Henry Schein Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2023

There are 10 speakers on the call.

Operator

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, Graeme.

Speaker 1

Thank you, operator, and my thanks to each of you for joining us to and Company. With me 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 and Company. It will include information that's forward looking. As you know, risks and uncertainties involved in the company's business may affect the matters referred to in forward looking statements.

Speaker 2

Call. As a result, the company's

Speaker 1

performance may materially differ from those expressed in or indicated by such statements. These forward looking statements are qualified in their entirety by the and Company. 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. Research. In addition, all comments about the market we serve, including end market growth rates and market share are based upon the company's internal analyses and estimates.

Speaker 1

Research. Today's remarks will include both GAAP and non GAAP financial results. We believe the non GAAP financial measures provide investors with useful supplemental information about the financial performance of our business, enable the comparison of financial results between periods Relations, 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. Relations. 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.

Speaker 1

Relations. Reconciliations between GAAP and non GAAP measures are included in Exhibit B of today's press release and can be found in the Financial and Filings section of our Investor Relations website under the supplemental information heading. For additional Financial information, please refer to our quarterly earnings presentation also posted on our Investor Relations website. Henry Schein undertakes no obligation to revise or update any forward looking statements to reflect events or circumstances after the date of this call. Research.

Speaker 1

Lastly, 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

Thank you, Graeme. Good morning, everyone, and thank you for joining us today. We are today reporting solid results for the 2nd quarter, and with continuing strength in sales of our technology and value added services, our implants, biomaterials and endodontic products. Research. The underlying fundamentals in the U.

Speaker 3

S. Dental market remain strong and demand for dental services and customer confidence Research. In addition, we are seeing growing demand for our implant systems and endodontic products as well as our integrated software and services solutions, which are generating strong growth by delivering greater efficiency and a better experience to our customers. In the alternate care market, that's the medical market, Elective procedures are close to normal levels while second quarter visits to primary care physicians were down year over year, However, we are now seeing sales level off sequentially and we expect the year on year impact to be much lower in the second half of twenty twenty three. When excluding these product categories, local currency internal sales growth for the company was 3.3%.

Speaker 3

Research. In general, our North American Dental business performed better than we expected at the start of the year, Officer, offset by some incremental COVID related headwinds facing our medical business as discussed earlier on. Research. Our outlook reflects overall confidence in our business and in the markets we serve and accordingly we are affirming our non GAAP diluted EPS Financial guidance for 2023. Our financial results and guidance demonstrate the strength of the business Relations.

Speaker 3

As discussed earlier and continued advancement of our 2022, 2024 Bold plus 1 strategic plan, Research. We are successfully executing key initiatives, the key initiatives actually in the plan, Products and Value Added Services portfolio, optimizing our distribution businesses, Leveraging key customer relationships and driving digital transformation. Year to date, we have committed over $1,000,000,000 Relations that accelerate the implementation of our strategic plan, adding high growth, high margin products and services to our offering. With this clear focus, we believe we are well positioned to further enhance Henry Schein's leadership in the markets that we serve and to deliver long term sustainable shareholder value. Among the larger transactions are our strategic partnership and the recently announced acquisitions of Shield Healthcare and Large Practice Sales, which we expect to close in the 3rd quarter.

Speaker 3

Research. With these transactions, we have significantly expanded our implant, bone regeneration and clear aligner product portfolio, Digital workflow capabilities, presence in distributing products directly to the patient Care and Value Added Services. Continuing our strategy of following the patient to provide healthcare services Research. With this being delivered, we expect our recently announced agreement to acquire Shield will create an offering with more than $300,000,000 Research. On completion of this acquisition, this business will be led by Adam Rees, who joined Henry Schein as Vice President, General Manager, Home Care Medical Products and has significant experience in this area.

Speaker 3

We are excited about the fundamentals of this market, which The trend of moving care to the home is expected to provide efficiency in the overall healthcare system. Research. And most important, many of our customers have asked us to provide the service. We've been providing it Partners. In a moderate way up to now, but now we are committed to advancing our position in this market to support our customers Care, who have requested us to move into the home care arena as a continuum of care.

Speaker 3

Our home care medical product offering will now include enteral, Research. Also for many years, we have had a successful practice transitions group dedicated to existing smaller and mid sized dental practices and our most enthusiastic about the acquisition of Large Practice Sales, a leading transition advisory services business, of our dental digital workflow software with our practice management software to create a unique digital solution for dental practitioners. Research. In this connection, we have asked Andrea Albertini, CEO of our International Distribution Group Software Solutions for our customers. This simplified open architecture process begins with the capture of any image Research.

Speaker 3

Let me now turn to a review of the quarterly highlights from each business unit, beginning with the dental distribution. In North America, dental offices were generally busy and this helped our 2nd quarter dental merchandise grow, Products. A driver in equipment sales was a broad equipment was of course our broad equipment offering, and of course drive up the efficiency of the practice and of course better clinical care. North American dental equipment sales were up Incorporated. Sales of traditional equipment continue to be strong and we are pleased that sales of digital equipment returned to growth Research.

