Good morning, ladies and gentlemen, and welcome to Henry Schein's Fourth Quarter 2022 Earnings Conference Call. [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's Vice President of Investor Relations and Strategic Financial Project Officer. Please go ahead, Graham.

Thank you, operator, and my thanks to each of you for joining us to discuss Henry Schein's financial results for the fourth 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 is forward-looking. As you know, risks and uncertainties involved in the company's business may affect the matters referred to in forward-looking statements. And 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 and the financial performance of our business, enable the comparison of financial results between periods where certain items may vary independently of business performance and allow for greater transparency with respect to key metrics used by management in operating our business. These non-GAAP financial measures are presented solely for informational and comparative purposes and should not be regarded as a replacement of the 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 the website. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, February 16, 2023. Henry Schein undertakes no obligation to revise or update any forward-looking statements or reflect events or circumstances after the date of this call. We prepared slides summarizing our fourth quarter financial results, and these can also be found on 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.

Good morning, and thank you, Graham, and thank you all for calling in today. We closed our 2022 with a very good fourth quarter in which we continue to execute effectively on our 2022 to 2024 strategic plan goals, achieving strong growth in earnings for the fourth quarter and, of course, for the full year of 2022, despite the macroeconomic concerns and of course, the foreign exchange headwinds. We overcame significant headwinds from lower sales of PPE products and COVID-19 test kits. Our sales were affected by a decline in sales of PPE products and COVID-19 test kits. Excluding sales of PPE products and COV19 test kits, and taking out the 53rd sales week for 2022, we achieved very good internal growth of 5% in local currencies, that's internal. There was a negative impact on dental visits for seasonal flu and COVID-19 last quarter. And this was both in North America and internationally. So dental visits were down because of the impact of flu, both the seasonal and the COVID. On the other hand, this was offset by a positive impact at least from a product sales point of view of visits to our physician customers. We experienced growth in each of our business units across the board. And overall, we generated some financial results for the quarter, reflective, I think, of a stable market -- in the markets that we serve. So we made excellent progress in advancing our 2022 to 2024 BOLD+1 strategic plan. So first year of the plan was '22, where we advanced our one distribution strategy to enhance the customer experience and improve operational efficiency, very important, by creating our North American distribution group led by Brad Connett, and our international distribution group led by Andrea Albertini. We had good results across the board, both…

Very good. Thank you, Stanley, and good morning, everyone. As we begin, I'd like to point out that I'll be discussing our results as reported on a GAAP basis and on a non-GAAP basis. Our fourth quarter non-GAAP financial results for 2022 and 2021 exclude restructuring and integration costs as well as acquired intangible asset impairment charges. This is detailed in Exhibit B of today's press release and in the supplemental information section of our Investor Relations website. As Stanley mentioned, the fourth quarter of 2022 included 1 additional selling week compared to the fourth quarter of 2021, which was the holiday week between Christmas and New Year's Day. We report on a 52-, 53-week fiscal year ending on the last Saturday in December. The next time our results will include an extra selling week will be in 2028. With respect to sales growth, I will focus on LCI sales growth, which is internally generated sales in local currencies and excluding acquisitions. To facilitate more meaningful comparisons, the estimated extra week of sales will also be excluded from LCI sales growth figures. A detailed breakout of the components of our sales growth, including LCI growth, is included in Exhibit A of today's press release. Fourth quarter global LCI sales decreased by 1.8% versus the prior year. However, when excluding sales of PPE products and COVID-19 test kits, our LCI sales grew 5%. We sold approximately $161 million in PPE products and approximately $93 million in COVID-19 test kits, including multi-save flu and COVID-19 combination kits in the fourth quarter. This compares with approximately $261 million in PPE products and approximately $187 million in sales of these tests in the fourth quarter of 2021. Our GAAP operating margin for the fourth quarter of 2022 was 2.15%, a 387 basis point decline…

Thank you, Ron. We have about 20 minutes -- over 20 minutes to answer questions. Sorry, the call was that long, but there's a lot going on. We're highly confident in the business. And the business ex PPE and COVID tests is doing quite well, even though there are challenges from a macro point of view. Having said that, I think we've got great momentum in the business and look forward to answering any questions. Operator?

