Henry Schein Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 16, 2023

There are 10 speakers on the call.

Operator

Morning, ladies and gentlemen, and welcome to Henry Schein's 4th Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. And as a reminder, this call is being recorded. I would now like to introduce your host for today's call, Graeme Stanley, Henry Schein's Vice President of Investor Relations and Strategic Financial Project Officer.

Operator

Please go ahead, Graham.

Speaker 1

Thank you, operator, and my thanks to each of you for joining us to discuss Henry Schein's financial results for the Q4 of 2022.

Speaker 2

With me

Speaker 1

on the call today are Stanley Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein and Ron Sells, 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. As you know, risks and uncertainties involved in the company's business This may affect the matters referred to in forward looking statements. And as a result, the company's performance may materially differ from those expressed in or indicated by such statements. These forward looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's filings with the Securities and Exchange Commission and included in the Risk Factors section of those filings.

Speaker 1

In addition, all comments about markets we serve, including end market growth rates and market share are based upon the company's internal analogies and estimates. Our conference call remarks will include both GAAP and non GAAP financial results. We believe the non GAAP financial measures provide investors with useful supplemental information on the financial 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 The content of this conference call contains time sensitive information that is accurate only as of the date of the live broadcast, February 16, 2023. Henry Scheinham seeks no obligation to revise or update any forward looking statements or reflect events or circumstances after the date of this call.

Speaker 1

We've prepared slides summarizing our Q4 financial results and these can also be found on the Investor Relations section of our website. During today's Q and 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.

Speaker 3

Good morning and thank you, Graham. And thank you all for calling in today. We closed out 2022 With a very good Q4 in which we continue to execute effectively on our 20 22 to 2024 strategic plan goals, achieving strong growth in earnings for the Q4 and of course for the full year of 2022. Despite the macroeconomic concerns and of course the foreign exchange headwinds, We overcame significant headwinds from lower sales of PPE products and COVID-nineteen test kits. Our sales were affected by a decline in sales of PPE products and COVID-nineteen test kits, excluding sales of PPE products COVID-nineteen test kits and taking out the 53rd sales week For 2022, we achieved very good internal growth of 5% in local currencies, that's internal.

Speaker 3

There was a negative impact on dental visits for seasonal flu and COVID-nineteen last quarter. And this is both in North America and internationally. So dental visits were down because The impact of flu, both the seasonal and the COVID. On the other hand, this was offset by a positive impact, At least from a product sales point of view of visits to our physician customers, we experienced growth in each of our businesses Across the board and overall, as such, we generated solid financial results for the quarter, Reflective, I think of a stable market in the markets that we serve. So we made excellent progress in advancing our 2022 to 2024 Bowl Plus 1 strategic plan.

Speaker 3

So, 1st year of the plan was 2022, where we advanced our 1 distribution strategy to enhance the customer experience And improve operational efficiency, very important, by creating our North American Distribution group led by Brad Kinnett and our international distribution group led by Andrea Albertini. We had good results across the board, both in North American distribution and in our international distribution group. We strengthened our dental position with national DSOs who won new accounts and had an excellent success With our technology solution and specialty products within our within the National DSO segment And on the medical side, we did expand our position with IDNs and large group practices. On the digital side, the bold plan calls for a significant effort in this area. We created our global digital team, including the appointment of experienced veterans in this area.

Speaker 3

Trent Clark as Chief Global Customer Experience Officer Sarah Dillon as Chief Data Officer. We're working closely with Lee Benowitz, Chief Global Digital Transformation Officer and Mark Hillenbrand, Chief Digital Revenue Officer. We made excellent progress designing and building our global e commerce platform and this is an advancement of our current platform, Which we expect to start rolling out in the latter part of this year and that's we start to roll out the Upgrades to the current platform. At the same time, we had some exciting news on the AI side, We launched our DetectAI, an AI enabled X-ray analysis tool powered by Vidya Health. And last week, we were advised that WIDIA Health has received 501 ks FDA clearance for its periodontic solution, which we expect will further advance the use of AI as a tool in dentistry.

Speaker 3

We were active on the M and A front. We acquired Midway Dental in the U. S. And Condo Dental in Switzerland, and therefore, expanding our reach in Underpenetrated areas of the market, we acquired a majority stake in Unitas and announced plans to acquire a major a majority stake In Biotech Dental, both of these investments we'll address in a moment. We have begun implementing our restructuring plan to reduce our global real estate footprint to reflect TSM at Steamshine member preference for flexibility in work locations.

Speaker 3

In this connection, we have closed One of our 2 buildings in our Melville headquarters on Long Island. We intend to invest In our remaining real estate footprint around the world to provide modern and flexible office space and we will also continue to invest in technology To ensure that we maintain and build on our strong competitive position from a technology point of view, in other words, the tools We provide our team to operate and of course the tools we offer to our customers to interface with us. This past quarter, we disposed of an unprofitable business, so we can redirect our resources to operations that are Priorities in our 2022 to 2024 strategic plan. The costs associated with this are included in our restructuring costs for the quarter. So if you look ahead a bit, we are introducing guidance for 2023, which Ron will discuss in a moment.

