Henry Schein Inc (HSIC) — Q4 2023 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 fourth quarter and full year 2023. With me on today’s call 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. Risks and uncertainties involved in the company’s business may affect the matters referred to in forward-looking statements and 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 the non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business, enable the comparison of financial results between periods where certain items may vary independently of business performance and allow for greater transparency with respect to key metrics used by management in operating our business. These non-GAAP financial measures are presented solely for informational and comparative purposes and should not be regarded as a replacement for corresponding GAAP measures. Reconciliations between GAAP and non-GAAP measures are included in Exhibit B of today’s press release and can be found in the Financials and Filings section of our Investor Relations website under the Supplemental Information heading. For additional 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 accurate only as of the date of the live broadcast, February 27, 2024. 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 today’s Q&A session, please limit yourself to a single question and a follow-up. And with that, I’d like to turn the call over to Stanley Bergman.

Thank you, Graham. Good morning, everyone, and thank you for joining us. We are quite pleased with our performance in the fourth quarter and for the full year of 2023, which was in line with our expectations and reflects a solid recovery from last year’s cybersecurity incident. Our fourth quarter financial results included strong growth in our technology and value-added services businesses and in global sales of implants and biomaterials, largely driven by acquisitions, and were negatively impacted by higher than usual acquisition-related expenses and adjustments. As we discussed last quarter, the cyber incident primarily affected our dental and medical distribution businesses in North America and Europe. These distribution businesses recovered well in the second half of the quarter. The revenue impact from the incident was at the low end of our expectations and the earnings impact was at the high end largely due to the success of our promotion activity, which drove sales and customer retention. Overall, we feel good about the pace of our recovery, driven by our durable customer loyalty and strong relationships our field sales consultants, telesales representatives, and service technicians have with our customers around the world. Of course, this is coupled with our most effective direct marketing and customer care capabilities, which includes a very strong e-commerce presence, particularly on social media. Today, our North American and international distribution businesses are experiencing merchandise sales that are running below pre-cybersecurity incident levels, and we estimate that the incident is currently having a low-single-digit percentage headwind to our merchandise sales growth, with some episodic customers not fully returned yet. We are doing a lot of work in this area and we expect the residual impact to be short-term and diminish over the first half of the year through our sales and marketing programs, including digital marketing. The 2024 guidance we are introducing today reflects our continued confidence in the stability of the underlying markets we serve, our recovery efforts from the cybersecurity incident, and the execution of our strategic plan. For 2024, while we expect to have some short-term residual impact from the cybersecurity incident, we believe we will continue to strengthen our leading market position. The markets we serve are expected to grow towards the lower end of the ranges we set out at our Investor Day last year, and we also expect some remaining impact from lower year-over-year PPE pricing, primarily impacting sales growth in the first quarter or the first third of the year. We are also introducing adjusted EBITDA guidance, as we believe this provides investors with an additional metric that reflects the performance of the business as we pivot to higher growth, higher margin products and services. We believe we are well-positioned to grow the business in line with our financial goals of high-single-digit to low-double-digit operating income and earnings per share by continuing to execute on our BOLD+1 Strategic Plan. Now, let me turn to a review of our quarterly highlights from each of our business units, beginning with the dental distribution business. In North America, we believe patient traffic in the dental office picked up in November and December, although in January, illness and weather impacted cancellations, but this has improved in February. We have seen in our medical business that point-of-care diagnostic sales are also strong, indicating that flu visits to medical doctors are elevated as a result of this year’s late flu season, which adversely impacted dental patient traffic. We expect the effect on patient traffic from the flu season to normalize by the end of March. International markets remain steady and consistent with the third quarter. Regarding North America and international dental equipment, there was a decline in sales both in traditional and digital equipment. Equipment sales are very important and reflect a redeployment of our field sales consultants as well as our equipment sales specialists during the cybersecurity incident to focus on addressing immediate customer needs rather than initiating and processing new equipment orders, resulting in moving sales into the first quarter of 2024. Digital equipment sales also reflected year-over-year lower prices of intraoral scanners, but we expect to see good demand for intraoral scanners to continue, and the impact of these price declines to be less significant going forward. We’ve had a lot of questions on this, but we expect equipment sales to be supported by the investment plans of many of our DSO customers