Henry Schein Inc (HSIC) — Q2 2022 Earnings Call Transcript

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 2022. With me on the call today are Stanley Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein; and Ron South, Senior Vice President and Chief Financial Officer. Before we begin, I'd like to state that certain comments made during this call will include information that'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 differ from those expressed in or indicated by such statements. These forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's filings with the Securities and Exchange Commission and included in the Risk Factors section of those filings. In addition, all comments about the markets we serve, including end market growth rates and market share, are based upon the company's internal analysis and estimates. Our conference call remarks will include both GAAP and non-GAAP financial results. We believe the non-GAAP financial measures provide investors with useful supplemental information 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 certainly 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 also available in the Investor Relations section of our website. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, August 2, 2022. 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, this quarter, we have also prepared a presentation summarizing our second quarter financial results. This can also be found in the Investor Relations section of our website. Please limit yourself to a single question and a follow-up during Q&A. And with that, I'd like to turn the call over to Stanley Bergman.

Thank you, Graham. Good morning, everyone, and thank you for joining us. Today, we are excited to share our record second quarter financial results, which demonstrate strong underlying momentum in our business and effective execution of our strategies. Sales were notably robust in our technology and Value-Added Services businesses, as well as in our Medical sector. Although we faced some short-term challenges this quarter due to COVID infection rates and other factors, our solid operational execution and results highlight the inherent strength of our business. In June, we observed COVID-19 rates contributing to a decrease in patient traffic, particularly affecting our dental business. We anticipate that patient traffic will improve as infection rates decline, which varies regionally. While we are maintaining our full year EPS guidance for 2022 between $4.75 and $4.91, we are adjusting our sales growth expectations to account for factors such as a strengthening US dollar and reduced demand for COVID-19 test kits. The management team is focused on advancing our BOLD+1 strategy for 2022 to 2024, ensuring we deliver an exceptional experience to our customers, provide differentiated solutions for their success, and improve patient outcomes to achieve our financial goals. We believe long-term trends in our markets will support our objectives. In summary, Henry Schein is positioned well to deliver consistent, sustainable profit growth and create value for our shareholders, as we have done for nearly 28 years as a public company. Before discussing our business updates and growth initiatives, I want to address the macroeconomic challenges we face and how Henry Schein is strategically positioned to navigate our current dynamic environment. First, concerns regarding a possible economic downturn—Henry Schein's extensive portfolio of medical and dental products and services makes us a vital partner to healthcare providers focused on patient care and community health. Historically, our market has shown resilience during economic slowdowns. People still require services from healthcare practitioners, both medical and dental, along with alternative healthcare solutions we offer. We are actively working to minimize the impact of any potential economic slowdown on our stakeholders by enhancing efficient, cost-effective supply chain solutions and practice management services that help practitioners run more efficient practices for optimal patient care. Today, we are announcing a restructuring plan aimed at funding our strategic priorities by reallocating resources while also streamlining operations to boost efficiency. Ron will elaborate on this shortly. Second, we are engaging with our suppliers to mitigate inflationary pressures on product prices and transportation costs. In the second quarter, we estimated price inflation for non-PP&E merchandise from brand manufacturers to be around 3%, possibly slightly lower. We've managed to collaborate effectively with our manufacturers on this. The inflationary impact on equipment sales, aside from non-PP&E merchandise, was relatively minor, while prices for PPE have seen significant declines due to glove price deflation. When customers raise price concerns, our comprehensive product offerings often allow us to present lower-cost national brand solutions or corporate brand alternatives, enabling us to maintain our margins while aiding our customers in coping with inflation. Third, global supply chain pressures have been stable over the past three quarters. Our broad product portfolio gives us a competitive advantage, allowing for substitutions when certain products or brands are in short supply. We still expect supply chain challenges in traditional equipment sales to impact revenues through year-end. However, the situation appears stable and improving, as some suppliers, particularly in traditional segments, are expanding their capacity and providing better service than a few months ago, notably in fill rates. Our strong order book for equipment across all product categories continues to grow, supporting positive sales in the upcoming quarters. Fourth, Henry Schein is well-equipped to manage rising interest rates, given our low borrowing levels, which means interest expenses are minimally affected by rate changes. Most of our existing debt is on fixed rates. The primary business area impacted may be dental equipment, as these purchases are usually financed, but interest rates remain relatively low historically, and our equipment order book is solid and strengthening. Lastly, regarding labor and skill shortages, Henry