Henry Schein, Inc. (HSIC) Q1 2021 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Henry Schein First Quarter 2021 Conference Call. [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 2021 first quarter. 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 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 IR section of our website. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, May 4, 2021. 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 we have allotted for this call. With that, I would like to turn the call over to Stanley Bergman.

Thank you, Carolynne. Good morning, everyone. I appreciate everyone calling in today. We’re obviously very pleased with what we view as an exceptional first quarter for our financial -- our global financial performance for the year 2021 versus the comparable period last year, but also versus the first quarter of 2019. These good results are based on excellent planning and execution across all of our businesses. Our team really came through for our customers, for our investors, for our suppliers during 2020 and now the first quarter of 2021. We also delivered very strong operating margins for the quarter. While end markets in most geographies still face challenges due to the ongoing pandemic, the overall global market recovery and our improving results have continued. Our positive momentum reflects the adaptiveness of our business model and, as I noted, a deep commitment of Team Schein Members across the board to our customers and, in fact, the communities that we serve. Throughout these unprecedented times, Henry Schein has remained focused on the safety of our team above all and, yes, responding to our customers’ needs, which were extremely varied across the world and went up and down as dynamics changed in an extremely dynamic environment. We, of course, continued to drive innovation across the platform. We gained market share, enhancing our margin and, yes, focused on optimizing our cost structure as we have for many years. We believe all this positions us well to continue to drive earnings growth and create value over the long run. Our steady way in which we’ve driven the business for decades remains very much intact with very good momentum. In line with improving end market conditions, in the fourth quarter of 2020, we resumed acquisition activity. We have a lot of activity going on. Of course, no deal is completed until it’s actually signed and inked and will then be reported on. In the first quarter of 2021, we closed 5 acquisitions across our Dental, Medical and Technology and Value-Added Services businesses, across basically the company with the aggregate sales of nearly $140 million, reflecting our commitment to a balanced strategy that supplements solid organic growth with acquisition contributions. In addition, during the first quarter, we resumed share repurchases. The bottom line is that our solid cash flow enables us to invest in our business, reflecting our goal to continue to deliver an attractive return on capital. I will remind shareholders that we’re into our 26th year as a public company, reflecting compounded annual growth of 12% on a non-GAAP basis and an increase in stock price of a similar number over this period on a compounded annual growth basis. Now returning to the current moment. The latest survey data published by the American Dental Association for U.S. -- for the U.S. shows that dental practices are approximately 87% of pre-COVID-19 patient volume, a data point that continues to improve, and we are experiencing improvements throughout the system, specifically in the U.S. The ADA remains bullish on the outlook for the dental profession in the months ahead as vaccinations likely hit a tipping point. The ADA also recently issued a report of partnering with Back to Normal Barometer to gain insights on customer sentiments related to dentistry. The survey found that a vast majority of patients who have not already visited dentists this past year are ready to return. As you know, we also closely monitor Henry Schein U.S. Dental eClaims data as a directional indicator. And we have a decent amount market share of that data -- of those claims processes -- claims processed. This data continues to show that patients are returning to practices for a broad set of oral care procedures and, most recently, including the hygiene arena. In addition, our medical customers have been resilient throughout this pandemic, and we are committed to helping our practitioners, both dental and medical, ensure patients can safely return to routine care as well as elective procedures and, of course, nonelective procedures. As COVID-19 cases decline and more people are vaccinated, we expect to see traffic -- patient traffic to physician offices and ambulatory surgery centers normalized, although I must stress that we’re not back to where we were with elective ambulatory surgical procedures. There’s a lot published on this. And also the normal rate of vaccinations by our practitioners is somewhat down since the volume, including pediatric visits, is down. But it’s slowly catching up to the 2019 volumes. Henry Schein has been deeply involved in efforts to promote more effective participation of primary care physicians and other office-based practitioners, including dentists in many states, who are allowed to administer the vaccination, and we are committed to driving vaccination rates nationwide with a particular focus on office-based practitioners. While many states provide these practitioners with access to the vaccine, it is extremely difficult and a complex process for office-based practitioners to receive an allotment of these vaccines. And at present, only about 1/3 of primary care physicians are able to offer the vaccine to their patients across the nation. COVID-19 vaccination efforts to get shots in the arms of the U.S. citizens have been quite extraordinary thus far. However, we also recognize that the country is now in a race against the variants. We continue to see equity challenges in the uptake of the vaccine, and there continues to be high rate of vaccine hesitancy in some areas of the country. We also recognize that the nation will swiftly need to prepare for delivery of booster vaccines and, yes, pediatric vaccination. Henry Schein has been working closely with the U.S. Department of Health and Human Services, FEMA, CDC, state and local authorities urging authorities to more effectively include primary care physicians and other office-based practitioners, as I noted, including dentists, by utilizing the existing and well-established distribution network to deliver vaccine to these providers. As part of this effort, we recently submitted the letter to the U.S. House Select Committee on the corona crisis. We firmly believe that primary care physicians are a vital resource in the COVID vaccination effort because the high level of trust they enjoy amongst patients, the understanding of patients’ health history and personal circumstances and their physical presence in every community around the country. The vast network of physicians and dentists in the U.S. can be immediately activated and, of course, literally overnight, more effectively advocating -- activating the cadre of health professionals who are highly trusted leaders in their communities to vaccinate Americans through their practices. This is critical at this moment in the country’s vaccination efforts to help overcome hesitancy, to address at-risk populations, reduce health inequities and ultimately ensure more patients are vaccinated. At the same time, more must be done to help other countries that face shortages of these critical vaccines, as equitable global access is crucial to ending the pandemic and the safety of the world’s population, including Americans. Through our work with the World Economic Forum and our partnership with the Pandemic Supply Chain Network, Henry Schein has been working to support COVAX, the international entity led by CEPI, Gavi and the World Health Organization and Unicef to accelerate access to the COVID vaccine in low and middle-income countries around the world. So the business is in good shape. We continued to have very good momentum. We’ve been reporting on our results throughout this period in a little bit more detail than in the past, and continued to be very optimistic with the direction of the pandemic at the moment, although there are some setbacks in countries like India. And we are well positioned -- continued to be well positioned to help combat the pandemic and at the same time increase shareholder value. With that, I’ll hand the call over to Steven to discuss our quarterly financial performance, and I’ll provide some additional commentary on current business conditions and our markets. Steven, please.

