Good morning, ladies and gentlemen, and welcome to the Henry Schein Third Quarter 2021 Earnings 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, Graham Stanley, Henry Schein's Vice President of Investor Relations and Strategic Financial Project Officer. Please go ahead, Graham.

Thank you, operator. And my thanks to each of you for joining us to discuss Henry Schein's results for the 2021 third 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 on this call that incite 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 and other fee estimates. Our conference call remarks will include both GAAP and non-GAAP financial results. We believe the non-GAAP financial measures provide invested with useful supplemental information about the financial performance of our business, enable the comparison of financials between periods but certain items may vary independent 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 Appendix B of today's press release, which is available in the Investor Relations section of our website. Lastly, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, November 2, 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 yourselves to a single question and a follow up during Q&A to allow as many listeners as possible to ask their question within the 1 hour we have allotted to this call. With that said, I would like to turn the call over to Stanley Bergman.

Thank you very much, Graham, and congratulations on your appointment as Head of our Investor Relations. And of course, thank you for all you've done for the company over the last dozen plus years. So good morning to everyone, and thank you for joining us. Really, really happy today to report record third quarter financial results, driven by a keen focus on execution by the team. And the team has done a remarkable job since the virus -- the pandemic started back in March of 2020. And of course, there was a steady patient traffic pattern during this quarter, which also contributed to the very good and actually the excellent results. And we have excellent momentum across the entire company. So if we compare the results of sales a year ago, Henry Schein's worldwide internal sales that's in local currencies increased a robust 7.2%. But what's really important, if you exclude the sales of PP&E and COVID-19-related products, results are up 6.3%. That's the internal sales growth in local currencies. We believe that patient traffic was generally similar to the previous quarter for our dental customers, that's in the United States and globally, small adjustments in different parts of the world, but not material. And definitely, the pattern is improving for our medical customers. We mentioned in previous calls that business to physician offices had gone down compared to '19 and definitely in ambulatory surgical centers as well. We see this traffic as increasing again. In mid-September, we announced important changes to our senior distribution business leadership structure. And let me comment on these changes before I review the third quarter performance for each of our business groups or actually Steven will do that first and then I'll provide additional comments later. We have been pursuing an umbrella strategy which…

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 third quarter non-GAAP results for 2021 and 2020 exclude certain items that are detailed in Exhibit B of today's press release as well as 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 the prior year sales to Covetrus under the transition services agreement, which concluded in the fourth quarter of 2020. While the agreement has ended, these sales are still reflected in the prior year comparative results. Turning now to our financial results. Total net sales for the quarter ended September 25, 2021, with $3.2 billion, reflecting growth of 11.9% compared with the prior year period. Internally generated sales were up 7.2% in local currencies, and you can again see the details of our sales performance in Exhibit A of the earnings press release that was issued earlier this morning. On a GAAP basis, our operating margin for the third quarter of 2021 was 6.63% and that's relatively flat that represents an increase of 2 basis points compared with the prior year. On a non-GAAP basis, operating margin of 6.63% for the third quarter of 2021, that represents a decrease of 22 basis points compared with the prior year. Again, a reconciliation of GAAP operating margin to non-GAAP operating margin can be found in the supplemental information page on our website. The year-over-year decline is due to higher expenses this quarter compared with Q3 2020, which reflected temporary expense reduction initiatives we put in place last year in response to the COVID-19 pandemic.…

Thank you very much, Steven. So let's provide some thoughts on each of our businesses. Third quarter dental revenue growth was solid, as you heard. Overall gains in consumable merchandise and equipment sales in North America and international markets reflect the continuing recovery. And as noted, this is coupled with key focus on execution by Team Schein. North American dental consumable merchandise internal growth in local currencies with and without PP&E and COVID-19-related products also was quite solid in the third quarter. Consumable merchandise sales continue to improve, which we believe was bolstered by a steady flow of patient traffic. Here in the U.S., the most recent American Dental Association data shows patient traffic is currently at about 90% of pre-pandemic levels, and Henry Schein One billings associated with general claims processing are, once again, about 100% and of pre-pandemic levels, a little over. These statistics are similar to those we reported in the second quarter, and we believe the market to be sequentially stable dropping slightly through improvement. Similar kind of data around the world, some countries are a little ahead, some a little behind, but on balance, pretty stable on the dental side. You may recall that many of the international markets we serve posted a quick recover in sales and consumable merchandise in the third quarter of last year when we recorded at that time, record sales. This comparison resulted in slightly lower sales growth than we have seen in prior quarters. Most markets are back to normal, as I noted, with some modest weakness in the UK, although it is better. And in Australia and New Zealand for a very short period of time to the main cities were on lockdown. But the market -- the lockdown has been largely lifted and Australian and New Zealand…

[Operator Instructions]. Your first question will come from John Kreger with William Blair.

Can you just elaborate a little bit more on the One Distribution plan? Does that mean you're going to move to sort of a shared footprint across your distribution networks? And is that going to be global? And I'll just ask my follow-up now and get off. The second question, Steve, is for you. I think the guidance implies a little bit of a sequential step down in earnings. Should we think about that as just because of basic equipment being lower? Or is there something else going on in Q4?

