that threshold and that we would We only would have been slightly below that threshold in the fourth quarter and for the full year of 2023 if the cyber incident had not occurred. As we look to 2024, our priorities include continuing to focus on customer experience. This is critical for us in all our businesses. And, of course, the recovery of sales post the cyber security incident. We also will focus on and prioritize further enhancing technology and product development, including our integrated digital workflow, and continue to grow sales and specialty products by integrating recent acquisitions and through new product launches. And we believe we have a good pipeline of product launches in both our dental specialties products area and our value-added services, including Henry Schein I. With that, I'll turn the call over to Ron to discuss our quarterly financial results and our 2024 guidance. Ron, please.

Thank you, Stanley, and good morning, everyone. As we begin, I'd like to point out that I will be discussing our results as a reporter on a GAAP basis and also on a non-GAAP basis. Our fourth quarter non-GAAP financial results for 2023 and 2022 exclude integration and restructuring costs, amortization expense of acquired intangible assets, certain asset impairment costs, as well as expenses directly related to the cybersecurity incident. This is detailed in Exhibit B of today's press release. The fourth quarter of 2022 included one additional selling week compared with the fourth quarter of 2023. We report on a 52-53 week fiscal year, ending on the last Saturday in December. and the extra week in 2022 was the holiday week between Christmas and New Year's Day. The next time our results include an extra selling week will be in 2028. With respect to sales growth, I will focus on LCI sales growth, which is internally generated sales in local currencies compared with the prior year and excludes acquisitions. To facilitate a more meaningful comparison, we've also excluded the estimated extra week of sales in the prior year from our LCI sales growth figures. Please note that our sales growth was adversely impacted by the cybersecurity incident, and we estimate the reduction of fourth quarter sales was between $350 to $400 million worldwide. Turning to our fourth quarter results, global sales of $3.0 billion reflected an LCI sales decrease of 12%, with the cybersecurity incident impacting sales growth by an estimated 10 to 12%. Our gap operating margin for the fourth quarter of 2023 was 1.28%, an 87 basis point decrease compared with the prior year gap operating margin. On a non-gap basis, operating margin for the fourth quarter was 4.86%, a 279 basis point decline compared with the prior year non-gap operating margin, and was primarily a result of the cybersecurity incident and the sales recovery initiatives we introduced in the quarter. We estimate that the cybersecurity incident negatively impacted our operating income by approximately $120 to $130 million in the fourth quarter. Fourth quarter 2023 gap net income was $18 million, or 13 cents per diluted share. This compares with prior year gap net income of $47 million, or 34 cents per diluted share. Our fourth quarter 2023 non-GAAP net income was $86 million, or 66 cents per diluted share. This compares with prior year non-GAAP net income of $184 million, or $1.35 per diluted share. The fourth quarter 2023 non-GAAP EPS includes 5 cents of acquisition expenses and related adjustments, which compares to 2 cents in the fourth quarter of the prior year. Details for the quarter and full year are included in Exhibit D to our press release. We estimate that the cybersecurity incident impacted our fourth quarter 2023 non-GAAP EPS by approximately 70 to 75 cents per diluted share. The foreign currency exchange impact on our fourth quarter EPS was favorable by one cent, and the impact on full year EPS was immaterial. Turning to our fourth quarter sales results, Global dental sales were $1.8 billion, and LCI sales decreased by 10.9%, with underlying sales growth being offset by the impact of the cybersecurity incident. Global dental merchandise LCI sales decreased by 11.3% versus the prior year. Global dental equipment LCI sales decreased 9.7%. As Stanley mentioned, there were delays in processing new equipment orders, moving some sales into 2024. Dental specialty product sales were approximately $281 million in the fourth quarter with growth of 17.2% driven by acquisitions and solid organic growth in implants and biomaterials. Global technology and value-added services sales during the fourth quarter were $212 million with total sales growth of 13.4%. LCI sales growth of 7.1% included 6.8% LCI sales growth in North America, and 9.8% LCI sales growth internationally. In North America, sales growth was driven primarily by our practice management solutions business, particularly Dentrix Ascend, while internationally, growth was driven by our Dentali cloud-based solution. Global medical sales during the fourth quarter were $1.0 billion. And LCI sales decreased 17% as sales were also impacted by the cybersecurity incident. Regarding stock repurchases, we repurchased approximately 692,000 shares of common stock in the open market during the fourth quarter, buying at an average price of $72.32 per share for a total of $50 million. For the full year, we invested $250 million