Okay. Thank you, Stanley, and good morning to everyone. As we begin, I’d like to point out that I will be discussing our results from continuing operations as reported on a GAAP basis and also on a non-GAAP basis. Our Q1 2021 and Q1 2020 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 corporate sales category for Q1 that represents prior year sales to Covetrus under the transitional services agreement, which concluded in the fourth quarter of 2020. Turning now to our financial results. Total net sales for the quarter ended March 27, 2021, were $2.9 billion, reflecting growth of 20.4% compared with the prior period. Internally generated sales were up 14.9% in local currencies. And again, you could find details of our sales performance contained in Exhibit A of our earnings press release. On a GAAP basis, our operating margin for the first quarter of 2021 was 7.9%, representing an increase of 70 basis points compared with the prior year. On a non-GAAP basis, our operating margin was 8.4%, which was an increase of 104 basis points on a year-over-year basis. And it’s important to note, we’re really very pleased with our non-GAAP operating margin performance, which was the highest quarterly margin that we’ve achieved in the last 5 years. Again, 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. Turning to taxes. Our reported effective tax rate on a GAAP basis for the first quarter of 2021 was 25.1%. This compares to 22.4% GAAP effective tax rate for the first quarter of 2020. On a non-GAAP basis, our effective tax rate was also 25.1% and compares to the prior year of 22.5%. A reconciliation of GAAP effective tax rate to non-GAAP effective tax rate is again included in the Supplemental Information page on the Investor Relations site of our website. We expect the effective tax rate to continue to be in the 25% range, both on a GAAP and non-GAAP basis, for the remainder of the year. And of course, this assumes no significant changes in tax legislation. Moving on, our GAAP net income from continuing operations attributable to Henry Schein for the first quarter of 2021 was $166.0 million or $1.16 per diluted share. This compares with the prior year GAAP net income from continuing operations of $130.5 million or $0.91 per diluted share. Non-GAAP net income from continuing operations for the first quarter of 2021 was $177.7 million or $1.24 per diluted share, and this compares with the same non-GAAP net income from continuing operations in the first quarter of 2020 of $134.1 million or $0.94 per diluted share. To provide a little bit more detail, amortization from acquired intangible assets for Q1 2021 was $29.7 million pretax or approximately $0.13 per diluted share. This is up slightly from $26.8 million or the same $0.13 per diluted share in the same period last year. Also, foreign currency exchange favorably impacted our Q1 ‘21 diluted EPS by approximately $0.02 per share. Let me now provide some detail on the sales results for the quarter, starting with global dental. Our global dental sales of $1.8 billion grew 21.3% compared with the same period last year, and internal sales growth of 13.7% in local currencies. Our global dental consumable merchandise internal sales increased by 13.2% in local currencies in the first quarter, and if you were to exclude PPE and COVID-19-related products, the sale increase was 10.9%. We experienced very solid dental consumable merchandise sales growth in the U.S., Canada, Australia, New Zealand, Brazil, Asia and throughout most of Europe. In Europe, we saw a particular strength in France, the Netherlands, Belgium, Italy and to a lesser extent, in Germany. However, the U.K. continued to experience lower sales as that country is just recently easing lockdown measures. In North America, the dental internal sales growth in local currencies was 10.9% and included 9.3% in dental consumable merchandise or 6.9% when excluding PPE and COVID-19 related products. Our North American dental equipment sales internal growth in local currencies was 17.4% and was driven by 31.6% internal sales growth in local currencies for high-tech equipment and also strong growth in traditional equipment, which was 10.6%. Our international dental sales growth in local currencies was 17.9% and included 19.2% growth in dental consumable merchandise, which is 16.7% growth when you exclude PPE and COVID-related products. International dental equipment internal sales growth in local currencies was 12.9% in Q1 and was driven by strength in France, Italy, Austria, as well as Australia and New Zealand and the