who have these plans in place and have continued to expand their operations, and this not only applies to the national DSOs, but to many of the regional DSOs too, who are investing in their practices both from an equipment point of view and a software point of view. The impact of lower global equipment sales was partially offset by overall good growth in our global equipment technical services. Our technical services capability is a strategic advantage for us as we believe we provide excellent response times and high-quality service for our customers. We are known for this globally. Now, let’s turn to the global dental specialties businesses or products. We believe we continue to increase our global market share in implants and biomaterials this quarter as we believe for the full year of 2023. We believe the implant markets we serve in the aggregate were generally flat in the fourth quarter against the prior year. Against that backdrop, our global implant and biomaterial sales grew by quite a bit more than 30%, primarily due to acquisitions but also some internal growth. We posted significant growth in the European, Latin American, and Asian markets, mainly from the Biotech acquisition in France and the S.I.N. acquisition in Brazil, along with above-market share growth in our leading BioHorizons, Camlog brand in Europe, primarily in Germany, while we had low-single-digit growth in our U.S. implant sales. As a result of the cyber incident, our endodontic sales growth slowed somewhat last quarter. Our orthodontic sales were also impacted by the cyber incident and by the expiration of the motion product patents earlier this year. To address this, we launched a replacement product this quarter, which is being well received in the marketplace. We remain highly optimistic about the growth in our dental specialty products in 2024, as we have a robust pipeline of product innovations planned across various geographies in the first half of the year and we expect sales growth to continue to outpace market growth. Let’s turn now to our technology and value-added services business. Excellent sales growth was driven by Henry Schein One, with most core products posting double-digit gains including our practice management software, revenue cycle management, analytics, and our AI solutions. As we have seen all year, Henry Schein One growth was driven by Dentrix Ascend and entirely cloud-based solutions. The customer base of cloud solutions continued to grow well and increased by about 36% compared with the start of the year. We launched a number of digital clinical workflow solutions for our customers, including AI technologies, to provide our customers with highly effective diagnostic solutions. During the fourth quarter, we worked with one of the largest DSOs to introduce their AI solution. We are pleased to now have over 1,000 users subscribing to these solutions. Product enhancements introduced last quarter, including remote scheduling and payments are also contributing to growth. Claims eligibility and patient relationship management features will be areas of significant focus during 2024. We continue to see strong interest and good growth in Dentrix Ascend from our DSO customers, and we recently announced two new large multi-site Dentrix Ascend accounts. Turning to our medical business, growth during the fourth quarter was also impacted by the cybersecurity incident. In addition, the late flu season also negatively impacted point-of-care diagnostic sales and patient visits, which were down versus the prior year. However, the late flu season is driving higher quarter one sales. Our new $300 million plus homecare platform grew sales in the high-single digits during the quarter, with this market segment continuing to grow faster than the overall healthcare market. Finally, in late December, we announced that we signed an agreement to acquire a majority interest in TriMed, which marks our entry into the upper and lower extremity segment of the growing orthopedic market. This being a complement to our Brasseler saws and blades business, which is also doing quite well. This transaction, the TriMed investment fills a need particularly for our ambulatory surgical center and orthopedic specialist customers who expect to leverage our customer relationships and our contractual expertise to grow the business. We expect to close this transaction later this quarter. Concurrently, we entered into a strategic relationship with Extremity Medical, a medical device company focused on developing complementary products for bone infusion, fixation, and motion prevention treatment. So, in summary, we are executing well against our BOLD+1 Strategic Plan and we made significant progress. We are very pleased with our strategic priorities during 2023. We completed a number of strategic acquisitions, investing almost $1 billion supportive of our 2022 to 2024 strategic plan. These acquisitions are growing well in the high-single-digits to low-double-digit percentages, and we are on track to achieve our goal of generating 40% of our operating income from sales of our high growth, high margin products and services. We estimate that we would only have to be slightly below that threshold, and that we would have only been slightly below that threshold in the fourth quarter and for the full year of 2023 if the cyber incidents had not occurred. As we look to 2024, our priorities include continuing to focus on customer experience. This is critical for us in all our businesses, and of course, the recovery of sales post the cybersecurity incident. We will also focus on and prioritize further enhancing technology and product development, including our integrated digital workflow and continue to grow sales in specialty products by integrating recent acquisitions and through new product launches. We believe we have a good pipeline of product launches in both our dental specialties products area and our value-added services, including Henry Schein One. With that, I’ll turn the call over to Ron to discuss our quarterly financial results and our 2024 guidance. Ron, please.