Speaker 3

International equipment sales were relatively flat to the prior year. The equipment backlog in North America has held steady and our international equipment backlog is returning to pre pandemic levels. Now turning to our dental specialties. Sales of dental implants and biomaterials were key drivers in the 2nd quarter, and Clear aligner businesses. We are seeing implant demand increasing in North America with Research.

Speaker 3

Internationally demand for implant systems remains very good. Generally demand for implants Moving of demand for value priced products is reflected in our double digit growth achieved by our Medentis Provider of Dental Implants and Bone Regeneration Products. Looking at recent deals, our transaction with Biotech Dental brings and Digital Workflow Software. Products. Cin, on the other hand, that Cin Implant Systems provides us an entree into the large Brazilian implant market and complements our successful Brazilian General Dental consumables and equipment business.

Speaker 3

Both Biotech and SIM Brands at an attractive price and we have the exciting opportunity of expanding this cost Products to other geographies, including the United States, providing of course a more comprehensive offering and enabling us to be even more competitive in the implant and bone regeneration space. This quarter growth in our endodontic business continued to be driven by our brussela and edge brands in both North America and internationally. And Company. We are seeing growing demand for our specialty products from DSOs And that's from specifically from our DSO customers. Recall, we have a pretty Specialty procedures among dental practitioners.

Speaker 3

We have grown our global implant and our specialty products to approaching $1,200,000,000 in revenue in the aggregate on an annualized basis. Research. We now offer a broad range of premium and value alternatives to North American and international practitioners. Research. We expect dental specialty growth to accelerate in the second half of the year Research.

Speaker 3

We are pleased to report that we are pleased to report that we are in the Research. Now let's turn to the technology and value added services business where the largest component of course is Henry Schein One. Research. Global growth in Henry Schein One is being driven by ongoing migration to our cloud based practice management software solutions, Dentrix, Ascend and Dentale and by growth in our revenue cycle management business resulting from increased Patient traffic driving a higher volume of e claims. Dentrix Ascend and Dentale grew Customers and prospective customers are partially particularly enthusiastic about incorporating our artificial intelligence solution into their practice management software product.

Speaker 3

We believe our embedded solution is certainly best in class. In addition to Henry Schein's Technology Solutions, we now offer a broad range of value added services Research and Technology. Through our businesses such as ESS, which provides revenue cycle management and Unithus providing advice on PPO agreements Partners along with other services, including financial services, practice transitions, staffing services, Investor Relations. We expect the technology and value added services sales growth will accelerate during the second half of the year. Turning now to the medical business.

Speaker 3

Research. During the Q2, our medical business achieved low single digit growth excluding PPE products and of course COVID-nineteen test kits. Research. This compares with mid double digit growth last year. It's really important to understand that when results benefited from excuse me, was a more typical flu season.

Speaker 3

And as a result, we had much lower sales of flu, Research. Sales growth was also affected by the conversion of certain pharmaceuticals and other Products with lower priced generics and corporate brands, of course, with a higher gross profit margin. This is a trend Research. That is taking place throughout healthcare. Sales of medical equipment were relatively soft in the market.

Speaker 3

The market took a temporary pause to assess likely future demand. However, we have subsequently seen investment interest return in July. So in summary, Research. The fundamentals of our core business remain solid, very good and the team is executing well on our 2022 to 2024 Bold plus 1 strategic plan. Research.

Speaker 3

With that, I'll turn the call over to Ron to discuss specifics relative to our quarterly financial results Research and provide full year guidance. Thank you. Ron, please.

Speaker 2

Thank you, Stanley, and good morning, everyone. I'll be discussing our results Securities and Exchange. Our 2nd quarter non GAAP financial results for 2023 2020 Release. With respect to sales growth, I will focus on LCI sales growth, which has internally generated sales in local currencies compared to the prior year and excludes acquisitions. 2nd quarter global sales were $3,100,000,000 Our LCI sales grew 3.3%.

Speaker 2

We sold $138,000,000 in PPE products in the Q2 of this year, Research, a decrease of approximately 62% year over year. Our GAAP operating margin for the Q2 of 2023 was 6.5%, and Investor Relations. An 81 basis point decline compared with the prior year GAAP operating margin. On a non GAAP basis, operating margin for the 2nd quarter was 8.2%, Research, a 14 basis point decline compared with the prior year non GAAP operating margin. Excluding the impact From lower PPE and COVID-nineteen test kit sales, we estimate that non GAAP operating margin expanded 27 basis points.

Speaker 2

Securities. 2nd quarter 2023 GAAP net income was $140,000,000 or $1.06 per diluted share. Research. This compares with prior year GAAP net income of $160,000,000 or $1.16 per diluted share. Research.

