Henry Schein, Inc. (HSIC) Q1 2022 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen. And welcome to the Henry Schein First Quarter 2022 Earnings Conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer and instructions will follow at that time. [Operator Instructions] I would now like to introduce your host for today's call. Graham Stanley, Henry Schein Vice President of Investor Relations, and Strategic Financial Project Officer. Please go ahead Graham.

[Indiscernible]

Excuse me, Graham. Can you speak a bit louder? You sound far from the phone.

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 transplant to reflect the key metrics used by management in operating our business. These non-GAAP financial measures are presented solely for informational and comparative purposes which 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. Lastly, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, May 3rd, 2022. Henry Schein undertakes no obligation to revise or base 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 [Indiscernible] questions within the one hour we have allotted for this call. We have updated the format of today's call with Stanley covering the business performance followed by Ron's review of our financial results. We hope you find this format beneficial. And with that, I'd like to turn the call over to Stanley Bergman.

Thank you very much, Graham. Good morning, everyone. Thank you for joining us. Before we get into the details of today's call, I would like to take a moment to express my appreciation once again to Steven Paladino, who retired last week after 35 years of outstanding service to Henry Schein. For the excellent execution of Steven succession plan and the smooth transition of his responsibility to Ronald South. I'm certain that investors will appreciate working with Ron and Graham and as we continue to build our Investor Relations communications. Ron is joining us on today's call and we'll discuss details of our first quarter financial performance and full-year guidance. So Ron will discuss that in a moment. At the start of the call. I would like to highlight that 2022 is off to a strong start. With record first-quarter financial results as we successfully execute on our 2022 to 2024 strategic plan that sets out our winning proposition. Our winning proposition is that customers rely on us for an exceptional experience delivering differentiated solutions that make their practices most successful and improve patient outcomes. Our bold plus one priorities, which we have discussed with in the past, is as follows. The B stands for building complementary software, specialty, and services businesses, for high growth. Operational one Distribution to deliver exceptional customer experience, increased efficiency and sales growth. And the L stands for one Schein to broaden and deepen relationships with our customers that is with our entire product offering -- service offering. And the D, the drive, stands for driving digital transformation for our customers and for Henry Schein. So our [Indiscernible] priorities will be executed in the context of the plus one. Aligning our key stakeholders, which of course, our suppliers, customers, shareholders, investors, and Team Schein members and society. Today we are affirming our full year 2022 GAAP diluted EPS guidance of $4.75 to $4.91, reflecting the solid growth and stability of our business. To emphasize, we're very, very excited about our 2022 to 2024 strategic plan. Which started at the beginning of this year. We believe we're on a very, very good projectory in that regard. So let me comment on two topics that are on the minds of many investors. That being inflation and also Global supply chain. We are continually monitoring the potential impact on inflation -- of inflation on our business. The impact journey varies by product category for both merchandise and equipment. And to an extent it it also varies by geography. We estimate that on balance, price, inflation on our product offering. So far this year has been about 3%. Some of our manufacturing partners are currently implementing additional price increases, which obviously will in all probability impact that 3%, but so far it's been about 3%. While we have generally been able to pass along these increases to our customers, we do seek to reduce supply increases wherever possible. Of course, we are aligned with our customers in that regard. Where customers wish to explore ultimate alternative sources of products because of these pricing pressures, we are typically able to offer various, less expensive alternatives given our broad product assortment of national brands, as well as our wide selection of Henry Schein corporate brands and owned brand products. Our extensive offering to our customers provides many options and is an important differentiator for Henry Schein in the marketplace given the extensive options that we uniquely offer we believe to our customers. The impact of inflation on our equipment business is significantly deferred due to the lead times between confirmation of an equipment order by manufacturers and delivery of the equipment. Generally, we book orders in advanced with our manufacturers for the liberty in delivering at a future date and that's generally at a confirmed price. So not much inflation in the first quarter, some of course, but not much on the equipment side. In addition, inflation largely impacts the traditional equipment products, as average selling prices for digital equipment continues to decline, although somewhat modestly. Now, turning to the supply chain pressure on our business. Here, the situation is relatively stable, pretty similar to the fourth quarter. Of course, we continue to experience extended lead times for certain products, which are primarily impacting the equipment. On the consumable side, merchandise side, we generally had products. May not be every single product option in a particular category, but we have basically the products. And the lead time problems are in fact impacting our equipment deliveries. The recent lockdowns in China, we've received a lot of questions on that, are so far not having a significant supply chain impact on us as most of our manufacturing partners are located outside the effected regions and ports are largely operational from our point-of-view with, of course, some delays. Now, this may be slightly different for specific suppliers of ours of finished goods. Our team is actively managing these inflationary and supply chain matters, which are reflected in our financial guidance. Turning now to the Ukraine. Henry Schein has relatively low dental sales to customers and really no direct presence in either Ukraine or Russia. So the conflict itself is not directly impacting our business per se. Of course, it could impact our suppliers, consistent with our longstanding commitment to humanitarian work and disaster relief, our team continues to support refugees and displaced persons in and from Ukraine. As we have done, for example, with refugees from Syria, other parts of the Middle East and of course elsewhere. Our support is through the delivery of healthcare product donations in partnership with several of our suppliers and with international NGOs that we've worked with for a long time. And yes, in this case, through our local teams underground in Poland. And there are other on the ground teams that are working with us to provide these relief -- support these relief programs, these humanitarian relief programs. We're actively supporting refugees through managing of donations, products, clothing and yes, in some instances money. We also are responding to those affected by natural disaster around the world, such as floods in Australia, and last year in Germany, and continuing to work in advancing health equity. Advancing health equity has been a key component of Henry Schein's success for many, many years. That goes to advance access to oral care and, in many respects, to primary care as well. Turning now to the business review of recent accomplishments. Starting with our dental distribution business. The first quarter growth in our dental business was driven by strong global equipment sales, as dentists continued to invest in their practices. And consumable merchandise sales recovered well during the second half of the quarter in line with the decline of COVID-19 infection rates. Let me peel the onion a little bit more for you. In North America, we believe consumable merchandise sales were impacted by lower patient traffic in January as a result of COVID-19, but we are progressively stronger in February and March. Sales were also impacted by lower sales of Personal Protective Equipment, I'll refer to that and Ron will refer to that as PPE products for the rest of the call. This decline in patient traffic was primarily a result of appointment cancellations, staffing shortages, and some office closures given the spread of COVID. Although we believe patient traffic has now returned to the levels of early December 2021. We are seeing similar trends globally, but obviously,

