Henry Schein Inc (HSIC) — Q2 2020 Earnings Call Transcript

Thank you, Regina, and thank you to everyone for joining us to discuss Henry Schein's results for the second quarter of 2020. On the call today are Stanley Bergman, Chairman of the Board and Chief Executive Officer at Henry Schein, and Steven Paladino, Executive Vice President and Chief Financial Officer. Before we begin, I want to mention that some comments made during this call will include forward-looking information. Risks and uncertainties in the company's business may impact the matters referred to in these statements, meaning the company's performance could significantly differ from what is expressed or indicated. These forward-looking statements are entirely qualified by the cautionary notes in Henry Schein's filings with the Securities and Exchange Commission, particularly in the Risk Factors section. Additionally, any comments about the markets we operate in, including growth rates and market share, are based on our internal analyses and estimates. Our remarks will cover both GAAP and non-GAAP financial results. We believe non-GAAP financial measures provide valuable supplemental information about our financial performance, allow for comparisons of financial results across different periods where certain items may vary independently of business performance, and enhance transparency regarding key metrics used in managing our business. Non-GAAP financial measures are solely for informational and comparative purposes and should not replace corresponding GAAP measures. Reconciliations between GAAP and non-GAAP measures are available in the supplemental information section of our Investor Relations website and in exhibit B of today's press release, located in the Investor Relations section of our website. The information shared in this conference call is time-sensitive and accurate only as of the live broadcast date, August 4, 2020. Henry Schein has no obligation to revise or update any forward-looking statements to reflect events or circumstances after this call. With that said, I would like to turn the call over to Stanley Bergman.

Thank you very much, Carolynne. Good morning, everyone, and thank you for joining us. In recent months, we have observed that dental and medical practices are continuing to reopen globally. Although patient volumes remain lower than they were before the COVID-19 pandemic, the recovery in the dental and medical markets is advancing much more quickly than we had initially expected. We are closely monitoring these trends, especially as some U.S. states and certain international regions are seeing an increase in diagnosed COVID-19 cases. While this is resulting in stricter social distancing measures in some areas, we have not, at this time, seen any significant closures of dental and medical practices despite the rise in cases. We will continue to keep an eye on any possible impact on healthcare services in these regions, and we are ready to implement further cost-saving measures if necessary. However, practices appear to be opening, those that have reopened seem to be maintaining operations, and there is a gradual increase in the number of practices that are starting to open. One major issue we faced when COVID-19 emerged was the demand for personal protective equipment, or PPE. We are pleased to share that we have made significant progress in sourcing PPE over the past three months, which includes expanding our sourcing in critical product categories, adding high-quality substitute products that comply with regulations, and adapting our transportation model to reduce lead times for product delivery from factories. As a result, we have greatly enhanced our PPE supply chain capabilities and product availability. Our global team has worked tirelessly to position Henry Schein to emerge from this crisis as a stronger company. While we are still navigating the pandemic, we believe we are adeptly handling the rapidly changing daily challenges and are well positioned for the future. Looking ahead, I, along with the entire Henry Schein Board of Directors, have complete confidence in Henry Schein's business strategy, our leadership team, and truly, all of Team Schein. I would like to express my heartfelt gratitude to Team Schein worldwide for their unwavering commitment to our customers, their extraordinary effort during this time, and the sacrifices they have made for the benefit of Henry Schein's long-term business, which we believe is on a solid foundation. We have done a commendable job in meeting our customers' needs. At this point, I will hand the call over to Steven to discuss our financial performance, after which I will provide some further insights on our perspective of current business conditions. Steven?