Netherlands and Brazil. We experienced 14.8% internal sales growth in local currencies in traditional equipment in the international market and high-tech equipment grew 10.3%. Our global dental specialty revenue in the first quarter totaled $222 million and had internal growth of 18.3% in local currencies versus the prior year. The growth was split between North America, which was up 19.3%, and internationally, up 15.7%. So very strong growth across the globe. Global Medical sales during Q1 were $993 million, which grew 24% compared to the same period last year, including internal sales growth of 22.1% in local currencies. That 22.1% includes 22.4% increase in North America and 12.6% internationally. Our Medical sales results were driven by strong demand for PPE and COVID-related products. Excluding sales of these products, Global Medical internal sales in local currencies was down 6.8%. But this was, in part, resulting from an extremely mild influenza season that impacted both diagnostics and consumable merchandise sales as well as lower pharmaceutical sales related to fewer patient office visits related to COVID-19. We sold over $180 million of COVID-19 test kits in Q1, including some multi-assay flu and COVID-19 combination test. This compares with approximately $270 million in test kits in the fourth quarter. That said, we expect COVID-19 test kits to decline somewhat, primarily as a result of unit price erosion. Turning to Technology and Value-Added Service. Sales during Q1 were $143 million, an increase of 8.4% compared with the prior year, including internal growth in local currencies of 3.6%. In North America, the internal sales growth was 4% driven by the Henry Schein One business as well as strong financial services revenue, which benefited from double-digit equipment sales growth. Internationally, Technology and Value-Added Service internal sales grew 1.1% compared with the prior year. Again, the prolonged lockdown in the U.K. impacted our international business again this quarter. As Stanley mentioned earlier, we resumed our share repurchases in Q1 and purchased approximately 1.3 million shares of common stock at an average price of $66.90 for a total of $88.7 million. The impact of this repurchase program on the first quarter EPS was immaterial. At the end of the first quarter, Henry Schein had $112.6 million authorized and available for future repurchases of common stock. Okay. Turning to our balance sheet and cash flow. We have access to significant liquidity to provide flexibility and financial stability. Our operating cash flow from continuing operations for the first quarter was $63.3 million. That compares to $78.8 million in the first quarter of last year. This modest year-over-year decrease was primarily due to higher working capital requirements, partially offset by increased net income. As part of our previously disclosed restructuring initiative, we recorded a pretax charge in Q1 of $2.9 million or $0.02 per diluted share. This is, again, a charge related primarily to severance pay and facility closing costs and reflects opportunities to continue to reduce expenses and drive operating efficiencies and mitigate stranded costs. Let me now conclude my remarks by updating our 2021 non-GAAP diluted EPS guidance. At this time, we are not providing GAAP diluted EPS guidance, as we are unable to provide an accurate estimate of expenses related to the restructuring that I just mentioned. We are raising the guidance for 2021 non-GAAP diluted EPS from continuing operations attributable to Henry Schein. And now we expect that floor, and it’s important to note that it’s a floor, of $3.70, and that compares to the previous floor that we had issued at $3.51. Again, remember, this is not traditional guidance where we typically give a range. This is really effectively the low end of the range and the floor, and we hope to continue to update guidance as the year progresses. Keep in mind that our guidance for 2021, non-GAAP diluted EPS attributable to Henry Schein is for continuing operations as well as completed or previously announced acquisitions, but does not include the impact of share repurchases, potential future acquisitions, if any, or restructuring expenses. Guidance also assumes that foreign exchange rates are generally consistent with current levels, that the end markets remain stable and are consistent with current market conditions and, of course, does not assume any material adverse market conditions related to COVID-19 pandemic. So with that, I’d like to turn the call back over to Stanley.

