Good morning, ladies and gentlemen, and welcome to Henry Schein’s Third 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. Thank you, sir. 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 third 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 materially differ from 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, November 1, 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. Finally, we have also prepared a presentation summarizing our third quarter financial results. This can also be found in the Investor Relations section of our website. During today’s Q&A session, please limit yourself to a single question and a follow-up. And with that, I’d like to turn the call over to Stanley Bergman.

Thank you, Graham. Good morning, everyone, and thank you everyone for joining us on this call today. Our financial results for the third quarter of 2022 reflects solid underlying growth across our business and actually most geographies. We grew our non-GAAP diluted EPS compared with third quarter 2021 and this is despite the significant currency headwinds and lower sales of PPE and COVID test kits. Today, we are narrowing our 2022 non-GAAP diluted EPS guidance range, which reflects our confidence in the underlying strength and the stability of our business. Overall, we feel very good about the outlook for the company and remain highly focused on delivering on our both plus one strategy, which we’re happy to go into details during the Q&A period and as we continue to increase the sustainable profitability of the business. Importantly, current market demands in both our dental and medical businesses are generally stable and actually have been this way for a while. We continue to receive price increases from various suppliers, with additional price changes towards the end of the second quarter. The depth and breadth of the Henry Schein portfolio allows us to satisfy customer’s needs, and to offer alternative national brand and corporate brand products to price sensitive customers, thus positioning us to also protect our gross profit. This is reflective of a deep and lasting relationship we have with our customers and our suppliers. As we commented in the previous quarters, market prices for gloves continue to decrease. However, we believe at a reduced pace, while our unit volume for gloves is relatively stable, and this is driving lower sales and profits in the PPE category. Remember, the PPE category is largely gloves. Similarly sales and profit for COVID test kits have declined compared to the prior year. But pricing…

Very good. Thank you, Stanley. And good morning everyone. As we begin, I’d like to point out that I will be discussing our results as reported on a GAAP basis and on a non-GAAP basis. Our third quarter non-GAAP financial results for 2022 and 2021 excludes certain items detailed in Exhibit B of today’s press release and in the supplemental information section of our Investor Relations website. I will focus my comments on sales primarily to LCI sales and LCI growth, which has internally generated sales in local currencies and excluding acquisitions compared with the same quarter in the prior year. A detailed breakout of the components of our sales growth, including OCI growth is included in Exhibit A of today’s press release. Our third quarter global LCI sales decreased 2.4% versus the prior year. However, when excluding sales of PPE and COVID-19 test kits, our LCI sales grew 6.8%. Third quarter combined sales of PPE and COVID-19 test kits were $260 million lower than in the third quarter of the prior year. Our GAAP operating margin for the third quarter of 2022 was 6.86%, a 23 basis point improvement compared with prior year GAAP operating margin. Our non-GAAP operating margin for the third quarter was 7.18%, a 55 basis point improvement compared with prior year non-GAAP operating margin. Operating margin improvement was driven by gross margin expansion, mainly as a result of increased growth and sales of higher margin products. Turning to taxes. Our reported GAAP effective tax rate for the third quarter of 2022 was 22.7%. This compares with a 23.9% GAAP effective tax rate for the third quarter of 2021. On a non-GAAP basis, our effective tax rate for the quarter was 22.8% and this compares with the prior year non-GAAP effective rate of 23.9%. Third quarter…

Thank you, Ron. So before we open the call to questions, I would like to take a moment to note the passing of our board director, Diane Rico in August. Diane was an internationally known authority on aesthetic and restorative dentistry, as well as an early pioneer in digital dentistry. She served on our board since 2014 and brought a valuable perspective to Henry Schein. And was a wonderful human being. I would also like to spotlight that early last month Henry Schein was named to Fortune magazine’s annual Change the World list. We recognized for our leadership initiatives to advance health equity for individuals with disability, and in particular our engagement with our key stakeholders in support of this work. Our CSR report, which was released in mid August, aligned with two of the most common disclosure standards FASB, GRI. This is important milestone as we prioritize transparency and accountability in our ESG work. So in conclusion, while there are a number of external factors at play, specifically as it relates to PP and E, and test kits, and FX our BOLD plus one strategy remains our North Star. And our team is executing according to plan. As a result, we feel very good about our position in the markets we serve and generally, the team’s focus on priorities and delivery. So with that review of our third quarter financial results and some commentary on our future I like to open the call to questions. Operator, please.

Thank you, sir. We will now be conducting a question and answer session. [Operator Instructions] Our first question comes from the line of Jeff Johnson with Baird. Please proceed with your question.

