The operator introduces the Henry Schein Third Quarter 2023 Earnings Conference Call and the hosts, Graham Stanley and Stanley Bergman. Stanley gives a disclaimer about forward-looking statements and the potential risks and uncertainties involved. He also mentions that the comments about market growth and share are based on the company's internal analysis and estimates. The call will cover both GAAP and non-GAAP financial results.

The company believes that non-GAAP financial measures provide useful information and transparency for investors. They should not be used as a replacement for GAAP measures. The company's third quarter performance will be reviewed, but first, an update on a recent cybersecurity incident is provided. The company took precautionary actions and temporarily disrupted some operations to contain the incident.

The company activated a team of cybersecurity experts to assist in the investigation and recovery process after a cyber attack. They have been able to resume operations and are hopeful that their e-commerce platform will be back up soon. Orders have already started to increase and the company believes their strong relationships with customers and value-added services will continue to make them the best choice. The incident mainly affected their North American and European distribution businesses, but their other operations were mostly unaffected. A significant amount of information was obtained by the unauthorized third party.

The company experienced a cybersecurity incident and is continuing to investigate. They have addressed the misuse of bank account information with the affected suppliers. The financial impact of the incident will affect their fourth quarter results. The company thanks their customers, suppliers, and team members for their support during this time. Despite lower sales of PPE and COVID-19 tests, the company achieved good total sales and non-GAAP diluted EPS growth in the third quarter. Sales of PPE and COVID-19 tests continue to decline but at a slower rate. The company's profitability was aided by increased demand for lower-priced products and growth in equipment technical service revenue. They are also making progress towards their goal of achieving 40% of operating income from high-growth, high-margin products as part of their three-year strategic plan.

Despite current economic conditions and a cybersecurity incident, the company remains confident in the stability of the dental and medical markets and is committed to their long-term financial model. They have made strategic investments and recently acquired Shield Healthcare, which is performing well. In North America, dental offices have been busy, but patient traffic slowed in September due to an increase in cancellations, possibly due to flu and COVID-19. International dental business has remained steady, and traditional dental equipment sales have returned to pre-pandemic levels with mid-single digit growth. The company expects equipment sales to normalize in the first quarter of 2024 and has seen an increase in orders at a recent trade show. International equipment sales have slowed in some parts of the world outside of North America.

Henry Schein expects equipment sales to grow in the low to mid-single digits over the long term due to the increasing integration of high-tech digital workflow systems in dental practices. The company has gained global market share in the dental specialties, particularly in the implant business through acquisitions. However, the North American market has slowed down. The endodontic and clear aligner segments of the orthodontic business have shown strong growth. The company is optimistic about the long-term growth prospects of the specialty markets and has a robust new product pipeline for 2024. The technology and value-added services businesses are also expected to contribute to growth.

Henry Schein experienced strong sales growth in their technology and value-added service businesses, driven by their practice management software and the acquisition of Large Practice Sales. The growth was led by their cloud-based solutions, which saw a 40% increase in customer base. The company has formed a DSO Strategic Advisory Council to focus on growing practice revenues and solving operational issues for large group practices. They have also introduced new features and upgrades, including Lighthouse 360, a platform for patient communications and practice success. Henry Schein One's goal is to continue growing their customer base and offering integrated solutions for clinical aspects and specialty procedures.

The third quarter saw low single-digit growth for the company, excluding sales of PPE and COVID-19 tests. This was due to high prior year comparison sales and higher sales on lower-priced products. The company has also begun distributing COVID-19 vaccines, but does not expect it to significantly impact sales or profits. There was an increase in sales of COVID-19 test kits in September, which is expected to continue in the fourth quarter. The company's core business remains strong and they are ahead of schedule with their strategic plan. Due to a recent cybersecurity incident, the company will be delayed in filing their Q3 Form 10-Q. The non-GAAP financial results for the third quarter exclude certain costs and there were no effects of the cybersecurity incident on the results. The company's sales growth will primarily focus on internally generated sales in local currencies and exclude acquisitions.

The third quarter global sales of $3.2 billion for the company showed a decrease of 1.2%, but when excluding sales of PPE products and COVID-19 test kits, there was actually a growth of 1.1%. The GAAP operating margin for the quarter was 6.3%, a slight decline from the previous year due to higher operating expenses. Net income for the quarter was $137 million on a GAAP basis and $173 million on a non-GAAP basis. Global Dental sales were $1.9 billion and LCI sales decreased by 0.2%, but excluding PPE products, there was a slight growth of 0.3%. North American dental merchandise sales decreased by 1.2% and international sales increased by 2.9%.

