Henry Schein, Inc. (HSIC) Q3 2020 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Henry Schein Third 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 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 third 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 those 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 as well. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, November 02, 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 listeners as possible to ask a question within the one hour that we have allotted for this call. And with that said, I would like to turn the call over to Stanley Bergman.

Good morning everyone, thank you Carolynne, and thank you for calling in to today's call. Needless to say 2020 has been an extraordinarily challenging and unpredictable year for our team, customers and of course, suppliers. I commend the work and sacrifice of Team Schein to support business continuity for our customers. The pandemic caused disruption to supply chain and suppliers reacted to increased demand for PPE in particular and other products as well, and shortages of raw materials were experienced throughout the marketplace, both domestically and internationally for much of the -- for many of the products, shall we say, that we offer. As a result of the hard work and dedication of the team throughout the COVID-19 crisis, we were ready to assist our dental and medical customers deal with emergencies, while many of whom were subject to restrictions and faced severe challenges as they then returned to their offices to provide safe, quality clinical care. Clearly, the COVID-19 pandemic continues to present challenges and uncertainties for the global economy and our customers. We remain confident that we have a solid long-term strategy in place, supported by a strong balance sheet and significant access to liquidity. The strong rebound in sales that began late in the second quarter continued into the third quarter with growth over the prior year driven by sales of PPE and COVID-19 related products. This growth coupled with the various actions we took earlier in the year to reduce operating expenses, resulted in diluted EPS that grew 8.8% on a GAAP basis and 14.4% on a non-GAAP basis. As noted in our -- as noted our Q3 EPS growth also reflected the various actions we took earlier in the year to reduce operating expenses. Most of these temporary expense reduction initiatives have now ended. We remain committed to the well-being of Team Schein and our disciplined strategy that is focused on the success of our customers, helping practitioners efficiently manage practices, while providing quality care as the driver of long-term profitable growth for the company. Given the challenging macro environment that started with the onset of the pandemic early this year, we posed our longstanding program of strategic acquisitions. Yet as global business conditions have improved, we have resumed these activities. We now believe we have significant opportunities to allocate capital in support of our strategic plan with a goal of maintaining a strong balance sheet and continuing to increase operating cash flow over time. As we prepare to exit 2020, we will redefine our strategic plan with the goal of having -- well refine -- I mean, we will refine our strategic plan with the goal of having our strategic plan in place for 2022 through 2024. We will continue to focus on a number of key initiatives, which include increasing customer penetration organically and through acquisition, geographic expansion including into the developing world, advancing technology solutions centered on software including patient communications, leading the digitization of medical dental offices including interoperability to devices and prosthetics, and expanding our specialty segment and solutions offering all while advancing our dental business globally and our medical business globally as well. Our team, including telesales, customer service and our distribution centers remained open, fully operational during this period and have done an extraordinary job throughout this COVID-19 crisis of processing ongoing high volume of orders received and ensuring they ship quickly to our customers. Those certain SKUs of PPE are still relatively tight supply wise and are commanding somewhat of a higher price. We believe the general PPE market has stabilized and we will strive to maintain, as we had throughout the crisis, fair pricing for our customers. At this time I'll hand the call over to Steven to discuss our recent financial performance and then I'll provide some additional commentary on our view of the current business conditions in the markets we serve. So, 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 on an as reported GAAP basis and also on a non-GAAP basis. Our Q3 2020 and Q3 2019 non-GAAP results excludes 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 Q3 that represents sales to Covetrus under the Transitional Services Agreement. As we stated our intention on our last earnings call that essentially all remaining TSMs [indiscernible] have returned from furlough and from reduced work hours. We will continue to closely monitor the health of our business and remain prepared to take additional cost saving measures if necessary. Turning to our financial results, net sales for the quarter ended September 26, 2020 were $2.8 billion reflecting an increase of 13.2% compared to the prior year with internally generated sales growth of 13.0% in local currencies. PPE and COVID-19 related product sales accounted for nearly all of the growth in our sales this quarter. Although we expect PPE and COVID-19 related product sales to positively impact dental and medical consumable merchandise sales in the future, we also expect overall sales growth to moderate from the third quarter. Details of our sales performance are contained in Exhibit A of our earnings press release that was issued earlier today. On a GAAP basis our operating margin for the third quarter of 2020 was 6.6%, representing a decrease of 85 basis points compared to the prior year. On a non-GAAP basis, our operating margin of 6.9% contracted by 58 basis points on a year-over-year basis. A reconciliation of GAAP operating margins and non-GAAP operating margin can also be found in the supplemental information page on our Investor Relations website. Operating margin was primarily negatively impacted by significant