Good morning, ladies and gentlemen, and welcome to Henry Schein's Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session [Operator Instructions] And as a reminder, this call is being recorded. 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.

Thank you, operator, and my thanks to each of you for joining us to discuss Henry Schein's Financial Results for the second quarter of 2022. With me on the call today are Stanley Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein; and Ron South, Senior Vice President and Chief Financial Officer. Before we begin, I'd 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 those expressed in or indicated by such 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 and 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. 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 certainly 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. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, August 2, 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. Lastly, this quarter, we have also prepared a presentation summarizing our second quarter financial results. This can also be found in the Investor Relations section of our website. Please limit yourself to a single question and a follow-up during Q&A. And with that, I'd like to turn the call over to Stanley Bergman.

Thank you, Graham. Good morning, everyone, and thank you all for joining us. Today, we are pleased to report record second quarter financial results that reflect a good underlying momentum in the business and execution on our strategies. Sales were particularly strong in our technology and Value-Added Services businesses and our Medical businesses. Although there were some near-term headwinds in the quarter due to COVID infection rates, among other factors, our solid operational execution this quarter, and our results demonstrate the strength -- the underlying strength of the business. In June, we saw COVID-19 infection rates, which we believe contributed to a -- so there was a rising COVID-19 infection rates, which we believe contributed to a decline in patient traffic. This is particularly so in our dental business. We expect patient traffic to increase again when the infection rates moderate, and this is, to some extent, quite regional. While we are maintaining our full 2022 full year guidance for EPS for 2022, and that's the guidance range of $4.75 to $4.91, we are adjusting our expectations for full year sales growth to reflect changes, which include continued strengthening of the US dollar and declining demand for COVID-19 test kits. The company's management team is laser focused on executing our BOLD+1 2022 to 2024 strategic plan priorities, thereby, providing our customers with an exceptional experience, delivering differentiated solutions that make our customers practices more successful and improved patient outcomes, leading to delivery of our financial goals, as we've set out in 2022 to 2024 strategic plan. We believe that the long-term trends across our end markets provide a solid platform for us to deliver on our goals. In short, Henry Schein remains well-positioned to deliver consistent, sustainable profit growth and to create value for our shareholders as we have for…

Thank you, Stanley, and good morning, everyone. Turning to our second quarter financial results. Total net sales for the second quarter of 2022 were $3.0 billion, reflecting growth of 2.1% compared with the prior year period. Internally generated sales in local currencies, which I will refer to as LCI, increased 2.4%. And when excluding sales of PPE and COVID-19 related products, our LCI growth was 6.7%. As Stanley mentioned, prices for PPE products and specifically for gloves increased last year due to market volatility and supply chain disruptions. More recently, prices of gloves and COVID-19 test kits have declined. This pricing volatility, combined with the strong prior year sales comparison is driving a year-over-year decline in sales of PPE and COVID-19 related products. Additional details of sales performance are contained in Exhibit A in our earnings press release issued earlier today. Operating margin for the second quarter of 2022 was 7.27%, representing an 18 basis point improvement compared with prior year GAAP operating margin. When compared with prior year non-GAAP results, operating margin improved by 6 basis points. Operating margin improvement was due to gross margin expansion, mainly as a result of an increase in sales of higher-margin products. This was partially offset by higher operating expenses as a percent of sales, which grew as a result of increases in payroll and travel since our operations have generally returned to normal this year. Turning to taxes. Our effective tax rate for the second quarter of 2022 was 23.8%. This compares with an effective tax rate of 23.4% for the second quarter of 2021 on a GAAP basis and 23.2% on a non-GAAP basis. GAAP net income attributable to Henry Schein, Inc. for the second quarter of 2022 was $160 million or $1.16 per diluted share. This compares with prior year…

