Henry Schein, Inc.

Good morning, ladies and gentlemen, and welcome to Henry Schein's second quarter 2024 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 assistance during the call, please press the star key followed by zero on your touchtone phone. As a reminder, this call is being recorded. 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. Please go ahead, Graham.

Thank you, Operator, and my thanks to each of you for joining us to discuss Henry Schein's financial results for the second quarter of 2024. 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 is 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 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 the 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. and in 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, August 6, 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.

Good morning, and thank you, Graham. Thank you all for joining us today. We delivered solid second quarter financial results, including strong operating cash flow that reflected stable end markets. Gross margin has continued to increase driven by our strategies to expand our high growth, high margin products and services, and by the successful performance of our recent acquisitions. We are experiencing improving sales trends in our distribution businesses. However, the pace of recovery since the cyber incident last year has been slower than anticipated. Now, given the challenging economic environment we'll talk about a little bit later, In certain markets, as well as this delay in cyber incident recovery, we are updating our 24 full-year financial guidance. We remain committed to our long-term financial goals through our advancement of the Bold Plus One strategic plan, which has stood us well, supported by a strong balance sheet and new restructuring plans. As we continue to generate synergies by connecting our distribution businesses, specialty products, and technology and value-added services, we continue to see great symbiotic relationships between our various businesses. We are also announcing a restructuring plan to integrate recent acquisitions and right-size operations and further increase efficiencies Targeting somewhere between 75 million to 100 million annual savings. We are comfortable that we will continue after this restructuring plan is put in place with improving operating margins. And we are increasing at the same time our repurchase authorization. Following recent board approval, an additional 500 million as we expect to leverage the strong cash flow we have. So let me turn to the various business units. Dental distribution, to start with. In North America, patient traffic was generally flat with the prior quarter, with unemployment rates and dental insurance coverage generally remaining consistent with prior periods. We are experiencing improving sales trends in our dental distribution businesses, and we believe we gained market share in the quarter as we strengthened focus on gaining back episodic customers following the cyber incident. However, the pace of recovery since the cyber incident late last year has been slower than anticipated. We reported year-over-year decline in merchandise sales which reflects the pace of recovery, and of course, lower sales of PPE products, which are primarily the result of lower glove pricing. Membership in the Thrive Signature Program continued to increase with nearly 1,500 new members added in the second quarter, bringing the total membership to approximately 6,000 U.S. dental practices. This subscription-based program drives customer loyalty and has been very good, again, in driving stickiness to our various businesses, whether it's distribution, specialty products, or, for that matter, specialty services. We were pleased with our North American dental equipment sales growth. This reflected positive trends across the board. Traditional equipment, digital imaging, CAD-CAM, and parks and services. We achieved modest growth in international dental merchandise sales driven by good growth in the Duff countries and in Brazil. International dental equipment sales were impacted by a decrease in sales in France as a result of changes in the DSO legislation, a generally slow equipment market in Italy, and the expiration of tax incentives last year in Australia, with other markets generally in line with last year. Given demographic trends, we expect patient demand to outpace the supply of dental services. We've seen this for a while. And for this to drive further efficiency need in the dental practices, which we expect to be a positive driver in the growth of our dental businesses, all fitting in the goal for the Bold Plus One strategic plan. Now, let's take a look at dental specialties. Shifting to our dental specialties business, sales growth in the quarter was generally consistent to the pace of growth in the first quarter, as acquisitions and organic growth in Europe were offset by lower sales in North America. In Europe, sales of dental implant products posted solid growth as we continued to gain market share with our broad and highly competitive offering. Within North America, We received FDA approval to launch the bone-level tapered pro-conical implant in mid-June. This was a bit later than we expected, and we believe this timing impacted the quarter two sales growth as some customers held back on purchases, deferred them in anticipation of the launch of this important new product. We expect dental implant sales growth in North America to resume in the third quarter aided by this new product line. As a reminder, the tapered pro conical positions us to provide an innovative, highly competitive offering for the half of the U.S. dental implant market we weren't previously addressing. The initial feedback we are receiving from customers is quite positive, and we look forward to reporting on our progress in future calls. Our endodontic business continued to grow, aided by a small acquisition we made in Latin America. The focus for orthodontics last quarter was the launch of the Biotech Smiler Clear Aligner into the U.S. market. Again, our orthodontic business is very, very small relative to the entire specialty business. Now, it's important for our investors to understand we continue to align our dental sales teams successfully deepening our penetration of the DSO segment last quarter across our specialties. It's the distribution side working in concert with the specialty businesses and the value-added services that are creating great value for our customers and in turn for the profitability of Henry Schein. So now let's turn to the technology and value-added services and Henry Schein I. which is our dental software business. The customer base for our Dentrix Ascent and entirely cloud-based solutions