Thank you, Steven. Last quarter, we discussed our One Schein initiative, which is a unified go-to-market approach that enables practitioners to work synergistically with Henry Schein’s medical and dental supply chain, equipment sales and service, specialty businesses, Henry Schein One, and other value-added services. This allows our customers to leverage the combined value that we offer through a unique approach to managing customer engagement. Given our position as a large-scale distributor to both dental and medical practitioners, we are uniquely positioned to deliver value to our large customers by leveraging best practices and customer engagement and support while realizing internal synergies across our distribution businesses through common functions, processes and systems. We refer to these activities internally and related external and -- we refer to these activities and related external and internal benefits as One Schein. That’s how we refer to it internally. So we have -- sorry, One Distribution, sorry. We have One Schein, which really provides the customers with a unique experience, and One Distribution, which focuses on our internal infrastructure so that we can provide our customers with a unique experience. The benefit for our customers that purchase broadly across both dental and medical product categories, such as DSOs, for example, IDNs, large group practices, the government community health centers and other enterprise organizations is a more streamlined interface for formulary construction, RFP management, contract compliance, analytics and, yes, commission processing. For example, a large DSO customer will benefit from our expertise and resources addressing challenges that we have already solved for the medical customers such as onboarding new practices, promoting formulary compliance, rebate negotiations and efficient order processing. DSOs benefit from our ability to deliver a specialty offering like implants, bone regeneration products, orthodontics, endodontics, all in combination with our distribution platform. And the same applies to Henry Schein One software solutions, which can be combined with the distribution offering, consumables equipment, our specialty products, all providing customers with a unique experience through One Schein and through efficiencies internally through One Distribution. They also benefit from our capabilities, our customers, that address distribution value-added services needed from one source. In fact, we believe that a number of our recent DSO wins were attributable to the unique value proposition offered by our One Schein strategy. Now let’s spend a few minutes on the distribution side, looking more closely at our Dental distribution. Our first quarter Dental performance experienced, of course, strong sales growth in both North America and our international markets, including significant growth in North America dental equipment sales versus the fourth quarter of 2020. We experienced broad-based sales growth in North America and international dental consumable merchandise as the dental end markets have continued to improve. So now, let’s take a brief look at our specialty businesses. How does this fit in? As Steven noted, our global dental specialties generated double-digit year-over-year sales growth as we further penetrated these key specialty markets, both domestically and internationally. We also had a number of key strategic developments in each of these product categories. Our implants and oral surgery business, this is the largest of these 3 business units, including in our dental specialty business. This implants and oral surgery business unit experienced solid double-digit growth in the first quarter with significant contribution from BioHorizons and CAMLOG from specifically their implant lines. Sales growth in the U.S. was driven by new product introductions, growth with DSO customers, and also by a digital CAD/CAM related solution for implant procedures. New product launches include our progressive implant line across Europe, Canada and more recently, the U.S., as well as our Tapered Pro implant and NovoMatrix reconstruction tissue solutions. On the endodontic side, just a brief note. In the first quarter, the strength was driven by DSO -- by the DSO customer segment as well as by the launch of several nickel titanium products across the endo platform. In the orthodontic market, we continued to see a steady improvement in both orthodontic case volume and revenue, as dental practice patient volumes have improved. While our Reveal and SLX Clear Aligner business is currently a small portion of total dental sales, we believe this business will have a more meaningful contribution to growth over the long term. It’s steady progress. We have expanded to offer Reveal in over 20 international markets, including recent launches in France and Poland, and we anticipate launching in several additional markets this year, including Ireland, Italy and Spain. Importantly, we continued to invest in advancing our orthodontic treatment software, including scanner integration, delivery -- delivering an intuitive solution that streamlines case submissions, clinical reviews and treatment tracking. We continue to invest further in innovation as we develop an enhance treatment solutions for these markets. And we expect patient volume across our Dental business to continue to improve over time as infection rates decline. That’s, I think, a global statement. So let’s just now focus a little bit on Henry Schein One. This is highlighted within our Technology and Value-Added Services business. Henry Schein One sales continued to improve towards prepandemic levels and our investment in R&D and our teams continue to make good progress in the area of our Henry Schein One business. In the first quarter of 2021, we introduced a number of new products, enhancements, including new Dentrix imaging software, tools for processing insurance remittances and calculating payment adjustments, marketing campaign enhancements for the Lighthouse 360 platform and an online booking feature for our Sesame, that’s primarily an orthodontic business software for those websites. Importantly, we are more closely aligning our Henry Schein One and Henry Schein Dental teams through the -- through our Henry Schein -- through our One Schein program, bringing together Henry Schein One and Henry Schein Dental teams to promote bundled solutions aimed at improving customer experience, retention and most importantly, practice efficiency. And this is, of course, primarily through digital integration. Now the Medical distribution business. If you look at the performance of the Medical distribution business, you will see why we are pleased with the strong double-digit sales growth in the first quarter. This was driven by PP&E and COVID-19 test sales. Similar to the dental end markets, we expect the physician ambulatory surgical center, alternate care home health markets to improve over time as infection levels abate and patient volumes normalize. We also have a focus on workplace health and sports medicine on both of those segments in the U.S., which is as important as employers consider cost-effective means for employee wellness. Our plans offer employers diagnostic testing support, PP&E and return-to-work consultation. Overall, our solutions portfolio remains a focus beyond traditional medical supplies. This includes a comprehensive telemarketing platform in the medical arena, a cybersecurity solution for health care that we offer to physicians and medical practices, and a digital diabetes care initiative. I’d like to point out that while PP&E sales have begun to moderate from recent quarterly growth levels in both Dental and Medical, both sides of the house, we anticipate that PP&E sales will remain at elevated levels as dentists and physicians implement new standards of care, new best practices as related to infection control. And so we do see this demand for PP&E products to continue, although there will be pricing deflation in several areas, but the units will continue to be relatively strong. So now, operator, if there’s any questions, we can handle them. Thank you.

