The operator welcomed participants to Henry Schein's Second Quarter 2023 Earnings Conference Call and introduced Graham Stanley, Henry Schein's Vice President of Investor Relations and Strategic Financial Project Officer. Stanley Bergman, Chairman of the Board and Chief Executive Officer, and Ron South, Senior Vice President and Chief Financial Officer, were also present. Stanley warned that certain comments made during the call would contain forward-looking information and that risks and uncertainties involved in the company’s business could affect the matters referred to in forward-looking statements. He also stated that comments about the market they serve were based on the company's internal analysis and estimates. Financial results would include both GAAP and non-GAAP figures.

Henry Schein reported solid results for the second quarter driven by their North American dental businesses with strong equipment and general merchandise sales, and continuing strength in sales of technology and value-added services, implants, biomaterials and endodontic products. They also provided investors with non-GAAP financial measures for informational and comparative purposes and provided additional financial information in a quarterly earnings presentation.

The dental market remains strong and demand for dental services and customer confidence continues to improve. Demand for implant systems, endodontic products, software and services solutions is growing. Electric procedures in the alternate care market are close to normal levels, while primary care physician visits are down year-over-year due to the extended flu season last year. Sales of PPE and COVID test kits are leveling off and the year-on-year impact is expected to be much lower in the second half of 2023. The North American dental business is performing better than expected, offset by some COVID-related headwinds in the medical business. The company is affirming their non-GAAP diluted EPS financial guidance for 2023, and is successfully executing key initiatives in their BOLD+1 Strategic Plan, such as expanding their specialty products and value-added services portfolio, optimizing their distribution businesses, leveraging key customer relationships and driving digital transformation.

Henry Schein has committed over $1 billion to acquisitions that accelerate their strategic plan, adding high growth, high margin products and services to their offering. These acquisitions have expanded their implant, bone regeneration and clear aligner product portfolio, digital workflow capabilities, presence in distributing products directly to the patient in the homecare arena and value-added services. With the recently announced acquisition of Shield Healthcare and Large Practice Sales, they are creating an offering with more than $300 million in annual revenue that distributes medical supplies directly to patients in their home. This acquisition is expected to provide efficiency in the overall healthcare system and convenience to the patient.

Schein is expanding its homecare medical product offering to include enteral, ostomy, incontinence, wound care and diabetes products, and is leveraging its physician relationships, product distribution expertise and corporate brand assortment to do so. It is also integrating its dental digital workflow software with its practice management software to create a unique digital solution for dental practitioners. This process begins with the capture of any image, followed by the application of artificial intelligence to help with diagnosis, case acceptance, planning and design, and ending with the direct connection to fabricate the prosthetic.

In the second quarter of the year, dental offices in North America were generally busy, helping to increase dental merchandise growth. This was driven by a broad offering of equipment solutions, enabling customers to increase productivity and efficiency. Sales of traditional equipment were strong and digital equipment returned to growth. International equipment sales were relatively flat. Implant and biomaterial sales were key drivers, complemented by endodontics and clear aligner businesses. Demand for implants continues to favor value-priced products, which is reflected in the double-digit growth achieved by Medentis. Recent deals, such as the one with Biotech Dental, have brought a portfolio of dental implants and clear aligners to Henry Schein, along with digital workflow software.

Implant Systems provides an entry into the large Brazilian implant market, and complements the successful Brazilian general dental consumables and equipment business. Biotech and S.I.N. offer high quality implants at an attractive price, and there is potential to expand these products to other geographies. Henry Schein One is the largest component of the technology and value-added services business, and the company is seeing growing demand for specialty products from dental practitioners and DSOs. The company now offers a broad range of premium and value alternatives, and expects dental specialty growth to accelerate in the second half of the year.

Henry Schein One has seen growth in its cloud-based practice management software solutions Dentrix Ascend and Dentally, as well as its revenue cycle management business. AI solutions have been incorporated into the practice management software, and the technology and value-added services have grown into a $900 million portfolio. The medical business achieved low single-digit growth in the second quarter, excluding PPE products and COVID-19 test kits, although there was a more typical flu season.