Speaker 3

We expect operating income growth in the high single digits to low double digit percentage When excluding the contributions from PPE Products and COVID-nineteen test kits, We anticipate the impact of lower selling prices of PPE products and reduced demand from COVID-nineteen test kits We'll largely be offset by earnings momentum in our underlying core businesses and the good momentum we have as we enter 2023, this gives us confidence in the 2023 guidance and the specifically The growth in our operating income when you exclude PPE products and COVID-nineteen tests. So a little bit of specifics on our dental distribution merchandise sales in North America grew slightly when excluding sales of PPE and taking out sales From the 53rd week, in North America, we have a relatively stable market and our market share, we believe, remains Stable to slightly positive. We believe global dental consumable merchandise growth As noted earlier, was impacted by the high incidence of flu and COVID-nineteen cases, which caused increased rates of patient cancellations and accentuated staffing shortages. Now what's important is the rate of patient flow It appears to have returned to more normal levels in January this past January of 2023. The impact from manufactured merchandise price increases, we believe lessened as last year's increase began to annualize.

Speaker 3

The depth and breadth of the Henry Schein product portfolio, of course, allows us to support our customers' needs When we have customers that are concerned with pricing, as we have offerings of alternative national and corporate brand products, That's our own brands as well as alternative national brands where we experienced customers' resistance to price But having said that price increases, we believe that are sticking in the marketplace are relatively stable now and Not anywhere near what they were at the beginning of last year. Our demand for Dental Equipment North America remains healthy And our North American equipment order book is stable. Although we saw good sales from traditional equipment And steady sales for digital imaging equipment, which we had challenges in the past Because of pricing issues, but this seems to be stabilized now. And there was a decline in sales of digital restoration equipment Compared to corresponding the corresponding period in the 4th quarter and of course, we had good sales in the Q4 of last year. But the challenge has been customer demand is shifting from chairside mills, Quite expensive to 3 d printing, much less expensive and a mixed shift to lower price intra oral scanners.

Speaker 3

There was also a supply chain issue with one of our important intraoral scanner suppliers that introduced a new scanner This in the last few months. So all in all, the demand for digital restoration, that market is pretty tough, But there are these mixed challenges that I've just described and we can go into them in greater detail if anyone has questions. The value of our North American order book for equipment is stable. We continue to see construction delays to some extent and a slight Reduction in the number of planned new office openings amongst specifically some of our larger DSOs. On the international dental merchandise sales side, the same impact as in the United States, North America, The COVID patient flow challenges we experienced also as well as the lockdowns in China that were offset on the international side, But those were largely offset by good growth in the UK, Eastern Europe and Brazil.

Speaker 3

Towards the end of the quarter, dental office Staffing, absenteeism and patient appointment cancellations began to ease Likewise, in our international business. Demand for equipment internationally held up quite well with sales moving to lower priced intraoral units as well and the overall equipment sales essentially were in line with last year. The 4th quarter equipment sales And our outlook was slightly impacted by purchase delays in anticipation, this is on the international side again, With the biannual IDS show in Cologne, where customers expect new promotions to be introduced New products and that show takes place at the end of the Q1. The fundamentals in our dental End markets remain solid. Of course, the aging population and the growing global awareness So demand for dental services also generally correlated, We believe with unemployment rates and in the developed world, these remain relatively Consistent, historically low, if you will.

Speaker 3

So we think the underlying base is okay Supporting oral care. And let me now turn a little bit to the Dental Specialty Products business, Where we were impacted particularly in our largest sector, implants and Bone regeneration products with significant prior year growth, prior year comparisons. The By Horizon's Camelot premium value implant segment continues to grow in North America and Europe. We have some offset here with the decline in China, although I'll point out that our China business is not material, but it did impact the growth line to some extent. Sales for DSO customers in the United States for The byRise's Camelot line remains solid and our value brand, Modentus, primarily in Germany, but also to some extent in China, Achieved double digit sales growth, but this was mainly coming, as I said, from Europe And a little bit from Asia.

Speaker 3

When I refer to Asia, I'm specifically talking to Japan, We are implants are doing quite and oral surgery products are doing quite well. In December, we announced plans subject to regulatory approval To acquire majority ownership stake in the French dental solutions provider, Biotech, we look forward to bringing Biotech Dental's high quality software. This is It's the whole digital flow that is so important that Biotech Dental will contribute to Henry Schein, But also the general products and services that dentists and dental labs by Important for new geographies with respect to Biotech, specifically in France, where we believe we will be close, if not the leader in implants at some point in the near future. These also have an alignment product that is well received in that market. So, dental products, liners, implants, biomaterials, all are high growth, high margin products and biotech We'll contribute to that as well as providing support, additional support for our leading digital workflow solution On the endodontics side, sales growth remained strong, driven by new products introduced early in the year.

Speaker 3

Recent data suggests that the percentage of general practitioners in the U. S. Who perform root canal procedures is increasing. That plays right into our sweet spot as well. We believe that this trend combined with an aging population intent on obtaining their teeth It bodes quite well for the Henry Schein Endodontic business.