inventory adjustments associated with PPE and COVID-19 related products. This was offset by reduced expenses driven by our previously mentioned cost reduction initiatives that were put in place earlier in the year in response to the COVID pandemic. These temporary cost reduction initiatives will not have a significant impact on Q4 results, as most of these measures such as furloughs, reduced work hours, hours, and salary reductions are no longer in place. Turning to taxes, our reported GAAP effective tax rate for the third quarter of 2020 was 16.4%. This compares with a 23.5% GAAP effective tax rate for the third quarter of 2019. On a non-GAAP basis, our effective tax rate was 16.7% and this compares with the prior year non-GAAP effective tax rate of 23.5%. The lower tax rate in the third quarter was favorably impacted by U.S. federal income tax settlement, which lowered income tax expense by approximately $15.6 million or $0.11 per diluted share. Excluding this impact the rate would have been in the 25% range on both a GAAP and a non-GAAP basis. Moving on GAAP net income from continuing operations attributable to Henry Schein for the third quarter of 2020 was $141.7 million or $0.99 per diluted share and this compares with prior year GAAP net income from continuing operations of $134.9 million or $0.91 per diluted share. The non-GAAP net income from continuing operations for the third quarter of 2020 was $147.0 million or $1.03 per diluted share and this compares with a non-GAAP net income from continuing operations of $134.3 million or $0.90 per diluted share for the quarter. On a continuing operation basis, amortization of acquired intangible assets for Q3 2020 was $25.2 million or $0.13 per diluted share, and that compares to $29.5 million pretax or $0.15 per diluted share in the same period last year. For the first nine months of the year, amortization from acquired intangible assets was $79 million or $0.41 per diluted share and that compares to $79.6 million pre-tax or $0.40 per diluted share for the same period last year. Foreign currency exchange did not have any material impact on our Q3 diluted EPS for the quarter. Let me now provide some details on our sales results for the quarter. Our dental sales of $1.6 billion grew 6.7% compared to the same period last year with internal sales growth of 6.5% in local currencies. Our North American internal dental sales growth in local currencies was 6.3% and that included growth of 8.1% in dental consumable merchandise and 0.2% growth in dental equipment. Internationally, our dental internal sales growth in local currencies was 6.9%, with growth of 11.1% in consumable dental merchandise and a 6.9% decline in equipment sales. Again this quarter North America and international dental merchandise growth was driven by strong PPE and COVID-19 related product sales. Last quarter we provided year-over-year PPE sales growth as well as PPE contribution to global dental sale. For Q3 we had expanded that category to include other COVID-19 related products as well. So this category now also includes COVID Test Solutions as well as heat thermometers. On that basis dental PPE and COVID-19 related product sales in Q3 increased by 130% compared to the prior year and for comparison purposes, year-over-year growth was nearly 35% in Q2. Turning to dental specialty products, in Q3 internal sales growth of global dental specialty products increased by 6.5% in local currencies, with very strong growth in North America at 14.8%. We believe this higher margin product category had solid growth potential over the long-term. Our medical sales of $1 billion grew 27.8% compared to the same period last year or 27.7% in local currencies. That 27.7% included a 27.8% growth in North America and internationally 20.7%. Our medical sales results were driven also by continued strong demand for PPE and COVID-19 related products, medical and COVID-19 related products sales increased by approximately 600% compared to the prior year. For comparison purposes, the year-over-year growth for Q2 was 200%. Turning now to our technology and value added services segment, total sales were $138.4 million in the third quarter, an increase of 0.7% compared to the prior year, which reflects a decline of internally generated sales in local currencies of 1.3%. North American technology and value added services internal sales declined by 0.2% in local currencies and internationally, technology and value added services declined by 9.5% in local currencies compared to the same period last year. The slight decline in technology and value added services sales in local currencies was impacted by lower than historical patient flow, which resulted in lower Henry Schein one transactional revenue. Additionally, our financial services revenue was negatively impacted by lower equipment sales volume. As we first discussed on our 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 on our business operations and also due to certain restrictions related to financial covenants. As of today Henry Schein has $201.2 million authorized for future repurchases of common stock. Currently, we also have access to significant liquidity providing flexibility and financial stability in this challenging environment. Our operating cash flow from continuing operations for the third quarter was $261.3 million and that compares to $226.4 million for the third quarter of the prior year. The year-over-year increase was primarily due to both higher net income and improvements in working capital. As part of our previously disclosed restructuring initiative, we recorded a pre-tax charge in Q3, 2020 of $7 million or $0.04 per diluted share. This restructuring charge primarily includes severance paid, facility closing costs, and reflects opportunities to reduce expenses, drive operating efficiencies, and mitigate stranded costs. We continue to expect our restructuring initiatives to continue through the end of the year. I 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 are not providing financial guidance at this time. As a reminder, most about temporary expense reduction initiatives have now ended and although we expect PPE and other COVID-19 related product sales to positively impact dental and medical consumable merchandise sales in the future, we also expect overall sales growth to moderate from the third quarter. So with that, I'd like to turn the call back over to Stanley.