Okay. Thank you, Stanley, and good morning to all. As we begin, I'd like to point out that I will be discussing our results from continuing operations as reported on a GAAP basis and also on a non-GAAP basis. Our Q2 2020 and Q2 2019 non-GAAP results exclude certain items that are detailed in exhibit B of today's press release and in the supplemental information section of our Investor Relations website. Please note that we have again included a corporate sales category for Q2 that represents sales to Covetrus under the transitional services agreement. As Stanley mentioned, our 2020 second quarter results were impacted by COVID-19 but to a much lesser extent than we had originally expected. As we mentioned on our last earnings call, in response to the COVID-19 pandemic, we have implemented a broad-based cost reduction initiative, including a payroll cost reduction plan centered around furloughs, reduced work hours, voluntary unpaid time off, a suspension of our 401(k) match and certain job reductions. Over the course of the last few months, we have reevaluated the need for each of these initiatives, and I'm pleased to say that given the recovery we are experiencing in certain markets, our TSMs have begun to return from furlough and reduced hours, particularly TSMs and customer-facing roles. We expect the remaining furloughed TSMs to return by the beginning of the fourth quarter of 2020. We will continue to closely monitor the health of our business and remain prepared to take additional cost-saving measures if necessary. Now turning to our financial results. Our net sales for the quarter ended June 27, 2020, were $1.7 billion, reflecting a decline of 31.2% compared with the second quarter of 2019, with internally generated sales declining in local currencies at 30.5%. You could see the dental sales performance is contained, and all of the details of our sales performance are contained in exhibit A in our earnings press release, which was issued today. On a GAAP basis, operating margin for the second quarter of 2020 was negative 0.4%, representing a decrease of 707 basis points compared with the second quarter of 2019. On a non-GAAP basis, our operating margin was 0.5% and contracted by 662 basis points on a year-over-year basis. A reconciliation of GAAP operating margin to non-GAAP operating margin can be found in the supplemental information page on the Investor Relations page of our website. The margin contraction in the quarter was primarily due to a reduction of global dental sales and related gross profit as well as other factors related to COVID-19, including certain inventory charges associated with PPE. Turning to taxes. Our reported GAAP effective tax rate for the second quarter of 2020 was 5.9%. This compares with a 23.6% GAAP effective tax rate for the second quarter of 2019. Our GAAP effective tax rate was a bit distorted given the pretax loss in the second quarter of 2020. Moving on. GAAP net loss from continuing operations attributable to Henry Schein for the second quarter of 2020 was $11.4 million or negative $0.08 per basic share, and this compares with the prior year GAAP net income from continuing operations of $116.8 million or $0.78 per share. Non-GAAP net income from continuing operations for the second quarter of 2020 was slightly positive at $0.6 million or rounding to $0.00 per basic share, and this compares with the non-GAAP net income from continuing operations of $125.7 million or $0.84 per share for the second quarter of '19. On a continuing operations basis, amortization from acquired intangible assets for Q2 2020 was $24.9 million pretax or $0.13 per diluted share and that compares to $28.0 million pretax or $0.14 per diluted share for the same period last year. For the first half of 2020, our amortization from acquired intangible assets was $53.7 million pretax or $0.28 per diluted share, and that compares with $49.8 million pretax or $0.25 per diluted share in the same period last year. In Q2 of 2020, foreign currency exchange positively impacted our diluted EPS by approximately $0.01 per share. Let me now provide some details of our sales results for the second quarter. In general, dental sales performed better than anticipated as practices reopened sooner than we expected during the quarter. Our dental sales of $941.3 million declined 41.2% compared with the prior year, with a decline in internal sales in local currencies of 40.1%. North American internal sales in local currencies declined 46.9% and included a decline of 47.5% in sales of dental consumable merchandise and a decline of 44.9% in dental equipment. Our international dental internal sales in local currency declined 29.5% and included a 29.2% decline for dental consumable merchandise sales and a 30.5% decline in dental equipment. We experienced an increase in sales as the quarter progressed in line with more practices reopening and increased patient traffic. In addition, global dental sales in the second quarter benefited from PPE sales, which increased by more than 30% compared to the prior year. If we look at our dental specialty products in Q2, internal sales of our global dental specialty products decreased 39% in local currencies, and we believe this higher-margin product category has solid growth potential over the long term. Turning to medical sales. Our medical sales were $617.8 million, a decrease of 11.4% compared to the same period last year. There was no material impact from foreign currency exchange on our global medical sales, and there was no acquisition growth during the quarter. The 11.4% decline included the 12.1% decline in North America with internationally internally generated sales in local currencies at 13.3%. Our medical sales also resulted in fairly resistant sales due to strong demand for PPE products, which grew approximately 140% over Q2 of last year. Technology and value-added services sales were $105.2 million in the second quarter, a decline of 15.9%, which reflects a decline in internally generated sales in local currencies of 17.0%. In North America, the tech and value-added services internal sales declined by 15.1% in local currencies. And internationally, the technology internal sales declined by 29.8% in local currencies during the quarter. We generally saw improvements in our transactional software revenue throughout the quarter as more patients started to visit practices worldwide. As we discussed on the Q1 earnings call in early May, we temporarily suspended our share repurchase program as a means to preserve cash in response to the impact of COVID-19 on our business operations and due to certain restrictions related to financial covenants. As of today, the company has $201.2 million authorized for future repurchases of common stock. Currently, we have access to significant liquidity, providing flexibility and financial stabilization in this challenging environment. Our operating cash flow from continuing operations for the second quarter was negative $91.6 million, and that compares to positive $165.5 million for the second quarter of last year. The year-over-year decline was primarily due to lower net income and higher working capital requirements from inventory purchases this quarter. As part of our previously disclosed restructuring initiative, we recorded a pretax charge in Q2 2020 of $15.9 million or $0.08 per diluted share. This restructuring charge primarily includes severance pay and facility closing costs and reflects opportunities to reduce expenses and drive operating efficiencies. We expect to continue our restructuring initiatives through the end of this year. I'll conclude my remarks on the topic of financial guidance. Again, due to the continued uncertainty surrounding the COVID-19 pandemic and its impact on our business operations, we will not be providing 2020 financial guidance at this time.

