Henry Schein Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2022

Key Takeaways

  • Henry Schein reported Q3 non‐GAAP diluted EPS of $1.15, up from $1.10 a year ago despite a $260 million decline in PPE and COVID test kit sales and foreign currency headwinds.
  • The company narrowed its 2022 non‐GAAP EPS guidance to $4.79–$4.87, implying 6–8 % growth over 2021 (including a $0.10 adverse FX impact), and expects full‐year operating margin expansion of 20–25 bps.
  • Global dental sales ex‐PPE grew 5.8 % on an LCI basis, driven by solid consumables growth and a robust equipment order backlog in North America and international markets.
  • Henry Schein One’s cloud‐based software surpassed 5,000 customers, adding over 1,000 year‐to‐date and averaging 100 new installations per month, with further expansion planned in the U.K., Australia and New Zealand.
  • PPE (mainly gloves) and COVID test kit revenues are expected to be ~30 % lower in 2022 versus 2021, representing a meaningful headwind that remains volatile despite signs of price and volume stabilization.
AI Generated. May Contain Errors.
Earnings Conference Call
Henry Schein Q3 2022
00:00 / 00:00

There are 10 speakers on the call.

Operator

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. And as a reminder, this call is being recorded. I would now like to introduce you to your host for today's call, Graeme Stanley, Henry Schein's Vice President of Investor Relations and Strategic Financial Project Officer.

Operator

Thank you, sir. Please go ahead, Graham.

Speaker 1

Thank you, operator, and my thanks to each of you for joining us to discuss Henry Schein's financial results for the Q3 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 would 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.

Speaker 1

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 In addition, all comments about the markets we serve, including end market growth rates and market share based upon the company's internal analyses 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 solely for informational and The presentation 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, 2020 2.

Speaker 1

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 prepared slides summarizing our Q3 financial results. These also can be found in the Investor Relations section of our website. During today's Q and 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.

Speaker 2

Thank you, Graham. Good morning, everyone, and thank you, everyone, for joining us on this call today. Our financial results for the Q3 of 2022 reflect solid underlying growth across our business And actually, in most geographies, we grew our non GAAP diluted EPS compared with the Q3 of 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 Bold plus 1 strategy, which we're happy to go into details during the Q and A period and as we continue to increase The sustainable profitability of the business.

Speaker 2

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 our customers' 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 As we commented in 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.

Speaker 2

Remember, the PP and E category is largely gloves. Similarly, sales and profit of COVID test kits have declined compared to the prior year, But pricing and volume for these products is also stabilizing. So generally, the PP and E market on gloves has deflated. Volumes are definitely stable and tests COVID-nineteen tests are relatively stable from a pricing point of view and a volume point of view provide further information on the whole PP and E and COVID test category. Having said that, our business, Excluding PP and E and COVID test did perform quite well as we will discuss in detail during this call.

Speaker 2

So let me start by reviewing performance highlights for each of our business units, starting with the Dental Distribution Business. Internal growth in local currency of global dental sales, excluding PPE, was good. Consumable merchandise growth, excluding PP and E, was solid, and we were especially pleased With the excellent growth of our North American equipment business and continued strength in our global equipment order That's the backlog. We had a strong growth in sales of traditional equipment during the 3rd quarter. We are also experiencing continuing good demand for high-tech equipment, an area where Henry Schein is a global leader.

Speaker 2

And this is because dental practices look to secure and maintain a competitive advantage and the product offering Available in the space has expanded and there is practically something for every dental practice. So this growth was largely driven by volume as we are seeing new innovation in digital dental equipment come to market At somewhat lower average selling prices, but the market is significant, Big opportunity, lots of units, and we have a very good offering. We believe that consumable merchandise sales growth in Europe What's impacted this year because of summer holiday season as dental practitioners and patients Took more vacation days than in the previous year, but we also believe that our consumable merchandise growth in Europe will remain stable, leaning slightly positively. On the other side of the coin, other parts of the world, International growth did benefit from ongoing strength in Australia, New Zealand and Brazil, which was partially offset by continued lockdowns in China. Having said that, our China business is relatively small compared to our total business.