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 fourth quarter non-GAAP financial results for 2023 and 2022 exclude integration and restructuring costs, amortization expense of acquired intangible assets, certain asset impairment costs, as well as expenses directly related to the cybersecurity incident. This is detailed in Exhibit B of today’s press release. The fourth quarter of 2022 included one additional selling week compared with the fourth quarter of 2023. We report on a 52, 53-week fiscal year ending on the last Saturday in December, and the extra week in 2022 was the holiday week between Christmas and New Year’s Day. The next time our results include an extra selling week will be in 2028. With respect to sales growth, I will focus on LCI sales growth, which is internally generated sales in local currencies compared with the prior year and excludes acquisitions. To facilitate a more meaningful comparison, we’ve also excluded the estimated extra week of sales in the prior year from our LCI sales growth figures. Please note that our sales growth was adversely impacted by the cybersecurity incident, and we estimate the reduction of fourth quarter sales was between $350 million to $400 million worldwide. Turning to our fourth quarter results, global sales of $3.0 billion reflected an LCI sales decrease of 12%, with the cybersecurity incident impacting sales growth by an estimated 10% to 12%. Our GAAP operating margin for the fourth quarter of 2023 was 1.28%, an 87 basis point decrease compared with the prior year GAAP operating margin. On a non-GAAP basis, operating margin for the fourth quarter was 4.86%, a 279 basis point decline compared with the prior year non-GAAP operating margin, and was primarily a result of the cybersecurity incident and the sales recovery initiatives we introduced in the quarter. We estimate that the cybersecurity incident negatively impacted our operating income by approximately $120 million to $130 million in the fourth quarter. Fourth quarter 2023 GAAP net income was $18 million, or $0.13 per diluted share. This compares with prior year GAAP net income of $47 million or $0.34 per diluted share. Our fourth quarter 2023 non-GAAP net income was $86 million or $0.66 per diluted share. This compares with prior year non-GAAP net income of $184 million or $1.35 per diluted share. The fourth quarter 2023 non-GAAP EPS includes $0.05 of acquisition expenses and related adjustments, which compares to $0.02 in the fourth quarter of the prior year. Details for the quarter and full year are included in Exhibit D to our press release. We estimate that the cybersecurity incident impacted our fourth quarter 2023 non-GAAP EPS by approximately $0.70 to $0.75 per diluted share. The foreign currency exchange impact on our fourth quarter EPS was favorable by $0.01, and the impact on full year EPS was immaterial. Turning to our fourth quarter sales results, global Dental sales were $1.8 billion, and LCI sales decreased by 10.9%, with underlying sales growth being offset by the impact of the cybersecurity incident. Global Dental merchandise LCI sales decreased by 11.3% versus the prior year. Global Dental equipment LCI sales decreased 9.7%. As Stanley mentioned, there were delays in processing new equipment orders moving some sales into 2024. Dental specialty product sales were approximately $281 million in the fourth quarter with growth of 17.2%, driven by acquisitions and solid organic growth in implants and biomaterials. Global Technology and Value-Added Services sales during the fourth quarter were $212 million with total sales growth of 13.4%. LCI sales growth of 7.1% included 6.8% LCI sales growth in North America and 9.8% LCI sales growth internationally. In North America, sales growth was driven primarily by our practice management solutions business, particularly Dentrix Ascend, while internationally growth was driven by our Dentally cloud-based solution. Global Medical sales during the fourth quarter were $1.0 billion and LCI sales decreased 17% as sales were also impacted by the cybersecurity incident. Regarding stock repurchases, we repurchased approximately 692,000 shares of common stock in the open market during the fourth quarter, buying at an average price of $72.32 per share, for a total of $50 million. For the full year, we invested $250 million to repurchase 3.2 million shares. At fiscal year end, we had approximately $265 million authorized and available for future stock repurchases. Additionally, to accelerate the implementation of our BOLD+1 Strategic Plan, we invested $287 million in business acquisitions during the