Henry Schein, Inc. (HSIC) Q2 2020 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Henry Schein Second Quarter 2020 Conference Call. [Operator Instructions]. I would now like to introduce your host for today's call, Carolynne Borders, Henry Schein's Vice President of Investor Relations. Please go ahead, Carolynne.

Thank you, Regina, and my thanks to each of you for joining us to discuss Henry Schein's results for the second quarter of 2020. With me on the call today are Stanley Bergman, Chairman of the Board and Chief Executive Officer at 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. Reconciliations between GAAP and non-GAAP measures 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, August 4, 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. [Operator Instructions]. With that said, I would like to turn the call over to Stanley Bergman.

Thank you very much, Carolynne. Good morning, everyone, and thank you for joining us. Over the past few months, we have witnessed dental and medical practices continue to reopen worldwide. While patient volumes are still below pre-COVID-19 levels, the recovery in the dental and medical end markets is progressing at a far more rapid pace than we had originally anticipated. We are, of course, closely monitoring these trends, in particular, because a number of U.S. states and a certain number of international geographies are experiencing an uptick in diagnosed COVID-19 cases. While this is leading to stricter social distancing requirements set in certain places, we have not, at this point, seen dental and medical practices closing in any meaningful way despite the recent rise in cases. Of course, we will continue to monitor any potential impact to health care services in those regions, and we are prepared to implement additional cost-saving measures as warranted. But at this point, practices seem to be opening. Those that have opened seem to be staying opened, and there's a gradual increase in more practices opening. One of the critical issues we've faced when COVID-19 emerged was demand for personal protective equipment, that's the PPE. We are pleased to report that we made solid strides on procuring PPE during the past 3 months, including expansion of sourcing in critical product categories, the addition of high-quality substitute products that are regulatory compliant and adapting our transportation model to shorten lead times in product delivery from factories. As a result, we have significantly expanded our PPE supply chain capabilities and availability of product. Our team around the globe has worked diligently to position Henry Schein through this crisis so that we emerge as a stronger company. We are, of course, still in the midst of the pandemic. However, we believe we are successfully navigating the daily rapid changing challenges we are well positioned -- and are well positioned, we believe, for the future. As we look to the future, together with the entire Henry Schein Board of Directors, I have the utmost confidence in Henry Schein's business strategy, in our leadership team and indeed, all of Team Schein. Once again, I offer my sincere thanks to Team Schein across the globe for the team's unwavering commitment to our customers, extraordinary work effort during this time and for the sacrifices the team has made for the benefit of Henry Schein's long-term business, which we believe is on a solid sound footing and has -- as a company, we've done a very, very good job, we believe, in satisfying our customers' needs. At this time, I'll hand the call over to Steven to discuss our financial performance, and then I'll provide some additional commentary on our view of current business conditions. Steven?

