Henry Schein Inc (HSIC) — Q1 2023 Earnings Call Transcript

Thank you, operator, and my thanks to you for joining us to discuss Henry Schein's financial results for the first quarter of 2023. With me on the call today are Stanley Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein; and Ron South, Senior Vice President and Chief Financial Officer. Before we begin, I'd like to state that certain comments made during this call will 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 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. Today's remarks will include both GAAP and non-GAAP financial results. We believe that non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business, enable the comparison of financial results between periods where certain items may vary independently of business performance, and allow for greater transparency with respect to key metrics used by management in operating our business. These non-GAAP financial measures are presented solely for informational and comparative purposes and should not be regarded as a replacement for corresponding GAAP measures. Reconciliations between GAAP and non-GAAP measures are included in Exhibit B of today's press release and can be found in the Financials & Filings section of our Investor Relations website under the Supplemental Information heading. For additional financial information, please refer to our quarterly earnings presentation also posted on our Investor Relations website. The content of this conference call contains time-sensitive information that is effective only as of the date of the live broadcast, May 9, 2023. Henry Schein undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Lastly, during the Q&A session, please limit yourself to a single question and a follow-up. And with that, I'd like to turn the call over to Stanley Bergman.

Thank you, Graham. Good morning, everyone. I appreciate you joining us today. We're happy to report strong financial results for the first quarter of 2023, meeting our expectations from the beginning of the year and showing positive earnings momentum in our core businesses. Market trends have remained consistent with what we discussed during last quarter's call compared to the fourth quarter of last year, where flu cases were high. Patient visits to dental offices globally have recovered, reaching or nearing pre-pandemic levels. Similarly, patient traffic through physician practices has also normalized. As we expected, our results were impacted by decreasing sales of PPE products and COVID test kits. In the PPE category, pricing pressure was lower, and pricing has now stabilized on a sequential basis. The volume of COVID-19 test kits sold has decreased. Excluding these categories, we saw strong internal growth across the company of 6.3% in local currencies. Our financial results were also negatively affected by acquisition-related expenses and foreign exchange rates. Regarding acquisitions, our pipeline remains strong. In early April, we finalized our acquisition of a majority stake in Biotech Dental, which has a leading portfolio of dental implants and clear aligners. Additionally, we announced plans to enter the larger Brazilian implant market by acquiring S.I.N. Implant System, one of Brazil's top dental implant manufacturers, complementing our successful dental consumables and equipment business. I will elaborate on these shortly. Today, we're updating our non-GAAP diluted EPS guidance for 2023 to reflect the impact of the Biotech Dental acquisition. The outlook for our core business aligns with previous estimates, including expectations for operating income growth in the high single to low double-digit percentage range, excluding the effects of PPE products, COVID test kits, and acquisition-related expenses. Now, let's review highlights from each of our business units, starting with dental distribution. The fundamentals of our dental markets remain strong, driven by an aging global population, low unemployment, and increased awareness of preventive care and oral hygiene. First-quarter dental sales growth, excluding PPE, showed stable patient flow. Dental merchandise sales, excluding PPE, were robust, aided by a lower comparison from last year, which was impacted by high flu case numbers and COVID-19. Our dental equipment sales were solid, with traditional equipment sales performing well while digital equipment sales, including 2D and 3D imaging, mills, and intraoral scanners, lagged compared to the previous year. In North America, traditional equipment growth included some price increases from the latter half of last year and robust growth in parts and service. This growth offset declines in digital equipment sales. The market for intraoral scanners is healthy, evidenced by increased unit sales this quarter. However, as noted last quarter, our sales decline is due to lower average selling prices for intraoral scanners, along with significant sales in the prior year to a dental service organization (DSO). Unit sales in other digital categories are now normalized compared to last year. In addition, we saw good sales growth in dental equipment across Europe, with limited international price inflation and a solid equipment backlog returning to more normalized levels. The biennial IDS show in Cologne in March was another successful event for Henry Schein, yielding sales impacts consistent with past IDS meetings. Our global equipment order book primarily comprises traditional equipment and is up year-over-year. Looking at our Global Dental Specialty business, product sales growth increased from the fourth quarter, and we anticipate modest