fourth quarter and $955 million for the full year. Turning to our balance sheet and cash flow, we continue to benefit from significant liquidity, providing our businesses with the flexibility and financial stability to execute on organic growth initiatives and strategic acquisitions while continuing to return capital to our stockholders. Operating cash flow for the fourth quarter was an outflow of $32 million compared with positive $254 million last year. This decrease is primarily due to delayed billings in the quarter relating to the cybersecurity incident, which resulted in abnormally high receivable balances at the end of the year. We expect improvements to cash flow in the first quarter as we make these collections and receivable balances return to normal levels. For the full year, operating cash flow was $500 million compared with $602 million in 2022. Restructuring expenses in the fourth quarter were $21 million or $0.08 per diluted share and were incurred as part of our previously disclosed restructuring initiative. These expenses mainly relate to severance benefits, costs relating to exiting certain facilities, and the planned exit of a non-core business. In addition, in the fourth quarter, we incurred expenses of $11 million or $0.06 per diluted share that were directly related to the cybersecurity incident, mostly consisting of professional fees. We expect to incur some additional professional fees and other expenses related to the cybersecurity incident in 2024, but at a lower amount. During the fourth quarter, we also recorded a charge of $27 million or $0.15 per diluted share related to a non-cash impairment of capitalized assets in Europe and a charge of $7 million or $0.04 per diluted share related to a non-cash impairment of some intangible assets. I’ll conclude my remarks by introducing our 2024 financial guidance. At this time, we are unable to provide estimates for costs associated with integration and restructuring for 2024 and direct expenses associated with the cybersecurity incident. Therefore, we are not providing GAAP guidance. As usual, we are introducing 2024 financial guidance for total sales growth and diluted non-GAAP EPS. In addition, we are providing guidance for 2024 adjusted EBITDA. We believe this provides an additional metric reflecting the performance of the business as we pivot to more high growth, high margin products and services. For 2024, we expect our non-GAAP diluted EPS attributable to Henry Schein, Inc. to be in the range of $5 to $5.16, reflecting growth of 11% to 15% compared with 2023 non-GAAP diluted EPS of $4.50. This guidance reflects an estimated residual impact of the cybersecurity incident of approximately $0.15 per diluted share, which we expect to primarily impact the first quarter, and an estimated increase in the non-GAAP effective tax rate from 23% to 25%, or approximately $0.13 diluted share. We expect to file an insurance claim arising from the cybersecurity incident and believe our claim will be covered under our cyber policy. Although, final resolution is subject to insurer approval, this policy has a $60 million claim limit on an after-tax basis with a $5 million retention, and we would not expect it to be recognized until later in the year. Our 2024 guidance does not include any associated benefit from potential insurance claim proceeds from this claim. As Stan said, we now believe that sales of COVID test kits and PPE have reached the point where year-over-year comparability has largely normalized, and we do not expect to break out the related EPS impact. We do expect there to be some remaining impact from lower year-over-year PPE pricing, primarily impacting sales growth in the first quarter. Our 2024 non-GAAP total sales guidance is for 8% to 12% growth over 2023, with higher growth anticipated in the second half of the year, reflecting merchandise sales growth from the business recovery from the cybersecurity incident. This sales guidance also includes sales from the acquisitions we completed in 2023. Our 2024 adjusted EBITDA growth is expected to increase by more than 15% versus 2023 adjusted EBITDA of $984 million. As Stan mentioned, we expect market growth rates to be at the lower end of our long-term assumptions. Our 2024 guidance is for current continuing operations as well as acquisitions that have been announced, and does not include the impact of future share repurchases and potential future acquisitions. Guidance also assumes that foreign currency exchange rates are generally consistent with current levels and that end markets remain consistent with current market conditions.

