Henry Schein Inc (HSIC) — Q1 2021 Earnings Call Transcript

Thank you, Regina, and my thanks to each of you for joining us to discuss Henry Schein’s results for the 2021 first quarter. With me on the call today are Stanley Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein; and Steven Paladino, Executive Vice President and Chief Financial Officer. Before we begin, I would like to state that certain comments made during this call will include information that is forward-looking. As you know, risks and uncertainties involved in the company’s business may affect the matters referred to in forward-looking statements. As a result, the company’s performance may materially differ from those expressed in or indicated by such forward-looking 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, including the Risk Factors section of those filings. In addition, all comments about the markets we serve, including end market growth rates and market share, are based upon the company’s internal analysis and estimates. Our conference call remarks will include both GAAP and non-GAAP financial results. We believe the non-GAAP financial measures provide investors with useful supplemental information 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 can be found in the Supplemental Information section of our Investor Relations website and in Exhibit B of today’s press release, which is available in the IR section of our website. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, May 4, 2021. Henry Schein undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Please limit yourself to a single question and a follow-up during Q&A, to allow as many listeners as possible to ask a question within the one hour we have allotted for this call. With that, I would like to turn the call over to Stanley Bergman.

Thank you, Carolynne. Good morning, everyone. I appreciate everyone calling in today. We’re obviously very pleased with what we view as an exceptional first quarter for our global financial performance for the year 2021 versus the comparable period last year, but also versus the first quarter of 2019. These good results are based on excellent planning and execution across all of our businesses. Our team really came through for our customers, for our investors, and for our suppliers during 2020 and now the first quarter of 2021. We also delivered very strong operating margins for the quarter. While end markets in most geographies still face challenges due to the ongoing pandemic, the overall global market recovery and our improving results have continued. Our positive momentum reflects the adaptiveness of our business model and, as I noted, a deep commitment from our Team Schein members across the board to our customers and, in fact, the communities that we serve. Throughout these unprecedented times, Henry Schein has remained focused on the safety of our team above all and responding to our customers’ needs, which were extremely varied across the world and fluctuated as dynamics changed in an extremely dynamic environment. We continued to drive innovation across the platform. We gained market share, enhancing our margin, and focused on optimizing our cost structure as we have for many years. We believe all this positions us well to continue to drive earnings growth and create value over the long run. Our steady approach, which we’ve employed for decades, remains intact with very good momentum. In line with improving end market conditions, in the fourth quarter of 2020, we resumed acquisition activity. We have a lot of activity going on. Of course, no deal is completed until it’s actually signed and inked and will then be reported on. In the first quarter of 2021, we closed five acquisitions across our Dental, Medical, Technology and Value-Added Services businesses, with aggregate sales of nearly $140 million, reflecting our commitment to a balanced strategy that supplements solid organic growth with acquisitions. In addition, during the first quarter, we resumed share repurchases. The bottom line is that our solid cash flow enables us to invest in our business, reflecting our goal to continue to deliver an attractive return on capital. I will remind shareholders that we’re into our 26th year as a public company, reflecting compounded annual growth of 12% on a non-GAAP basis and an increase in stock price of a similar number over this period. Now returning to the current moment. The latest survey data published by the American Dental Association for the U.S. shows that dental practices are approximately 87% of pre-COVID-19 patient volume, a point that continues to improve, and we are experiencing improvements throughout the system, specifically in the U.S. The ADA remains optimistic about the outlook for the dental profession in the months ahead as vaccinations likely hit a tipping point. The ADA also recently issued a report partnering with Back to Normal Barometer to gain insights on customer sentiments related to dentistry. The survey found that a vast majority of patients who have not already visited dentists this past year are ready to return. As you know, we also closely monitor Henry Schein U.S. Dental eClaims data as a directional indicator. We have a considerable amount of market share of those claims processed. This data continues to show that patients are returning to practices for a broad set of oral care procedures, including hygiene. In addition, our medical customers have been resilient throughout this pandemic, and we are committed to helping our practitioners, both dental and medical, ensure patients can safely return to routine care, as well as elective and nonelective procedures. As COVID-19 cases decline and more people are vaccinated, we expect to see traffic to physician offices and ambulatory surgery centers normalize, although I must stress that we’re not back to where we were with elective ambulatory surgical procedures. There’s a lot published on this. The normal rate of vaccinations by our practitioners is somewhat down since the volume of patient visits, including pediatric visits, is down. But it’s slowly catching up to the 2019 volumes. Henry Schein has been deeply involved in efforts to promote more effective participation of primary care physicians and other office-based practitioners, including dentists in many states, who are allowed to administer the vaccination, and we are committed to driving vaccination rates nationwide with a particular focus on office-based practitioners. While many states provide these practitioners with access to the vaccine, it is extremely difficult and a complex process for office-based practitioners to receive an allotment of these vaccines. Currently, only about one-third of primary care physicians are able to offer the vaccine to their patients across the nation. COVID-19 vaccination efforts to get shots in the arms of U.S. citizens have been quite extraordinary thus far. However, we also recognize that the country is now in a race against the variants. We continue to see equity challenges in the uptake of the vaccine, and there continues to be a high rate of vaccine hesitancy in some areas of the country. We also recognize that the nation will need to prepare for the delivery of booster vaccines and pediatric vaccinations. Henry Schein has been working closely with the U.S. Department of Health and Human Services, FEMA, CDC, and state and local authorities, urging them to more effectively include primary care physicians and other office-based practitioners, including dentists, using the existing and well-established distribution network to deliver vaccines. Recently, we submitted a letter to the U.S. House Select Committee on the coronavirus crisis. We firmly believe that primary care physicians are a vital resource in the COVID vaccination effort due to the high level of trust they enjoy amongst patients, their understanding of patients’ health history and personal circumstances, and their physical presence in every community around the country. The vast network of physicians and dentists in the U.S. can be activated literally overnight, effectively advocating for vaccinations for Americans through their practices. This is critical at this moment in the country’s vaccination efforts to help overcome hesitancy, address at-risk populations, reduce health inequities, and ultimately ensure more patients are vaccinated. At the same time, more must be done to help other countries that face shortages of these critical vaccines, as equitable global access is crucial to ending the pandemic and ensuring the safety of the world’s population, including Americans. Through our work with the World Economic Forum and our partnership with the Pandemic Supply Chain Network, Henry Schein has been supporting COVAX, the international entity led by CEPI, Gavi, and the World Health Organization and UNICEF to accelerate access to the COVID vaccine in low and middle-income countries around the world. So the business is in good shape. We continue to have solid momentum. We’ve been reporting our results throughout this period in a little bit more detail than in the past and continue to be very optimistic about the direction of the pandemic at the moment, although there are setbacks in countries like India. We remain well-positioned to help combat the pandemic and, at the same time, increase shareholder value. With that, I’ll hand the call over to Steven to discuss our quarterly financial performance, and I’ll provide some additional commentary on current business conditions and our markets. Steven, please.