year-over-year growth in the first half of the year, given the strong performance in the first half of 2022. Implant sales growth was driven by significant growth in our premium Camlog line in Germany, Austria, and Switzerland, where we have a strong market share, alongside continuous double-digit growth in our Medentis value price line. In North America, we are observing more specialty practices being acquired by larger DSOs, and we maintain excellent relationships with a growing number of DSO accounts. We are committed to encouraging conversion to specialty products within these networks. We also see increasing adoption of specialty dental procedures among general practitioners, indicated by enrollment in our continuing education courses. Recent highlights in our Global Dental Specialty business include the majority stake acquisition in Biotech Dental and our planned entry into the Brazilian implant market via the acquisition of S.I.N. Implant System. Biotech Dental enhances our portfolio with a complete suite of planning and diagnostic software and a rapidly growing assortment of dental implants and clear aligners, resulting in around $100 million in revenue for 2022. We are especially enthusiastic about introducing Biotech Dental software products to our customers, combining them with our existing management and clinical software for a seamless digital workflow solution. Last week, we announced an agreement to acquire S.I.N. Implant System, a leading manufacturer in Brazil with revenues of approximately $60 million in 2022, marking our entry into the large Brazilian implant market. Brazil has been a significant growth area for us over the past five to six years, providing strong value to local dentists and laboratories. S.I.N. recently broadened the distribution of its value price dental implants, including in the U.S. and other regions, with the deal expected to close later this year pending regulatory approval. Both the S.I.N. and Biotech Dental acquisitions reflect our progress in advancing our BOLD+1 strategy, focusing on internal growth and business development opportunities with high growth and high margin potential, particularly in innovative products and services. This quarter, our endodontic business showed good growth, particularly through our Brasseler and Edge brands in North America. Although our orthodontic business is smaller, we’re pleased with the positive development of our Clear Aligner business, especially among DSOs. Moving on to our Technology and Value-Added Services business, the largest component, Henry Schein One, performed exceptionally well this quarter. Investing in these growth areas is a key element of our BOLD+1 strategic plan, and we believe our customers appreciate the technological innovations we provide. North American growth is driven by Dentrix and Dentrix Ascend cloud-based solutions, with upgrades from our Easy Dental product as its lifecycle concludes later this year. Internationally, growth has been supported by our fully cloud-based solutions, particularly in Australia and New Zealand, where they have recently launched. The number of customers using Dentrix Ascend and Dentally has grown by approximately 30% over the past year. We’re excited about our customers transitioning to these solutions. We also saw revenue growth from our insurance claims product due to increased e-claims processing and improved invoicing and reimbursement functionality. This product's sales growth signals a strong underlying market, as evidenced by the higher volume of e-claims processed. In summary, our practice management solutions give us a competitive advantage in dental and integrate well into operatory workflows, enhancing practice efficiency. We also showcased the integration of AI technologies into Dentrix Ascend. This software automatically analyzes digital images for faster evaluations and effective treatment recommendations. Early feedback on this AI product has been positive. Furthermore, our new voice technology feature is enhancing the speed and efficiency of dentists and hygienists during periodontal exams and clinical note completion. Although it’s still early, we're seeing good adoption of this new AI-driven solution, and we’re excited to support dentists in delivering the best patient care. In our medical distribution business, we achieved a 4% growth in the first quarter, excluding PPE products and COVID-19 test kits. As previously mentioned, we expect our medical business to continue growing, albeit at a slower pace this year compared to last year's remarkable growth. We remain optimistic about our medical business. Sales of COVID tests have significantly decreased, and drug pricing in the PPE category has stabilized, although at lower prices than last year. Pharmaceutical and equipment sales remained strong, while point-of-care diagnostic product sales declined somewhat, attributed to high flu diagnoses last year. We also announced our acquisition of Regional Healthcare Group in Australia and New Zealand, both of which are growing markets contributing to the growth of our dental business. This acquisition will enhance our operations in Australia and New Zealand, expanding our global medical products presence. In conclusion, the foundational aspects of our core business remain strong, and we are executing effectively as we advance our BOLD+1 strategic plan. We're confident in our position, optimistic about our business, and excited about moving forward with our BOLD+1 strategy. I'll now turn the call over to Ron to discuss our first quarter financial results and full-year guidance. Thank you all for your time.