Speaker 3

Now turning to our technology and value added business. The largest segment of course is Henry Schein One, our software business. Growth was strongest in the international business due to The strength of our entirely cloud based solution, which is doing very well outside of the United States. Growth in North America was driven by sales of our practice management software. Also the Specifically, the cloud based software that we offer, Dentrix Ascend.

Speaker 3

And we see Customers upgrading to Dentrix, Dentrix Ascend as the life cycle of our Easy Dental product ends. So we're very pleased with the progress of progressing from Easy Dental to our Dentrix and Dentrix Ascent products. What is very important is we now see close to 6,000 customers on our cloud based products, Dentrix Ascend entirely. We have noted in the past these cloud based systems drive demand for other Henry Schein One products. We also had nice customer wins during the Q4 with our Jarvis Analytics business.

Speaker 3

He assisted well as well. This is the business that helps with Revenue cycle management, Eosys made a significant investment in Unitas, A PPO solutions provider and generally puts us in a very, very good position to help practitioners And we're now delighted to be able to integrate these value added services into our Product offering at Henry Schein 1. So you'll see that the Dental Specialty Products Technology and value added services business, did well, record year this year, up against some tough comps Towards the end of the year and this is where we're placing a lot of emphasis An important part of our 2022, 2024 Goal Plus 1 strategic plan, which we'll talk about in greater detail at our Investor Day. The medical distribution business continued to see excellent growth. This did reflect higher patient traffic to Ultimate Care sites, Partially driven by the incidence of flu and COVID-nineteen, but generally the trends are there Moving from the acute care setting to the alternate care side, we had good sales of course as you would expect In point of care diagnostics and other products associated with flu, when excluding sales of PPE products, COVID-nineteen test kits, we experienced double digit growth in local currencies, adjusting for that extra week And really absent any public health outbreaks, new ones, our medical sales should return to more normal mid to high We are pleased with the continued growth of new accounts across the independent and large group practices As well as ambulatory surgical centers and urgent care facilities, strong pharmaceutical sales were driven by pneumonia treatments And equipment sales also continue to do quite well as practitioners invest in their practice And as the offering of office based practitioner equipment expands in terms of availability to treat Over the last several years, Henry Schein has been able to shift priorities and provide solutions needed to help our medical and dental customers And the public, of course, during the COVID-nineteen crisis and last year's flu season And even with it during the crisis and of course last year's flu season and even with this change, The impact of COVID-nineteen and flu, which required huge support from our team to deal with these Currently significant inflows of orders.

Speaker 3

It's important to realize that We delivered a compounded average sales growth even with these inflows, unusual inflows of PP COVID tests Of about 6 point just over 6 percent, when you take out the PPE in COVID. So Inner Science Internal growth, growth in general, excluding PPE and COVID is quite solid. And so We also believe that the PP and E and COVID efforts that we undertook helped us generate more customers, Helped our customers understand that for healthcare products, it's better to go to a reliable source. And so I want to thank the team for doing a remarkable job getting out the 1,000,000,000 of dollars of unusual one time, in respect, COVID test and PPE So with that, I'll turn over the call to Ron for a review of the 4th quarter results And our 2023 guidance.

Speaker 2

Very good. Thank you, Stanley, and good morning, everyone. As we begin, I'd like to point out I'll be discussing our results as reported on a GAAP basis and on a non GAAP basis. Our 4th quarter non GAAP financial results for 2022 and 2021 This is detailed in Exhibit B of today's press release and in the supplemental information section of our Investor Relations website. As Stanley mentioned, the Q4 of 2022 included one additional selling week compared to Q4 of 2021, which was the holiday week between Christmas and New Year's Day.

Speaker 2

We report on a 50 two-fifty 3 week Fiscal year ending on the last Saturday in December. The next time our results will include an extra selling week will be in 2028. With respect to sales growth, I will focus on LCI sales growth, which has internally generated sales in local currencies and excluding acquisitions. To facilitate more meaningful comparisons, the estimated extra week of sales will also be excluded from LCI sales growth figures. A detailed breakout of the components of our sales growth, including LCI growth is included in Exhibit A of today's press release.

Speaker 2

4th quarter global LCI sales decreased by 1.8% versus the prior year. However, when excluding sales of PPE products and COVID-nineteen test kits, our LCI sales grew 5.0%. We sold approximately $161,000,000 in PPE products and approximately $93,000,000 in COVID-nineteen test kits, including multi assay flu and COVID-nineteen combination kits in the 4th quarter. This compares with approximately $61,000,000 in PPE products and approximately $187,000,000 in sales of these tests in the Q4 of 2021. Our GAAP operating margin for the Q4 of 2022 was 2.15%, a 3.87 basis point decline compared with the prior year GAAP operating margin.

Speaker 2

This was primarily a result of restructuring and integration expenses and the impairment of certain intangible assets incurred in the quarter. Our non GAAP operating margin for Q4 was 6.74%, a 56 basis point improvement compared with the prior year non GAAP operating margin. This improvement was driven by gross margin expansion, mainly as a result of sales mix favoring higher margin products along with lower operating expenses as a percent of sales. Regarding income taxes, our reported GAAP effective tax rate for the Q4 of 2022 was 23.6%. This compares with a 22.5 percent GAAP effective tax rate for the Q4 of 2021.