Thank you, Steven. I would like to discuss our business performance from the second quarter and recent weeks, starting with Dental. Most of the dental markets we serve showed significant sales improvements in the latter half of the quarter, except for the U.K., which is recovering more slowly due to reopening delays. China began to recover in early April, and Germany and Austria faced fewer restrictions from lockdowns. Other international markets started to show improvement around the middle of the quarter, with the Netherlands, France, Italy, New Zealand, and Australia seeing recovery first, followed by Spain and Brazil. The U.S. also showed positive trends, while Canada is lagging the U.S. by about a month. We were pleased that our second-quarter sales for dental consumables and equipment surpassed our expectations at the first-quarter earnings call as dental practices reopened and patients returned for clinical care. Steven mentioned our year-over-year PPE growth for Henry Schein. To provide some context regarding PPE, before COVID-19, our PPE sales were in the mid-single digits as a percentage of global dental sales. By the end of the second quarter, this increased to around 11% of our total dental sales. This was a significant increase but still not extensively material in terms of total sales. Dental equipment sales in the second quarter also declined less than we initially expected as many practices proceeded with capital equipment purchases for both traditional and high-tech solutions. In North America, traditional equipment sales declined by about 40%, while high-tech equipment saw a decrease of roughly 54%. Within high-tech, laser sales had a healthy increase in the second quarter, although starting from a relatively small base. CAD/CAM equipment sales, which encompass digital impressions and related laboratory sales, dropped by approximately 60% in North America during the second quarter. Imaging sales decreased by 53% year-over-year. Traditionally, international equipment sales dropped around 28%, with high-tech equipment experiencing a decrease of about 36% in local currencies, and CAD/CAM equipment sales also declining by approximately 36%. It is difficult to predict the growth trend for PPE in the future, but we anticipate that it will remain a significant portion of our dental sales as safety measures are crucial for patient visits. We believe that a new product category that will gain traction is air management equipment, including extraoral suction devices and air purification systems, which we are currently distributing. As infection control and ambient air safety become more critical, we expect this category to grow in importance, although it had minimal impact in the second quarter. According to the American Dental Association, most U.S. dental practices have reopened, although not at full capacity. Their latest data indicates significant improvement in patient volumes since late May, yet patient capacity remains limited due to the time needed for required safety procedures, affecting daily patient numbers. However, more dentists and hygienists are extending their working hours to address this. We expect practices to become more efficient as they adapt to using additional PPE and safety precautions, which likely will boost productivity over time. Overall data from our eClaims processing in the U.S. aligns with the recent ADA survey data, showing that U.S. dental practices had recovered around 70% of pre-COVID-19 patient volume by July. Our eClaims data revealed that patients are returning for regular oral care, including hygiene visits, rather than only seeking emergency dental care. This suggests that the overall dental practice business is on solid ground. In the U.S., following a strong June, we observed a 30% increase in eClaims data for emergency procedures from June to July. Importantly, while other procedures increased by about 35%, global dental sales rose in the mid-single-digit percentage range year-over-year— a stark contrast to the 70% decline we experienced in April. Growth in both North America and internationally for dental markets was primarily driven by strong consumable merchandise sales, with dental equipment sales slightly down in both regions in July, indicating a stable environment for dental equipment. For our dental specialty businesses, encompassing implant, endodontic, and orthodontic sales, we have seen a trend similar to general dental practices, with patients returning for specialist procedures in both the U.S. and internationally since May, continuing through June and significantly in July. We are especially encouraged by our implant sales in the DACH region, specifically Germany, where internal sales in local currencies in the second quarter saw only a slight decline compared to the previous year. Over the last quarter, Henry Schein has collaborated closely with our customers to develop strategies for navigating practice disruptions, including business continuity planning and recovery assistance for both individual practices and larger groups, alongside third-party financing programs. These efforts encompass a range of Henry Schein One software solutions that facilitate patient engagement regarding appointments, procedures, and safety practices, including the setup of virtual waiting rooms. While the changes in workflow introduced by Henry Schein One have been well received, they were initially time-consuming and resulted in some inefficiencies in practices but ultimately led to enhanced infection control. We believe that over time, practices will become much more efficient. We are dedicated to understanding our customers' challenges and providing programs that help them during these difficult times while preparing them for future growth. Our hands-on consulting approach is a key differentiator for our business and why our customers rely on us. The COVID period underscored the importance of our consultative approach to practices. Now, turning to the medical business, I’d like to remind investors that we focus on office-based practitioners, particularly smaller surgicenters and urgicenters, along with customers in renal dialysis, cancer centers, and community health centers, but not long-term care or acute care. In the second quarter, our medical sales remained fairly resilient due to strong PPE demand. Many U.S. physician offices stayed open throughout the quarter, albeit with reduced patient volumes. Consequently, sales of medical consumables and PPE helped to offset declines in the dental market. Before COVID-19, PPE sales represented high single digits of our medical sales, rising to over 12% by the end of the second quarter. While this is important, it is not overwhelmingly so, as our overall medical business did experience growth as the quarter progressed, continuing into July. Regarding dental PPE, we cannot predict long-term growth in this product category among medical customers, but we believe it will remain a significant part of medical sales as practices strive to ensure safety for both patients and staff. We have consistently worked to provide a range of COVID-19 point-of-care diagnostic tests in the U.S., focusing specifically on