In the second quarter of 2023, LCI sales decreased by 0.2%, however, when excluding sales of PPE products and COVID-19 test kits, LCI sales grew 3.3%. The GAAP operating margin for the second quarter of 2023 was 6.5%, a decrease of 81 basis points compared to the prior year. The fundamentals of the core business remain solid and the team is executing well on the 2022-2024 BOLD+1 Strategic Plan.

In the second quarter of 2023, net income was $140 million or $1.06 per diluted share on a GAAP basis, and $173 million or $1.31 per diluted share on a non-GAAP basis. The results were impacted by lower PPE and COVID-19 test kit sales, estimated to be $0.08 per diluted share, and the increased capital deployment for acquisitions, resulting in acquisition expenses of $6 million or $0.04 per diluted share. There was a net favorable impact of $10 million or $0.05 per diluted share from the purchase of a controlling interest of a previously held equity investment.

In the second quarter of the year, global dental sales were $2.0 billion and LCI sales increased by 2.0%. North America dental merchandise sales were flat compared to the prior year, but grew 2.6% when excluding sales of PPE products. Global dental equipment LCI growth was 6.4%, with North America dental equipment LCI sales increasing 9.8%. Sales of dental specialty products, such as implants and bone regeneration materials, were approximately $270 million with growth of 15.7%. Global technology and value-added services sales during the quarter were $193 million, with LCI growth of 5.5%. The net impact of acquisition expenses and related fair value adjustments was only $0.01 per diluted share.

LCI sales decreased 5.3% due to lower sales of PPE products and COVID-19 test kits, while North America, excluding those products, saw a 2.0% increase. The company repurchased 638,000 shares of common stock for $50 million at an average price of $78.36 per share, and extended the maturity date of their $1 billion revolving credit facility to July 2028. Operating cash flow for the second quarter was $274 million, primarily due to lower inventory levels.

Henry Schein, Inc. is affirming its 2023 non-GAAP diluted EPS guidance of $5.18 to $5.35 per share, which is down 1% to 4% from 2022 and includes a previously announced $0.05 to $0.10 dilution from 2023 acquisitions. The company expects total sales growth of 1% to 3% over 2022 and a larger decline in sales of COVID-19 test kits by 70% to 80%. Restructuring expenses of $18 million or $0.10 per diluted share were incurred in the second quarter and are expected to extend through 2024.

The company's PPE product sales are expected to decrease by 25-30%, but the impact on 2023 non-GAAP diluted EPS from PPE products and COVID-19 test kits is still estimated to be $0.35-$0.40 per share due to higher-than-anticipated gross margins. Non-GAAP operating income is expected to grow in the high single-digit to low double-digit range, excluding PPE products and COVID-19 test kit sales, and non-GAAP operating margin is expected to contract by 10-15 basis points. The company also expects an effective tax rate for the year in the 23% range and for foreign currency exchange rates to remain consistent with current levels. The guidance does not include the impact of future share repurchases and potential future acquisitions.

Ron South responds to Elizabeth's first question about the fair value adjustment, explaining that it was something they had contemplated in their guidance but they were not sure of the exact amount. Stanley Bergman then responds to Elizabeth's second question about the S.I.N. Implants, explaining that a significant part of the portfolio is already approved in the U.S. and is being well received by their DSO customers.

The acquisition of Shield and Prism has put the company in a competitive position in the US and other markets, with a portfolio of premium and economic products. It is expected to create synergies quickly, and by 2024 should start adding accretion. The acquisitions will also enable the company to provide services to big IDN customers, including homecare, physician, and urgi care.

Stanley Bergman has provided an overview of the macro backdrop in the dental industry. In North America, patient traffic has been steadily increasing since the first quarter of 2022 and July was a good month. Implant sales, endodontics, and small aligner businesses are all growing. In international markets, the situation is more tepid, with Europe largely closed for the summer months, and the second quarter being affected by strikes in France. Germany is doing better than other countries.

In 2022, patient traffic in Germany, the company's largest market outside of the U.S., remained steady. Medical and dental services were back to pre-COVID levels, and the company was seeing growth in market share. Specialty products were seeing some trading to lower priced products from DSO customers, but overall the markets were stable. The backlog of equipment in North America and internationally was similar to pre-COVID levels.

