Henry Schein, Inc. (HSIC) Q4 2022 Earnings Report, Transcript and Summary

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 in North American distribution and in our international distribution group. We strengthened our dental position with national DSOs One new accounts and have an excellent success with our technology solution and specialty products within the national DSO segment. And on the medical side, we did expand our position with IDNs and large group practices. On the digital side, the BOLD plan calls for a significant effort in this area. We created our global digital team, including the appointment of experienced veterans in this area: Trinh Clark as Chief Global Customer Experience Officer; Sara Dillon, as Chief Data Officer. We are working closely with Lee Benowitz, Chief Global Digital Transformation Officer and Mark Hillebrandt, chief Digital Revenue Officer. We made excellent progress designing and building our global e-commerce platform, and this is an advancement of our current platform, which we expect to start rolling out in the latter part of this year, and that's -- we start to roll out the upgrades to the current platform. At the same time, we had some exciting news on the AI side, where we launched our Detect AI and AI-enabled x-ray analysis tool powered by Video Health. And last week, we were advised that Video Health has received 510(k) FDA clearance for its periodontics solution, which we expect will further advance the use of AI as a tool dentistry. We were active on the M&A front. We acquired Midway Dental in the U.S. and Condor Dental in Switzerland, thereby expanding our reach into underpenetrated areas in the market. We acquired a majority stake in Unitas and announced plans to acquire a major -- majority stake in Biotech Dental. Both of these investments will address in a moment. We have begun implementing our restructuring plan to reduce our global real estate footprint to reflect TSM, that's Team Schein Members, preference for flexibility in work locations. In this connection, we have closed 1 of our 2 buildings in our headquarters on We intend to invest in our remaining real estate footprint around the world to provide modern and flexible office space, and we will also continue to invest in technology to ensure that we maintain and build on our strong competitive position from a technology point of view, in other words, the tools that we provide our team to operate and, of course, the tools we offer to our customers to interface with us. This past quarter, we disposed of an unprofitable business so we can redirect our resources to operations that are priorities in our 2022 to 2024 strategic plan. The costs associated with this exit are included in our restructuring costs for the quarter. So if you look ahead a bit, we are introducing guidance for 2023, which Ron will discuss in a moment. We expect operating income growth in the high single digits to low double-digit percentage range when excluding the contributions from PPE products and COVID-19 test kits. We anticipate the impact of lower selling prices of PPE products and reduced demand from COVID-19 test kits will largely be offset by earnings momentum in our underlying core businesses. And the good momentum we have, as we enter 2023, this gives us confidence in the 2023 guidance. And the -- specifically the growth in our operating income when you exclude PPE products and COVID-19 tests. So a little bit of specifics on our dental distribution business. Merchandise sales in North America grew slightly when excluding sales of PPE and taking out sales from the 53rd week. In North America, we have a relatively stable market. And our market share, we believe, remains stable to slightly positive. We believe global dental consumable merchandise growth, as noted earlier, was impacted by the high incidence of flu and COVID-19 cases, which caused increased rates of patient appointment cancellations and accentuated the staffing shortages. Now what's important is the rate of patient flow appears to have returned to more normal levels in January -- this past January of 2023. The impact from manufacturing merchandise price increases, we believe, lessened as last year's increases began to annualize. The depth and breadth of the Henry Schein product portfolio, of course, allows us to support our customers' needs when we have customers that are concerned with pricing as we have offerings of alternative national and corporate brand products, that's our own brands, as well as alternative national brands where we experienced customers resistance to price increases. But having said that, price increases, we believe that are speaking in the marketplace are relatively stable now and not anywhere near what they were at the beginning of last year. Our demand for dental equipment in North America remains healthy, and our North American equipment order book is stable. Although we saw good sales from traditional equipment and steady sales for digital imaging equipment, which we had challenges in the past because of pricing issues, but this seems to be stabilized now. And there was a decline in sales of digital restoration equipment compared