Schein has always been an appealing workplace for talent. Our culture and philosophy attract talent, and we continuously assess and support our workforce while seeking out the skills we need. We believe our internal talent is stronger than ever and will play a vital role in executing our growth plans. Our strategic plan outlines how we will adapt to fundamental shifts impacting our customers. The dental and medical sectors are undergoing significant changes, and we are addressing these dynamics through our strategy. These plans include accelerating the adoption of digital technology not only within our company but also by helping our customers embrace digitalization in their practices. We offer excellent consulting services and a strong array of digital products to facilitate this transition. Yesterday, we introduced three new senior executive strategic roles aimed at enhancing our strategic plan. These new teams, led by experienced leaders, will collaborate to advance digital technology, enhance customer experience, and drive efficiency for both our customers and Henry Schein. The first is Leigh Benowitz, named Senior Vice President and Chief Global Digital Transformation Officer, who will oversee the development of our e-commerce capabilities and lead the implementation of our global e-commerce platform, GEP. Leigh has been instrumental in our progress and will guide us through the successful implementation of this platform. The second is Trinh Clark, appointed Senior Vice President and Chief Global Customer Experience Officer, responsible for developing a cohesive customer experience and brand marketing strategy globally. Trinh will implement the existing strategy and collaborate across our organization to drive a consistent experience. Finally, we have Mark Hillebrandt named Vice President and Chief Digital Revenue Officer, tasked with engaging customers online through our e-commerce platform to promote digital transactions and generate leads for our sales team. Mark has significantly improved our digital lead generation and online shopping experience, working closely with our sales force to drive results. We are also progressing in executing our one distribution strategy outlined in our plan. In May, we appointed Dirk Benson as Chief Commercial Officer of our North American Distribution Group. Dirk joined us after a successful career at Medline Industries and is responsible for enhancing customer relationships and driving efficiency for our dental and medical distribution segments in the US. Now, let's provide some insights into the performance of our business units, starting with dental distribution. Our global dental business saw impressive growth due to strong demand for equipment as dentists continue to invest in their practices. Internal sales growth in local currencies, excluding PPE and COVID-19-related products, was impacted by appointment cancellations and staff shortages linked to COVID-19 rates. A drop in PPE sales was primarily due to decreasing glove prices, which peaked in mid-2021 and are now in decline. We expect this pricing challenge to diminish in the coming quarters. Our North American Dental Equipment business continues to see strong demand across both traditional and digital restoration categories, benefiting from sales to larger DSO accounts that are consistently investing in their practices. As mentioned, our equipment order book remains solid, and international equipment sales follow similar trends. Two rapidly growing areas in digital dentistry are digital restorations and 3D printing. We believe our significant investments in these segments and strong supplier relationships will provide differentiated offerings to our customers, allowing us to continue experiencing growth. We have set a goal to expand our geographic footprint, recently announcing the acquisition of Condor Dental, which provides services to dental practitioners and laboratories in Switzerland, enhancing our presence in this market. Now, regarding dental specialty and technology value-added services, we continue to make progress toward developing complementary high-growth software and services, shifting toward higher-margin products for improved corporate profitability. We have invested in excellent assets and management teams, and our high-margin technology value-added services now represent about 40% of total sales and approximately 36% of operating income. Our dental specialty product sales performed well in the second quarter, driven by BioHorizons' oral surgery products in North America and demonstrating adoption among national DSO customers as well as smaller practices. We are excited about a new partnership between BioHorizons and Camlog for a tissue regeneration product, which we expect to launch towards the end of the third quarter. In endodontics, we have seen good growth with our recently launched EdgePRO irrigation laser, generating sales and positive customer feedback. In orthodontics, while overall sales were weaker, our Reveal Clear Aligner product has seen success, particularly in the DSO market, thanks to the launch of our Studio Pro 4.0 software. We're pleased with the strong growth in our Technology and Value-Added Services categories, with North American and International sales rising by double digits. Demand for our Dentrix Ascend and Dentally cloud-based solutions is robust, with more than 400 new cloud customers added in the second quarter, reflecting good momentum in digitalization trends. We are committed to ongoing product development and customer service enhancements, which we believe are driving solid growth. Turning to our medical business, it has shown strong performance over the years, with another excellent quarter of double-digit growth in local currencies, excluding PPE and COVID-19 products. There was strong demand for point-of-care diagnostic tests and equipment, buoyed by an uptick in patient traffic for seasonal influenza. Although ambulatory surgical centers have yet to return to pre-COVID levels, overall performance in the medical sector remains solid. With that overall overview of our business and the current environment, I’d like to invite Ron to provide a more detailed review of our financial results. Thank you, Ron.