Thank you, Ron. The 2024 guidance that Ron just discussed reflects somewhat of a transition year following the cyber incident. That said, we are incredibly pleased with the great strides the team has made in our recovery efforts. It’s quite remarkable how effectively this team operated while advancing the execution of our strategic plan. We look forward to continuing this momentum and delivering our long-term growth metrics that we established during our Analyst Day event last February. I know we’ve covered a lot of ground today; it’s a little bit complex, but we are here to clarify any questions or thoughts that investors may have. So please.

Hi, guys. Thanks so much for the details on the outlook and the quarter. That was very helpful. I just think as I had a couple of questions about the equipment sales commentary, I was wondering if you could go into a little bit more detail on sort of the end-market environment and sort of any way you can quantify what you’re expected push out into Q1 from the cybersecurity impact, specifically on equipment. Yes, that would be a great place to start. Thank you.

I’ll give you some high-level thoughts, Elizabeth, and then maybe Ron can provide you with specific information or numbers to the extent we’re providing that. So our dental equipment backlog was generally flat from the end of the third quarter to the end of the fourth quarter; they were about the same. With the North America backlog down mid-single-digits and the international backlog high-single-digits. Now you have to bear in mind that historically our backlog declined significantly in the fourth quarter due to the fourth quarter being the strongest equipment sales quarter. Of course, dentists and physicians want to get as much equipment installed in the fourth quarter as possible for tax purposes. So the equipment sales growth in the fourth quarter was impacted by the cybersecurity incident, and that’s because we redeployed our sales consultants and particularly our sales equipment specialists in visiting customers and dealing with the cyber incident that occurred. They were not focused on generating sales. Our installation operation worked well. Our service operation recovered almost immediately. But the traditional equipment market is approximately flat, not our sales. The digital equipment sales did result in further erosion of the selling price, but we believe that we have now gone past that. Of course, there are potentially some opportunities to bring in another round of digital scanners at perhaps a lower price into the United States, perhaps even into Europe, that we think would expand the market even further. But even without that, we think the price has stabilized. But the demand is very, very strong for these intraoral scanners. There were a lot of concerns last quarter that DSOs were halting investments; there may be some DSOs that have a challenge, but generally, our DSO customers are investing both in national DSOs and in more regional DSOs. We are optimistic about the equipment business in general. There are also going to be some launches in the traditional equipment sales area that we expect a leading manufacturer to undertake this year that will stimulate demand. As I said, the annualization of the intraoral scanner price decreases. So, that’s sort of the overview. Maybe there’s more information; if you have anything specific we can give you, I’m not sure what numbers we’re providing at this stage.

No, Elizabeth, I think what we can say is that we do expect good equipment sales growth in the first quarter, and a lot of that is from some of these orders that got pushed from Q4 of 2023 into Q1 of 2024. We have contemplated the estimated impact of that when arriving at our $0.15 kind of residual impact from the cybersecurity incident. So that $0.15, in some respects, is a net number. It would take into account some of the favorability that we also expect to get from the pushback of some of these equipment orders or sales into Q1.

Got it. That’s super helpful. And maybe as a follow-up, Stanley, you mentioned a bunch of some dental specialty product launches and some additional products and value-added services. Can you give us a little bit of context around what those are and sort of how you’re thinking about the contribution of those organic launches? I understand, obviously, you also have the follow-through from some of the acquisitions you’ve made in 2023 and 2024.

On the launches, Elizabeth, I’ll give you highlights. If you want more, please call afterward because there’s a lot. On the endodontic side, Brasseler is expecting to advance the Pediatric Putty program, lower-cost Pediatric Putty, Aquasil, in the K-Files direct endodontics portfolio. This is in Europe. There’s a new NiTi file coming out with edge, the bioceramic sealer launch in the U.S. further activity in that area with edge. On the orthodontic side, I covered this already. We had a significant challenge with the patent expiration of the Motion Pro, and for about three quarters, our pricing collapsed. But at this time, the new motion portfolio, the clinical system that we introduced, achieved class one approval and became delayed, and we’re seeing very good recovery. On the software side, I can’t go through the list. It’s huge. A lot of activity is happening, particularly the AI revenue cycle management on the Dentrix Enterprise side, the whole job its analytics side, a lot, a lot of activity going on there. And as it relates to the acquisitions, we’re very pleased with the implant and biomaterial side of Biotech. The software that we’re so excited about will be launching in the U.S., what’s actually launched in the U.S. as part of our clinical workflow. The S.I.N. acquisition, although the market in Brazil is quite tough right now, we’re optimistic from an advancing point of view in U.S. sales, as well as some of the innovative products we have from the BioHorizons, Camlog portfolio entering the Latin American market. Overall, the pipeline of new product introductions, some are already introduced or will be introduced this quarter, and as the year progresses, you’ll see more activity on the specialty side and on software, as well as some of the value-added services products. The acquisitions are doing quite well, all of them.

Hey, good morning, Stan, Ron. Wanted to start on the revenue guidance. Just really hoping we can peel apart a few of the moving pieces as we try to bridge to a core organic growth rate. You’ve got acquisitions that are contributing a few points, maybe a little bit more in 2024, the business recapture and easy comps from the cybersecurity incidents, probably another few points, maybe FX is adding a little bit. Am I right on those? Are we talking one to 5% or 2% to 6% local internal growth for the year? And then if so, can you help with what you’re assuming to get within that organic growth range? If we acknowledge that we’re starting in a little bit of a hole with the cybersecurity incident, what are you estimating for your core organic growth versus your end markets?