Thank you, Steven. Let's review our business performance from the third quarter and recent weeks in October, starting with dental. In the third quarter, we saw growth in the U.S., Canada and throughout Europe in consumable merchandise with particular strength in France and Italy. The UK was the exception where the continued impact on COVID-19 has led to slower patient traffic. The end markets of China, Australia, New Zealand, and Brazil also recovered quite nicely from the pandemic -- the pre-pandemic -- actually from the pandemic levels returning home almost to actually to the pandemic -- to the pre-pandemic levels. During the third quarter our internal sales for consumable merchandise in local currencies in both North America and international markets were strong at the 8.1 and 11.1 growth respectively. The growth was driven by sales of PPE and COVID-19 related products. PPE and COVID related product sales as a percentage of global dental sales were in the mid-single-digits percentages range prior to COVID-19 which grew to approximately 11% in the second quarter and in the third quarter, this contribution in dental was approximately 10%. We continue to expect that PPE will constitute a meaningful portion of our dental sales going forward as safety protocols remain a necessity for both patients and dental offices and actually feel that dentists in general in the United States and abroad are handling infection control, sepsis control extremely well, and that there is an adequate amount of PPE available for these practitioners to continue to provide safe environments with a very good infection control in these offices. On our dental specialty businesses which is comprised of implants, endodontics, and orthodontics sales and during the third quarter in this segment we actually performed quite well, led by endodontic product sales. Also our implant sales were particularly strong in North America, where internal sales growth in local currencies increased by approximately 18%. Dental equipment sales in the third quarter continued to recover. In North America, both traditional and high technology equipment internal sales growth in local currencies was essentially flat. Within those categories, we experienced strong sales in laser products, albeit a small base and double-digit growth in CAD/CAM equipment versus the third quarter last year, whereas 2D and 3D imaging sales declined in the quarter. International equipment sales experienced a mid-single-digit percentage decline. Sales in Europe declined for both traditional and high technology during the -- equipment during the third quarter as some practices deferred investment decisions. As I mentioned last quarter, we are seeing heightened interest from customers in the air purification category where we have exclusive relationships specific with the Radic8 and the surgically clean air. And we also offer solutions from other manufacturing partners, including Vanaman [ph], Isolite, and Dry Shield. It's clear that practices are getting more efficient in seeing patients as they adjust to new protocols. The degree of increased efficiency is hard to determine at this time, but clearly the addition of safety protocols in the practice and driving efficiency are both at play. In particular, we believe there will be continued interest in equipment solutions that enhance productivity, which is particularly important as practices look to see more patients in a safe environment. So in summary, substantially all of the dental markets we serve strengthened relative to the second quarter as we progress through the third quarter with a month to month improvements in consumable merchandise sales, obviously driven by demand of PPE and COVID related products. So where are we at this point? Dental practices in North America, Europe, Australia, and New Zealand are open again for the most part as well I might add, is Brazil. And patients are returning for care. China is essentially back to pre-pandemic levels. Despite rising COVID-19 diagnosed cases in North America and a growing number of European countries, including Germany, France, the UK, Belgium, the Netherlands, Italy, Spain, Austria, Switzerland and Czech Republic of Poland and also in Brazil, patients continue to visit their dentist. This is very encouraging, completely different to what it was in April. These practices are open and patients are visiting the dental practice. Very clearly, very, very different to April and the demand for products, both consumables and equipment remains. The latest survey data published by the American Dental Association for the U.S. shows that dental practices are approximately 77% of pre-COVID-19 patient volume. This is down approximately 2% versus the prior ADA survey, but not showing any material degradation in patient volume. I think we have to be careful reading anything into the swing of a couple of percentage points. Henry Schein’s e-claims data also show that patients continue to return for a broad set of procedures. It is clear that in the United States, the public view dentistry as important and although we do not have as finite detailed information in Europe, we can see that in Europe dentists are being viewed as important health care providers. Of course, the UK is the exception with regulations have been such that the visits to the dentist have been restricted. But the rest of Europe is essentially open for dentistry, actually, older markets were in. So overall, we would characterize the current dental end markets as improving in some areas and continuing to stabilize in others. At this moment, this is exactly what we're seeing. Of course, we continue to watch all geographies as COVID-19 cases rise, particularly whether this impacts patient utilization and whether the V shaped recovery becomes more of a W. But at this stage, we do not see any reason why we should go into a W. The recovery seems quite stable as dental practices are open. Before we move on to the performance of our medical business, let me comment on the recent announcement that The Dental Supply Company or TDSC which was originally launched by the California Dental Association to offer members of organized dentistry a low price online only option for obtaining dental supplies has joined Henry Schein. TDSC will maintain its core focus on providing consistent online only competitive pricing to dental association members. TDSC customers will benefit from the expanded product portfolio, enhanced shipping, improved order performance, and of course, faster delivery backed by Henry Schein. Henry Schein’s full service distribution model, coupled with TDSC’s strategy will offer State Dental