Excuse me, just the Operator. Apologize that there will be a slight delay in today's conference. Please hold and conference will resume shortly.

We are lowering both line's disconnected mainline and the backup. I don't think that's a function of our foundries.

Yes.

Everything disconnected.

Please proceed.

Just sorry. We had the [Indiscernible] the line disconnected, but let me continue on where we ended. So the decline in patient traffic was primarily the result of the appointment cancellation, strapping shortages, and some office closures given the spread of COVID, although we believe patient traffic has now returned to December 21 level, I think I covered that already, and I think it went through. The global trends are somewhat vary depending on the region of the world. So lower sales of PPE products in the quarter were primarily as a result of lower glove sales. The glove market has been quite volatile for about a year, maybe a little longer, not much longer, 15 months. We expect glove pricing will be an increasing headwind for a few quarters since pricing peaked in the second quarter of last year. That's 2021. Nevertheless, if you exclude PPE products, North American consumable merchandise, internal sales growth in local currencies was quite solid. Despite the softer stock to the quarter, we gained momentum as the quarter progressed. This was supported by good growth in sales to new DSO accounts. Our North American dental equipment business had very good quarter with strong sales in both traditional and digital categories. Now, particularly in digital restorative restoration equipment, our equipment order book in North America remains strong at the quarter-end, consistent with the backlog at the beginning of the corner. So new orders continue to come in at a very nice rate. As commented early in the call, we did not see a significant impact from inflation on this quarter's equipment sales due to long lead times for equipment, as we had largely lacked in supplier prices for orders shipped during the quarter. Our equipment results benefited from sales to some of our large DSOs. As we believe that anticipation of further price increases. Also, we believe that anticipation of further price increases is modestly providing some of the elevated demand we see today. It's not a huge impact. [Indiscernible], as some orders coming in from customers who expect pricing to go up and would like to get in the gate before the prices go up. Not a huge impact, but I'll nevertheless, point that out for you. We continue to experience supply chain issues for traditional equipment, arising from component port shortage delays in office build-outs and reservations, as well as longer lead times with digital imaging technology. This is -- not that the product is not available, it's just taking a little longer on the digital stride to deliver our orders. Having said that, if a practitioner needs anything urgently, we of course, we'll make sure that we supply both traditional equipment and digital imaging. We now expect these equipment delays will continue to be factors through the second half of the year and will provide further support for good equipment sales over the next few quarters. In fact, bottom line is we remain bullish on the equipment market and especially the digital dental equipment product offering. We expect to continue demonstrating good growth in the digital category, including intraoral scanners. Now, in the last period of time, the impact with digital 3D printing, we're starting to see that flow through as well, net demand to be of interest. We continue to look for innovative ways to add value to our customers. Last month, we hosted thrive lives in Las Vegas. This was a three-day dental educational confidence that it replaces with successful ten clicks business of dentistry conference we have held in years prior to COVID we designed its inaugural event to offer a learning path for every member of the dental office from the front office after the hygiene in the dentist -- including dentist themselves. So everyone from the staff, [Indiscernible] all the way to [Indiscernible] participating in this conference. And the programs which is designed for the various players in office. We were able to select from over 50 sea credited courses led by more than 40 leading commissions with a strong educational focus on digital technology and practice management solutions that Henry Schein has quite a bit of competency in advising our customers on. The customer feedback we received as the most positive and got advance [Indiscernible] thrive at least from our point of view position us to connect with our customers in deeper ways, and positions our team to help provide greater productivity and provide better clinical care and practices. Educational top events like this provide great sales opportunities as well. Turning now to the international DEMP to international [Indiscernible] Our international equipment sales were also quite strong for the quarter. Our international consumable sales were impacted by similar trends as North America, including lower PPE and COVID -19 related products sales. And by the decline as patient visits, particularly during the first half of the quarter. That said, compared to North America, the impact of COVID-19 was more pronounced internationally, especially in Europe. So let's peel the onion a bit more in Europe. Patient traffic picked up at very paces as the quarter progressed and COVID-19 