Henry Schein, Inc. (HSIC) Q1 2020 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Henry Schein First Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I'd now like to introduce your host for today's conference, Carolynne Borders, Henry Schein's Vice President of Investor Relations. Please go ahead, Carolynne.

Thank you very much Holly. And my thanks to each of you for joining us to discuss Henry Schein's results for the first quarter of 2020. With me on the call today are Stanley Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein; and Steven Paladino, Executive Vice President and Chief Financial Officer. Before we begin, I would 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 may affect the matters referred to in forward-looking statements. As a result, the company's performance may materially differ from those expressed in or indicated by such forward-looking 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, including in the Risk Factors section of such filings. In addition, all comments about the markets we serve, including end market growth rates and market share are based upon the company's internal analysis 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 about the financial performance of our business, enable the comparison of financial results between periods where certain items may vary independently of business performance, and allow for greater transparency with respect to key metrics used by management in operating our business. These non-GAAP financial measures are presented solely for informational and comparative purposes, and should not be regarded as a replacement for corresponding GAAP measures. These reconciliations can be found in the Supplemental Information section of our Investor Relations website; and in Exhibit B of today's press release, which is available in the Investor Relations section of our website. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast May 5, 2020. Henry Schein undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Please limit yourself to a single question and a follow-up during Q&A to allow as many -- excuse me, as many listeners as possible to ask a question. With that said, I would like to turn the call over to Stanley Bergman.

Good morning. And thank you Carolynne. And thank you everyone for joining us. As we gather on this call today to discuss Henry Schein's first quarter 2020 results, we face an unprecedented public health and economic crisis from the COVID-19 pandemic. It was only a few months ago when we last spoke with investors during our year-end call and of course at the Chicago Dental Society Midwinter Meeting, yet so much has changed during that time. Over the last several weeks, our leadership team supported by our Board of Directors has had to make some very difficult decisions. The company has maintained focus on three key priorities: protecting the health and welfare of our Team Schein Members and the well-being and the Team Schein families. Assisting with business continuity for our customers and our suppliers. And third, sustaining financial health of the business in the midst of this uncertain macroeconomic landscape and of course positioning the company for the future. Beginning in mid-March, most of Henry Schein's dental customers worldwide began to suspend operations except for emergency procedures. Dental sales were approximately 65% of Henry Schein's total sales last year for the year 2019. Therefore these closures had, and of course, continue to have a meaningful impact on our business. Our Medical business, which serves physician offices; urgent care centers; ambulatory care sites; emergency medical techs' EMTs; dialysis centers; large enterprises such as group practices and IDNs the integrated delivery networks amongst other providers, represented approximately 30% of our total sales in 2019. As the COVID virus spread, many physician, offices limited patient flow due to social distancing guidelines. In turn, we moved into the second quarter -- as we moved into the second quarter, individuals increasingly sought critical care in hospital settings or interacted with their physicians online through telemedicine for example. And ambulatory care centers many of them were converted into COVID-19 treatment units. In the United States following [Technical Difficulty] Dental Association's guidance recommending that U.S. dental practitioners suspend seeing patients for elective procedures and that was of course issued on March 16, 2020, we were guided by the Federal Emergency Management Agency, FEMA to direct critical personnel products PPE to medical health care professionals and institutions and specifically to the hotspots. In our Medical business, PPE throughout the quarter was of course in high demand. As COVID rapidly gained momentum, we worked with our suppliers to expand availability and to prioritize the delivery of critical PPE and also brought to market rapid test solutions for health care professionals. Relative to our Henry Schein One dental software business, lower sales associated with reduced transactional services and fewer patient visits were partially offset by dental practices leveraging our software communications tools to stay connected with their patients. Our medical and technology and value-added services businesses both performed better than our dental business in the first quarter. In the face of revenue headwinds, we have taken swift and decisive actions to preserve cash. Cash is really important for us now, but more important positioning ourselves for the future including reducing our own cost structure to best position Henry Schein through this crisis and of course beyond; to ensure that we remain well-positioned to face any ongoing business challenge and of course for the future. The difficult decisions we have had to make to reduce costs have impacted all Team Schein Members across the company, all 19,000. We, of course, have not made these decisions lightly. Team Schein is our company's number one asset and a critical constituent in our mosaic of success, the constituents that make up the Henry Schein mosaic of success. And, of course, Team Schein as number one on that list along with our customers, suppliers, investors and society. Keep in mind that we continue to assess our cost reduction plans and adapt as required. We will do this in a very agile way. In an effort to preserve cash, we reduced or eliminated all nonessential capital expenditure. And in early March, we temporarily suspended our acquisition activity and share repurchase program. While we have provided intense focus on managing the impact of COVID-19 on our business, we simultaneously view the critical responsibility we have to help guide our customers through this extremely challenging time and our customers are really facing unprecedented challenges. As most of our dental and medical practices began to suspend operation, we focused on helping our customers build a road map to navigate through the disruptions to their practices. We are, of course, working closely with our customers to assist with business continuity planning for today. The key is to keep our customers economically afloat so that when patients go back to the practices they are ready; and in anticipation of all of this ensuring that our patient -- our practice -- our customers' practices are ready when patients start returning. Let me take this opportunity to offer my sincere thanks to our team for the valiant work and support during this extremely difficult time and offer my deep gratitude for the sacrifices our team are making. Most are working from home and the systems are working. And there's a huge number working in our DCs, in our distribution centers. And these distribution centers are functioning as normal; many, many orders, very frequently small orders for PPE that are frequently reordered because of availability. And the stuff comes in and goes out. At this time, I'd like to hand the call over to Steven to discuss our financial performance. And then I'll provide some additional commentary on our view of our current business conditions. Steven please.