Thank you, Stanley, and good morning, everyone. Turning to our second quarter financial results. Total net sales for the second quarter of 2022 were $3.0 billion, reflecting growth of 2.1% compared with the prior year period. Internally generated sales in local currencies, which I will refer to as LCI, increased 2.4%. And when excluding sales of PPE and COVID-19 related products, our LCI growth was 6.7%. As Stanley mentioned, prices for PPE products and specifically for gloves increased last year due to market volatility and supply chain disruptions. More recently, prices of gloves and COVID-19 test kits have declined. This pricing volatility, combined with the strong prior year sales comparison is driving a year-over-year decline in sales of PPE and COVID-19 related products. Additional details of sales performance are contained in Exhibit A in our earnings press release issued earlier today. Operating margin for the second quarter of 2022 was 7.27%, representing an 18 basis point improvement compared with prior year GAAP operating margin. When compared with prior year non-GAAP results, operating margin improved by 6 basis points. Operating margin improvement was due to gross margin expansion, mainly as a result of an increase in sales of higher-margin products. This was partially offset by higher operating expenses as a percent of sales, which grew as a result of increases in payroll and travel since our operations have generally returned to normal this year. Turning to taxes. Our effective tax rate for the second quarter of 2022 was 23.8%. This compares with an effective tax rate of 23.4% for the second quarter of 2021 on a GAAP basis and 23.2% on a non-GAAP basis. GAAP net income attributable to Henry Schein, Inc. for the second quarter of 2022 was $160 million or $1.16 per diluted share. This compares with prior year GAAP net income of $156 million or $1.10 per diluted share and prior year non-GAAP net income of $157 million or $1.11 per diluted share. Amortization from acquired intangible assets for the second quarter of 2022 was $31.3 million or $0.14 per diluted share. This compares with $30.1 million or $0.13 per diluted share for the same period last year. Foreign currency exchange negatively impacted our second quarter diluted EPS by approximately $0.03 versus the second quarter of last year. And at the current foreign exchange rates, we expect the impact to be more pronounced in the second half of the year compared to the first half of the year. I'll now provide some detail on our second quarter sales results. Global Dental sales of $1.9 billion declined 3.1% compared to the same period last year, with LCI sales down 0.3%. LCI sales growth, excluding PPE and COVID-19 related products was 3.5%. Global Dental consumable merchandise LCI sales declined 2.2%, but when excluding sales of PPE and COVID-19 related products, they increased 2.4%. Global dental equipment LCI sales growth was 7.0%. North America dental LCI sales declined 1.1% compared to the prior year, primarily due to consumable merchandise LCI sales declining 3.5%. However, when excluding sales of PPE and COVID-19 related products, North American dental consumable merchandise LCI sales increased 2.2%. Consumable merchandise sales were impacted by lower patient traffic during the quarter offset by price inflation. North America dental equipment LCI sales increased 8.1% compared with the second quarter of 2021, with good performance in both traditional and digital restoration categories. International dental LCI sales growth was 1.0% compared with the second quarter of 2021, driven by equipment LCI sales growth of 5.5%. The growth in equipment LCI sales was partially offset by a 0.3% decrease in International Dental consumable merchandise LCI sales. However, these sales increased 2.7% when excluding sales of PPE and COVID-19 related products. Lower patient traffic, which we believe is a result of higher COVID-19 infection rates, resulted in lower consumable merchandise sales in parts of Europe and in Australia and New Zealand as well as China because of the required lockdowns and were offset by double-digit sales growth in Brazil. Our equipment backlog in our North America and international businesses remains strong. Sales of Dental Specialty products were approximately $242 million in the second quarter with LCI growth of 6.6% compared with the prior year. Growth was particularly notable in North America for oral surgery products, consisting of implants and bone regeneration products. Technology and Value-Added Services sales during Q2 were $181 million, an increase of 18.1% compared with the prior year, including LCI growth of 10.8%. In North America, Technology and Value-Added Services LCI sales growth was 10.4%. This growth was broad-based with particular strength in our practice management business, including Dentrix and Dentrix Ascend. Internationally, Technology and Value-Added Services LCI sales increased 13.4% compared to the prior year, driven by performance in the United Kingdom. During the second quarter, our Technology and Value-Added Services businesses, together with our Dental Specialty products achieved total sales growth of 9.0% and LCI sales growth of 8.2%, slightly lower than our goal of double-digit growth for the full year. Global Medical sales during the second quarter of $1.0 billion grew 10.3% compared to the same period in 2021, with LCI sales growth of 6.7%, led by growth in point-of-care diagnostics. We sold approximately $68 million in COVID-19 test kits in the second quarter of 2022, including multi-assay flu and COVID-19 combination test. This compares with approximately $75 million in test kit sales in the second quarter of 2021. We expect continued volatility in sales of test kits for the remainder of the year. Excluding sales of PPE and COVID-19 related products, Global Medical LCI sales increased 13.6% compared to the second quarter of 2021. Regarding stock repurchases. We repurchased common stock in the open market during the second quarter, buying approximately 1.3 million shares at an average price, $81.42 per share for a total of $110 million. The impact of the repurchase of shares on our second quarter diluted EPS was immaterial. As of the end of the second quarter, we had $90 million authorized and available for future share repurchases. Turning to our balance sheet and cash flow. We continue to benefit from significant liquidity, providing our businesses flexibility and financial stability. Operating cash flow for the second quarter of 2022 was $157 million compared to the $159 million for the second quarter of last year. As Stanley mentioned, today, we are announcing a company-wide restructuring plan that is focused on funding the priorities of the strategic plan and streamlining operations and other initiatives to increase efficiency. The company expects to record restructuring charges in 2022 and 2023. However, an estimate of the amount of these charges has not yet been determined. Any restructuring charges are expected primarily to include severance pay and facility-related costs. The expense savings realized from this plan are expected to mainly affect 2023 and beyond. Turning to 2022 financial guidance. I will conclude my remarks by noting that we are affirming our 2022 full year GAAP diluted EPS guidance range of $4.75 to $4.91, reflecting growth of 7% to 10% compared with our 2021 GAAP diluted EPS of $4.45 and growth of 5% to 9% compared with our 2021 non-GAAP diluted EPS of $4.52. With reference to the balance of the year, we currently anticipate higher EPS growth in Q4 than in Q3. We are revising our full year sales guidance and now expect sales growth of approximately 3% to 6% over 2021 versus our previously communicated expected sales growth of 5% to 8%. This change reflects adverse effects from foreign exchange rates and a decrease in anticipated sales of PPE and COVID related products, including COVID-19 test kits. Sales of COVID-19 test kits are now expected to decline 25% to 30% from 2021 versus a previously estimated decline of 15% to 25%. We continue to expect full year 2022 operating margin expansion of 39 to 44 basis points over 2021 GAAP operating margin, an expansion of 20 to 25 basis points over 2021 non-GAAP operating margin. Our guidance is for current as well as completed or previously announced acquisitions and does not include potential future acquisitions or restructuring expenses. Guidance also assumes that foreign currency exchange rates will remain generally consistent with current levels. However, additional headwinds from foreign currency exchange rates for the remainder of the year may further impact our sales and EPS. Guidance further assumes that end markets will remain stable and consistent with current market conditions and that there are no material adverse market changes associated with COVID-19. With that, I'll now turn the call back to Stanley.