[Operator Instructions] Our first question will come from the line of Jeff Johnson with Baird.

Can you hear me okay?

Yes, Jeff. Go ahead.

Great. So I wanted to start first on your operating margin. Obviously, the 8% operating margin was a big improvement sequentially, but also relative to 1Q, both last year and even relative to 2019’s 1Q. Steve, when I look at kind of your floor guidance, and I understand it’s floor, but it seems to imply operating margin maybe falling back down to the low 7s, maybe even a little bit below 7% over the balance of this year. Just, one, help us understand the drivers of the 1Q improvement and then how to think maybe sequentially the next few quarters on the operating margin line?

Yes, Jeff, thanks for the question. We had an extraordinary quarter in sales, and that drove the operating margin. We continued to look at driving expenses down, but we’re not giving specific guidance on margins. But I think it’s important to note, this is a 5-year high, this operating margin of 8.40%. So I think it will moderate, but we’re not going to give specifics at this time on that. We’re continuing to look at reducing expenses. Some expenses will come back later in the year, we’re estimating, like travel, like conventions and some other things. But we’re still very pleased and we still think long term we have a significant opportunity to continue to expand operating margins annually.

Fair enough. And maybe just as a quick follow-up. When I look at your Dental business, Steve or Stan, and look at kind of relative to 2019 and try to exclude the PPE, it looks to me like your core dental revs ex that PPE and COVID testing is probably up about 6% to 8% relative to 1Q ‘19. So are we sustainably back to core dental being above 2019 levels? Was there something in 1Q that might be a little bit of a head fake there? Just how to think about the next few quarters, again, knowing that you’re not guiding on revenue either? Are we sustainably above kind of the ‘19 levels of core dental?

Yes. First, Jeff, your estimate on growth is pretty accurate over 2019. I think that there’s a couple of things that will reduce sales growth a little bit. Stanley mentioned PPE prices moderating, including COVID test kits moderating. But we still feel that we’ll have solid growth over 2019 because the market is continuing to improve, again, 87% patient traffic in the U.S. Hopefully, that will continue to climb up. So we’re feeling pretty good about sales growth in Dental as well as Medical for the balance of the year.