Speaker 2

On a non GAAP basis, our effective tax rate for the quarter 22.2 percent and this compares with the prior year non GAAP effective rate of 22.5%. Q4 2022 GAAP net income was $47,000,000 or $0.34 per diluted share. This compares with prior year GAAP net income of $147,000,000 or $1.05 per diluted share. Our Q4 2022 non GAAP net income was $165,000,000 or $1.21 per diluted share. This compares with prior year non GAAP net income of $151,000,000 or $1.07 per diluted share.

Speaker 2

Amortization expense of acquired intangible assets for the Q4 of 2022 $30,700,000 or $0.14 per diluted share. This compares with $32,600,000 or $0.14 per diluted share for the same period last year and this expense is included in the 2022 and Excluding amortization expense of acquired intangible assets better represents the underlying business results. Beginning with the Q1 of 2023, We will be modifying our non GAAP reporting to exclude amortization expense of acquired intangible assets. Using this method, Our full year 2022 non GAAP net income was $741,000,000 or $5.38 per diluted share. We will include a reconciliation of our non GAAP financial results with the new methodology in our quarterly presentation available on our Investor Relations website.

Speaker 2

And finally, foreign currency exchange negatively impacted our 4th quarter diluted EPS by approximately $0.04 versus the Q4 of last year. I'll now provide some detail on our 4th quarter sales results. Global Dental sales were $2,000,000,000 and LCI sales decreased by 2.6%. Excluding sales of PPE products, our global dental LCI sales growth but increased by 1.0 percent when excluding PPE products. Global dental equipment LCI growth was 0.7%.

Speaker 2

North America Dental LCI sales decreased 3.4% compared with the prior year, primarily due to a 5.1% decrease Consumable merchandise sales. However, when excluding sales of PPE products, North America dental consumable merchandise LCI sales grew 1.3 North America dental equipment LCI sales also increased 1.3%. International dental LCI sales decreased by 1 point 4% and consumable merchandise LCI sales decreased by 1.7%. When excluding sales of PPE products, International consumable merchandise LCI sales increased 0.7%. International equipment LCI sales decreased by 0.4%.

Speaker 2

Sales of dental specialty products were approximately $247,000,000 in the 4th quarter with LCI growth of 0.3% compared Global Technology and Value Added Services sales during the Q4 were $187,000,000 with LCI growth 3.4% compared with the Q4 of 2021. Sales were negatively impacted by the expiration of a government contract, which we mentioned during our Q3 2022 Conference Call. Adjusting for this contract, the underlying sales growth was 9.1%. During the Q4, our technology and value added services businesses together with our dental specialty products achieved LCI sales growth of 1.6% or 3.9% after adjusting for the expiration of the government contract. Global medical sales during the Q4 were $1,200,000,000 And LCI sales decreased 1.3% due to lower sales of PPE products and COVID-nineteen test kits.

Speaker 2

In North America, excluding sales of PPE products and COVID-nineteen test kits, LCI sales grew 14.9%, led by strong point of care diagnostics, medical equipment and pharmaceutical sales. Regarding share repurchases, we repurchased approximately 3,600,000 shares of common stock in the open market during the Q4, Buying at an average price of $79.55 per share for a total of $285,000,000 The impact of the repurchase of shares on our 4th quarter diluted EPS was immaterial. For the full year, we spent $485,000,000 to repurchase 6,100,000 shares. At fiscal year end, we had approximately $115,000,000 authorized and available for future share repurchases. An additional $400,000,000 was approved by the company's Board of Directors on February 8, 2023.

Speaker 2

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 our organic growth initiatives And strategic acquisitions, while continuing to return capital to our shareholders. Operating cash flow for the Q4 was $254,000,000 For the full year, operating cash flow was $602,000,000 compared with $710,000,000 in 2021. Regarding our restructuring program, as part of our previously disclosed integration and restructuring initiative, we recorded a pre tax charge In the Q4 of $121,000,000 or $0.70 per diluted share. These expenses mainly relate to vacating 1 of the buildings at our Millville headquarters and the impairment of intangible assets associated with the disposal of an unprofitable business.

Speaker 2

There were also restructuring expenses associated with severance and costs related to the exit of some other facilities. Due to the disposal of certain assets and the lengthy remaining period of certain leases we exited, Expense savings from this plan are expected to be realized over a longer period of time. We expect to continue to record integration and primarily to include severance pay and facility related costs. We also recorded an impairment for intangible assets of $34,000,000 pre tax or $0.17 per diluted share related to certain continuing operations. Let me conclude my remarks with our 2023 financial guidance.

Speaker 2

At this time, we are not able to provide estimates for costs associated with integration and restructuring for 2023. Therefore, we are not providing GAAP guidance. As I mentioned, beginning with our Q1 2023 financial results, we will modify our non GAAP treatment to exclude amortization expense of acquired intangible assets. This is in addition to the other adjustments we made in 2022 to our GAAP financial results. All guidance today reflects this change.