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 Q2 2020 and Q2 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 Q2 that represents sales to Covetrus under the transitional services agreement. As Stanley mentioned, our 2020 second quarter results were impacted by COVID-19 but to a much lesser extent than we had originally expected. As we mentioned on our last earnings call, in response to COVID-19 pandemic, we have implemented a broad-based cost reduction initiative, including a payroll cost reduction plan centered around furloughs, reduced work hours, voluntary unpaid time off, a suspension of our 401(k) match and certain job reductions. Over the course of the last few months, we have reevaluated the need for each of these initiatives, and I'm pleased to say that given the recovery we are experiencing in certain markets, our TSMs have begun to return from furlough and reduced hours, particularly TSMs and customer-facing roles. We expect the remaining furloughed TSMs to return by the beginning of the fourth quarter of 2020. We will continue to closely monitor the health of our business and remain prepared to take additional cost-saving measures if necessary. Now turning to our financial results. Our net sales for the quarter ended June 27, 2020, were $1.7 billion, reflecting a decline of 31.2% compared with the second quarter of 2019, with internally generated sales declining in local currencies at 30.5%. You could see the dental sales performance is contained, and all of the details of our sales performance are contained in exhibit A in our earnings press release, which was issued today. On a GAAP basis, operating margin for the second quarter of 2020 was negative 0.4%, representing a decrease of 707 basis points compared with the second quarter of 2019. On a non-GAAP basis, our operating margin was 0.5% and contracted by 662 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. The margin contraction in the quarter was primarily due to a reduction of global dental sales and related gross profit as well as other factors related to COVID-19, including certain inventory charges associated with PPE. Turning to taxes. Our reported GAAP effective tax rate for the second quarter of 2020 was 5.9%. This compares with 23.6% GAAP effective tax rate for the second quarter of 2019. Our GAAP effective tax rate was a bit distorted given the pretax loss in the second quarter of 2020. Moving on. GAAP net loss from continuing operations attributable to Henry Schein for the second quarter of 2020 was $11.4 million or negative $0.08 per basic share, and this compares with the prior year GAAP net income from continuing operations of $116.8 million or $0.78 per share. Non-GAAP net income from continuing operations for the second quarter of 2020 was slightly positive at $0.6 million or rounding to $0.00 per basic share, and this compares with the non-GAAP net income from continuing operations of $125.7 million or $0.84 per share for the second quarter of '19. On a continuing operations basis, amortization from acquired intangible assets for Q2 2020 was $24.9 million pretax or $0.13 per diluted share and that compares to $28.0 million pretax or $0.14 per diluted share for the same period last year. For the first half of 2020, our amortization from acquired intangible assets was $53.7 million pretax or $0.28 per diluted share, and that compares with $49.8 million pretax or $0.25 per diluted share in the same period last year. In Q2 of 2020, foreign currency exchange positively impacted our diluted EPS by approximately $0.01 per share. Let me now provide some details of our sales results for the second quarter. In general, dental sales performed better than anticipated as practices reopened sooner than we expected during the quarter. Our dental sales of $941.3 million declined 41.2% compared with the prior year, with a decline in internal sales in local currencies of 40.1%. North American internal sales in local currencies declined 46.9% and included a decline of 47.5% in sales of dental consumable merchandise and a decline of 44.9% in dental equipment. Our international dental internal sales in local currency declined 29.5% and included a 29.2% decline for dental consumable merchandise sales and a 30.5% decline in dental equipment. We experienced an increase in sales as the quarter progressed in line with more practices reopening and increased patient traffic. In addition, global dental sales in the second quarter benefited from PPE sales, which increased by more than 30% compared to the prior year. If we look at our dental specialty products in Q2, internal sales of our global dental specialty products decreased 39% in local currencies, and we believe this higher-margin product category has solid growth potential over the long term. Turning to medical sales. Our medical sales were $617.8 million, a decrease of 11.4% compared to the same period last year. There was no material impact from foreign currency exchange on our global medical sales, and there was no acquisition growth during the quarter. The 11.4% decline included the 12.1% decline in North America with internationally internally generated sales in local currencies at 13.3%. Our medical sales also resulted in fairly resistant sales due to strong demand for PPE products, which grew approximately 140% over Q2 of last year. Technology and value-added services sales were $105.2 million in the second quarter, a decline of 15.9%, which reflects a decline in internally generated sales in local currencies of 17.0%. In North America, the tech and value-added services internal sales declined by 15.1% in local currencies. And internationally, the technology internal sales declined by 29.8% in local currencies during the quarter. We generally saw improvements in our transactional software revenue throughout the quarter as more patients started to visit practices worldwide. As we discussed on the Q1 earnings call in early May, 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 and due to certain restrictions related to financial covenants. As of today, the company has $201.2 million authorized for future repurchases of common stock. Currently, we have access to significant liquidity, providing flexibility and financial stabilization in this challenging environment. Our operating cash flow from continuing operations for the second quarter was negative $91.6 million, and that compares to positive $165.5 million for the second quarter of last year. The year-over-year decline was primarily due to lower net income and higher working capital requirements from inventory purchases this quarter. As part of our previously disclosed restructuring initiative, we recorded a pretax charge in Q2 2020 of $15.9 million or $0.08 per diluted share. This restructuring charge primarily includes severance pay and facility closing costs and reflects opportunities to reduce expenses and drive operating efficiencies. We expect to continue our restructuring initiatives through the end of this year. I'll conclude my remarks on the topic of financial guidance. Again, due to the continued uncertainty surrounding COVID-19 pandemic and its impact to our business operations, we will not be providing 2020 financial guidance at this time. So with that, I will turn the call back over to Stanley.