Thank you, Stanley, and good morning to everyone. 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 Q1 2021 and Q1 2020 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 Q1 that represents prior year sales to Covetrus under the transitional services agreement, which concluded in the fourth quarter of 2020. Turning now to our financial results. Total net sales for the quarter ended March 27, 2021, were $2.9 billion, reflecting growth of 20.4% compared with the prior period. Internally generated sales were up 14.9% in local currencies. You can find details of our sales performance contained in Exhibit A of our earnings press release. On a GAAP basis, our operating margin for the first quarter of 2021 was 7.9%, representing an increase of 70 basis points compared with the prior year. On a non-GAAP basis, our operating margin was 8.4%, which was an increase of 104 basis points on a year-over-year basis. It’s important to note that we’re very pleased with our non-GAAP operating margin performance, which was the highest quarterly margin that we’ve achieved in the last five years. 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. Turning to taxes. Our reported effective tax rate on a GAAP basis for the first quarter of 2021 was 25.1%. This compares to a 22.4% GAAP effective tax rate for the first quarter of 2020. On a non-GAAP basis, our effective tax rate was also 25.1% and compares to the prior year of 22.5%. A reconciliation of GAAP effective tax rate to non-GAAP effective tax rate is again included in the Supplemental Information page on the Investor Relations site of our website. We expect the effective tax rate to continue to be in the 25% range, both on a GAAP and non-GAAP basis, for the remainder of the year. Of course, this assumes no significant changes in tax legislation. Moving on, our GAAP net income from continuing operations attributable to Henry Schein for the first quarter of 2021 was $166.0 million or $1.16 per diluted share. This compares with the prior year GAAP net income from continuing operations of $130.5 million or $0.91 per diluted share. Non-GAAP net income from continuing operations for the first quarter of 2021 was $177.7 million or $1.24 per diluted share, and this compares with the same non-GAAP net income from continuing operations in the first quarter of 2020 of $134.1 million or $0.94 per diluted share. To provide a little bit more detail, amortization from acquired intangible assets for Q1 2021 was $29.7 million pretax or approximately $0.13 per diluted share. This is up slightly from $26.8 million or the same $0.13 per diluted share in the same period last year. Foreign currency exchange favorably impacted our Q1 ‘21 diluted EPS by approximately $0.02 per share. Let me now provide some detail on the sales results for the quarter, starting with global dental. Our global dental sales of $1.8 billion grew 21.3% compared with the same period last year, with internal sales growth of 13.7% in local currencies. Our global dental consumable merchandise internal sales increased by 13.2% in local currencies in the first quarter, and if you were to exclude PPE and COVID-19-related products, the sales increase was 10.9%. We experienced very solid dental consumable merchandise sales growth in the U.S., Canada, Australia, New Zealand, Brazil, Asia, and throughout most of Europe. In Europe, we saw a particular strength in France, the Netherlands, Belgium, Italy, and to a lesser extent, Germany. However, the U.K. continued to experience lower sales as that country is just recently easing lockdown measures. In North America, the dental internal sales growth in local currencies was 10.9% and included 9.3% in dental consumable merchandise or 6.9% when excluding PPE and COVID-19 related products. Our North American dental equipment sales internal growth in local currencies was 17.4% and was driven by 31.6% internal sales growth in local currencies for high-tech equipment, along with strong growth in traditional equipment, which was 10.6%. Our international dental sales growth in local currencies was 17.9% and included 19.2% growth in dental consumable merchandise, which is 16.7% growth when excluding PPE and COVID-related products. International dental equipment internal sales growth in local currencies was 12.9% in Q1 and was driven by strength in France, Italy, Austria, as well as Australia, New Zealand, the Netherlands, and Brazil. We experienced 14.8% internal