Speaker 2

Our Q2 2023 non GAAP net income was $173,000,000 or $1.31 per diluted share. Research. This compares with prior year non GAAP net income of $179,000,000 or $1.30 per diluted share. Research. These results were impacted by a decreased contribution from lower PPE and COVID-nineteen test kit sales estimated to be $0.08 per diluted share relative to the prior year period.

Speaker 2

The foreign currency exchange impact on our Q2 EPS was immaterial. As Stanley mentioned, we have committed over $1,000,000,000 in the acquisitions we have announced so far this year with $250,000,000 Equity Investments and Business Acquisitions in the Q2 of this year and we have subsequently signed agreements committing another $800,000,000 Research. The increased capital deployment for acquisitions has impacted quarterly financial results more than in previous years. Research. The Q2 2023 GAAP and non GAAP financial results included high acquisition activity Investments of $16,000,000 or $0.09 per diluted share, including a related remeasurement gain resulting from the purchase of a controlling interest of a previously held equity investment.

Speaker 2

This resulted in a net favorable impact of $10,000,000 or $0.05 per diluted share for the quarter Resources, as illustrated in Exhibit C to our press release. On a year to date basis, the favorable net impact of these acquisition expenses and acquisition related fair value adjustments, including the related remeasurement gain resulting from the purchase of a controlling interest of a previously held equity investment was only $0.01 per diluted share. We are confident That these strategic investments will drive enhanced growth and value creation over the long term as we accelerate the implementation of our 2022 2024 Bold Plus 1 strategic plans. Turning to our 2nd quarter sales results. Global Dental sales were Research.

Speaker 2

Global Dental Merchandise LCI sales increased by 0.7%, but increased by 2.8 Research and Development Solutions. North America Dental Merchandise sales were flat compared to the prior year and grew 2.6% when Excluding sales of PPE products with good underlying growth offset by lower growth in our dental lab business as a result of digitalization and in our traditional orthodontics business. International Dental Merchandise LCI sales increased by 1.9% and by 3.2% when excluding sales of PPE products. Global dental equipment LCI growth was 6.4%. Our North America dental equipment LCI sales increased 9.8% as we continue to see strong sales growth for traditional equipment and Retail Equipment in North America returned to growth.

Speaker 2

International Equipment LCI sales increased by 1.6%. Dental Specialty products include implants, bone regeneration materials, orthodontic products and endodontic products. Research. Sales of these products were approximately $270,000,000 in the second quarter with growth of 15.7% driven by acquisitions and good implant sales in both North America and internationally, particularly in Austria, Switzerland and in Germany, where we have a leading market position. Global Technology and Value Added Services sales during the Q2 were $193,000,000 with LCI growth of 5.5%.

Speaker 2

Sales were again negatively impacted by a government contract, which expired early in Q3 of 2022. LCI sales growth was 6.9% when adjusting for this contract. In North America, sales growth was driven primarily by our Dentrix Ascend, Practice Management and Revenue Cycle Management Businesses. Growth internationally was driven by our Dentale cloud based solution. Research.

Speaker 2

Global Medical sales during the Q2 were $950,000,000 and LCI sales decreased 5.3% Test and Related Product Sales. Keep in mind, this was against a very difficult comparison as LCI growth excluding PPE products and COVID-nineteen test kits grew 14.3% in the Q2 of 2022. Regarding stock repurchases, we repurchased approximately 638,000 shares of common stock in the open market during the Q2, We had approximately $365,000,000 authorized and available for future stock repurchases. Turning to our balance sheet and cash flow. We continue to benefit from significant liquidity, providing our businesses with the financial flexibility and stability to execute on organic growth initiatives and strategic acquisitions, while continuing to return capital to our stockholders.

Speaker 2

We further strengthened our balance sheet by recently extending the maturity date of our $1,000,000,000 revolving credit facility to July of 2028 and also closed on a new $750,000,000 credit facility. Operating cash flow for the Q2 was $274,000,000 compared with $157,000,000 last year, primarily as a result of lowering inventory levels. Restructuring expenses in the Q2 were $18,000,000 or $0.10 per diluted share and were incurred as part of our previously disclosed restructuring initiative. These expenses mainly relate to severance benefits and costs related to exiting facilities. We now expect restructuring activities to extend through 2024.

Speaker 2

Let me conclude my remarks with our 2023 financial guidance. At this time, we are still unable to provide estimates for costs associated with integration and restructuring Securities and Exchange. Therefore, we are not providing GAAP guidance. We are affirming our guidance for 2023 non GAAP diluted EPS Securities and Exchange, Inc. Of $5.18 per share to $5.35 per share, which is down 1% to 4% compared with our 2022 non GAAP diluted EPS of $5.38 and includes the previously announced and the impact of all acquisitions that have been announced so far.

Speaker 2

The net impact of acquisition expenses and acquisition related fair value adjustments, and Investor Relations. This is expected to be insignificant for 2023 and has been included in guidance. We expect these acquisitions to contribute to earnings growth beginning in 2024. Research. It is important to recognize that we expect year over year growth in diluted EPS to be higher in the Q4 than in the Q3 of this year.

