Good morning, ladies and gentlemen, and welcome to the Henry Schein Second Quarter 2021 Conference Call. [Operator Instructions]. I would now like to introduce your host for today's call, Carolynne Borders, Henry Schein's Vice President of Investor Relations. Please go ahead, Carolynne.

Thank you, Regina, and thanks to each of you for joining us to discuss Henry Schein's results for the 2021 second 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 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. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, August 3, 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. [Operator Instructions]. With that, I would like to turn the call over to Stanley Bergman.

Thank you, Carolynne. Good morning, everyone. And of course, thank you very much for joining us today. We are most pleased to report record second quarter financial results as we continue to execute on our key strategies. Strengthening demand in the global Dental and Medical markets drove strong year-over-year increases in sales versus the prior year when a significant number of dental and medical practices suspended activity because of the COVID-19 pandemic. Notably, compared with pre-COVID-19 data, environment of the second quarter of 2019 to be specific, Henry Schein's worldwide internal sales in local currencies increased by 15.2%. So if you go back to the second quarter of 2019, you will see that Henry Schein's worldwide internal sales growth in local currencies increased by 15.2% in 2021, again, compared to 2019. We are also pleased with operating margin expansion that reflects a favorable product mix as well as operating expense leverage. As we continue to invest in our business to supplement solid organic growth, we completed several acquisitions during the second quarter of 2021 across the dental and Technology and Value-Added Services businesses with aggregate annual sales of approximately $60 million. Our capital allocation strategy also includes share repurchases as a means to deliver value to our shareholders. Steven will provide greater detail on the approximately $113 million spent in the second quarter as part of our Board-approved share repurchase authorization. While the number of new COVID cases has risen in certain geographies, to date, we have not seen a material impact on patient traffic. Rather, practice visits have continued to improve as offices are generally open. Data for the end markets we serve points to continued global improvements as economies recover across the globe. The most recent American Dental Association data shows current patient traffic at 88% of pre-pandemic…

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 on an as-reported GAAP basis and on a non-GAAP basis. Our second quarter non-GAAP results for 2021 and 2020 exclude certain items that are detailed in Exhibit B of today's press release and in the Supplemental Information section of our Investor Relations website. Please note that we have again included a corporate sales category for Q2 that represents prior year sales to Covetrus under the transitional services agreement. This concluded in the fourth quarter of 2020. While the agreement has ended, these sales are still reflected in the prior year comparative results. In addition to these comparisons with the prior year, I will also be comparing some key metrics with Q2 of 2019, given the height of impact of the pandemic on our business occurred in Q2 of 2020. So turning to our financial results. Total net sales for the quarter ended June 26, 2021, were $3 billion, reflecting growth of 76.2% compared with the prior year period. Internally generated sales were up 65.5% in local currencies. And compared with the pre-pandemic second quarter of 2019, internal sales in local currencies increased 15.2%. The details of our sales performance are contained in Exhibit A of our earnings press release which was issued earlier today. Note that on Exhibit A-1, it also contains details of our sales performance compared with 2019. On a GAAP basis, operating margin for the second quarter of 2021 was 7.09%, reflecting an increase of 753 basis points compared with the prior year and an increase of 46 basis points compared with 2019. We are pleased with our operating margin performance in the second quarter. And on a non-GAAP basis,…

Thank you very much, Steven. We believe Henry Schein's leadership positions in the global Dental and Medical distribution businesses serve as an excellent foundation to continue to expand our wide range of value-added solutions and services as well as our specialty products for practitioners, including self-manufactured products. We are focused on gross profit growth, outpacing operating expense growth over the long term, as we expand our mix of high-margin products and leverage efficiencies across our business, in part through One Schein and One Distribution strategies. These strategies were discussed in the last call and happy to discuss them further on this call. We believe we remain on the path to achieving our increased long-term profitability goals. In fact, we are very pleased with the performance of the business all around. We do expect to build on our track record of continued EPS growth, compounded EPS growth, with our 103rd quarter as a public company. In fact, looking at results for 2020, our high-margin businesses, which are comprised of Technology and Value-Added Services and the dental specialties businesses, represented approximately 12% of worldwide sales. It's already contributed over 1/3 of our GAAP and non-GAAP operating income. When looking at the components of our high-margin businesses, Technology and Value-Added Services, including Henry Schein One, comprised about 5% of worldwide sales in 2020 and approximately 15% of worldwide operating income. On the dental specialty side, this comprised about 7% of worldwide sales in 2020, along with approximately 20% of worldwide operating income. Let's go a little bit deeper into the dental distribution business. We delivered excellent dental revenue growth during the second quarter, driven by sales of both consumable merchandise and equipment and, more specifically, consumable merchandise sales in North America. And our international markets experienced double-digit growth compared with 2019. So both…