sales growth in local currencies in traditional equipment in the international market, and high-tech equipment grew 10.3%. Our global dental specialty revenue in the first quarter totaled $222 million and had internal growth of 18.3% in local currencies versus the prior year. The growth was split between North America, which was up 19.3%, and internationally, up 15.7%. So very strong growth across the globe. Global Medical sales during Q1 were $993 million, which grew 24% compared to the same period last year, including internal sales growth of 22.1% in local currencies. That 22.1% includes a 22.4% increase in North America and 12.6% internationally. Our Medical sales results were driven by strong demand for PPE and COVID-related products. Excluding sales of these products, Global Medical internal sales in local currencies was down 6.8%. This was, in part, a result of an extremely mild influenza season that impacted both diagnostics and consumable merchandise sales as well as lower pharmaceutical sales related to fewer patient office visits due to COVID-19. We sold over $180 million of COVID-19 test kits in Q1, including some multi-assay flu and COVID-19 combination tests. This compares with approximately $270 million in test kits in the fourth quarter. That said, we expect COVID-19 test kits to decline somewhat, primarily due to unit price erosion. Turning to Technology and Value-Added Service. Sales during Q1 were $143 million, an increase of 8.4% compared with the prior year, including internal growth in local currencies of 3.6%. In North America, the internal sales growth was 4%, driven by the Henry Schein One business as well as strong financial services revenue, which benefited from double-digit equipment sales growth. Internationally, Technology and Value-Added Service internal sales grew 1.1% compared with the prior year. Again, the prolonged lockdown in the U.K. impacted our international business again this quarter. As Stanley mentioned earlier, we resumed our share repurchases in Q1 and purchased approximately 1.3 million shares of common stock at an average price of $66.90 for a total of $88.7 million. The impact of this repurchase program on the first quarter EPS was immaterial. At the end of the first quarter, Henry Schein had $112.6 million authorized and available for future repurchases of common stock. Moving on to our balance sheet and cash flow. We have access to significant liquidity to provide flexibility and financial stability. Our operating cash flow from continuing operations for the first quarter was $63.3 million. That compares to $78.8 million in the first quarter of last year. This modest year-over-year decrease was primarily due to higher working capital requirements, partially offset by increased net income. As part of our previously disclosed restructuring initiative, we recorded a pretax charge in Q1 of $2.9 million or $0.02 per diluted share. This charge related primarily to severance pay and facility closing costs and reflects opportunities to continue to reduce expenses and drive operating efficiencies and mitigate stranded costs. Let me now conclude my remarks by updating our 2021 non-GAAP diluted EPS guidance. At this time, we are not providing GAAP diluted EPS guidance, as we are unable to provide an accurate estimate of expenses related to the restructuring that I just mentioned. We are raising the guidance for 2021 non-GAAP diluted EPS from continuing operations attributable to Henry Schein. We now expect a floor, and it’s important to note that it’s a floor, of $3.70, which compares to the previous floor of $3.51. Remember, this is not traditional guidance where we typically provide a range. This is effectively the low end of the range, and we hope to continue to update guidance as the year progresses. Keep in mind that our guidance for 2021, non-GAAP diluted EPS attributable to Henry Schein is for continuing operations as well as completed or previously announced acquisitions, but does not include the impact of share repurchases, potential future acquisitions, if any, or restructuring expenses. Guidance also assumes that foreign exchange rates are generally consistent with current levels and that the end markets remain stable and are consistent with current market conditions, and of course, it does not assume any material adverse market conditions related to the COVID-19 pandemic. So with that, I’d like to turn the call back over to Stanley.