Thank you, Ron. Just a couple of very brief comments on senior leadership. A couple of updates. As of July 1st, Gerry Benjamin retired from Henry Schein as EVP and Chief Administrative Officer and he stepped down from the Board when his term expired in May. Gerry has been in the company for 34 years. He will be continuing as a consultant and was invaluable as we grew from a domestic mail order business of a couple hundred million dollars into a global full-service products and services business with nearly 22,000 team Henry Schein members and operations in 32 countries. We are fortunate to have a deep bench, and with Gerry’s retirement, Michael Ettinger became EVP and Chief Operating Officer, reporting to me. In addition to Michael's Corporate Affairs responsibility, he has assumed responsibility for HR, IT, and supply chain, with each of these three functions being led by highly competent, long-standing Henry Schein executives. Michael joined Henry Schein in 1994, serving most recently as Senior Vice President of Corporate Affairs. The creation of the CEO position is a result of the growing size, scope, and complexity of our operations. And I'm confident that Michael will be successful in his new role, together with the leadership in general about business units, four to five big business units and the rest of the executive management team. Barry Alperin also retired from our Board of Directors at our Annual Stockholder Meeting in May. And I would like to take this opportunity to thank Barry for his 26 years of exceptional service and our board, having joined in 1996 shortly after the company's initial public offering. So operator, with those comments, we’re free to answer any questions.