Thank you, Steven. Let me review our business performance from the second quarter and recent weeks, and let me start with Dental. Substantially all of the dental markets that we serve showed -- that we serve showed notable sales improvements during the second half of the quarter with the exception of the U.K., which is progressing more slowly due to the timing of reopening. China recovered from the beginning of April and Germany and Austria were less impacted by lockdowns. A number of other international geographies began to improve towards the middle of the quarter with the Netherlands, France, Italy, New Zealand and Australia recovering first, followed by Spain and Brazil. And then, of course, the U.S. and at the end of that, Canada, which is lagging the U.S. by about a month or so. We were pleased that our second quarter sales for both dental consumable merchandise and equipment fared much better than our expectations at the time of our first quarter earnings call as practices reopen and patients returned to the dentists for clinical care. Steven commented on our year-over-year PPE growth for Henry Schein. To add some color to this discussion on the importance of PPE, prior to the onset of COVID-19, our PPE sales as a percentage of global dental sales were in the mid-single digits. That increased to approximately 11% of our total dental sales by the end of the second quarter. So it went up quite a bit, but not hugely material in the context of total sales. Dental equipment sales in the second quarter also declined less than we originally anticipated as a number of practices move forward with capital equipment purchases for both traditional and high-technology solutions. As a result, in North America, traditional equipment sales declined by approximately 40%, while high-tech equipment sales experienced approximately 54% decrease. Within our high-tech category, laser sales had a healthy increase in the second quarter, although off a relatively small base. And CAD/CAM equipment sales, which includes digital impression, full chairside and related laboratory sales declined by approximately 60% in North America in the second quarter. 2D and 3D imaging sales declined 53% year-over-year. Internationally, traditional equipment sales declined by approximately 28%, and high-tech equipment sales experienced an approximate 36% decrease in local currencies. International CAD/CAM equipment sales also declined approximately 36%. It is impossible to predict our growth trend for PPE going forward, but we expect that PPE will continue to constitute a meaningful portion of our dental sales going forward as safety protocols remain a necessity for safely seeing patients in the dental practice. A new product category that we believe will gain traction going forward is air management equipment, including extraoral suction devices and air purification systems, which are -- which we are distributing today. As more emphasis is placed on infection control and the safety of ambient air, we expect this to become an increasingly important product category, although with minimal impact in the second quarter. In line with the survey data published by the American Dental Association, our experience has been that most U.S. dental practices have reopened, although not at full capacity. The latest ADA data suggests that in the U.S., patient volumes have improved significantly since late May. However, patient capacity continues to be constrained as the amount of time it takes to implement required safety procedures impacts the number of patients that can be seen in a given day. That said, we are seeing that more dentists and hygienists are working longer hours to compensate for this. We would expect efficiencies and practices getting used to the additional PPE and being used and additional safety precautions. As they get used to that, we think productivity is likely to increase. Overall, the data we see through our commercial insurance, eClaims processing in the U.S. correlates with the most recently published survey data by the ADA, which shows that dental practices in the U.S. in July have recovered approximately 70% -- or to 70% of pre-COVID-19 patient volume. As we look closer into our eClaims data, we are seeing patients return for regular oral care procedures. This is important, including hygiene visits, as opposed to mainly visiting a dentist for emergency reasons such as pain management. And so the underlying business in the dental practice seems to be on solid footing. In the U.S., coming off a strong June sequential comparison, we saw July versus June eClaims data for emergency procedures increased by approximately 30%, but here's what's important. While other procedures grew by approximately 35%, for July, global dental sales increased in the mid-single-digit percentage range year-over-year, which stands in stark contrast to the 70% decline we saw in April. In both North America and international, dental markets growth was primarily driven by strong consumable merchandise sales. Dental equipment sales were only slightly -- were down -- only down slightly in North America and internationally in July. So we've seen a pretty stable environment emerging on the dental equipment side as well. Looking at our dental specialty businesses, which is comprised of implant, endodontic and orthodontic sales, much like the trend with the general dental practices, patients have been returning for specialist procedures, both in the U.S. and internationally. This began in May and continued in June and significantly in July. We are particularly pleased with our implant sales performance in the DACH region, specifically Germany, where internal sales in local currencies in the second quarter declined only slightly versus the prior year. Henry Schein spent the last quarter working closely with our customers to build a road map to navigate through practice disruption, including assistance with business continuity planning and practice recovery for both practices and large group customers as well as third-party financing programs. These programs include a host of Henry Schein One software solutions that enable patient engagement related to bookings, procedures and practice safety as well as assistance, developing and operating virtual waiting rooms. These adoption -- the adoption of these changes in workflow driven by Henry Schein One have been well received and yes, in the beginning, are a little bit time-consuming, resulting in inefficiencies in the practice but of course, resulting in increased sepsis control. And we think that over time, the practices, again, will become much more efficient. We are committed to understanding our customers' challenges, obviously, and delivering programs that not only see our customers through these difficult times but also prepare practices for future growth. Our hands-on consultant approach is a key differentiator for our businesses and why our customers really rely on us. I think the COVID period showed our customers why our hands-on consultative approach really is important to the practice. Now let's review the medical business. And here, I would like to remind investors, we focus on office-based practitioners; we focus on surgicenters, particularly the smaller ones; and on urgicenters; customers that are in renal dialysis; cancer center field; our community health centers, but we do not focus on long-term care nor the acute care space. And in our second quarter, medical sales were fairly resilient due to the strong demand for PPE. A portion of U.S. physician offices remained open throughout the second quarter, although with reduced patient volume. As such, sales of consumable merchandise and PPE, medical -- the PPE in the medical market helped offset the decline we experienced in the dental market. Prior to the onset of COVID-19, PPE sales as a percentage of our medical sales were in the high single digits. By the end of the second quarter, that increased to more than 12%. Important, but not significantly important because our general