Good morning, ladies and gentlemen and welcome to the Henry Schein Fourth Quarter 2021 Earnings Conference Call. [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, sir.

Thank you, operator and my thanks to each of you for joining us to discuss Henry Schein’s results for the 2021 fourth quarter and full year. With me on the call today are Stanley Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein; Steven Paladino, Executive Vice President and Chief Financial Officer; and Ron South, Vice President, Corporate Finance and Chief Accounting Officer and who will be assuming Steve’s responsibilities as Chief Financial Officer at the end of April. 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 also 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, February 15, 2022. 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 single question and the follow-up during Q&A to allow as many listeners as possible to answer questions within the 1 hour we have allotted for this call. With that said, I would like to turn the call over to Stanley Bergman.

Thank you, Graham. Good morning, everyone and of course, thank you for all joining us. Let me take this opportunity to thank Team Schein for the team’s extraordinary effort over the past 2 years. Despite the impact of the global COVID-19 pandemic, we are pleased to report excellent full year 2021 financial results, including an outstanding fourth quarter that exceeded our expectations. Our fourth quarter results were driven by strong internal sales growth in local currencies of 6.3%, when excluding sales of personal protection equipment or PPE and COVID-19 related products as well as prior year sales to Covetrus under the transition agreement and acquisition growth of 4.3%, while also reporting operating margin expansion of 30 basis points. So, we are pleased with our sales results and we are pleased with our operating margin expansion. We have updated our 2022 financial guidance based on this latest view of our businesses. Steven will provide additional details on that topic in a moment. We have also completed a strategic review recently of our businesses and we are excited to recently present an updated 2022 to 2024 strategic plan to our board. We update our strategic plan generally every 3 years. The 2022 to 2024 strategic plan was very well received by our board. The updated guidance reflects the execution of two key strategic priorities contained in the strategic plan: first, continuous operational improvement in our distribution businesses, leading to exceptional customer experience and profit improvement. This was complemented by increasing the overall contribution of our technology and value-added services businesses and our Dental Specialty products, which have higher sales growth and higher operating margins. So, specifically, our technology and value-added services businesses and our dental specialties products businesses, together for the full year of 2021, achieved internal local currency sales growth of…

Okay. Thank you very much, Stanley. Thank you for those kind words and good morning to everyone. Before I review our financial results, as this will be my last of more than 100 quarterly conference calls as CFO, I’d like to acknowledge the relationships I have built with so many of you in the investment community, our investors and analysts. I would also like to express my deep appreciation to the finance team here at Henry Schein and other colleagues with whom I have worked closely with over the years. While I’m looking forward to life’s next chapter, it’s those relationships that I will remember most. I thank you for those memories and for your friendships. Now, turning to our review of financial results, 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 fourth 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. Turning to our financial results, total net sales for the quarter ended December 25, 2021, were $3.3 billion, reflecting growth of 5.2% compared with the prior year. Internally generated sales were up 1.4% in local currencies, acquisition growth was 4.3% and foreign exchange impacted sales growth by minus 0.5%. Excluding sales of personal protective equipment, or PPE, and COVID-19-related products as well as prior year sales to Covetrus under the transitional services agreement, our internal growth in local currencies was 6.3%. As you may recall, in 2020, prices for PPE products and specifically, gloves, increased due to some increased due to some supply chain disruptions that we experienced. However, prices of those products along…

Thank you, Steve, and it’s great to be speaking with all of you this morning. I’m honored and excited to be stepping into the role of Henry Schein’s CFO. I have worked closely with Steve for more than a dozen years, and I’m looking forward to working with Olga, Graham and the entire Henry Schein global finance team. To underscore what Stanley said, I expect a smooth transition into my new position. Steve has been a tremendous steward of Henry Schein’s finances during several decades of impressive growth and expansion. I look forward to continuing his legacy of transparency, coupled with fiscal responsibility. You’ll be hearing more from me when we report our Q1 financial results in early May. But in the meantime, it’s great to be joining the team on today’s call. Now I’d like to turn the call back to Stanley.