Thank you, Steven. Last quarter, we discussed our One Schein initiative, which is a unified go-to-market approach that enables practitioners to work synergistically with Henry Schein’s medical and dental supply chain, equipment sales and service, specialty businesses, Henry Schein One, and other value-added services. This allows our customers to leverage the combined value that we offer through a unique approach to managing customer engagement. Given our position as a large-scale distributor to both dental and medical practitioners, we are uniquely positioned to deliver value to our large customers by leveraging best practices in customer engagement and support while realizing internal synergies across our distribution businesses through common functions, processes, and systems. We refer to these activities internally as One Schein. We also have One Distribution, which focuses on our internal infrastructure to provide customers with a unique experience. The benefits for our customers that purchase broadly across both dental and medical product categories, such as dental service organizations (DSOs), integrated delivery networks (IDNs), large group practices, government community health centers, and other enterprise organizations, include a more streamlined interface for formulary construction, RFP management, contract compliance, analytics, and commission processing. For example, a large DSO customer will benefit from our expertise addressing challenges that we have already solved for the medical customers, such as onboarding new practices, promoting formulary compliance, rebate negotiations, and efficient order processing. DSOs benefit from our capability to deliver a specialty offering like implants, bone regeneration products, orthodontics, and endodontics, all in combination with our distribution platform. This applies to Henry Schein One software solutions, which can be combined with the distribution offering, consumables, equipment, and specialty products, providing customers with a unique experience through One Schein and efficiencies internally through One Distribution. We believe several of our recent DSO wins were attributable to the unique value proposition offered by our One Schein strategy. Now let’s spend a few minutes on the distribution side, specifically focusing on our Dental distribution. Our first quarter Dental performance experienced strong sales growth in both North America and international markets, including significant growth in North American dental equipment sales versus the fourth quarter of 2020. We experienced broad-based sales growth in both North America and international dental consumable merchandise as the dental end markets continue to improve. Now, let’s take a brief look at our specialty businesses. Our global dental specialties generated double-digit year-over-year sales growth as we further penetrated these key specialty markets, both domestically and internationally. Our implants and oral surgery business, which is the largest of these three business units, experienced solid double-digit growth in the first quarter with significant contributions from BioHorizons and CAMLOG from their implant lines. Sales growth in the U.S. was driven by new product introductions, growth with DSO customers, and by a digital CAD/CAM-related solution for implant procedures. New product launches include our progressive implant line across Europe, Canada, and recently in the U.S., as well as our Tapered Pro implant and NovoMatrix reconstruction tissue solutions. On the endodontic side, we saw strength driven by the DSO customer segment, as well as the launch of several nickel titanium products across the endo platform. In the orthodontic market, we continued to see steady improvement in both orthodontic case volume and revenue, as dental practice patient volumes have improved. While our Reveal and SLX Clear Aligner business currently represents a small portion of total dental sales, we believe this business will contribute meaningfully to growth over the long term. We have expanded to offer Reveal in over 20 international markets, including recent launches in France and Poland, with plans to launch in several additional markets this year, including Ireland, Italy, and Spain. Importantly, we continued to invest in advancing our orthodontic treatment software, including scanner integration that streamlines case submissions, clinical reviews, and treatment tracking. We continue to invest further in innovation as we develop enhanced treatment solutions for these markets, and we expect patient volume across our Dental business to continue to improve over time as infection rates decline. So now, let’s focus on Henry Schein One, highlighted within our Technology and Value-Added Services business. Henry Schein One sales continued to improve towards prepandemic levels, and our investment in R&D continues to make good progress in our Henry Schein One business. In Q1 2021, we introduced several new products, including Dentrix imaging software, tools for processing insurance remittances and calculating payment adjustments, marketing campaign enhancements for the Lighthouse 360 platform, and an online booking feature for our Sesame orthodontic business. Importantly, we are closely aligning our Henry Schein One and Henry Schein Dental teams through our One Schein program, bringing together Henry Schein One and Henry Schein Dental teams to promote bundled solutions aimed at improving customer experience, retention, and most importantly, practice efficiency, primarily through digital integration. Regarding the Medical distribution business, we were pleased with the strong double-digit sales growth in Q1, driven by PPE and COVID-19 test sales. Similar to the dental end markets, we expect that the physician, ambulatory surgical center, and alternate care home health markets will improve as infection levels decline and patient volumes normalize. We also focus on workplace health and sports medicine in the U.S., which is vital as employers consider cost-effective means for employee wellness. Our plans offer employers diagnostic testing support, PPE, and return-to-work consultation. Overall, our solutions portfolio remains a focus beyond traditional medical supplies, including a comprehensive telemarketing platform in the medical arena, a cybersecurity solution for healthcare that we offer to physicians and medical practices, and a digital diabetes care initiative. While PPE sales have begun to moderate from recent growth levels in both Dental and Medical, we anticipate that PPE sales will remain at elevated levels as dentists and physicians implement new standards of care and best practices related to infection control. We expect the demand for PPE products to continue, although there may be pricing deflation in several areas. However, the units sold will remain relatively strong. So now, operator, if there are any questions, we can handle them. Thank you.