Hi, Jason. Yes, your estimates are generally accurate. We expect about 3 basis points or 300 basis points of growth that would come from just the recovery on cybersecurity to get to a more normalized level. We do think acquisitions can get us pretty close to another 3 percentage points of growth as well. So that accounts for six points there of the 8 to 12; FX could get us somewhere between, say 0.5 points to 1 point. So that narrows down what that internal growth piece would be, which reflects continued accelerated growth in our technology and value-added services, as well as some growth in the core business and specialty businesses.

Okay. But it accounts, I guess, what does it account for? Just as a quick follow-up here, what does it account for in terms of where you’re starting at? I caught from the prepared remarks you’re maybe 97% or 98% of the way back. But if we’re talking about low end of the guidance or the ranges you gave at your investor day, I’m just maybe having a hard time trying to figure out how we get into that 4%, 5%, 6% range for core growth unless I misunderstood where you’re at on recapture.

Well, I think the core growth you might be referring to would include specialty. So that’s going to be part of that. We did kind of direct towards the low end of the market growth rates that we had communicated on Investor Day last year, but those are market growth rates. So it’s up to us to try to outperform that market, and that becomes part of our growth assumption.

Great. Thanks for taking my question. Just wanted to look into some of the margin assumptions here. Now, I think just on a base level, you’ve got adjusted EBITDA margin, probably expanding, call it, 30 basis points at the midpoint. And then on growth, when we think about normalizing for cybersecurity with the numbers you’ve provided, we’re looking at kind of low-single-digit core adjusted EBITDA growth. Is that the right way to think about how you’re seeing the core profit dollars expand when we look to 2024?

Yes, I think it’s a good general starting point, John. There will be some margin pressure that comes from the recovery still from cyber. We did have to delay, for example, some projects in the back half of the year, for example, our global e-commerce platform. So some of those costs are now being incurred in 2024 other investments that we’re making that create a bit of that margin pressure. But as we recover from the cybersecurity incident and ramp up the revenues a little bit more as the year goes on, we’ll begin to see improvements in those margins over the course of the year.

Great. And then just looking at capital allocation for 2023, you probably were above the long-term guides for cash deployment on M&A. As we think about 2024, is there a shift in the way that you guide us to think about capital deployment, particularly around potentially debt pay down? Then it sounds like you’re not incorporating any share repurchase in the guide. Is there anything we should think about there as it relates to overall capital deployment?

Yes, we’ll continue with some share repurchases. Traditionally, we have not included that in the guide. Last year was a little lighter year for us on share repurchases. We did less in Q4 than we normally would do just to preserve some capital after the cybersecurity incident. I don’t expect us to do a billion dollars in M&A in 2024. I suspect we’ll be something closer to our historical run rates of $300 million to $400 million there. In terms of the general philosophy around capital allocation, we do have, you mentioned some debt pay down? We are carrying more debt than we have historically, so we will be contemplating that as an alternative to use of capital. If we believe that is better accretion than a share repurchase, then we’ll try to mix in some additional pay down on the debt if we think that is more accretive than the other options available to us.

Great. Thanks, guys. Good morning. Yes, a lot of numbers, so maybe I’ll sort of stick to that theme. But, Ron, I get a $5.36 normalized for 2024. I’m taking your midpoint of $5.08; I’m adding back the tax at $0.13, the residual $0.15. And that’s sort of apples-to-apples to the $5.22, in my opinion, in 2023, the $4.50 plus to $0.7 to $0.75. So you’ve got low single-digit year-over-year EPS growth, but the revenue growth to the prior question is arguably solid. I don’t know that internal might land you around 3% to 4%. You’ve got some acquisitions you did. That should be accretive in 2024. So can you just provide a little bit more context on why I’m sort of arriving at that low single-digit year-over-year, call it normalized EPS growth, in light of what looks like low to mid single-digit solid internal revenue growth?

Yes, John, I agree with your numbers. I agree with your math. As I mentioned before, the 2024 numbers do include some investments we’re making in the business, some things that had to be deferred from 2023, as well as ongoing investments that we believe are necessary for future growth in the business. That’s reflected within our earnings estimates.