restrictions were relaxed in certain parts of Europe, and we expect these markets to continue to recover. We also expect the Australian market to start to recover having reached the peak, COVID-19 session rate towards the end of the quarter. This should help or cut about similar guys in Europe, straighter in our Billion business are strong throughout first quarter. Balance in China impact our business. Notes are growing Chinese businesses still relatively. It's still a relatively small part of our Global Dental business. These lockdowns also intensified during our fiscal second quarter. They had little impact in the first quarter. I remind you though, it's we had a nice growing business in China, but it's not material in the relative concept about the relative size of Henry Schein relative to AECOM, our Global consolidated sales. Pertaining to Dental Specialties and Technology and Value-Added Services. sales about Dental Specialty products was solid during the first quarter. Specifically, oral surgery, which consists of dental implants ACE bone regeneration products. In particular sales of by Horizons, Implants grew by double-digit this quarter. Executing well in North America, with these businesses primarily focused and with the markets for restorations continues to be quite strong. Our Camlog and Merck Dentist brands in Europe, primarily in Germany, also had quite a good first quarter for the implants and bone regeneration products in Europe. We have also had success selling ACE bone regeneration products into the large DSO market. And this is another very good example of the health all in our bold strategy leveraging one Schein strategic priorities. Now, within our endodontics products offering and our businesses also quite solid. We recently launched our age pro laser, which is actually off to quite a successful launch, having been well-received at next week's meeting here in United States. We do believe that Ace Bone is upstanding cleaning, debridement, and disinfection, coupled with greater value compared with competing products. Meanwhile, our priority in the orthodontic business as I reveal clear aligner product line. In March, we completed the U.S. domestic launch of the [Indiscernible] for product next to software, and we are now rolling out the software update globally. Software features, advanced treatment planning and realization tools. Obviously, I think investors are away that orthodontic sales were not great in the first quarter. Because of practices not being at full capacity as a result of COVID. Overall, our solid position and Dental Specialty products is built upon strong customer offering and our commitment to meaningful, ongoing investments in R&D. If there are questions on that, happy to provide further color during the call. Turning to Technology and Value-Added Service sales, they also increased by double-digits during the first quarter, in both North America and international. We believe Henry Schein One offers one of the broadest product offerings of dental practice management and related software and services, and is the largest contributor sales in the sector of technology and value added services. Growth within Henry Schein One continues to be driven primarily by recovery in patient traffic to dental offices, which generates demand for our revenue cycle management solutions, and also by cloud-based solutions, our cloud-based solutions, that [Indiscernible] flexibility, scalable services to drive practice efficiency, and yes, patient engagement too. As another example of our commitment to expanding our technology product offering, [Indiscernible] got making our job as analytic software products available to private [Indiscernible] practices, whereas previously, the job's software was available primarily to DSOs, Also within our value-added services business is eAssist business which provides revenue cycle management solutions for insurance reimbursements. We're quite pleased with the integration and performance of this business which we acquired last year. So now turning to our Medical business, where the Global Medical sales were excellent as we achieved further penetration into existing customer accounts. Internal sales growth in local currency, if you exclude PPE and COVID-19 related products, also continued to be strong. The U.S. patient traffic to physician offices and ultimate care sites and that in particular in our cases, the ambulatory surgical centers was up consistently throughout quarter one versus the prior year. Sales of medical laboratory equipment were up double-digits while demand for non - COVID point-of-care diagnostic test was also quite strong. Sales of PPE products declined by double-digits compared to the strong first quarter last year. As I mentioned earlier, we expect further pricing declines for gloves throughout the rest of the year, it prices to remain above pre -pandemic levels. Sales of COVID-19 tests were extremely strong during January, very strong and declined shortly towards the end of the quarter. The future of these products are difficult to predict as we face the somewhat offsetting forces of new variance spreading rapidly, trading demand, along with increased availability in hotels from the other side and many of which of the paid for by the government in the U.S. So that's a broad overview, now, Ron, will give you more specifics on the financial results for the first quarter? So Ron, there you go. Thank you. And welcome to your first call.