business in the medical field did grow as the quarter progressed and, of course, into July. As mentioned earlier, with regard to dental PPE, we cannot predict long-term growth of this product category among medical customers. However, we believe PPE will continue to be a meaningful portion of medical sales as practices seek to create a safe environment for both patients and yes, the staff. We have consistently worked to make available a variety of COVID points -- COVID-19 points of care diagnostic tests in the U.S. specifically focusing on rapid tests as well as testing solutions in general. We believe our long-term relationship with -- relationships with world-class diagnostic companies and the deep breadth of our distribution know-how, network in the medical arena for customers using testing diagnostics in their office positions us well to continue to deliver these important testing products to the market over time. Throughout these challenging times, we have worked closely with our customers, including physicians, large group enterprises, alternate care sites in general, urgicenter dialysis centers, yes, EMS, schools, community health centers and government organizations. This included assistance with the procurement of PPE and other infection control solutions and safely engaging with patients and in reopening practices in line with the recommended guidelines published by the Centers for Medicare and Medicaid Services. As we look to the future, we will increasingly leverage our telemedicine solutions such as Medpod and VisualDx for diagnosing and treating patients virtually. We plan to continue to invest in this health platform, which has a potential to increase access to acute care, improve the quality of care, reduce costs, enhance patient engagement and, of course, drive efficiency in the health care practitioner's office. In July, our medical experience -- sales experienced a solid double-digit year-over-year increase, a significant improvement to the nearly 30% year-over-year sales decline we experienced in April. We experienced positive medical sales growth in July as PPE sales continue to be strong, but the strength was felt and experienced actually throughout the product selection that we offer in the medical business. So now let's move on to technology and value-added services. This is primarily Henry Schein One, but also includes our financial services business and our brokerage business, practice sales, transitional services. Technology and value-added services sales experienced a single-digit percentage decline year-over-year in July, which has also significantly proven from the approximately 25% year-over-year decline in April. The decline in the second quarter was mainly due to lower than historical patient flow that impacted transactional revenue. And of course, as I mentioned, financial services revenue was lower year-over-year as practice transitions and equipment leasing were impacted. Henry Schein One software sales began to improve as we progressed through the second quarter, in line with the resumption of dental practice operations. In particular, we have seen improvements in the monthly transactional software revenue trends for services such as eClaims as more patient visits occur in the U.S. but also in other countries, but specifically Europe, Australia and New Zealand, where Henry Schein One is active. And yes, credit card processing. With the launch of our electronic statement solution with online payments acceptance, this also has been well received and contributed to sales. With regards to practice management systems sales in the second quarter, we did have success with signing new customers for both our Ascend, that's our leading cloud-based solutions; and our Dentrix Enterprise platform as large-scale customers sought solutions to help manage their operation centrally. Having a single patient record helps large multi-site dental organizations focus their team on value-added activities instead of having to spread the responsibility out of each location. Due to the remote capabilities of these products, dental customers were able to use our products to keep many of their team members safely working from home. Last, my -- to many dental service organizations, DSO, as known in the dental space, we're looking to improve their technology while most of their locations were seeing fewer patients. In addition, the ability for dentists to communicate and engage with patients through our recurring revenue platforms was critical during this reduced period of dental operations. Providing information on practice reopening plans and safety measures, virtual waiting room capabilities, communication templates, patient forms and contactless patient processes all have been critical solutions for our customers in response to COVID-19. Dental practices have relied on Henry Schein for these patient engagements and demand creation software solutions as they navigate office closures, staff furloughs and resumption of procedure bookings. Through our COVID-19 education center, we moved quickly to develop content and programs to help customers navigate through this crisis. This included symposiums, webinars and guidance to help customers secure financial relief, communicate with patients, manage disruptions to practice operations and use downtime to develop staff skills and stage practice operations to bounce back from COVID-19 in the closure period. I think these programs were quite successful as demonstrated by the increase in demand for products in July. I would also note that in July, Henry Schein One announced the acquisition of a cloud-based U.K. dental software provider, Dentally, which expands our international presence and enhances our practice management software solution portfolio. This addition will further Henry Schein One's goal of providing integrated management systems that help dentists and their teams to constantly improve each stage of the patient's experience. In light of evolving practice needs resulting from COVID-19, we'll -- we believe our ongoing investment in software solutions positions us very well to meet our customers' needs in the challenging clinical environment that our customers are experiencing and going through and as the industry emerges from the pandemic. So in conclusion, we looked across all of our business groups, we're seeing accelerated sales from lows early in the second quarter, gradually increasing. It's almost like a V. We went down rapidly in April and started coming up in May and June and now quite robustly in July. We remain cautiously optimistic about immediate future. Obviously, if the trends continue, we're going to be fine. We actually expect to have a good second half. But of course, the spread of the virus could impact that, although we doubt it will go back to closures the way we saw early on in the pandemic, as I think both the medical and dental professionals -- professions have grown accustomed to working in this environment and have put in very good procedures to deal with patients' visits. Of course, we're closely monitoring cases and potential impact on customers' activity and with an eye to focusing on cash management as I expect our investors would want us to do. So our enthusiasm for both our near and long-term business prospects remains unchanged. The team is in high spirits, having worked very, very hard. It's been a very stressful time for every single Team Schein member as it is for the public in general. But I think we gave our customers a good service capability during this period. Of course, there were times when the V went down and had emerged very rapidly and put stresses on our systems. We were, I believe, the telephone address for every single health care practitioner in our space seeking PPE, whether they were Schein customers or not. So tons and tons of telephone calls and e-exchanges, but we got through it and are experiencing a good July and beginning of August. So with that in mind, Steve and I would be very pleased to take any questions.