to repurchase 3.2 million shares. At fiscal year end, we had approximately $265 million authorized and available for future stock repurchases. Additionally, to accelerate the implementation of our BOLD Plus One strategic plan, we invested $287 million in business acquisitions during the fourth quarter and $955 million for the full year. Turning to our balance sheet and cash flow, we continue to benefit from significant liquidity, providing our businesses with the flexibility and financial stability to execute on organic growth initiatives and strategic acquisitions while continuing to return capital to our stockholders. Operating cash flow for the fourth quarter was an outflow of $32 million compared with positive $254 million last year. This decrease is primarily due to delayed billings in the quarter relating to the cybersecurity incident, which resulted in abnormally high receivable balances at the end of the year. We expect improvements to cash flow in the first quarter as we make these collections, and receivable balances returned to normal levels. For the full year, operating cash flow was $500 million, compared with $602 million in 2022. Restructuring expenses in the fourth quarter were $21 million, or $0.08 per diluted share, and were incurred as part of our previously disclosed restructuring initiative. These expenses mainly relate to severance benefits, costs relating to exiting certain facilities, and the planned exit of a non-core business. In addition, in the fourth quarter, we incurred expenses of $11 million, or six cents per diluted share, that were directly related to the cybersecurity incident, mostly consisting of professional fees. We expect to incur some additional professional fees and other expenses related to the cybersecurity incident in 2024, but at a lower amount. During the fourth quarter, we also recorded a charge of $27 million, or 15 cents per diluted share, related to a non-cash impairment of capitalized assets in Europe, and a charge of $7 million, or 4 cents per diluted share, related to a non-cash impairment of some intangible assets. I'll conclude my remarks by introducing our 2024 financial guidance. At this time, we are unable to provide estimates for costs associated with integration and restructuring for 2024. and direct expenses associated with the cybersecurity incident. Therefore, we are not providing guidance. As usual, we are introducing 2024 financial guidance for total sales growth and diluted non-GAAP EPS. In addition, we are providing guidance for 2024 adjusted EBITDA. We believe this provides an additional metric reflecting the performance of the business as we pivot to more high-growth, high-margin products and services. For 2024, we expect our non-GAAP diluted EPS, attributable to Henry Schein, Inc., to be in the range of $5 to $5.16, reflecting growth of 11% to 15% compared with 2023 non-GAAP diluted EPS of $4.50. This guidance reflects an estimated residual impact of the cybersecurity incident of approximately 15 cents per diluted share, which we expect to primarily impact the first quarter and an estimated increase in the non-GAAP effective tax rate from 23% to 25%, or approximately 13 cents per diluted share. We expect to file an insurance claim arising from the cybersecurity incident and believe our claim will be covered under our cyber policy. Although final resolution is subject to insurer approval, this policy has a $60 million claim limit on an after-tax basis with a $5 million retention, and we would not expect it to be recognized until later in the year. Our 2024 guidance does not include any associated benefit from potential insurance claim proceeds from this claim. As Stan said, we now believe that sales of COVID test kits and PPE have reached the point where year-over-year comparability has largely normalized, and we do not expect to break out the related EPS impact. We do expect there to be some remaining impact from lower year-over-year PPE pricing, primarily impacting sales growth in the first quarter. Our 2024 non-GAAP total sales guidance is 8% to 12% growth over 2023, with higher growth anticipated in the second half of the year, reflecting merchandise sales growth from the business recovery from the cybersecurity incident. This sales guidance also includes sales from the acquisitions we completed in 2023. Our 2024 adjusted EBITDA growth is expected to increase by more than 15% versus 2023 adjusted EBITDA growth. of $984 million. As Stan mentioned, we expect market growth rates to be at the lower end of our long-term assumptions. Our 2024 guidance is for current continuing operations as well as acquisitions that have been announced. It 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. The 2024 guidance that Ron just discussed reflects somewhat of a transition year following the cyber incident. That said, we are incredibly pleased with the great strides the team has made in our recovery efforts. Actually, it's quite remarkable how effective this team operated. while actually advancing the execution of our strat plan. We look forward to continuing this momentum and delivering our long-term growth metrics that we established during our analyst day event last February. I know we've covered a lot of ground today. It's a little bit complex. But we are here to clarify any questions or thoughts that investors may have. So please.