Speaker 2

2023 non GAAP diluted EPS excludes amortization expense of prior acquisitions A $0.56 a share in 2023 and this was $0.57 in 2022. For 2023, we expect non GAAP diluted EPS Attributable to Henry Schein Inc. To be in the range of $5.25 to $5.42 per share, Reflecting growth of negative 2% to positive 1% compared with our 2022 non GAAP diluted EPS of 5.38 Our guidance for 2023 assumes total sales growth of approximately 1% to 3% over 2022 The sales of COVID-nineteen test kits declining approximately 35% to 40% from sales in 2022. Additionally, PPE product sales are expected to decline about 20% to 25%. In the aggregate, revenues of these product groups are expected to decrease 30% to 35% from 2022.

Speaker 2

The impact on 2023 non GAAP diluted EPS from the lower contribution to earnings from Sales of PPE products and COVID-nineteen test kits is approximately $0.35 to $0.40 per share. This impact will be much more pronounced over the first half of twenty twenty three and especially in the Q1 as we had sales of almost $500,000,000 PPE and COVID-nineteen test kits combined in the Q1 of 2022. These headwinds are largely offset by earnings momentum in our underlying core businesses And we expect non GAAP operating income will grow in the high single digit to low double digit range when excluding the contribution from PPE products Please note that 2023 will include one less selling week compared to 2022, which will occur in the Q4. For 2023, we expect non GAAP operating margin to be 10 to 15 basis points below our 20 22 non GAAP operating margin of 8.20 percent. And this is largely a result of lower PPE products in COVID-nineteen test kit sales and profits.

Speaker 2

Our guidance reflects non GAAP operating margin expansion when excluding income from PPE products and COVID-nineteen test kit sales. Our 2023 guidance includes higher interest expense than in 2022 as a result of higher interest rates and higher minority interest from our higher growth businesses, mainly Henry Schein and I. We also expect an effective tax rate in the Our guidance for 2023 diluted EPS is for current continuing operations as well as completed acquisitions and does not include the impact of future share repurchases, the acquisition of Biotech Dental and other potential future acquisitions or integration Guidance also assumes that foreign currency exchange rates are generally consistent with current levels, The end markets remain consistent with current market conditions and that there are no material adverse market changes associated with COVID-nineteen. With that, I'll now turn the call back to Stanley.

Speaker 3

Thank you, Ron. We have about 20 minutes, a little over 20 minutes to answer questions. I'm sorry the call was that long, but there's a lot going on. We're highly confident in the business and the business ex PPE And COVID test is doing quite well, even though there are challenges from a macro point of view. Having said that, I think we've got great momentum in the business and look forward to answering any questions.

Speaker 3

Operator?

Operator

Thank you. We will now be conducting a question and answer session. Thank you. One moment please while we poll for questions. And our first question comes from the line of Jeff Johnson with Baird.

Speaker 4

Thank you. Good morning, guys. Ron, maybe wanted to start just on the COVID testing kit and PPE guidance. When I look at kind of the EPS impact this year, it seems like it's dropping through at a decremental margin in the mid, if not upper teens level. I think over the last couple of years, those have been contributing positively, kind of those have been flowing through or at least kind of you guys have signaled that those were dropping through kind of Corporate wide margin rates.

Speaker 4

So why it makes some sense, I guess, when you're losing some of that inflated top line growth, There's a deleveraging impact there, but dropping through at that mid to upper teens decremental margin seems a lot bigger than I would have expected. So any comments you can make there?

Speaker 2

Yes, certainly. I think that we could see a little bit of pressure on gross margins on both PPE and COVID test kits versus But I think the bigger issue there Jeff is just the gross profit dollars. I mean the compounded effect of the ongoing decrease in the revenues from these product categories in both 2022 and then continuing into 2023 Results in fewer gross profit dollars and I think that kind of dilutive effect begins It begins to hurt the operating margins a little more so than that makes it more difficult for us to cover it like we did in 2022.

Speaker 4

Yes, understood. And then historically, you guys have provided organic growth guidance, revenue guidance, you did last year anyway, I guess, Prior to that, not necessarily. A lot of moving parts this year with the selling week, one less selling week, the PPE updates, obviously, some acquisition contribution. If I look at that 1% to 3%, we're kind of calculating that at maybe a 3% to 6% organic guidance ex All that noise and if I assume medical and tech VA a little above that, dental in kind of that low to mid single digits, are those kind of all least ballpark we should be thinking about as we're setting up our models for 2023? Thanks.

Speaker 3

Yes. I mean,

Speaker 2

you're in range there. I think that we're I think we have a headwind from PPE and COVID test kits combined of probably 300 basis points to 400 basis points, right? You also have a headwind from the 53rd week that's going to be somewhere between 1 point and 1 point 5 in there. We'll get a little bit of benefit from acquisitions. That kind of leaves you with a number that could be 3 to 6, 4 to 7 in terms of non PPE COVID test kit growth that we would expect in 2023 versus 2022.

Speaker 4

Dental a little below and medical above, is that the way to kind of think about that? Thanks.

Speaker 2

Yes, that's probably a fair

Speaker 3

statement, yes.

Operator

And the next question comes from the line of Elizabeth Anderson with Evercore Cy, please proceed with your question.