Association members the options they seek when choosing to purchase dental supplies and small equipment for their practices. These two marketing channels are complementary and are aimed at delivering the requisite level of service for varying customer segments. Henry Schein will, of course, maintain and build on our full service distribution model, offering customers a wide range of competitively priced consumable merchandise, equipment, and technology products and services including software coupled with our highly experienced field and telesales teams. TDSC has had sales in 2019 of approximately $20 million. So a high touch model is very much the model that we subscribe to at Henry Schein, but we're offering an alternative of a pure online service to those customers that wish to take advantage of such an offering. Now let's move to our medical business. The medical sales growth during the third quarter was also driven by strong demand for PPE and COVID-19 related products. This marked the first quarter in which our medical team achieved $1 billion in sales and we are extremely pleased with the medical teams track record in building this business. We are beginning to see improved access to COVID tests solutions that were first being allocated to the government for initial distribution. As we move into 2021 we expect testing solution availability for practitioners to continue to improve as more tests are approved and as further allocations to the private sector markets occur in line with manufacturing capacity increases. We are, as noted, receiving greater allocation of tests for office based practitioners who very much view it as important to conduct specifically Rapid COVID tests in their offices. In other words, the point of care tests. PPE and COVID-19 related products sales as a percentage of the global medical sales increased from mid-single-digit percentage pre-COVID-19 to approximately 17% in the second quarter and approximately 24% in the third quarter. We expect that PPE and COVID related products sales including tests will continue to be a meaningful portion of our medical sales as practices seek to create a safe environment for both patients and staff and undertake more testing in the office based setting environment. Regarding the potential to distribute COVID-19 vaccines, I'd like to point out that Henry Schein has had a long history of leadership in supply chain readiness and response. The strategic partnerships we have developed over many years provide us with the specialized insight into outbreaks and supply chain challenges. We also have, excuse me, we also have excellent relationships with a number of manufacturers working on vaccines and I'll stay in close contact with these manufacturers. We believe that when these products enter the commercial distribution channel that we well with our credibility and our history of effectively working with pharmaceutical manufacturers as well as our public private partnerships will be recognized as well as the office based practitioner will also be recognized as a place to administer these vaccines. So let's move on to our technology and value added services business. As dental practices continued to reopen throughout the third quarter, Henry Schein’s one transaction software revenue, including e-claims and credit card processing was down and it is slightly -- it is going up slightly. We are following the trends of visits to dental practices. This was offset by solid growth and I was comparing it to the previous year to 2019. This is offset by solid growth in sales of our dental plans and Dentrix Ascend cloud based software solutions. Remote access provided through cloud based solutions such as Dentrix Ascend are especially attractive to practices that desire or have a requirement to conduct remote work, including managing the business and clinical aspects of their practice. During the third quarter, we launched a number of product enhancements for our Henry Schein One solutions including a number of new DSO centric capabilities, imaging enhancements, new sophisticated accounting capabilities, and e-prescribing solutions and payment processing features in the Dentrix Ascend products. New insurance management and payment processing enhancements in Dentrix and key enhancements to our very successful online bill payment solution. We continue to invest in our platform of dental software solutions to deliver integrated technologies that automates more tests and simplifies the digital workflow to increase practice productivity. In summary, looking at our current business, while it's still early in the fourth quarter, we are continuing to see dental and medical sales growth over the prior year at this time driven by PPE and other COVID related products. That said, this is not necessarily indicative of what full code of performance may be but having said that, we are very encouraged with the performance in October actually across the board, but of course must be a little cautious in that, this is a very unpredictable time. So before we move to your questions, I would like to note how pleased we were in September to be named to the Fortune Magazine's Change the World List, which is an annual ranking of companies that have had a positive social impact through activities that are part of the core business strategy. Henry Schein was recognized for our role in helping to create the pandemic supply chain network at the World Economic Forum in 2015, a public private partnership aimed at saving lives by strengthening the resilience of global health care supply chain in general in response to epidemics and pandemics. We are most pleased to serve as the TSCA’s private sector lead on these very important initiatives. We were also pleased to be named among the top Nasdaq listed companies included in the next generation 100 index designed to measure performance of the largest 100 non-financial Nasdaq companies that are focused on growth and innovation, and which are ranked after those companies in the Nasdaq 100 index by capital, by market capitalization. This week is a special week at Henry Schein with respect to Nasdaq as we celebrate 25 years as a public company on the exchange. Over those years we have successfully navigated through many changing market dynamics and grown our business delivering value to our shareholders. In fact, since the time of our IPO, we are pleased to have delivered compounded annual growth from continuing operations of 13% in sales and 14% in non-GAAP EPS through the end of 2019. So with those comments in mind, we'd be very pleased Steven and I to answer any questions that investors may have. Thank you.