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 queue. You may press star 2 if you'd 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 details on the outlook and the quarter. That was very helpful. I just think if I had a couple of questions about the equipment sales commentary. I was wondering if you could go into a little bit more detail on sort of the end market environment and sort of any way you can quantify what you're expected, push out into one queue from the cybersecurity impact specifically on equipment. Yeah, that would be a great place to start. Thank you.

I'll give you some high-level thoughts, Elizabeth, and then maybe I can provide you with specific information or numbers to the extent we're providing that. So our dental equipment backlog was generally flat with the end of the third quarter to the end of the fourth quarter. They were about the same. With the North America backlog down mid-single digits and the international backlog high single digits. Now you have to bear in mind that historically our backlog declined significantly in the fourth quarter due to the fourth quarter being the strongest sales quarter and of course dentists and physicians wanting to get as much equipment installed in the fourth quarter as possible for tax purposes. So the equipment sales growth in the fourth quarter was impacted by the cyber security interest incident, of course. And that's because we redeployed our sales consultants and particularly our sales equipment specialists in visiting customers and dealing with the cyber incident that occurred. And so they were not focused on generating sales. Our installation operation worked well, our service operation All of that recovered almost immediately. So there's quite a bit of business that's going to move into the fourth quarter, both in the United States and Canada and then globally. But overall, it's our view that the traditional equipment market is approximately flat. The market we're talking about, right? Not our sales. and that the digital equipment sales did result in further erosion of the selling price, the average selling price. But we believe that we have now gone past that. Of course, there are potentially some opportunities to bring in another round of digital scanners at perhaps a lower price into the United States. perhaps even into Europe, that we think would expand the market even further. But even without that, we think the price has stabilized, number one. But number two, the demand is very, very strong for these intraoral scanners. Also pointed out in the script, and there were a lot of concerns last quarter that DSOs were stopping to invest. There may be some DSOs that have a challenge, but generally our DSO customers are investing, both the national DSOs and the more regional DSOs. So we are quite optimistic about the equipment business in general. And there are also going to be some launches in the traditional equipment sales area that we expect a leading manufacturer to undertake this year that will stimulate demand. And as I said, the annualization of the intraoral scanner price decreases. So that's sort of, maybe there's more information if you have anything specific we can give you. I'm not sure, Graham, around exactly what numbers we're providing at this stage, but perhaps you can address.

No, you know, Elizabeth, I think what we can say is that we do expect good equipment sales growth in the first quarter. And a lot of that is from some of these orders that got pushed from Q4 of 23 into Q1 of 24. We have contemplated the estimated impact of that when arriving to our 15 cent kind of residual impact from the cybersecurity incident. So that 15 cents, in some respects, is a net number. It would take into account some of the favorability that we also expect to get from the pushback of some of these equipment orders or sales into Q1.

Got it. That's super helpful. And maybe as a follow-up, Stanley, you mentioned a bunch of some dental specialty product launches and some additional products and value-added services. Can you give us a little bit of context around what those are and sort of how you're thinking about the contribution of those organic launches? I understand, obviously, you also have the follow-through from some of the acquisitions you've made in 2023 and in 2024. Sure.