Hey, good morning. Thanks for taking our questions. Stanley, if I could start on the patient staff absenteeism you referenced in impacting dental patient volumes. Is there any way you can quantify what you think that impact may have been in the quarter? I think you said it was mostly a regional impact. But could you compare those regions that were less impacted to those that saw the volume effects? And then, is it the real-time trends that you're seeing with patient volumes that gives you the confidence here today to anticipate a patient volume recovery here in the second half of the year?

Yes, Jason, that's a number we're continuously analyzing. It's quite challenging due to the COVID situation fluctuating in waves. The positive aspect is that I don't believe we'll have to wait too long. In July in the United States, we experienced significant absenteeism and cancellations during the first three weeks. However, in the recent weeks, things have improved, although there are still some cancellations and shortages present. This issue has been somewhat alleviated. I anticipate that we will see an increase in the latter part of the quarter. Internationally, the situation is quite variable by region. Last quarter, Germany was significantly affected. In July, which I can share during this public call with our investors, Brazil's performance was outstanding. Similarly, while Australia and New Zealand are relatively smaller markets, their conditions have worsened compared to last year when rates were quite favorable. China's situation is not substantial for the overall company but has generally stabilized, despite some specific locations being locked down for a few days. My expectation is that things will smooth out by the third quarter. However, there's no definitive way to predict this, and it seems that the severity of COVID, based on conversations with various individuals across Europe, doesn't appear to be as serious now. People are getting mildly ill but tend to recover within about 8 to 12 days. This is all I can share at this point, and I wish I could provide more insights.

Okay. No, that's helpful. Appreciate that, Stanley. And then, Stanley or Ron, just on the guide, reaffirming the guide here today. Great to see you stick with the outlook of extending non-GAAP operating margins here 20 to 25 basis points. Given where we're at year-to-date, that does imply a decent step higher here in the second half of the year in order to hit that guide. So the margin comps do get easier, so that helps. But maybe can you speak to the margin visibility you have in terms of cost controls versus how much of that margin expansion that’s in the guide is volume growth or business mix dependent?

I believe that the improvement in gross margin in the second quarter is primarily due to product mix, particularly with increased growth in our Dental Specialty products and Technology business. We expect to maintain this positive mix moving forward. However, it is crucial for us to carefully manage our operating expenses in the latter half of the year, and we are very mindful of this. These factors are the main contributors as we focus on product mix and maintaining oversight of operating expenses in order to achieve the expected expansion in operating margin.

All right. Very helpful. I’ll hop back in queue. Thanks, guys.

Hi guys. Good morning. Thanks for taking the question. Stanley, I want to go back to the comments you made in the prepared remarks around some of the customers, I guess, pushing back on pricing increases and your ability to sort of find alternative solutions. I guess just broadly speaking, is this something that, I guess, the majority of your customers are asking for at this point, and we should start to be thinking about sort of a multi-quarter revenue headwind associated with that, or is this less of the majority at that point? Thanks.