rapid tests and general testing solutions. Our longstanding relationships with top diagnostic companies and our extensive distribution network in the medical sector position us well to continue offering these essential testing products over time. Throughout these challenging times, we have collaborated closely with various customers, including physicians and large group enterprises, as well as alternative care sites, urgicenters, dialysis centers, EMS, schools, community health centers, and government organizations. This has included assistance with procuring PPE and infection control solutions and safely engaging with patients while reopening practices according to the guidelines issued by the Centers for Medicare and Medicaid Services. Looking ahead, we aim to increasingly utilize our telemedicine solutions like Medpod and VisualDx for virtual patient diagnosis and treatment. We plan to continue investing in this healthcare platform, which has the potential to improve access to acute care, enhance care quality, reduce costs, improve patient engagement, and increase efficiency in practitioners' offices. In July, our medical sales saw a solid double-digit year-over-year increase, reflecting a significant recovery from the nearly 30% sales decline we experienced in April. Our positive sales growth in July was driven by strong PPE sales, and this strength was also evident across the other products we offer in the medical business. So now let's move on to technology and value-added services. This is primarily Henry Schein One, but also includes our financial services business and our brokerage business, practice sales, transitional services. Technology and value-added services sales experienced a single-digit percentage decline year-over-year in July, which has also significantly improved from the approximately 25% year-over-year decline in April. The decline in the second quarter was mainly due to lower than historical patient flow that impacted transactional revenue. And of course, as I mentioned, financial services revenue was lower year-over-year as practice transitions and equipment leasing were impacted. Henry Schein One software sales began to improve as we progressed through the second quarter, in line with the resumption of dental practice operations. In particular, we have seen improvements in the monthly transactional software revenue trends for services such as eClaims as more patient visits occur in the U.S. but also in other countries, but specifically Europe, Australia, and New Zealand, where Henry Schein One is active. And yes, credit card processing. With the launch of our electronic statement solution with online payments acceptance, this has also been well received and contributed to sales. With regards to practice management systems sales in the second quarter, we did have success with signing new customers for both our Ascend, that's our leading cloud-based solutions, and our Dentrix Enterprise platform as large-scale customers sought solutions to help manage their operation centrally. Having a single patient record helps large multi-site dental organizations focus their team on value-added activities instead of having to spread the responsibility out of each location. Due to the remote capabilities of these products, dental customers were able to use our products to keep many of their team members safely working from home. Last, to many dental service organizations, DSO, as known in the dental space, we're looking to improve their technology while most of their locations were seeing fewer patients. In addition, the ability for dentists to communicate and engage with patients through our recurring revenue platforms was critical during this reduced period of dental operations. Providing information on practice reopening plans and safety measures, virtual waiting room capabilities, communication templates, patient forms, and contactless patient processes all have been critical solutions for our customers in response to COVID-19. Dental practices have relied on Henry Schein for these patient engagements and demand creation software solutions as they navigate office closures, staff furloughs, and resumption of procedure bookings. Through our COVID-19 education center, we moved quickly to develop content and programs to help customers navigate through this crisis. This included symposiums, webinars, and guidance to help customers secure financial relief, communicate with patients, manage disruptions to practice operations, and use downtime to develop staff skills and stage practice operations to bounce back from COVID-19 in the closure period. I think these programs were quite successful as demonstrated by the increase in demand for products in July. I would also note that in July, Henry Schein One announced the acquisition of a cloud-based U.K. dental software provider, Dentally, which expands our international presence and enhances our practice management software solution portfolio. This addition will further Henry Schein One's goal of providing integrated management systems that help dentists and their teams to constantly improve each stage of the patient's experience. In light of evolving practice needs resulting from COVID-19, we believe our ongoing investment in software solutions positions us very well to meet our customers' needs in the challenging clinical environment that our customers are experiencing and going through as the industry emerges from the pandemic. So in conclusion, we looked across all of our business groups, and we're seeing accelerated sales from lows early in the second quarter, gradually increasing. It's almost like a V. We went down rapidly in April and started coming up in May and June and now quite robustly in July. We remain cautiously optimistic about the immediate future. Obviously, if the trends continue, we're going to be fine. We actually expect to have a good second half. But of course, the spread of the virus could impact that, although we doubt it will lead to closures the way we saw early on in the pandemic, as I think both the medical and dental professions have grown accustomed to working in this environment and have put in very good procedures to deal with patient visits. Of course, we're closely monitoring cases and potential impact on customers' activity and with an eye to focusing on cash management as I expect our investors would want us to do. So our enthusiasm for both our near- and long-term business prospects remains unchanged. The team is in high spirits, having worked very, very hard. It's been a very stressful time for every single Team Schein member as it is for the public in general. But I think we gave our customers a good service capability during this period. Of course, there were times when the V went down and emerged very rapidly and put stresses on our systems. We were, I believe, the telephone address for every single healthcare practitioner in our space seeking PPE, whether they were Schein customers or not. So tons and tons of telephone calls and e-exchanges, but we got through it and are experiencing a good July and beginning of August. So with that in mind, Steve and I would be very pleased to take any questions.