continues to grow during the second quarter and was up more than 25% year over year with now worldwide installations exceeding 8,000. What I think is important to understand is when we, in the past, when we sold software we recognized sale on-prem software right away. We are switching rapidly to cloud-based solutions, which are highly profitable in the long run, and retention rate is great, but you don't recognize the full sale at the time, the full revenue at the time of the sale. These cloud-based practice management software products are both the cornerstone of Henry Schein I, and at the same time a powerful enabler of additional product sales and equipment merchandise at the Henry Schein level, as well as driving specialty products through the NEMOTEC software that is now being advanced in sales. The number of claims processed by our revenue cycle management e-claims business increased by single digit percentages versus the prior year. Now, this is despite the changed healthcare cyber incident. Under normal circumstances, we would have expected a greater growth, but the changed healthcare cyber incident has slowed us down. We are servicing our customers. There's no interruption from that point of view, but there is some impact on the cash collection of our customers because change did process the actual payment. We processed through change the claims processing, we found an alternative source, but the actual check or electronic transfer to the customer of the funds is still going through change. Some dental practices are therefore facing cash flow challenges due to reimbursement delays, and we believe this continued to temporarily impact demand for certain software products, and we think a little bit also on the equipment side. This is we believe, a temporary cash flow issue which will get resolved. It didn't really impact our collections of our receivables, but it is a bit of a challenge to some practices that are not getting their checks as frequently as they were. The claims are being processed. The collaboration between Henry Schein 1 and our distribution of specialty products businesses supports highly integrated solutions, enables deeper customer relationships and multiple touchpoints between Henry Schein and our dental customers, which helps drive growth, as I mentioned earlier on. And this is especially the case with the DSO segment, although as we move towards our 2025 strategic plan, we will drive the synergy down into the smaller accounts. Many of our high-quality leads for Dentrix products and services are generated by the U.S. Dental Field Sales Representative, And by the way, this is the case not only in the U.S., but in Canada and in all the markets abroad where Henry Schein 1 operates. Here are a few further examples of integration. NEMOTEC, the specialty software that was developed by Biotech in France, is now integrated with our Dentrix practice management software in the U.S., providing, as we discussed during our investor day, the integrated three-click digital workflow software for implants and orthodontics. This is being recognized by some of the big DSOs as very, very important. We have implementation with some of the big DSOs, and we expect this to advance further, advancing Henry Schein's strength and connectivity to these DSOs, and again, will over time advance the smaller practices. We also expanded our solutions offering by pairing Dentrix Detect AI, that's the AI system, clinical AI system we sell, powered by Vidya Health, an early carries detection solution with a terrific product, CuraDent, an early carries treatment product. We're also having early success with a recent launch of Reserve with Google, All of these are being well received by the more sophisticated, larger DSOs, and we are quite optimistic that the Vidya current solution will become standard of care over time in many practices. So these are some of the examples of the unique strength of our combined platform, and we continue to unlock benefits and value from the interconnectivity of interconnectedness across our business. All of this is contained in our strategic plan thinking. Let me just now quickly return to our medical group. Second quarter sales also reflect the slower than anticipated pace of recovery from the cyber incident. In addition, sales were impacted by ongoing migration to generic alternatives for certain branded pharmaceuticals, and particularly in the injectable area where we have a very strong market presence. Of course, there was the declining sales of PPE products, all primarily the result of lower pricing, glove pricing. As with the dental distribution business, we continue to win back episodic medical customers And in particular, large accounts that move their prescription drug business to other distributors, primarily the drug distributors. Once the customers understand our unique logistics capabilities, they are moving back. It takes time. It may enter into commitments. And I think although this is slower than anticipated, we will get these customers back. Excluding the impact of point-of-care diagnostic tests, which were impacted by flu seasonality, so the quarterly sequence of the flu diagnostic testing, moving from one quarter to another, did have an impact on the quarter, but sequentially medical sales growth is improving. Excuse me. Our home solutions business again performed well, with sales up double-digit percentage during the quarter, led by the Shield Healthcare and Prism Medical businesses. We're particularly pleased with Shield. It's been well-received since we acquired the majority interest in last October. So although our overall home care sales volumes are still relatively modest, This is a strategically important market for us. And together with the movement of procedures to the ASC, the Ambulatory Surgical Center, represents enormous growth opportunity for Henry Shire. So let me conclude my remarks by opening remarks before Ron takes over with the specific math. We believe we delivered solid second quarter financial results, again, including strong operating cash flow. And although in the short term we expect our results to be impacted by the challenging economic environment in certain markets, we have in dentistry experienced these kinds of ups and downs over the years. This one seems to be a little bit more of a challenge. And Of course, the anticipated recovery from the cyber incident has been slower but consistent. Every month we get a little bit better. So we remain bullish about the prospects for the business in general. Of course, we'll get into more details. But before we get into answering questions, let me ask Ron to discuss our quarterly financial results and the 24 guidance documents. with a little bit greater detail. So thank you, everyone. Ron, please.