Thank you, Ron. Congratulations on your well-deserved promotion. You are truly respected by our entire management team at Henry Schein, and thank you for your service. Of course, I thank Graham as well for his new role and for his service and, in fact, the entire finance team. In September of 2021, we announced a new leadership structure associated with what we internally refer to as One Distribution. Our One Distribution strategy contemplates a North American dental and medical distribution leadership under the leadership of Brad Connett, a 25-year veteran of Henry Schein. Our international distribution businesses are being led correspondingly by Andrea Albertini, an exceptional healthcare executive who joined our team 9 years ago. As noted earlier, One Distribution is part of Henry Schein’s commitment to continuous operational improvement in our distribution businesses, leading to exceptional customer experience – building on our exceptional customer experience and, of course, profit improvement. Turning now to our most recent accomplishments in our distribution businesses, let me start with Dental. Fourth quarter Dental revenue growth was solid. In North America, we are especially pleased with the growth in dental consumable merchandise sales with strong internal growth in local currencies with and without sales of PPE and COVID-19-related products. The growth reflects the impact of some modest price increases as well as the contribution from two large DSO contracts awarded in 2021. We expect additional price increases from suppliers to be made by the end of the first quarter, which unfortunately, we’re having to pass on to our customers. And there may be more throughout the year. Patient traffic held quite well in December. However, we believe there was a decline in January resulting from higher patient appointment cancellations and dental staff shortages due to absenteeism. We consider our Dentrix insurance claims data as…

Thank you so much. [Operator Instructions] Your first question comes from the line of Matt Miksic from Credit Suisse. Your line is open.

Hi, thanks so much for taking the questions. Congrats on a really strong finish to ‘21. Just a couple of questions, if I could, on first the guidance, if you could talk a little bit about the impact, how to quantify perhaps the impact of the extra week in Q4 as we sort of bake that into the cadence of growth for the year? And then your comments around Q1 in January, it sounds like if you could maybe just run through the sequential commentary that you made one more time, to be clear. It sounded like you were seeing some pressure in January with resilience in February, but then it also seemed like some of that sequential movement was relatively consistent with your historical experience from Q4 to Q1? So may be just a clarification on those two points. Thanks so much.

Sure. And I will ask – thank you for the question. I’ll ask Steven to respond to those. Before I do that, I somehow glossed over. I don’t know why I missed this in the script. But Brad Connett, a 25-year veteran at Henry Schein, runs our North American distribution businesses, that’s dental and medical, all pursuant August 2021 reorganization. I have no idea where I missed that, but good people are checking on what I say. So Steven, please. Hello. Steven?

Yes. Sorry, I was on mute and want to – I’m back. So first on the extra week, the extra week is probably one of our slowest weeks of the year because it’s the last week of the year so it’s a holiday week. We generally see a lot of practices and customers even slow that week or close that week. So it’s not a normal week. It’s a very slow week for us. All of that, though, is incorporated into our guidance range of 6% to 8% of sales growth in 2022 over 2021. And remember, that sales growth is all in, so it includes acquisitions that occurred in 2021 that you now have the full year impact of, but it does not include any acquisitions, new acquisitions that we may do in the year. So, it’s baked into that 6% to 8% number. And again, it’s a slow week. On January sales performance, so what we have said and what we believe is that, yes, we did see, first in Q4, we did see some modest impact of the Omicron variant impacting our customers. That continued and probably accelerated slightly into January. We saw more patient appointment cancellations and rescheduling of patients really because even staff of dental practices were impacted by the Omicron and were closed by some absenteeism. But as Stanley said, as we exited January, we started to see a pickup of sales just modestly again. So, we do believe that those sales – that sales impact is temporary caused cancellations of payments, but they will be rescheduled and we are not expecting that to be a long-term negative impact. Similarly, in Medical, we did see some elective procedures canceled in some of our customers in January. But again, we do believe that to be temporary. It’s primarily impacting ambulatory surgery centers. It didn’t have a significant impact on our business, but we also believe that, that will reaccelerate and is a temporary impact. We are trying to be less best thing on sales. We are trying to be a little bit conservative on PPE and test kits. As we said on the prepared remarks, we are assuming approximately 10% lower sales of test kits for the year. And we also have assumptions on PPE with lower average selling prices built in there. So, hopefully, that helps you on some of the sales numbers, Matt.

That’s great. Thank you.

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

Thank you. Good morning all and Steve, just want to say thanks for all the guidance and insight. I think it’s been almost 20 years you and I have known each other, so that will be missed and congrats on the retirement. Let me ask a two-part question, I guess on gross margin. The first part, just what’s the algorithm for the 20 basis points to 25 basis points of operating margin expansion this year? Is it hold gross margin and leverage operating expense in 2022 and going forward? Can we expect any kind of gross margin improvement off these levels? Just thinking more on the gross line rather than operating margin. Any updates there you can provide?