Thank you, Stanley, and good morning, everyone. As we begin, I'd like to point out that I will be discussing our results as reported on a GAAP basis and also on a non-GAAP basis. Our first quarter non-GAAP financial results for 2023 and 2022 exclude restructuring costs as well as amortization expenses of acquired intangible assets. This is detailed in Exhibit B of today's press release. With respect to sales growth, I will focus on LCI sales growth, which is internally generated sales in local currencies compared to the prior year and excludes acquisitions. First quarter global sales of $3.1 billion reflected an LCI sales decrease of 3.7%. However, when excluding sales of PPE products and COVID-19 test kits, our LCI sales grew 6.3%. This sales growth benefited somewhat from the timing of our fiscal reporting calendar whereby the December 2021 holiday week was included in the first quarter of 2022, but Q1 2023 did not include a holiday week as it fell in the fourth quarter of 2022. In the first quarter of 2023, we sold $149 million in PPE products, a decline of approximately 35% year-over-year and $52 million in COVID-19 test kits, a decline of approximately 80% year-over-year. On a combined basis, PPE and COVID-19 test kits declined approximately 60%. As a reminder, our first quarter sales in both PPE and COVID-19 test kits were especially strong last year. Our GAAP operating margin for the first quarter of 2023 was 5.7%, a 196 basis point decline compared with the prior year GAAP operating margin. Our non-GAAP operating margin for Q1 was 7.7%, a 102 basis point decline compared with the prior year non-GAAP operating margin. This decline was mainly a result of lower gross profit dollars from PPE and COVID-19 test kit sales, which helped to cover our fixed costs as well as higher acquisition-related costs, partially offset by gross margin rate improvement. First quarter 2023 GAAP net income was $121 million or $0.91 per diluted share. This compares with prior year GAAP net income of $181 million or $1.30 per diluted share. Our first quarter 2023 non-GAAP net income was $161 million or $1.21 per diluted share. This compares with prior year non-GAAP net income of $200 million or $1.44 per diluted share. Several factors adversely impacted our GAAP and non-GAAP results this quarter. Specifically, the contribution from PPE products and COVID-19 test kit sales to diluted EPS decreased by an estimated $0.24 per diluted share relative to the prior year period. Acquisition-related costs impacted diluted EPS by $0.04 per diluted share this year compared with approximately $0.015 per diluted share last year. And note that these acquisition costs are operating expenses that we do not add back for non-GAAP reporting purposes. Additionally, foreign currency exchange negatively impacted our first quarter diluted EPS by approximately $0.02 versus the first quarter last year. So turning to our first quarter sales results. Global Dental sales were $1.9 billion, and LCI sales increased by 4%. When excluding sales of PPE products, LCI sales growth was 7.4%. Global Dental merchandise LCI sales increased by 4%, but increased by 8.4% when excluding PPE products. We expected strong merchandise sales growth as last year's sales were impacted by the Omicron variant and timing of the reporting calendar, as I previously mentioned. North America dental merchandise sales increased 1.3% and by 6.6% when excluding sales of PPE products. International dental merchandise LCI sales increased by 8.1% or 11% when excluding sales of PPE products with strong sales growth in Central Europe, Australia, as well as in Brazil. Global Dental equipment LCI growth was 3.9%. We had strong LCI sales growth for traditional equipment, and this was offset by a decrease in digital equipment LCI sales. Our North America dental equipment LCI sales increased 2.6%. International equipment LCI sales increased by 5.8% and were bolstered by tax incentives in Italy and the UK, which ended this quarter, and in Australia, which are due to expire at the end of the second quarter. Dental Specialty products include implants, bone regeneration materials, orthodontic products, and endodontic products. Sales of these products were approximately $233 million in the first quarter with LCI growth of 4.4%. Global technology and value-added services sales during Q1 were $191 million, with LCI growth of 6.5%. Sales were again negatively impacted by a government contract, which expired early in the third quarter of 2022. LCI sales growth was 12.4% when adjusting for this contract. In North America, sales growth was driven by our practice management and revenue cycle management businesses. Growth internationally was driven by our Dentally cloud-based solution. Global Medical sales during the first quarter were $971 million, and LCI sales decreased 17.1% due to lower sales of PPE products and COVID-19 test kits. In North America, excluding sales of PPE products and COVID-19 test kits, LCI sales grew 4.2%, led by strong medical equipment and pharmaceutical