[Operator Instructions]. Our first question will come from the line of Nathan Rich with Goldman Sachs. Please go ahead.

Good morning and thanks for the questions. Maybe starting with your comments on the outlook, Stan and Steve could you give us any detail on how October performed relative to the third quarter and when we think about your expectation for growth to moderate relative to the third quarter, is that solely due to what you're seeing with respect to PPE and COVID related products or are you also expecting moderation in sort of the underlying growth rate for the dental and medical segments as well?

So thank you for the question. October has continued with the trend of September, in fact, even maybe a little higher. The concern we have is the potential impact of the rising number of diagnosed COVID patients. Having said that, at the moment it seems like dental practices are seeing patients again, very different to April, both domestically and in most markets abroad. Some markets at a much greater increased rate than even before COVID and others down. So we just want to be cautious in the context of the latest data on diagnosed patients. Having said that, the business seems in a pretty good place right now with dentists across the board seeing patients. And the same for medical practitioners. Steven.

Yeah, I think that some of us -- I would add maybe a couple of additional points, we think during Q3 there was a bit -- continued bit of a backlog of patient demand that got caught up during Q3 that may not continue going forward. We also think related to PPE and COVID related sales that there was a lot of initial order taking to start up practices and to restart practices that may not continue at the same rate. So those reasons really also contribute to us being a little bit more cautious on the outlook going forward.

That's helpful and just two quick clarifications, with respect to the rising COVID case counts that you cited, have you seen an impact in your volumes in recent weeks or is that just kind of adding to the uncertainty in the outlook? And then secondly, Steve, could you maybe talk through your expectations on PPE pricing going forward just as we think about the magnitude of the topline and margin impact that we should expect in the fourth quarter and beyond?

We don't see a significant change in volume at this moment. Practitioners seem to be seeing patients consistent with what we saw in September. Having said that, anecdotally, the ADA data is down a couple of percent. I'm not sure whether that is meaningful or not. Having said that, our caution relates to the increase in diagnosed patients both in the United States and in Europe but at the same time, we don't see a significant reduction in visits to practitioners. Steven.

Yeah, and on PPE and related products, I think we would assume that pricing will continue to moderate. Back in Q2 and early Q3 the pricing for certain products primarily facemasks was significantly elevated as there was a shortage of supply. And that was really our cost was really significantly higher than what typical costs was. As supply continues to improve, that pricing is beginning to moderate on most of those products. There is one product category, though, that is now in short supply. So it would be hard to tell how this has impacted. But nitrile examination gloves are now in very short supply globally. So we may see a spike in our cost for those products, which would in turn have us increase somewhat our pricing to end users. But I would say for the most part, I would think that pricing will moderate on products of PPE and COVID related.

That's helpful, thanks for the questions.

Your next question will come from the line of Steven Valiquette with Barclays. Please go ahead.

Great, thanks. Good morning, Stan and Steve, thanks for taking the questions. So asking a few questions here on the gross margins. It was fairly flat sequentially. It was down year-over-year, likely just due to mix. So I guess I'm curious if there's any color on how much the gross margin in 3Q was impacted just simply by greater mix of lower margin medical sales versus higher margin dental sales?

Steven.

Sure, Steve. The main driver was not mix, the main driver as we outlined in our press release was related to PPE and related product where because early on in buying that product we saw significant increases in our cost. And remember it was a difficult time to even access products back then, most suppliers were not selling unless you prepaid for the product, and there was absolutely no way to negotiate pricing. At that time we made a decision that it's important to have access to product for our customers because it's such a critical product category. And because of that, we did buy some product at high prices that required inventory adjustments during the quarter. So that was one -- that was the biggest impact on margins for the quarter. There were also some other impacts, some of the PPE selling prices were also at lower margin, that was a smaller contributor. And also supplier rebates, also a smaller contributor were less in the quarter because of volume that they related to. I'm hopeful that we'll see a lot of that go away, although it's really difficult to predict on inventory adjustments because the pricing is still very volatile on both the purchase side as well as the market sale side. So we just kind of have to wait and see for that.