Yes. So I don't think it's across the board. Having said that, we have to be competitive. And so we can switch customers if particular manufacturers want to stick with the price increases, we have options. And customers are looking at those options. Obviously, the midsized customers and some of the bigger DSOs, national DSOs are much more, if you will, educated consumers, so they can see that on one product versus another one manufacturer versus another, there are options. And I was quite clear in my remarks I indicated that I don't think this will impact margin, but could impact sales in the sense that customers are moving maybe to lower-priced products for the same function, functionally the same lower price. And in some instances, obviously, the margin will be better. We're not pushing our private brand, but where we're in a competitive situation, we will push a private brand. Margins are pretty good. There's been some inflation on the private brand, but we're also in a pretty good position to work with our manufacturers. So what I'm saying generally, we can manage through this. Our margins will be good. I think we're providing excellent value-added services to our customers in this regard. What I'm excluding, of course, is PP&E, where there's deflation and generic and other pharmaceuticals where those move in different directions to the general market. In all of those areas, I think we are maintaining and, in fact, we likely will grow our gross profit.

Okay. Thanks for that. That's helpful. And then I guess just on the staffing commentary around sort of dental, now recognizing, I guess, this could be a little bit longer of a headwind than we might be anticipating here. Can you just sort of talk about some of the longer-term opportunities that this dynamic might sort of create for Schein with your expansion into some of the services and technologies? And maybe, I guess, just part of that, can you talk about some of the specific investments that you're going to be making here throughout the balance of 2022? Thanks for the questions.

Very good question actually. I expect that no one has a crystal ball but I expect the dental staffing to emerge closer to 2019 within the next few months. Maybe it lingers into the fourth quarter. I don't think so. There is an issue still with hygienists. They feel very uncomfortable. It goes back to COVID. It's an important part of prevention of the business. But if we can get the dentists back to full complement, they’ll just have to handle a lot more of the hygiene. They have to work a little bit longer hours. Having said that, there's a lot of technology out there to make the practice of dentistry more productive — the movement from impression material to scanners to implementing systems like Ascend, drive practice efficiency. I think also the PPE use in the practice was a little bit more intense in terms of the doubling up in the amount of time dentists spent on PPE masking, gloving, wearing these coats and things. That's become more efficient. So I think the production per practice is likely to go up as well. Now as for the value-added services, this is key for us, the strategies, whether it's revenue cycle management, demand generation, a business that provides insurance coverage of discounted insurance. All sorts of activities as it goes — as it relates to education and seminars, publications and the like. We're driving different services that really increase the efficiency in their practice while facilitating better clinical care. And this has been a key strategy for years. We will invest more in it. I think we quoted eAssist, which is a business that focuses on revenue cycle management, significantly in demand, highly profitable, and highly appreciated by dentists. Jarvis, which provides information on dental practice, indexes and KPIs, all of these things are in demand. And the biggest issue — or the biggest opportunity of all is our field sales consultants are today much more appreciated for their consulting services than pre-COVID. During COVID, a number of practitioners bought products that weren't good, didn't necessarily have the most efficient technology in the practice. And so our consultants are being consulted on these items, of course, providing good advice, but at the same time providing great stickiness.

Thanks guys. Good morning. Stanley, maybe just the first on the dental equipment outlook. You seemed, I thought bullish last quarter, and I got the feeling maybe equally as bullish this quarter, you talked about solid orders and a strong backlog. I'd just love to get your thoughts. Is that sort of a fair takeaway? And maybe how do you expect the equipment outlook to hold up well into the back part of 2022, even in arguably of what's quickly becoming or supposedly becoming a weaker overall environment?