Very good. Thank you, Stanley. And good morning, everyone. So turning now to our record, first-quarter financial results, total net sales for the quarter ended March 26th 2022 were $3.2 billion reflecting growth of 8.7% compared to the prior year period. Internally generated sales were up 7.7% in local currencies. And when excluding sales of PPE and COVID 19 related products, internal growth in local currencies was 8.9%. Formerly mentioned prices for PPE products and specifically gloves increased last year due to market volatility and supply chain disruptions. More recently, prices of these products along with COVID-19 test kits have declined. This pricing volatility combined with a strong Q1 prior year sales comparison is [Indiscernible] a year-over-year decline in sales of PPE and COVID-19 related products. Detail from sales performance are contained in Exhibit A in our earnings press release issued earlier today. Operating margin for the first quarter of 2022 was 7.7%, representing a decrease of 17 basis points compared to the prior year GAAP operating margin. When compared with prior year Non-GAAP results, operating margin decreased 71 basis points. Operating margin contraction was due to higher operating expenses primarily as a result of increases in payroll commissions in travel and entertainment. Since most of our operations have returned to normal this year. The year-over-year contraction was also due to the unusually high operating margin in the first quarter of last year. Turning to taxes, our effective tax rate for the first quarter of 2022 was an even 24%. This compares with an effective tax rate of 25.1% for the first quarter of 2021 on both a GAAP and a Non-GAAP basis. GAAP net income attributable to Henry Schein for the first quarter of 2022 was $181 million for $1.30 per diluted share. This compares with prior year GAAP net income of $166 million or a $1.16 per diluted share and prior year non-GAAP net income of a $178 million or $1.24 per diluted share. Amortization from acquired intangible assets for Q1 2022 was $32.2 million pretax or $0.14 per diluted share. This compares with $29.7 million pretax or $0.13 per diluted share in the same period last year. And foreign currency exchange negatively impacted Q1 2022 diluted EPS by approximately $0.01. I'll now provide some detail on our sales results for the first quarter. Global Dental sales of $1.8 billion increased 2.2% compared with the same period last year with internal sales growth of 3.5% in local currencies. Global Dental consumable merchandise internal sales increased 1.3% in local currencies and excluding sales of PPE and COVID-19 related products, internal sales in local currencies increased 4.7%. Global Dental equipment internal sales growth in local currencies was 11.9%. North America dental internal sales growth in local currencies was 4.8%, which was driven by especially strong performance in equipment, which internally grew 13.2% compared with the prior year period, with strong performance in both traditional and digital categories. This growth also comes off a difficult comp, as Q1 2021 internal equipment sales growth in local currencies was 17.4%. North America dental consumable merchandise internal sales in local currencies increased 2.6% compared with Q1 2021 or 7.3% when excluding sales of PPE and COVID-19 related products. International dental internal sales growth in local currencies was one 1.8% compared with first quarter of 2021, when we had an exceptionally strong sales quarter, with internal sales growth of 17.9% in local currencies. International dental consumable merchandise internal sales in local currencies decreased 0.5% compared to the first quarter of 2021, an increase of 1.3% when excluding sales of PPE and COVID-19 related products. Sales were impacted by an increase in COVID infections, especially in January and February. This sales growth is also against a difficult comp, as the internal sales growth in the prior year was 19.2% in local currencies. International dental equipment internal sales, growth in local currencies was 10.1%. And this is also against a difficult first quarter of 2021 comp. And such growth was 12.9% in local currencies. Sales of Dental Specialty products were approximately $236 million in the first quarter with internal growth of 7.2% in local currencies compared with Q1 2021 when we had an exceptionally strong