Okay, I appreciate the color. Thanks.

Your next question will come from the line of Jon Block with Stifel. Please go ahead.

Great, thanks and good morning guys. Stanley, maybe just to start with you, if you can compare and contrast some of the dental consumable figures that you gave, I think ex-PPE and COVID dental consumables were flat, it caught like the basic consumables but I thought you mentioned a very strong dental specialty number that was up 14% in North America, I think even implants up 18%. So maybe if you can just talk to that dichotomy between the two within consumables? And then I've just got a follow-up.

Yes, it's a very good question. So if you take out the PPE related sales or actually the COVID related sales, because within that category it's PPE and testing. But if you take that all out and you look at both the dental and medical, our sales for core products, consumables is about flat. So, that's where we've been for the third quarter and it's looked like -- it looks like that's where we are in October as well. So, that's the basic situation. Patients really are visiting dentists, same with physicians. So we're quite comfortable that they will remain busy. But of course, there is no -- there's no clarity as to what could happen in November and December given the increase in diagnosed tests. Having said that, clearly practitioners are open to see patients everywhere other than really in the UK, which is an anomaly. Very, very different to the situation in April and the early part of May. Did you have another question?

Well, I do have another one, thank you. I will pivot, Steven to you on the gross margin, it follows up on Steve's question. 26 and change down about 300 or so basis points and you had been running steadily, pretty steadily, 30% to 31% throughout 2018 and 2019. So, I guess sort of a two pronged part question. Is there a gross margin to put on that PPE and COVID bucket and/or if not just looking forward, most importantly, do we think about gross margins improving off this call it, trough 26.6, but maybe not recapturing the 30% to 31% longer term because you'll always have to a certain extent that lower margin PPE sales, somewhat permanent in nature in the consumable sales? Thanks, guys.

Yeah Jon, let me just touch on the earlier question when Stanley commented that excluding PPE and COVID products, consumable merchandise sales were relatively flat. That includes the positive benefit of specialty sales, Jon. So it's all embedded in that because that's included in consumables. So, going to your current question, it's still -- there's still a lot of volatility in margins related to PPE and COVID related and as I said, nitrile gloves is the next one that will probably show a significant increase in costs for us and there's a limit on what we could pass through. So I'm not ready to give guidance on gross margin just yet because there's too much volatility on the buy side and on the sell side and it's all related. PPE and COVID products has positives and that it really drives sales growth, it really drives people buying additional products. If you don't have the products, you may lose the entire sale, but it also has huge volatility in margin. So you've got to take the positive with the not so positive.

Understood. Thanks for the color.

Jon, just to add a little bit more light on the specialty side, the specialty business is of course, a high margin business. But in terms of sales, compared to the total approximately $10 billion business it's not material. But in terms of profits, it is very important. And that those businesses have done quite well, certainly in the third quarter and going into the fourth quarter. So in terms of materiality, in terms of the overall sales, it's not material in terms of profit, it's a decent contributor.

Perfect, thanks for the color.

Your next question comes from the line of Jeff Johnson with Baird. Please go ahead.

Thank you, good afternoon or good morning, guys. Maybe just following up on both of Jon's questions, if I could. So Steve, if specialty was slightly -- or was positive in the quarter, as you mentioned, nicely positive in the quarter, that would put general consumables on the dental side, maybe down low to mid-single-digits or so. Yet we know the ADA survey at that down 20% that's kind of consistent with what our surveys have been showing as well. Is that when you talk about kind of a little falloff from here is that we get a little bit of normalization from here between kind of where you have been at maybe that down 5% for general consumables going somewhere between there and kind of where some of those volume surveys are showing?

Well, let me -- Jeff, let me just clarify, on the ADA survey they are talking about patient traffic, that 80% plus or minus is estimated patient traffic. So we think actual sales volume is a bit better than that because it doesn't really factor in the additional sales of PPE products. It also seems that based on a procedure basis, for some reason, procedures are a little bit higher volume that are currently being done than historically. So 80 in sales volume is higher than 80% -- sorry, the 80% patient traffic is higher in sales volume. And so hopefully that clarifies and I just want to make sure you had a second question there Jeff, if you could just repeat it.

No, it was just my question -- if I understand the volume side and like I said, that I know a lot of surveys are showing that down 20 and we are getting the higher intensity of dentistry and things like that to drive the revenues higher than that. But as you talk about kind of a little bit of a falloff in the dental performance going forward, is it because revenues start to normalize at least a little bit back towards volumes, over time I wouldn't think mix can be such a positive contributor of 15 or so points as it's been here in the last quarter?