Speaker 5

Hi, guys. Thanks so much for the question this morning. I had a question around sort of your utilization and Could you help us parse that apart a little bit more for 2023? I'm thinking specifically on maybe sort of like Medical visits and then sort of overall dental visits.

Speaker 3

Yes, very good questions. We did take a dip On visits in dentistry, and it was both in the United States and Europe and the rest of the world wasn't so bad, of course, China, it was in the 4th quarter. And it is down a bit. And there's been a recovery in January, quite nice recovery. It is down a bit from 2019 in the United States, Hard to get data outside of the United States.

Speaker 3

But we are not 100% back to where we were, But the dip that we experienced in the 4th quarter has mostly, if not all, Recovered and at least from what we can tell from the 1st 40 days or so of the year and probably hearing from our customers, We're back to where we were in about the Q3. So correspondingly, on the medical side, there was an increase in visits. People had flu and they wanted to confirm that it wasn't COVID. So we experienced some growth In that respect, in terms of flu tests, and you can see that information from the flu test manufacturers, a lot of them are providing that information. But again, We expect in January, February that the visits We're relatively back to where they were before in the Q3, say, before these the flu.

Speaker 3

So the businesses are relatively stable now. And we had that temporary dip In dental visits and I think a bubble a little bit in medical. But on average, average amount, If you look at our internal growth, local currency is about 5% internal growth for the company. So And I think all things being equal, perhaps it will be a little bit better in the Q1. Hard to tell, It's looking quite positive for the 1st 40 days of the year.

Speaker 5

Got it. And sorry, just two clarifying questions. One, your comments about sort of the dip and then Little bit of the recovery in January early February that also applies to Europe. And then secondarily, you're assuming for your 2023 guidance that these

Speaker 3

As it relates to international or Europe in particular, because China and the other countries kind of cancel out, although there's a bit of a positive impact in Brazil where we have a big But not big market share, but big business, so to say, big decent market share too. I would say the trends will be very, very similar. Of course, our medical business is not material in Europe, so I would exclude that I might even shift. We can give you data on that because it's so diffuse. But our Dental business had similar Trends to the United States and therefore to North America.

Speaker 3

What was your second question,

Speaker 5

And then is that January sort of rate of visits, etcetera, was sort of what you were using to underpin your 2023 guidance?

Speaker 3

I'll have Ron answer the guidance question. I'm not sure whether the 1st 40 days really carry through for the full year or don't. So Ron?

Speaker 2

Yes. I mean, it's a little early at this point. I think that our guidance is supported by our budgeting process. We do obviously monitor What's happening so far in 2023, but I think that the assumptions The dental market last year suffered a little bit in January from Omicron. So there's some assumptions in there on Q1.

Speaker 2

But At the same time, the last year, like I said in the prepared remarks, we did about $500,000,000 in revenues and PPE and COVID test kits in Q1 won't get it won't be nearly that much this year, right? So Q1 is going to have it's still going to have a little bit of noise in it.

Speaker 5

Got it. Thank you.

Speaker 3

But when you flow through everything, Elizabeth, I think you We're pretty comfortable with our budget for this year, which contemplates at the end of the day high single digit to low double digit Operating income growth when excluding PPE and COVID. So I think if you can see through the PPE and COVID, You'll see the business is pretty solid. That's actually better performance than we've had in the past. And I still think that the whole management of these PPE and COVID tests where we Put the accelerator down, generated over $2,000,000,000 or so in sales and pretty good profits Has paid off because our customers are understanding that they can rely on shine during challenging times And that the products we sell are generally of our compliance with regulations and very often They were buying products during this PPE during this COVID period that had regulatory issues and so and quality issues. So I think the strategy has played out well in terms of focus of PP and test.

Speaker 3

And at the same time, We garnered quite a bit, I think, of core business and that's reflected in our Expectations for 2023 in terms of growth of operating income.

Speaker 5

Got it. Thank you very much.

Operator

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

Speaker 6

Hey, good morning. Thanks for taking the questions. Maybe Stanley, I'll start with you. A lot going on here, as you said, But maybe with the outlook, you got 1% to 3% of the top line. I know Jeff was digging in there on the organic growth.

Speaker 6

Core EBIT growing up or single to low double digits. It implies some pretty nice core margin expansion and that would seem to fit with the historical trend line of the business. But Maybe double clicking on Jeff's question there, wondering if you can comment a bit further on how you see the core dental consumables and equipment lines performing in 2023 in North America and international? And then are the drivers of the core margin expansion implied in your guide, are those more growth or operating, if you're willing to comment there?

Speaker 3

Yes. Let me deal with the first part, and I think it's best for Ron to respond to the guidance from a mathematics point of view. As noted in the prepared remarks, we believe the dental market in the developed world certainly It's quite stable. We believe that generally, we're growing some market share. There are puts and takes here, namely The seasonal adjustment because of flu in the 4th quarter And a little bit of a rebound and or back to normal in the Q1.