Sure. And thanks for the kind words, Jeff. I have enjoyed building relationship with you and all those difficult questions that you typically ask. So, we do expect in our guidance that we might see a little bit – some modest gross margin expansion over 2021. Again, that’s driven primarily by a shift to higher-margin products, but we don’t expect a major change in gross margin, but either flat to slightly modest increase. And we really do expect that the margin expansion will come from leveraging expenses primarily as well as, again, shifting towards higher-margin products and impacting it on the operating margin side. So, that’s the way we built our budget for 2022.

Yes. Alright. That’s helpful. And then maybe one follow-up just on that margin comment. Can specialty and technology and value-add, can that hold kind of the 20% operating margin leverage going forward? And when I think about double-digit growth for those two businesses, it seems like each year that should throw out kind of 10 basis points to 20 basis points of operating margin improvement right there. So, is the algorithm then kind of hold margin in the rest of the business and get the margin benefit of that mix shift to those higher-margin products? Is that kind of the other way to think about the algorithm? And just again, can those businesses hold that 20% margin? Thanks.

Yes. I would say we haven’t given that level of specifics. But remember, we also want to invest in those businesses, so there may be some additional investment. But I would say generally speaking, that the margins should generally hold in both the technology and the dental specialties. Obviously, if we did acquisitions in either of those areas, that could change the mix. But I think it generally should hold – and again, that’s helping on overall margin as those businesses grow faster than the core business.

Thank you.

Okay. Thanks Jeff.

Your next question comes from the line of Nathan Rich from Goldman Sachs. Your line is open.

Hi. Good morning. Thanks for the questions. Maybe just following up on the margin guidance, you talked about the restructuring that you went through last year. Is there a way to quantify the savings that you are expecting to show up this year? And then how should we think about the impact of price increases and inflation both to top line and margins this year?

Sure. I will take the last part of your question first since it’s a little bit easier. The inflation really should not have any significant impact on margins, because really, what we are trying to do is maintain margins with the price increases that we have seen and we expect to continue to see. So, there is really not a margin per se opportunity, although there is a gross profit dollar slight opportunity because if the margin – same margin on a slightly higher selling price will add to that. So, I think that, that’s not really driving it. It’s driving dollars, but not margin. And what was the second part of your question, Nathan?

Just the savings from the restructuring.

Remember, the restructuring that we completed in 2021 really wasn’t all that significant. I am trying to put out a number. For the year, it was $7.9 million. Typically, our restructuring has a 12-month to 18-month payback, so the impact, something less than that $7.9 million. But remember, some of the reasons for doing the restructuring is for us to also free up dollars to continue to invest for our future growth.

Okay, makes sense. And then if I could just ask a follow-up. On the two DSO contracts that you referenced, obviously, it seems like you saw a nice contribution in the fourth quarter. I would imagine there is some incremental benefit before those annualize. But could you maybe just talk about sort of the scope of those? And are there any other RFPs or potential contracts that are up for renewal over the upcoming year that we should have in mind? Thank you.

Sure, yes. So, the two larger DSO contracts that were awarded during 2021, we now have on-boarded those customers, so those are flowing through our sales numbers in Q4. We still should have an annualized impact in 2022, but much more modest, because we have been seeing a lot of those sales already in 2021. With respect to DSO contracts, we probably always have one or two every year that is coming up for renewal. We don’t have them all a bunch stuffed in one particular year like we did many years ago. We feel very good with our relationships with DSO customers. We feel like we serve them really well. Our pricing is very sharp. So, we feel good about the renewals. But there is always one or two every year.

Thank you.

Okay.

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

Hi. Thanks very much. Steve, what I would really like to ask you is for your sort of favorite Schein anecdote, but that’s probably not appropriate for this call. Maybe instead, I wanted to ask about the technology and value-added services. It seems like the growth you reported in the quarter is a lot higher than normal. Can you just talk about what drove that? And what’s the sort of sustainable level of growth you guys are shooting for from that segment?