I guess the sales decline in consumables versus equipment was pretty comparable in both North America and international. So I guess going forward, do you expect more of a dispersion maybe in the sales trends between the two categories where consumables could be more resilient, and maybe equipment could lag a little bit if it's more economically sensitive? Or does that equipment lag maybe seem less likely now just given those current trends?

That's an excellent question, and it's something we regularly consider. We believe that consumables are largely influenced by customer visits, and we see strength in that market. Practices are purchasing products because they are seeing patients. While personal protective equipment is important, it doesn't make up a significant portion of practitioners' total purchases compared to the past. Practices are increasingly recognizing the importance of investing in their operations. They want to demonstrate that they are using modern equipment, particularly in infection control, ensuring that their chairs, imaging equipment, and CAD/CAM are the latest available with the best infection control measures. We are optimistic about the dental sector regarding both consumables and equipment. However, it's challenging to predict the exact direction of the market. July showed strong performance across the board, though each market has unique dynamics. Certain parts of Europe, like Germany, returned to normalcy much sooner, as did China. Additionally, there's a growing segment in infection control equipment that may not be significantly material but will contribute positively, and we possess strong expertise and product access in that area. Therefore, we remain hopeful about both consumables and equipment in dental, as well as in the medical sector, where demand for testing equipment is increasing. We have solid manufacturers providing us with products. Initially, most of this equipment went to the government, but now it's becoming available to the private sector, and our channels are capturing a decent share of that market. Overall, we are optimistic regarding the future of our business in both consumables and equipment, despite the inherent unpredictability.