to corresponding -- the corresponding period in the fourth quarter. And of course, we had good sales in the fourth quarter of the year. But the challenge has been customer demand is shifting from chairside mills, quite expensive, to 3D printing, much less expensive, and a mix shift to lower-priced intraoral scanners. There was also a supply chain issue with one of our important intraoral scanner suppliers that introduced a new scanner this in the last few months. So all in all, the demand for digital restoration, that market is pretty hot, but there are these mix challenges that I've just described, and we can go into in greater detail if anyone has questions. The value of our North American order book for equipment is stable. We continue to see construction delays to some extent and a slight reduction in the number of planned new office openings amongst specifically some of our larger DSOs. On the international general merchandise sales side, the same impact as in the United States, North America that COVID patient flow challenges we experienced also as well as the lockdowns in China that were offset on the international side, but those were largely offset by good growth in the U.K., Eastern Europe and Brazil. Towards the end of the quarter, dental office staffing absenteeism and patient appointment cancellations will begin to ease likewise in our international business. Demand for equipment internationally held up quite well, with sales moving to lower-priced intraoral scanner units as well and the overall equipment sales essentially were in line with last year. The fourth quarter equipment sales and our outlook was slightly impacted by purchase delays in anticipation, this is on the international side again, with the biennial IDS show in Cologne, where customers expect new promotions to be introduced new products, and that show takes place at the end of the first quarter. The fundamentals in our end markets remain solid. Of course, the aging population and the growing global awareness of the health care benefits of preventative care and oral health, all play into our strategic benefits for Henry Schein, short, medium and long term. So demand for dental service is also generally correlated, we believe, with unemployment rates. And in the developed world, these remain relatively sort of consistent historically low, if you will. So we think the underlying base is okay, supporting oral care. And let me now turn a little bit to the dental specialty products business, where we were impacted, particularly in our largest sector, implants and bone regeneration products, with significant prior year growth prior year comparisons. The BioHorizons premium value implant segment continues to grow in North America and Europe. And we have some offset here with the decline in China, although I'll point out that our China business is not material, but it did impact the gross line to some extent. Sales for DSO customers in the United States for the BioHorizons line remains solid, and our value brand, Medentis, primarily in Germany but also to some extent in China, achieved double-digit sales growth. But this was mainly coming, as I said, from Europe and a little bit from Asia. When I refer to Asia, specifically talking to Japan, where our implants are doing good and oral surgery products are doing quite well. In December, we announced planned, subject to regulatory approval, to acquire majority ownership stake in the French dental solutions provider, Biotech. We look forward to bringing Biotech Dental's high-quality software that is so important. It's the whole digital flow that is so important that Biotech Dental will contribute to Henry Schein, but also the general products and services that dental labs are important for new geographies with respect to Biotech, specifically in France, where we believe we will be close, if not the leader in implants at some point in the near future. These will also have a line of product that is well received in that market. So dental products implants, biomaterials, all are high-growth, high-margin products, and Biotech will contribute to that as well as providing support -- additional support for our leading digital workflow solution in dentistry, of course. On the orthodontic side, sales growth remained strong, driven by new products introduced earlier in the year. Recent data suggests that the percentage of general practitioners in the U.S. who perform root canal procedures is increasing. That plays right into our sweet spot as well. We believe that this trend, combined with an aging population bodes quite well for the Henry Schein in orthodontic business. Now turning to our technology and value-added business. The largest segment, of course, is Henry Schein One, our software business. Growth was strongest in the international business due to the strength of our entirely cloud-based solution, which is doing very well outside of the United States. Growth in North America was driven by sales of our practice management software. Also the -- specifically the cloud-based software that we offer Dentrix Ascend. And we see customers upgrading to Dentrix Ascend as design life cycle of our Easy