Can you hear me okay?

Yes, Jeff. Go ahead.

Great. So I wanted to start first on your operating margin. Obviously, the 8% operating margin was a big improvement sequentially, but also relative to 1Q, both last year and even relative to 2019’s 1Q. Steve, when I look at kind of your floor guidance, and I understand it’s a floor, but it seems to imply operating margin maybe falling back down to the low 7s, maybe even a little bit below 7% over the balance of this year. Just, one, help us understand the drivers of the 1Q improvement and then how to think maybe sequentially the next few quarters on the operating margin line?

Yes, Jeff, thanks for the question. We had an extraordinary quarter in sales, and that drove the operating margin. We continued to look at driving expenses down, but we’re not giving specific guidance on margins. But I think it’s important to note, this is a 5-year high, this operating margin of 8.40%. I think it will moderate, but we’re not going to give specifics at this time on that. We’re continuing to look at reducing expenses. Some expenses will come back later in the year, like travel and conventions, but we’re still pleased and still believe we have a significant opportunity to continue to expand operating margins annually.

Fair enough. And maybe just as a quick follow-up. When I look at your Dental business, Steve or Stan, and look at relative to 2019 and try to exclude the PPE, it looks to me like your core dental revenues ex that PPE and COVID testing are probably up about 6% to 8% relative to 1Q ‘19. So are we sustainably back to core dental being above 2019 levels? Was there something in 1Q that might be a little bit of a head fake there? Just how to think about the next few quarters, again, knowing that you’re not guiding on revenue either? Are we sustainably above kind of the ‘19 levels of core dental?

Yes. First, Jeff, your estimate on growth is pretty accurate over 2019. I think there are a couple of things that will reduce sales growth a little bit. Stanley mentioned PPE prices moderating, including COVID test kits. But we still feel that we’ll have solid growth over 2019 because the market is continuing to improve, with patient traffic in the U.S. currently at 87%. Hopefully, that will continue to climb.

Thank you, Steven. Let me just add something from a macro point of view, Jeff. We feel good about the global dental market, which has bounced back particularly strong in some of the specialty areas, at least in our business. The only caution I have is that we’re in the midst of a pandemic. The pandemic is not finished. We saw what’s going on in India and a number of other parts of the world. This could all come back. So I don’t want to cloud the dental industry or our performance. Assuming things continue, and there are no major setbacks because of COVID, I remain extremely optimistic about the dental markets. There is a growing understanding amongst payers that there’s a direct correlation between good oral care and good healthcare. I expect that governments around the world will recognize this, resulting in greater reimbursement for dentistry. I can’t say it’s going to be next quarter, but I think we can be relatively bullish about the dental market with one big footnote: no one knows where this virus is going. That’s the basis under which Steven gave guidance at a floor, and we just can’t provide guidance on the upside because we just don’t know where this virus is going to take us. The virus will, at some point, be over though.