Thank you, Steven. Let me just add something, a comment from a macro point of view, Jeff. We’re feeling pretty good about the global dental market. It’s bounced back, particularly strong in some of the specialty areas, at least in our business. The only caution we have to add is, we’re in the midst of a pandemic. The pandemic is not finished. We saw what -- we can see what’s going on in India and a number of other parts of the world. This could all come back. So I don’t want to be a negative cloud over the dental industry or our performance as a company. But assuming things continue, assuming we do not have any major setbacks because of COVID, I remain extremely bullish about the dental markets. In particular, there is a growing understanding amongst payers that there’s a direct correlation between good oral care and good health care. I expect that governments around the world will recognize this. It will be greater reimbursement for dentistry. Can’t say it’s going to be next quarter. But I think we can continue to be relatively bullish about the dental market with one big footnote. No one knows where this virus is going. And that’s the basis under which Steven gave guidance at a floor. And we just can’t give guidance on the upside because we just don’t know where this virus is going to take us. The virus will, at some point, be over though.

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

My first question would be on the implant market. It seems like you guys have noticed that, obviously, an uptick as we’re coming out of, hopefully, the pandemic. Is that sort of just a reflection of the return of volumes? Or do you see any kind of increasing competitive sources in the implant industry broadly, both -- maybe if you could comment both on this sort of -- any particular geographies or products?

I would say, in general -- it’s a good question. Thank you for that question. The implant mount markets have been pretty steady across the world. Remember, our strength is in the U.S., in Canada and in Germany. Of course, we’re active in a number of other countries, including Japan, some business, of course, in China. But in the markets I mentioned that we are strong in, the markets are pretty good. But I would also say that we have been pretty productive in those markets. We’ve gained market share, and this has been going on now for quite a few years. So our -- whereas the markets are strong, we believe our market share has grown with our premium line, which is the BioHorizons, CAMLOG lines, and with our discount line, the Mega Dental -- Medentis, I mean, knowing full well that the markets we’re in are not necessarily growing as fast as some of the developing world markets. But in the markets we’re in, we’re doing quite well. I think that may be, to some extent, related to Henry Schein’s uniqueness in those markets. But overall, one can say that the implant markets are doing okay and that there is a focus on more expensive dentistry right now.

Got it. That’s helpful. And can you talk about specifically some of your expectations throughout the year for the -- in the Medical business, maybe particularly on what you’re assuming around flu in the fourth quarter? And then anything else in terms of changes to COVID vaccines?

Yes. I -- it’s also a good question. On the Medical side, our Medical business has done well for several years in the base business, which is consumables, generally pharmaceuticals and equipment. There are a number of variables that are market or economy or public health dependent. The first is vaccinations. I’m not talking about the COVID vaccine now, I’m talking about general vaccination. The rate of visits to physician offices for these standard vaccinations is down. I expect -- and remember, the focus for us in the vaccination area is the United States. I expect as the COVID rates go down, more people will visit the doctor’s office for their traditional vaccines, and that part of the business will grow once again. It’s down quite a bit right now. The second relates to flu -- the traditional flu. We shipped our traditional flu vaccines pretty early in the cycle in 2020. It was slightly above the previous year. I think it is fair to say, all things being equal, unless something comes out in the press that it’s not a good idea to have a traditional flu vaccine, I expect that, that will continue in the 2021, 2022 vaccine period -- flu vaccine period, which is generally sometime between August and October. Then there’s the flu test, the traditional flu test. This is an area where there have been -- where there’s been a significant issue. And of course, it’s good for the public because the traditional flu was almost nonexistent this year. So we didn’t sell many tests, hardly sold any, in fact. And who knows where that’s going to end up in ‘20 -- at the end of ‘21, early ‘22. I have to expect, as people wear less masks going towards the end of the year, as COVID mitigates further that there will be an increase in those tests and then back to ‘19 and ‘18 levels. And then the other area is, of course, the COVID test. The price of -- firstly, we are focused on the point-of-care rapid test. I think that there will be a continued demand for those tests, but the prices have come down substantially, both for the PCR and the antigen test. So factoring all of that in, you may have some volatility in our Medical business. Having said that, the core business is doing quite well as procedures move from the acute care setting into the physician’s office, into the ambulatory care centers, and expect that this will recover as the public gets confidence in returning to the physician offices for traditional visits for their vaccinations and to the ambulatory surgical centers for elective surgery.

Your next question comes from the line of Steven Valiquette with Barclays.

So in some of our recent channel checks, there’s been some conjecture that over the past couple of quarters that the large dental distributors are taking some market share back from smaller competitors in the U.S. market, driven by just more focus on greater expertise, demand from distributor partners and no longer just buying on price but also just some bundling of products tethered to PPE orders. I guess, it seems once again china is growing, U.S. dental sales much faster than the market. Just curious if you have a little more thoughts around that, whether your market share gains are coming from smaller competitors versus other sources?