Okay. Thank you, Stanley, and good morning to all. As we begin, I'd like to point out that I will be discussing our results from continuing operations as reported on a GAAP basis and also on a non-GAAP basis. Our Q1 2020 and Q1 2019 non-GAAP results exclude certain items that are detailed in Exhibit B of today's press release and in the Supplemental Information section of our Investor Relations website. Please note that we have again included a corporate sales category for Q1 that represents sales to Covetrus under the transitional services agreements. As Stanley mentioned, our 2020 first quarter results were negatively impacted by COVID-19. While it's difficult to quantify the precise impact, we saw negative effects of the virus beginning in March particularly as global dental practices began to suspend operations. In response to the COVID-19 pandemic, we have implemented a broad-based cost reduction initiative, including having implemented a payroll cost reduction plan centered around furloughs, reduced work hours, voluntary unpaid time off, suspension of our 401(k) match and certain job reductions. As we proceed throughout the year, we will be closely monitoring the health of our business and we are prepared to take additional cost-saving measures as warranted. Before I walk through our financial performance for Q1, I would like to note that we recorded a noncash asset impairment charge of approximately $6.1 million pre-tax related to certain prepaid assets and intangible assets. We do not expect the impairment to have any future impact on our business operations or liquidity or cash flow from operating activities or any compliance with debt covenants. So turning now to our financial results. Net sales for the quarter ended March 28, 2020 were $2.4 billion, reflecting a 2.9% increase compared with the first quarter of 2019 with internally generated sales growth in local currencies of 2.1%. COVID-19 negatively impacted our worldwide sales growth as many dental and medical practices have closed or are seeing a limited number of patients. Dental office closures occurred on somewhat of a rolling basis beginning in the mid-quarter first in China, then in Europe and then in the U.S. The details of our sales growth are contained in Exhibit A in our earnings press release that was issued this morning. On a GAAP basis operating margin for the first quarter of 2020 of 7.2%, represents a decrease of 15 basis points compared with the first quarter of 2019. On a non-GAAP basis, our operating margin of 7.4% also contracted by 15 basis points on a year-over-year basis. A reconciliation of GAAP operating margin to non-GAAP operating margin can be found in the Supplemental Information page on the Investor Relations page of our website. This margin contraction in the quarter was primarily due to a reduction in global dental sales that began in March due to the impact of COVID-19 as well as the $6.1 million pre-tax non-cash impairment charge. If we look at our taxes. Our reported GAAP effective tax rate for the first quarter of 2020 was 22.4%. This compares with 24.6% GAAP effective tax rate for the first quarter of 2019. On a non-GAAP basis our effective tax rate was 22.5% and this compares with a prior year non-GAAP effective tax rate of 25.4%. Again, you can see the Supplemental Information page on our Investor Relations website for a reconciliation of GAAP to non-GAAP taxes. Our GAAP net income from continuing operations attributable to Henry Schein Inc. for the first quarter of 2020 was $130.5 million or $0.91 per diluted share and this compares with prior year GAAP net income from continuing operations of $118.4 million or $0.78 per diluted share. Non-GAAP net income from continuing operations for the first quarter of 2020 was $134.1 million or $0.94 per diluted share and this compares with non-GAAP net income from continuing operations of $120.6 million or $0.80 per diluted share for the first quarter of 2019. This represents growth of 11.3% and 17.5%, respectively. Providing some detail on our results. Due to the current economic environment with COVID-19, we recorded an incremental bad debt reserve for our global Dental business of approximately $10 million pre-tax for the quarter or about 20% of the existing reserve balance. This $10 million is an estimate based on how quickly dental offices reopen and how quickly patients return to those practices so it's therefore subject to ongoing analysis and adjustments. We also recorded a net credit in the quarter to our stock-based compensation of $17.5 million pre-tax reflecting our current expectation that none of our performance-based shares will vest due to the impact of COVID-19 on our earnings results. As referenced earlier, net income was also impacted by $6.1 million of non-cash impairment charges. On a continuing operations basis, amortization from acquired intangible assets for Q1 2020 was $26.8 million pre-tax or $0.14 per diluted share. This compares with $21.8 million pre-tax or $0.11 per diluted share in the same period last year. I will also note in Q1 of 2020 foreign currency exchange negatively impacted our diluted EPS by approximately $0.01 per share. I'll now provide some detail on our sales results for the first quarter. Dental sales of $1.5 billion declined 4.6% compared with the prior year with a decline in internal sales in local currencies of 3.7%. North American Dental sales were relatively in line with our expectations in both January and February. However in March this growth was negatively impacted by significant practice closures in the U.S. and virtually all the markets we serve worldwide. North American internal sales in local currencies declined 3.9% including a decline of 4.2% in sales of dental consumable merchandise and a decline of 2.7% in dental equipment. In Q1, North American internal sales in local currencies for