My first question would be on the implant market. It seems like you guys have noticed an uptick as we’re coming out of the pandemic. Is that sort of just a reflection of the return of volumes? Or do you see any kind of increasing competitive sources in the implant industry broadly, both maybe if you could comment on this in terms of specific geographies or products?

I would say, in general, the implant markets have been pretty steady across the world. Our strength is in the U.S., Canada, and Germany. Of course, we’re active in several other countries, including Japan and some business in China. In the markets I mentioned where we are strong, the markets are pretty good. However, we have been quite productive in those markets. We’ve gained market share, and this has been going on for quite a few years. So our performance is strong relative to the market. I think this may relate to Henry Schein’s uniqueness in those markets. Overall, one can say that the implant markets are performing well, and there is a focus on more expensive dentistry right now.

Got it. That’s helpful. And can you talk about specifically some of your expectations throughout the year for the Medical business, particularly around flu in the fourth quarter? Additionally, are there any changes to COVID vaccines?

On the Medical side, our Medical business has performed well for several years in the base business, which consists of consumables, generally pharmaceuticals and equipment. There are various market or public health dependent variables. The first is vaccinations, not just the COVID vaccine. I'm talking about standard vaccinations. The rates of visits to physician offices for these traditional vaccinations have decreased. I expect that as COVID rates decline, more people will visit the doctor’s office for their traditional vaccines, resulting in growth in that area. Second relates to the flu, where we shipped our traditional flu vaccines early in the cycle in 2020. Unless something appears in the press suggesting against traditional flu vaccines, I expect that we will continue in the 2021-2022 flu vaccine period. Then there’s the flu test. This year, the traditional flu was almost nonexistent, meaning we hardly sold any tests. I expect that as masks come off, there will be an increase in those tests and that we will return to similar levels as 2019 and 2018. As for COVID testing, we are focused on point-of-care rapid tests, and I think there will be continued demand for those tests, but prices have declined substantially for both PCR and antigen tests. Factoring all of that in, you may see some volatility in our Medical business while our core business remains strong, as procedures move from acute care settings into physician offices, ambulatory care centers, and ensuring confidence in patients visiting health care facilities for their vaccinations and elective surgeries.

In some recent channel checks, there’s been conjecture that over the past couple of quarters the large dental distributors are taking back market share from smaller competitors in the U.S. market, which is driven by greater expertise, demand from distributor partners, and not only buying on price but also bundling products tethered to PPE orders. It seems like U.S. dental sales are growing faster than the market. I’m curious about your thoughts on whether your market share gains are coming from smaller competitors versus other sources.

It’s difficult to provide precise information on where our sales are stemming from. However, I can make a few general statements. We believe the high-touch model is most appropriate for dentists. We provide all the online capabilities that a traditional online-only provider provides. Our prices are competitive for customers that use us primarily. Recent investment in TDSC confirms that if customers prefer to purchase only from an online supplier, it’s available. We have good software there, and we're seeing solid sales. I don’t foresee huge shifts overnight in any one sector. However, over the long run, I believe our customers will appreciate the full-service distributors like ourselves. Our DSOs are increasingly more sophisticated buyers, understanding the value of a comprehensive offering such as consumables, equipment, specialty products, and software solutions through Henry Schein One. I believe that the segment that relates to discount purchasing will remain but at similar rates.

Okay. That’s helpful. Just one follow-up question on guidance. With $1.24 posted in 1Q, you’d have to have EPS fall back down into the $0.80 to $0.85 range on average over the next three quarters for EPS to end up around that floor. I know you mentioned conservatism regarding the pandemic, but is there anything we should focus on that would cause EPS to drop sequentially in Q2 versus the trends just posted in Q1?

Well, Steven, you're correct that it’s a floor. However, it’s also important to remember that Q1 estimates were likely low based on full-year estimates. Many analysts probably factored in a significant increase for estimates in later quarters, which explains the large beat in Q1. We don’t see anything structurally changing going forward. We don’t want to provide specific guidance for Q2, Q3, and Q4, but we believe the market and the business remain strong. And it is a floor, so we hope to perform better than that.