sales quarter with internal sales growth of 18.3% in local currencies. This quarter, growth was strong in our oral surgery category, which consists of implants and bone regeneration products. Technology, and Value-Added Services sales during a $179 million, an increase of 23.4% compared to the prior year. Included internal growth of 11.1% in local currencies. In North America, technology and value-added services internal sales growth was 10.3% in local currency. This growth was driven by our practice management business, the strong growth in Dentrix and Ascend. Our revenue cycle management business also exhibited solid revenue growth. Internationally, Neurology and Value-Added Services, internal sales increased 15.7% in local currencies compared with the prior year. This growth was driven by a strong performance in the UK, which benefited from a favorable comparison to the prior year when the lockdown was just beginning to ease. During Q1, our technology and value-added services businesses, together with our Dental Specialty products, achieved total sales growth of 13.1% and internal sales growth in local currencies and 8.7%. And this total sales growth is in line with our double-digit growth goal for the forward year. Global Medical sales during Q1 was $1.2 billion grew 18.3% compared with the same period of 2021 with internal sales growth of 14.7% in local currencies led by growth in COVID test kits and other point-of-care diagnostics. We sold approximately $250 million in COVID-19 test kits in the first quarter of 2022, including multi-assay flu and COVID-19 combination test kits. This compares with approximately $180 million in test kits in Q1 of 2021, we expect continued volatility in sales of test kits for the remainder of the year. Excluding sales of PPE and COVID-19 related products, Global Medical internal sales in local currencies increased 14.5% compared with Q1 of 2021. Regarding share repurchases. We did not repurchase any shares of Henry Schein stock during the first quarter, because we had a 10-b, 5-1 plan that did not result in any shares being repurchased during the quarter. We intend to put in place an additional plan that has affected as of tomorrow, May 4th. As of the end of the first quarter, Henry Schein had $200 million authorized and available for future share repurchases. This program remains a core pillar of our balanced capital allocation strategy, which also includes ongoing disciplined investment to support organic growth and strategic acquisitions. Turning to our balance sheet and cash flow, we have continued to benefit from significant liquidity providing our businesses flexibility and financial stability. Operating cash flow for the first quarter of 2022 of $93 million compared to $63 million for the first quarter of last year. Turning to 2022 financial guidance. I will conclude my remarks by noting that we are affirming our 2022 full-year GAAP diluted EPS guidance range of $4.75 to $4.91 reflecting growth of 7% to 10% compared to our 2021 GAAP diluted EPS of $4.45 and growth of 5% to 9% compared with our 2021 non-GAAP diluted EPS of $4.52. We expect 2022 full-year sales growth of approximately 5% to 8% over 2021 versus our previously communicated expected sales growth of 6% to 8%. This change primarily reflects the latest foreign exchange rates and a decrease in sales of COVID-19 test kits. As Stanley mentioned earlier, the future demand for test kits is difficult to predict. However, given recent trends, we now estimate sales of COVID-19 test kits to be 15% to 25% lower than 2021, as opposed to the 10% decline we had previously communicated. We continue to expect full-year 2022 operating margin expansion of 20 basis points to 25 basis points over the 2021 Non-GAAP operating margin and expansion of 39 basis points to 44 basis points over the 2021 GAAP operating margins. Our guidance is for current as well as completed or previously announced acquisitions and does not include the impact of future share repurchases, potential future acquisitions or restructuring expenses, if any. Guidance also assumes that foreign currency exchange rates will remain generally consistent with current levels. That end markets will remain stable and consistent with current market conditions. And if there are no material adverse market changes associated with COVID-19. With that, I will now turn the call back to Stanley.