[Operator Instructions]. Our first question comes from the line of John Kreger with William Blair.

Maybe, Steve, can you just talk a little bit about gross margins? Very nice improvement year-over-year, but I know it's still down from the levels of a couple of years ago. What are your thoughts about how that metric trends in the second half and your ability to kind of get back to that close to 31% level?

Yes, John. We do believe that there is opportunity for a little bit of gross margin expansion. We did have some small inventory adjustments during the quarter. And I think everyone knows that supplier rebates is also lower than normal. So I would see an opportunity for some modest gross margin expansion for the balance of the year. And that will be driven by the elimination, again, of inventory adjustments completely as well as a favorable mix as the higher gross margin businesses are growing faster than the others.

That's great. And then can you just clarify the supply chain challenges you talked about in basic equipment? So that's hurting North America but not Europe? Is that correct? And why would that be?

Yes. I'll start and then maybe Stanley will want to add some comments. So the manufacturers that we're buying from in North America are generally different for traditional equipment than internationally. So the delays that we're seeing from the traditional manufacturers of chairs, delivery units and lights are impacted in North America and not internationally because of that. It's hard to tell, John, whether - how long this will take to be rectified by the manufacturers. It's related to raw materials that they're buying. We did say that we expect it to continue for the second half of this year, but it's really hard to tell. Stanley, do you want to add any more color to that?

Sure, Steven. Thank you, John. A very important question. Let me just be clear that this relates to 1 sector and relates to U.S. manufacturers, 3 in particular, manufacturers of units, chairs and lights. Firstly, we are seeing strong demand for general equipment or equipment in general. And these particular manufacturers of these chairs, units and lights are experiencing significant demand, firstly, because of the elevated demand, but also because a manufacturer in this particular sector left the market. We are not experiencing any significant shortages in terms of supply on imaging equipment. In fact, we're doing okay in particular with 2D. There is no issue with delivery of CAD/CAM equipment at all, whether it's the scanners or the mills. And there are no issues with handpieces, for example. Sterilizers, available, may not be every brand in every quantity. But generally, that's fine. Again, I do want to stress that when looking at equipment sales, please take a couple of quarters into account and don't look at 1 quarter in particular. And as I pointed out, this is a U.S. issue. Canada seems to be doing okay. And Europe is fine, too. And Australia and New Zealand business, which is quite active in equipment, also has an adequate source of product.

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

Maybe two qualifier. One clarifying question, one question on guidance. Steve, just for clarification purposes. I think you gave a global Medical organic growth versus 2Q '19 ex PPE and the same international dental consumables versus 2Q '19 ex PPE. Did you give that for North America dental consumables? Just the organic growth versus 2 years ago ex PPE. That number would be helpful.

Yes. Let me see if I have it handy. I don't think I did give it on the call. You know what, I don't have the exact number, Jeff, but the medical international business is very small. So it's very similar, the global number, to the North American number. But I don't have the specific number handy.

Yes. I'm sorry, Steve, I was asking North American dental consumables organic ex PPE.

Oh, North American dental consumables. Yes, I think we did say that.

I heard a 9% number. I thought that was with PPE though. Maybe I'd misheard.

Yes. Let me check. I thought you were referring to Medical, my mistake, sorry. Hold on. Yes. So the North America compared to Q2 2019, the total was 11.5%, and excluding PPE and COVID-related products was 4.8%.

4.8%. That's all of North American dental or North American consumables?

That's consumables only, yes, because we're just...