high-tech equipment increased approximately 4.7% including growth in CAD/CAM equipment of approximately 14.5% and strong laser sales. This was offset by a decline in traditional equipment of 5.8%; and a decrease in digital imaging sales of 7.6%, which includes high-tech sensors, panoramic x-rays and 3D imaging. International Dental internal sales in local currencies declined 3.4% and included a 4% decline in sales of dental consumable merchandise and a 1.2% decline in dental equipment. Sales in Germany and to a lesser extent Australia and Brazil were not as significantly affected by COVID-19 compared with our other international geographies that we serve. In fact these currencies experienced positive total Dental internal sales growth in local currencies. Specific to Germany our largest dental market in Europe consumable merchandise internal sales in local currencies experienced a 2.1% sales decline. However, dental equipment sales increased by 13.8%. Turning to dental specialty products. In Q1 internal sales of global dental specialty products decreased 6.4% in local currencies. Our dental specialty sales were significantly impacted in the last month of the quarter as dental practices began to close. Dental specialty sales are still a relatively small portion of our total Dental sales, but they have higher margins and we do believe this category has solid growth potential over the longer term. Looking at our Medical sales. They were $800.7 million for the first quarter, an increase of 17.1% with internally generated sales in local currencies growing 13.4%. The 13.4% internal growth in local currencies included 13.6% growth in North America and 9% growth internationally. Medical sales results were driven by solid organic growth earlier in the quarter. Our Medical sales were also in line with our expectations in January and February and were followed by a significant increase in orders in March for PPE. Economic conditions have had less of an impact on our Medical group versus Dental, mainly, due to continued strong sales of PPE. While certain SKUs of PPE remained in tight supply such as masks, gowns and face shields, we are working with our suppliers to source these products to satisfy demand plus replenish our inventory as quickly as possible. Turning to Technology and Value-Added Services sales. Those sales from continuing operations were $132.0 million in the first quarter, an increase of 14.2% with internally generated sales growth in local currencies of 6.4%. This growth was negatively impacted by COVID-19 later in the quarter. In North America Technology and value-added services sales -- internal sales growth in local currencies was 6.3%. Sales were solid through mid-March when we started to see declines related to patient traffic. Our North American financial services business in Q1 was relatively flat versus the prior year mainly due to lower dental equipment sales and the financing, thereof, towards the end of the quarter. We expect certain Henry Schein One products to see a more significant adverse impact to our technology and value-added services from COVID-19 in Q2. That's specifically related to the transactional portion of the business within Henry Schein One. Internationally, technology and value-added services internal sales increased by 6.8% in local currencies during the quarter. These sales were driven by positive trends in recurring revenue associated with our practice management, patient engagement and patient demand creation software solutions, as well as strong financial services revenue led by practice brokerage transactions in the U.K. In early March, we temporarily suspended our share repurchase program as a means to preserve cash in response to the impact of COVID-19 on our business operations. Prior to this, we repurchased 1.2 million shares of our common stock during the first quarter at an average price of $61.49 per share or a total of approximately $73.8 million. The impact of the repurchase of shares on the first quarter 2020 diluted EPS was not material. As of today, Henry Schein has $201 million authorized for future repurchases of common stock. Again as Stanley noted, we have also temporarily suspended our acquisition activity in early March, again to preserve cash. Let me point out that Henry Schein has a very strong balance sheet with low debt leverage. At the end of the first quarter, our debt-to-EBITDA leverage ratio was approximately 1.2 times. Additionally in April, we enhanced our liquidity with a new committed credit facility of approximately $700 million, which provides $500 million of incremental funding as we let expire certain uncommitted credit facilities. We now have access to approximately $1.7 billion in liquidity providing flexibility in this challenging environment. Our operating cash flow from continuing operations for the quarter was $90.8 million, compared with $133.3 million for the first quarter of last year. The year-over-year decline was primarily related to a reduction in distribution from equity affiliates over the prior year. As part of our previously disclosed restructuring initiative, we recorded a pre-tax charge in Q1 2020 of $4.8 million or $0.03 per diluted share. This restructuring charge primarily includes severance pay and facility closing costs and reflects opportunities to reduce expenses and drive operating efficiencies. I will conclude my remarks on the topic of financial guidance. You may recall that on our February earnings call, we specifically stated our guidance for 2020 non-GAAP diluted EPS from continuing operations, assumed no significant supply chain disruption on the business related to COVID-19. As the virus proliferated into a worldwide pandemic, we withdrew our guidance for 2020 and as of now we are not providing financial guidance at this time. So with that, let me turn the call back to Stanley.