Thank you very much, Ron, unfortunate the beginning part of our call with Graham made his introductory remarks. We're not sort of broadcast to our participants. There was a problem versus Operator and intervention the call got disconnected. I think my remarks and Ron's are fully picked up. Graham. You may want to repeat maybe a remarks, please, Graham. Thank you.

Sure. Thank you, Stan. I just like to state that certain comments made during this call will include information that's 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 included 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. So with that, I'll hand the call back to Stanley cause I think everybody heard the rest of the statements at the beginning. Thank you, Stanley.

Thank you very much, Graham. Operator, please refer the questions, open the line for questions. Thank you.

You're welcome. [Operator Instructions] Please stand by while we compile the Q&A list. We have our first question comes from the line of Jeff Johnson from Baird. Your line is open. Please go ahead.

Thank you, guys. Just two quick ones maybe and then I'll get back in queue. Stanley, could you give us any update maybe just on April trends that you're seeing in the specialty dental area, the general dental area and medical? And then Ron, just for you from a guidance standpoint on the 5% to 8% revenue growth, I think a lot of us just look at organic growth for Schein. It tends to be a very consistent metric in your business. Could you just give us how we should be thinking about maybe organic growth given that you do a lot of acquisitions and currency obviously is a big impact this year. Thanks, guys.

Thank you, John. Drip, I mean, thank you. Equipment sales remained strong in April with internal sales growth double-digit numbers. As we indicated, we expect list at this moment, equipment sales remain strong for the balance of the year. Now, in North America with particularly encouraged by the sales in April. How about PPE sales we're lower than prior year due to the lower price of gloves. The brushing clubs has had quite a bit of an effect. Therefore, while the line growth is good, XPP&E and the general PPE excluding grabs pretty good. Overall, therefore, merchandise, internal sales growth in local currencies. So if you take out the PPE is okay, it's pretty good. Now, international -- so that was about North America. If you look at our international components. Again, PPE is having quite a bit of an impact in particular loans. But we're quite encouraged because from a European point of view, most of the markets now are back in full swing in this major markets that we're in. Also, Australia reached the peak towards the end of the quarter, last quarter and they're back in business again. We'll continue the nice growth we've experienced in Australia for a while. For whatever reason, Brazil continues to be very good, doesn't seem to have been impacted at all in the first quarter and continues to be strong in April. Now, we've seen quite a bit of disruption as you could tell from new [Indiscernible] of course, particularly in Shanghai. But I think now other parts of the country, even Beijing or the other because of total lockdown. Our China sales are impacted in April. Having said that, please remember, China is relatively immaterial in the context of our 12.5 or so billion-dollar business. And on medical, very similar results primarily here in North America. Our medical businesses continue to have very, very good growth, non - COVID, non -- that's not COVID -related products, excluding diagnostics and the PP&E. So Ron, will you provide certain for the color on the -- what you took in accounts in coming up with guidance?

So Jeff, if you recall, our original sales guidance was 6% to 8% and the components of that included about 0.4 acquisitions and a point for the 53rd week this year. So that left us with about 4% to 6% of internal growth, whether it be the price increases or from increased volumes. I think we were taking down the sales growth of 5% to 8% and that extra point we're taking off the floor. There is really a combination of what we're seeing in trends in the COVID test kits, as we said, for expecting those sales be 15% to 25% lower than last year versus our original guidance of 10% lower and also the FX headwinds. You can kind of do that math and say, the internal number, now be something that's closer to say 3.5% to 5.5% or 6% in terms of the internal number that we're still aiming for for this year. I don't know. Hopefully that acceptably.

It does. Thank you.

Our next question comes from the line of Jason Bednar from Piper Sandler. Your line is open. Please go ahead.

Hey, good morning. Thanks for taking my questions. A couple from us, just actually wanted to first come back on the top line guide their point there. Just to confirm, coming to the bottom end of that guide, coming 100 basis points lower, so now [Indiscernible] reported for the year, it looks like 50 basis points of that is COVID test kits. Just to confirm that the balance of that is just [Indiscernible]. I guess -- are there any other good guys or bad guys within that revenue guidance that we should be considering, whether it's glove pricing or anything else that's playing out here just as we, as we think through some of those mechanics.

But I'd say your estimate on the COVID test kits to the FX are pretty reasonable. And that's really -- those are really the components. There's not offsetting items that were [Indiscernible]

Okay. All right. Perfect. And then just thinking through how the first quarter played out. Your earnings came in significantly better than how you were communicated it back in February. I think the original guide was for earnings to be slightly lower on a year-over-year basis. Can you talk about where the outperformance came versus expectations? Was it a quicker recovery in the top line and like in core trends in dental and medical, better expense control? Where you've got -- you beat the street by over a dime. So I guess where did that outperformance come from in your eyes?