Thank you, Ron. Just a couple of very brief comments on senior leadership. A couple of updates. As of July 1st, Gerry Benjamin retired from Henry Schein as EVP and Chief Administrative Officer and he stepped down from a Board when his term expired in May. Gerry has been in the company for 34 years. He will be continuing as a consultant and was an invaluable as we grew from a domestic mail order business of a couple hundred million dollars into global full service products and services business with nearly 22,000 team Henry Schein members and operations in 32 countries. We are fortunate to have a deep bench, and with Gerry’s retirement Michael Ettinger became EVP and Chief Operating Officer, reporting to me. In addition to Michael's Corporate Affairs responsibility, responsibility has assumed, responsibility for HR, IT and supply chain with each of these three functions is led by highly competent, long standing Henry Schein executives. Michael joined the Henry Schein in 1994, serving most recently as Senior Vice President of Corporate Affairs. The creation of the CEO position is a result of growing size, scope and complexity of our operations. And I'm confident that Michael will be successful in his new role, together with the leadership in general about business units, four to five big business units and the rest of the executive management team. Barry Alperin also retired from our Board of Directors at our Annual Stockholder Meeting in May. And I would like to take this opportunity to thank Barry for his 26 years of exceptional service and our board, having joined in 1996 shortly after the company's initial public offering. So operator with those comments, we’re free to answer any questions.

Thank you sir. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jason Bednar with Piper Sandler. Please proceed with your question.

Hey, good morning. Thanks for taking our questions. Stanley, if I could start on the patient staff absenteeism you referenced in impacting dental patient volumes. Is there any way you can quantify what you think that impact may have been in the quarter? I think you said it was mostly a regional impact. But could you compare those regions that were less impacted to those that saw the volume effects? And then, is it the real time trends that you're seeing with patient volumes that gives you the confidence here today to anticipate a patient volume recovery here in the second half of the year?

Yes. Jason, that's a number that we're constantly trying to figure out. It's very difficult, because this is -- this COVID is going in waves, rolling waves. The good news is, I don't think we’re going to have to wait too long. July in the United States, we still saw heavy absenteeism, cancellations in the beginning part, maybe the first three weeks. And most recently, the last few weeks it's gotten better. But there is still some cancellation activity and shortages. So -- but it's been mitigated to some extent. I think we can expect that to increase in the rest of the quarter. Internationally, it's really very regionally dependent. Last quarter, Germany was really heavily hit. And in July -- since this is the call -- a public call with all our investors, I can report on this. July was exceptional. Brazil was exceptional. Australia, New Zealand, although relatively small, it's gotten worse, because last year this time, the rates were quite good. China, it's not material to the whole of Henry Schein, but generally has stabilized. Having said that, there are locked down for three, four, five days in specific locations. So my expectation is this is going to iron itself out in the third quarter. Although, there's no way to tell, that also seems like this COVID, speaking to several people in different countries in Europe, doesn't seem to be as serious. People get sick, small symptoms, and they generally come out of it within 8 to 10, 12 days. So it’s all I can give you. I wish I could give you more.

Okay. No, that's helpful. Appreciate that, Stanley. And then, Stanley or Ron, just on the guide, reaffirming the guide here today. Great to see you stick with the outlook of extending non-GAAP operating margins here 20 to 25 basis points. Given where we're at year-to-date, that does imply a decent step higher here in the second half of the year in order to hit that guide. So the margin comps do get easier, so that helps. But maybe can you speak to the margin visibility you have in terms of cost controls versus how much of that margin expansion that’s in the guide is volume growth or business mix dependent?

Well, I think, if you look at the kind of the expansion of gross margin in Q2, that's largely driven by product mix. That's largely driven by greater growth in our -- some of our Dental Specialty products and our Technology business. And so we're projecting that we can continue that kind of favorable mix going forward. This also requires us to very carefully manage our operating expenses in the back half of the year. And there is -- we are acutely aware of that. But that's -- those are the -- really the primary drivers as we look at product mix and ongoing kind of vigilance over operating expenses in the back half of the year in order to approve -- to achieve that operating margin expansion.

All right. Very helpful. I’ll hop back in queue. Thanks, guys.

Our next question comes from the line of Andrew Brackmann with William Blair. Please proceed with your question.

Hi, guys. Good morning. Thanks for taking the question. Stanley, I want to go back to the comments you made in the prepared remarks around some of the customers, I guess, pushing back on pricing increases and your ability to sort of find alternative solutions. I guess just broadly speaking, is this something that, I guess, the majority of your customers are asking for at this point, and we should start to be thinking about sort of a multi-quarter revenue headwind associated with that, or is this less of the majority at that point? Thanks.