Steven will address the second part -- the second question. So we have shared services in a number of areas already. Our distribution systems, our telesales customer service, for example, inventory management has been a shared service. But there are many other parts of our business, particularly the front end. For example, management of customer contracts, equipment service, financial services, order processing, the front end order processing. Some of it is already corporate-wide and others -- parts of it are specific related to medical and dental. These areas, I think, operating under common management to drive out costs and provide better customer service. The big area that we are preparing for is our new digital front end, our global e-commerce platform that we'll launch in the middle of next year in the U.K. and then will be rolled out throughout the company carefully. We need common management, because that system is geared towards digital interfacing with our customers, dental and medical. So to cut a long story short, our very large customers and our midsized customers are going through a lot of experiences that our medical team already undertook and went through a decade plus ago. So there's a lot of learning and these are learnings that our dental team can provide our medical team. So we've broken up our business into 2, our North American business, led by Brad Connett, who's run our medical business for decades; and Andrea Albertini, internationally, who's been with us also for about a decade and has significant experience in manufacturing as well and distribution. And they are all working very closely with David Brous, who's responsible together with René Willi for our Specialty businesses. So internally, it works very, very well to advance our strategic plan that will be unfolding in -- for 2022 to 2024.

Okay. I'll tackle the second part of your question, John. So Q4 guidance. First, I'll note that our guidance is up, for the year, quite significantly. Remember, we gave a floor of $3.85 for the full year, and now we're at $4.27to $4.35. But specific to Q4, we wanted to consider a few things that I'll enumerate. One is North American equipment and availability of product. We have estimates for product being delayed into 2022. But there was still a little bit of volatility and uncertainty as to exactly how much product we'll get in Q4 for North America. And this is really the traditional equipment. So we're being conservative there. We also have seen a fair amount of volatility on 2 product items that we're trying to be a little bit conservative on. One is COVID test kits. You can see it's been jumping around. We had a very strong Q3. But we do expect COVID test kits to moderate -- sales to moderate a bit in Q4 as well as PPE pricing. We do expect PPE pricing to also moderate a bit in Q4. So there's some conservatism built into the Q4 numbers. I'll also note that if you compare the EPS to the EPS of last year, remember, last year, we had that tax settlement that was $0.11 per share, and that obviously was nonrecurring. And finally, I'll say because there's been some notes and thought on inflationary. Obviously, any price inflationary items are fully considered, both in our 2021 and 2022 guidance.

The next question is from Jeff Johnson with Baird.

Steve, maybe following up on your last point there. I mean you talked about these price increases in dental and your efforts to maybe hold those in check. But can you talk about your ability to pass those price increases from the manufacturers through to your end users? I know you've alluded to it a couple of times. But we hear that you've raised rates here in the last few weeks, may or may not be able to fully pass price increases through to your end customers. So just on both those topics would be helpful.

Sure, Jeff. So again, our guidance assumes what we believe is a reasonable estimates of inflation. To give a little bit of detail, in pre-pandemic times, pricing inflation was probably in the low single digits, 2%, maybe to 3%. Right now, pricing is coming in for 2022, and it's a bit higher than that. It's probably in the 4% to 5% range. Generally, we try to pass through pricing to the end user, to the customer. But as Stanley said in his prepared remarks, we're also working with manufacturers to see how much we can limit those price increases and do other things. With respect -- I know there were some questions earlier this -- last week, actually, on specific customers. And on that, we're not going to comment on specific terms and conditions for specific customers for competitive reasons. But again, we feel like inflation is a little bit higher, and it's not just on product costs, it's also on labor and other things. And all of that is baked into our guidance, best we can do at this time.

All right. That's helpful. And just a quick follow-up. Just -- you talked about dental volumes kind of globally and in North America being fairly stable. We're 1 month into 4Q. How was October? And just any color on a very high level on kind of -- are you still seeing that stability here at mid the fourth quarter?

Sure. I would say that specific to dental, October continued to show good results, strong results. I'd be careful, though, for everyone on the line. It's very common to see a strong month and then sometimes, it changes because of ordering patterns of customers. But we definitely saw a very continued progression of the market conditions in October for the company.

The next question will come from Jon Block with Stifel.

Maybe just a near term and then a more high level. So just on the near term, it's certainly a solid quarter, big, broad top line and bottom line be. Maybe the only thing to pick on was gross margins, down roughly 100 bps sequentially and below our estimates. Steve, maybe if you can just talk to that, what was that from? Was it all mix? Was it the big medical number and PPE. And do we expect that to bounce back sort of into the fourth quarter and trajectory into '22?

Yes. The gross profit, first of all, we had a significant increase in the gross profit year-over-year and that was primarily driven by lower inventory adjustments. I would say it's a little bit of mix. And the second thing I would point to in impacting the gross margin is pricing on PPE products. PPE products continue to have pricing declines. So while -- it's not as big an impact on margins, it does impact the absolute dollars as well as the mix because it is now not contributing as much to the mix. So it's primarily mix, Jon. And we do think that these pricing issues in PPE will be behind us, certainly during Q4. They've moderated a lot in Q3, but there still seems to be a little bit more to go. And going forward, we expect -- our goal is also to continue to drive towards higher-margin businesses, those technology and specialty sales products, which carry a higher margin. And the goal is to help improve the margin with a positive mix shift.