sales, offset by lower point-of-care diagnostics revenue. Keep in mind, this is against a difficult comparison as North American medical LCI sales growth, excluding PPE and COVID-19 test kits was approximately 15% in Q1 of 2022, driven by higher office visits related to the Omicron variant. Regarding stock repurchases, we repurchased approximately 1.2 million shares of common stock in the open market during the first quarter, buying at an average price of $81.70 per share for a total of $100 million. Turning to our balance sheet and cash flow. We continue to benefit from significant liquidity, providing our businesses with the financial flexibility and stability to execute on our organic growth initiatives and strategic acquisitions, while continuing to return capital to our stockholders. Operating cash flow for the first quarter was $27 million compared with $93 million last year, with the decrease primarily due to lower income from PPE and COVID-19 test kits as well as restructuring expenses incurred in the quarter. Those restructuring expenses in Q1 were $30 million or $0.16 per diluted share and were incurred as part of our previously disclosed restructuring initiative. These expenses mainly relate to severance benefits and costs related to the exit of facilities. We expect to continue to record restructuring charges during the remainder of 2023. Let me conclude my remarks with our 2023 financial guidance. At this time, we are still unable to provide estimates for costs associated with integration and restructuring for 2023. Therefore, we are not providing GAAP guidance. We are updating our guidance for 2023 non-GAAP diluted EPS attributable to Henry Schein to a range of $5.18 to $5.35 per share, reflecting a growth of negative 4% to negative 1% compared with our 2022 non-GAAP diluted EPS of $5.38. This guidance now includes $0.05 to $0.10 of estimated dilution for the Biotech Dental acquisition, primarily due to acquisition accounting adjustments for inventory and integration-related expenses. Our outlook for the remainder of the business remains consistent with our prior guidance. Our guidance for 2023 assumes total sales growth of approximately 1% to 3% over 2022, with sales of COVID-19 test kits now expected to decline by approximately 65% to 70% from sales in 2022 as compared to our previous 2023 guidance of a decline of 35% to 40%. Additionally, PPE product sales are expected to decline about 20% to 25%, consistent with our original 2023 guidance. Note that our sales growth guidance reflects one less selling week in 2023 than in 2022. The impact on 2023 non-GAAP diluted EPS from lower sales of PPE products and COVID-19 test kits is still estimated to be $0.35 to $0.40. We expect the impact of the steeper-than-anticipated decreases in COVID-19 test kit sales in 2023 to be offset by slightly higher-than-anticipated gross margins on PPE sales relative to our original guidance. These headwinds are anticipated to be largely offset by earnings momentum in our underlying core businesses, and we expect non-GAAP operating income will grow in the high-single-digit to low double-digit range when excluding the contribution from PPE products and COVID-19 test kit sales and acquisition-related expenses. We expect lower non-GAAP operating margin of 10 to 15 basis points below the 2022 non-GAAP operating margin of 8.2% and this was largely a result of lower PPE product and COVID-19 test kit sales and profits. Our guidance reflects non-GAAP operating margin expansion when excluding income from PPE products and COVID-19 test kit sales and acquisition-related expenses. Our 2023 guidance includes higher interest expense than in 2022 as a result of higher interest rates and higher borrowings along with higher minority interest from our higher growth businesses such as Henry Schein One. We also expect an effective tax rate in the 23% range, assuming no changes in tax legislation. Our guidance for 2023 diluted EPS is for current continuing operations as well as completed acquisitions and does not include the impact of future share repurchases, other announced or potential future acquisitions, or integration and restructuring expenses. While the recently closed Biotech Dental acquisition is now reflected within our guidance, our recently announced acquisition of S.I.N. Implant System is not. Guidance also assumes that foreign currency exchange rates are generally consistent with current levels and that end markets remain consistent with current market conditions. To summarize, although we are updating our financial guidance for the year, we are maintaining expectations for the underlying business and continue to anticipate steady growth trends in both dental and medical markets. We expect that the second quarter will continue to have some headwinds from PPE and COVID-19 test kits, but we do expect good income growth in the second half of the year as some of the year-over-year comparatives covered on this call should normalize. With that, I'll now turn the call back to Stanley.