Yes. It’s very difficult, Steve, to give you precise information on where our sales are coming from. But I could make a couple of general statements. The first is that we believe that the high-touch model is most appropriate for dentists. We provide all the online capabilities that are normal -- let’s say, a traditional online-only provider provides. When I say traditional, these are online providers, have not been around that many years. But whatever they can offer in terms of online purchasing, we can offer. Our prices are competitive for customers that essentially use us as a primary supplier. And recent investment in TDSC confirms that if customers want to buy only from an online supplier, it’s available. We have good software there. We’re doing okay in sales. I don’t see a huge switch overnight to any one sector, whether it’s traditional or it’s online only. Over the long run, I believe that our customers will appreciate the work that full service does. Our DSOs, obviously, are a little bit more sophisticated buyers. They understand that. This whole idea of consumables equipment, specialty products and the offering of Henry Schein One altogether is a compelling offering. I think the part of the market that relates to discount purchasing and quotes, not necessarily at a discount price but perceived discount, will continue to be there at similar rates, maybe it’ll move a few percent one way or the other. But from a Henry Schein point of view, I feel confident that we will continue to gain overall market share in our Dental business as we have had -- as we have for decades. And -- but I don’t see massive shifts one way or the other. Of course, PP&E was a unique situation. I know, from Henry Schein point of view, we were extremely conservative with the quality and the regulatory process that we went through on each PP&E product we sold. I’m not sure that was the case amongst every -- amongst the rest of the distribution channels, whether it was full service or digital only. I just don’t know. But we are very, very conservative. And there were products probably that we could have bought and sold that we refused to do based on our standards. So that may have moved some product to different channels.

Okay. That’s helpful. Just one quick follow-up question on guidance. So I think we all recognize that the $3.70 EPS number is a floor, but with $1.24 posted in 1Q, you’d have to have EPS fall back down into the $0.80 to $0.85 range on average over the next 3 quarters for EPS to end up somewhere around that floor. I know you mentioned this conservatism around the pandemic, but just sequentially, is there anything -- any 1 or 2 things we should focus on the most that would cause EPS to go down sequentially in 2Q versus the trends just posted in 1Q?

Well, Steve, a, you’re right. It’s a floor. But remember also, I think Q1, the estimates for the quarter were low compared to the full year estimates. I think a lot of the analysts assumed a significant increase going forward in estimates, and that’s why there’s such a big beat in Q1. But we don’t see anything structurally changing going forward. I don’t want to give specific guidance for Qs 2, 3 and 4. But structurally, we see the market and the business still faring well. And again, it’s a floor, so hopefully, we’ll do better than that floor.

Your next question comes from the line of Jon Block with Stifel.

Stanley or Steven, maybe just the first one, equipment results in Dental were big in the quarter. And they could be lumpy. You guys have called that out in the past. But last quarter, I think you alluded to a solid pipeline or backlog, and we sort of saw that manifest, I’d argue, in the first quarter numbers. So maybe if you could just comment on how the backlog for equipment looks as you guys go into the second and third quarters, that would be great. And then I’ve just got a quick follow-up.

Yes. Our backlog is pretty good. Of course, our customers really are investing in their practices. This is not only, by the way, in North America but internationally. So as of now, our backlog is pretty strong. And just remember that the backlog only represents a portion of what’s expected to ship in the second quarter. There’s a portion of equipment sales that will not be in the backlog, that it just generated each day. But generally, the backlog has been pretty good now for a couple of quarters. And there’s a significant desire by practitioners in the United States, Canada and the rest of the world to invest in their practices.

Okay, great. And then maybe just as a follow-up, Steven, just to push you a little bit on the gross margin details. I mean gross margins were huge in the quarter. They were up, I believe, over 300 bps sequentially. Can you give a little bit more color on what we should attribute the sequential improvement to? In other words, is it a big move in the margins on PPE? Is it underlying? Is it mix shift? Just how we should sort of think through that and maybe how sustainable this is going forward?

Yes, Jon. I think the gross margins improved for a few reasons. One is mix, but two, lower inventory adjustments than we’ve had previously, which is something we talked about that we would have lower inventory adjustments. And I do think that going forward, say, for mix changes, we feel good about the gross margin level and where it’s at.

Your next question comes from the line of John Kreger with William Blair.