Speaker 2

Research. Our guidance for 2023 assumes total sales growth of approximately 1% to 3% over 2022. As a reminder, our guidance reflects 1 less selling week in Research. Additionally, PPE product sales are expected to decrease about 25% to 30% versus our previous guidance of a decrease of 20% to 25%. Products and COVID-nineteen test kits is still estimated to be $0.35 to $0.40 per share due to higher than anticipated gross margins on PPE sales non GAAP operating income will grow in the high single digit to low double digit range when excluding the contribution from PPE products and COVID-nineteen test kit and Sales.

Speaker 2

We continue to expect non GAAP operating margin contraction of 10 basis points to 15 basis points from the 2022 non GAAP operating margin Research. Our guidance reflects non GAAP operating margin expansion when excluding income from PPE products in COVID-nineteen test kit sales. Research. Our 2023 guidance includes higher interest expense than in 2022 and as a result of higher interest rates and borrowing levels. We also expect an effective tax rate for the year in the 23% range, assuming no changes in tax legislation.

Speaker 2

Our guidance is for current continuing operations as well as acquisitions that have been announced and does not include the impact of future share repurchases and potential future acquisitions. Research. Guidance also assumes that foreign currency exchange rates are generally consistent with current levels and that end markets remain consistent with current market conditions. Research. With that, I'll now turn the call back to Stanley.

Speaker 3

Thank you, Ron. We're here to answer any questions which Investors may have. So, operator?

Operator

Thank you. We will now be conducting a question and answer session. Relations. And the first question comes from the line of Elizabeth Anderson with Evercore ISI. Please proceed with your question.

Speaker 4

Hi, guys. Thanks so much for the question. I have maybe one shorter term question and one longer term question. Research. In terms of the shorter term question, obviously, the fair value adjustment was new this quarter.

Speaker 4

Partners. And I just wanted to sort of make sure I understood. Was this something that you knew sort of last quarter when you updated your guidance or because we're just trying to I'm Trying to understand whether the like core guidance moved down ex that. And then for my longer term question, It's obviously very interesting with you adding all these new capabilities and geographies in. How do we think about like for example for SI Ed like How long does that might take or what your plans are in terms of bringing those implants into the United States?

Speaker 4

And then similarly, in terms of the medical, the ability to sort of push Sort of more broadly across the new products across your portfolio. Thank you so much.

Speaker 2

Certainly. Elizabeth, I'll take the first question and Stanley will respond To your second question, so the remeasurement gain was something we contemplated in our guidance. We didn't have a definite amount for it, Just like we weren't sure how much our acquisition costs were going to be either. So ultimately, those as we've kind of demonstrated in that exhibit to Press release, those amounts once we realized the higher expenses and we also realized the net remeasurement gain have largely offset on a year to date basis. So yes, our guidance does contemplate the effect of those items.

Speaker 2

And Stanley, if you want to take the second question.

Speaker 3

Thank you. Research. Elizabeth, the SI N implants, not the whole line, but significantly important part of the portfolio already approved in the U. S, are selling to some extent And are being well received by our particularly DSO customers where we in fact by coincidence last week We're able to land a pretty decent DSO that is interested in the SI N implant system. It puts us The whole SIN transactions puts us in a very competitive position now because to some extent in the U.

Speaker 3

S. And maybe some other markets. Although by Horizon's Camlog is premium product selling at a slightly lower price than some of the major brands, if not all of them. We still were missing a piece in our portfolio on the Research. Next year or so, we will be able to also launch the biotech line in the United States, Research.

Speaker 3

Different market segments, but I think we're definitely in a very competitive position now and are actually starting to see some sales.

Speaker 4

Really helpful. And then for Shield as well, that's sort of the similar timeline and you can sort of push that across your broader portfolio later this year or is that more of a we should think about that as more I

Speaker 3

think we acquired Prism about a year or so ago, 2 years ago, which was mostly an East Coast business with a relatively limited portfolio. Sheals was missing the wound care offering that Prism had. So we believe we will create synergies relatively quickly. There are costs, of course, in the integration, which we've taken into account in our guidance, mostly one time costs. But But I think in 2024, we should be able to start adding accretion in a nice way.

Speaker 3

This has really been an area that our customers, our Big IDN customers have wanted us to perform and we didn't undertake these kinds of services. We have one IDN in the New York area that we service in the home care area, but we didn't really have the full capabilities between these two acquisitions and another small one, which we hope to announce soon. We will have a pretty good offering in products for the home

Operator

and the next question comes from the line of Brandon Vazquez with William Blair. Please proceed with your question.

Speaker 5

Hi, everyone. Thanks for taking the question. Maybe first on one high level question just on the macro backdrop. Can you guys talk about where you're seeing some strengths and weaknesses in the environment today? I think maybe equipment looked pretty strong in the U.