I have two quick questions. First, regarding PPE, you mentioned some unique challenges related to supply direction. I appreciate your insights on PPE demand growth and mix for the quarter. Could you provide an estimate of the potential growth in that category for the second quarter if you had all the desired supply of PPE? Second, I'd like to know about your involvement in vaccine distribution. Could you remind us of your role in this area and the extent of your visibility regarding your responsibilities in distributing the COVID-19 vaccine once it becomes available?

Those are two very important questions. I'll start with the question about vaccines, which has a shorter answer. It's still early, but we expect to be involved in the distribution of COVID-19 vaccines once they are approved by the FDA. It's important to note that our medical business operates within the pharmaceutical distribution and vaccine injectable sector in the United States, while our business abroad is relatively small outside of pharmaceuticals. The products will be available through the FDA's provisions and the CDC's guidelines. We have a strong history of participating in public-private partnerships that tackle complex healthcare safety issues. Together with corporations, government, and other entities, including NGOs, we can effectively utilize our resources and infrastructure to distribute these products. Henry Schein is recognized as a significant player in public-private partnerships, and we hope to continue our involvement in this area. We have been a strong contributor to the FEMA task force, which has performed admirably in recent months. Our role will be acknowledged when these products are available through standard distribution channels, especially as one of the largest suppliers of vaccines to office-based practitioners. I expect we will have a significant role in that area. Regarding PPE availability, the main challenge at the start of the crisis was that N95 masks were not commonly used in dental and medical offices, where flat surgical masks were standard. We advocated for the recognition of dentists and alternate care sites within the supply chain, emphasizing their importance in preventing hospital visits. While we faced challenges in April and early May, we eventually gained access to more products and were encouraged by FEMA to shift focus towards medical channels. Throughout the quarter, we secured a greater supply of respiratory masks, including N95s and KN95s, playing a crucial role in meeting demand. However, we never fully satisfied all customer needs due to a highly unstable market, as both U.S. and European regulatory products were in short supply. Emergency provisions had been implemented, leading to fluctuating regulations. We navigated these challenges and consistently distributed compliant products, despite some providers failing to do so. We championed the needs of dentists and alternate care sites throughout this process. While it was a tough period, we've learned a lot, and suppliers now recognize the need to meet our demands. Governments are also becoming more aware of the importance of dental and alternate care providers. Currently, our situation is better, though not perfect. We are collaborating with governments, manufacturers, and logistics providers worldwide to ensure rapid availability of these products, and we believe we are in a reasonably good position today.

Stanley, I'd like to clarify something. Did you say that global dental sales were up by mid-single digits year-over-year in July, or was that just a specific merchandise number? I'm unsure if that includes equipment. Additionally, can you explain the difference in your July numbers being up mid-single digits while the ADA has been approximately 70% of pre-COVID levels? Is it mainly due to your PPE exposure, inventory rebuilding at practices, or international factors? What are the reasons for your acceleration compared to the ADA figures? I also have a shorter follow-up.