Yes. And just kind of understanding guidance. So Steve, if I look at the first half of this year, you're up 40% or even more than 40% relative to the first half of '19. It sounds like structurally, you expect PPE revenues this year to stay higher, even though they are coming down here a little bit sequentially higher than past years. Dental seems like it's bounced back. You've got organic growth versus 2 years ago, both Dental and Medical. But your second half guidance, I understand it's the floor, but it implies kind of a 20% decline versus the second half of '19. And conceptually, I can't wrap my mind around how you could get anywhere close to it being down, let alone down 20%. So understanding that's the floor, can you just kind of help us understand why you're setting the floor what seems to be a level that would suggest a pretty significant falloff versus the second half of '19?

Well, we're not really projecting a significant falloff. But there's a lot of uncertainties, a lot of moving parts. Similar to what we did in Q1, we gave a floor that we increased. We increased it $0.15 this quarter. I think there's opportunity for us, with the momentum of the business, to do much better than the floor. But right now, again, because of all the uncertainties, that's the way we're approaching it, Jeff. We see very good momentum in the business. But there's still a fair amount of uncertainties, that's why we're preparing it the way we are. And hopefully if things continue, you'll see us continue to raise the floor if things continue well.

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

I'm actually going to pick up where Jeff left off and maybe just take a different crack at it. The $3.85 you mentioned, a floor, but let me just sort of deconstruct it a little bit. It implies a 2H '21 op margin of mid-5% or so. You did high 7% in 1H. And to John Kreger's question, you mentioned maybe stable gross margins or even higher. So you sort of ran through the math, Steve, it implies OpEx of 24.5% in the back half of '21. Pre pandemic, it wasn't even that high, and that's off of a lower revenue base. So I know it's a lot to throw you in moving parts, but just directionally, can you elaborate on if the GMs are flat to up in the back half, why would we see sort of such an amount of deleverage in the OpEx line, especially relative to pre-pandemic levels? And then I promise my follow-up will be shorter.

That's okay, Jon. Yes. So I think you're looking at it the wrong way. We're not saying we're going to hit the floor. We expect to be ahead of that. So to do all your analytics at the floor, I think, is the long approach. What we just haven't said is how much above the floor we expect to be, and we haven't done that because, again, of all the uncertainties that are out there. So again, I would caution you not to do the analysis the way you're doing it and just to take the floor as the balance of the year, because we do expect to be above the floor, but we just haven't quantified how much at this point.

Okay. Fair enough. That's one. So maybe just to pivot, Stanley or Steven, inflationary costs, anything that you're seeing on a labor perspective? And if so, are you able to pass that through? And your ability to pass that through real time, if that is something that you are experiencing.

Yes. On the inflation side, we have experienced some inflation on branded supplier products, of course, due to raw material shortages and increase in labor. We've seen some price increases in PP&E products. Well, those seem to be moderating now. Our private label is seeing some price inflation. We expect that this will moderate. Companies are getting back into full swing, have a lot of overtime they're incurring to catch up. So I think there's going to be some inflation. I think it's going to moderate, number one. Number two is we are passing a lot of this on to our customers. But where we see this as a short-term issue, we're not doing that. So we're not super worried, but there is some pressure here due to the supply chain not quite being back to where it was in 2019. Container costs are up. As I said, overtime is being incurred by manufacturers. So I don't think it's alarming at this point. And if it were sustained, we, of course, pass it on to our customers, but also work with manufacturers to contain this increase in costs.

Your next question comes from the line of Jason Bednar with Piper Sandler.

Stan and Steve, you mentioned the belief that the shifting demand to scan-only options in the high-tech equipment side, on the CAD/CAM side, and how you expect those units to upgrade to full CAD/CAM capabilities in the future. Is that an indicator you're selling predominantly 1 manufacturer scanner over another or more a reflection of how you see the market evolving over time? And then do you sense the demand from dentists is at all being influenced by product positioning and promotions being offered by those manufacturers?