Speaker 5

S, but maybe a little weaker international and then consumables globally looked kind of stable, low single digits. So curious So, all these segments on the dental side are playing out from the macro side?

Speaker 3

Yes. Thanks for that question. On the macro side in North America, Research. I believe there is stability on the dental side. That's what our team believes in general.

Speaker 3

Consumables, people are Research. Patients are returning to the dental office. The data is not perfect, but if you look at the latest ADA survey and Research. Some recent analyst reports and studies, it suggested that patient traffic picked up throughout the second quarter Research. After the steady volumes in the Q1 of 2023.

Speaker 3

And so we and we also of course, Research. We had some volatility in the Q1 of 2022. And so it appears that patient flow is good. July from our point of view was a good month. Our e claims data also suggests that what I've just described Research.

Speaker 3

He's backed up again by e claims data from Henry Schein 1. If you Peel Yan in a little bit further. At least from our point of view, implant sales continue to grow well Research. In North America, same for Endodontics, our small line of business is showing similar kinds of trends. If you look at international, it's slightly more tepid in international.

Speaker 3

It's hard to tell because we're now in the summer months when Europe is largely closed. Having said that, We did suffer in the Q2 because of the strikes in France. I would say Germany is okay. Research. We had pretty strong numbers in 2022 from Patient traffic in Germany, which is our biggest market outside of the U.

Speaker 3

S. Seems to be steady. Research. There is somewhat of a staff shortage. But again, it's really hard to tell.

Speaker 3

This is the vacation month Research. Now, July, August, and it's very hard to tell exactly what is happening in Europe, Germany. But From our checks, it's pretty steady. We don't see much of a deterioration at all. In fact, it could be Research.

Speaker 3

Okay. On the medical side, a little bit more. We did have high comps The medical is not going to, as we did caution at the time, present that kind of growth going forward. There is some trading to more generic products, specifically on the pharmaceutical side. It doesn't impact the absolute dollar profits.

Speaker 3

But I think medical is, at least with the ASC business, Research is back to where it was before COVID. And I think if you take out the unusual Research. I think we've covered this in our call. And at least from our point of view, we don't see any major impact from a unit's point of view that is Trading to lower priced products, specifically from our DSO customers. But in general, our markets are stable and Research.

Speaker 3

I think we are quite comfortable at this moment. Our backlog on equipment year on year in North America is Research. Similar to where it was at the end of last quarter and on the international side is building up again Research and Development Solutions. So I would say stability all around that would be our view at this moment. Research.

Speaker 5

Perfect. Thank you very much. And maybe one other quick one for Ron. We're trying to Can you clarify and you may have given this already on the call, but just to be clear, can you kind of talk about what EPS growth is in 2023 Research. We're kind of looking at our 2024 models, where maybe PP and E and COVID sales can kind of stabilize and we can return to some more normalized growth rates.

Speaker 5

Thank you.

Speaker 3

Yes.

Speaker 2

Our full year guidance point 4 zero dollars headwind versus the prior year of impact on EPS from contributions from PPE sales and COVID-nineteen test kit sales. Research. So those that remains unchanged from a guidance standpoint. While we have we've adjusted the Some of our revenue assumptions on those products, because of the better than expected margins on the PPE sales, we haven't had to adjust

Operator

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

Speaker 6

Thank you. Good morning, guys. Stanley, maybe I would like to dig a little deeper on your North American comments. Consumables, You described that market as fairly stable. I think that fits with a lot of our survey data as well.

Speaker 6

The consumables number though did Come down to 2.5% on an organic basis ex PPE this quarter. Last quarter, it was 6.5%. Do you think that's just the comps from the omicron stuff The Q1 last year that really helped inflate that Q1 number. Was there any change in pricing dynamics? Any other factors kind of bridging from the 6.5% first quarter to the 2.5% consumables growth in this quarter?

Speaker 6

Thanks.

Speaker 3

Very good question, Jeff. Thanks for asking. I think you need to take the Q4 of 2022 and the Q1 of 2023 and more or less average out Research. Because of the cutoffs, it leans a little bit higher in the Q1, but it certainly was a 6.5% growth Apples to Apples. I think we've covered that in the past.

Speaker 3

I would also Suggest that inflation in the consumable world Individually, our certain brands have gone up. They're not necessarily sticking from The manufacturer pass through we're not that the manufacturers are not necessarily able to hold all these consumable price increases. At the same time, there is a movement towards corporate brandgenerics. And Research. Some of the smaller brands are doing well where some of those manufacturers are prepared to keep prices or even reduce prices.

Speaker 3

So it's very hard on a 1 quarter basis to give you the perfect measurement of mix, but I would take into account The cutoffs for 2022 for the 4th quarter and I would take into account the fact that generally There's been some deflation in merchandise prices. And I would say this is particularly coming from Research. We are pleased with the larger DSOs and the midsized DSOs who are today a lot more educated consumers than in the past. There's a lot of nuance in what I just said. Let's see what happens in the 3rd and 4th quarter.