Yes. Steven, maybe you should just address the specifics on dental sales increase in July, breaking it down between domestic or North America, as we call it, and international and also between consumables and equipment.

Sure. So the mid-single-digit growth in July was for global dental sales. It included consumables and equipment. The consumables were stronger than the equipment, both domestically and internationally. But overall, a very strong number. I would though point out that you shouldn't take that as guidance for the quarter since we're not giving guidance. And as you know, there are times when sales are lumpy on the positive and on the negative side, but it is a good trend. And we do feel very optimistic that we're continuing to see an improvement in the market.

In the U.S., the recovery has been quite strong in July. While this doesn't indicate future performance, U.S. merchandise sales are seeing growth in the high single digits, even outpacing Canada. July has shown solid consumable sales, although it's uncertain how the rest of the quarter will unfold, although initial days of August have also appeared strong. Regarding why people are visiting the dentist more, it's likely due to dentists working longer hours and some pent-up demand; many patients hadn't seen a dentist for nearly 2.5 to 3 months. In certain parts of Europe, particularly Germany, which has remained open, the situation is improving, though it’s not at full capacity. However, it’s worth noting that China has been fully operational for most of the quarter. Overall, we are performing better than our expectations, and we are excited because we anticipated a more severe downturn. While we cannot provide specifics, our situation generally aligns with the ADA's perspective in the U.S.

Maybe just two quick follow-ups to questions that have been asked. Regarding Jon's question about the 70%, I think what we're trying to understand is whether the July results suggest that there were some catch-up sales that might have been one-time occurrences, and that they may not accurately reflect the ongoing run rate.

There must have been some catch-up. People weren't visiting the dentist for about 2.5 months in the U.S., so there likely needs to be some catch-up there. That said, I think the PPE was quite strong in June and remains strong in July. Practitioners bought a lot of PPE in June and continue to purchase it in July. So yes, there must be some catch-up involved. It’s hard to determine the exact number. However, we're currently selling both PPE products and traditional consumables in decent quantities, making it difficult to pinpoint the specifics. Overall, it looks pretty good. I can’t imagine the market is significantly growing, so a growth rate of 5-plus percent to 10%, particularly 9% in dental consumables, is relatively high. Part of that increase likely stems from catch-up. We're essentially guessing how to divide normal servicing of consumables for practices from how much is catching up on backlog, and how much is additional PPE that will now be part of the regular purchasing routine for dentists.

Stanley, could you provide some insight into the current status of dental offices now that most are open? Based on your conversations with customers, what is your perspective on what full capacity may look like with social distancing measures in place? Does the 70% figure reflect full capacity, or could it be closer to 80% or 90% given the limitations they are facing? I understand they are also working longer hours, but we are trying to evaluate what full capacity really means for dentists in the present pre-vaccine situation.

Yes, that's a question we spend a lot of time trying to get right. Dentists are currently less efficient as they adapt to this environment, but I believe efficiency will improve, and the dental hygiene aspect will also see significant growth. Hygiene hasn't recovered as quickly as the rest of dentistry. Some dentists are performing limited hygiene work because patients are primarily focused on necessary procedures, asking them to address their hygiene needs as well. However, I am confident that hygiene services will also rebound, leading to increased capacity with dentists and allowing more procedures to be transferred to hygienists. Overall, I expect capacity to grow, though it's difficult to quantify how much. The debate about whether there is excess capacity in the U.S. exists, with some arguing we were near capacity while others suggest there was excess. Certainly, some regions have excess capacity. Nevertheless, I believe efficiency will improve. Evidence from countries like Germany suggests that capacity hasn’t significantly decreased. With additional months of experience, I think dentists will become more efficient. This isn't based on any empirical research; it's more of an intuitive response based on feedback from our customers through discussions with our sales team. I believe we will see substantial capacity increases in the coming months.