Ron South clarified that their full-year guidance of $5.18 to $5.35 includes a $0.35 to $0.40 headwind due to contributions from PPE sales and COVID-19 test kit sales. In response to Jeff Johnson's question about the North American consumables market, Stanley Bergman explained that the 2.5% organic growth ex-PPE this quarter is mostly due to the Omicron stuff from the first quarter last year, with no significant changes in pricing dynamics.

Stanley suggests that inflation in the dental arena has been muted, and that there has been some deflation in merchandise prices due to larger and midsized DSOs becoming more educated consumers. He predicts that this trend will not change much in the third and fourth quarters. Jeff Johnson then follows up by asking if there will be more deflation to come, to which Ron responds that acquisition activity will have a net been impact that is close to flat this year.

Stanley Bergman and Ron South explain that while there may be deflation in the dental consumables business, it is not expected to have a significant impact on their total sales. They also confirm that their acquisition guidance for the year remains unchanged, with $0.05 to $0.10 of dilution expected due to all the acquisitions they have announced.

Jason Bednar asked Ron South about the inventory step-up costs from the Biotech Dental transaction, and its effect on gross margins and earnings. Ron South replied that the step-up charge for the second quarter was $2 million, and that the dilutive S.I.N transaction was absorbed within the $0.05 to $0.10 guidance. He also stated that Biotech churns inventory twice a year.

Ron South discussed the composition of the equipment backlog, which is holding steady with North America equipment growth on an LCI basis of 9.8%. Traditional equipment saw a growth of 14.6%. On the high-tech side, there are still headwinds on scanners due to pricing, but there was low single-digit growth across the board, including in mills and 3D printing.

Ron South reported that the company has chosen to focus on total sales growth in the dental specialties division rather than LCI sales growth in order to stay consistent with their message from their Investor Day. Stanley Bergman reported that BioHorizons Camlog premium implants, a lower price premium implant, delivered mid-single-digit growth in North America, and implant demand remains good internationally.

BioHorizons Camlog is doing well in its biggest market, Germany, Austria, and Switzerland. They have gained market share in terms of units and euros/dollars. S.I.N. will enable them to be competitive in the lower end of the North American market. In the medical division, ex-PPE and COVID was up 2%, though it has come up a little shy of expectations in the past couple of quarters. For the intermediate term, BioHorizons Camlog expects to have a balanced outlook for 2023.

Stanley Bergman discussed the impact of COVID on the sale of medical products and equipment, noting that July was a lot better than before but that it is hard to draw conclusions. He also mentioned that the impact of generic pharmaceuticals is quite a bit on the injectable side, and that the company is growing market share on a unit basis. Finally, he mentioned that the equipment backlog in North America is stabilizing.

Stanley Bergman discusses the demand for dental equipment, mentioning that the larger DSOs are continuing to invest and the demand for traditional equipment is steady. He also mentions that DI scanners and 3D printing are quite hot, and that there is a movement away from consumables into digitalization on the dental lab side.

The dental market is generally stable with some exceptions, such as Germany with a shortage of dentists and Australia with incentives for this quarter. The dental equipment backlog in the United States is similar to what it was at the end of the last quarter, indicating dentists' desire to invest in their practices. This includes investing in AI software such as Henry Schein One, with embedded AI. Ron South added that the backlog is better for customers to reduce the timing of that backlog, so they get their equipment more quickly.

Stanley Bergman thanked everyone for calling in and expressed satisfaction with the progress the business is making, both in terms of core and specialty products. He reaffirmed their guidance, but noted that the complexity of the PPE and test acquisitions, expenses, and related costs and income generated in that area may be confusing for investors. Bergman expressed hope that next year would be a relatively clean year and that their confidence in the business would be justified.

The teleconference has concluded, and the team thanked everyone for participating. They remain confident in their team and the work they have done as they come out of the COVID pandemic. They wish everyone a great remainder of the summer.

This summary was generated with AI and may contain some inaccuracies.