Speaker 3

Research. My sense is the trend that I just described is not going to change much.

Speaker 2

Research. All

Speaker 6

right. That was going to be my follow-up, Stanley. So is there more deflation to come? Or have we kind of taken that step down and you think we can hold steady from there? And then, Ron, just a follow-up on your on the non recurring below the line well, I think it was above the line actually this quarter on the one time gain.

Speaker 6

The 5% to 10 percent $0.10 I'm sorry, of dilution is unchanged. That is on a gross amount. You're talking about a net BIN impact from acquisition activity being close to flat this year. If you had provided that net guidance last quarter, would that have also been Flat, so essentially you're not changing your gross or your net acquisition guidance for the year? Just wanted to understand that.

Speaker 6

Thank you.

Speaker 3

Jeff, it's hard to tell as I maybe I wasn't clear exactly what the impact Manufacturers for Specific Kinds of Products. Yes, I Doubt we're in more than 100, 150 basis point swing, maybe 200, but I'm not sure it's much different to that. So I don't think inflation is going to be significant in the dental consumable business. I think it may go down slightly to deflation, but we're in that range. Units are holding more or less steady.

Speaker 3

Of course, from our point of view, we're growing our specialty business, although the business may be growing, Dental consumables is not material in the context of the whole consumable offering. Having said that, Investor Relations. Specialty products are impacting our margin in a positive way and so are corporate brands and some of the smaller manufacturers.

Speaker 2

And Jeff, to answer the second part of your question, the $0.05 to $0.10 that we referred to After the Q1 when we amended guidance was with specific reference to the expected dilutive effect during the year from Biotech. We're holding that $0.05 to $0.10 but it now is for all the acquisitions that we have announced Which are largely offset by the remeasurement gain, that we recorded in the second quarter as well. So we've kind of have set those aside and that was the purpose of Exhibit C to the press release so people could see the components of that and we're holding to the $0.05 to $0.10 of Delusion, but now it captures all of the acquisitions that we have announced to date.

Operator

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

Speaker 5

Research. Hey, good morning.

Speaker 7

Thanks for taking the questions. I'll actually follow-up there on kind of the track that Jeff was going down. Research. But maybe so Ron, just maybe first starting on gross margins, I mean those are still hanging around multi year highs,

Speaker 3

despite what

Speaker 7

I think are maybe some inventory step up costs from the Biotech Dental transaction. So could you quantify how much inventory step up may have hit in the quarter in terms of hitting that gross margin and earnings. And then with absorbing the dilutive SIN transaction in your reaffirmed guidance today, Can you give us some detail on how to think about what the dilution is from that deal that you're absorbing even rough numbers? Is it a few pennies, a nickel, a dime? Anything there would be helpful.

Speaker 2

Research. I'll start with the quantifiable one first. The step up charge that we have and it will be disclosed in the 10 Q as well. Research. In the second quarter for Biotech was $2,000,000 So not a real significant effect on gross margin.

Speaker 2

Research. In terms of SIN, it is absorbed within that $0.05 to $0.10 There's also going to be a step up on SIN, but they don't turn their inventory quickly. So we don't expect it to quarter to quarter have as dramatic of an effect. So, Cyn, without kind of disclosing The modeled dilution on that, I can tell you that it is absorbed within that $0.05 to 0.10

Speaker 7

Research. Okay. And then on that $2,000,000 I guess just as a quick follow-up there, is that $2,000,000 steady as we go forward for the next Quarter 2 for 3Q and 4Q or does that need to move higher just as we think about how to model gross margins for the back half of the year?

Speaker 2

I'm sorry, biotech, just to answer you quickly, biotech churns their inventory about twice a year. So we have about another quarter of that inventory step up left. So it'll be another $2,000,000 in Q3 and then we'll

Speaker 7

Got it. Perfect. And then as we think about the composition of the equipment backlog, you mentioned it's holding steady, You're seeing that recovery leading, I would assume it's mostly in iOS, but just wondering if you're starting to see any better results out of digital imaging or anything The milling or 3 d printing side that's maybe influencing some of your comments today.

Speaker 2

Yes. We're very pleased with The equipment growth we had, North America equipment growth on an LCI basis of 9.8%, especially in this environment Research. On some of the high-tech equipment, traditional remains very high Our LCI in North America on traditional equipment was growth of 14.6% and that was with Virtually no movement in the backlog. It's almost identical from the beginning of the quarter to the end of the quarter. So it's very indicative Ongoing strong demand for traditional equipment.

Speaker 2

On the high-tech side, we still have some headwinds Research. On scanners, but it's price related. We're getting good volumes on scanners, but the revenues are Research. Some on the scanners. We do have I think they're down 12.1% Well, I'm sorry, digital restoration sales were down 12.1%, but the scanner revenue is still down 40% for us year over year and that's really a pricing Matter.