Okay. So then maybe I’ll ask a follow-up, and the second question all at once. But taking that answer into account, you’re providing 2024 guidance today, but I’ll ask about 2025. Some of that stuff is just specific to 2024, right? Like the $0.15 residual and these investments that sort of shifted out in 2023 into 2024. When we think about your LRP and just some of that longer-term – the long-term numbers, arguably, when we take that into consideration, I’m guessing 2025 might be the beneficiary from a growth perspective as you exit that in 2024.

Yes, your understanding of that is correct. We do look at the possibilities for 2025 as being what we said in our Investor Day a year ago, that being that our long-term goals at that point in time were revenue growth of 6% to 8% and EPS growth at 8% to 11%. That’s what we’re working to position ourselves for as we get into 2024.

Hey, thanks, guys. Let me ask kind of a one, two parter just to follow up on two things that have been asked. And then I do have a fundamental question as well. But Jon just threw out a kind of a 3% to 4% organic, hopefully not groupthink here, but that’s kind of where our math was as well. Ron, does that kind of 3% to 4%, I think Jason said kind of maybe a bigger range, but 3% to 4%, kind of the organic core growth rate you’re looking at this year when we take into account deals and the cyber stuff and all that? And then you mentioned a 0.5 point to 1 point on currency; I just want to make sure you’re talking a headwind or a tailwind there as you model it on currency.

We have a slight tailwind on currency, Jeff. And yes, 3% to 4% internal revenue growth is what we’re aiming for as we factor in the cybersecurity normalization and also acquisitions. So the residual that is left in that revenue guidance would be in that 3% to 4% range.

Yes, fair enough. And then the fundamental question I just wanted to ask is, as you move some of the ACE surgical stuff now out of the specialty sales force into the FSCs, same with some of the EdgeEndo stuff. Should we think of that as an incremental opportunity? I mean, I guess, obviously, it is. But were some of those products already being sold to the GPs, and those sales just getting handed off from the FSCs to the specialty sales reps, and now it’s something that the FSCs can actually get compensated on, or is this a big kind of incremental opportunity? Because those products weren’t even really being detailed in a big way at the GP level. Thank you.

Very good question, Jeff. So on the endo side, the portfolio of endo products that is historically sold through distribution in the United States in particular is rather limited. That’s why we entered into the specialty field ourselves. Yes, selling of the EdgeEndo product through Henry Schein in the United States and in Canada will be a net positive. On the A side, Henry Schein’s reps have had access to some of the biomaterials that we offer at Henry Schein, namely the ACE biomaterials. However, I would not say that they were focused on this. By providing the specialty salesforce capabilities, I believe we can make nice progress within the oral surgery community for the biomaterials and equipment, and perhaps even some general sales. There will be collaboration, of course, with our implant company in the United States, namely BioHorizons, and with the S.I.N. product line as that is launched further into the United States. This is something very exciting. Sales have taken off somewhat, but I expect much more sales after our national sales meeting in the summer this year as the sales force is educated in how to create leads for the specialty sales team in both of these areas.

Great. Thanks so much for taking the time to chat now. Relative back – going back to the equipment line as you think about not only 2024 but the jumping-off point. Stanley, you’ve talked about traditional being at a kind of flattish overall market. How do you see your role, especially on the back of the recovery from the cyber incident taking hold in terms of where your best opportunities are to drive share and where could be the biggest point of variation, both the up and downside, not only on traditional but on high-tech equipment?

Very good question, Michael. We continue with our role of helping practitioners operate a more efficient practice so that they can operate a more efficient practice, and on the clinical side. We believe that our clinical workflow, which I think is quite unique, we covered at our Investor Day and have made quite a bit of progress in that area. This leads to greater sales in digital equipment units for sure in the scanners, in 3D printing, and I think the chair side mill is relatively flat today, but particularly in those two areas, as well as 3D printing and imaging, 2D, 3D imaging, all connected to our software. I think all of that helps us advance our position on the digital side, where it’s already quite strong, both in the United States, Canada, and internationally, particularly in markets where we offer practice management software. Overall, we believe we will continue to gain market share in a rapidly growing market on the digital side. On the traditional side, we will continue to edge forward with our market share. We’ve been doing that for years, both here in the United States and abroad. There are a couple of international challenges, particularly in parts of Western Europe where some of the national brands have lost market share due to pricing, and we’re now selling more of the lower priced brands. This affects the selling price but may not affect profits. Overall, we are quite bullish about our equipment business. It’s stabilized since the post-COVID period, and we are comfortable that we can grow market share. Our equipment service business is performing very well, too – we’ve invested in software and systems in that area throughout the world, and that is paying off.