Dental product ends. So we're very pleased with the progress are progressing from Easy Dental to our Dentrix and Dentrix Ascend products. What is very important is we now see close to 6,000 customers on our cloud-based products, Dentrix Ascend entirely. We have noted in the past, these cloud-based systems drive demand for other Henry Schein One products. We also had nice customer wins during the fourth quarter with our Analytics business. He assisted well as well. This is the business that helps with revenue cycle management made a significant investment in Unitas, a PPO solutions provider and generally puts us in a very, very good position to help practitioners operate a more efficient practice while, of course, they provide good clinical care. We've enjoyed a relationship with Unitas since 2014, and we're now delighted to be able to integrate these value-added services into our product offering at Henry Schein One. So you'll see that the dental specialty products technology value-added services business did well, record year this year, up against some tough comps towards the end of the year. And this is where we're placing a lot of emphasis on an important part of our '22-'24 BOLD+1 strategic plan, which we'll talk about in greater detail at our Investor Day. The medical distribution business continued to see excellent growth. This did reflect higher patient traffic to ultimate partially driven by the incidence of flu and COVID-19. But generally, the trends are there moving from the acute care setting to the alternate care side. We had good sales, of course, as you would expect, in point of care diagnostics and other products associated with the flu. When excluding sales of PPE products, COVID-19 test kits, we experienced double-digit growth in local currencies adjusting for that extra week and really absent any public health outbreaks, new ones, medical sales should return to more normal mid- to high range single digits. We are pleased with the continued growth of new accounts across the independent and large group practices as well as surgical centers and urgent care facilities. Strong pharmaceutical sales were driven by pneumonia treatments, and equipment sales also continued to do quite well as practitioners invest in their practice and as the offering of office space practitioner equipment expands in terms of availability to treat and diagnose more treatments with more diseases and other ailments in the office-based practitioner environment. Over the last several years, Henry Schein has been able to shift priorities and provide solutions needed to help our medical and dental customers. And the public, of course, during the COVID-19 crisis and last year's flu season and even with -- during last -- and during the crisis and of course, last year's flu season. And even with this change, the impact of COVID-19 and flu, which required huge support from our team to deal with these currently significant inflows of orders to realize that we delivered a compounded average sales growth even with these inflows, unusual inflows of PPE, COVID tests of about 6-point -- just over 6% when you take out the PPE and COVID. So Henry Schein's internal growth in general, excluding PPE and COVID, is quite solid. And so we also believe that the PP&E and COVID efforts that we undertook helped us generate more customers, help our customers understand that for health care products is better to go to a reliable source. And so I want to thank the team for doing a remarkable job getting out the billions of dollars of unusual onetime in respects COVID tests and PPE products, which help generate customer loyalty. So with that, I'll turn over the call to Ron for a review of the fourth quarter results and our 2023 guidance.

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 compared with the prior year GAAP operating margin. This was primarily a result of restructuring and integration expenses and the impairment of certain intangible assets incurred in the quarter. Our non-GAAP operating margin for Q4 was 6.74%, a 56 basis point improvement compared with the prior year non-GAAP operating margin. This improvement was driven by gross margin expansion, mainly as a result of sales mix favoring higher-margin products, along with lower operating expenses as a percent of sales. Regarding income taxes. Our reported GAAP effective tax rate for the fourth quarter of 2022 was 23.6%. This compares with a 22.5% GAAP effective tax rate for the fourth quarter of 2021. On a non-GAAP basis, our effective tax rate for the quarter was 22.2%, and this compares with the prior year non-GAAP effective rate of 22.5%. Fourth quarter 2022 GAAP net income was $47 million or $0.34 per diluted share. This compares with prior year GAAP net income of $147 million or $1.05 per diluted share. Our fourth quarter 2022 non-GAAP net income was $165 million or $1.21 per diluted share. This compares with prior year non-GAAP net income of $151 million or $1.07 per diluted share. Amortization expense of acquired intangible assets for the fourth quarter of 2022 was $30.7 million or $0.14 per diluted share. This compares with $32.6 million or $0.14 per diluted share for the same