[Operator Instructions]. Our first question will come from the line of Steven Valiquette with Barclays.

I guess the sales decline in consumables versus equipment was pretty comparable in both North America and international. So I guess going forward, do you expect more of a dispersion maybe in the sales trends between the 2 categories where consumables could be more resilient and maybe equipment could lag a little bit if it's more economically sensitive? Or does that equipment lag maybe seem less likely now just given those current trends?

A very, very good question, obviously, and one that we deliberate on regularly. We feel that, of course, the consumables, to a large extent, are based on customer visits. We feel that there is strength in that market. Practices are buying product, of course, because they are seeing patients. PPE is important, but it's not a huge part of the total purchase of practitioners. It's a greater percent of the total purchases in the past, but it's not huge. And I think practices are seeing the importance of investing in the practice. I think practices want to show that they are using modern equipment, in particular, that they are investing in infection control-type equipment, including making sure that their chairs and the imaging equipment and the CAD/CAM is the latest with the best available infection control. So I think we're pretty optimistic on the dental side with consumables and equipment. But obviously, we -- there's no way to predict where this is heading. July was strong both ways, and each of the markets are slightly different. Remember that parts of Europe like Germany came back much sooner. China came back much sooner, so more normalized right now. But -- and there's this whole new area of infection control equipment. It won't be necessarily hugely material but will be additive. And I think we have great know-how and access to product in that area. So I think we remain optimistic on both sides, both on the consumable side, on the equipment side for dental. And likewise, on the medical side, given that there will be a greater demand for testing equipment and we have some good solid manufacturers that are providing us with product. Of course, in the early days, most of that product went to the government, but now it's being made available to the private sector and our channel's picking up a decent share of that availability and market share. So I think both on the consumables and equipment side in dental and medical, we remain optimistic, although you can't predict the future perfectly and all this is subject to our disclosures but very, very optimistic about the future of the business.

Your next question comes from the line of Steve Beuchaw with Wolfe Research.

I wanted to ask just two quick ones. One is, as it relates to PPE. So Stanley, you just made a mention of how there have been some challenges unique to this time as it relates to PPE and where the supply is being directed. I appreciate all the color on PPE demand growth and mix in the quarter. Can you give us a sense for if you had a full supply, all the supply you wanted of PPE, where the growth in that category might have been in the second quarter? And then -- and my second one is on vaccines. It would be helpful if you could just remind us how it is you're involved in vaccine distribution, what your role is there? And to what extent as a part of the White House's COVID-19 Supply Chain Task Force you have visibility into what your role will be in distributing COVID-19 vaccine when they do become available?