Thank you, Steven. So let's review our business performance from the first quarter and recent weeks starting with dental. As we discussed, North American dental consumable merchandise sales were relatively in line with expectations in January and February. In fact, the business was quite good, but were significantly impacted by U.S. dental office closures during the American Dental -- driven by the American Dental Association's guidance issued in the middle of March. Similarly in Canada, most provinces recommended that dental practices suspend operations except for emergency procedures, of course, significantly impacting sales in the last couple of weeks of March. Similarly international dental consumable merchandise and equipment, internal sales growth was relatively in line with expectations during January and February. However, these sales were significantly impacted in March, a little bit earlier than in the U.S. by social distancing with practices closed and limiting hours across virtually all of the dental markets Henry Schein serves, including China and Europe; as previously mentioned, the exception in Germany where practices were not broadly mandated to close for general dentistry. Of course, social distancing was important, but practices were allowed to operate using very careful infection control guidelines. Also sales in Australia and Brazil experienced less-severe decline versus other countries since the COVID-19 impact began later than in other regions and government restrictions on practices were not implemented until late March. Today we have begun to see dental clinics reopen in China. However, the rate of practices reopening has been at a gradual pace but most of China is back in one way or another but at a much, much lower pace. The number of patients that practitioners can see is being limited. The number of people allowed into the practice is limited, but in other parts of the world, we expect that as stay-at-home orders are relaxed, dental practices will also begin to resume operations. Of course, we cannot predict the exact timing in each country or in each state in the United States or province for that matter in Canada. Overall, due to the ongoing impact of COVID-19, while it cannot be calculated with a certainty, we estimate that the run rate for global Dental sales is down somewhere between 70% to 80% year-over-year. We only have April to gauge a little bit of March. And to extrapolate from that is very, very difficult, but the range of 70% to 80% potentially on the lower end is where we think we are running at this time. We are working with customers now on programs to -- designed to help our customers during this downturn. Of course, financial options safety is a big, big issue emergency services that we provide. For servicing equipment there is some installation going on; as well as now a focus on reopening services and support for those practices, either operating on an emergency basis today or planning to open; and to -- of course in that context to ensure that appropriate products are available and the equipment in our customers' practices is actually working. It needs to be checked before -- while patients -- while emergency patients are being seen and in anticipation of opening practices. In particular, with our -- and we -- what we call our recovery planner, we are helping customers identify practice management's opportunities so practices can plan for scheduling adjustments, daily procedural improvements and customized solutions to increase production. These are all things we're doing as practices resume clinical operations. As we look to the future, Henry Schein along with our dental customers and our suppliers, face two unknowns. This is obvious. The first is when will practices fully reopen and the second is when will patients fully return. We can't of course predict either, but we can help our customers to prepare for both and that is exactly what we're doing. We're leveraging a number of our long-established service offerings as well as some of our newer offerings involving third-party financing sources in an effort to help practices sustain the health of their business during the downturn. On the finance side the key is to keep -- these practitioners that is challenged because of revenue drying up keep them afloat. With our Henry Schein One software solutions, we are helping clinicians stay engaged with their patients and implement plans to prospect new patients as practices resume operations. In the interim, while dentists are seeing patients for emergency and also in line with new protocols once practices reopen our patient engagement solutions will create virtual waiting rooms for patients to complete forms online, text the practice when they arrive for the appointment and wait until the dentist is ready to summon the patient into the practice. This is quite an interesting software development that has emerged from Henry Schein One in recent days. Now let's move on to our Medical business in which a fairly typical January and February unfolded although there were some elements of positive sales as a result of the flu season. That was followed by the impact of COVID-19 really leading to a surge in orders in March as those customers that were open for emergencies on the medical side, purchased more PPE and other products as well as us servicing some institutions as requested by FEMA that we really don't normally service. The influenza season this past winter was relatively severe which favorably impacted sales of consumable merchandise and seasonal rapid tests. Whereas typically influenza sales wind down near the end of the calendar year, we saw influenza-related product demand continue to be strong into the first quarter January and February in particular. At this time, we estimate that the run rate for our Medical sales is down somewhere between 20% and 30% on a year-on-year basis. That's the run rate, again hard to predict exactly or estimate due to the ongoing impact of course of COVID-19. And yes, we cannot calculate that with certainty. Henry Schein is committed to bringing essential products to the health care professionals who are fighting the pandemic. Our primary focus is those on the front line. And the office-based practitioner is right on the front line in many instances, not only physicians, but dentists who are right there to help patients and really reducing the number of patients heading into the hospital emergency room. It is amazing what the office-based practitioners dentists and physicians, urgi centers are doing. Heros. Early in this crisis, we knew that health care professionals needed PPE. We spoke about that on our last conference call, our year-end report when we addressed this issue in March. And we addressed the notion that there would be a shortage and that we were working on this shortage. And we knew that health care professionals would need the PPE for their safety as well as for the safety of those they've treated. We also have been focused on rapid diagnostic tests. More about that later, but we've always been a key player in delivering rapid diagnostic tests to office space and related health care practitioners. We began to work quickly with our suppliers around the world to make these essential products available to the best of our ability, while being mindful of two very important elements: quality. There's a lot of product available that doesn't meet the quality test and regulatory compliance a very, very complex area. Regulations throughout the world change rapidly and we want to make sure that we're in compliance. Of course, the priority is the quality. Even if there's a -- we satisfy a regulatory standard it may not be good enough for us from a quality point of view. So let's talk about PPE. As part of this work, Henry Schein is a participant in the White House COVID-19 supply chain task force. We have worked with the Strategic National Stockpile to deliver PPE to the COVID testing sites the first ones that were opened. We are also working with FEMA to deliver critical supplies to healthcare professionals; and to institutions, often institutions that we do not normally service the acute care part. Henry Schein co-founded the Pandemic Supply Chain Network in 2015 together with the World Health Organization, the World Economic Forum, the World Bank, the U.S. CDC and others to improve the efficiency of worldwide PPE supplies and to work on the supply chain. Since its inception five years ago Henry Schein has served as the private sector lead for the Pandemic Supply Chain