Thanks. Good morning, guys. Can you hear me okay? Good morning, and congratulations on the quarter. I guess a two part question. They’re not really connected. But I want to shove both of them together because I do want to ask both questions. But the first one Ron just on the gross margin up 110 basis points year-over-year. Could you help us bridge how much FX was weighing on that gross margin versus how much maybe price increases in the lower PPE and COVID testing might be offsetting and helping? Those are the three big variables outside of just kind of normal operations that I think we’re all trying to understand what the impact is on the gross margin side. And then if I go back to our September health care conference, Stanley, I think you and Ron had made the comment that I think you and Ron had made the comment that you would provide at least some framework for 2023. I’m not really hearing a lot of that. And I know and markets are a little uncertain right now. But if I look at the street, around the street as modeling 6% EPS growth next year, we’re admittedly closer to flat year-over-year in our model just can you help us kind of peg between where the streets at that 6%, where maybe I’m modeling closer to plant just how to think about maybe the ups or downs from either of those numbers? Thanks.

Well Jeff, we’ll start with your gross margin question first, I think that especially with given our portfolio, you get a kind of a broad mix of change of products, and that, obviously, is going to impact that gross margin. So we did see some benefit from some of the higher margin products. We did see, I think, some benefits in the third quarter on merchandise, primarily, in the non-PPE area, obviously, because gloves were down in pricing, but from inflation that we estimate to be in kind of that 3% to 4% range benefiting there as well. So I think that gave us a little bit of a lift on the gross margin versus last year. In terms of 2023, as you mentioned, there’s a lot of different moving parts, as we kind of work to and look to 2023, we just considered it to be prudent at this point in time to provide guidance with our Q4 release so that we can better understand the dynamics of the PPE market, what’s happening with COVID-19 test kits. These are all things that have a significant influence on our income. So when we provide our fourth quarter earnings release, we will provide 2023 guidance at that point in time.

Jeff, let me just highlight. We can’t give guidance now. But in general, we’re feeling pretty good about our core businesses. That is our distribution businesses in the United States globally. Our specialty businesses, although I would say in the implant field, there is a greater demand at this moment for the lower priced also, premium implants and software businesses and other value added service businesses. Having said that, the price of PPE, namely, primarily gloves is highly volatile, although we think of stabilizing and test kits, we think have stabilized from the latter the last few quarters. But I think it wouldn’t be appropriate right now to provide guidance for 2023 taking into account the volatility in PP and E and I wish we could do more, but I think it would be irresponsible to try to predict those areas.

Next question comes from the line of Elizabeth Anderson with Evercore ISI. Please proceed with your question.

Hi, guys, thanks so much for the question. Stanley I think you sort of alluded to and in Jeff’s question a little bit. But if we think about sort of October and sort of the beginning of the Q2 results, how would you say the trajectory compares to the third quarter? And then just in general, on the overall visibility of the business now right now, obviously, one question many investors have been asking is, has there been ex-COVID and each, like broader changes and how you sort of think about the visibility of the business right now. Thanks.

Yes, I think that’s together with Jeff question is the core which we ponder, and I think we’re quite comfortable. Look, October dental consumable merchandise, internal sales growth, excluding PP and E grew relatively consistent with the third quarter, and that’s both in North America and internationally. So those businesses are relatively stable. Of course, we can’t, we just don’t have visibility on the price of gloves. And it could swing in a number of directions. Having said that, I think it’s better to look at the core business. And we’ll break out for you sales of these gloves, the gloves and the test categories. And so you’ll be able to figure out how we’re doing in the core business. And we’re seeing that that is pretty stable. We gave you and actually doing quite well we gave you sales, excluding those items, and excluding foreign exchange, foreign exchange and Ron will give you the number did have an in packed in all three quarters. We’re contemplating in our guidance that we’ve reached a stable foreign exchange, which is, of course, reflective of very strong dollar in the markets that we serve. Now, if I wasn’t clear, I’m happy to give you more clarity or Ron can do that. Now, as it relates to an external by the way, and medical also if you take our PPE and test October was more or less in line with the third quarter as well. And global technology value added services, sales not that material but in the scheme of Henry Schein, but the profits seem to be stable as well, from the third quarter. So patient traffic, it’s very hard to get this precise. If you take a look at the ADA survey, and we don’t know 100% how this works. Some…

Our next question comes from the line of Brandon Vazquez with William Blair. Please proceed with your question.

Hi everyone, thanks for taking the question. In terms of profitability there’s a lot of macro headwinds that are uncertain here. And I can appreciate it’s hard to put a finer point on those. But how do you guys think about balancing investments in future growth, and kind of balancing those near term headwinds to deliver some profitability and EPS? So what are some key investments you’ll continue to put capital into, regardless of what happens and kind of the trajectory things you can’t change and where areas that you can pull back on spend?