In the third quarter, global dental equipment LCI sales decreased by 2.0%, with traditional equipment sales growing in mid-single digits but offset by lower digital equipment sales due to lower prices. North America dental equipment LCI sales increased by 0.2%, while international equipment LCI sales decreased by 5.9% due to macroeconomic uncertainty in Europe. Sales of dental specialty products saw a 25% growth driven by acquisitions. Global technology and value-added services sales grew by 9.6%, with growth in North America driven by Dentrix Ascend and internationally by Dentally. These segments represented about 35% of total operating income. Global medical sales decreased by 4.6% due to lower sales of PPE products and COVID-19 test kits. In North America, excluding these products, LCI sales grew by 1%. The company also repurchased approximately 660,000 shares of common stock during the quarter for a total of $50 million, with $215 million authorized and available for future repurchases.

The company has significant liquidity, allowing them to pursue growth initiatives and acquisitions while also returning capital to stockholders. They have committed over $1 billion to acquisitions this year and have incurred restructuring expenses related to a previously announced initiative. They are unable to provide GAAP guidance for 2023 due to uncertainty surrounding integration and restructuring costs and expenses related to a recent cybersecurity incident. However, they have updated their non-GAAP guidance to reflect a narrower range and a negative impact on sales growth due to the incident.

The estimated impact of the cybersecurity incident on the company's fourth quarter earnings is $0.55 to $0.75 per share, but does not include certain expenses and potential insurance claim recovery. The company's 2023 net sales are expected to be 1% to 3% lower than 2022, primarily due to the incident. The company's guidance also includes higher interest expense and an effective tax rate of 23%. Future share repurchases, acquisitions, and expenses related to the cybersecurity incident are not included in the guidance. The company plans to introduce 2024 financial guidance in the future.

The operator announces that they will be taking questions from investors and the first question is from Jon Block of Stifel. He asks about customer retention and the impact of the website issues on ordering frequency. Stanley Bergman responds that they believe they are at a 85-90% floor and larger customers are using e-commerce systems or workarounds, while smaller customers rely on field sales consultants and telesales reps. They have not heard of customers leaving, but some may have made alternative decisions.

The company's buyers of pharmaceuticals were eager for controlled drugs and the controlled drug system is expected to be up soon. The company has received support from its customers and the entire industry, despite the prevalence of cyber issues in healthcare. The second question is about high-level thoughts for 2024, with a focus on growth and the impact of the cybersecurity incident. The $0.55 to $0.75 hit in 4Q '23 will not include any expenses and the exit impact for December is expected to be lower than October.

The company confirms that the $0.55 to $0.75 impact on Q4 results is due to business interruption and does not include one-time costs related to reactivating systems. They plan to report these costs in their non-GAAP reconciliation. The impact on margins in 2024 will depend on the level of business with One web back up, and they may offer customer retention programs. The next question asks about the status of cybersecurity operations and the company confirms that the website will be back up tomorrow and they feel confident about the rest of their systems. They also mention their BOLD initiative for 2024.

The speaker, Stanley Bergman, is responding to a question about the impact of the recent cybersecurity incident on cost cuts. He explains that their CTO made a good decision to shut down the system immediately, and that their backups have been effective. They are currently working on turning on each application and doing forensic work to ensure there are no hidden issues. Some areas, such as invoicing and returns, are expected to be fully functional by the end of the week, while others may take a few more weeks.

The speaker believes that the company is currently in good shape from a customer perspective, with the exception of potential delays in responding to inquiries about past purchases. The company's backups are in good condition and the IT team is working to bring up stable systems. The speaker does not anticipate any acceleration of cost cuts in 2024, as the company will continue with its original plans and look for synergy opportunities following acquisitions.

Jeff Johnson from Baird asks a question about the company's outlook and how to conceptualize their growth. Stanley Bergman responds by saying that their business is relatively recession-resilient and that they saw moderate softness in patient traffic in North America due to appointment cancellations in September and October. He also mentions that traditional dental equipment sales have reverted to pre-pandemic levels and digital equipment sales are still impacted by lower prices. It is difficult to predict when things will normalize due to the recent cyber incident.