On the launches, Elizabeth, I'll give you highlights. If you want more, please call afterwards because there's a lot. On the endodontics side, Brussels is expecting to advance the pediatric putty program, lower-cost pediatric putty. Acufil in the K-files, direct endodontics portfolio, this is in Europe. There's a new NITI file coming out with EDGE. The bioceramic sealer launched in the U.S., further activity in that area with Edge. On the orthodontic side, you know, I covered this already, we had a significant challenge with the patent expiration of the Motion Pro, and for about three quarters, our pricing collapsed, but at this time, the new Motion portfolio, the clinical system that we introduced, achieved Class 1 approval, and we bit delayed, and we're seeing very good recovery there. On the implant side, BioHorizon's pro-surgical kit launched in the U.S. This is a new surgical kit. Simplify surgical workflow by combining the guide that we offer and the free hand surgery into one kit. We are quite optimistic on that. On the membrane side, rollout in France, Netherlands, Italy, Spain. A lot of good activity going on in there. And there's some new zygomatic MT16 implant kits, and 45 degree abutment launch in the U.S. Basically, bringing to market much more in the value area in the United States. On the software side, I can't go through the list. It's huge. A huge amount of activity happening, particularly the AI, revenue cycle management, on the Dentotex enterprise side, the whole Java's analytics side, I want a lot of activity going on there. And as it relates to the acquisitions, we're very pleased with the implanted biomaterials side of biotech. The software that we're so excited about will be launching in the U.S. It's actually launched in the U.S. as part of our clinical workflow. The SYN acquisition, although the market in Brazil is quite tough right now, from an advancing of sales in the U.S. point of view, as well as introducing a number of the innovative products we have from the BioHorizons Camlog portfolio into the Latin American market. So I would say overall the pipeline of new product introductions, some have already been introduced or will be introduced this quarter, and as the year progresses, you'll see more and more activity on the specialty side and on the software, as well as some of the value-added services products. And the acquisitions are really doing quite well, all of them. So, yeah, I mean, if we have questions more on the product side, I think it would be a good idea to speak to Graham. He has a lot of that information and is very close to these businesses.

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

Hey, good morning, Stan, Ron. Wanted to start on the revenue guidance. Just really hoping we can peel apart a few of the moving pieces as we try to bridge to a core organic growth rate. You've got acquisitions that are contributing a few points, maybe a little bit more in 24. The business recapture and easy comps from the cybersecurity instance, probably another few points. Maybe FX is adding a little bit. Am I right on those? Are we talking 1% to 5% or 2% to 6% local internal growth for the year? And then if so, can you help with what you're assuming to get within that organic growth range? If we acknowledge that we're starting in a little bit of a hole with the cybersecurity incident, what are you estimating for your core organic growth versus your end markets?

Hi, Jason. Your estimates, I would say, are generally accurate. We expect... about three basis points or 300 basis points of growth that would come from just the recovery on cybersecurity and to a more normalized level. And we do think acquisitions can get us pretty close to another three percentage points of growth as well. So that accounts for six points there of the eight to 12. FX could get, is somewhere between say a half a point to a point. So that kind of narrows down what that internal growth piece would be. which reflects continued accelerated growth in our technology and value-added services, some growth obviously in the core business as well as in the specialty businesses to kind of cover that remaining gap.

Okay, but it accounts, I guess, what does it account for? Just as a quick follow-up here, what does it account for in terms of where you're starting at? I caught from the prepared remarks you may be 97% or 98% of the way back. But if we're talking about low end of the guidance or the ranges you gave at your investor day, I'm just maybe having a hard time trying to figure out how we get maybe into like that 4%, 5%, 6% range for core growth, unless I misunderstood on where you're at on recapture.

Well, I think the core growth you might be referring to would include specialty. So that's going to be part of that. We did kind of direct to the low end of the market growth. rates that we had communicated on Investor Day last year, but those are market growth rates. So it's up to us to try to outperform that market, and that becomes part of our growth assumption.

And our next question comes from the line of John Stanzel with JPMorgan Chase & Company. Please proceed with your question.

Great. Thanks for taking my question. Just wanted to look into some of the margin assumptions here. Now, I think just on a base level, you've got adjusted EBITDA margin, probably expanding call it 30 basis points at the midpoint. And then on like growth, when we think about, you know, normalizing for cybersecurity with the numbers you've provided, you know, we're looking at kind of low single digit core adjusted EBITDA growth. Is that the right way to think about how you're, you're seeing like the core, you know, profit dollars expand? Um, when we look to 2024?