Well, when you say investments, let me deal with the M&A side. As I noted earlier on, deals are not done until they are signed and announced. But we have a view that we wish to spend $300, $400 million a year on M&A. We’ve done approximately that on average. Some years it’s been a lot higher. Last year was a bit higher. During COVID, it was a bit lower. But we want to do, we want to continue to invest in M&A at that kind of a rate. The pipeline is relatively full. Specialty products is an area of focus. We’ve already announced two fold ins on the distribution side. But I would say it’s the high margin high growth areas that we’re most interested in. it doesn’t mean we will not continue to fold in businesses, expand our geography on the distribution side. Again we remain quite optimistic in that the pipeline is full. But we can’t commit to closing anything. As it relates to investments in the business, I would ask Ron, to cover that. We have specific areas where we’re focusing on reducing expenses but other areas where we going to move investments towards that we believe will impact the long term, sustainable profits of the business. Ron on the investment the business, your thoughts?

Yes. Brandon part of this restructuring initiative we have in place is to give us an opportunity to redirect some investment internally in the business to those areas where we see greater opportunities for growth, greater opportunities for higher profitability. So that’s part of it. But we’re also like I mentioned in the prepared remarks, we have $400 million authorized for share repurchases, and we will expect that to continue to be an important part of our capital allocation going forward as well. So part of this is share buyback together with I think kind of targeted M&A as Stanley pointed out, but plus also some reallocation of internal investment and as we proceed through 2023.

And our next question comes from the line of A.J. Rice with Credit Suisse. Please proceed with your question.

Hi, everybody. Thanks for the question. I wondered if maybe to expand a little bit on your comments on inflation. And I know in the prepared remarks, you talked about seeing some price increases at the end of the quarter. Are you still able, generally to pass those along? Are you seeing any significant shift toward your the national brand or your corporate brand, as an offset to those inflationary pressures? And maybe also, as you progress through the year is the trend of that inflationary increases been pretty steady throughout the year? I know year-over-year it’s up but pretty steady throughout the year, or you’ve seen it build over the course of the year?

So good question. There all been good actually. Let me begin with the end. We did see some national brands some a bunch of increases at the end of the second quarter by some manufacturers. And I would say that there’s a growing awareness amongst our customer base of manufacturers that have increased significantly, multiple times, and those that have held their prices back. So there’s a much more acute understanding of price increases in the marketplace now than I would say, six months ago, two or three quarters ago. There’s nothing, in very little that is so unique in dentistry, that a customer can move from one manufacturer to another. Obviously, certain brands provide more comfort, as brands generally do. Statements generally make about branding than other brands. So generally, we’ve been able to pass on price increases and manufacturers have not been supportive of that. In other words, they may not want to recognize the chargeback. It’s very rare. I can’t think of too many manufacturers, but that’s not a good. It’s generally the norm in medicine. It’s been the case in medicine for two decades. There are a couple of well, one, maybe one or so manufacturers that are in dentistry that are having an issue with that. But generally we’re able to pass them along and were we not meant I would say the customers are working with us and where there isn’t a national brand option we do offer our private brand and some customers look to private brands in any event. So it’s not a crisp answer in that is not one shoe that fits all. But generally we’re able to move price increases along. And the suppliers are understanding where manufacturers are going further than others, that there are options, whether it’s with other national brands, big ones, smaller ones, or our private brand. So I believe we have very good relations with our customers, with most of our suppliers, and a managing to this in a rather effective way. Our margins, gross profit has done okay. It’s not only because of this particular issue that we describe, but it’s also a movement towards a higher growth, higher margin businesses.

Okay, maybe just a follow up on the comment you made that lead times on the equipment side are starting to improve a little bit. Does that change the dynamic in the marketplace where they’re potential customers that just said, look, it’s a long lead time. So I’m not going to order now that may now start to order or does it affect the sales process in any other way?

Yes, I think we mentioned our order book is stronger the end of this quarter, was stronger at the end of this quarter the last quarter. It’s a combination of areas. Some of it is the CAD CAM to large extent, the digital side was because the -- meeting was in a different quarter. That’s to some extent, not a large extent, but some of it. So generally because we did have a pretty strong quarter, both here in the U.S. by the way, international relative was held back a bit in the percentages because of prior numbers. But generally the quarter was good. And the buildup went up. Again, some of it because of then supply will moving around. But in general, it’s good. On the traditional equipment, if a customer really needed something we could supply them. If there wasn’t a rush, we asked them to wait. I would say the challenge was U.S. traditional. I would say that the manufacturers in that two major manufacturers in lights. One has not had any back order issues now for a while believe they treat us with the priority. And the other one also treats us very well that improve the capacity but it’s still backlogged. The bigger issue is less availability of the products and more the delays in the sites of installation whether is I think, in line with the general economy, labor shortage, delays by contractors and so we haven’t been able to necessarily deliver. But I think these are all marginal issues because generally equipment from our point of view is strong. Some extent is probably from gaining market share. But in general our equipment business here in the United States and globally is quite strong.