Network. The supply chain for PPE is under considerable stress, which has caused the scarcity of products globally. Complicating the tight global supply chain and this is very important for our investors to understand is the rapidly changing government restrictions in certain countries and it's multiple countries, not one, multiple countries on both the export of PPE and in-country distribution of PPE as well as the need to ensure that PPE is procured from suppliers with the regulatory requirement. So there's a lot of shortage of course. That's an issue but there's a lot of export restriction issues that emerge and disappear. And then they come back in different forms and requirements to move product to certain jurisdictions within countries. All the while, while we are securing product from new suppliers, we want to ensure the quality is right and full compliance with regulatory mandates that vary rapidly country by country. Needless to say, our outsourcing team is working around the clock -- around the world, around the clock to efficiently procure high-quality products for our customers. We are hopeful that there will be additional supplier of PPE in the market beginning in late May, hope because restrictions on exports could impact that and increasing steadily thereafter assuming no impact from government restrictions. Therefore for the second quarter we expect a continued tight supply for certain PPE products, yet we are hopeful that we will ease -- that this will ease in the third quarters -- quarter as our manufacturing suppliers continue to reopen and accelerate capacity. Now on tests. United States and most nations across the globe face our greatest public health challenge in a century with the spread of COVID-19 claiming lives and disrupting livelihoods and economies. In the face of this unimaginable threat, we must find the most effective strategies to combat the spread of this virus protect human life and yes, ensure the resilience of economies. We believe that testing is critical. We've always believed that and have been in the testing business for 40 years providing different forms of tests to office-based practitioners that not only identify illness but towards prevention, informing treatment and recovery. Henry Schein, as I noted for decades has been a most successful provider of laboratory tests both equipment and related agents; and yes, a key area being for us points-of-care rapid diagnostic tests for use in physician offices and other healthcare provider sites. We provide a wide offering of tests to our customers by partnering with the world's leading diagnostic manufacturers both for the equipment, for the reagents and yes, for the snap quick tests. In the United States, Henry Schein recently introduced two rapid point-of-care test kits that can detect antibodies associated with COVID-19 in as little as 15 minutes and without the need for machine equipment. These tests are important because they deliver results quickly, at a low cost and can easily be deployed in large quantities where they are needed. Currently the COVID-19 antibody test offered by Henry Schein are being marketed under an FDA emergency enforcement policy. They have not been independently reviewed by the FDA. Under their policy, the tests may be administered by labs and healthcare professionals at locations that clear certifies as authorized to perform high-complexity tests. So there are limited sites that can use these tests at this moment. We are in the process of seeking an EUA for these products and are hopeful that we will receive that soon and that will expand the number of sites that can use these products. Healthcare professionals can utilize these test results. And this is important: These tests are not like a pregnancy test. They don't say, yes or no. They don't read, yes or no. They need to be used by healthcare professionals along with clinical judgment, assessment of symptoms, previous tests to make informed decisions. Henry Schein believes that public health officials can also use these tests as part of broader testing to better understand the spread of the disease. The company is working to bring additional tests as well as more on PPE to market both tests and PPE. We are also working to address test-related shortages in other capacities such as nasal swabs, to test for the COVID-19. Since this is the most common means of specimen collection at this moment, there is a shortage of swabs. As a result, ACE Surgical that's one of our subsidiaries is currently working with one of our dental suppliers to produce 3D-printed nasal swabs in volume, using our sterilization and packaging services to support current fiber swab shortages in order to meet virus testing needs. It is our goal that, our customers and dental practices employees are ready willing and positioned to treat patients when the practices are once again able to open their doors. There are requirements in place suggested protocols. There are multiple ways of addressing these protocols. It's not going to be easy. We will not have unlimited amount of supplies, but we are working to ensure that our customers have products available when they open the doors, yes in limited quantities and -- but at the same time, quality product in compliance with regulatory means. Let's move to our Technology and Value-Added Services businesses. Much like our Dental and Medical businesses months of January and February were consistent with positive quarterly patterns in our Technology and Value-Added Services businesses, particularly for Henry Schein One practice management; patient engagement patient demand creation; dental software solutions all three of those. Yet, when the offices began to close in the United States in mid-March, the impact of COVID-19 began to materially impact sales in these categories, as well as new system installations. Our DentalPlans.com business and financial services businesses all started feeling the impact in March. As I mentioned, when discussing our Dental operations, we are actively working with practices to promote tools for patient engagement at this critical time as practices recognize that communicating with patients has never been more important. And we spend a lot of time encouraging dentists to remain in communication with their patients. Dental practices are using our patient communication and engagement solutions to inform patients, when their practices are going to be open, advise of the safety measures implemented to protect patients, and quickly reschedule appointments so practices can more quickly return to normal operations. Examples of these tools include patient reminders two-way texting, patient portals for rescheduling, virtual waiting rooms for emergency check-in, marketing e-mail campaigns and online billings. We believe that no other company has the breadth of software services offerings that Henry Schein delivers under one umbrella. We estimate that the run rate for our Technology and Value-Added Services sales is down again hard to tell the exact number approximately 30% to 40% year-over-year on a global basis. In addition to managing our supply chain for the products that are still needed at this time during practice downtime, our COVID-19 education centers offering symposiums, websites, webinars -- and webinars to advise customers on managing business operations staffing approximately -- areas relating to staffing and preparing for future bookings, developing financial resource plans for practices and much, much more. So before we take questions, I'd like to reiterate that Team Schein Members across our businesses are committed to supporting our customers as they navigate through this crisis; and really are ready to help our customers at a moment's notice reopen their doors when it is appropriate and ensuring that the supplies needed are there. Again, I'd like to express my deep gratitude to our team colleagues, Team Schein, who have so quickly and confidently risen to the challenge. Many Team Schein Members have had their compensation reduced. In fact, practically everyone in the company has had compensation impacted in one way or another. If the commitment across our organization is palpable, it's quite amazing. The work that is being done each day is unbelievable and gives me huge confidence in the future. I'm in awe, when I see the work that our colleagues around the globe are working on and how they're executing their responsibility to support our mission, working with our suppliers and our customers. So with those comments, operator ready to take questions.