Yes. So I don't think it's across the board. Having said that, we have to be competitive. And so we can switch customers if particular manufacturers want to stick with the price increases, we have options. And customers are looking at those options. Obviously, the midsized customers and some of the -- and the bigger DSOs, national DSOs are much more if you will, educated consumers, so they can see that on one product versus another one manufacturer versus another, there are options. And I was quite clear in my remarks indicated that I don't think this will impact margin, but could impact sales in the sense that customers are moving maybe to lower-priced products for the same function, functionally the same lower price. And in some instances, obviously, the margin will be better. We're not pushing our private brand, but where we're in a competitive situation. We will push a private brand. Margins are pretty good. There's been some inflation on the private brand, but we're also in a pretty good position to work with our manufacturers. So what I'm saying generally, we can manage through this. Our margins will be good. I think we're providing excellent value-added services to our customers in this regard. What I'm excluding, of course, is PP&E, where there's deflation and generic and other pharmaceuticals where those move different directions to the general market. In all of those areas, I think we are maintaining and in fact, we likely will grow our gross profit.

Okay. Thanks for that. That's helpful. And then I guess just on the staffing commentary around sort of dental, now recognizing, I guess, this could be a little bit longer of a headwind than we might be anticipating here. Can you just sort of talk about some of the longer-term opportunities that this dynamic might sort of create for Schein with your expansion into some of the services and technologies -- and maybe, I guess, just part of that, can you talk about some of the specific investments that you're going to be making here throughout the balance of 2022? Thanks for the questions.

Very good question actually. I expect that no one has a crystal ball but I expect the dental staffing to emerge closer to 2019 within the next few months. Maybe it lingers into the fourth quarter. I don't think so. There is an issue still with hygienists. They feel very uncomfortable. It goes back to COVID. It's an important part of prevention of the business. But if we can get the dentists back to full complement, they’ll just have to handle a lot more of the hygiene. They have to work a little bit longer hours. Having said that, there's a lot of technology out there to make the practice of dentistry more productive, the movement from impression material to scanners to implementing systems like Ascend, drive practice efficiency. I think also the PP&E use in the practice was a little bit more intense in terms of doubling up in the amount of time dentist spent on PP&E masking, gloving, wearing these coats and things. That's become more efficient. So I think the production per practice is likely to go up as well. Now as the value-added services, this is key for us, the strategies, whether it's revenue cycle management, demand generation, a business that provides insurance coverage of discounted insurance. All sorts of activities as it goes -- as it relates to education and seminars publications and the like. We're driving different services that really increase the efficiency in their practice while facilitating better clinical care. And this has been a key strategy for years. We will invest more in it. I think we quoted eAssist, which is a business that focuses on revenue cycle management, significantly in demand, highly profitable and highly appreciated by dentists. Jarvis, which provides information on dental practice, indexes and KPIs, all of these things are in demand. And the biggest issue -- or the biggest opportunity of all is our field sales consultants are today much more appreciated for their consulting services than pre-COVID. During COVID, a number of practitioners bought product that wasn't good, didn't necessarily have the most efficient technology in the practice. And so our consultants are being consulted on these items, of course, providing good advice, but at the same time providing great stickiness.

Thank you. Our next question comes from the line of Jon Block with Stifel. Please proceed with your question.

Thanks guys. Good morning. Stanley, maybe just the first on the dental equipment outlook. You seemed, I thought bullish last quarter, and I got the feeling maybe equally as bullish this quarter, you talked about solid orders and a strong backlog. I'd just love to get your thoughts. Is that sort of a fair takeaway? And maybe show do you expect the equipment outlook to hold up well into the back part of 2022, even in arguably of what's quickly becoming or supposedly becoming a weaker overall environment?

Yes. It's a very good question. I believe equipment is going counterintuitive to the way one would think in a challenged economy. Traditional equipment is doing well. I think -- the consumer is expecting dentists to have a good-looking modern chair and the dentists are understanding this. So they're investing in their practices. I would say, the whole restorative area is doing extremely well. That's the digital restorations particularly, whether it's scanners, full chairside and now, of course, 3D printing. All of these are in demand and specifically as it relates to interoperability with some of our software, this is all boding well. I would say, the imaging side, the units are relatively strong, not great. 2D/3D, it's not terrible, but there is some inflation in that area. And there are some shortages in terms of chips, they're holding back availability. I wouldn't say it's critical and there's options to move from one brand to the other. So what I just said to you is not a North American issue only opportunity, but this is global, where our equipment demand continues to be good. The whole traditional equipment supply chain issue was a US, North American issue, not a European issue at all. And so, on both the traditional equipment side and the restore -- digital restoration side, demand is very good in this country, North America, Canada and globally. We're quite --

Got it. Sorry.