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

Great, thanks, guys. And good morning. Appreciate the time. And maybe just two quick questions. First, on the dental consumable side. It seems like your LCI growth premium between specialty and basic consumables ex-PPE has compressed and Stanley I think you talked about some implant headwinds. Should we expect that call it that ratio compression, I guess to continue in coming quarters and if so, why Stanley? Is that just sort of teasing out some shifts going on in the dental industry of maybe that move back to call a bread and butter dentistry or more hygiene dominating the chair versus higher end procedures and then I’ve got a quicker follow up and equipment. Thanks.

Yes. Hard to tell. We haven’t seen the data yet on worldwide sales of implants for some data available. We haven’t seen the report yet. But my sense is the units in oral surgery have not gone down significantly, maybe slightly. But there is a greater interest in the lower priced implants it’s still a little bit strange that the actual cost of the implants is insignificant compared to the procedure. But I guess dentists in certain markets are looking at that. We’re still optimistic about the oral surgery business, very optimistic. Both the market is stable. And because we continue to do well in parts of Europe and in the United and North America, on implants. And I think the low priced units gain our business in that area is doing very well. So we’re also dealing with high comps. The quarters, previous ‘21 was very high comps, very high numbers. So I wouldn’t draw any specific conclusions as to the strength of those businesses from our point of view. I think they are pretty solid. On the other side, our indoor businesses done very well. And our traditional wires and brackets business, although it’s very small, has not done well. But our liners have done well. Let me hasten to say, with a very small market share, but we have a couple of DSO contracts that were they work exposed exclusively with us.

And maybe just a follow up. And I’ll try to push you a little bit. Your dental equipment, comments and continue to, I think be pretty upbeat overall on dental equipment. And that’s contrary at least just to arch axe and it’s telling your conviction that this is true, call it end user demand is not a function of a catch up from the supply issues of six to 12 months ago. And do you think that equipment strength continues into 2023? Thanks for your time, guys.

Yes. We’re talking about at the margin, a relatively small percentages, one way or the other. But generally, I think the business is solid. We also do well with DSOs globally on the equipment side, I think that helps. We have capabilities, I think, on installation, able to bring up many new DSOs, practices on one day, if they buy practices, whole group of practices, we’re able to help install new equipment relatively quickly. We work very well with our suppliers. Not all but most of our suppliers on the equipment side is a great way to markets. So there’s a lot of factors in there. But I would say at least for the foreseeable future, our dental conviction is pretty good. I can’t comment on the rest of the market. There are many players with some private players, even the public players don’t disclose exactly what’s going on. Again, chairs units and lights is largely, are largely private companies. And so it’s very hard to give you a comparison to the market. Having said that we do feel comfortable with our equipment growth as November 1 2022.

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

Great, thanks. I have a quick question on the medical segment. What’s driving the highest single digit growth? I guess was a little bit slower than what we saw in the first half. But that’s excluding the COVID related dynamics and what the sustainability of this growth, are you seeing market share gains? Or what are some of the factors driving that? Thanks.

Yes. That’s also another good question. We don’t get many questions on the medical business which we think is a great franchise. We’re doing very well with IDNs. Now IDNs generally use other map distributors, big, big hospital distributors for their hospital acute care needs. But for the ultimate care needs, the physician practices primary but other ultimate care sectors other than long term care which we are not in generally, we are viewed as an important player. We don’t win every contract, but we win a lot. It’s based on our service, our relationship with suppliers, efficient charge-back systems that we have in place with suppliers that work very well with us on that side of the house, where there’s been charge-backs for example, in place for years as a way of doing business and we just do it very well on the ultimate care side, particularly the for physician side. So with the large IDNs too many new ones, we have won a few in the last few years, but that have switched that often. Having said that, there’s a growing part of the IDN business that’s moving from the acute care setting into the ultimate care specifically, physician ASC side of the provider side. And we do well with that. We also made a comment that our other medical businesses are doing well. Government business we do quite well in that area. We have some unique businesses in that area. And they’re not huge, but they’re doing well. We’ve also indicated that our sports medicine, there are parts of the EMS business that we’re in that dwell podiatry the smaller practices, the smaller group practices, these are all areas where we have folks directly focused on these businesses that are doing well. So I think we do well in this marketplace. We have scale. And we have sophisticated supply chain. I’m not sure if anyone does it better than us from a logistics point of view, combining med surg, pharmaceuticals, equipment, installation, the whole package all in one from one distributor with formularies charge-backs that really work very well.