Speaker 2

Having said that, on the high-tech equipment, we did achieve very a little bit of growth. It's Single digit, low single digit growth, but we did get some high-tech growth, which we're pleased with. And that's coming from Some growth really kind of across the board. You mentioned a lot of the categories, some growth in mills, some growth in 3 d printing. Research.

Speaker 2

Those are all coming off relatively low basis, but nevertheless they're providing us with some growth and that's helping the category.

Operator

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

Speaker 8

Research. Great. Thanks, guys. Good morning. Maybe just the first question on Dental Specialties.

Speaker 8

I think the report, it was up 15.7%. I don't know if I missed it, but do you have a precise Internal number for that division. And then to just go a little bit further down the road, how implant growth shook out within whatever that internal number was? Research. Was it above overall internal, below and just maybe your thoughts on ongoing share gains or implant Share gains, pardon me.

Speaker 8

Now that you've got some of those investments in the more robust implant portfolio to work with going forward? And then I'll ask a shorter follow-up. Thanks.

Speaker 2

Certainly. I think with reference to our specialty growth, I mean, we've kind of elected to stick to total sales growth in order to be Day. Consistent with the message we had around specialties, in our Investor Day. So we're really we're focusing on total sales growth as opposed to LCI sales growth. We think it's more reflective of our strategy for that portfolio of products.

Speaker 2

We remain very bullish on implant sales. Research. I think that we've gotten we had growth in North America as well as internationally on implant systems. Endodontic sales on the specialty side remain very strong for us both inside and outside the U. S.

Speaker 2

Stanley, anything you wanted to add on the specialty side?

Speaker 3

Yes, John. That was a thank you for that question. It's a premium implant at a slightly lower price than perhaps our competitors in the premium area, delivered mid single digit growth Research. And that's a sequential improvement versus the Q1. Internationally, implant demand remains good.

Speaker 3

Remember, we have a very small business in China. Generally, demand for dental implants, again, favored the low price part. Although I must say for BioHorizons Camlog, we did very well in our biggest market, which is Germany, Austria and Switzerland. But Modentes did very well also in Germany, which is on the lower end. So overall, we're quite comfortable actually very excited about our Investor Relations.

Speaker 3

Our next question comes from the line of James St. John St.

Speaker 2

John St. John St. John St. John St.

Speaker 3

John St. John St. John St. John St. John St.

Speaker 3

John St. John St. John St. John St. John St.

Speaker 3

John St. John St. John St. John St. John St.

Speaker 3

John St. John St. John St. John St. John St.

Speaker 3

John St. John St. John St. John St. John St.

Speaker 3

John St. John St. John St. John St. John St.

Speaker 3

John St. John St. John St. John St. So as it relates to the competitiveness of our product line, Elizabeth asked a question earlier on, We were missing a piece in the lower end of the mix in North America.

Speaker 3

Research. I believe SIN will enable us to be highly competitive in this area, specifically with DSOs, large ones and midsized ones. Research. I just want to go back to the ID, the sensor DI question of earlier on. I think we reported this time last year that our sales did include a large sale of DI Equipment to substantial DSO.

Speaker 3

And so if you take that out, the The units are more or less returning to where they were and there still is some deflation, but not a significant amount. And on the DI side, it's not really deflation relative to particular brand, but they are lower priced brands that we're selling more of relative to the larger brands.

Speaker 8

Research. That was helpful. Thank you. And maybe I'll try to ask a tight second question. Just for medical, That's come up a little shy versus our expectations.

Speaker 8

I know you talked about the long term thoughts at the Analyst Day. But in the more intermediate term, is there a way that we should Research. Think about that division, maybe just over the balance of 23, you're still staring at a couple of comps maybe, but maybe just talk to us on how See that unfolding for the balance of 23 again ex PPE COVID? Thanks.

Speaker 3

Yes. It's very hard to give you I think we're doing well in terms of units with our existing customers. We are gaining customers, Research and Development Solutions. We sell quite a bit of flu related products, be it the tests or the related products that go with the test. At the moment, it seems pretty steady.

Speaker 3

Research. I wouldn't want to say this really. I wouldn't want you to view this in the wrong way, but COVID is growing a little bit, so people are going more to the physician offices to check things out. So July was a lot better, but you can't draw conclusions. Research.

Speaker 3

There was a low in equipment sales. We had a lot of good inquiries in July, but it's hard to give you We don't sell many tablets and capsules, not our business. So overall, it's a good business. And whether it's Research. 3% or 5% or 6%, I don't think that impacts the overall profitability in a meaningful way.

Speaker 3

There are so many Puts and takes in our medical business, but we feel very good about our medical business and continue to believe that

Operator

We have time for one last question coming from the line of A. J. Rice with Credit Suisse. Please proceed with your question. Research.

Operator

Our final question will come from the line of Nathan Rich with Goldman Sachs. Please proceed with your question.

Speaker 9

Great. Thanks for fitting me in at the end. I'll ask both upfront. First, I wanted to go back to the commentary around traditional equipment and the equipment backlog in North America stabilizing. It has obviously Coming it down, I think, as we cycle through some of the supply constraints.