Thank you, Ron. Graham, if we can now open the call to questions. We'll be happy to answer any questions investors may have.

Hey there, thanks. Good morning, everyone. Ron, wanted to start on the margin performance in the quarter, really a couple of entertaining questions here. First, the gross margins hit a multiyear high in the first quarter. Hoping you could expand upon maybe the drivers of the margin performance in the quarter, especially considering your higher-margin high-tech equipment sales were down year-over-year. And then I'm sure there are questions out there regarding the lack of drop-through from that gross margin upside. It looks like some maybe above-normal SG&A spend and as fixed cost absorption wasn't as great because of the PPE dynamics you mentioned. Just wondering if you could talk about any other puts and takes that impacted SG&A spend in the quarter as really, we think, through gross and operating margin cadence for the rest of 2023?

Hi, Jason. I think on the margin question, and as you mentioned, the specialty businesses perhaps did not grow as much, but they did grow, and this is a year or a quarter, I should say, where year-over-year we actually had some contraction in reported sales. So that growth still takes on a greater mix, right? So we're getting the benefits of a greater mix from our specialty products and the growth that we experience on the technology and value-added services side. And that mix is favorable to the gross margin. I think, too, that while within the distribution sector, we tend to get slightly better gross margins in dental, and the growth we had in dental versus medical and the growth we had in dental versus medical I think also contributes to that particular margin performance being as high as it was. On SG&A, I think that we have a fair number of expenses that are fixed. So the operating margin itself is going to come down some as those gross profit dollars are lower from the lower contribution from PPE and COVID test kits. So I think that's what we're seeing primarily as the drag on the operating margin. I think from an SG&A standpoint, we did have a little bit of an increase in costs, but some of those are related to the acquisition costs that we incurred during the quarter. We've got a very robust pipeline, the nature of these transactions that we've been doing, as you can see from the last couple of implant transactions that we announced, require a little more work on the acquisition side. And so I think that that was a bit of a drag on SG&A as well.

Okay. That's helpful. Maybe I'll actually use your response there as a bit of a segue to the next question. If we look at the guidance adjustment, modest reduction you're making today for EPS, you were pretty transparent with the Biotech deal that was going to be dilutive from some of those one-time costs. How should we think about the recognition of that headwind throughout the year? Does that higher cost inventory from inventory step-up mostly flow through your model of the 2Q and 3Q? And then I know the recent S.I.N. transaction is a bit smaller than Biotech, but maybe just to be clear, we should expect another kind of one-time impact from inventory step-up once this deal closes? And can you confirm each of these deals are accretive in year one when excluding these inventory accounting adjustments? Thank you.

I will begin by discussing the impact of the inventory adjustments. Typically, an implant business will turn its inventory a few times each year, which means it will take us about six months to process the increased inventory value, affecting our gross margin during that time. Therefore, in the second and third quarters, as we address this inventory adjustment, we are still working on finalizing the precise figure for that increase. Regarding the remaining aspect of Biotech, there will be some costs this year related to integration. We acquired a company with several locations that was privately operated, so we need to invest some funds to prepare it for public company standards. We expect Biotech to contribute positively after 2023, and we believe that starting in 2024, it will definitely enhance our results. Concerning the recently announced S.I.N. deal, it has not yet closed and is currently under review by the Brazilian regulatory authority, so we cannot specify a closing date. In our press release, we suggested the latter part of 2023 as a tentative timeline since we lack a clear estimate. The impact on the current year remains uncertain due to the inventory adjustments we have to manage, but we also anticipate that S.I.N. will be beneficial post-inventory adjustments, ideally closing earlier in 2023, allowing for a positive contribution in 2024 as well.

Good morning. Thank you for the questions. Ron, could you clarify whether you've assessed the sales impact of not starting the first quarter with the holiday week regarding the dental consumables business? Additionally, it seems that patient demand has remained stable during the first quarter. Are there any positive or negative factors you're observing from an end market perspective, particularly since the international consumables segment appears to be performing well?

Yes, I think I'll begin with the question about the fiscal calendar. It likely contributed a couple of growth points for us this quarter, although this can differ from market to market. The impact is more significant internationally than it is in the U.S. In some international markets, dental practices close between Christmas and New Year's, leading to limited sales during that period. Overall, I believe it accounts for a couple of points in our dental merchandise figures. Regarding patient traffic, it appears to be quite steady at this time. The market seems fairly normalized in that we aren’t experiencing the usual fluctuations in patient traffic, and our customers have not reported concerns as much as in the past. This trend seems to have continued into April, with patient traffic being fairly consistent with what we observed in the first quarter.

Could you discuss how you anticipate the specialties business will perform throughout the year? I believe the number for the quarter was around 4%, and previously you mentioned expecting mid to high-single-digit growth for the entire year. I understand that comparisons for this business are becoming a bit easier, but could you share your insights on the demand for implants and orthodontic procedures and how you foresee it trending for the remainder of the year? Thank you.