That's a very good question. There is clearly a shift to digital dentistry. We've called this out for years now. I'm not saying it is a standard of use to use a scanner, but it's close to it. And I think in certain practices, value practices, say, and higher-value practices, I think the public is expecting scan only. They've heard about scan only from friends and relatives. So we are moving clearly in that direction. There's still a huge number of dentists that don't have scanners. And there are also a number of scanners - dentists that have scanners that have an older version. So there is quite a movement towards scanners. And I think dentists are investing in these scanners right now. We are comfortable that these scanners will, at some point, turn into full chairside, including CAD/CAM, in other words, adding a mill maybe a couple of quarters out, because dentists have a lot to spend money on now. But clearly, the chairside - clearly, the scanner is getting a lot of focus now. And I think it's going to be the case for the foreseeable future. And the full mill program will also gain momentum. Now we, of course, sell a number of major brand scanners and are growing with all our major brand scanners that are 1 or 2, 1 in particular that has a significance to actually market share from our point of view. They are all doing well. And there are fewer manufacturers of the machines, the chairside mills. And there, I think the market share relative between the 1 and the other of the 2 major ones we sell is about stable. The other area where we're seeing quite a bit of activity is with dental labs. We are the largest provider of dental laboratory products in the world and labs are clearly digitalizing as well. So we're quite optimistic about this category, and I wouldn't read anything into this particular quarter. This particular quarter, we happen to have a very strong quarter in scanners. But I wouldn't view that as any kind of negative outlook on full chairside mills - systems with mills.

All right. That's really great color, Stanley. Appreciate that. Just maybe one really quick follow-up on the supply chain challenges you were referencing on the basic equipment side. I mean this really sounds, as you framed it up, like a market-wide issue at the manufacturer level in terms of sourcing materials, which would suggest that business is simply just slipping into future quarters for you and others. But I guess just to clarify and to make sure, I mean has there been at all business that's moving to competitive distributors?

No, no, no. On the contrary, our equipment business was very strong. Our backlog both in the United States or in North America and internationally is very strong. There is a bit - as I noted, there's 1 manufacturer that left the market in chairs, units and lights. That capacity had to be filled. Plus there is a demand in product. Dentists are investing in their practices. And so I see this as a demand increase coupled with a void that had to get filled, in particular with chairs, units and lights. But I wouldn't read anything else beyond that. And we are very, very comfortable with our equipment business, which is doing quite well with small practices, midsized practices and, of course, with the DSOs that are also investing heavily. So I won't read more into that than that. I'm referring to chairs, units, lights doing well. The imaging doing well, in particular, the 2D. And on CAD/CAM, at least for the last quarter, the scanners did well compared to the full. But I think, overall, the full will also pick up. And in Europe, we are not experiencing these supply chain issues and our equipment business is quite strong, again, with backlog, good backlogs in both the domestic and global markets. The equipment business is doing quite well.

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

A couple of things. I guess first, it's kind of hard to think back to Q2 2019 for the dental industry, it feels like eons ago. But just regarding the international dental equipment growth of 16.6% this quarter versus 2Q '19, seems like a pretty strong number given that 2Q '19 was likely a tough comparison with the IDS trade show occurring in March of that year. Recall that Europe was strong in the second quarter of '19. I think Brazil was a drag for some reasons. I just want to get your quick thoughts on that comparison. And also related to IDS, with the trade show set to resume in September of this year, are you assuming the normal bump in international dental equipment sales in 4Q '21? Or could it be more water down just given the potential impact of COVID on the trade show dynamics?

Yes. I don't have any specific projections in front of me. I don't know, Steven, whether we disclose this kind of information. But generally, 2 things. One is please understand that equipment sales can be lumpy, number one. But number two is dental equipment purchases and demand in the markets we're in is quite solid. You do reference Brazil. We did exit a part of the equipment market in Brazil. Essentially, we defocused certain manufacturers and have added other manufacturers. That was a 1- or 2-quarter issue. And our Brazil equipment are now, although not significant in the context of Henry Schein as a company, is doing quite well. But overall, I would say our equipment market is doing well. Dentists are investing in their practices. They want their practices to look and feel modern. Interest rates are helpful. Of course, when you look at all these numbers, you have to take into account tax situations. Who knows what exactly what is going to be the tax situation at the end of the - for the fourth quarter of 2021 in the United States? But generally, I would look at the trend and the trend for equipment sales domestically, Canada, mix up. North America and internationally is quite solid all around. And this particular supply chain issue will be dealt with. And these are quality manufacturers who will deal with the issue. And I expect to continue to see solid equipment growth in all categories going forward.