Stan, I think you mentioned at the beginning of the call that you made 5 acquisitions during the quarter, assuming I heard that right. Can you just elaborate on what you bought? And thinking about the rest of the year, is your head more around kind of pushing into new geographies, adding scale in existing geographies or maybe going after new brands? Just maybe help us understand where your priorities are.

All right, John. On the acquisitions that we’ve made, they’re relatively small sales, not a huge amount of capital put to work. And so I’m not sure we -- I don’t even have all the information with me right now, but they’re really all over the entire platform, small acquisitions throughout the platform. As to the future, we will continue to invest, as you note, in expanding our distribution business around the world. Yes, there will be some geographic expansion. But the big focus is on value-added services, anything we can invest in that makes sense to help our customers operate a more efficient practice so that they can provide better clinical care will be on that list. Specialty product businesses, both in terms of geographic expansion and a little bit more tonnage in that regard, but also to add additional features to our product lines. And Henry Schein One, to expand on that platform. I think that is another area of great interest to us. So it’s really across the board. Of course, we never know when the deals will close. We have a history of adding to our platform and supplementing our internal growth with equity position growth for 30 years its worth. And at the moment, we don’t see any massive acquisition, but it’s a consistent addition of businesses across the platform in each of our business growth.

That’s helpful. And then one quick follow-up. Over the past year, you’ve called out supply chain disruptions and shortages. How do those stand at this point?

At this very moment, we can get anything we really want. We don’t necessarily have every brand in the quantities we would like, but I would say that in general, there’s availability of all the -- all the products we need. There are some manufacturers that have not fully come back yet to matching our purchase orders with their shipments. I would say that most manufacturers have an issue in one way or another. I don’t think we felt necessarily the disruption that you may read about in the paper as it relates to certain semiconductors or whatever, chips. But there are some manufacturers -- I would say, across the board, there are manufacturers that don’t -- can’t ship everything we want. But generally, we can get products in every category. We may have to substitute, and that requires a lot of discussion with customers. I think this is one of the reasons why dentists and physicians appreciate full service distributors, because we can provide the guidance on dislocations in the marketplace. Having said that, I still remain very concerned with the global PP&E structure. It’s not fully worked out yet. Providing subsidies to build a factory in the U.S. doesn’t mean that those factories are going to be operational when the prices return to pre-COVID competitive purchasing, U.S. versus global pricing. So right now, we’re okay, but there is a lot of work to be done on the global PP&E and other supply chain matters.

Your final question will come from the line of Nathan Rich with Goldman Sachs.

I’ll ask both my questions upfront. I wanted to go back to the PPE and COVID-related revenues. I think across Dental and Medical in the first quarter were about $370 million. But I’d imagine that kind of run rate coming out of the quarter is less, just given your comments around pricing. So Steve, I don’t know if you can maybe help us think about how much pricing has come down recently as we think about sort of the right run rate for PPE and COVID testing over the balance of the year? And can you also remind us what the margin is on those products? And how you would expect margins to change as the sales volumes moderate over the balance of the year?

Sure, Nathan. So on PPE pricing, it depends on the product category. Some protect categories are declining relatively significantly, namely the COVID tests and others are kind of really just normalizing a bit. I would say though that we continue to expect the margins for COVID and PPE products to be similar to average margins that we have in the business group, whether it’s Dental or Medical. So we see the margins continuing, but the sales price may come down. The sales may come down even though the units will stay probably high.

At this time, I’ll turn the conference back over to management for any closing remarks.

Thank you, operator. Thank you all for calling in. Thank you for the good questions. Appreciate the interest. As we’ve been saying for a long time, we really are confident in our core business, and the additions we’ve added, our foundation, our strategy of focusing on high-touch, full-service dental and medical services, the variety of consumables equipment and pharmaceuticals that we sell, supplemented with our specialty medical and dental products, our software offerings through Henry Schein One and we have a small offering in the medical world, as well as our value-added services. So we’re optimistic that we will continue to deliver good internal growth rates, supplemented by acquisitions, adding more to our platform, driving up sales, operating margin and EPS. We’re committed, as Steven noted, to continuing to buy back stock in moderation as we have for many years, a good way to return capital to our shareholders in a tax advantage way. And so the team is -- morale is high. I believe the management team in each of our businesses is very good and corporate. So I thank you for your interest. And we will have some meetings with investors over the next few days, few weeks. Happy to answer further questions. So thank you very much. And if you have any questions, please reach out to Carolynne Borders or to Steven directly, and they’ll be happy to answer your questions. So thank you very much.

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