Yes, we believe the comparisons will improve for dental specialty products in the second half of the year compared to the first half. Specifically, in implants, while we experienced double-digit growth in Europe, the U.S. had a more challenging comparison due to last year’s strong performance. Consequently, growth in the U.S. was lower. However, endodontic products continue to perform well, showing steady growth in the high-single-digit range. There are definitely areas of strong performance, and we anticipate that as we move into the latter part of the year and the comparisons become easier, growth should strengthen.

Hi, everybody. First, I wanted to ask you about the conference in Cologne. I know it's a significant event. You mentioned last quarter that you were monitoring its effect on sales. Have you observed any impact in Q1? Do you anticipate any residual benefit in Q2? Additionally, given the concerns about the European economy, did you gain any insights about the equipment market from the conference?

Yes, thank you, A.J. The Cologne Show was beneficial for us. It mainly focuses on Germany and Austria from a sales perspective. Overall, it was as good as in previous years. The equipment market in Europe is quite stable, although there is a slight issue in France due to a strike in April, which doesn't have a significant impact on the overall business. We'll address that if necessary. Generally, we see the European and international equipment market as stable. There are ups and downs. Traditional equipment is performing a bit better, while there is some deflation in unit pricing for the DSO products. Mills are beginning to stabilize again, and there is potential growth from 3D printing. Overall, I would say the market is quite stable at this time.

Okay. Following up on the medical test in PPE, you achieved just over 4% this quarter. Is that reflected in your expectations for the rest of the year? I understand there is ongoing discussion about patients returning to the health care system, which may be driving some additional demand. Are you observing any of this? Do you anticipate seeing more as the year progresses?

Yes. Some device companies were significantly affected by market fluctuations. We experienced only a minor impact because last year had many more visits, particularly in the early part of the year due to COVID and various flu strains. We had high comparisons during that time, but I believe conditions will improve as the year progresses. Our businesses remain steady when excluding the test-related impacts. I would say that PPE has returned to a more normalized state. However, COVID testing is decreasing, and it's unclear if that trend will persist. We’ve provided our best guidance, but the medical segment is quite stable and is actually performing well with nice growth.

Thank you. Good morning, guys. Let me start, I guess, just to see if I can get any more color out of you Ron or Stanley, on the specialty business, the 4.5% growth in the quarter year-over-year. One, did that get the same 2-point benefit from the timing? Just wondering on that. But more importantly, it sounds like you said, I think, Ron, endo was up high-single-digits. If I kind of assume away the ortho business, which I know is growing in the Clear Aligner space, but is still probably the smallest of the three. Would that put implants closer to flat year-over-year in the quarter? Just trying to kind of gauge between those three business lines within the specialty business. Thank you.

I think regarding the implant business, it's important to consider the specific markets. In Europe, our implant sales grew quite well, achieving about double-digit growth. In the U.S., we saw growth as well, but it was much more modest, only a small increase. However, the U.S. was facing a tougher comparison than Europe did last year. The endodontics sector has been stable, consistently showing mid to high single-digit growth quarter over quarter. It's more challenging to identify a trend in orthodontics due to its low base for us. We did notice significant growth in Clear Aligners this quarter, largely thanks to our partnerships with some dental service organizations, although it is still starting from a low point.

All right. And I guess just to help me out here, if U.S. was kind of flat to up a bit in implants, Europe up strongly. I think you said upper single-digits and endo up high-single-digits. I mean, your Camlog business in Germany, obviously, the number one, number two player there is a big business. I would think that means your Global Implants were somewhere at least kind of 3% to 4% and endo high-single-digits. How does the whole specialty business end up just 4%, 4%? I still can't reconcile that math.

Well, keep in mind that implants constitute about 60% of that category, so they have the most influence on the overall calculations. While ortho had decent sales, it only makes up about 10% of the category, with endo accounting for the remaining 30%. You're right in your observation. Implants experienced a global growth of about 3% to 4%, and this tends to drive the overall figure due to their significant weight within the category.

Fair enough. I just have a clarifying question about the model. When you started excluding amortization at the beginning of this year for deals, do you include inventory adjustments, even if you have to do some restructuring? Those costs for future deals are assumed to remain in the EPS calculation, and we don't exclude those. I just wanted to clarify that.