You mentioned this briefly, but I want to clarify the trends in dental equipment. Were you indicating that the equipment demand in the second quarter was largely driven by pre-COVID orders being fulfilled? Were practices using their downtime to upgrade to more advanced equipment? Also, do you have any insight into how practices are financing these purchases, considering the cash flow challenges many faced in the quarter?

Yes. Everything you said is in the mix how to get the exact numbers, the weighting. But I think there were some orders that were placed, of course, in the first quarter that we filled in the second. But I will also say that in April, we did not install a lot of equipment for two reasons. One, customers asked us to hold back because they don't know where the cash flow is coming from. And at the same time, we were limiting the number of our technicians in the field. At the same time, I think government stimulation dollars, both in the United States and in other parts of the world, did help. But I think towards the end of the second quarter perhaps, June-ish, perhaps a week or two of May, dentists started realizing that they wanted to invest. They had time to look at the equipment. A lot of this equipment can now be examined and understood digitally. They had time to do that. And I think that resulted in some buying, all towards making the practice more efficient, more infection control-driven, so it's all of the above. Hard to tell, but CAD/CAM was down quite a bit in the quarter, in the second quarter. And I think that is moving up now. And fewer visits to the dentists, more efficient. I think it's also something dentists want to show their patients. So digitally, a mold crown is something of more greater interest, I think, to the practitioner today. All of this is adding up and leading towards, at least at this time, solid demand for equipment.

That's very helpful. I know you're not providing formal guidance at this time. As we consider the ongoing recovery, there have been many questions in July. If we think about some of these patients returning for routine appointments, as you mentioned, they may not come back for hygiene appointments until the first quarter. So, we might want to avoid modeling an entirely linear demand recovery, especially since there could be a decrease in the fourth quarter. Is it too early to make that assessment?

Yes. Steven?

Yes. I think, again, it's too soon to say. I think the tone that we're trying to say is, A, things are much better than we thought they would be 3 months ago; B, we're still seeing a progression and improvement in dental and medical practices; and C, right now, in the states in the U.S. that are showing an increased infection rate for COVID, we're not seeing any significant falloff in patient demand. But to really be more specific than that now, Elizabeth, I don't think really makes sense.

I think a lot of focus here, we're all trying to figure out the sustainability of the July number. And I know and appreciate you don't want to give guidance. But Stanley, as I think about some of the comments you've made, the U.K. is lagging in recovery. We know some financing promotions and some CAD/CAM trade-in promotions just have started up in the last couple of weeks through you and some of your manufacturing partners. And I think of some of these catalysts that it feels like we have to respect the backlog issue and think about how much that helping in July, but there's also some further improvements on to come here. So we'd just like to kind of hear your thoughts on the puts and takes of how we take that July number and think about the next 3 to 6 months or so?

Yes. Thank you, Jeff. The same question, of course, we're trying to answer. And the market feels relatively strong compared to certainly where we thought it was heading. And even the last few weeks, it feels pretty good. Beyond that, I'm not sure what else we could say. Maybe, Steven, you can turn that thought into a more numerical...

Yes. Again, we don't really want to provide that level of specifics in the second half. We quoted the July number not as a trend that we expect to continue. I don't think we expect consumables to be up mid to high single digits in North America right now, but it's a positive trend. And again, there's too much uncertainty in the market to give more specifics, Jeff. So sorry about that.

So thank you, everybody. Thank you, Steven. Thank you, everybody, for your interest. I think you can tell from our prepared remarks and the way we've responded to the questions that we feel a deep sigh of relief that our expectations turned out better than we thought. The V did not go down as far, and the coming up was much more rapid. Of course, we're not through the virus yet. But I think practitioners on the dental side are much better equipped to handle these challenges. From our point of view, more PPE available, high-quality and regulatory-approved. And there is certain infection control equipment that we are making available. That should also allow for the public to be much more comfortable going to the dentist. Our medical position in the business has been well positioned also before COVID and especially now during the COVID period. And so we remain quite comfortable with our short-term plans and midterm plans and quite optimistic about the future of the company as we go back to implementing our long-term strategies. So thank you for your interest, and we look forward to reporting back to you in 3 months. Thank you very much.