Yeah, I think it's a good general starting point, John. I think that as there will be, there is some margin pressure that comes from the recovery still from cyber. We did have to delay, for example, some projects in the back half of the year, for example, our global e-commerce platform. So some of those costs are now being incurred in 24. Other investments that we're making that create a little bit of that margin pressure. But I think as we get to As we continue to recover from the cyber incident and begin to ramp up the revenues a little bit more as the year goes on, we'll begin to see improvements in those margins over the course of the year.

Great. And then just looking at capital allocation, you know, 2023, you probably were above, you know, the long-term guides for, you know, cash deployment on M&A. As we think about 2024, is there a shift in the way that you would guide us to think about capital appointment, particularly around essentially debt pay down, then it sounds like you're not incorporating any share repurchase in the guide. Is there anything we should think about there as it relates to overall capital appointment?

Tim Stenzelman Yeah, there will be. We'll continue with some share repurchases. Traditionally, we have not included that in the guide. Last year was a little lighter year for us on share repurchases. We did less in Q4 than we normally would do just to kind of preserve some capital after the cybersecurity incident. I don't expect us to do a billion dollars in M&A in 2024. I suspect we'll be something closer to our historical run rates of $300 or $400 million there. In terms of just the general philosophy around capital allocation, We do have, you mentioned, some debt pay down. We are carrying more debt than we have historically, so we will be contemplating that as an alternative to use of capital if we believe that is better accretion than a share repurchase. Then we'll try to mix in some additional pay down on the debt if we think that is more accretive than the other options available to us.

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

Great. Thanks, guys. Good morning. Yeah, a lot of numbers, so maybe I'll sort of stick to that theme. But, you know, Ron, I get a $5.36 normalized for 2024. You know, I'm taking your midpoint of 508. I'm adding back the tax at $0.13, the residual $0.15. And that's sort of apples to apples to the 522 rate. in my opinion, in 2023, the 450 plus the 70 to 75. So, you know, you've got low single-digit year-over-year EPS growth, but the revenue growth to the prior question is, you know, arguably solid. I don't know, that internal might land you around 3 to 4 percent. You've got some acquisitions you did that should be accretive in 24. So, can you just provide a little bit more context on, you know, why I'm sort of arriving at that low single-digit year-over-year, call it normalized EPS growth, in light of what looks like, you know, low to mid single digit solid internal revenue growth.

Yeah, John, I agree with your numbers. I agree with your map. You know, as I mentioned before, the 2024 numbers do include some investments we're making in the business, some things that had to be deferred from 23, as well as ongoing investment that we believe is necessary for future growth in the business. And that's reflected within our earnings estimates.

Okay, so then maybe I'll ask a follow-up and then the second question all at once. But taking that answer into account, you know, I mean, you're providing 24 guidance today, but I'll ask about 25. I mean, some of that stuff is just specific to 24, right? Like the 15-cent residual and these investments that sort of shifted out of 23 into 24. When we think about your LRP and just some of that longer-term, the long-term numbers, I mean, arguably, when we take that into consideration, I'm guessing 25 might be the beneficiary from a growth perspective, right, as you exit that in 24. And then, sorry, the second question is just want to make sure I get one cue right. You've got an equipment tailwind, but you got a big consumable headwind. And the net of that is the majority of the 15 cent 24 residual impact. Thanks, guys.

Yeah, I'll confirm the latter part of your question, John. I will confirm, yeah, your understanding of that is correct. And, yes, we do look at the possibilities for 25 as being what we said in our investor day a year ago, that being that our long-term goals at that point in time were revenue growth of 6% to 8% and EPS growth of 8% to 11%. And that's what we're working to position ourselves for. as we get into 24.

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

Hey, thanks guys. Let me ask kind of one two-parter, just a follow-up on two things that have been asked, and then I do have a fundamental question as well. uh you know john just threw out a kind of a three to four percent organic that hopefully not group think here but that's kind of where our math was as well ron does that foot kind of three to four percent i think jason said kind of maybe a bigger range but three to four percent kind of the organic uh core growth rate you're looking at this year when we take into account deals and the cyber stuff and all that and then you mentioned a half a point to a point on currency i just want to make sure you're talking a headwind or a tailwind there as you model it on currency thanks

We have a slight tailwind on currency, Jeff. And, yes, three to four percentage points on internal is, I believe, is what we are shooting for in terms of our goals from an internal standpoint on the revenues. I mean, that's, you know, when you back out the – that's kind of backing out a cybersecurity normalization. It's also taking into account the acquisition. So the residual that is left in that – And that revenue guidance would be, you know, in that three- to four-point range.