Yes. Let me clarify your question because inventory step-up is quite different from restructuring costs. When we incur restructuring costs during our transactions, we will add those back. We will mention inventory step-up to highlight its impact on earnings, but we are not treating inventory step-up as a non-GAAP adjustment, nor are we adding back the costs associated with our deals. We consider these costs to be a fundamental part of our business; acquisitions are crucial to our strategy, and we do not exclude the costs incurred when completing these transactions in our non-GAAP adjustments. However, if we have a quarter with an unusually high volume of acquisition expenses, we will mention it to ensure everyone understands how it affects operating income, as it is part of our operating expenses.

Yes, that's very helpful. Thank you.

You're welcome.

Jeff, just to be clear, our North American implant sales were flattish, and that's because we had significant growth last year. Our implant business outside of the United States, outside North America had high single-digit growth.

Thanks, guys. Good morning. Stanley, maybe for you, just any more details on the U.S. Hi-Tech equipment environment. I know you had some commentary. But maybe at a high-level, what's working well and less well? And then the pricing pressure in iOS? I'm just curious, I feel like that's been going on for a couple of quarters now. So I get it. It's a year-over-year headwind, but has that stabilized of late? Is it starting to level off the pricing pressure more Q-over-Q?

A very good question. I'm glad that was asked. Yes. I think the year-over-year pricing on intraoral scanners and iOS has stabilized. When you look at our numbers, you will see that iOS sales and units went up quite nicely in the first quarter. What was down was the DSO business because we had some significant sales in iOS in the first quarter of 2022. So I would say the iOS units are good, and the pricing has stabilized. I think the mills now have also stabilized. Of course, 3D printing is being viewed as an option. But I think we've gotten back some momentum in the mills and expect to do well with 3D printing for the remainder of the year as well.

Great. Thanks for that color. And then the second one is just a quick clarification. Ron, the revenue guide unchanged, I believe, reported. So COVID comes down. I don't know your exact FX assumption. Biotech comes in. Sometimes, there are other small little deals. But I guess just to clarify; did anything change organic maybe to help offset the COVID sales step down? Or is that just Biotech and some other nickels and dimes? Thanks, guys.

It's primarily the latter. We're seeing a bit of additional growth from acquisitions. However, we still believe that the core underlying business can grow in the mid-single digits in sales, potentially reaching high-single digits in sales.

Hi everyone, thank you for the question and all the information. I appreciate the insights you're providing regarding equipment growth in various categories. It was encouraging to see that the equipment comparisons actually improved sequentially. Can you address the concerns about the ongoing demand environment? Could you share how the backlog is currently positioned? I know you've provided helpful details on that previously. Additionally, how has the environment been as we approach the end of the quarter and into April?

Yes, certainly, Elizabeth. I think with reference to the backlog, I mean, during the quarter, we actually saw a bit of a tick down in backlog sequentially, but the backlog at the end of the first quarter this year is still greater than the backlog at the end of the year last year. It's still quite a bit higher than the backlog levels we had pre-pandemic. That is principally traditional equipment, right? And so that's helping with the growth and gives us, I think, some optimism in terms of our ability to continue to sell traditional equipment at pretty good growth rates going forward. Now that's in North America. Internationally, we've seen the backlog come down a little bit, but it still is ahead of pre-pandemic levels. So while the backlogs are working down a little bit more internationally, there's still a fairly healthy backlog there.

Okay. And sorry. And just in terms of the comment of how sort of the end of March, if you can comment on April, trended sort of post some of the recent financial turmoil?

I'm sorry, I didn't quite understand what you said at the beginning of that, Elizabeth.

Oh, sorry. So I was just talking about if you could comment on sort of the demand environment in equipment. If we think about the end of March post the start of some of the financial turmoil and if you could talk about April as well, if that's possible?

Yes. I think the trends we have in April have been really a continuation of what we saw in the first quarter. I wouldn't say there's been anything that's coming out of the financial markets that has been a significant disruptor to that.

Thanks. In the context of just the cadence, if you had this benefit in Q1, is there any falloff at the end of the year or anything else we should contemplate? And just thinking about cadence in terms of earnings for the year, any color or guidance you can provide us?

Kevin, when you say benefit in Q1, can you be more specific which benefits?

Oh, I'm sorry, the calendar benefit.

I don't anticipate the calendar to significantly impact our performance going forward, aside from the fact that this year's fourth quarter will have 13 weeks compared to last year's 14 weeks. However, we may still experience some fluctuations in our quarterly results due to the challenges we're facing with PPE and COVID test kits, which are more significant in the first half of the year, especially during the first quarter, as shown by the $0.24 impact we reported this quarter. The effect will lessen moving into the second quarter compared to the third and fourth quarters. Therefore, we expect to face some challenges in Q2, but we believe it will stabilize as we progress into Q3 and Q4.