Speaker 3

But generally, I think the market is stable. I think specialty products are stable. You should not necessarily read anything into our specialty sales per se, because we had an exceptional 4th quarter for implants and bone regeneration products in 2021. But generally, I would say the consumable markets In the developed world are relatively stable. There are a few markets where it's a bit down and a few markets where it's a bit up, But Joni, it's stable.

Speaker 3

On the equipment side, traditional equipment is okay. We haven't quite run off The backlog is pretty stable. The area that in the past, I was a little bit more concerned about is the imaging. I think it's relatively stable now. The prices are not going down as they did and the units the demand is pretty good.

Speaker 3

The area where there'll be lots of ups and downs is in the digital area. There's enormous interest in digital dentistry. I've not seen the interest this high. I think when it comes to the scanners, I think we're well beyond the 1st run of innovator type buyers and into standard of use buyers. There are many new entrants into this market.

Speaker 3

There are lower priced product for sure, and that's where the market is heading, But the demand for units is very strong. I would say that we were challenged a bit, and I think it's going to be that way for a few quarters With a new product from our leading provider of scanners, but I don't think we'll lose those orders, they'll come. On the other side, the mill market has really almost come to a halt. We're still selling mills, but Dennis, they were looking at mills, are now looking at 3 d printing. We got a bit of a boost there in the United States.

Speaker 3

The ADA has now Provided a billing code. And so, Dennis, they may not buy the 3 d printer right away, but they're certainly looking at it. And I think that, that market is going to do well. It's the technical use maybe for the front Using it later for the front teeth is not perfect yet, but this is a great opportunity for us and we're doing well And we expect to do even better, although it's not covering the reduction in mill demand. And now I'm dealing with the dentists.

Speaker 3

On the lab side, the mills are doing quite well. And so generally, that's what's happening In the equipment business, I think it's quite a good market on the traditional, On the 3 d printing, mills are a challenge and there's a slight issue in Europe because of the ideas that occurs at the End of March. And so I think people are waiting to see what developments occur, but I don't think that's going to impact the whole year sales. So that's just may A slight dip in uptick, but generally, I would say, dental is stable. On the medical side, we continue to see the migration From the acute care setting, I myself am having a partial knee replacement and I'm told I'll be out on the same day.

Speaker 3

That was not the issue, not the situation perhaps a year and a half ago. Perhaps a year and a half ago. So there is a migration and we're benefiting from that.

Speaker 2

And Jason, with reference to your question on operating margin, yes, I do think that Like we said, we believe operating income is growing in the high single digits, low double digits when excluding the drag from And that yes, that should imply kind of a pro form a operating margin expansion As you inferred, I think it's a it really shows that the benefits of having the The broad product portfolio we have of not just being a distributor, but also having the specialty products, also having being in the medical business, also being in the technology business That we can continue to kind of offset some of these market conditions that have adversely affected us a little bit with whether it be in

Speaker 6

Got it. Just so Ron, just as a quick follow-up there, you're suggesting operating margin I totally get that. Is it gross margin driven or OpEx driven? And thanks for the comprehensive answer. I'll hop back in queue after that.

Speaker 2

It's good. It's given that the product mix aspect of it would be primarily gross margin driven.

Operator

Thank you. And the next question comes from the line of Jon Block with Stifel. Please proceed with your question.

Speaker 7

Thanks, guys. Good morning. Ron, maybe just going on a similar path, the high single digit to low double digit 2023 Non GAAP EBIT growth for the core business, can you talk to how much that benefits from the restructuring in the back part of 2022, I know you guys usually do restructuring. This seems a little bit bigger than normal. And when we think about going forward, more importantly, Is the high single digit to low double digit a good representation of the business longer term once the PPE COVID headwinds abate?

Speaker 7

And then maybe in the interest of time, I'll just ask both upfront. Stanley, on the implant side of the Dental Specialties, I know you guys had a very difficult comp, but I think just Maybe in the back part of 2023 implants might be flattish, call it, in 2H22 year over year to throw a dart. Just would love your thoughts on how that compares to market growth and if you feel like you guys are still taking share there. Thanks for your time.

Speaker 2

Yes. John, I think in terms of the and if I I'll paraphrase your question and tell me if I have it wrong, it's really kind of Sustainability of continued growth in the high single to low double digits in the balance of the business. And we do have some confidence there that we can continue with that. I think that you may be aware that we have an Investor Day coming up on February 27, And we'll provide more kind of some kind of midterm assumptions at that point in time in terms of what we are expecting beyond 2023. But Yes.

Speaker 2

This is again kind of partially driven by the mix of the business and the fact that we're growing some aspects of the business

Operator

The questioner has dropped off. The next question comes from the line of Nate Fritz. Let me just

Speaker 3

respond quickly to the specialty products. The implants and bone regeneration products are doing Very well. We're very pleased with our internal growth in that area. I think the Biotech acquisition will help. So that business continues to be strong, particularly in our core markets, which is the United States and Germany, a couple With the Germanic countries, Japan, on the endo products, we're doing well.

Speaker 3

Also, they like an implant's bone regeneration to believe we are gaining market share. The aligners are so small, but I think we will get a boost with the Biotech acquisition. We will have certain synergies That I think will help drive more sales, but it's a very small business.