Yeah, I think that's correct. It's also, again, a few other things that’s moderating pricing on PPE products that should continue. It is some of this pent up demand that may fall off a little bit. It's a little bit of increases in positive test results for COVID. So I don't think it's one particular item. It's just a few things that are impacting our thoughts on that.

Fair enough, and then last question just on the margin side, Jon asked if we were at trough margin on the gross margin side. You did talk about some of these temporary cost savings going away and I think that's more on the OPEX side. But in the past, I think you've also talk about sourcing some PPE from local markets for local markets. So as we think about those two levers, do we see margins staying down at these levels, can they pick back up in the near-term just over the next call it 12 to 18 months, is there a trend up or down from these levels on the margin side?

Yeah, I think there's too many -- too much volatility for us to really give specific guidance on this. Again, we don't know exactly what's going to happen with nitrile gloves, but we do know that there's a worldwide shortage and what that means to pricing and margin is still ahead of us, I don't want to just speculate on that. So, I think we just really can't give specific guidance along those lines at this time. So hopefully in Q4 we will have better insight.

Yeah, understood. Thank you.

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

Hi, thanks for the time here. So there's been a lot of questions asked about a lot of very important parts of the progression and the model. But what I think we might benefit from is even if it's philosophical. But as you think about getting into planning for 2021 and beyond, when you try to piece together all the parts, even if we just isolate and say, hey, let's just talk about the top line. When you've got a base business, excluding COVID related items that that's flat in the middle of a pandemic and then you have probably an elevated PPE tailwind for some. What would it take to get 2021 revenues to be lower than 2019, is there a way we can sort of set a floor here?

We remain quite optimistic in the return of the business, specifically in dentistry given the fact that the strength in business, the dentists starting in June, we were quite surprised with how fast the recovery occurred and remain optimistic that that will continue to increase. People want to see dentists and there's a huge trust that dental offices are safe. So we can't say for sure how many quarters the COVID high test data will continue but as the data comes down, I think you can expect for dentists offices to fill up to the rate of 2019. I think dentists are dealing with the inefficiency in the office because of -- control, they are getting much better at that. But as we get into, say, the middle of 2021 I think we can expect to go back to normalcy of where it was in 2019. It all depends, of course, on when the vaccine will be available and how effective it will be. But it seems like the 75% to 80% number is a number that looks good for this time. And from there, I think we'll build up based on the effectiveness of the vaccine and actually more testing availability. We have seen that in markets where there is comfort and return to normal rates such as China, Australia, New Zealand. People are very comfortable going to the dentist and our specialty businesses, for example, in those markets are doing extremely well. So we are enthusiastic that we will return to more normal rates sometime in the middle of next year, assuming that the vaccine kicks in and is relatively efficient. But it seems like we've hit more or less the floor. But again, it's very hard to give you a precise timing on all of that.

Okay, that's fair. Two very quick follow-ups, one for Stan, one for Steve. Stanley, I wonder if you could spend just a minute on the TDSC transaction. I realize it's not a huge business that that you're acquiring here, but it might be a pretty significant segment of the market that you can go after a little bit more acutely, could you just talk about the definition of that customer segment of the market that you're going after a little bit more, perhaps more effectively with TDSC as part of the portfolio here? And then, Steve, I wondered if you could spend a minute on what I've been calling cost savings discovery. So, COVID has given us a window into where we might have been spending money here and there. We've obviously had to stop spending money on certain things like travel. How is that progression going, how close are you to maybe putting a dollar amount or basis points on what might be a permanent cost savings from that discovery effort? Thank you.

Thank you. So, very good question again on the TDSC. We see that there's always been a market for let’s put it this way, non-full-service, non-high-touch, that was the market Henry Schein was in a couple of decades ago. And the percentage of business being transacted through what was originally mail order that went to telesales and now is defined as e-commerce has been relatively constant up to the end of 2019. During the COVID period it increased just like all e-commerce increased. Both the e-commerce only businesses, online only businesses, and our own website where the volumes of business that were transacted digitally increased. We've always had a strong relationship with organized dentistry and there is a part of the market that would like to transact business digitally only, online only. And so we made an investment alongside the California Dentists Association to enter the online only marketplace. We are through other investments in the United States and particularly abroad invested in alternate channels, and although these channels have not exhibited significantly faster growth rates than the full service part until the end of 2019, we think that it is important for us to service this part of the market and to provide both options to dentists in the United States, as by the way we do in Europe and elsewhere. So we will keep the two models side by side and we'll service them both from the same distribution network.