Yeah, fair enough. And then the fundamental question I just wanted to ask is, you know, as you move some of the ACE surgical stuff now out of the specialty sales force into the FSCs, same with some of the Agendo stuff, you know, should we think of that as an incremental opportunity? I mean, I guess obviously it is. But were some of those products already being sold to the GPs and those sales just getting handed off from the FSCs to the specialty sales reps and now just it's something that the FSCs can actually get comped on? Or is this a big kind of incremental opportunity because those products weren't even really being detailed in a big way at the GP level? Thank you.

Very good question, Jeff. So on the endo side, The portfolio of endo products that is historically sold through distribution in the United States in particular is rather limited. That's why we entered into the specialty field ourselves. And yes, selling of the edge endo product through Henry Schein in the United States and in Canada will be a net very nice positive. On the ACE side, Henry Schein's reps have had access to some of the biomaterials that we offer at Henry Schein, namely the ACE biomaterials, but I would not say that they were focused on this. By providing the specialty sales force capabilities, I think we should make nice progress within the oral surgery community for the biomaterials, for equipment and perhaps even some general sales. And then there will be collaboration, of course, with our implant company in the United States, namely BiHorizons, and also with the SYN product line as that is launched further into the United States. So this is something very exciting. Sales have taken off somewhat, but I expect much more sales after our national sales meeting in the summer this year, as the sales force is educated in how to create leads for the specialty sales team in both of these areas.

And the next question comes from the line of Michael Cherney with Learing Partners. Please proceed with your question.

Great. Thanks so much. Excuse me. Thanks so much for taking the time to chat now. Relative, going back to the equipment line, as you think about not only 24 but the jumping off point, Stanley talked about traditional being at a kind of flattish overall market. How do you see your role, especially on the back of the recovery from the cyber incident, taking hold in terms of where your best opportunities are to drive share and where could be the biggest point of variation both to the up and down side, not only on traditional but on high-tech equipment?

Very good question, Michael. Also, I think we continue with our role of helping practitioners operate a more efficient practice so that they can operate a more efficient practice on the clinical side. So in order to do that, we believe that our clinical workflow which I think is quite unique. We covered that at our investor day and have made quite a bit of progress in that area. So that leads to greater sales in digital equipment, units for sure in the scanners, in the 3D printing arena. I think the chair side mill is relatively flat today. But particularly in those two areas as well as 3D printing, as well as imaging, 2D, 3D imaging, all connected to our software. I think all of that helps us advance our position on the digital side, where it's already quite strong, both in the United States, Canada, and internationally, particularly in the markets where we offer practice management software. So I think, overall, the digital side we will continue, I think, to gain market share in a rapidly growing market. On the traditional side, I think we continue to edge forward with our market share. We've been doing that for years, both here in the United States and abroad. There are a couple of international challenges, namely in parts of Western Europe, where some of the national brands, because of pricing, have lost some market share, and we're now selling more of the lower priced brands. So it brings down the selling price. I'm not sure it brings down the profits. But overall, we are quite bullish about our equipment business. It's not what it was during the post-COVID period. The market has stabilized, and we are comfortable that we can grow market share. At the same time, our equipment service business is doing very well, We've invested in software and systems in that area throughout the world, and that is paying off.

And just one quick related follow-up, if I can. You mentioned earlier about the iOS scanner pricing being a headwind on growth. I don't think that's a surprise to anyone. Do you feel like we're at the bottom on pricing industry-wide, and if not, what gets us there?