Yes. Again, technology, especially our services that are based on patient traffic, was impacted and was slower to return to pre-COVID level, so we are seeing a nice impact from that. We haven’t really given specific guidance, but certainly, we would like to see that segment be double-digit top line grower and hopefully, slightly greater than that because of margin opportunity. So, we feel good about that business. Now the only thing is I would caution that double-digit sales assumes no major shift to a SaaS model where I think everyone knows that in the SaaS model, you would record revenue every month, so it’s an annuity, which is good for the company. But if you compare it to a non-SaaS model where you have the sales all upfront, it does impact overall sales growth. Should that become material, I am sure we can carve that out for investors. But right now, it’s not that material.

Great. Thank you. And then…

Let me just add a little bit more to that. First of all, my favorite story is when we were on the road with a William Blair salesperson who said, “Stan, you talk too much. Listen to Steven.” So I just want to point out that for the specialty products and technology products, we are investing heavily in R&D in these areas and have good results, whether it’s in the endo, the orthodontic, dental surgery or, in fact, the whole Henry Schein One area. Many, many – if I am looking at a list at Henry Schein One, that’s seven or eight significant new product launches in the last two quarters or so quarters. So, these businesses are going to drive even higher margin in the future. We can’t say exactly when because there is still a lot of investment going on. But they are in driving operating income, but we expect for that to grow over time as this new development, the R&D projects materialize.

Thanks Stan. One quick follow-up, we hear broadly that dentists’ and doctors’ practices are really struggling with staffing themselves. From your perspective, do you guys have an offering maybe within the technology business to sort of help lessen that strain that your customers are facing right now?

Yes. Your observation, by the way, is correct. I think it’s particularly acute in the DSO world. I can see light at the end of the tunnel. We have two areas of support for our customers. One is Henry Schein One does help with identifying office managers and helping to train the office managers, etcetera, etcetera. And we do have a staffing business. It’s relatively small, but we are – this is in our services, value-added services business, and we are investing heavily in that area to advance.

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

Hi. Good morning. Congrats on a nice finish to the year. And Steve, all the best here, I hope you enjoy your current retirement to its fullest here. You talked about price increases that have already been contemplated, those that are still coming this quarter and maybe even others that you have been citing to later this year. So, I guess I would be curious if these are manufacturers pushing through multiple price increases in the year or if these are just different manufacturers that have some very timing for implementing their price increases. And then just what’s been the response from the dental community? Are your customers pushing back at all in any way? How are those conversations being handled? And are you seeing any substitution or trade down in response to the price increases?

Yes, maybe I will kick off. So, I think that the bulk of the price increases that we were expecting have come through already. There may be – there is a few manufacturers who have done more than one price increase, but the bulk have come through. But if inflation continues at this rate, I guess it’s possible that more could come through going forward. From a customer perspective, look, there is always – whenever prices go up, there is always a little bit of pushback, but I think customers understand that we are in a highly inflationary environment. It’s not just us that are raising prices, it’s really across the board. And I think that helps that people have awareness of inflation going on. But there is always a little pushback, but it’s certainly very manageable, and we think that we will be successful in passing through those price increases. Even though it’s unfortunate, we would prefer not to, but we are getting price increases so we just kind of have to pass it through to the end user.

Thank you, Steven. There is also a little bit of deflation occurring in some of the commodities, obviously in the PP&E area, quite substantial. Some of the other commodities, there is an opportunity to consolidate purchasing power on behalf of our customers, so we are getting support in that area. And also, I would say on – in the digital dentistry area. 3D imaging has come down in pricing and it’s making it more affordable to the general dentist. And the whole scanner world is also coming down in pricing which ultimately, I think, will lead to standard of use. We are not there yet. A lot of practices don’t have it, but I think there is going to be more units going out to general dentists in the scanner world. And we have many, many options, including some of our major suppliers today are advising that they are going to come up with more competitive offerings in future. So, I think it’s not as bad as you read in the newspapers, but we are in an inflationary period for sure, on our payroll as well. And we have to balance all of this to ensure that we do the right thing for all the constituents, including Henry Schein and our investors. And I believe our management team is doing a great job in this area.

Alright. Very helpful. And then just as a quick follow-up on capital allocation and really maybe more a question for Ron. Ron, in our conversations, I have gotten the sense that your views are very much aligned with what we have seen from how Henry Schein has operated historically and how Steve’s managed the financials during his tenure. But there is a lot of capacity on the balance sheet. So, I guess it would just be helpful to hear your philosophy regarding leverage and how you see the balance of M&A and share repo moving forward? Thanks.