-- and 3D printing is also a newly emerging opportunity. So we're very optimistic about our equipment business.

Thanks, Stanely. Great color. And maybe as a quick follow-up. Ron, for you, any color on the decrementals for the COVID tests and PPE? Just in terms of a way to think about that at the op margin level. And then, just do we have to actually start thinking about them differently with the way that COVID tests have rolled over? Any color there? Thanks, guys.

Well, I would say, at the operating margin level, with PPE, we're still getting -- well, let's first talk about gross margin. With PPE, we're getting, I would say, a gross margin that we're happy with. I think what happens is that, as that pricing of PPE goes down, it obviously results in a lower sales number. So it puts a little bit of strain on operating margin to the extent we have fixed costs as operating expenses. I think COVID test kits, we are seeing a little bit of pressure on pricing there, but we have seen some stability in that -- in the demand for COVID test kits. We had a fairly consistent run, kind of, weekly run rate in the back half of the second quarter that has continued into July and then I think it has perhaps even improved slightly in July. So -- and that's all taken into consideration when we provide the guidance on that number. But I do think that -- from a gross margin standpoint, kind of going back to your original question, we feel like we're getting a good gross margin on PPE. But at those lower sales dollars, it does put a little bit of pressure on the operating margin.

Our next question comes from the line of Jeff Johnson with Baird. Please proceed with your question.

Thank you. Good morning, guys. I've got some background noise here, so I'll just ask two questions and then go back on mute. But first question, just on the North American consumables growth rate this quarter. Stanley, I think you're talking about some COVID headwinds during the period. You had Omicron headwinds last quarter as well. So how do you just bearing out the impact of COVID versus some of the inflationary pressures and just consumer pressures we've seen here over the last couple of quarters or last couple of months, what gives you the confidence that it's COVID not macro? And then number two, I know you're doing a great job trying to hold pricing in line for your customers. I think your customers absolutely appreciate that in our checks anyway. How are you thinking about pricing maybe into 2023? It might be early, but I know manufacturers are struggling given that dental fees haven't gone up for quite a while on how much they might be able to ratchet pricing up again next year. Thank you.

Jeff, as I noted earlier, it's very hard to really identify how much of a dampening impact we had as a result of COVID. But my sense, just listening to our salespeople having gone to a couple of conferences, spending time with customers is that -- it's -- there were several hundred basis points on the consumable side that are related to this dampening because of COVID. I expect that, that will improve the rate -- at the rate of infection. Well, as it improves, we'll drive visits back to the office. That's not in the US, but globally, I think. The impact of inflation, I'm actually a little bit surprised with the fact that we've been able to keep our rates I quoted a 3% number. I think it's actually less in the non-private label in the non glove PP&E area. So the volumes are there and the inflation doesn't seem to be too bad. How it goes in, how this drives, where this ends up in the fourth quarter or even 2023 is hard to tell. We are not getting huge pushback on pricing from our point of view. But we're being asked about different brand options. And I think manufacturers are going to have to think this through. I know they're doing that now. And again, I'm talking about consumables. So it's hard to see how much inflation rate is really going to be towards the end of the fourth quarter, the beginning of the first. But it doesn't look like we've seen in other -- with other products in the general economy.

And our next question comes from the line of Erin Wright with Morgan Stanley. Please proceed with your question.

Hey, this is Justin Wang [ph] filling in for Erin. We were wondering what is embedded in your guidance as it relates to potential macro pressures. Is there a risk to guidance from here if we see tougher macro backdrop or is this an element that's really been baked into your guide? Thank you very much.

Yes. I mean I would say that one reason we stayed with the $0.16 range is because of that macro uncertainty that you've referenced. I think that we've kind of played out different scenarios, whether it be in terms of additional inflation, whether it be from additional geopolitical concerns and we did fall within that range of guidance that we provided. So it is taken into consideration for the balance of the year that there could be further deterioration, but we feel like we have the plans in place to try to mitigate that.

Great. Thank you very much.

We have time for one last question coming from the line of A.J. Rice with Credit Suisse. Please proceed with your question.

Hi everybody. Just two questions. First, can you just comment on what you're seeing in the medical side? I know you're focused on the alternate side area. We're hearing mixed things about how procedure volumes progressed and how much that was impacted by COVID? But alternatively, it sounds like there's a flow out of hospitals into some of those alternate sites and maybe they'd be above pre-pandemic levels. And I'm just curious what you're seeing?