I think a couple of areas. In a COVID test kits the $250 million in the quarter, and while we're taking down the full year on COVID test kits, I don't think we didn't expect to do quite that well in the first quarter with a test kits sales. I think also, we're really happy with our gross margins in the dental business. In spite of some of the pressure we're feeling on gloves, we still did fairly good on the margins there. And then of course the equipment. The equipment came in much better than what we had originally expected. And as we said on the call, we remain bullish on equipment. So I think all those things when combined, guide us to a good place on the quarter. There's other things I would acknowledge that we did well on effective tax rate, we did well in a few other areas, but I think that between the good margins that we experienced in dental, not just in gloves, but in non-PPE sales as well, helped us out for the first quarter.

All right, very helpful. Thanks, Ron.

Our next question comes from the line of Justin Lin, from William Blair. Your line is open. Please go ahead.

Hi. Good morning. Thank you for taking my questions. First of all, can you talk about your dental market spending growth outlook for 2022 and beyond? Do you think the elevated spending per visit levels from 2021 can persist or are you seeing a decline already?

I think generally strong, a visit to dentist point-of-view, taking into account COVID -impacted locations. I think generally, we're in positive territory from visits dentist, from what we can tell, the higher end procedures remained quite strong with some specialty products at the high end, sleep quite. The strong at the moment, we're more respect to where we were in December of 202’1 posts. You never know where this variant is going to have an impact. Right now, though we did have pretty bad January from a business point of view, and February, March started getting better April looking okay. I think [Indiscernible] to stable leading pasture.

Got it. Thank you. And the line was a big surprise last week, and I -- just wondering, any visibility on your end regarding the declining consumer sentiment that some of these companies are seeing, maybe especially around your -- I know it's a small part still, but your reveal clear line of business?

I would reveal a line of business is relatively small and growth is impacted by new accounts, particularly some DSOs that have not taken on the [Indiscernible] line. I don't think our sales are much of an indication. Although obviously, in the first part of the first quarter, visits or elective procedures were down. It came back again. But I'm not sure we're the right party to give you an indication of the market in general. Suffices to say, we remain quite bullish for our reveal line. Having said that, it's a very small business, relatively small business compared to the market.

Okay. That's fair. Thank you very much.

Our next question comes from the line of Elizabeth Anderson from Evercore ISI. Your line is open. Please go ahead.

Hi, guys. Thanks so much for the question. I was wondering if you could provide some additional detail on the North American medical account penetration. Was that broadly expanding your range of products into certain clients? Was that of share gain wins versus peers? Any additional details there you can provide would be super helpful.

Our medical business focuses on the ultimate key areas, mostly physician offices. With our independent or part of a group or in fact, a large part of it is with the medical practices are owned by IDNs. We also have businesses that focus on the government. And we have businesses that focus on smaller ambulatory surgical centers. And we have businesses that focus on provide us such as renal treatment centers and cancer centers. That's -- we do not serve as the long-term care in a way, nor the acute care area, and obviously not the drugstore. So that's really our business. And the net area, we have been gaining market share for a decade. Just very good execution. I would say that all this continues to point to gain market share. Obviously the PPE and the tests the spot numbers sometimes magnified and sometimes you reduce our underlying business performance. But essentially within that particular part that I described, we continue to gain market share. We do add some new products, but we should contribute. I would say, including better way we entered the homecare space in small way and would expand that. But I'm not sure if that contributed at all to the internal growth as miss the acquisition growth. So overall, the business is just gaining market share.

Got it. That's very helpful. And Ron, maybe one for you as we think about the cadence of opex spend going forward for the rest of the year, can you help us think through the [Indiscernible] takes as increase in wages and some of the other labor type cost that you called out versus some of the ongoing impacts of the cost cutting plans that you guys have put into place?

Yeah. We're dealing with wage inflation, like everybody is right. And our normal cadence of salary increases as the company goes into effect people one, so we will see an increase in payroll costs going forward. That is taken into consideration when we talk about operating expenses and our plant operating expense, expansion for the margin expansion.

Unfortunately, we had a putting space, a straight surcharge. We've done this in the past to deal with increased costs. Utilities. Generally, customers average shifted that as the requirements.

Got it. Okay, thanks.

Next question comes from the line of Nathan Rich from Goldman Sachs. Your line is open. Please. Go ahead.