Sure. I mean, it’s kind of every CFO’s challenge to try to find that optimal capital allocation. But I do think that Steve is allowing me to inherit a very strong balance sheet and that give us some flexibility to be opportunistic on M&A going forward. It just has to be the right opportunity. And so in the meantime, we will continue to kind of follow the – what we have done historically with some share buybacks, some reinvestment in the business, but as we see the opportunistic M&A come up, we want to be able to move on it. And we have a balance sheet that gives us a lot of flexibility there.

Great. Thank you.

We have time for one last question coming from the line of Elizabeth Anderson from Evercore ISI. Your line is open.

Hi guys. Thanks so much. And Steve, it’s obviously been great, so congratulations on your retirement. Maybe from a question perspective, one thing that obviously caught my attention was sort of when you were talking about the lower average sales numbers or sales pricing in terms of the equipment side, could you go into a little bit more detail about what’s driving that? Is it sort of a new product suite? Is it people switching from complete chairside solutions to just control scanners? Any additional details there would be super helpful. Thanks.

Yes. So, I think on the equipment side, the demand for digital dentistry has created a lot of interesting new products being introduced, an examination by some of the supplier – existing suppliers who are saying, there are markets that we are not penetrating and are advancing ideas in more affordable scanners. At the same time, those that have had 2D imaging machines can now upgrade to 3D at a relatively low price, that sale as a unit. So, you take all of this, the drive towards digital dentistry to some extent, not fully, is similar to what you may have experienced in the calculator or in the PC world, greater demand, more efficiency and movement towards standard of care when it comes to 3D imaging scanners. But I might add right away, and please take into account, the whole area of 3D printing is now emerging and is also becoming much more affordable. So, we expect all of this stuff to balance and result in greater demand and greater sales and profits for the digitalization of dentistry. And for Henry Schein, that ties in, in an interoperable way with Henry Schein One. So, this is all a very exciting period for us. A lot of movement, a lot of excitement and dentists are awakening to the importance of digitalization in dentistry, more to follow. It’s a key component of our strategic plan, but we just don’t have time to talk all – about all of that today.

That makes sense. And maybe just as a quick follow-up on the implant side. A number of the major implant manufacturers have announced new products or sort of revamped or future revamps that are coming to their product portfolio. I was just wondering if you could comment on sort of demand in that environment and the relative competitive levels there and sort of pricing as well, if that’s sort of providing a unique opportunity for you.

Yes. On the implants in particular, and of course, we also have a very nice business in bone regenerations. Products and implants, we have a premier lines, a couple of premier lines, namely Camlog and Horizons. We also have Medentis in the discount area, and – I wouldn’t say discount but lower-priced. Our products tend to be more, again, on the premium side, but relatively lower-priced. And Camlog has had significant new product offerings over the years, last year I mean, so the Camlog progressive line has done quite well. The Pro, another area has done well, the Fusion line and the NovaMetrix on the biomaterials side, lots of new developments. We actually believe we have a pretty comprehensive competitive offering in the implant, the oral surgery line. Likewise, I think on the endodontics and orthodontics side. Happy next time we have a call or should you want specific details, happy for you to reach out to our Investor Relations. Unfortunately, we don’t have more time now, but we are very excited about our specialty products and our Henry Schein One and other value-added services.

Thanks. That was helpful.

So Graham, I know I can talk for hours, even – not for hours, minutes, lots of information to share. I think we are at the end, right, Graham?

Yes. That was our last question so we can conclude now.

Okay. So again, Steven, all the best officially, but we know you will be guiding us for years to come, be involved with our team. Ron views you as a mentor and so do our – all our senior executives value our relationship. And so we will continue the relationship and your advice to Henry Schein’s Board and to our management team. So, thank you for everything. Thank you to all our investors. Sorry, we went over a little bit today. If anybody has any questions, please reach out to Graham, Investor Relations, who can put you in touch with Steven or Ron South. So, thank you all for calling in. We look forward to seeing you – to speaking to you in the early May meeting call. And we will be participating in a few investor conferences coming up. As perhaps you can understand from the tone of this call, we are very, very excited about the company. We are very excited about our ‘22-23 strategic plan and the execution of that. So, thank you all for calling and stay safe.

This concludes today’s conference call. Thank you all for joining. You may now disconnect.