Those are two, of course, very important questions. Let me deal with the second one, which is a much shorter answer and concise answer. Well, it's still early. I think we can expect to participate in the distribution of COVID-19 vaccines once vaccinations are approved by the FDA. And I'll remind everyone, we only are in the pharmaceutical distribution and vaccine injectable business in the United States in our medical business. Our medical business abroad is relatively small, but not on the pharmaceutical side. And of course, the product was made available by the FDA and available under provisions of the CDC, the Center for Disease Control and Prevention, under their guidelines. But we've had well-established history of participating in public-private partnerships that address complex health care safety issues. So together, corporations, government and other industries, others in industry, including NGOs, can work together to leverage the resources and infrastructure needs to get these products out. And we believe Henry Schein is well recognized as a major contributor in the area of public-private partnerships. So we remain hopeful that we will be able to continue to play a good role in this area. We work very well and I think have been a very good member of the task force, the FEMA task force, which I might add, in my view, has done very, very good work in the last couple of months. And so I think our role will be recognized. Obviously, when these products become available through normal distribution channels, as one of the largest providers of vaccines to office-based practitioners, I would expect that we would have an important role there. But in the general overall distribution of vaccines and PPE and stockpiling, I would hope that our credibility and our history of working in public-private partnerships effectively working will be recognized. Now on availability of PPE. So the biggest challenge at the beginning of the crisis was that N95s and respiratory-type masks were not really used in the office-based practitioner environment. They were not used in dental offices and rarely in medical offices. The surgical flat mask was what was used. So we had a push for recognition within the supply chain, both to government and private sector, of the importance of dentists and alternate care site providers in preventing patients from actually ending up in the hospital and, therefore, should be given access to these products. We did have a challenge in April. And in the early part of May, we did have access to some of this product, and we're encouraged by the FEMA to move that product into the medical channel more than the dental channel. But we probably had more access to legitimate regulatory-approved product than most. And as the quarter progressed, we did have more access to these respiratory masks, the N95s and KN95 masks. And I think we played an important role in satisfying the needs. But at no time did we have completely adequate product to satisfy our customers' needs. A highly volatile market because regulatory authorities in the United States and abroad, really, were navigating in environments where U.S.-approved FDA product was in relative short supply or approved product in Europe was in relatively short supply. So emergency provisions were passed and the regulations were quite volatile. We navigated through this and all times, we believe, distributed product that was regulatory compliant, I cannot say that, that was the case amongst all of the providers of these products in our markets. Very volatile. We had access -- we did champion the needs of dentists and the alternate care physician sites, including EMT, during the process in the United States and abroad. But it was a challenging time. I think we learned a lot. Our suppliers are understanding the importance of providing product to our channel. I believe that governments are, in different parts of the world, are understanding the importance of dentists and of alternate care suppliers. So we are in a better place today, but we did not have enough product going into this, certainly not during the second quarter. Availability is much better today, not perfect. And we are working with governments and manufacturers around the world, including logistics providers, to make these products available rapidly. And I think we're in a decent place today.

Our next question will come from the line of Jon Block with Stifel.

Stanley, the first one I'm going to burn is on a clarification. Did you say global dental sales were up mid-single digits year-over-year in July? Or was that just a merchandise-specific number? I didn't get if that included equipment or not. And then, I guess, a follow-on to that same question would just be, either way, can you just talk to the separation in your July number of up mid-single digits versus -- ADA has sort of been stagnating at around 70% of pre-COVID levels. Is it purely your PPE exposure? Is it inventory rebuild at the practices? Is it your international exposure? What are some of the drivers causing your, call it, acceleration relative to that of the ADA numbers? And then I got a shorter follow-up.

Yes. Steven, maybe you should just address the specifics on dental sales increase in July, breaking it down between domestic or North America, as we call it, and international and also between consumables and equipment.

Sure. So the 11% that Stanley quoted in his prepared remarks -- sorry, not 11%, the mid-single-digit growth, sorry, my apologies, in July was for global dental sales. It included consumables and equipment. The consumables were stronger than the equipment, both domestically and internationally. But overall, a very strong number. I would though point out that you shouldn't take that as guidance for the quarter since we're not giving guidance. And as you know, there are times when sales are lumpy on the positive and on the negative side, but it is a good trend. And we do feel very optimistic that we're continuing to see an improvement in the market.

Okay. And Jon, just to clarify. In the U.S., the recovery has been quite strong in July. And again, this is no indication of the future, but U.S. merchandise sales are topping high single digits. And that -- and versus Canada, which is even higher. So it's a pretty strong July. So we want to indicate to our investors and to the market that consumable sales in July have been strong. Having said that, that's no indication of where the rest of the quarter will go, although the first few days of August seem to have been relatively strong. Your question on, I guess, why are people going to the dentist? Or why is the -- why the strong sales versus the 70% the ADA and us are talking about, I think generally, dentists are working longer hours. I think there is some pent-up demand. Look, the patients didn't go to dentists in the United States for almost 2.5, 3 months. So there is some of that. But I have to say that in parts of Europe, in particular, Germany, that has really been open throughout this period, it's not bad. It's not quite 100%, but it's topping that. Of course, you can't compare it to China, which has been open for almost the entire quarter. But in general, we are much better than we thought we'd be. And actually very, very excited about that because we thought that this V would be much, much worse. So I can't give you specifics other than we do correlate more or less with the ADA's view in the United States.