I thought we mentioned, but maybe we were not clear. I think we will see a little bit more in the part of the year, and I think we will stabilize. Having said that, there is a possibility of additional less feature-friendly, feature-full systems being introduced into the United States, but I think that will only expand the market. I don't know, what are we, 40% of dentists or half the dentists using one of these scanners? I think every dentist should use one. I think the patients want that. And so there's a huge opportunity to expand the market. Plus, replacement business is also growing, and systems that integrate with our software, that is also a growing space. You combine that with the 3D printing, and the whole digital space is very, very exciting. And I think we've probably gotten to the bottom on the price erosion side, or close to it, maybe a little bit more, as I said, the first three, four months of the year. And If a lower-priced product is introduced, less features, I think that will only expand the market.

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

Great. Good morning, and thanks very much for taking the question. I wanted to ask about the, I think you described it as a low single digit kind of gap in merchandise sales that you're still seeing related to the cyber security incident. What type of customer or purchase have you not seen come back yet? And how should we think about the company's plans to close that gap? And it sounds like you don't expect a residual impact to extend beyond one Q. So do you, I guess, expect to recover those kind of order volumes this quarter and sort of be back to pre-incident levels, you know, kind of going into the second quarter?

Yeah. So that's also – these are good questions. So – What happened during the cyber incident? For about a month or so, our website didn't work. A little bit longer internationally. Which resulted in customers who are impulse shoppers, customers that look for pricing when they buy, and customers where we have particular data on what Business, they are not giving us particular products or particular timing. We didn't have access to all of that data, and we couldn't really market through our website and through our social media. Of course, that's back again, and we're quite active in that area, and I think we're starting to bring that business back again. These are the customers that are not necessarily called upon by a field sales representative, or for some of the products, they go shopping, or where a telesales representative doesn't have a deep relationship, or even if the telesales representative had a deep relationship, they were busy taking orders, not calling out. That whole area is the area that we have to reinvigorate. Our Google ratings went down, obviously, because our customers were not going to Google. to buy from us, to do searching. All of that is being worked on. I have a tremendous confidence in our team that is involved in e-commerce, and I think that's how we'll get that business back again, and we're already starting to see that. As it relates to the larger customers, I think they're more or less all back again. I mean, a couple of them may have gotten support from our competition during that period and feel they need to give them a little bit more business. But I think largely that business is back again. We had to satisfy the CISOs of many of our larger customers that everything's okay. And by and large, those systems have turned on again. So, I mean, it's going to take at least a quarter, maybe four months, two to four months, to get back to normal. I don't think we've lost many customers. Our services are great, whether it's the services that we offer for equipment installation or for claims processing. There was an incident recently where a big part of the claims processing in our industry was impacted by a cybersecurity incident through one of the providers. It didn't impact us. we came up with alternative procedures very quickly. And so I think people will understand, just like in COVID, when they didn't have masks, they knew who to call. And so I think our brand in the marketplace is very strong today, and we will recover, I think, this business. Just can't tell you exactly what day. It's not going to be long.

Okay, great. And Maybe just a quick follow-up on, I think it was John's question on first quarter expectations. Could you maybe just talk about how significant the weather and flu impacts that you mentioned seeing in kind of January, maybe in February, were to the business? And, you know, just as we put that together with the kind of residual impact of the cybersecurity incident on consumables, You know, is the right way to think about what you'll see in, you know, the first quarter sort of like a mid-single-digit type decline in that part of the business?

Yeah. Hi, Nathan. I think that January was a, you know, there was some disruption to patient traffic in January related that we believe was somewhat related to weather, somewhat related to illness as we, you know, The flip side of that is we did see some increases in the medical business in, for example, flu diagnostic kits, which is usually a precursor to us seeing increased cancellations in the dental offices. So there was some illness impact in January as well as weather. We have seen improvements in February, which leads us to believe that we're approaching a more, what I would consider to be a more normal traffic pattern as we come out of February into March. I think that there have been, there are other factors we have to take into consideration, obviously, and sometimes there's a lot of judgment involved in terms of how much of this is residual effect from cyber as we look at our activity versus weather versus illness. So it's difficult to kind of specify the exact impact of each of those. But we are reaching our, we believe we're going to reach our Q1 goals There's also going to be, while we've said that PPE is not as going to be as pronounced, the effects of that in 24 versus 23, Q1 will have the most significant impact year over year for us because of the difference in the price point in Q1 last year versus Q1 this year. So there's some headwinds year over year from PPE as well and other market conditions. But we do think that we can reach our first quarter goals in line with our overall guidance for the year.