So I think you're referring specifically to the ambulatory surgical centers. We were close to 2019 numbers. I can't remember a couple of quarters back. We've gone back a little bit. But generally, ASCs are quite strong. And we are gaining market share in that area for sure. We have a lot to offer. I think ASCs are also looking at ensuring that the supply chain is efficient that they're not having too much wastage product, exploration dates on product issues, and we help for those kinds of things. So I would say, overall, that's a good area. But we're in a number of alternate sites, whether it's oncology, renal centers. And for us, these markets are all doing quite well. I do believe having said that there probably is going to be some pent-up demand for elective surgery in the ASC space that will go to market. I think people will want these procedures. And so as COVID that take us down here in the United States.

Okay. And Stanley, in your prepared remarks, you mentioned that you're helping your clinicians deal with key changes in dental and medical professions. And I know you called out specifically digitization in their work. I wondered if you would expand a little more on what you're referring to in some of those key changes that they're dealing with and how that impacts your business down the road?

That's a very good question. There's a clear understanding amongst all the office space practitioners, small to the largest that efficiency is critical. They're going to face reimbursement pressure to some extent, they're facing and now. I think for them, in many respects, labor costs have increased more than reimbursement. So they're turning to our sales force for advice and how to manage the practice and, of course, how to ensure that their clinical standards increase with access to the latest technology. And on the dental side, digitalization, the biggest one is the DI, the scanners in the prosthetic field. I don't know what the number is, but is because it's not clear. But I have to imagine it's still half the dentists in the developed world are still doing manual impressions. So there's a huge opportunity in that regard to convert practices using manual impression to digital impression. The whole movement of impressions to the lab and digital manufacturing of crowns and bridges in the lab is a big opportunity for us. We're a significant player in the lab space. I think we're the largest provider of laboratory products in the world. So as that moves digitally, that's a huge opportunity for us. It has been very good to us in the last year or two, but lots of opportunity in that regard. The practice management arena, the movement from -- towards a cloud-based technology from a security point of view, from a practice management point of view, the digitalization of more of the practice presents a significant amount of opportunity on the practice management side. The interoperability, connectivity between devices and practice management software is a big opportunity. Actually, that's both dental and medical. The movement to 3D printing is starting to get some good momentum. You'll hear more from us in that regard. Actually, hopefully, in the next week or two, we'll have some announcements there. So we're very excited about this on the dental side, the digitalization. And on the medical, just simply, the capital equipment that we're selling, refining practices, replacing non-digital equipment with digital equipment for diagnostics, for other activities. So generally, a more efficient digitalized practice is what practitioners are looking, seeking guidance from our field sales force for and our field sales force is much more capable today of satisfying these needs, because we've got lots of tools in their bags. More information on that, I think, Graham or Ron can provide, I'm happy to connect you with our teams -- our business teams, but simply because of time now, we've got to probably end the call. So we’re very exited about it.

Thanks a lot.

That's a very, very good question. And plays to the opportunity for Henry Schein going forward.

So with that in mind, I want to thank everyone for calling. We are most enthusiastic about where we are. We think our BOLD+1 2022 to 2024 strategic plan is going to play out well for us even with a contracted economy, and we're underway to implementing these goals. I’ll talk about it at a future call. Of course, a key part of that is to drive efficiency, as we drive efficiency in all of our distribution businesses as one distribution, One Schein, the notion of selling a package of products to a customer rather than one or two products or services is working well. And of course, our high-margin technology value-added services and specialty products are growing at a good pace. So we're very happy with our senior team, in general. I think the team’s doing very well, and the organization is motivated to support our senior team and our management in general. The long-term trends for our markets are good, so we believe we're servicing a very solid market with a great plan and a great team. So with that, I thank you for calling. If you have any questions, please feel free to reach out to Graham Stanley on Investor Relations or Ron directly. Then if -- Graham's contacts are on the website or it's Graham Stanley.

Graham.Stanley@henryschein.com

Graham.Stanley@henryschein.com. And Ron is Ronald.

Ronald.South@henryschein.com

Ronald South. And please feel free to reach out. And if people want to speak to me, go through those channels, too. Again, thank you very much for calling. Lots going on in the business, and we remain excited as we have for decades. Thank you very much.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.