Hi. Good morning. Thanks for the questions. I'll ask them both upfront. I guess, maybe on the dental equipment business, it seems like you're seeing longer lead times and you expect those kind of delays to continue through the second half of the year, but you had a strong first quarter from a revenue standpoint and it doesn't sound like the outlook for dental equipment, at least on the revenue side has changed this year. Can you maybe just talk about how you've been able to work through the supply issues, and also where you're still seeing, just in terms of demand for CapEx from practices? And then just a quick follow-up for Ron. It looks like the seasonality of earnings this year is a little bit different than what you've seen historically. And so I guess should we think about kind of earnings towards the back half of the year as closer to what the go-forward run rate of the business will be, one PPE normalizes some of these equipment supply issues resolve. It will just be helpful to get your color on what the back half of the year means for the longer-term go-forward. Thank you.

Yeah. Two very good questions. First of all, the demand for dental equipment, both traditional and digital, has been quite strong, actually since around the early part of the time we -- practices went back after COVID. So I guess from the second quarter of -- third quarter, post third quarter of 2020. It's been pretty well. Demand is there. There's one particular challenge, and that is on the chairs, units, and lines, that part of traditional business. We had a big supplier exit the markets. And the other two major suppliers plus three or four other smaller ones, have had challenge keeping up with our demand because we were a big customer of the business that closed down on the chairs, units, and lines side of the business. The capacity has increased. We certainly can provide equipment, traditional equipment to any customer urgency needs it. Having said that, demand continues to grow, supply increases, but it's still a bit of an imbalance. And we don't see at the moment the time when the demand for traditional equipment will significantly reduce status view as of this very moment. On the digital side, demand continues to grow. Digital dentistry is growing rapidly. We have a number of suppliers providing us with products. They all to one extent to another had some challenges in providing satisfying demand, though, some fall is challenged than others. And the demand is doing -- and we continue to sell a lot with [Indiscernible] buildup in the backlog in that regard, there it's related to the suppliers having thoughts, chips, challenges. So the market is stable. There is a problem, is satisfying all about purchase orders. And the demand is good so dentists are investing the practices I might add the same is on the medical side. So practitioners are generally investing in the practices we have a good selection in good manufacturer support and equivalent business both in dental, medical, domestic, and globally is quite strong. And regarding your question on seasonality, I will say it's a very good question and it's a very difficult question to answer. You're right. Historically, there were some seasonal trends, they were somewhat nuanced, but they were some seasonal trends to our business and I think as we went into the pandemic and are coming out of the pandemic a lot of that has -- that dynamic has changed. And I think that there's -- there are so many different factors, whether they be covid test kit, pricing of PPE, demand for PPE. The days are kind of predicting increased sales in the fourth quarter for equipment, tax incentive, equipment purchasing are difficult now. I think it's admittedly our sales -- our earnings are probably going to be a little choppier than they have been historically. And that's really just driven by the dynamics of the markets in which we're operating right now.

Thanks very much.

We have time for one last question coming from the line of Mike Miksic from Credit Suisse. Your line is open. Please go ahead.

Hello. This is Justin Wang stepping in for Mike. Thank you so much for the question. We were wondering if you could provide any color on implant trends in the U.S. as well as OUS and how you've seen these carry into April, as well as your expectations for Q2. Thank you very much.

This implant trends continue to be quite strong. As I noted, the Hyatt end of industry seems to be doing quite well. Our strengths of close is in North America and Europe course we have a presence in Asia, but we're not as large in those markets. On a global basis, the Asian markets and some of developing world markets are growing at a faster rate than the pin, with particularly strong in Germany, The U.S. market. In the markets we're in. I think we're doing a pay for these. We are gaining market share from a global point of view, there are other markets that are growing faster that we're not really in and imagine those other markets will have a setback because of sales in China and Russia and Eastern Europe. Overall, I think from our point view, the market's are continued to be quite good, and we continue to gain market share with a number of very important introductions products in the specialty areas, implants with bone generally that we liked regeneration and of course to moving. Thank you. So -- Unfortunately, we have to end the call. We are few minutes over, but we have this interruption. It was beyond under control. Thank you, everyone for the interest. We changed the format. And if you have feedback a little bit on the format or on the press release, hopefully it's more concise, satisfied our investor needs, but we will very much would appreciate any input from our investors. As you can tell, we remain bullish about the business. We're quite happy with our 2022 to 2024 strategic plan. We're making very good progress. We have an outstanding management team behind the plan. And generally think our both +1 strategy will increase shareholder value and nice consistently as we've done for the past 100 + quarters as a public company. Thank you for your interest and feel free to reach out to Graham or to Ron and look forward to seeing people at the -- speaking to people at the future conferences next month ahead. And have a great summer. Thank you.

And this concludes today's conference call. Thank you for participating. You may now disconnect. Have a great day.