We have time for one last question coming from the line of Justin Lin with William Blair. Please proceed with your question.

Hi, good morning. Thanks for squeezing me in here. Can you remind us what investments you need to make on the commercial execution front to fully realize your acquisitions? One example you talked about was kind of bringing SIN implants to the U.S. But, you know, any additional color and perhaps shield and other acquisitions would be great.

Yeah, Justin, I don't think there are any major investments to bring SIN to the United States. They already had approval at the time we acquired or invested in, actually acquired the business. Of course, there's educating of our sales force in the United States. They already have a specialty sales force SIN has a specialty sales force. I don't think that they're going to have to invest much more than the income that they generate from expanding their sales in the United States. I expect that actually to be accretive. So I don't think that will be an issue. There is some work going on that's costing us money in the alignment of the aligners between biotech and Henry Schein orthodontics. We're going to be merging facilities. We're going to be moving around the world different sites for the manufacture of the aligners and going to be operating under one brand. So there's some investment in that. There's quite a bit of investment in the recovery of the systems from an operational point of view. But, I mean, that's all baked into our numbers and not material in the context of the entire Henry Schein business.

Got it. That's very helpful. And just one follow-up.

By the way, Shield, I think, is totally accretive. That whole health care business is a very nice business for us and certainly not a drain on earnings. Sorry.

That's Super helpful. Thank you. And how is the underlying demand for your specialty dental business versus maybe your expectations? You've touched on implants and endodontics a little bit, but also curious to hear about how Clearliners is doing. I know that business is relatively small still, but I guess what needs to happen outside of macro getting better to maybe see some accelerated growth in your specialty business overall?

Yeah. First of all, it's less than 10% of our specialty business. It's doing quite well, particularly with DSOs where we provide very good value. I think it's doing quite well in France, a number of European countries. But again, it's relatively small and I wouldn't expect this to move the numbers much from a corporate point of view other than it enables us to go into a customer and offer all the products and related services that the customer may need. So it's a good product offering, but again, as I said, specifically for DSOs, several large ones are quite happy with our software business, and that's with our aligner business and with the software in that field. And it's growing quite nicely, but it's really an adjunct to our specialty business. Okay. So let me thank everyone for calling in. I know these numbers are complex. Graeme and Ron stand by to clarify any of the questions you may have, answer the questions. We remain confident in the business, quite enthusiastic with the relatively quick recovery in the latter part of the fourth quarter and into the first quarter. Of course, We had some challenges with the flu in the first quarter. I think you heard that from a number of analysts. You read the newspapers. You can see that dental visits were canceled in January, but it's recovered in February. And our medical doctors did OK with additional flu visits so far in the quarter. The recovery is going well. We have to remember that our team was entirely focused on servicing customers and not on sales for most of the fourth quarter and that our equipment team was really servicing customers but not really going out and selling much in the fourth quarter. I don't think we missed a lot of business, but we now have to get back into the business of selling, which we are, installing and I think we will define in the equipment area as well, both here and internationally. European business is stable. Australia and New Zealand is stable. Brazil is slightly challenged because of the economy, but we're still growing. And our software businesses are great. In particular, we are very impressed with how quickly our team at Henry Schein 1 responded to the challenge of the major clearinghouse in claims having gone down last Wednesday and our ability to service claims through alternative methodologies so quickly. I think our customers will appreciate that and I would expect us to garner some new customers in that process. And the specialty businesses doing well we believe we continue to grow market share particularly the implant side in a market that is relatively stable slightly growing and we will be back with I think some very positive growth on the endodontic side now that the equipment the systems are fully restored and yes the orthodontic side will grow so with that And with our enthusiasm for our digital workflow taking hold and the medical business continuing to have a great position in that market, including the home care, I remain very enthusiastic about a strong 2024. Again, Ron and Graham are ready to clarify questions you may have. So thank you very much for calling in. And we'll be back, I guess, in two months, but I think we'll be going to some investor conferences as well. And there are some calls that you can call into that some of the analysts have set up. So thank you very much.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.