Yes. It's a very good question. I believe equipment is going counterintuitive to the way one would think in a challenged economy. Traditional equipment is doing well. I think the consumer is expecting dentists to have a good-looking modern chair and the dentists are understanding this. So they're investing in their practices. I would say, the whole restorative area is doing extremely well. That's the digital restorations particularly, whether it's scanners, full chairside, and now, of course, 3D printing. All of these are in demand and specifically as it relates to interoperability with some of our software, this is all boding well. I would say, the imaging side, the units are relatively strong, not great. 2D/3D, it's not terrible, but there is some inflation in that area. And there are some shortages in terms of chips, they're holding back availability. I wouldn't say it's critical and there are options to move from one brand to the other. So what I just said to you is not a North American issue only opportunity, but this is global, where our equipment demand continues to be good. The whole traditional equipment supply chain issue was a US, North American issue, not a European issue at all. And so, on both the traditional equipment side and the restore — digital restoration side, demand is very good in this country, North America, Canada and globally. We're quite optimistic about our equipment business.

Got it. Sorry.

Well, let's first talk about gross margin. With PPE, we're still getting — well, let's first talk about gross margin. With PPE, we're getting, I would say, a gross margin that we're happy with. I think what happens is that, as that pricing of PPE goes down, it obviously results in a lower sales number. So it puts a little bit of strain on operating margin to the extent we have fixed costs as operating expenses. I think COVID test kits, we are seeing a little bit of pressure on pricing there, but we have seen some stability in that — in the demand for COVID test kits. We had a fairly consistent run, kind of, weekly run rate in the back half of the second quarter that has continued into July and then I think it has perhaps even improved slightly in July. So — and that's all taken into consideration when we provide the guidance on that number. But I do think that — from a gross margin standpoint, kind of going back to your original question, we feel like we're getting a good gross margin on PPE. But at those lower sales dollars, it does put a little bit of pressure on the operating margin.

Thank you. Good morning, guys. I've got some background noise here, so I'll just ask two questions and then go back on mute. But first question, just on the North American consumables growth rate this quarter. Stanley, I think you're talking about some COVID headwinds during the period. You had Omicron headwinds last quarter as well. So how do you just bear out the impact of COVID versus some of the inflationary pressures and just consumer pressures we've seen here over the last couple of quarters or last couple of months, what gives you the confidence that it's COVID not macro? And then number two, I know you're doing a great job trying to hold pricing in line for your customers. I think your customers absolutely appreciate that in our checks anyway. How are you thinking about pricing maybe into 2023? It might be early, but I know manufacturers are struggling given that dental fees haven't gone up for quite a while on how much they might be able to ratchet pricing up again next year. Thank you.

Jeff, as I noted earlier, it's very hard to really identify how much of a dampening impact we had as a result of COVID. But my sense, just listening to our salespeople having gone to a couple of conferences, spending time with customers is that — it's — there were several hundred basis points on the consumable side that are related to this dampening because of COVID. I expect that, that will improve the rate — at the rate of infection. Well, as it improves, we'll drive visits back to the office. That's not in the US, but globally, I think. The impact of inflation, I'm actually a little bit surprised with the fact that we've been able to keep our rates. I quoted a 3% number. I think it's actually less in the non-private label in the non-glove PP&E area. So the volumes are there and the inflation doesn't seem to be too bad. How it goes in, how this drives, where this ends up in the fourth quarter or even 2023 is hard to tell. We are not getting huge pushback on pricing from our point of view. But we're being asked about different brand options. And I think manufacturers are going to have to think this through. I know they're doing that now. And again, I'm talking about consumables. So it's hard to see how much inflation rate is really going to be towards the end of the fourth quarter, the beginning of the first. But it doesn't look like we've seen in other — with other products in the general economy.

Hey, this is Justin Wang filling in for Erin. We were wondering what is embedded in your guidance as it relates to potential macro pressures. Is there a risk to guidance from here if we see tougher macro backdrop or is this an element that's really been baked into your guide? Thank you very much.

Yes. I mean I would say that one reason we stayed with the $0.16 range is because of that macro uncertainty that you've referenced. I think that we've kind of played out different scenarios, whether it be in terms of additional inflation, whether it be from additional geopolitical concerns and we did fall within that range of guidance that we provided. So it is taken into consideration for the balance of the year that there could be further deterioration, but we feel like we have the plans in place to try to mitigate that.

Hi everybody. Just two questions. First, can you just comment on what you're seeing in the medical side? I know you're focused on the alternate site area. We're hearing mixed things about how procedure volumes progressed and how much that was impacted by COVID? But alternatively, it sounds like there's a flow out of hospitals into some of those alternate sites and maybe they'd be above pre-pandemic levels. And I'm just curious what you're seeing?