Absolutely. [Operator Instructions] Our first question is going to come from the line of Jon Block, Stifel.

Great. Thanks guys morning. Stanley, the down 70% to 80% comment for Dental I believe that was a global metric. And I know this is a bit detailed but is there a way to view how that looked for the end of April versus the beginning of the month? And then sort of part two of that same question is just for China. Is there an estimate of where that market is relative to normal as we sit here in April? Because people are looking at that as call it a leading indicator for future markets. And then I've just got a follow-up.

Yes. Maybe Steven has that data. I don't have it with me right now. Steven?

Yes. Jon, the variance between the end of April and beginning of May, was not really that significant on a global Dental basis. It was all within that range. Specifically with China, since the outbreak started in China, we are seeing gradual improvement there. We are seeing many dental offices that were closed a little while ago are now reopening. So we do see that occurring and that's optimistic for what could occur in the rest of the world.

Okay. And then second question Stanley for you. Just would love your thoughts on the long-term ramifications of COVID. In other words what does it mean for PPE at dental practices and other practices? And is that a long-term positive for you? Does it accelerate the pace of dental consolidation because some practices unfortunately won't make it out of this? Is that a long-term negative for you? I'd just love to get your thoughts call it on these longer-term structural changes in the industry. Thanks guys.

A very good question. Obviously it's pretty soon into the COVID history, but I think dentistry will recover. I think the question is more when. I think 2021 will be -- I wouldn't say back to where it was in 2019, but getting closer to that. I do think that on the specialty side, there will be a good solid demand for products, but maybe pricing will have to come down a bit at the dentist level; and therefore, there may be some pressure on pricing. I don't know for sure. But I think the demand will remain solid. The question is really the bridge between now and then between now and say, the middle of 2021. And I can only reflect on what happened in the '80s with respect to the HIV AIDS situation when -- and remember this was the time that probably dentists wore masks and gloves. And so going into that crisis they were not wearing gloves and masks. And then the public became aware of the concern of the infection. And dentists understood that and they understood the concern and they needed to protect themselves. It took about a year or two to bridge that. And then patients returned to practices. It was the result by the way from a business point of view that an area a product category gloves and masks which was very small for dental distributors at that time became a significant category. So I think that business will -- I'm not sure how close to normal, but will get back pretty close to where it was sometime in 2021. And at the same time, the demand for PPE will grow. Having said that I also think that there is a bit of a reduction in regulatory compliance standards today to allow product in and those standards are going to be up. So it's going to require significant quality control and regulatory compliance on the PPE side. And then there is going to be a call to action, I think for products to be made in countries where they are used. I'm not only talking about the United States but countries around the world are going to want to have certain capacity internally for PPE. This will increase the price of this product and so it's going to be an added burden to dentists. I would imagine that in certain countries where there's government support for dentistry, the reimbursement will go up. Insurance carriers in other parts of the world will have to increase the price -- the reimbursement, but I remain very, very enthusiastic about the future of dentistry. I think we have to bridge through the balance of this year and probably into the middle of next year to help the practitioners recover. As it relates to consolidation, I think there is going to be some consolidation. On the one hand, some of the DSOs do have stretched balance sheets. On the other hand midsized practices some of whom in the United States have gotten PPP funding will be in a position to expand and consolidate. So I think the shift from solo to midsize will continue and from midsize to large practices will continue, but not all midsized practices and not all large practices are actually in a good -- have the right kind of balance sheets today. So that's just some random thinking. Obviously I know more -- no more than what you do because this is all public information. And a lot of it is sort of figuring out where the market is or where the psyche is of the public, but I do think people will be going back to the dentists.

Thank you. Our next question will come from the line of John Kreger with William Blair.

Hi, thanks very much. Stan just to follow up on some of those very helpful stats you gave us towards the end of the call. For a typical U.S. dental customer, is it reasonable to assume that emergency care would be on the order of 20% of what you would normally be doing for that customer? Or would you give a different stat?

I'm not sure that -- it's very hard to tell. There is no available information, but there are some practices that are doing more and there are some practices that are doing very little. The exact mix is very difficult John to tell at this time, but there are a lot of practices undertaking emergency services today but not all. And probably a lot of practices are doing virtually nothing. So it's very hard to get that mix right. I think the basic statistic that we gave in the call on all three of our businesses on expectations -- although very difficult to tell exactly where this is heading, but I think the basic guidelines we gave on Dental 70% to 80% down run rate; Medical 20% to 30%; Technology 30% or 40% are probably reasonable. Having said that, the Dental side may be closer to the 70% than the 80% at this moment, of course states are opening up and maybe it's going to be good. Maybe it's going to not. We don't know if there's going to be a second bout, but if there's not then we're actually ahead of these numbers. But we have to be very, very careful because we don't know if a state opens up whether there's a second round to go on the CV-19.

Thank you. That's helpful. One quick clarification on your technology businesses: if I am a typical Dentrix kind of client server customer am I able to use some of the virtual tools that you now offer under Henry Schein One? Or do I have to convert to the cloud system? Thank you.

That's a good question. I'm pretty sure it's available to Dentrix users. We will confirm that. I don't know if you know Steven.

Yes, I'm pretty sure also that it is available both cloud and non-cloud systems.

Great, thank you.

Thank you. Our next question will come from the line of Jeffrey Johnson, Baird.

Thank you. Good morning guys. Stanley, I just want to say thanks for all you guys do as a company, in response to COVID. But also for all these earthquakes and hurricanes in that you're always putting, emergency services out there. It's well appreciated. We don't talk about it enough on these calls. So thank you. Steve, wondering if I could push you a little bit on Jon Block's question about China, you didn't give a percentage. We've heard a percentage from others that China is back to 20% or 40% or 60%. Could you put a number on that? And maybe it’s something similar on Germany as well? My gut is that the German market would be a better predicate for the U.S. market just given small practices versus hospital care in China. So any numbers you could put on Germany as well would be helpful. Thank you.

Yes. Thank you, Jeff. Thanks for that comment earlier. Yes, I'm not sure, it makes sense to be very specific on the percentages, because I'm not sure that they will translate into other countries or not. And it's still rather fluid. So I'd rather not give specifics. Well, Germany I think was impacted less from the beginning, for whatever reason they had less cases of COVID-19. And that's why the market in Dental held up much better than in other areas, like Italy and other places. But I'd rather not give specific numbers at this point. Because it is very fluid and it does change quite quickly.

Yes sure, understood. Fair enough. On the cost-cutting side, Steve or Stanley, obviously you guys have been very aggressive. Can you talk about maybe what the flow-through then from some of these revenue declines, should be decremental margin-wise or however you could couch it for us? And another part of that question, just your largest competitor on the Dental side anyway, doesn't seem to be making nearly the aggressive cuts that you guys are. They have a couple years ago gone through some of that. But how does this position you competitively coming out of a downturn? Any concerns there? Or is the industry just changing that some of these maybe changes on the sales force side that you're making, probably would have been necessary overtime anyways? Thank you.

Steven?

Yes. On the cost cutting, we've done a lot. And the main reason is that, no one really knows how long the impact will be, what the duration of the impact will be, in the Dental side. And we've done it in a way where we do things like furloughs, where we can extend it if need be or cut those expense cuts to shorter term if need be. So it does allow us flexibility on the expense cuts, because no one really knows how long it will last. Some of those are just -- some of the cuts really are things that are an outcome like supplier rebates. I think people realize that we do get a certain amount of supplier rebates. One of the reasons why our gross margin was down a bit in Q1 was because the performance-based supplier rebates. At this point, we're not expecting much to be able to be earned, unless we renegotiate those performance criteria. So we took I would say the conservative, but a realistic view that very little will be earned. You could see on our cash flow the adjustment on stock-based compensation was $17.5 million for the quarter. So again, we have the flexibility. And I believe, we are the best positioned in the industry with the strongest balance sheet, the most access to liquidity. And the things that we've been doing in cost cutting to really emerge smarter and strong from whenever this pandemic ends.