And then on 2023, just, I get it there’s limited visibility on PPE and test kits and also the macro kind of heading into 2023. But are there other factors that could be limiting your visibility there for instance are there upcoming changes in DSO or manufacturing contracts that would impact your ability to provide guidance into 2023 now like, or do you anticipate that it’s a fairly normal environment next year from a customer and manufacturer relationship standpoint? Thanks.

No. Hi Erwin, it’s Ron. I would say that it’s more the latter from what you just said. We’re not anticipating any other significant changes in the market. We’re just trying to better digest what’s happening on PPE and the COVID-19 test kits. I mean, we’re happy with how the business is doing. We’re happy with the quarter. We faced a $260 million revenue headwind this quarter in terms of decreased revenues in PPE and COVID test kits and in grew EPS from, non-GAAP EPS from $1.10 to $1.15. So, we’re happy with the core business, but we need to get it, we want to better understand the whole dynamics of what’s happening with PPE and COVID test kits we’ll be able to provide, I think detail that will be helpful to people when we include 2023 financial guidance with our Q4 earnings release.

Thank you. We have time for one last question coming from the line of Jason Bednar from Piper Sandler. Please proceed with your question.

Hey, good morning. Thanks for squeezing me in here. And congrats on the results today. Yes I’ll go with a two partner here. And I’ll just ask both of them upfront, they’re both follow ups to prior questions. So maybe with the forward looking question here, and I’ll take a different cracker than what Jeff did on 2023. Are you willing to commit at all to earnings growth for next year? Or is there any I guess any reason to think operating margins don’t expand in 2023 given the restructuring that you have underway? And then building on Jon Block’s question, if we’re thinking about the sales contribution, shifting maybe on the margin away from the more profitable specialty areas, those parts of the business softening up a little bit, it sounds like. Can you reconcile or fill the gap and how profitability and margin expansion is still remaining that solid as you see it for 2022 in spite of this dynamic, thank you.

Yes Jason regarding 2023, like I said, we’ll be providing plenty of details around our 2023 financial guidance with our Q4 earnings release. So I think at this point in time, we’re not prepared to provide anything directional. With reference to your question on the kind of dental margins and the influence of specialty products I think something to keep in mind is that specialty products are likely going to have or historically may have a little more volatility in their growth versus merchandise. Merchandise can fluctuate a few points year-over-year while specialty products might have a little greater volatility than that. As Stanley said we had pretty good growth last year in the third quarter of the specialty product. So you’re right in terms of this particular quarter maybe there’s a little more kind of I’m not sure what the right word is, but how the margins kind of come together. But I don’t know if we’re to the point of saying that’s going to be kind of a long term trend here.

We still highly bullish about high growth, high margin businesses. There may be some volatility as Ron indicated, but generally, the oral surgery business is a good one. We believe growing our market share globally. And endo is very strong. Obviously, some volatility in brackets, and aligners seem, with a small for us seem to be also positive area. But I wouldn’t read any anything into one or two or three quarters. I think we’ve shown that long term our businesses are growing and we expect commitments to add in organic growth to that.

Thank you, I would like to turn the floor back over to Stanley Bergman for any closing comments.

Thank you, operator. Thank you, everyone, for your participation. I think we’ve said it a couple of times today, many times, we have confidence in our core businesses. We just don’t know the degree of volatility in the PP and E, primarily gloves, and the COVID test area, the rapid test area. But excluding that we feel strength, stability. We are feeling good about our dental consumable businesses around the world, the equipment business. We are feeling good about our medical business and our value added services businesses recovered specialty. So obviously, we’re in a volatile times. But we’re also focusing on our expenses as we’ve announced in the past relative to our restructuring and this is something Henry Schein has gone through many times in the past, have a good management team in place, focused on the priorities at the center, which is a BOLD plus one initiative. So with that in mind, thank you all again for calling in. We’ll speak to you at the beginning of mid February, the longer period, mid February, but I think we’ll be at a couple of conferences will be two or three conferences. Right. And, again, if anyone has any specific questions, please feel free to reach out to Ron, to Graham and Ron and thank you very much. Since we won’t have another one of these calls, have a safe holiday season and thank you very much for your interest in Henry Schein.