Okay. Fair enough. I gained a lot on that first question. I think the July one was really what I wanted to get after. And thanks for the color, so I'll follow-up more offline.

Your next question comes from the line of Glen Santangelo with Guggenheim.

Maybe just two quick follow-ups to questions that have been asked. With respect to Jon's question on the 70%, does it -- I think what we're all trying to figure out is does the July results kind of imply that there were some catch-up sales that may have been onetime in nature, and that's not really representative of what you're seeing on this run rate?

There must have been some -- yes, of course. There must be some catch-up. People were not visiting the dentist for 2.5 or so months in the U.S. so there must be some catch-up there. Having said that, I think the PPE was pretty strong in June, but it's pretty strong in July as well. So I think practitioners have bought a lot of PPE in June but continue to buy it in July. But yes, I would say, Jon, there must be some catch-up in there. The exact number is hard to tell. But we're selling both PPE products and traditional consumable products in decent quantities at the moment, and it's really hard to pinpoint it. But so far, it looks pretty good. I can't imagine the market is significantly growing, so 5-plus percent to 10% or so, 9% in dental consumables is quite high. So part of that has to be catch-up. It's really -- we're in the guessing world exactly to split between normal servicing of consumables for the practice and how much is a catch-up of backlog and -- how much is incremental PPE that is now going to be part of the day-to-day purchases of dentists.

Stanley, maybe if I can just ask a kind of a follow-up to that. With most of the dental offices open now, do you -- and speaking with your customers, do you have a sense that with the social distancing requirements, like, what full capacity may look like? Is that 70% representative of full capacity? Or you think it could be like 80% or 90% given the constraints that they're working with? And I appreciate that they're working longer hours as well. But I think what we're trying to assess is that in this sort of pre-vaccine environment that we're in, like, what is really sort of full capacity for dentists today?

Yes. Again, that's a question we spend a lot of time trying to figure out how to get perfectly right. But yes, dentists are far less efficient today because they're learning how to work through this environment. I believe efficiency will increase. I believe the dental hygiene part will increase also significantly. Hygiene has not been -- has not bounced back as fast as the rest of dentistry. And I think some dentists are doing a little bit of hygiene work because the patients, I think, at this stage are saying, "I'm here for a drill or a fill. Please take care of my hygiene. I know you. I'd rather work with you." But I believe that the hygiene part will come back also. And that will move capacity -- it would expand capacity with dentists and move procedures to the hygienist. So overall, I think we're going to increase capacity. How much, it's hard to tell. And whether we had an excess of capacity in the U.S. or not is debatable. There are some that say we were close to capacity, and there are some that say there was excess capacity. Certainly, there's excess capacity in parts of the country. But the efficiency will increase here. And I think it's shown that in parts of the world like Germany, the capacity is not significantly down. So with a few months of extra experience, I think dentists will become more efficient. Again, this is not based on any empirical study. It's a gut of what we're hearing from our customers through the chatters from our salespeople. But I think we'll increase capacity quite a bit in the months ahead.

Our next question will come from the line of Elizabeth Anderson with Evercore.

You commented on this a little bit, but I just wanted to better understand some of the dental equipment trends. So were you saying in the 2Q equipment demand and said that was sort of pre-COVID buying that sort of got -- or pre-COVID orders that sort of got fulfilled in the second quarter? Are you saying that people were maybe taking the time when their practices were closed to sort of, as you said, reequip with more state-of-the-art equipment or -- and then how people -- are more people -- do you have any visibility into how people are financing that given sort of the constraints on the cash flow that a lot of practices saw in the quarter?

Yes. Everything you said is in the mix how to get the exact numbers, the weighting. But I think there were some orders that were placed, of course, in the first quarter that we filled in the second. But I will also say that in April, we did not install a lot of equipment for 2 reasons. One -- in April and the first part of May for 2 reasons. One is customers asked us to hold back because they don't know where the cash flow is coming from. And at the same time, we were limiting the number of our technicians in the field. At the same time, I think government stimulation dollars, both in the United States and in other parts of the world, did help. But I think towards the end of the second quarter perhaps, June-ish, perhaps a week or two of May, dentists started realizing that they wanted to invest. They had time to look at the equipment. A lot of this equipment can now be examined and understood digitally. They had time to do that. And I think that resulted in some buying all towards making the practice more efficient, more infection control-driven, so it's all of the above. Hard to tell, but CAD/CAM was down quite a bit in the quarter, in the second quarter. And I think that is moving up now. And fewer visits to the dentists, more efficient. I think it's also something dentists want to show their patients. So digitally, a mold crown is something of more greater interest, I think, to the practitioner today. All of this is adding up and leading towards, at least at this time, solid demand for equipment.