Thank you.

Thank you. Our next question is going to come from the line of Steven Valiquette, Barclays. Mr. Valiquette, your line is open. All right, we will go to the next question. Okay. Our next question will come from the line of Glen Santangelo, Guggenheim.

Yes. Thanks for taking my questions. I just want to follow-up on two areas, if I could. First Stan with respect to the comments that have been made with respect to China and Germany, it sounds like we're seeing some sort of measured recovery. And while, it seems intuitive that consumables will come back. First, could you maybe comment a little bit more specifically on what you're seeing about the return of equipment sales, given the economic hit being absorbed by some of these practices?

Sure, Glen. I -- also another -- a lot of good questions here today, I do think that, equipment will come back in that, a big part of our equipment growth has been coming from digital, from the digital side. And I do believe that that will continue, as practices will try to position themselves or position themselves as being competitive compared to other practices using best-of-class, products and procedures. And of course, digital dentistry is best of class and the best equipment for procedures. So I think there will be a need for that. I also think that, there will be greater pressure on ensuring that every practice has digital imaging. So I think these categories will grow. There is also -- and there are also new products out there, relating to air treatment in the practice. I'm not going to -- I'm not sure if we're actually going to classify them as large equipment or midsize, and therefore in our consumable category, but there will be a demand for these kinds of products amalgam separators, et cetera. So hard to give you a specific number sitting here in the early part of May when practices are closed, but for example in Germany, we're seeing quite a bit of interest in our equipment. And by the way our implant business in Germany is not doing terribly. So I don't know if these are early sort of exit polls, but it's -- I would say, I'm more encouraged today than I was two or three weeks ago, but this is a very volatile situation.

I appreciate that. Maybe I just follow-up one for Steve. Steve thanks for discussing the cash flow in the first quarter, but I think what a lot of us are trying to understand is the impact on the cash flow for example in April at the sort of lower revenue run rates. Like how should we think about the cash situation and the expenses relative to the $1.7 billion of liquidity that you referenced in the press release?

Sure, Glen. Let me just tag onto the first question to Stanley. I think it's clear that consumables, the new way of doing business with consumables should accelerate the overall market. People will now be using more PPE equipment and products than prior to COVID. People will use more cleaning agents and disinfectants and things like that, so when consumables does come back, it should come back in my opinion at a higher rate, because of the new use of these products. Equipment on the other hand what we learned in the recession of 2008 and 2009 is equipment does take a little bit longer to come back, because people can delay equipment purchases. With respect to cash flow, look, it's very fluid. We're not going to give cash flow guidance for Q2, but we do expect that cash flow will be negatively impacted versus Q1 for the quarter given the sales declines. Even with the mitigation of expenses and also reducing capital expenditures and things like that cash flow will be negatively impacted, but again, we feel like we've done the right things to preserve cash and mitigate the sales downturn. And again, we have really the ability to use our credit lines and our cash on hand to mitigate any cash flow impact, but again it's too early really to give specifics on that. I'm not giving any guidance on the P&L. I don't think it makes sense to give guidance on the cash flow other than to say, we feel like we're well prepared and it will be negative compared to Q1.

Okay. Thank you.

And our next question is going to come from the line of Steve Beuchaw, Wolfe Research.

Hi. Thanks for the time here and I'd echo the comments thanking you guys for everything you're doing to help everyone who's really in need today. First, I wanted to ask about PPE. I appreciate the comment about PPE supply ramping up to be hopefully at a better level later in May, but I wonder if you could take that and play that a little bit further out and say, how long does it take to get to the level of PPE that you need to supply your medical customers and dental customers at the level that they're really looking for? And how close do you think the first quarter growth rate in Medical is to being a reasonable barometer for growth in Medical if we had that level of supply?

So the second part of your question, I will ask Steven to respond to. The first part, product is growing in output. Output is growing in PPE product. Having said that, there are complexities with moving product around the world. Governments not one, but multiple governments are precluding exports; put restrictions in place; or put additional hurdles on paperwork, customs work, et cetera and getting our products. Production is coming up. So it's actually grown significantly a multiple of what it was before the COVID. And the issue is the actual logistics being impacted by as I noted restrictions, but also logistics. And planes out of China are much more expensive multiples of what they were a few -- six weeks ago and they're being used not only for PPE but for other products as well. At the same time, there will be expansion of product capacity in the United States on certain products. Having said that, that product is really heading to U.S. government, primarily I think for replenishment of stockpiles. We don't know for sure what they're going to do with the product, but also for use by specific states. So exactly how this is going to flow who is going to get the product. There is a certain amount of sympathy, I think within the U.S. government and in other parts of the world for the importance of alternate care sites, whether it's dentists' offices that are really playing a valiant job in keeping patients out of the ER or for that matter physician offices and alternate care sites in general. So all of this has to play out, and this will all impact I think the second and third and maybe the fourth quarter as well in terms of allocation availability. I think as we go into next year there is going to be much more capacity and availability. Having said that please remember one thing that restaurants and other places where the public is now -- are now going to be visiting once the social distancing is removed will be huge buyers of gloves --of masks and of course of gloves too. So these will not necessarily be of the type of gloves that we use and masks particularly that we use. Having said that, they are going to be competing for supply of product. So all of these factors need to go into this calculation. Bottom line, from a pure Henry Schein sales point of view, there is likely to be more opportunity as there was in the 1980s to expand the category of PPE. Having said that, there will be competition for products, especially products of the standards we are looking for. And we want to also make sure that these companies are diligently complying with the regulations that are enforced today and are likely to get more complicated in the future. Restrictions will be narrowed and there'll be more definition provided by regulatory authorities. So this is -- I've said a lot there, but these are all the various puts and takes that we're dealing with. Overall, from a pure sales point of view, I do expect the category to continue to grow.