And just a follow-up on the backlog question, if I just want to make sure I understand. Is backlog like quarter-over-quarter flat or down on the equipment side? And would that be related to core equipment or digital equipment? Like how should we think about that?

The backlog mainly consists of standard equipment, which includes chairs, units, and lights. We analyze the backlog sequentially by comparing what it was at the beginning and the end of the quarter. As I mentioned earlier, the North American equipment backlog did decrease somewhat over the quarter, but it remains higher than it was at the end of last year's first quarter. Therefore, it is still considered a fairly healthy backlog and significantly above the levels we experienced prior to the pandemic. The situation is similar internationally, where we also see a gradual decline quarter-to-quarter. However, their backlog is slightly lower compared to last year’s first quarter, which distinguishes it from North America.

Thank you very much.

And we also think that the digital side from a pricing point of view has stabilized, and we're seeing good growth on the units.

Hi, thank you for taking my question. I'll ask both parts together since they are related. First, you have clearly been more active in making acquisitions, so I'm curious if there are any significant gaps in your portfolio that you are focusing on addressing from an M&A perspective. The second related question is, as you continue to be more acquisitive, particularly looking at Biotech Dental, there may be some overlap in your portfolio. For instance, you have Reveal and now another Clear Aligner. What is your strategy regarding this? Will you keep both brands separate, or will you combine them for greater efficiency as they grow? I’m interested in your approach to integrating businesses like these. Thank you.

Brandon, thank you for that question. As we indicated early on, our pipeline remains quite good. Our bold strategic plan calls for us to continue to advance those businesses that are high margin, high growth through organic growth and through acquisition growth. There are parts of the portfolio that we could add to, of course. I don't think we have much overlap. But we're very much committed to advancing our high-growth, high-margin businesses, and there's no deviation from that. We outlined that quite clearly in our Investor Day, and we're executing. As it relates to brand alignment, I think we've always been pretty good at that. We will, over time, align brands. We've done that with Camlog and BioHorizons, I think, quite well. We never lost any business when we aligned the brands. We have a combined BioHorizons Camlog brand today in many parts of the world, certainly all the big markets in a few parts of the world where each of the particular brands is distributed through different distributors. We may keep it. But generally, in the big market, we keep them separate in the big markets; we're aligning and have aligned for the last two or three years in a single brand. We will keep both the line of brands going. It goes to different markets. But I would imagine, over time, we will align brands. But more important, we're aligning the production, and all the administrative activity, which should be accretive, of course. So we are very, very careful with brand alignment. We've done a good job of that over the years, and we'll continue to do that.

Thanks. I have a question regarding DSO. Are there any expected changes in DSO relationships in the 2023 guidance? How have you been performing in the DSO market segment? Can you share any growth rates you're observing in that segment and anything noteworthy? Thank you.

Our DSO business is performing well and remains stable. We have been adding more DSOs, particularly in the mid-market sector. Some of our larger DSO clients have made notable acquisitions and have included our products in their purchases. We are making solid progress in the specialty area within the DSO market. While equipment sales can be variable, we had a significant sale in the first quarter of last year that influenced our unit sales. Although we may have lost some smaller accounts, we are doing well with larger clients and gaining new midsized customers as well. Overall, this is a growing segment for us. Our focus is on advancing high-growth, high-margin products, especially our software and value-added services. The growth is steady, and we maintain strong relationships with our large and midsized DSOs. Okay. So thank you, everyone, for calling in. I realize there are a couple of complexities in this quarter. But if you peel out the PPE and the tests and you understand that the accounting regime for acquisitions on inventory step-up takes those expenses relating to the step-up and runs them through the operating income against operating income, likewise, some M&A expenses are run through operating income. If you take all of that out, you'll see our core business is doing quite well, good internal sales growth. Gross profit is doing quite well, moving it a bit higher, all on with our strategic plan. I think you will see that the business is quite stable. We anticipate operating income to continue to grow as Ron outlined in our guidance and we're happy with the business. So of course, if you have questions, Graham and Ron are available. And we're optimistic about the business. I appreciate all the questions and look forward to our next call in a couple of months' time. I think we're going to be at some conferences and happy to provide more color on the business. But overall, we're very pleased with the performance of the business and nothing really unexpected at this time. So thank you very much.