Okay. That's very helpful. And then just -- I know you're not formally giving guidance at this point. As we think about the continued ramp back up, there have obviously been a lot of questions in July. But if we think about -- if some of those were sort of hygiene patients, as you stated, that are started to come back in the third quarter, we should perhaps think that those people wouldn't, again, come for hygiene appointments until maybe like 1Q. So not to sort of model like an exactly linear demand coming back because you might see sort of like a dip in the fourth quarter from that perspective? Or is that sort of too soon to say?

Steven?

Yes. I think, again, it's too soon to say. I think the tone that we're trying to say is, A, things are much better than we thought they would be 3 months ago; B, we're still seeing a progression and improvement in dental and medical practices; and C, right now, in the states in the U.S. that are showing an increased infection rate for COVID, we're not seeing any significant falloff in patient demand. But to really be more specific than that now, Elizabeth, I don't think really makes sense.

We have time for one last question coming from the line of Jeff Johnson with Robert W. Baird.

I think a lot of focus here, we're all trying to figure out the sustainability of the July number. And I know and appreciate you don't want to give guidance. But Stanley, as I think about some of the comments you've made, the U.K. is lagging in recovery. We know some financing promotions and some CAD/CAM trade-in promotions just have started up in the last couple of weeks through you and some of your manufacturing partners. And I think of some of these catalysts that it feels like we have to respect the backlog issue and think about how much that helping in July, but there's also some further improvements on to come here. So we'd just like to kind of hear your thoughts on the puts and takes of how we take that July number and think about the next 3 to 6 months or so?

Yes. Thank you, Jeff. The same question, of course, we're trying to answer. And the market feels relatively strong compared to certainly where we thought it was heading. And even the last few weeks, it feels pretty good. Beyond that, I'm not sure what else we could say. Maybe, Steven, you can turn that thought into a more numerical...

Yes. Again, we don't really want to provide that level of specifics in the second half. We quoted the July number not as a trend that we expect to continue. I don't think we expect consumables to be up mid to high single digits in North America right now, but it's a positive trend. And again, it's really -- there's too much uncertainty into the market, in the market really, to give more specifics, Jeff. So sorry about that.

No, understood. And then just final question, I guess, just -- and it's a blanket statement, and I haven't gone back and looked at my models, so maybe it's a dangerous statement to make. But no real acquisition benefit this quarter. It's probably one of the few quarters in a number of years we haven't seen a decent-sized benefit. You guys have been obviously good acquirers of business over many years. So just what's your outlook now that maybe the tenor of business is improving, the balance sheet is still strong? I would assume cash flow has been coming back. How should we think about your M&A plans over the next year or 2?

Yes. Jeff, whether there's actual contribution to earnings or dilution as a result of acquisitions this quarter, I'll leave it up to Steven to respond to and to confirm either way. We're slowly opening up the M&A pipeline and reactivating a number of deals that we were pretty close to before the COVID. These are all strategic, I think, and we're hopeful that there will be accretion coming. No guarantees in the not-too-distant future. Steven, I don't know if you want to comment any further.

Yes. So again, as Stanley said, we probably won't do any really large cash acquisitions in the very short term. Again, we still want to be cautious. But we are looking at doing some activity that was put on pause. There's still a lot of work to do to see what the impact was on those companies that we're targeting. But we would hope to do something before the end of the year, possibly. And typically, our acquisitions, it takes us until we integrate, which is generally 6 to 12 months before we start getting any GAAP-based accretion.

So thank you, everybody. Thank you, Steven. Thank you, everybody, for your interest. I think you can tell from our prepared remarks and the way we've responded to the questions that we feel a deep sigh of relief that our expectations turned out better than we thought. The V did not go down as far, and the bottom of the V did not go down as far and the coming up was much more rapid. Of course, we're not through the virus yet. But I think practitioners on the dental side are much better equipped to handle these challenges. From our point of view, more PPE available, high-quality and regulatory-approved. And there is certain infection control equipment that we are making available. That should also allow for the public to be much more comfortable going to the dentist. Our medical position in the business has been well positioned also before COVID and especially now during the COVID period. And so we remain quite comfortable with our short-term plans and midterm plans and quite optimistic about the future of the company as we go back to implementing our long-term strategies. So thank you for your interest, and we look forward to reporting back to you in 3 months. Thank you very much.

Ladies and gentlemen, that will conclude today's call. Thank you all for joining, and you may now disconnect.