[Operator Instructions]. And our first question comes from the line of Jeff Johnson with Baird.

Ron, maybe I wanted to start just on the COVID testing kit and PPE guidance. When I look at kind of the EPS impact this year, it seems like it's dropping through in a decremental margin in the mid, if not upper teens level. I think over the last couple of years, those have been contributing positively, kind of those have been flowing through or at least kind of you guys have signaled that those were dropping through kind of a corporate-wide margin rate. So why -- it makes some sense, I guess, when you're losing some of that inflated top line growth if there's a deleveraging impact there, but dropping through at that mid- to upper teens decremental margin seems a lot bigger than I would have expected. So any comments you can make there?

Yes, certainly. I think that we could see a little bit of pressure on gross margins on both PPE and COVID test kits versus the prior year. But I think the bigger issue there, Jeff, is just the gross profit dollars, I mean the compounded effect of the ongoing decrease in the revenues from these product categories in both 2022 and then continuing into '23 results in fewer gross profit dollars. And I think that kind of dilutive effect begins to hurt the operating margins a little more so than it makes it more difficult for us to cover it like we did in '22.

Yes. Understood. And then, historically, you guys have provided organic growth guidance, revenue guidance, you did last year anyway, I guess, prior to that, not necessarily. A lot of moving parts this year with the selling week -- 1 less selling week, the PPE updates, obviously, some acquisition contribution. If I look at that 1 to 3, we're kind of calcine that at maybe a 3% to 6% organic guidance ex all that noise. And if I assume medical and tech VA a little above that, dental in kind of that low to mid-single digits, as those kind of all at least ballpark we should be thinking about as we're setting up our models for 2023?

Yes. I mean you're in range there. I think that -- I think we have a headwind from PPE and COVID test kits combined of probably 300 to 400 basis points, right? You also have a headwind from the 53rd week that's going to be somewhere between 1 point and 1.5 points in there. We'll get a little bit of benefit from acquisitions. So that kind of leaves you with a number that could be 3% to 6%, 4% to 7% in terms of non-PPE, COVID test kit growth that we would expect in '23 versus '22.

Dental a little below and medical above. Is that the way to kind of think about that?

Yes, that's probably a fair statement, yes.

And the next question comes from the line of Elizabeth Anderson with Evercore ISI.

I had a question around sort of your utilization and visit assumptions. Could you help us parse that apart a little bit more for 2023? I'm thinking specifically on maybe to like medical visits and then sort of overall dental visits?

Yes, Elizabeth, very good questions. We did take a dip on visits in dentistry. And it was both in the United States and Europe, and the rest of the world wasn't so bad, of course, China was in the fourth quarter. And it is down a bit. And so -- and there's been a recovery in January, quite nice recovery. It is down a bit from 2019 in the United States. Hard to get data outside of the United States. But we are not 100% back to where we were. But the dip that we experienced in the fourth quarter has mostly, if not all, recovered. And at least from what we can tell from the first 40 days or so of the year and probably hearing from our customers, we're back to where we were in about the third quarter. so correspondingly, on the medical side, there was an increase in visits. People had flu and they wanted to confirm that it wasn't COVID. So we experienced some growth in that respect in terms of flu tests. And you can see that information from the flu test manufacturers, a lot of them are providing that information. But again, we expect in January, February that the visits were relatively back to where they were before in the third quarter, say, before these -- the flu. So the businesses are relatively stable now, and we had a temporary dip in dental visits and I think, a bubble a little bit in medical. But on average, you average the amount, if you look at our internal growth, local currency is about 5% internal growth for the company. So -- and I think all things being equal, perhaps will be a little bit better in the first quarter. Hard to tell, but it's looking quite positive for the first 40 days of the year.