So on cost saving items, Steve, so there's two primary areas that we're still evaluating and focusing on, and we think we will be able to save expenses on. The first travel, but it's really broader than just travel. It also includes things like conventions, even investor meetings not sure. I think everyone knows on this call that now virtual investor meetings and conferences, similarly with conventions is more virtual items. So we certainly believe there's opportunity there for travel, to significantly reduce travel. Things like video conferencing certainly work. I think the people who were a little bit skeptical previous to this I think realized that while it's not as good as in person, it's really good and in many cases cancel flights. So that's one area that we're still evaluating. And the second area is we do believe that there's a fair amount of our Team Schein members who can work from home either permanently or on a hybrid basis. And we're doing a person by person detailed review to determine what that opportunity is. But certainly we do think that that opportunity over the longer term will be a benefit for us. But just recognize on that, the real estate footprint, it will take a little bit longer to reduce the real estate footprint or whatever that those lower needs will be. But both of those are still under evaluation. We don't have final answers on either one but we certainly believe that they will drive some costs, some permanent cost savings going forward. We have not yet quantified the specific amount.

Okay, thank you for all the help there.

Our final question will come from the line of Glen Santangelo with Guggenheim. Please go ahead.

Hi, thanks for taking my question. Stan, I just want to follow up on something we talked about last quarter around the vaccine opportunity. I think, 90 days ago you thought it was a little bit too early to speculate on if there would be a potential role for Henry Schein and what that could maybe look like. Have you given any more thought to that as we get closer to hopefully the launch of a successful vaccine here and maybe what will Henry Schein could play given where you sit at the supply channel?

Yes, Glen, I think that there will be a role for Henry Schein once the vaccine is outside of government distribution. Since it is expected, at least, it's our view that vaccines will at some point be administered in physician offices and in the workplace. We have a very nice workplace health care business. And so once we're through the initial government period of distribution of these vaccines using a third party logistics provider and when these vaccines return or become available through normal commercial operations, we expect that Henry Schein will have a role to play as we have in administering vaccines in general. And we've had that role for decades. Likewise, with testing we think that as the government takes less of the tests and allows the private sector to manage testing to a greater extent, that Henry Schein will receive a greater allocation of tests as well.

Maybe if I can just follow-up one more, stepping back from all the near-term questions around utilization, I was just kind of curious if the performance of DSOs in the current environment is maybe very different than independent practices and in this environment any longer term impact to the customer mix going forward, any discernible trends you're seeing between the two different classes?

I think basically we're on the same trajectory. The last DSO is growing to the extent they can secure dentists. The midsized practitioners that's growing to a greater extent. But there still is a very solid base of private practitioners. I doubt that one or two practice will survive long, but three or four or five practitioners going to maybe 10 in the practice has in my view, quite a lot of runway. So I don't think there's any marked difference in where dentistry will be practiced. But the trend that we've seen over the years is likely to continue and as it has moderately and the movement upstream will continue in a moderate way, to grow in a moderate way. So I don't see any significant dislocation of where dentistry will take place, although the trend will continue upstream.

Okay, thank you.

I'll now turn the conference back over for any closing comments.

Thank you very much, operator. We do feel very comfortable everyone with our strategy. We are comfortable that we will continue to serve the dental needs across the globe and we are comfortable through our hybrid full service model and in certain markets, digital only model. That this will be a very good strategy going forward as we provide more value added services to our customers, helping them operate a more efficient practice so that they can provide better clinical care. We believe that infection control is important in both the dental offices and medical offices and that we can provide the necessary PPE that is needed and that testing will become more important in our physician offices going forward. We also believe that our equipment businesses in dental are on solid footing. There may be a slight going back perhaps in the U.S. dental market as the DSO numbers compared to the previous year as we had a very strong fourth quarter DSO last year. But overall, we're comfortable that our dental equipment business in the United States and in Europe is on a solid footing with decent backlogs throughout. So as well just to comment with any questions on this, but we believe Henry Schein One is providing great value, moving towards more of cloud based software and are very comfortable and excited with that business opportunity. So let me end today where I started and once again extend thanks to Team Schein members across the globe for their unrelenting efforts on behalf of our customers, the team's passion, their commitment to Henry Schein has been nothing short of remarkable. As it relates to our businesses, we believe we are well positioned, as I noted, due to our breadth of products, services, and support with solid momentum to build shareholder value as we emerge from the COVID-19 pandemic. Again, it is clear that there is a demand for dentistry and for the physician based practice as procedures move from the acute care setting to more of the ultimate care setting. And we remain quite optimistic about the future of Henry Schein. So thank you for joining us today and look forward to speaking to you on our next call. Thank you.

Ladies and gentlemen, that will conclude your call for today. Thank you all for participating and you may now disconnect.