Speaker 9

I'd just be curious on the outlook for demand though, how you're thinking about That over the balance of the year, and what you're seeing with respect to kind of practice formation and remodels just in the current environment that we're in. And then, Ron, maybe a clarification on the margins. Any commentary on the margin outlook between 3Q and 4Q, I guess, especially as it relates to potential timing of acquisition expenses between those two quarters. Thank you.

Speaker 3

So Nathan, on the equipment, Research. I believe that demand is quite good and steady. Some of the larger DSOs continue to invest. Research. There may have been a bit of a pause a few months ago when some of these DSOs were perhaps highly leveraged.

Speaker 3

Research. We're looking to determine whether they really should invest or not. But there is a demand for dental care. And Research. I believe that our bigger DSOs are growing.

Speaker 3

1 of 2 of them had some operational issues, which I think they're largely behind them. But I believe that they are investing, I'm talking about the largest size and the midsize are growing as well, the smaller practitioners, not so much. But overall, I would say the demand for traditional equipment is there. The on the Digital side, the DI scanners are growing in terms of units. Research.

Speaker 3

Yes. To some extent, movement to the lower price units, but not discounting of Any particular unit in a material way, just a switch as more people look at this area. Very important to realize Research. The high comp we had in one area, in the DI area last year, we disclosed that on our call. And The mills, I would say, are steady.

Speaker 3

There's a demand. It's not as hot as it was. So a trade up could help a bit. Research. And 3 d printing is quite hot.

Speaker 3

Stick up back a little bit. If you look at our numbers In general, we're a big player on the dental lab side. There is a movement away from consumables into digitalization. So that movement is also impacting to some extent the sales of consumables and Research and Development Bank, resulting

Speaker 2

in an increase in equipment. But overall,

Speaker 3

I think our equipment backlog in the United States, which is pretty Research. Similar to what it was at the end of last quarter, I think is indicative of the desire of dentists to invest in their practices, to make the practices more efficient and provide better digital outcomes. A nice way to even look at that is another way is to look at the investment and AI. We have it relates primarily to our Henry Schein One software, Research. We have, I believe, the most integrated solution, embedded AI in our software and the units of those This is all tied to the desire of practitioners to invest in the practice.

Speaker 3

So I think the market is stable to growing and International is quite complex and different issues in different countries. But in the countries where there is large government support like Germany, from From our point of view, it's stable, although there is a shortage of dentists. And hopefully, France will sort itself out after Labor Day. The rest of the markets are stable. There's some ups in Australia because of a little bit of incentives Research.

Speaker 3

For this quarter, Brazil is pretty stable and overall Canada is stable. So I would say Research. The dental markets are pretty stable, solid overall.

Speaker 2

And Nathan, just one thing to add on the backlog. Research. Like I mentioned before, our backlog in North America has stayed pretty constant over the course of the quarter and we saw a very good Sales Growth. I would quite frankly, I would like for that backlog to come down some, not just for the revenue lift it would give us, but It's just better for our customers to reduce the timing of that backlog, so they get their equipment more quickly and increases capacity in the end market quite frankly So we would like for that backlog to come down, but right now we still in North America, we're experiencing a fairly consistent backlog. Research.

Speaker 2

In terms of your question on Q3, Q4 margins, I do think that especially at a gross margin level, we can continue At the levels we're at, I think that it's indicative of the growing importance of the Gentle Specialty Products in our overall portfolio as well as the growth in our technology business. And I think we can continue with that as we get into the back half of the year. Of course, there's always it's a broad portfolio. There are things that can impact that. For example, Q4 tends to be Heavier quarter for equipment sales than other quarters and those sales tend to be at Slightly lower margins than what our overall margin is right now.

Speaker 2

So that can bring down margins a little bit. But in exchange for the additional sales, we'll clearly take that. So I don't know. I think that that's my general expectation is we'll be able to continue with the margins that we've seen in the first half

Speaker 3

Thank you. I know we've gone over 8 minutes over a lot of time. Thank you everyone for calling in. Again, we're I'm very pleased with the progress we're making in the business, both the core business, our specialty businesses, our software businesses. Research.

Speaker 3

The markets are steady, lots of ins and outs, subtle points, but generally we're comfortable where we are today. We've reaffirmed guidance. Sorry about the complexity on PPE and tests and the acquisitions, expenses and related costs and income generated in that area. But this will, I think, We will try to make it clearer to our investors, make it as simple as possible for the remainder of the year. But I think next year should be a relatively clean year.

Speaker 3

Research. And hopefully, you will see that we our confidence in the business is justified. So thank you all for calling Research. And of course Graeme and Ron are available to speak with investors over the next days. And thank you for Relations.

Speaker 3

We come out of the other side of COVID and implement our strategic plan. So thank you all and have a great remainder of summer. Thank you very much.

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Earnings Conference Call
Henry Schein Q2 2023
00:00 / 00:00