Got it. And sorry, just 2 clarifying questions. One, your comments about sort of the dip and then a little bit of the recovery in January and early February, that also applies to Europe. And then secondarily, you're assuming for your 2023 guidance at these current kind of January conditions continue ongoing?

As it relates to international or Europe in particular, because we are the international in China and the other countries kind of cancel out although there's a bit of a positive impact in Brazil where we have a big market share -- but not big market share -- big business, I would say, big decent market share, too. I would say the trends were very, very similar. Of course, our medical business not material in Europe. So I would exclude that. It might even shift, we can give you data on that because it's so diffuse. But our dental business had similar trends to the United States and therefore to North America. What was your second question, sorry?

And is that January sort of rate of visits, et cetera, was sort of what you were using to underpin your 2023 guidance

I'll have Ron answer the guidance question. I'm not sure whether the first 40 days really carried through for the full year or don't. Ron?

Yes. I mean it's a little early at this point. I think that our guidance is supported by our budgeting process. We do obviously monitor what's happening so far in 2023. But I think that the assumptions -- the dental market last year suffered a little bit in January from Omicron. So there are some assumptions in there on Q1. But at the same time, the -- last year, like I said in the prepared remarks, we did about $500 million in revenues in PPE and COVID test kits in Q1 that won't get -- it won't be nearly that much this year, right? So Q1 is going to have -- still going to have a little bit of noise in it.

But when you flow through everything, Elizabeth, I think you -- we're pretty comfortable with our budget for this year, which contemplates, at the end of the day, high single-digit to low double-digit operating income growth when excluding PPE and COVID covet. So I think if you can see through the PPE and COVID, you see the business is pretty solid, and that's actually better performance than we've had in the past. And I still think that the whole management of this PPE and COVID tests, where we put the accelerator down generated over $2 billion or so in sales and pretty good profits has paid off because our customers are understanding that they can rely on Schein during challenging times and that the products we sell are generally or compliance with regulations and very often, they were buying products during this COVID period that had regulatory issues and so -- and quality issues. So I think the strategy has played out well in terms of focus on PPE and tests. And at the same time, we garnered quite a bit, I think, of core business, and that's reflected in our expectations for '23 in terms of growth of operating income.

And the next question comes from the line of Jason Bednar with Piper Sandler.

Maybe Stanley, I will start with you. A lot going on here, as you said. But maybe with the outlook, you got 1% to 3% of the top line. I know Jeff was digging in there on the organic growth. Core EBIT growing upper single, low double digits. It implies some pretty nice core margin expansion, and that would seem to fit with the historical trend line of the business. But maybe double click in on Jeff's question there. Wondering if you could comment a bit further on how you see the core dental consumables and equipment lines performing in 2023 in North America and International? And then are the drivers of the core margin expansion implied in your guide? Are those more growth or operating that you're willing to comment there?

Yes. Let me deal with the first part. And I think it's best for Ron to respond to the guidance from a mathematics point of view. As noted, in the prepared remarks, we believe the dental market in the developed world, certainly, is quite stable. We believe that, generally, we're growing some market share. There are puts and takes here, namely the seasonal adjustment because of flu in the fourth quarter and a little bit of a rebound in -- or back to normal in the first quarter. But generally, I think the market is stable. I think specialty products are stable. You should not necessarily read anything into our specialty sales per se because we had an exceptional fourth quarter for implants and bone regeneration products in '21. But generally, I would say the consumable markets in the developed world are relatively stable. There are a few markets but down in a few markets where it's bit up. But generally, it's stable. On the equipment side, traditional equipment is okay. We haven't quite run off the backlog and it's pretty stable. The area that in the past, I was a little bit more concerned about is the imaging. I think it's relatively stable now. The prices are not going down as they did, and the units, the demand is pretty good. The area where there'll be lots of ups and downs is in the digital area. There's enormous interest in digital dentistry. I've not seen the interest this side. I think when it comes to the scanners, I think we're well beyond the first run of innovative-type buyers and into standard of use buyers. There are many new entrants into this market. There are lower priced products, for sure. And that's where the market is heading, but the demand…