period last year. And this expense is included in the 2022 and 2021 non-GAAP net income results I just mentioned. A key goal to our 2022 to 2024 strategic plan is to invest in higher-growth businesses that have a larger intangible asset component. And going forward, we believe earnings, excluding amortization expense of acquired intangible assets, better represents the underlying business results. Beginning with the first quarter of 2023, we will be modifying our non-GAAP reporting to exclude amortization expense of acquired intangible assets. Using this method, our full year 2022 non-GAAP net income was $741 million or $5.38 per diluted share. We will include a reconciliation of our non-GAAP financial results with the new methodology in our quarterly presentation available on our Investor Relations website. And finally, foreign currency exchange negatively impacted our fourth quarter diluted EPS by approximately $0.04 versus the fourth quarter of last year. I'll now provide some detail on our fourth quarter sales results. Global Dental sales were $2 billion, and LCI sales decreased by 2.6%. Excluding sales of PPE products, our Global Dental LCI sales growth was 0.9%. Global Dental consumable merchandise LCI sales decreased by 3.7%, but increased by 1.0% when excluding PPE products. Global Dental equipment LCI growth was 0.7%. North America dental LCI sales decreased 3.4% compared with the prior year, primarily due to a 5.1% decrease in consumable merchandise sales. However, when excluding sales of PPE products, North America dental consumable merchandise LCI sales grew 1.3%. North America dental equipment LCI sales also increased 1.3%. International Dental LCI sales decreased by 1.4% and consumable merchandise LCI sales decreased by 1.7%. When excluding sales of PPE products, International consumable merchandise LCI sales increased 0.7%. International equipment LCI sales decreased by 0.4%. Sales of dental specialty products were approximately $247 million in the fourth quarter, with LCI growth of 0.3% compared with the prior year. Global technology and value-added services sales during the fourth quarter were $187 million, with LCI growth of 3.4% compared with the fourth quarter of 2021. Sales were negatively impacted by the expiration of a government contract, which we mentioned during our Q3 2022 conference call. Adjusting for this contract, the underlying sales growth was 9.1%. During the fourth quarter, our technology and value-added services businesses, together with our dental specialty products, achieved LCI sales growth of 1.6% or 3.9% after adjusting for the expiration of the government contract. Global Medical sales during the fourth quarter were $1.2 billion, and LCI sales decreased 1.3%, due to lower sales of PPE products and COVID-19 test kits. In North America, excluding sales of PPE products and COVID-19 test kits, LCI sales grew 14.9%, led by strong point-of-care diagnostics, medical equipment and pharmaceutical sales. Regarding share repurchases, we repurchased approximately 3.6 million shares of common stock in the open market during the fourth quarter, buying at an average price of $79.55 per share for a total of $285 million. The impact of the repurchase of shares on our fourth quarter diluted EPS was immaterial. For the full year, we spent $485 million to repurchase 6.1 million shares. At fiscal year-end, we had approximately $115 million authorized and available for future share repurchases. An additional $400 million was approved by the company's Board of Directors on February 8, 2023. Turning to our balance sheet and cash flow. We continue to benefit from significant liquidity, providing our businesses with the flexibility and financial stability to execute on organic growth initiatives and strategic acquisitions while continuing to return capital to our shareholders. Operating cash flow for the fourth quarter was $254 million compared with $277 million last year, with the decrease primarily due to an increase in working capital that was driven by the timing of accounts payable. For the full year, operating cash flow was $602 million compared with $710 million in 2021. Regarding our restructuring program, as part of our previously disclosed integration and restructuring initiative, we recorded a pretax charge in the fourth quarter of $121 million or $0.70 per diluted share. These expenses mainly relate to vacating 1 of the buildings at our Melville headquarters and the impairment of intangible assets associated with the disposal of an unprofitable business. There were also restructuring expenses associated with severance and costs related to the exit of some other facilities. Due to the disposal of certain assets and the lengthy remaining period of certain leases we exited, expense savings from this plan are expected to be realized over a longer period of time. We expect to continue to record integration and restructuring charges in 2023. However, an estimate of the amount of these charges has not yet been determined. Any restructuring and integration charges are expected primarily to include severance pay and facility-related costs. We also recorded an impairment expense for intangible assets of $34 million pretax or $0.17 per diluted share related to certain continuing operations. Let me conclude my remarks with our 2023 financial guidance. At this time, we are not able to provide estimates for costs associated with integration and restructuring for 2023. Therefore, we are not providing GAAP guidance. As I mentioned, beginning with our Q1 2023 financial results, we will modify our non-GAAP treatment to exclude amortization expense of acquired intangible assets. This is in addition to the other adjustments we made in 2022 to our GAAP financial results. All guidance today reflects this change. 