Operator

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

Speaker 8

Great. Thanks for the questions. I'll ask both upfront as well. And both are related to the intraoral scanner market. Stanley, where would you say we are in the Shift to lower priced products.

Speaker 8

And can you just go into a little bit more detail on kind of what you're expecting from that market in 23, do we start to maybe see some signs of stabilization just in terms of ASP and mix? And then, could you go into a little bit more details on the supply issues you mentioned from that one supplier just in terms of when if you have any visibility into kind of when that Would potentially resolve or just what you're looking for there and what's assumed in the outlook? Thank you.

Speaker 3

Yes. On the iOS side, on the scanners, I don't think we've seen the bottom yet in terms of mix change. I think the pricing relative to Manufacturers may have stabilized, but there are entrants into this market That are very good products. At best, we didn't even sell nut shop in the past. They were now carrying and selling.

Speaker 3

So it's more of a mix to lower priced products rather than deflation of a particular manufacturer's existing products, Although, there could be some of that. As it relates to and by the way, I think We estimate about 20% to 25% of dentists in the developed world have one of these devices, And we think that's going to be standard of care within the next couple of years. So we're very optimistic about units in that area. And also these newer entrants that we're working with are doing quite well with us. As it relates to the manufacturer that has Supply chain issue, it's not a public company.

Speaker 3

I can't talk about it. But They have a new product. It's actually on the upper end that has done quite well. And That just goes to a little bit of a contradiction to what I said early on. For manufacturers that have unique Technology, there is a demand for paying more, but that's not generally for the whole market.

Speaker 3

The whole market, 75% of people that don't have a device, they're interested more in a lower price Product that has enough features for them, but the one that's on back order is on the higher end of features And we don't expect that to resolve for 3 quarters.

Operator

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

Speaker 9

Thanks and thanks for taking my question. Can you quantify in any way the impact of the 3 d printing that you called out in the release On the call, like in terms of numbers and market share and the like, because I know you've talked about it in the past, but I think this is the first time Billy called it out in a press release is impacting the business. And just as a follow-up to Aldis and appreciate all the color on the inventories And the equipment and Ios and the like, but your backlog grew in 3Q and you believe you said it grew sequentially through the quarter. What is the expectation for equipment sales and where does your backlog sit now Relative to where you were at the end of 3Q?

Speaker 3

Let me deal with the backlog first. It is in North America similar to what it was at the end of the 3rd quarter. So I don't think much has changed. I can't give you the exact timing. A lot of that is the result of traditional equipment, but we seem to be topping up whatever we ship.

Speaker 3

And so that market seems to be quite strong. In Europe, it's dipped slightly, but we think that's to some extent Because of the IDS, because people are holding back, we're dealing at the margin here. So it's not material. Bottom line is that The backlogs are good in both North America and internationally and the equipment is strong. As it relates to mills, I would say the mill market has significantly come down.

Speaker 3

And I'm referring to, as I know, chairside mills, that's just not doing well. I'm not referring to lab mills. We are the largest provider of products to dental laboratories and that market seems to be relatively strong. The switch to the 3 d printing is not occurring 1 to 1 yet. What's happening is there's a lot of dentists That is saying I need to find out more about this.

Speaker 3

And I expect that over the next couple of quarters, our Team will be out there educating Dennis on the opportunity for 3 d printing. I suspect it will result a little bit in mills going up again because right now it's a situation we dentists want to understand more And 3 d printing is going to be important, but not substitute completely for chairside milling. The market has just, I think, Come to a little bit of an educational stumble, but I think the mills will come back again, but not to where they were. And 3 d printing is at a relatively early stage, but I think we're doing very well in terms of growing our global market share, the sales that are out there. 3 d printing will improve as various materials come to market and as the aesthetics improve.

Speaker 3

But I think the message is that digital restorations are a hot product. Dentists are interested in investing. Our job is to make sure that we educate the dentists on the appropriate device for their practice and then close on sales.

Speaker 9

Thanks. And if I can ask Ron a really quick follow-up, I just wasn't sure if I heard, is the guidance include or exclude Dental Biotech? And what was the impact of that?

Speaker 2

The guidance does not include Dental Biotech. I think that when we put the release out on Dental Biotech, we said it would be Slightly dilutive to 2023 when excluding amortization expense.

Speaker 9

Okay, great. Thank you.

Speaker 3

Yes. Okay, everyone. Thank you very much for calling in. The message I think we want to communicate, I know we want Communicate is that our core business is in good shape. We expect decent internal growth rates.

Speaker 3

Local currency, of course, in 2023, we'll cover this in more detail at our Investor Day, we expect our internal growth sorry, our operating income to continue to grow quite nicely, High single digits, low double digits. And bottom line is the business is in good shape In markets that are doing well, there are nuances that need to be understood. We're happy to deal with that in further detail at the Investor Day. If anyone wants to reach out to Graham on the Investor Relations side, he'd be happy to provide further clarity on our remarks. So thank you very much.

Speaker 3

And hopefully, we'll see everyone on the call in our Investor Day in New York City

Remove Ads
Powered by Quartr
Earnings Conference Call
Henry Schein Q4 2022
00:00 / 00:00
Remove Ads