And Jason, with reference to your question on operating margin, yes, I do think that -- like we said, we believe operating income is growing in the high single digits, low double digits when excluding the drag from PPE and COVID test kits. And yes, that should imply kind of a pro forma operating margin expansion, as you inferred. I think it's a -- really shows that the benefits of having the kind of broad product portfolio we have of not just being a distributor but also having the specialty products, also having being in the medical business, also being in the technology business that we can we can continue to kind of offset some of these market conditions that have adversely affected us a little bit, whether it be in PPE or COVID test kits with the balance of the business.

Got it. Just so Ron, just as a quick follow-up there. You're suggesting operating margin expansion total to get that. Is it gross margin driven or OpEx driven? And thanks for the comprehensive answer. I'll hop back in queue after that.

It's -- given that the product mix aspect of it would be primarily gross margin driven

The next question comes from the line of John Block with Stifel.

Ron, maybe just going on a similar path, the high single digit to low double digit 2023 non-GAAP EBIT growth for the core business. Can you talk to how much that benefits from the restructuring in the back part of 2022? I know you guys usually do restructuring. Just seems a little bit bigger than normal. And when we think about going forward, more importantly, is the high single digit to low double digit, a good representation of the business longer term once the PPE, COVID headwinds abate? And then maybe in the interest of time, I'll just ask both upfront. Stanley, on the implant side, the dental specialties, I know you guys had a very difficult comp. But I think just -- maybe in the back part of '23, implants might be flattish, call it, in to which '22 year-over-year to throw a dart. Just would love your thoughts on how that compares to market growth? And if you feel like you guys are still taking share there?

Yes. John, I think in terms of the -- and if I'll paraphrase your question and tell me if I have it wrong, it's really kind of the sustainability of continued growth in the high single to low double digits in the balance of the business. And we do have some confidence there that we can continue with that. I think that you may be aware that we have an Investor Day coming up on February 27, and we'll provide more kind of -- some kind of midterm assumptions at that point in time in terms of what we are expecting beyond '23. But this is, again, kind of partially driven by the mix of the business and the fact that we're growing some aspects of the business faster than others and whether it be in specialties or in technology. Did that answer your question?

The questioner has dropped off. The next question comes from the line of...

Just to respond quickly to the specialty products. The implants and bone regeneration products are doing very well. We're very pleased with our internal growth in that area. I think the Biotech acquisition will help. So that business continues to be strong, particularly in our core markets, which is the United States and Germany, a couple of the Germanic countries and Japan. On the endo products, we're doing well. Continue also there like an implants, bone regeneration to believe we are gaining market share. The aligners are so small, but I think we will get a boost with the Biotech acquisition. We will have certain synergies that I think will help drive more sales, but it's a very small business.

Our next question comes from the line of Nathan Rich with Goldman Sachs.

I'll ask both upfront as well and both are related to the intraoral scanner market. Stanley, where would you say we are in the shift to lower-priced products? And can you just go into a little bit more detail on kind of what you're expecting from that market in 2023? Do we start to maybe see some signs of stabilization just in terms of ASP and mix? And then could you go into a little bit more details on the supply issues you mentioned from that 1 supplier just in terms of when -- if you have any visibility into kind of when that would potentially resolve or just what you're looking for there and what's assumed in the outlook?