Stanley or Steven, maybe just the first one, equipment results in Dental were big in the quarter. They could be lumpy, as you’ve mentioned in the past. However, last quarter, you hinted at a solid pipeline or backlog, and we saw that manifest in the first quarter numbers. Could you comment on how the backlog for equipment looks as you approach the second and third quarters?

Our backlog is pretty good. Of course, our customers are investing in their practices. This holds true not only in North America but internationally. At this point, our backlog is strong. Just keep in mind that the backlog represents only a portion of expected shipments in the second quarter. Parts of our equipment sales will not be reflected in the backlog; they are generated each day. But generally, our backlog has been looking solid for a few quarters now, and there is significant demand from practitioners in the US, Canada, and around the world to invest in their practices.

Got it. Great. And then maybe just as a follow-up, Steven, could you provide a bit more color on the gross margin details? I believe gross margins were over 300 basis points higher sequentially in the quarter. What do you attribute the sequential improvement to? Is it a significant move in margins on PPE, or a mix shift? Just how should we think through that and its sustainability going forward?

Yes, Jon. I think the improvements in gross margins occurred for a few reasons: one is mix; two, we had lower inventory adjustments than we had previously, which was something we discussed that we would have. We feel good about the gross margin level and where it’s at going forward.

Stan, I think you mentioned at the beginning of the call that you made five acquisitions during the quarter, assuming I heard that right. Can you elaborate on what you bought? Considering the rest of the year, are you focusing on pushing into new geographies, adding scale in existing ones, or perhaps pursuing new brands? Please help us clarify your priorities.

On the acquisitions we’ve made, they are relatively small, and we did not invest a huge amount of capital. I don’t even have all the information with me right now, but they are distributed throughout the entire platform. For the future, we will continue to invest in our distribution business worldwide, which will include geographic expansions; however, our primary focus will be on value-added services. Any investment that helps our customers operate more efficiently and provide better clinical care will be prioritized. There will also be strategic growth in specialty product businesses, including geographic expansion and increased product offerings.

That’s helpful. Then one quick follow-up: over the past year, you’ve called out supply chain disruptions and shortages. How do those stand at this point?

At this moment, we can acquire nearly everything we need. We may not have every brand in the quantities we would prefer, but generally speaking, all product ranges are available. Some manufacturers have not wholly returned to matching our orders with their shipments. However, I would say that most manufacturers have issues. Across the board, there are manufacturers that can’t ship everything we want. Nonetheless, we can source products in every category, although substitutes may be necessary, which requires additional discussions with customers. This highlights the importance of full-service distributors, who provide guidance on supply chain challenges. However, I remain concerned about the global PPE structure; it has not completely resolved. Giving subsidies to establish a factory in the U.S. doesn’t guarantee that those facilities will be operational when prices return to pre-COVID competitive levels.

I’ll ask both my questions upfront. I wanted to revisit the PPE and COVID-related revenues. I think across Dental and Medical in the first quarter was about $370 million. However, I’d imagine that coming out of the quarter, that run rate is less, given your comments around pricing. Steve, could you help us consider how much pricing has come down recently as we think about the right run rate for PPE and COVID testing over the rest of the year? Can you also remind us of the margin on those products, and how you expect margins to change as sales volumes moderate?

Sure, Nathan. Regarding PPE pricing, it varies by product category. Some categories are declining significantly, primarily due to COVID tests, while others are normalizing. However, we expect the margins for COVID and PPE products to remain similar to average margins that we have in the respective business groups. Thus, we see margins continuing, but sales prices may decline.

Thank you, operator. Thank you all for calling in. We appreciate your good questions and your interest. As we’ve been stating for a while, we are confident in our core business and in the additions we’ve made. Our foundation, focused on high-touch, full-service dental and medical services, coupled with various consumables, equipment, and pharmaceuticals that we provide, supplemented by our specialty medical and dental products and our software offerings through Henry Schein One, along with our Value-Added Services, assures us that we will continue delivering solid internal growth rates, supplemented by acquisitions that will drive sales, operating margin, and EPS. We are committed, as Steven mentioned, to buy back stock moderately, which we have done for many years, as it is an effective way to return capital to our shareholders in a tax-advantaged manner. Team morale is high, and I believe our management team across our businesses is exceptional. Thank you for your interest, and we will have meetings with investors in the coming days and weeks, where we would be glad to answer further questions. Thank you very much.