Speaker 2

Our North American equipment order book remains robust and continues to grow from last quarter, and this is partly a result of quite a successful DS World from our point of view. This event was held late in Q3 compared to the previous year when it was earlier, And we saw continuing demand for intraoral imaging, chairside mills, 2d, 3d digital Extra oral imaging devices, 3 d printing with a number of other manufacturers too. And of course, all the CADCAM lines did well also from an order taking point of view, Leading to probably a stronger, we believe, 4th quarter in a market that we're doing quite well in generally. Lead times for additional equipment are reducing slightly, although installations are still being affected by delays with general office construction. So we expect our demand and our sales in the equipment area to continue to be strong.

Speaker 2

Our international equipment order book is also solid. So dental growth during the Q3 was aided by, as Our investors know Midway the PIM Midway Dental acquisition, which strengthened our long standing presence in the Midwest of the United States, Provided dental customers of Midway with access to an expanded portfolio of solutions And of course, a highly competitive pricing. Midway built an excellent reputation within the industry over the past 35 years, And the vision of senior executives at Midway strongly aligns with the Henry Schein commitment to helping dentists operate a more efficient practice, while allowing a focus by the dentists on delivering high quality patient care. We have successfully completed the integration relatively quickly of the Midway Dental business, distribution business and the Condor Dental that we recently acquired in Switzerland that is on the distribution side is also largely completed from an So we continue to invest in our dental specialty portfolio and add new customers. Sales to DSO customers in the United States once again were good in the specialty areas and demonstrate success of our One SHINE strategic initiative.

Speaker 2

We are seeing some signs of economic caution in several specialty markets Regarding high end oral surgery procedures, I would not say this is the case As it relates to endodontics, but in oral surgery, there is some caution on the high end side Of implants, and our orthodontic business is relatively small. I'll cover that in a minute. But importantly, we believe that Henry Schein is well positioned to capitalize on these shifts, specifically in the oral surgery market as we offer a full range of dental implant options at various price points. So we think on the unit side, we will continue to do well and also on the profit side. So we had strong growth in our clear aligner business.

Speaker 2

Of course, let me remind those participating in today's call, our aligner business is relatively Small, but it is growing nicely and specifically with some DSOs. And again, as I mentioned, we are Seeing solid demand for our endodontic specialty products, which is driven by sales of new products, Our Triton Irrigation Solution and our Edge Pro Laser System. Both of these have done well, but I would also say Units of Endo have done relatively well. And so we believe that our Dental Specialty business is doing Quite well from a foundation point of view, and we always need to look at comparable quarters in previous years, Trends, etcetera, and I think the business is in pretty good shape. Let's move on to the technology and value added services.

Speaker 2

Our technology and value added services businesses had good underlying sales growth in the Q3. Sales growth was impacted by the expiration modestly profitable but significant large government contract. The largest business in this segment is Henry Schein One. It's a software business, which once again posted solid sales growth domestically and internationally, driven by our Dentrix practice management software And our Dentrix Ascend and Dentale cloud based solutions. During the quarter, we surpassed 5,000 cloud based customers, adding more than 1,000 new customers year to date and currently exceeding 100 new installations per month.

Speaker 2

We have launched Dentalea across the United Kingdom and in Australia, New Zealand as well, over the past 6 months and remain on track to further Geographic expansion in 2023. Ascend has been growing its customer base by double digit percentages quarter to quarter. Notably, these cloud based practice management systems also drive traction for other Henry Schein One solutions and therefore, in fact, Stickiness to the entire Henry Scheife portfolio. We recently announced that Dentrix Ascend was selected as the Cloud based practice management system of Sonae Brands, a dental service organization, a DSO organization with more than 700 locations, reflecting the competitive advantage of this product offering. So an important part of the Build 1 strategic plan To place greater emphasis on these high growth, high margin products and services, of course, no guarantees, but this is an area of focus for inorganic growth, and we feel that we're on track to deliver on our Expectations in that area with organic inorganic growth, although we will announce that any opportunities in that area or Any deals in that area once those deals are closed and there's no certainty as to when that may be.

Speaker 2

So Another bright spot in the organization and our performance of sales growth in local currencies in our medical business Which continued to be excellent during the Q3, when excluding PPE and COVID test kits, largely pricing issues, PP and E related to gloves and tests kits just relating to demand for the test kits, which we've discussed on several calls in the past. Our expectations were relatively in line on the test kits specifically. So we are continuing to deepen our relationships with existing large IDN customers, While nicely growing our other medical businesses, we are especially pleased with strong growth in our government sector, And we continue to make solid progress in gaining business for our independent physicians. Although several years ago, this group There is still we reduced the number of independent physicians. It is a relatively stable group today, and we continue to gain market share within that group.

Speaker 2

And of course, many these smaller medical groups are also areas where we're adding customers and market share, we believe. Our focus on equipment, pharmaceutical products and point of care diagnostics remain bright spots in this business, although I must say the whole of the Medical business is doing well. And of course, the volatility of sales in COVID-nineteen test kits, which went down dramatically in earlier quarters, has moderated, but of course, at a lower level of sales And on the PP and E, the glove side, the volume is stable, but the pricing is still somewhat unstable or less But less volatile than we saw in earlier quarters. 3rd quarter sales growth had a challenging prior year comparison When patient traffic to physician offices was bolstered by a surge in delta variants, And that tough comparisons will continue in the 4th quarter. Yet we expect medical sales growth, excluding PP and E and tests, To continue at healthy levels, reflecting volume gains, some price increases, but generally Growth in our market share in this area this important area for growth for Henry Schein.

Speaker 2

Most experts are expecting a high coincidence the high incidence of flu this year, The illness in the United States due to winter experience in the Southern Hemisphere, we would expect strong flu season to drive patient visits to physician offices and in turn increased demand for a host of products we provide specifically test The traditional point of care test for flu and other diseases, including our multi assay COVID-nineteen influenza diagnostic test kits. So with that overview on our business, I will turn the call over to Ron for a more detailed review of our financial results. Ron, please.

Speaker 3

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 3rd quarter non GAAP financial results for 20 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 LCI growth, is included in Exhibit A of today's press release.

Speaker 3

Our Q3 global LCI sales decreased 2.4% versus the prior year. However, when 9 sales of PPE and COVID-nineteen test kits were $260,000,000 lower than in the Q3 of the prior year. Our GAAP operating margin for the Q3 of 2022 was 6.86%, a A 23 basis point improvement compared with prior year GAAP operating margin. Our non GAAP operating margin for the 3rd quarter 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 in sales of higher margin products.

Speaker 3

Turning to taxes. Our reported GAAP effective tax rate for the Q3 of 2022 was 22.7%. This compares with a 23.9 percent GAAP effective tax rate for the Q3 of 2021. On a non GAAP basis, our effective tax rate for the Quarter was 22.8 percent and this compares with the prior year non GAAP effective rate of 23.9%. 3rd quarter 2022 GAAP net income was $150,000,000 or $1.09 per diluted share.

Speaker 3

This compares with prior year GAAP net income of $162,000,000 or $1.15 per diluted share. Our Q3 2022 non GAAP net income was $157,000,000 or $1.15 per diluted share. This compares with prior year non GAAP net income of $155,000,000 or $1.10 per diluted share. Amortization from acquired intangible assets for the Q3 was $31,600,000 or $0.15 per diluted share. This compares with $30,100,000 or $0.13 per diluted share for the same period last year.

Speaker 3

Foreign currency exchange negatively impacted our Q3 diluted EPS by approximately $0.02 versus the Q3 of last year. I'll now provide some detail on our 3rd quarter sales results. Global Dental 3rd quarter sales were $1,800,000,000 with LCI growth of 1.2%. LCI growth excluding sales of PPE was 5.8%. Global Dental consumable merchandise LCI sales decreased by 0.8 North America Dental LCI sales decreased 0.1% compared with the prior year, primarily due to a 3.6% decrease in consumable merchandise LCI sale.

Speaker 3

However, when excluding sales of PPE, North American dental consumable merchandise LCI growth was 3.8%. North American dental equipment LCI sales increased 12.8%, primarily driven by traditional equipment sales. The equipment backlog in both our North America and international businesses International Dental LCI growth was 3.3%, driven by consumable merchandise LCI growth of 3.9 percent. Consumable merchandise LCI growth was 6.9% when excluding sales of PPE and was driven by strength in Australia, New Zealand and Brazil. International Equipment LCI growth was 1.4%.

Speaker 3

Let me point out that this was against a tough comparable as international equipment LCI growth in the Q3 of 2021 was 23.9%. Sales of Dental Specialty Products were approximately $223,000,000 in the 3rd quarter with LCI growth of 2.5% compared with the prior year. Global Technology and Value Added Services sales during the Q3 were $176,000,000 with LCI growth 4.2% compared with the Q3 of 2021. Sales growth was impacted by the expiration of a government contract. Adjusting for this contract, underlying LCI growth was 8.5%.

Speaker 3

In North America, Technology and value added services LCI growth was 2.5% and was 7.3% when adjusting for the impact of the government contract. The strength in our revenue cycle management, patient relationship management, business solutions and practice management businesses, including Dentrix and Dentrix Xtend. Internationally, Technology and Value Added Services LCI growth was 16.5%, driven by strength in the U. K. During the Q3, our technology and value added services businesses, together with our dental specialty products, Achieved total sales growth of 0.8 percent and LCI sales growth of 3.2%.

Speaker 3

Global Medical sales during the Q3 were $1,100,000,000 and LCI sales decreased 8.8% due to lower sales of PPE products and COVID-nineteen test kits. In North America, LCI growth was 9.3% when We sold approximately $81,000,000 in COVID-nineteen test kits in the Q3, including Multiasay flu and COVID-nineteen combination tests. This compares with approximately $207,000,000 of test kits sold in the Q3 of 2021. Regarding stock repurchases, we repurchased common stock in the open market during the Q3, buying approximately 1,200,000 shares at an average price of $76.42 per share for a total of $90,500,000 The impact of the repurchase of shares on Our 3rd quarter diluted EPS was immaterial. As of the end of the quarter, we had approximately $400,000,000 authorized and available for future share repurchases.

Speaker 3

Turning to our balance sheet and cash flow. We continue to benefit from significant liquidity, providing our businesses with the flexibility and Operating cash flow for the Q3 was $98,000,000 compared with $211,000,000 last year, with the decrease primarily due to an increase in working capital driven by timing of accounts payable. With reference to restructuring, as part of our previously disclosed integration and restructuring initiative, We recorded a pretax charge in the Q3 of $10,000,000 or $0.05 per diluted share. This plan focuses on the strategic plan and The company expects to continue to record integration and restructuring charges for the remainder of 2022 and in 2023. However, an estimate of the amount of these charges has not yet been determined.

Speaker 3

Any restructuring and integration charges are expected to primarily include severance pay and facility related costs. The expense savings from this plan are expected Turning to 2022 financial guidance. As we are not able to provide estimates at this time for costs associated with integration and restructuring for the remainder of the year, we are not providing GAAP guidance. Also, our guidance for the balance of 2022 is for completed or previously announced acquisitions and does not include Guidance also assumes that foreign currency exchange rates will remain generally consistent with current levels. However, additional headwinds from foreign currency exchange rates may further impact our sales and EPS.

Speaker 3

On a non GAAP basis, we are narrowing our diluted EPS guidance range to $4.79 to $4.87 reflecting growth of 6% to 8% compared with our 2021 non GAAP diluted EPS This includes $0.10 adverse impact from foreign exchange rates versus 2021. We also continue to expect full year 2022 non GAAP operating margin expansion of 20 to 25 basis points over 2021 non GAAP operating margin. We are revising our full year sales guidance and now expect sales growth of approximately 1.5 to 2.5% versus our previous guidance for sales growth of 3% to 6%, which mainly reflects a strengthening U. S. Dollar We continue to expect 2022 full year sales of COVID-nineteen test kits It decreased 30% to 35% from 2021.

Speaker 3

2022 full year sales of PPE and COVID-nineteen test kits combined are expected to be approximately 30% lower than full year sales in 2021.

Speaker 2

This

Speaker 3

with our Dental and Medical businesses. Despite these meaningful market related headwinds, we continue to be confident in the strength of our underlying businesses, And we are taking additional time to finalize our view of the overall effect of PPE pricing and COVID-nineteen test kits volume for next year. As we have seen in 2022, this has a meaningful impact on our business and we want to ensure we give it appropriate consideration along with ongoing analysis We intend to issue 2023 financial guidance with our 4th quarter earnings results. With that, I'll now turn the call back to Stan.

Speaker 2

Thank you, Ron. So before we open the call to questions, I would like to take a moment to note 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.

Speaker 2

We were recognized for our leadership initiatives that 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 2 of the most common disclosure standards, SASB and GRI, this is an important milestone as we 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 1 strategy remains on 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 is focused on priorities And delivery. So with that review of our Q3 financial results and some commentary on our future, I'd now like to open the call to questions.

Speaker 2

Operator, please.

Operator

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

Speaker 4

Thanks. Good morning, guys. Can you hear me okay?

Speaker 2

Yes, pretty well. All right.

Speaker 4

Great. Well, good morning and congratulations on the quarter. I guess a 2 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 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 Just kind of normal operations that I think we're all trying to understand what the impact is on the gross margin side.

Speaker 4

And then if I go back to our September Healthcare Conference, Stanley, 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 end markets are a little uncertain right now. But if I look at The Street, Ram, The Street is modeling 6% EPS growth next year. We're admittedly closer to flat year over year in our model.

Speaker 4

Just can you help us kind of peg between where the Street's at, at that 6 Well, Jeff, I'll start with your gross margin question first. I think that,

Speaker 3

Well, Jeff, I'll start with your gross margin question first. I think that especially 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 Q3 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 In terms of 2023, as you mentioned, there's a lot of different moving parts.

Speaker 3

And 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 Better understand the dynamics of the PPE market, what's happening with COVID-nineteen test kits, these are all things that have a significant influence on So when we provide our 4th quarter earnings release, we'll provide 2023 guidance at that point in time.

Speaker 2

Thank you. Jeff, let me just highlight. 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 our software businesses and other value added service businesses. Having said that, the price of PP and E, namely or primarily gloves, is highly volatile, although we think it's stabilizing.

Speaker 2

And test kits, we think have stabilized over 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 tests, Wish we could do more, but I think it would be irresponsible to try to predict those areas.

Operator

And our next question comes from the line of Elizabeth Anderson with Evercore ISI. Please proceed with your question.

Speaker 5

Hi, guys. Thanks so much for the question. Stanley, I think you sort of alluded to it in Jeff's question a little bit. But If we think about sort of October and sort of the beginning of the 4Q results, how would you say the trajectory compares to the And then just in general on the overall visibility of the business right now, obviously one question, have been asking is, has there been ex COVID any like broader changes and how you sort of think about the visibility of the business right now? Thanks.

Speaker 2

Yes. I think, Elizabeth, that's together with Jeff's question is the call, which we ponder. And I think we're quite comfortable. Look, our TOBA Dental Consumable merchandise internal sales growth, excluding PP and E, grew relatively consistent with the 3rd quarter, And that's both in North America and internationally. So those businesses are relatively stable.

Speaker 2

Of course, what we can't We just don't have visibility on the price of bloods, 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 saying that that is pretty stable. We gave you And actually doing quite well.

Speaker 2

We gave you sales excluding those items and excluding foreign exchange. Foreign exchange and Ron can give you the number, did have an impact in all three quarters. We're Contemplating in our guidance that we've reached a stable foreign exchange, which is, of course, That reflected a very strong dollar in the markets that we serve. Now if I wasn't clear, I'm happy to give you more So clarity or Ron can do that. Now as it relates to and that's been all by the way.

Speaker 2

And medical also, if you take out PPE and tests, October was more or less in line with the Q3 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 Q3. 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 recent analyst reports suggest and some recent analyst reports suggest that patient traffic has slowed modestly since the end of August. Somewhere we're reading between 3% to 4%, if you take the ADA and analyst reports into account.

Speaker 2

And that according to certain analysts perhaps reading into the ADA report translates into approximately 6% below pre pandemic levels. Now our e claims data also suggests that volume is down, but approximately 3% to 4% compared to the previous year. So that is down from where it was going into the year. In addition, the ADA survey identifies that there's a growing number of dentists in the U. S.

Speaker 2

That The concern was staffing shortages, particularly of hygienists. With our hygienists and nonmaterial, it is a factor. They're having a problem getting dental assistance. And so there is a concern with satisfying the traffic. But if you look at our U.

Speaker 2

S. Dental merchandise everything I've said now relates to the U. S. If you take a look at our U. S.

Speaker 2

Merchandise sales, they're growing, if you take out PP and E, by about 4% and holding steady. So our inflation expectations are that we had Not expectations. Our view is that we have 3% to 5% product inflation. And so it means our volumes Relatively flat. We are seeing a slowdown, as I mentioned, in the But it's also strong 20 21.

Speaker 2

So, the business is basically stable. We believe we're gaining Some market share can prove it to you. The earnings power of the business, I think, has positive upside In that, we are working on managing expenses and moving towards higher margin earnings. So that's sort of basically the U. S.

Speaker 2

Side. Outside of the U. S, It seems pretty stable as well. Countries are different, but it seems relatively stable. So that's a long answer, But you cut through it all, it's relatively stable with us being optimistic on the positive side, Removing PP and E on the dental side and removing PPE and tests on the medical side and that relates to both domestic

Operator

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

Speaker 6

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 in kind of the trajectory of things you can't change and where are areas that you can pull back

Speaker 2

Well, when you say investments, let me deal with the M and A side. As I noted earlier on, deals are not done until they sign and announce. But we have The view that we wish to spend $300,000,000 $400,000,000 a year on M and A, we've done approximately that Average, some years it's been a little higher. Last year it was a bit higher. During COVID it was a bit lower.

Speaker 2

But we want to continue to invest in The pipeline is relatively full. Specialty Products is an area of focus. We've already announced 2 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 And our geography on the distribution side.

Speaker 2

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're going to Move investments towards that we believe will impact the long term sustainable profits of the business run. On the Investment in the business, your thoughts?

Speaker 3

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 $400,000,000 authorized for share repurchases and we will expect that to continue to be an important part of our capital allocation going forward as well. Part of this is share buyback together with, I think, kind of targeted M and A, as Stanley pointed out, but plus also some reallocation of internal investment as we proceed through 2023.

Operator

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

Speaker 7

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 increase has been pretty steady throughout the year. I know year to year it's up, but Pretty steady throughout the year or you've seen it build over the course of the year?

Speaker 2

Okay. So, good question. Okay. They've all been good actually. Let me begin with the end.

Speaker 2

We did see from National Brands Some bunch of increases at the end of the second quarter 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 Our price increases in the marketplace now, and I would say 6 months ago, 2 or 3 quarters ago. There's nothing and 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 you could generally make about branding and other brands. So, generally, We've been able to pass on price increases, and we manufacturers have not been supportive of that.

Speaker 2

In other words, they may not want to recognize the chargeback. That's very rare. I can't think of too many manufacturers where that's not occurred. It's generally the norm in medicine. It's been the case in medicine for 2 decades.

Speaker 2

There are a couple of well, 1, maybe 1 or so manufacturers that are In dentistry, they are having an issue with that. But generally, we're able to pass them along. And where we're not, 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 our private brand in any event. So it's not a crisp answer in that it's not one shoe that fits all.

Speaker 2

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 are managing through this in a rather effective way, our margins, gross profit It's not only because of this particular issue that we described, but it's also a movement towards Our higher growth, higher margin businesses.

Speaker 7

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 there Potential customers that just said, look, it's a long lead time, so I'm not going to order now, but may now start to order or Does it affect the sales process in any other way?

Speaker 2

Yes. I think we mentioned our order book It's stronger at the end of this quarter was stronger at the end of this quarter than last quarter. It's a combination of areas. Some of it is the CADCAM to a large extent. The digital side was because the Sirona Dentsply Sirona World Meeting was in a different quarter.

Speaker 2

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 it was held back a bit In the percentages because of prior year numbers. But generally, the quarter was good, and the buildup went up Again, some of it because of Dentsply world moving around. But in general, it's good.

Speaker 2

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 on the and the challenge was U. S. Traditional.

Speaker 2

I would say that the manufacturers in that 2 major manufacturers in chairs, units and lights, The other one also treats us very well. They've improved the capacity, but it's still backlog. The bigger issue is less availability of the products and more the delays in the sites Of installation, where there 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, it's strong.

Speaker 2

To some extent, it's probably from gaining market share. But in general, our equipment business Here in the United States and globally is quite strong.

Speaker 7

Okay, great. Thanks a lot.

Operator

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

Speaker 6

Great. Thanks guys and good morning. Appreciate the time. Maybe just two quick questions. 1st on the dental consumable side, it seems like your LCI growth premium between Specialty and Basic Consumables ex PPE has compressed.

Speaker 6

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 And then I've got a quicker follow-up on equipment. Thanks.

Speaker 2

Yes. Hard to tell. We haven't seen the data yet on worldwide sales of implants. There There is some data available. We haven't seen the report yet.

Speaker 2

But my sense is the units in oral surgery Have not gone down significantly, maybe slightly, but there's a greater interest in the lower priced implants. And it's a little bit strange in that the actual cost of the implants is insignificant compared to the procedure, but I guess, Dennis, in certain markets are looking at that. We're still optimistic about The oral surgery business is very optimistic, both the market is stable and because we continue to do well in parts of Europe And in North America, on implants. And I think the lower priced units, again, Our business in that area is doing very well. So We're also dealing with high comps.

Speaker 2

The quarter's previous 2021 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. Our endo on the other side, our endo business has 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, Very small market share, but we have a couple of DSO contracts that they work almost exclusively with us.

Speaker 6

Got it. Got it. Very helpful. And maybe just a follow-up. And I'll try to push you a little bit.

Speaker 6

Your dental equipment comments, they continue to, I don't know, I think be Pretty upbeat overall on dental equipment and that's contrary at least just to ArchX. And Stanley, your conviction that this is True, call it end user demand. It's not a function of a catch up from the supply issues of 6 to 12 months ago. And do you think that equipment strength continues into 2023? Thanks for your time guys.

Speaker 2

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 bring up many new DSOs on practices on one day.

Speaker 2

If they buy practices, a whole group of practices, We're able to help install new equipment relatively quickly. We work very well with our suppliers, I would say not all, but most of our suppliers on the equipment side 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. There are some private players.

Speaker 2

Even the public players don't disclose exactly what's going on. And again, the Chairs, Units and Lights is largely are largely private companies. And so it's very hard to give you a comparison to the market. We said that we do feel comfortable with our equipment growth. As I sit here, November 1, 2022.

Speaker 6

All good. Thanks for the time.

Operator

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

Speaker 8

Great. Thanks. I have a quick question on the Medical segment. What's driving the high single digit growth? I guess it was a little bit slower than what we saw in the first half, but That's excluding the COVID related dynamics.

Speaker 8

And what's the sustainability of this growth? Are you seeing market share gains? Or what are some of the factors driving that? Thanks.

Speaker 2

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 MAT distributors, big hospital distributors For their hospital acute care needs, but for their alternate care needs, the physician practices Primarily, but other alternate care sectors other than long term care, which we're not in generally. We are viewed as an important player.

Speaker 2

We don't win every contract, but we win a lot. It's based on our service, Our relationship with suppliers, efficient chargeback systems that we have in place with suppliers that work very well with us on that side Of the house, where there's been chargebacks, for example, in place for years as a way of doing business, And we just do it very well on the alternate care side, particularly the physician side. So with the large IDNs, We don't win too many new ones. We have won a few in the last few years, but they don't switch that often. Having said that, there's a growing part of the IDN business that is moving from the acute care setting Into this, alternate care specifically physician ASC side of the provider side, And we do well with that.

Speaker 2

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. 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 do well, 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.

Speaker 2

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 really better than us from a logistics point of view, combining MedSurg, Pharmaceuticals, Equipment, installation, the whole package all in one from 1 distributor with formularies, Chargebacks that really work very well.

Speaker 8

Okay. Thanks. 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 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 Or do you anticipate that it's a fairly normal environment next year from a customer and manufacturer relationship standpoint? Thanks.

Speaker 3

Hi, Yaron. 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-nineteen test kits. I mean, We're happy with how the business is doing.

Speaker 3

We're happy with the quarter. We faced a $260,000,000 revenue headwind this quarter in terms of decreased revenues in PPE and COVID test kits and grew EPS from a 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 and we'll be able to provide, I think, detail that will be helpful when we include 2023 financial guidance with our Q4 earnings release.

Speaker 8

Okay, got it. That's fair. Thank you.

Operator

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

Speaker 9

Hey, good morning. Thanks for squeezing me in here and congrats on the results today. I'll go with a 2 parter here and I'll just ask Both of them upfront and they're both follow ups to prior questions. So maybe with the forward looking question here and I'll take a different cracker than 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.

Speaker 9

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, Sounds like, can you reconcile or fill the gap on how profitability and margin expansion is still remaining as solid as you see it for 2022 in spite of this dynamic. Thank you.

Speaker 3

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 the specialty products Are likely going to have or historically may have a little more volatility in their growth versus merchandise.

Speaker 3

Merchandise Can fluctuate a few points year over year, while Specialty Products might have a little greater volatility than that. And as Stanley said, we had Pretty good growth last year in Q3 of the specialty products. 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 the long term trend here.

Speaker 9

Okay, fair enough. Thanks, Ryan.

Speaker 2

We still are Highly bullish about our 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 we're growing our market Globally and Endo is very strong also. Also, there's obviously Some volatility in wires and brackets and aligners seem although small for us seem to be Also a positive area.

Speaker 2

But I wouldn't read anything into 1 or 2 or 3 quarters. I think we've shown that long term these businesses are growing, and we expect the commitments Okay. Great.

Operator

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

Speaker 2

Thank you, operator. Thank you, everyone, Thank you for your participation. I think you'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, in the COVID test area, the rapid test area, But excluding that, we feel strength, stability.

Speaker 2

We're feeling good about our Dell consumable businesses around the world, the equipment business. We're feeling good about our medical business and our value added services We covered specialty. So obviously, we're in 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. We have a Good management team in place, focused on the priorities at the center of which is our Build Plus One initiative. So with that in mind, thank you all again for calling in.

Speaker 2

We'll speak to you at the beginning of

Speaker 6

Mid February.

Speaker 2

Mid February. Oh, it's the longer period. Mid February, but I think we'll be at a couple of conferences. Will it be 2 or 3 conferences. That's right.

Speaker 2

Right. And again, if anyone has any specific questions, Please feel free to reach out to Graham, to Ron, to Graham and Ron, and thank you very much. And

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