2023 non-GAAP diluted EPS excludes amortization expense of prior acquisitions of $0.56 a share in 2023, and this was $0.57 in 2022. For 2023, we expect non-GAAP diluted EPS attributable to Henry Schein, Inc. to be in the range of $5.25 to $5.42 per share, reflecting growth of negative 2% to positive 1% compared with our 2022 non-GAAP diluted EPS of $5.38. Our guidance for 2023 assumes total sales growth of approximately 1% to 3% over 2022, with sales of COVID-19 test kits declining approximately 35% to 40% from sales in 2022. Additionally, PPE product sales are expected to decline about 20% to 25%. In the aggregate, revenues of these product groups are expected to decrease approximately 30% to 35% from 2022. The impact on 2023 non-GAAP diluted EPS from the lower contribution to earnings from sales of PPE products and COVID-19 test kits is approximately $0.35 to $0.40 per share. This impact will be much more pronounced over the first half of 2023 and especially in the first quarter as we had sales of almost $500 million of PPE and COVID-19 test kits combined in the first quarter of 2022. These headwinds are largely offset by earnings momentum in our underlying core businesses. And we expect non-GAAP operating income will grow in the high single-digit to low double-digit range when excluding the contribution from PPE products and COVID-19 test kit sales. Please note that 2023 will include 1 less selling week compared to 2022, which will occur in the fourth quarter. For 2023, we expect non-GAAP operating margin to be 10 to 15 basis points below our 2022 non-GAAP operating margin of 8.2%. And this is largely a result of lower PPE products and COVID-19 test kit sales and profits. Our guidance reflects non-GAAP operating margin expansion when excluding income from PPE products and COVID-19 test kit sales. Our 2023 guidance includes higher interest expense than in 2022 as a result of higher interest rates and higher minority interest from our higher-growth businesses, mainly Henry Schein One. We also expect an effective tax rate in the 23% range, assuming no changes in tax legislation. Our guidance for 2023 diluted EPS is for current continuing operations as well as completed acquisitions and does not include the impact of future share repurchases, the acquisition of Biotech Dental and other potential future acquisitions or integration and restructuring expenses, if any. Guidance assumes that foreign currency exchange rates are generally consistent with current levels, the end markets remain consistent with current market conditions and that there are no material adverse market changes associated with COVID-19. With that, I'll now turn the call back to Stanley.

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 for units is very strong. I would say that we were challenged a bit, and I think it's going to be that way for a few quarters with the new product from our leading provider of scanners. But I don't think we'll lose those orders, they'll come. On the other side, the mill market has really almost come to a halt. We're still selling mills. But dentists, they were looking at mills are now looking at 3D printing. We got a bit of a boost there in the United States. The ADA has now provided a billing code. And so dentists, they may not buy the 3D printer right away, but they're certainly looking at it. And I think that, that market is going to do well. It's a technical use maybe for the front, I'm using it later for the front teeth is not perfect yet, but this is a great opportunity for us, and we're doing well and we expect to do even better, although it's not covering the reduction in mill demand, and now I'm dealing with the dentists. On the lab side, the mills are doing quite well. And so generally, that's what's happening in the equipment business. I think it's quite a good market on the traditional. On the 3D printing, mills are a challenge, and there's a slight issue in Europe because of the IDS that occurs at the end of March. And so I think people are waiting to see what developments occur, but I don't think that's going to impact the whole year sales. So that's just maybe a slight dip and up tick. But generally, I would say dental is stable. On the medical side, we continue to see the migration from the acute care setting and myself I'm having a partial knee replacement. And I'm told I'll be out on the same day. That was not the issue -- not the situation, perhaps 1.5 years ago. So there is a migration, and we are benefiting from that.

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.