That's helpful. Probably a good segue into the next one. Stanley, just M&A, now that the COVID environment has seemingly hopefully started to stabilize. Maybe your, just, appetite going forward for M&A. What do the multiples look like in the industry? And just as COVID alter your wants in one industry versus the other from what we've all experienced the past 18 months or so.

Yes, Jon, our strategy on M&A continues to be the same, namely to add products to our -- businesses to our distribution platform, parts of the world where we're not as strong as we would like to be. And at the same time, advancing our specialty areas, namely software, the specialty products area and services. And maybe multiples to increase to some extent. But there's lots of opportunity for us to create synergies and to bring new value-added services to our customer base. So we remain quite optimistic about the M&A area. Obviously, there's no deal until there's a deal. And our pipeline remains quite full. Having said that, again, we cannot commit to any particular quarter. And I think you heard from Steven's guidance that there's nothing in these numbers for M&A that is not announced.

We do have time for 1 final question, and that question will come from Jason Bednar with Piper Sandler.

Steve, I'd like to start with you on a couple of items related to guidance. First, I'd be curious in your level of confidence here today and margin expansion for the business next year and really trying to take into account the items that were impacting here real time in the quarter with respect to things like business mix and a step-up in stock comp. And how we should be thinking about those items when it comes to operating margins for '22? And then also kind of within that guidance discussion, do you have an estimate on what the currency headwind you're assuming in earnings growth guidance for next year?

Sure. You asked a lot of questions. Let's see if I can hit all of them. By the way, I just wanted to note that when I -- in the prepared remarks, when I was describing the technology sales growth, I inadvertently said $21.9 million sales growth when I meant 21.9% growth. So just to correct that. With respect to guidance, there's a couple of things. We're not assuming any major change in foreign exchange because of guidance. We do have a preliminary budget, so our 2022 guidance is based off of that preliminary budget. When you look at the Q3 stock compensation expense, it was higher than normal because of the overperformance in Q3 as well as the full year. So Q3, we caught up based on that new projection on some of the stock-based compensation expense. That will be normalized in 2022. And like I said, we're trying to be a little bit conservative on 2022 also, because of some of the uncertainty on test kits. We'll also see the benefit of the timing, Q4 timing on traditional equipment will be a headwind for us, but it'll be a tailwind in 2022 as those orders that can't get installed in Q4 get installed sometime in 2022. Did I cover, Jason, the bulk of your questions? Because you had a lot of sub-questions in there or something else that you want me to answer?

Yes. Sorry, no, I think you did. I mean, it was -- really trying to get the confidence in margin expansion for next year, but I think you did there. And then just coming back to one other point you were making there, Steve, just on hitting on the basic equipment challenges here near term, but it also sounds like this issue, before it's fully resolved, it may be extend a bit deeper into '22 than what you were alluding to a few months ago. I guess just at a high level, is there a point where you'd look to maybe procure product from elsewhere, bring in some international suppliers? I guess, just anything you can proactively do on your end to help mitigate this challenge from really dragging on deep into '22?

Yes. Maybe I'll make a comment and then pass it to Stanley. So this is what we're hearing from the impacted manufacturers right now. So remember, we don't see the insides of all of the detail. But what they're telling us is it won't be fully normalized until second half of 2022. We are doing a lot of different things to see if we can bring another product and get more product to fulfill demand as quickly as possible. But maybe I'll turn it to Stanley to give a little bit more comment on that.

Yes. Thank you, Steven. Jason, we are talking about traditional equipment in the United States, chairs, units, lights. All the other equipment is readily available and chairs, units and lights are available outside of the United States. So we're dealing with a particular situation where a significant manufacturer of ours exited the chairs, units and lights market. Other manufacturers have scaled up their capacity. This also happened simultaneously with an increase in demand for equipment, traditional equipment, whether it's a direct result of our gaining market share or actually practitioners and/or practitioners investing in their practice. This business will not be lost. Coincidentally, there is a delay in construction. I think this is a general economy issue. So even if we had the equipment, there would be several practices, quite a few that would not be ready to take them. So I don't think this is a need to add additional chairs, units and lights manufacturers to our mix. We're very happy with the major manufacturers that supply us with these products here. It's not an international -- or non-U.S. issue where the manufacturers in general are providing us with product. And it certainly doesn't impact products like imaging, digital equipment, et cetera. There, we're experiencing a steady flow of product. Perhaps we can't get everything we want right away, but we're not talking about significant delays. So in general, we are happy with our manufacturers of equipment. We don't have our own private brand equipment line. We do not intend to have that for the large equipment. And so we are happy that our major manufacturers will supply us with the equipment we need. On the consumable side, there is some dislocation. And there, we are moving some product around. If a manufacturer can't give us what we need,…

So thank you very much for participating in this call today. If you have any questions, please reach out to Steven or to Graham in Investor Relations, and I look forward to speaking to everybody when we report our fourth quarter numbers. Thank you.

Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect.