Henry Schein Q2 2023 Earnings Call Transcript

Participants

Corporate Executives

• Graham Stanley, Vice President of Invetor Relations and Strategic Financial Project Officer
• Stanley M. Bergman, Chairman of the Board and Chief Executive Officer
• Ronald N. South, Senior Vice President, Chief Financial Officer

Analysts

• Elizabeth Anderson, Evercore ISI
• Brandon Vazquez, William Blair
• Jeffrey Johnson, Robert W. Baird
• Jason Bednar, Piper Sandler Companies
• Jonathan Block, Stifel Nicolaus and Company
• Nathan Rich, The Goldman Sachs Group, Inc.

Presentation

[Operator]

Good morning, ladies and gentlemen, and welcome to Henry Schein's Second Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded.

And 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. Thank you. Please go ahead, Graham.

[Graham Stanley, Vice President of Invetor Relations and Strategic Financial Project Officer at Henry Schein]

Thank you, operator, and my thanks to each of you for joining us to discuss Henry Schein's financial results for the second quarter of 2023. 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 contain -- will include information that's forward-looking. As you know, risks and uncertainties involved in the company's business may affect the matters referred to in forward-looking statements. As a result, the company's performance may materially differ from those expressed in or indicated by such statements. These forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's filings with the Securities and Exchange Commission and included in the Risk Factors section of those filings. In addition, all comments about the market we serve, including end-market growth rates and market share are based upon the company's internal analyses and estimates. Today's 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 comparative purposes and should not be regarded as a replacement for corresponding GAAP measures. Reconciliations between GAAP and non-GAAP measures are included in Exhibit B of today's press release and can be found in the financial and filing section of our Investor Relations website under the supplemental information heading.

For additional financial information, please refer to our quarterly earnings presentation also posted on our Investor Relations website. The content of this conference call contains times-sensitive information that is accurate only as of the date of this live broadcast, August 7, 2023. Henry Schein undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Lastly, join 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.

[Stanley M. Bergman, Chairman of the Board and Chief Executive Officer at Henry Schein]

Thank you, Graham. Good morning, everyone, and thank you for joining us today. We are today reporting solid results for the second quarter, driven by our North American dental businesses with strong equipment and steady general merchandise sales and with continuing strength in sales of our technology and value-added services, our implants, biomaterials and endodontic products. The underlying fundamentals in the US dental market remains strong and demand for dental services and customer confidence confidence continues to improve, as of course, evidenced by the ongoing investments our customers are making in their practices. In addition, we are seeing growing demand for our implants systems and endodontic products, as well as our integrated software and services solutions, which are generating strong growth by delivering greater efficiency and a better experience to our customers.

In the alternate care market, that's the medical market, elective procedures are close to normal levels, while second quarter visits to primary care physicians were down year-over-year, reflecting last year's higher visits to physician offices and urgent care centers as a result of the extended flu season last year. As expected, sales of PPE and COVID test kits continued to decline. However, we are now seeing sales level -- the sales level up sequentially. We are now seeing sales level up sequentially, and we expect the year-on year impact to be much lower in the second half of 2023. When excluding these product categories, local currency internal sales growth for the Company was 3.3%. In general, our North American dental business performed better than we expected at the start of the year, offset by some incremental COVID-related headwinds facing our medical business as discussed earlier on.

Our outlook reflects overall confidence in our business and in the markets we serve and accordingly, we are affirming our non-GAAP diluted EPS financial guidance for 2023. Our financial results and guidance demonstrates the strength of the business as discussed earlier and continued advancement of our 2022, 2024 BOLD+1 Strategic Plan We are successfully executing key initiatives -- the key initiatives actually in the plan, including expanding our specialty products and value-added services portfolio, optimizing our distribution businesses, leveraging key customer relationships and driving digital transformation.

Year-to-date, we have committed over $1 billion to acquisitions that accelerate the implementation of our strategic plan, adding high-growth, high-margin products and services to our offering. With this clear focus, we believe we are well-positioned to further enhance Henry Schein's leadership in the markets that we serve and to deliver long-term sustainable shareholder value. Among the larger transactions are our strategic partnership with Biotech Dental, which we closed in April; the acquisition of S.I.N. and Implant Systems, which we closed in July; and the recently announced acquisitions of Shield Healthcare and Large Practice Sales, which we expect to close in the third quarter.

With these transactions, we have significantly expanded our implants, bone regeneration and clear line of product portfolio, digital workflow capabilities, presence in distributing products directly to the patient in the healthcare arena and value-added services. Continuing our strategy of following the patients to provide healthcare services where it's being delivered, we expect our recently announced agreement to acquire Shield will create an offering with more than $300 million in annual revenue and distributes medical supplies across the United States directly to patients in their home. On completion of this acquisition, this business will be led by Adam Breese [Phonetic] who joined Henry Schein as Vice President and General Manager, Homecare Medical Products, and has significant experience in this area.

We are excited about the fundamentals of this market, which supports a growing aging demographic experiencing more chronic disease beyond added convenience to the patient, the trend of moving care to the home is expected to provide efficiency in the overall healthcare system. And most important, many of our customers have asked us to provide the service. We've been providing in a moderate way up to now, but now we are committed to advancing our position in this market to support our customers who have requested us to move into the home care arena as a continuum of care.

Our Homecare medical product offering will now include antrostomy, incontinence wound care and diabetes products, and we plan to leverage our physician relationships, as noted earlier on, product, distribution expertise and corporate brand assortment to further grow this area. Also for many years, we have had a successful practice transitions group dedicated to existing smaller and mid-sized dental practices. And are most enthusiastic about the acquisition of Large Practice Sales, a leading transition advisor services business, which expands our capability to advise dental practices on larger practice transitions. Of course, being a service to our DSO customers as well.

We are also advancing the integration of our digital digital workflow software with our practice management software to create a unique digital solution for dental practitioners. In this connection, we have asked Andrea Albertini, CEO of our International Distribution Group to lead the cross-company one Schein Solution and accelerate what we have internally called our three-click integrated software solution for our customers. This simplified open architecture process begins with the capture of any image from an intraoral scanner or 2D, 3D digital imaging unit through our practice management software, followed by the application of embedded artificial intelligence solutions to help in diagnosis, case acceptance, planning and design and ending with direct -- or the direct connection to fabricate the prosthetic through either chairside known, a 3D printer, or the transmission digitally of the file to the dental lab.

Let me now turn to a review of the quarterly highlights from each business units, beginning with the dental distribution. In North America, dental offices were generally busy, and this helped our second quarter dental merchandise growth, of course, excluding sales of PPE products. A driver in equipment sales was a broad equipment was of course our broad equipment which enabled our customers meeting solutions to increase productivity to meet demand, and of course, drive up the efficiency of the practice and of course better clinical care. North American Dental equipment sales were up double-digits. Sales of traditional equipment continued to be strong and we are pleased that sales of digital equipment return to growth this quarter. Internationally, equipment sales were relatively flat to the prior year. The equipment backlog in North America has held steady and our international equipment backlog is returning to pre-pandemic levels.

Now turning to our dental specialties. Sales of dental implants and biomaterials were key drivers in the second quarter, complemented by endodontic and clear aligner businesses. We are seeing implant demand increasing in North America with sales of our BioHorizons Camlog premium implant delivering mid-single-digit growth, a sequential improvement versus the first quarter. Internationally, demand for implant systems remains very good.

Generally, demand for implant continues to favor value-priced products. We believe that our Camlog -- or BioHorizons Camlog product offering is well-positioned, but also the moving of demand for value-priced products is reflected in our double-digit growth achieved by [Indecipherable] provider of dental implants and bone regeneration products.

Looking at recent deals, our transaction with Biotech Dental brings a market-leading portfolio of dental implants and clear aligners to Henry Schein and digital workflow software. S.I.N. on the other hand, that's an implant systems, provides as an entree into the large Brazilian implant market and complements our successful Brazilian general dental consumables and equipment business. Both Biotech and S.I.N. offer high-quality implants at an attractive price, and we have exciting opportunities of expanding this cost-competitive products to other geographies, including the United States, providing, of course, a more comprehensive offering and enabling us to be even more competitive in the implant and bone regeneration space.

This quarter, growth in our endodontic business continues to be driven by our Brush [Phonetic] and Edge brands in both North America and internationally. Our orthodontic business is making steady progress with our line of business, although this is still a relatively small component of our global revenues. We are seeing growing demand for our specialty products from DSOs, and that shouldn't -- specifically from our DSO customers. Recall, we have a pretty. Decent market-share in the DSO market and we see continued adoption of specialty procedures among dental practitioners. We have grown our global implants bone regeneration and related products and services into over $800 million in revenue and our specialty products to approaching $1.2 billion in revenue in aggregate on an an annualized basis. We now offer a broad range of premium and value alternatives to North American and International practitioners. We expect dental specialty growth to accelerate in the second half of the year due to these acquisitions, but also due to year-over-year comparisons easing.

Now let's turn to the technology and value-added services business, where the largest component of course is Henry Schein One. Global growth in Henry Schein One is being driven by ongoing migration to our cloud-based practice management software solutions, Dentrix Ascend and Dentalee [Phonetic] and by growth in our revenue cycle management business resulting from increased patient traffic, driving a higher-volume of e-claims. Dentrix Ascend and Dentalee grew to approximately 7,000 customers and this day represents. approximately 40% year-over-year growth. Customers and prospective customers are particularly enthusiastic about incorporating our artificial intelligence solution into their practice management software product. We believe our embedded solution is certainly best-in class.

We have grown our technology and value-added services businesses into an almost $900 million revenue portfolio on an annualized basis. In addition to Henry Schein's Technology Solutions, we now offer a broad range of value-added services through our businesses such as ESS, which provides revenue cycle management and Uniqus providing advice on PPO agreements with insurance providers along with other services, including financial services, practice transitions, staffing services, education and remote patient monitoring for office space, dental and medical practitioners. We expect the technology and value-added services sales growth will accelerate during the second-half of the year.

Turning now to the medical business. During the second quarter, our medical business achieved low-single digit growth, excluding PPE products and of course COVID-19 test kits. This compares with mid double-digit growth last year. It's really important to understand that when results benefited from some late-season sales at point-of-care flu diagnostic test. This year, excuse me, was a more typical flu season, and as a result we had much lower sales of flu, COVID-19 and multi-assay diagnostic and related products. Sales growth was also affected by the conversion of certain pharmaceuticals and other products, lower price generics and corporate brands, of course, with a higher gross profit margin. This is a trend that is taking place throughout healthcare. Sales of medical equipment were relatively soft in the market. The market took a temporary pause to assess likely future demands. However, we have subsequently seen investment interest return in July.

So in summary, the fundamentals of our core business remains solid, very good, and the team is executing well on our 2022 to 2024 BOLD+1 Strategic Plan.

Would that, I'll turn the call over to Ron to discuss specifics relative to our quarterly financial results and provide full-year guidance. Thank you. Ron, please.

[Ronald N. South, Senior Vice President, Chief Financial Officer at Henry Schein]

Thank you, Stanley, and good morning, everyone. I'll be discussing our results as reported on a GAAP basis and also on a non-GAAP basis. Our second quarter non-GAAP financial results for 2023 and 2022 exclude integration and restructuring costs and amortization expense of acquired intangible assets. This is detailed in Exhibit B of today's press release.

With respect to sales growth, I will focus on LCI sales growth, which is internally generated sales in local currencies compared to the prior year and excludes acquisitions. Second quarter global sales were $3.1 billion or LCI sales decrease of 0.2%. However, when excluding sales of PPE products and COVID-19 test kits, our LCI sales grew 3.3%.

We sold $138 million in PPE products in the second quarter of this year, a decrease of approximately 28% year-over-year, and we sold $26 million and COVID-19 test kits, a decrease of approximately 62% year-over-year. Our GAAP operating margin for the second quarter of 2023 was 6.5%, an 81 basis point decline compared with the prior year GAAP operating margin. On a non-GAAP basis, operating margin for the second quarter was 8.2%, a 14 basis point decline compared with the prior year non-GAAP operating margin. Excluding the impact from lower PPE and COVID-19 test kit sales, we estimate that non-GAAP operating margin expanded 27 basis points.

Second quarter 2023 GAAP net income was $140 million or $1.26 per diluted share. This compares with prior year GAAP net income of $160 million or $1.16 per diluted share. Our second quarter 2023 non-GAAP net income was $173 million or $1.31 per diluted share. This compares with prior year non-GAAP net income of $179 million or $1.30 per diluted share. These results were impacted by a decreased contribution from lower PPE and COVID-19 test kit sales estimated to be $0.08 per diluted share relative to the prior year period. The foreign currency exchange impact on our second quarter EPS was immaterial.

As Stanley mentioned, we have committed over $1 billion in the acquisitions we've announced s -far this year, with $250 million invested in equity investments and business acquisitions in the second quarter of this year and we have subsequently signed agreements, committing another $800 million. The increased capital deployment for acquisitions has impacted quarterly financial results more than in previous years. The second quarter 2023 GAAP and non-GAAP financial results included high acquisition activity that resulted in acquisition expenses of $6 million or $0.04 per diluted share, which were offset by net acquisition-related fair-value adjustments of $16 million or $0.09 per diluted share, including a related remeasurement gain resulting from the purchase of a controlling interest of our previously held equity investment. This resulted in a net favorable impact of $10 million or $0.05 per diluted share for the quarter as illustrated in Exhibit C to our press release.

On a year-to-date basis, the favorable net impact of these acquisition expenses and acquisition-related fair-value adjustments, including the related remeasurement gain resulting from the purchase of a controlling interest of our previously held equity investment was only $0.01 per diluted share. We are confident that these strategic investments will drive enhanced growth and value-creation over the long-term as we accelerate the implementation of our 2022, 2024 BOLD+1 Strategic Plan.

Turning to our second quarter sales results. Global dental sales were $2.0 billion and LCI sales increased by 2.0%. Excluding sales of PPE products, LCI sales growth was 3.7%. Global dental merchandise LCI sales increased by 0.7%, but increased by 2.8% when excluding PPE products. North America dental merchandise sales were flat compared to the prior year and grew 2.6% when excluding sales of PPE products with good underlying growth, offset by lower-growth in our dental lab business as a result of digitalization and in our traditional orthodontics business.

International dental merchandise LCI sales increased by 1.9% and by 3.2% when excluding sales of PPE products. Global dental equipment LCI growth was 6.4%. Our North America dental equipment LCI sales increased 9.8% as we continue to see strong sales growth for traditional equipment and sales of digital equipment in North America return to growth. International equipment LCI sales increased by 1.6%.

Dental specialty products include implants, bone regeneration materials, orthodontic products and endodontic products. Sales of these products were approximately $270 million in the second quarter, with growth of 15.7%, driven by acquisitions and good implant sales in both North America and internationally, particularly in Austria, Switzerland and in Germany where we have a leading market position.

Global technology and value-added services sales during the second quarter were $193 million with LCI growth of 5.5%. Sales were again negatively impacted by government contract which expired early in the third quarter of 2022, LCI sales growth was 6.9% when adjusting for this contract. In North America, sales growth was driven primarily by our Dentrix Ascend, Practice Management and Revenue Cycle Management businesses. Growth internationally was driven by our Dentalee cloud-based solution.

Global Medical sales during the second quarter were $950 million and LCI sales decreased 5.3% 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 2.0% and were impacted by lower flu cases versus the prior year, which resulted in lower point-of-care diagnostic tests and related product sales. Keep in mind, this was against a very difficult comparison as LCI growth excluding PPE products and COVID-19 test kits grew 14.3% in the second quarter of 2022.

Regarding stock repurchases, we repurchased approximately 638,000 shares of common stock in the open market during the second quarter, buying at an average price of $78.36 per share for a total of $50 million. At quarter end, we had approximately $365 million authorized and available for future stock repurchases.

Turning to our balance sheet and cash flow, we continue to benefit from significant liquidity, providing our businesses with the financial flexibility and stability to execute on organic growth initiatives and strategic acquisitions, while continuing to return capital to our stockholders. We further strengthened our balance sheet by recently extending the maturity date of our $1 billion revolving credit facility to July of 2028, and also closed on our new $750 million credit facility.

Operating cash flow for the second-quarter was $274 million compared with $157 million last year, primarily as a result of lowering inventory levels. Restructuring expenses in the second quarter of $18 million or $0.10 per diluted share and were incurred as part of our previously disclosed restructuring initiative. These expenses mainly relate to severance benefits and costs related to exiting facilities. We now expect restructuring activities to extend through 2024.

Let me conclude my remarks with our 2023 financial guidance. At this time, we are still unable to provide estimates for costs associated with integration and restructuring for 2023, therefore we are not providing GAAP guidance. We are affirming our guidance for 2023 non-GAAP diluted EPS attributable to Henry Schein, Inc, a $5.18 per share to $5.35 per share, which is now 1% to 4% compared with our 2022 non-GAAP diluted EPS of $5.38, and includes the previously announced $0.05 to $0.10 dilution from 2023 acquisitions, which is consistent with our prior guidance, and has been updated to include second quarter results and the impact of all acquisitions that have been announced so far. The net impact of acquisition expenses and acquisition-related fair-value adjustments, including the related remeasurement gain resulting from the purchase of a controlling interest of a previously held equity investment is expected to be insignificant for 2023 and has been included in guidance. We expect these acquisitions to contribute to earnings growth beginning in 2024.

It is important to recognize that we expect year-over-year growth in diluted EPS to be higher in the fourth quarter than in the third quarter of this year. Our guidance for 2023 assumes total sales growth of approximately 1% to 3% over 2022. As a reminder, our guidance reflects one less selling week in 2023 than 2022. Our sales growth reflects a larger decline in sales of COVID-19 test kits, which we now expect to decrease by approximately 70% to 80% from 2022 versus our previous guidance of a 65% to 70% decrease. Additionally, PPE product sales are expected to decrease about 25% to 30% versus our previous guidance of a decrease of 20% to 25%. Despite the expected lower PPE and COVID-19 test kit sales, the impact on 2023 non-GAAP diluted EPS from PPE products and COVID-19 test kits is still estimated to be $0.35 to $0.40 per share due to higher-than-anticipated gross margins on PPE sales relative to our original guidance.

We are driving strong earnings momentum in our underlying core businesses and we still 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. We continue to expect non-GAAP operating margin contraction of 10 basis points to 15 basis points from the 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 and as a result of higher interest rates and borrowing levels. We also expect an effective tax rate for the year at the 23% range, assuming no changes in tax legislation. Our guidance is for current continuing operations as well as acquisitions that have been announced and does not include the impact of future share repurchases and potential future acquisitions. Guidance also assumes that foreign currency exchange rates are generally consistent with current levels and the end-markets remain consistent with current market conditions.

With that, I'll now turn the call back to Stanley.

[Stanley M. Bergman, Chairman of the Board and Chief Executive Officer at Henry Schein]

Thank you, Ron. We are here to answer any questions which investors may have. So, operator?

Questions and Answers

[Operator]

Thank you. [Operator Instructions] One moment please while we poll for questions. And the first question comes from the line of Elizabeth Anderson with Evercore ISI. Please proceed with your question.

[Elizabeth Anderson, Analyst at Evercore ISI]

Hi guys. Thanks so much for the question. I have maybe one shorter-term question and one longer-term question, in terms of the shorter-term question, obviously the fair value adjustment was new this quarter and I just wanted to sort of make sure I understood, was this something that you knew sort of last quarter when you updated your guidance or because we're just trying to -- I'm just trying to understand whether the like core guidance moved down ex that?

And then my longer-term question. It's obviously very interesting with you adding all these new capabilities and geographies and how do we think about, like for example for, S.I.N. and like how long that, that might take or what your plans are in terms of bringing those implant into the United States? And then similarly in terms of the medical, the ability to sort of push those sort of more broadly across the new products across your portfolio. Thank you so much.

[Ronald N. South, Senior Vice President, Chief Financial Officer at Henry Schein]

Certainly, Elizabeth. I'll take the first question and Stanley will respond to your second question. So the remeasurement gain was something we contemplated in our guidance. We didn't have a definite amount for it. Just like we weren't sure how much our acquisition costs were going to be either. So, ultimately those, as we've kind of demonstrated in that exhibit to the press release, those amounts once we realized is a higher expenses and we also realized the net remeasurement gain have largely offset on a year-to-date basis. So, yes, our guidance does contemplate the effect of those items. Sd I'll -- Stanley, if you want to take the second question.

[Stanley M. Bergman, Chairman of the Board and Chief Executive Officer at Henry Schein]

Thank you. Elizabeth, the S.I.N. implants, not the whole line, but significantly important part of portfolio already approved in the US are selling to some extent and are being well-received by our particularly DSO customers where we in fact by coincidence last week were able to land a pretty decent DSO that is interested in the S.I.N. and implant, the system. It puts us and the whole S.I.N. transactions puts us in a very competitive position now because to some extent in the US and maybe some other markets, although BioHorizons Camlog is a premium product selling at a slightly lower-price than some of the major brands, if not all of them, we still are missing a piece in our portfolio on the more economic side of implants and now I believe we are well-positioned with S.I.N, and I believe in next year or so we will be able to also launch the Biotech line in the United States different market segments, but I think we're definitely in a very competitive position now and are actually starting to see some sales.

[Elizabeth Anderson, Analyst at Evercore ISI]

And then for Shield as well, that sort of a similar timeline and you can sort of push that across your broader portfolio later this year or is that more, but we should think about that as more of a '24 type of occurrence?

[Stanley M. Bergman, Chairman of the Board and Chief Executive Officer at Henry Schein]

No, I think -- we acquired Prism about a year or so ago -- two years ago, which was mostly an East Coast business with a relatively limited portfolio. Shield puts us into the West Coast with a broader portfolio. And Shields was missing the wound care offering that Prism had. So we believe we will create synergies relatively quickly. There are costs, of course, in integration, which we've taken into account in our guidance, so mostly one-time costs.

But I think in '24, we should be able to start adding accretion in a nice way. This has really been an area that our customers -- big IDN customers that wanted us to perform. And we didn't undertake these kinds of services. We have one IDN in New York area that we service in the Homecare area, but we didn't really have the full capabilities between these two acquisitions and another small one which we hope to announce soon. We will have a pretty good offering in products for the home and will be a great extension to our physician urge care business.

[Operator]

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

[Brandon Vazquez, Analyst at William Blair]

Hi everyone. Thanks for taking the question. Maybe first on one high-level question just on the macro backdrop. Can you guys talk about where you're seeing some strengths and weaknesses in the environment today? I think maybe equipment looked pretty strong in the US, but maybe a little weaker international and then consumables globally look kind of stable, low-single digits. So, curious how all these segments on the dental side are playing out from the macro side.

[Stanley M. Bergman, Chairman of the Board and Chief Executive Officer at Henry Schein]

Yes. Thanks for that question. On the macro side in North America I believe there is stability on the dental side, that's what our team believes in general. Consumables, people are -- patients are returning to the dental office. If the data is not perfect, but if you look at the latest ADA survey and some recent analyst reports and studies suggest that patient traffic picked up throughout the second quarter after the steady volumes in the first quarter of '23. And so we. And so we, of course, we had some volatility in the first quarter of '22. And so it appears that patient flow is good. July, from that point of view was a good month. E-claims data also suggests that what I've just described, is backed-up again by e-claims data from Henry Schein One. If you peel the onion a little bit further, at least from our point of view, implant sales continue to grow well in North America. And the same for endodontics, our small aligner business is showing similar kinds of trend.

If you look at international, it's slightly more tepid in international. It's hard to tell because we're now in the summer months, that when the summer months when Europe is largely closed. Having said that, we did suffer in the second quarter because of the strikes in France. I would say Germany is okay. There we had pretty strong numbers in 2022 from a comp point of view because we had the Sera traded in the second quarter of 2022. Patient traffic in Germany which is our biggest market outside of the US. seems to be steady. There is somewhat of a staff shortage.

But again it's really hard to tell this is the vacation month now in July, August, and it's very hard to tell exactly what is happening in Europe, Germany. But from our checks, it's pretty steady. We don't see much of it to deterioration at all, in fact it could be on the positive side. So, generally dental and medical okay. On the medical side a little bit more. We did have high comps last year in 15% almost growth. So, the medical is not going to, as we did caution at the time present that kind of growth going forward. There is some trading to more generic products specifically on the pharmaceutical side doesn't impact the absolute dollar profits.

But I think medical is at least with the ASC business is back to where it was before COVID. And I think if you take out the unusual visits that we experienced in the first half of last year because of flu, I think medical is pretty stable as well. I think a on the other hand, I believed our market share is growing. On the specialty product side, again I think we've covered this in our call and introduced from our point of view, we don't see any major impact. From a units point of view, that is trading to lower-priced products specifically from our DSO customers. But in general, our markets are stable and I think we are quite comfortable at this moment. our backlog on equipment year-on year in North America is pretty similar to where it was at the end of last quarter. And on the international side is building up the game to pre-COVID levels. So, I would say stability or around, that would be our view at this moment. Thank you.

[Brandon Vazquez, Analyst at William Blair]

Perfect. Thank you very much. And maybe one other quick one for Ron. We're trying to -- can you clarify and you may have given this already on the call, but just to be clear. Can you kind of talk about what EPS growth is in '23 and baked in the guidance, ex to PPE and COVID? And part of why I'm asking is just to make sure we understand what underlying dynamics are, we're kind of looking at our 2024 models where may be PPE and COVID sales can kind of stabilize and we can return to some more normalized growth rates. Thank you.

[Ronald N. South, Senior Vice President, Chief Financial Officer at Henry Schein]

Yeah. Our full-year guidance is is still $5.18 to $5.35. And that includes an expected $0.35 to $0.40 headwind versus the prior year OF impact on EPS from contributions from PPE sales and COVID-19 test kit sales. So that remains unchanged From a guidance standpoint, while we've adjusted the -- some of our revenue assumptions on those products because of the better-than-expected margins on the PPE sales we haven't had to adjust the $0.35 to $0.40 expected headwind that was built into our original guidance.

[Operator]

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

[Jeffrey Johnson, Analyst at Robert W. Baird]

Thank you. Good morning, guys. Stanley, maybe I would like to dig a little deeper on your North American comments. Consumables, you described that market is fairly stable. I think that fits with a lot of our survey data as well. The consumables number though did come down to 2.5% on an organic basis ex PPE this quarter, last quarter it was 6.5%. Do you think that's just the comps from the Omicron stuff in the first quarter last year that really helped inflate that first quarter number? Was there any change in pricing dynamics? Any other factors kind of bridging from the 6.5% first quarter to the 2.5% consumables growth in this quarter? Thanks.

[Stanley M. Bergman, Chairman of the Board and Chief Executive Officer at Henry Schein]

A very Good question Jeff. Thanks for asking. I think you need to take the fourth quarter of 2022 and the first quarter of '23 and more or less average out because of the cut-offs and leads a little bit higher in the first quarter, but it certainly wasn't 6.5% growth apples-to-apples. I think we covered that in the past. I would also suggest that inflation in the consumable will in the Dental arena has muted. Maybe some products individually of certain brands have gone up, they're not necessarily fixed from the manufacturer pass through, but that the manufacturers are not necessarily able to hold all these consumable price increases.

At the same time, there is a movement towards corporate brand/generics. And some of the smaller brands are doing well, where some of those manufacturers are prepared to keep prices or even reduce prices. So it's very hard on a one-quarter basis to give you the perfect measurement of mix. But I would take into account the cut-offs for '22 for the fourth quarter and I would take into account the fact that generally there's been some deflation in merchandise prices. And I would say this is particularly coming from the larger DSOs and the mid-size DSOs who are today a lot more educated consumers than in the past. This is not really impacting our margin per se -- the general mix of our margin to DSOs. So there's a lot of nuance in what I just said. But let's see what happens in the third quarter and fourth-quarter, but my sense is the trend that I just described is not going to change much.

[Jeffrey Johnson, Analyst at Robert W. Baird]

All right. Now my follow-up, Stanley. So is there more deflation to come or you are able to kind of take in that step-down and you think we can hold steady from there? And then, Ron, just a follow-up on your -- on the nonrecurring below-the-line -- well, I think it was above-the-line actually this quarter on the one-time gain. The $0.05 to $0.10 of dilution is unchanged. That is on a gross amount, you're talking about a net den impact from acquisition activity being close to flat this year. If you had provided that net guidance last quarter, would that have also been flat? So essentially you're not changing your gross or your net acquisition guidance for the year. Just wanted to understand that. Thank you.

[Ronald N. South, Senior Vice President, Chief Financial Officer at Henry Schein]

Jeff, it's hard to tell as I -- maybe I wasn't clear exactly what the impact is going to be of deflation, whether it's price reduction on specific branded products or switch to generic or other manufacturers for specific kinds of products. Yeah, I doubt we're in more than 100 basis point to 150 basis point swing, maybe 200 basis point. But I'm not sure it's much different to that. So, I don't think inflation is going to be significant in the dental consumable business. I think it may go down slightly to deflation. But we're in that range. Units are holding more or less steady. Of course, from our point of view, we're growing our specialty business, although the business may be growing, it doesn't have an impact really in a material way on our total sales of dental consumables is because it's not material in the context of the whole consumable offering. Having said that, specialty products are impacting our margin in a positive way and are corporate brands and some of the smaller manufacturers. And, Jeff, to answer the second part of your question. The $0.05 to $0.10 that we referred to after the first quarter when we amended guidance was with specific reference to the expected dilutive effect during the year from the Biotech. We were holding that $0.05 to $0.10, but it now if for all the acquisitions that we have announced so far this year. Apart from that, we have higher-than-expected acquisition expenses, which are largely offset by the remeasurement gain that we recorded in the second quarter as well. So we've kind of have set those aside, and that was the purpose of Exhibit C to the press release so people could see the components of that, and we're holding to the $0.05 to $0.10 of dilution. But now it captures all of all of the acquisitions that we've announced to date.

[Operator]

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

[Jason Bednar, Analyst at Piper Sandler Companies]

Hey, good morning. Thanks for taking the questions. I'll actually follow-up there on kind of the track that Jeff was going down. But maybe, Ron just, maybe starting on gross margins. I mean, those are still hanging around multi-year highs despite what I think are maybe some inventory step up costs from the Biotech Dental transaction. So could you quantify how much inventory step up may have hit in the quarter in terms of hitting that gross margin ad earnings? And then with absorbing the dilutive S.I.N. transaction in your reaffirmed guidance today, can you give us some detail on how to think about what the dilution is from that deal that you're absorbing, even rough numbers? Is it a few pennies, a nickel, a dime? Anything there would be helpful.

[Ronald N. South, Senior Vice President, Chief Financial Officer at Henry Schein]

I'll start with the quantifiable one first. The step up charge that we have will be disclosed in the 10-Q as well. In the second quarter for Biotech was $2 million. So not a real significant effect on gross margin. In terms of S.I.N., it is absorbed within that $0.05 to $0.10. There's also going to be a step up on S.I.N., but they don't turn their inventory as quickly, so we don't expect it quarter-to-quarter have as dramatic of an effect. So, S.I.N., without kind of disclosing the modeled dilution on that, I can tell you that it is absorbed within that $0.05 to $0.10.

[Jason Bednar, Analyst at Piper Sandler Companies]

Okay and then on the $2 million, I guess just a quick follow-up there. That $2 million steady as we go forward for the next quarter or two for 3Q and 4Q, or does that need to move higher just as we think about how to model gross margins for the back half of the year and...

[Ronald N. South, Senior Vice President, Chief Financial Officer at Henry Schein]

I'm sorry, Biotech, just to answer you quickly. Biotech churns our inventory about twice a year. So we have got another quarter of that inventory step up left. So it will be another $2 million [Phonetic] in Q3 and then we'll be able to move on from that.

[Jason Bednar, Analyst at Piper Sandler Companies]

Got it. Perfect. And then as we think about the composition of the equipment backlog, you mentioned it's holding steady. But it sounds like maybe that's starting to shift back towards high-tech equipment. Could you drill down in the one areas of high-tech you're seeing that recovery leading? I would assume it's mostly in iOS, but just wondering if you're starting to see any better results on the digital imaging or anything on the milling or 3D printing side that's maybe influencing some of your comments today?

[Ronald N. South, Senior Vice President, Chief Financial Officer at Henry Schein]

Yeah. We're very pleased with the equipment growth we had. North America equipment growth on an LCI basis of 9.8% especially in this environment on some of the -- on some of the high-tech equipment. Traditional remains very high at -- our LCI in North America on traditional equipment was growth of 14.6% and that was with virtually no movement in the backlog, that's almost identical from the beginning of the quarter to the end of the quarter. So it's very indicative of ongoing strong demand for traditional equipment.

On the high-tech side, we still have some headwinds on scanners, but it price-related. We're getting good volumes on scanners, but the revenues are down on the scanners. We do have -- I think they're down 12.1% on -- well, I'm sorry, digital restoration sales were down 12.1%, but the scanner revenue was still down 40% for us year-over-year and that's really a pricing matter.

Having said that, on high-tech equipment we did achieve very -- a little bit of growth. It's low-single digit growth, but we did get some high-tech growth, which we're pleased with. And that's coming from some growth really kind of across-the-board. You mentioned a lot of the categories, some growth in mills, some growth in 3D printing. Those are all coming off relatively low basis, but nevertheless they providing us with some growth and that's helping the category.

[Operator]

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

[Jonathan Block, Analyst at Stifel Nicolaus and Company]

Great, thanks guys. Good morning. Maybe just a first question on dental specialties. I think the reported was up 15.7. I don't know if I missed it, but do you have a precise internal number for that division. And then to just go little bit further down the road, how implant growth shook out within whatever that internal number was? Was it above overall internal below? And just maybe your thoughts on ongoing share gains or implant share gains, pardon me, now that you've got some of those investments in the more robust implant portfolio to work with going forward. And then I'll ask a shorter follow-up. Thanks.

[Ronald N. South, Senior Vice President, Chief Financial Officer at Henry Schein]

Certainly. I think with reference to our specialty growth, I mean, we've kind of elected to stick to total sales growth in order to be consistent with the message we had around specialties in our Investor Day. So we're focusing on total sales growth as opposed to LCI sales growth. We think it's more reflective of our strategy for that portfolio of products. We remain very bullish on implant sales. I think that we've gotten -- we had growth in North America as well as internationally on the implant systems, and orthodontic sales on the specialty side remain very strong for us both inside and outside the US. Stanley anything you want it to add on the specialty side?

[Stanley M. Bergman, Chairman of the Board and Chief Executive Officer at Henry Schein]

Jon, that was a -- and thank you for that question. If you look at just North America, sales of BioHorizons Camlog premium implants, remember that it's a premium implant at a slightly lower price than [Indecipherable] competitors in premium area, delivered mid-single-digit growth. And that's a sequential improvement versus the first quarter. Internationally, implant demand remains good. Remember, we have a very small business in China. Generally, demand for dental implants again favored the low price part. Although I must say for BioHorizons Camlog we did very well in our biggest market, which is Germany, Austria and Switzerland. But my dentist did very well also in Germany, which is on the low end.

So overall we're quite comfortable -- actually very excited about our growth in the implant business. Hard to tell you how we're doing compared to others that data from the association that reports premium implant sales is not yet available for the second quarter, but my sense is we have gained market-share both in terms of units and in terms of euros, dollars. So as it relates to the competitiveness of our product line, Elizabeth asked the question earlier on. We were missing a piece in the low-end of the mix in North America. I believe S.I.N. enabled us to be highly competitive in this area, specifically with DSOs larger ones and mid-size ones.

I just wanted to go back to the ID, the sensor DI question of earlier on. I think we reported this time last year that are sales that include a large sale of DI equipment to substantial DSO. And so if you take that out, the units are more or less returning to where they were and there still is some deflation, but not a significant amount. And on the DI side, it's not really deflation relative to particular brand, but they are lower-priced brands that we're selling more of relative to the larger brands.

[Jonathan Block, Analyst at Stifel Nicolaus and Company]

That was helpful. Thank you. And maybe I'll try to ask a second question. Just for medical -- actually ex PPE and COVID was up 2% and I know flu was year-over-year headwind, but just the past couple of quarters has come up a little shy versus our expectations. I know you talked about the long-term thoughts at the Analyst Day, but in the more intermediate-term is there a way that we should think about that division, maybe still with the balance of '23, you are still starting on a couple of comps maybe, but maybe just talk to us onhow you see that unfolding for the balance of '23, again ex PPE COVID? Thanks.

[Graham Stanley, Vice President of Invetor Relations and Strategic Financial Project Officer at Henry Schein]

Yeah. It's very hard to give you specifics. I think we're doing well in terms of units with our existing customers. We are gaining customers. But the whole area of visits unrelated to study visits relative to urge centers and normal type medical visits is hard to gauge because of the impact of the seasonality of flu, and we saw quite a bit of flu-related products, be it the tests or the related products that go with the test. At the moment, it seems pretty steady. I wouldn't want to say this really and I wouldn't want you to view this the wrong way. But COVID is growing a little bit. So people are going more to the physician offices to check things out.

So. July was a lot better, but you can't draw conclusions there was a low in equipment sales. We had lot of good inquiries in July. But it's hard to give you a specific number. The impact of generic pharmaceuticals is quite a bit on the injectable side, not the vaccine side. We don't sell many tablets and capsules, not our business. So overall it's a good business. And whether it's 3% or 5% or 6%, I don't think that impacts the overall profitability in a meaningful way. There are so many puts and takes in our medical business, but we feel very good about our medical business and continue to believe that on a unit basis we're growing market share.

[Operator]

We have time for one last question coming from the line of AJ Rice with Credit Suisse. Please proceed with your question. Hello, AJ, your line is live. Okay. Our final question will come from the line of Nathan Rich with Goldman Sachs. Please proceed with your question.

[Nathan Rich, Analyst at The Goldman Sachs Group]

Great. Thanks for fitting me in at the end. I'll ask both upfront. First, I wanted to go back to the commentary around traditional equipment and the equipment backlog in North America is stabilizing. It is obviously been coming down I think as we cycled through some of the supply constraints. I'd just curious on the outlook for demand though, how you're thinking about that over the balance of the year and what you're seeing with respect to kind of practice formation and remodels in the current environment that we're in?

And then Ron maybe a clarification on the margins. Any commentary on the margin outlook between 3Q and 4Q? I guess, especially as it relates to potential timing of acquisition expenses between those two quarters. Thank you.

[Stanley M. Bergman, Chairman of the Board and Chief Executive Officer at Henry Schein]

So, on the equipment. I believe that the demand is quite good and steady. Some of the larger DSOs continue to invest. There may have been a bit of a pause a few months ago when some of these DSOs perhaps highly leveraged were looking to determine whether they really should invest or not, but there is a demand for dental care. And I believe that our bigger DSOs are growing. One or two of them had some operational issues, which I think are largely behind them. But I believe that they are investing some of the largest size and the mid-size are growing as well, smaller practitioners not so much. But overall I would say the demand for traditional equipment is there.

On the digital side, the DI scanners are growing in terms of units. Yes, to some extent movement to the lower price units, but not discounting of any particular units in a material way just to switch as more people look at this area. Very important to realize the high comp we had in the in one area in the DI area of last year we disclosed in our call. And the moves I would say a steadying. There is a demand. It's not as hot as it was, sort of trade up that helped a bit. And 3D printing is quite hot. Sticker back a little bit. If you look at our numbers, in general we're a big player on the dental lab side. There is a movement away from consumables into digitalization. So that's movement is also impacting to some extent the sales of consumables and resulting in an increase in equipment, but overall I think our equipment backlog in the United States which is pretty similar to what it was at the end of last quarter I think is indicative of the desire of dentist to invest in their practices and make the practices and more efficient and provide better digital outcomes.

A nice way to even looked at that is another way is to look at the investment in AI. We have -- and it relates primarily to our Henry Schein One software, where we have I believe the most integrated solution embedded AI in our software and the units of those are growing. This is all tied to the desire of practitioners to invest in their practice. So I think the market is stable to growing. And International is quite complex. There are different issues in different countries. But in the countries where there's large government support like Germany, from our point-of-view, it's stable although there is a shortage of dentists, and hopefully France will sort of sub out after Labor Day. The rest of the markets is stable to some ups in Australia because of a little bit of incentives for this quarter. Brazil is pretty stable. And overall Canada is stable. So I would say the dental markets are pretty stable, solid overall.

[Ronald N. South, Senior Vice President, Chief Financial Officer at Henry Schein]

And, Nathan, just one thing to add-on the backlog. Like I mentioned before, our backlog in North America has stayed pretty constant over the course of the quarter and we saw a very good sales growth. I would -- quite frankly I would like that backlog to come down some, not just for the revenue lift it would give us, but it's just better for our customers to reduce the timing of that backlog so they get their equipment more quickly and increases capacity in the end-market quite frankly in those situations where that backlog is for equipment that is -- that is new to the business as opposed to replacement. So would like for that backlog to come down, but right now we still -- in North America we're experiencing a fairly consistent backlog.

In terms of your question on Q3, Q4 margins. I do think that especially at a gross margin level, we can continue at the levels we're at. I think that it's indicative of the growing importance of the dental specialty products in our overall portfolio as what was the growth in our technology business and I think we can continue with that as we get into the back-half of the year. Of course, there's always -- it's a broad portfolio. There are things that can impact that. For example, Q4 tends to be a heavier quarter for equipment sales than other quarters and those sales tend to be slightly lower margins than what our overall margin is right now. So that can bring down margins a little bit. But in exchange for the for the additional sales, but we'll clearly take that. So, I don't know -- I think that that's my general expectation is we'll be able to continue with the margins that we've seen in the first-half of the year into the second-half of the year.

[Stanley M. Bergman, Chairman of the Board and Chief Executive Officer at Henry Schein]

So. Thank you. I know we've gone over eight minutes over the allotted time. Thank you everyone for calling in. Again, we are very pleased with the progress we're making in the business, both the core business, specialty businesses, our software businesses. The markets are steady. Lots of ins and outs, subtle points, but generally we are comfortable where we are today. We've reaffirmed guidance. Sorry about the complexity on PPE and tests and the acquisitions, expenses and related costs and income generated in that area.

But this will -- I think we will try to make it clearer for our investors and make it as simple as possible for the remainder of the year, but I think next year should be a relatively clean year and hopefully you will see that we -- are confidence in the business is justified. So thank you all for calling in. Of course, Graham and Ron available to speak with investors over the next days. And thank you for calling in. We remain confident in our team. Thank you to the team for their tremendous work that has been undertaken as we come out the other side of COVID and implement our strategic plan. So thank you all and have a great remainder of summer. Thank you very much.

[Operator]

[Operator Closing Remarks]