So I think you're referring specifically to the ambulatory surgical centers. We were close to 2019 numbers. I can't remember a couple of quarters back. We've gone back a little bit. But generally, ASCs are quite strong. And we are gaining market share in that area for sure. We have a lot to offer. I think ASCs are also looking at ensuring that the supply chain is efficient that they're not having too much wastage product, exploration dates on product issues, and we help for those kinds of things. So I would say overall, that's a good area. But we're in a number of alternate sites, whether it's oncology, renal centers. And for us, these markets are all doing quite well. I do believe having said that there probably is going to be some pent-up demand for elective surgery in the ASC space that will go to market. I think people will want these procedures. And so as COVID takes us down here in the United States.

Okay. And Stanley, in your prepared remarks, you mentioned that you're helping your clinicians deal with key changes in dental and medical professions. And I know you called out specifically digitization in their work. I wondered if you would expand a little more on what you're referring to in some of those key changes that they're dealing with and how that impacts your business down the road?

That's a very good question. There's a clear understanding amongst all the office space practitioners, small to the largest that efficiency is critical. They're going to face reimbursement pressure, to some extent, they're facing and now. I think for them, in many respects, labor costs have increased more than reimbursement, so they're turning to our sales force for advice and how to manage the practice and, of course, how to ensure that their clinical standards increase with access to the latest technology. And on the dental side, digitalization, the biggest one is the DI, the scanners in the prosthetic field. I don't know what the number is, but I have to imagine it's still half the dentists in the developed world are still doing manual impressions. So there's a huge opportunity in that regard to convert practices using manual impression to digital impression. The whole movement of impressions to the lab and digital manufacturing of crowns and bridges in the lab is a big opportunity for us. We're a significant player in the lab space. I think we're the largest provider of laboratory products in the world. So as that moves digitally, that's a huge opportunity for us. It has been very good to us in the last year or two, but lots of opportunity in that regard. The practice management arena, the movement from — towards a cloud-based technology from a security point of view, from a practice management point of view, the digitalization of more of the practices presents a significant amount of opportunity on the practice management side. The interoperability and connectivity between devices and practice management software is a big opportunity. Actually, that's both dental and medical. The movement to 3D printing is starting to get some good momentum. You'll hear more from us in that regard. Actually, hopefully, in the next week or two, we'll have some announcements there. So we're very excited about this on the dental side, the digitalization. And on the medical, just simply, the capital equipment that we're selling, refining practices, replacing non-digital equipment with digital equipment for diagnostics and other activities. So generally, a more efficient digitalized practice is what practitioners are looking, seeking guidance from our field sales force for, and our field sales force is much more capable today of satisfying these needs because we've got lots of tools in their bags. More information on that, I think, Graham or Ron can provide, I'm happy to connect you with our teams — our business teams, but simply because of time now, we've got to probably end the call. So we’re very excited about it. So with that in mind, I want to thank everyone for calling. We are most enthusiastic about where we are. We think our BOLD+1 2022 to 2024 strategic plan is going to play out well for us even with a contracted economy, and we're underway to implementing these goals. I’ll talk about it at a future call. Of course, a key part of that is to drive efficiency, as we drive efficiency in all of our distribution businesses as one distribution, One Schein, the notion of selling a package of products to a customer rather than one or two products or services is working well. And of course, our high-margin technology value-added services and specialty products are growing at a good pace. So we're very happy with our senior team, in general. I think the team’s doing very well, and the organization is motivated to support our senior team and our management in general. The long-term trends for our markets are good, so we believe we're servicing a very solid market with a great plan and a great team. So with that, I thank you for calling. If you have any questions, please feel free to reach out to Graham Stanley on Investor Relations or Ron directly. Then if — Graham's contacts are on the website or it's Graham Stanley.

Graham.Stanley@henryschein.com

Graham.Stanley@henryschein.com. And Ron is Ronald.

Ronald.South@henryschein.com

And please feel free to reach out. And if people want to speak to me, go through those channels, too. Again, thank you very much for calling. Lots going on in the business, and we remain excited as we have for decades. Thank you very much.