The speaker believes that the slowdown in equipment sales will improve in the first quarter of next year. International equipment sales have been impacted by macroeconomic issues and changes in tax incentives. The impact of the economy on dentistry is uncertain, but historically it has not been significant. Private practices and large practices are both experiencing similar trends, but sales for DSOs are not as strong due to interest costs. Patient traffic has been slower, potentially due to the traditional flu and COVID-19, but implants in Europe have been performing well.

The speaker discusses the current state of the cybersecurity market, noting that there is no definitive downward trend but there is some caution. They plan to take this into consideration when making future plans. They also mention the potential impact of customer retention programs, higher spending on cybersecurity, and potential customer loss, but state that they will have a better understanding of these factors once their website is reactivated.

The company will assess their cyber spend and invest accordingly based on the results of the ongoing forensic investigation. The swing factors that could affect their earnings include the return of customers who were unable to order during the website downtime and potential discounting that may impact margins. They expect to have more information in the coming weeks.

The company has seen an improvement in volumes since the incident, with a consistent trend in the past four weeks. However, there is still a ceiling at 85-90% of pre-incident volumes due to the need to gather intelligence on customer return rates. The majority of orders come digitally, but the funnel for ordering through field representatives and telesales was not large enough for a few weeks, causing some customers to be unable to order.

The company has expanded its digital ordering capabilities and increased the capacity of its telesales team during COVID. However, there were initial challenges with order funnels not being big enough to accept all orders. The company expects customers to return and place orders through the website. It may take some time for systems to return to normal. The recovery has been spread out across different categories and geographies, with some regions relying more on electronic ordering than others.

The speaker explains that Europe has a higher average rate than the US, but this is due to the fact that the US has more advanced systems. They also mention that the first month of the incident cannot be used to draw conclusions about specific products or regions. They clarify that the equipment business was operational throughout the period, but there may be a backlog of equipment orders due to manual systems. The speaker cannot provide conclusive information about renewal rates or projections for 2024.

The speaker responds to a question about the impact of the cybersecurity incident on the company's customer base and supplier relationships. They mention that larger customers have stuck with them, but there is still a 10-15% decrease in ordering from smaller customers who do not rely on sales reps. The incident did not have a significant effect on supplier product availability, but the company did have to buy based on older data for a short period of time. There is no expected impact on inventory levels or capital deployment in the near term.

The receiving department faced some challenges due to incomplete software, but most suppliers have been supportive and orders have been placed electronically. Inventory levels are expected to remain stable and there may be a slight impact on rebates. Capital deployment is not expected to change. The dental business outlook was not addressed.

The speaker is discussing the revised revenue range and its impact on the company's overall trajectory. They mention that the company is trending towards the lower end of their projected growth range due to softness in the end markets for dental specialties. They also mention that the cyberattack has affected a significant portion of their e-commerce revenues, which typically make up 70-75% of their overall revenues.

The speaker discusses the missing 10% to 15% of orders, which they believe is due to customers who exclusively ordered electronically and did not have a representative. They are working to get this business back. They also mention that they have seen a slowdown in demand in the dental industry, but it is difficult to determine the exact cause. They attribute it to a potential switch to generics and price resistance due to increased prices.

The speaker discusses the impact of flu and COVID on sales, noting that it is difficult to draw conclusions from the current economic climate. While there may be some concerns about the geopolitical environment, there is still government support in Europe. The speaker also mentions a slight resistance to more expensive equipment, but believes there is still potential for profitability in the service network. In North America, traditional equipment sales are stable while there is some volatility in digital equipment. The speaker predicts that 3D printing will eventually be adopted by more DSOs.

The speaker discusses the difficulty in giving a conclusive number for the company's growth due to various factors, but states that the business is relatively stable. They also mention the importance of addressing cyber threats and the successful handling of a recent attack by the company's IT team. The speaker praises the company's branding and strategic plan and acknowledges the support of the board and law enforcement in dealing with the issue.

The company's BOLD+1 plans are still in place and they expect the clinical workflow area to do well. They also anticipate that artificial intelligence will become more accepted in the DSO movement. The equipment is stable and they have given their thoughts on consumables. The company is focused on completing their systems and ensuring a successful recovery for their customers. Their sales force, telesales team, and digital team are all working to activate customers. The CEO thanks investors for their patience and acknowledges the support from customers and the industry. The company will report their fourth quarter numbers in mid-February and their filings with the SEC will be on time. The CEO concludes by thanking everyone for their patience.

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