Yes. On the side, on the scanners, I don't think we've seen the bottom yet in terms of mix change. I think the pricing relative to particular manufacturers may have stabilized. But there are entrants into this market that have very good products that perhaps we didn't even sell much of in the past that we're not carrying and selling. So it's more of a mix to lower-priced products rather than deflation of a particular manufacturer's existing products, although there could be some of that. As it relates to -- and by the way, I think we estimate about 20% to 25% of in the developed world have 1 of these devices, and we think that's going to be standard of care within the next couple of years. So we're very optimistic about units in that area And also these newer entrants that we're working with are doing quite well with us. As it relates to the manufacturer that has a supply chain issue, it's not a public company. I can't talk about it, but they have a new product. It's actually on the upper end that has done quite well. And that just goes to a little bit of a contradiction to what I said early on. For manufacturers that have unique technology, there is a demand for paying more, but that's not generally for the whole market. The whole market, the 75% of people that don't have a device, they're interested more in a lower-priced product that has enough features for them. But the one that some back order is on the higher end of features, and we don't expect that to resolve for 3 quarters.

And we have time for one last question coming from the line of Kevin Caliendo with UBS.

Can you quantify in any way the impact of the 3D printing that you called out in the release and on the call? Like in terms of numbers and market share and the like, -- because I know you've talked about it in the past, but I think this is the first time really called it out in the press release is impacting the business. And just as a follow-up, all this, and I appreciate all the color on the inventories and the equipment and IOS and the like. But your backlog grew in 3Q, and you believe you said it grew sequentially through the quarter. What is the expectation for equipment sales? And where does your backlog sit now relative to where you were at the end of 3Q?

Let me deal with the backlog first. It is in North America, similar to what it was at the end of the third quarter. So I don't think much has changed. I can't give you the exact timing. A lot of that is the result of traditional equipment, but we seem to be topping up whatever we ship. And so that market seems to be quite strong in Europe. It's dipped slightly, but we think that's to some extent because of the IDS because people are holding back. But we the margin here. So it's not material. The bottom line is the backlogs are good in both North America and internationally, and the equipment is strong. As it relates to mills, I would say the mill market has significantly come down. And I'm referring to as I know, chairside mills, that's just not doing well. I'm not referring to lab mills. We are the largest provider of products to dental laboratories. And that market seems to be relatively strong. The switch to the 3D printing is not occurring 1:1 yet. What's happening is there's a lot of dentists that are saying, I need to find out more about this. And I expect that over the next couple of quarters, our team will be out there educating dentists on the opportunity for 3D printing. I suspect it will result a little bit in mills going up again because right now, it's a situation where we dentists want to understand more about what's going on. And 3D printing is going to be important, but not substitute completely for chairside milling. The market is just, I think, come to a little bit of an educational stumble. But I think the mills will come back again, but not to where they were. And 3D printing is at a relatively early stage. But I think we're doing very well in terms of growing our global market share, the sales that are out there. 3D printing will improve as various materials come to market and as the aesthetics improve. But I think the message is that digital restorations, a hot product, dentists interest in investing, our job is to make sure that we educate the dentists on the appropriate devices for their practice and then close on sales.

And if I can ask, Ron, a really quick follow-up. I just wasn't sure if I heard. Is the guidance include or exclude Dental Biotech? And what was the impact of that?

The guidance does not include Dental Biotech. I think that when we put the release out of Dental biotech, we said it would be slightly dilutive to 2023 when excluding amortization expense.

Okay, everyone Thank you very much for calling in. The message I think we want to communicate, I know we want to communicate is that our core business is in good shape. We expect decent internal growth rates, local currency, of course, in 2023, we'll cover this in more in detail at our Investor Day. We expect our internal growth -- sorry, our operating income to continue to grow quite nicely, high single digits, low double digits. And bottom line is the business is in good shape in markets that are doing well. There are nuances that need to be understood. We're happy to deal with that and further detail at the Investor Day. So if anyone wants to reach out, Graham, on the Investor Relations side, he'd be happy to provide further clarity on our remarks. So thank you very much. And hopefully, we'll see everyone on the call at our Investor Day in New York City, the following week. 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.