Yes. And on the second part of your question with respect to Medical sales, the estimate of 20% to 30% down year-over-year in Medical sales is net. It does include some benefit for PPE products. Although, we're being conservative on that benefit since availability of products -- it's not certain on the timing of the availability, but it's all in that 20% to 30%.

Okay. Thank you very much for that clarification. And then just one quick follow-up. I wonder if you could tell us a little bit about your ambitions as it relates to testing. So you're very well positioned logistically to be a supplier into offices of all sorts with rapid tests. I'm going to set aside serological testing here for a moment and focus really on actual ID tests. I think of China as a provider of rapid antigen test for flu for example, but I wonder, how are you thinking about expanding your line-up of product to service the market as there will be increasing demands for rapid -- not just rapid antigen testing but for rapid molecular testing in office settings both dental and medical? Thanks so much.

Yes, also a good question. I noted in my call earlier on that Henry Schein has been focused on laboratory testing, both traditional and I'm talking about in-office testing; as well as places like urgi centers, community-type health care clinics. We've been involved in that for years both the equipment the reagents and the disposable snap test. I think we're one of the biggest provider of these products in the world. We are continuing to focus on that. We have a great and knowledgeable group of people that focus on identifying products and then of course selling them. We have people both in the field and on the telephone, and of course are capable of putting up very good marketing material. So we examine all these sources that have presented to us. Some of our traditional sources, manufacturers of equipment right now are in back order with us, because a lot of the product that they are producing a lot of equipment and the fluids the reagents and the like are going to the government. And by the way, this business is primarily a U.S. business for us, a small part in Europe but primarily going to the government or directed by the government to go to certain sites, and primarily acute care sites. So, we have not had a lot of availability, but we expect that availability to increase. And we offer, as I said, a wide variety of these products and will add to the offering as time goes by.

Thank you. We have time for one final question. That question will come from the line of Elizabeth Anderson, Evercore.

Hi. Good morning, guys. Thanks for taking the question. In terms of ordering patterns, when you've seen either practices as they were sort of shutting down or as they're reopening. Are you seeing anything in terms of fluctuations in terms of maybe some pre-buying of PPE before? Are they sort of ordering like slowly as they come back on? Are they placing big orders? Could you -- is there any kind of commentary you can reflect on that? And then could you also remind us what percent of sales PPE is for the Dental and Medical business either pre-COVID or post COVID depending on how you have it?

Yes. The demand has, of course, been significant from about the middle of March, in United States, for example, earlier in other parts of the world. But we've been on an allocation method basically around the number of practitioners in a practice, and really based on the size of the practice. It's not a precise science, but the allocation has been in place. So it's really not a matter of any particular practice spiking, because their allocation has been based on historical purchases. And so, I would not say there has been a loading of these practices not at Henry Schein. And I think there have been other parts of the market where people have bought significant amounts, but that's not been the case with us. It's been an allocation and rationing system that we've had in place since COVID picked up or since the spread of the COVID virus. So I wouldn't say there's been a particular loading in anticipation of practices returning either. We are selling at a continuous pace all along. Of course, the volume is much greater than it was last year, but not a huge amount more, a lot more but not a huge amount more. We expect that Dental volume will go up as we have availability, which we discussed already and as dental practices start opening up in the various states over the next month or so. Steven, I don't think we provide information on any product category other than consumables and equipment as broad categories, right?

Yes, that's right. And PPE, it's also difficult to answer because the definition of what is in PPE is also different something like an examination glove. We've always sold a lot of examination gloves. It's always been one of our top SKUs, but things like gallons we don't sell as much because we're not in the acute care setting. But we do sell some on the Medical side. So again definitionally what's in PPE everyone has a slightly different definition...

Okay. That's helpful. And then have you had a change in sort of practitioners? I know you've said about the $10 million of bad debt expense reserve but have you seen a change in people asking for payment terms or discounting or anything that we should take into consideration?

Steven?

Yes people are paying slower. It depends on the practice. Some are paying on time. We have certain third-party financing options for people to get practice loans to be able to pay off their debt whether it's to us or other people. Customers are also eligible for the government PPP program which should help but we are seeing generally slower payments from customers.

Okay. That's helpful. Thanks very much.

So I think we're -- we've gone over a little bit this time because we figured that there will be a lot more questions. And so thank you for listening to the call. I'd like to leave you with the following thought and that is that this is obviously a trying moment for business in general and particularly for health care providers. You can see it in the press, in the media, social media. We remain committed to continuing to provide outstanding customer service, driving operational efficiencies in our business. We have to provide better service unusual service shall we say because practices are operating differently to the way they were operating in the past, but we have to be mindful of our need to preserve cash so operating more efficiently than ever before. We have to conserve cash. This is a replay from this point of view of 2008 where I think -- for those investors that were around at the time I think we did a good job at preserving cash so when we got out of that crisis we were well positioned. We have maintained as Steven mentioned a strong balance sheet. We have ready access to capital for a while long term. And we believe we are positioned to weather this economic uncertainty and yes there will be opportunities that emerge from COVID-19 for Henry Schein to service the health care needs of the public through our practitioners. Our resiliency has been tested many times in the past and I am confident that the team will rise to the occasion again. We have an outstanding management team an extremely committed team in general 19,000 Team Schein Members. I believe our customers trust us. An extremely committed and I must tell you an experienced Board that have experienced all sorts of challenges along the way and have a good feel for health care in general. And so, as we end this call, I remain extremely confident in the future of Henry Schein, although we're going to have to go through some stormy waters, but the ship I believe is a solid ship manned by a great crew. So thank you for your participation. And to those investors that are with us thank you for your confidence. Thank you, operator.

Thank you. That will conclude today's Henry Schein Conference Call. We appreciate your participation and you may now disconnect.