We have time for one last question from the line of Nathan Rich with Goldman Sachs.

Maybe Steve to start, did M&A or FX have a significant impact on operating margins in the quarter? And then bigger picture, I mean there's been, looking at the last 2 quarters, a bit of volatility in the operating margin. And just how are you thinking about that trend for the back half of the year? Any thoughts you could kind of provide as we think about how to model that line would be helpful. And then Stanley, maybe turning to you. You highlighted the double-digit growth in North America consumables as well as international markets versus 2019. It would be great to get your thoughts on what you think momentum will look like on the 2-year basis in the back half of the year. And it sounds like there's still room for international markets to improve. I wonder if you could comment just on how far below baseline we still are in Europe and Asia.

Yes. I'll answer the first question, and then I'll turn it back to Stanley. Nathan, for the acquisition impact on Q2, negatively impacted our operating margin by 16 basis points. And I think people, just to remind people, the quarter you do acquisitions, you have deal costs, which drags the earnings. Plus typically, we don't get synergies immediately. It takes us generally a few quarters to get synergies and to improve the profitability of the acquired companies. But the impact was negative 16 basis points for the quarter.

So the question on our international business. I think the international dental markets are quite strong. Germany is - has been strong throughout this period, that have a little bit of retraction there. But overall, it's quite strong. It's our biggest market in Europe. Parallels in size and scope to our Canadian business. And it's quite solid. Implants have done exceptionally well during this period of time. It's very important to us. Very profitable. We, I believe, sell more implants in Germany than anyone else. Our prices are reasonable, by the way. And France has been solid. Italy and Spain recovered. U.K. is still in the process of recovering. Other markets like the Netherlands are okay. But we are not fully back in terms of visits, 100% back to where we were in 2019. I think there are certain markets we are. We're close. But compared to the U.S. where we think the market - the patient visits are, on average, a little higher than '19, the data from the ADA doesn't contemplate exactly the right measurements for practices that are over 100% compared to '19 visits. Brazil is - has a high COVID rate, but we're particularly doing well. And Australia and New Zealand is pretty stable. But I would say in all these markets, there's still room to go, to get back to '19 outside of the U.S. And Henry Schein clearly is gaining market share. We've been working very hard in Europe for a long time and believe we have an outstanding management team in Europe and internationally as well. In Asia, we're growing, in Australia and New Zealand and, of course, Brazil. All with a very good management team, I'd say very stable and dynamic and excellent management team, which is driving our consumables and equipment business as well as our technology businesses. Our Medical business is relatively slow - small outside of the U.S., but is growing, added to management over there and investing in the business. So overall, we're quite optimistic about our international business. Carolynne, so is that it?

Yes. Stanley, we're ready for closing remarks.

Okay. Thank you, Carolynne. Thank you, Steven. Thank you all for participating. I think you've got the tone of the call, and that is, we feel very good with the progress we're making. Our strategies are being implemented. I wouldn't say every strategy is exactly the speed we want. But there are parts of the business that are exceeding expectations. And we're very optimistic about the future. I believe we have a very good management team in place. The strategies are good. We are putting the final touches to our 2022 to 2024 strategic plan. I would say more or less in line with what we've been focused on for the past few years. Of course, we had, like everyone, a bump in the road in 2020. But I would say largely recovered from that. Although I think it is important, as Steven outlined, to be aware that we are in the midst of a pandemic. So once that concern dissipates, I think we can even be more optimistic. But overall, the business is doing well. We're performing on our strategies. Management is highly motivated. The team, in general, is motivated. And the dental markets have recovered to a very large extent. And the medical markets, almost there. So we believe that the growth in the ultimate care sites, from our point of view, is the right place to be, and that's what we're focused on. And we're putting our capital to work, I think, in an intelligent way, splitting it between investments and stock repurchase. The business is throwing off a lot of cash. So quite optimistic, and thank you for your interest. Of course, Steven and Carolynne would be happy to answer specific questions. I think our investor website has more information as well. So thank you, and look forward to an update 3 months from now. Thank you.

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