And just one quick related follow-up, if I can. You mentioned earlier about the IOS scanner pricing being a headwind on growth. I don’t think that’s a surprise to anyone. Do you feel like we’re at the bottom on pricing industry-wide? And if not, what gets us there?

I thought we mentioned, but maybe we were not clear. I think we will see a little bit more in the beginning part of the year and I think we will stabilize. There is a possibility of additional less-feature-rich systems being introduced into the United States, but I think that will only expand the market. What we’re talking about is that we are 40% of dentists; half of the dentists are using one of these scanners. I think every dentist should use one. Patients want that. There’s a huge opportunity to expand the market, plus the replacement business is also growing on systems that integrate with our software. You combine that with 3D printing and the whole digital space, and it is all very exciting. I think we’ve probably gotten to the bottom on the price erosion side or close to it, maybe a little bit more as I said, in the first three or four months of the year. If a lower priced product is introduced with fewer features, I think that will only expand the market.

Great. Good morning, and thanks very much for taking the question. I wanted to ask about the, I think you described it as a low-single digit kind of gap in merchandise sales that you’re still seeing related to the cybersecurity incident. What type of customer or purchase have you not seen come back yet? And how should we think about the company’s plans to close that gap? It sounds like you don’t expect a residual impact to extend beyond Q1. Do you expect to recover those order volumes this quarter and be back to pre-incident levels going into the second quarter?

Yes. These are good questions. During the cyber incident, our website was down for about a month or so, a little bit longer internationally, which resulted in customers who are impulse shoppers, customers looking for pricing when they buy, and customers who we have particular data on what business they are not giving us particular products or timing. We didn’t have access to all that data and couldn’t really market through our website and social media. All that is back again, and we’re quite active in that area. I think we’re starting to bring that business back again. These are the customers that are not necessarily called upon by a field sales representative or for some products they go shopping, or where a telesales representative doesn’t have a deep relationship, even if the telesales representative had a deep relationship because they were busy taking orders rather than calling out. That area is what we need to reinvigorate. Our Google ratings went down because we were not active. All of that is being worked on. I have tremendous confidence in our team working on e-commerce, and I think that’s how we’ll get that business back again. We’re already seeing some progress. Most of the larger customers are back again. I believe we have to satisfy the CISOs of many of our larger customers that everything’s okay, and by and large, those systems are functioning again. I expect it will take at least a quarter, maybe four months, to get back to normal. I don’t think we’ve lost many customers. Our services are great, whether it’s the services we offer for equipment installation or for claims processing. There’s an incident where a major part of the claims processing in our industry was affected through one of the providers, but it did not impact us. We quickly came up with alternative procedures. I think people will understand that just like in COVID, when they didn’t have masks, they knew who to call. Our brand in the market is strong today, and we will recover. I can’t tell you exactly what day, but it’s not going to be long.

Okay. Great. And maybe just a quick follow-up on, I think it was Jon’s question on first quarter expectations. Could you maybe just talk about how significant the weather and flu impacts that you mentioned seeing in January, maybe in February were to the business? And just as we put that together, what is the residual impact of the cybersecurity incident on consumables? Is that the right way to think about what you’ll see in the first quarter, sort of like a mid-single-digit type decline in that part of the business?

Yes, Nathan. January was indeed disrupted by patient traffic related to weather and illness. The flip side is we saw increases in our medical business related to flu diagnostic kits, which typically precedes increased cancellations in dental offices. There was illness impact in January as well as weather. We’ve seen improvements in February, leading us to believe that we’re approaching a more normal traffic pattern as we come out of February into March. There are factors we must consider, including the effects of the cyber incident as we evaluate our activity versus weather versus illness. It’s tough to specify the exact impact of each of those, but we believe we’ll reach our Q1 goals in line with our overall guidance for the year. We anticipate headwinds year-over-year from PPE, particularly in Q1 due to the difference in price points between Q1 last year and this year as well.

Hi, good morning. Thanks for squeezing me in here. Can you remind us what investments you need to make on the commercial execution front to fully realize your acquisitions? I think one example you’ve talked about was kind of bringing S.I.N. Implant to the U.S., but any additional color and perhaps Shield and other acquisitions would be great.

Hey Justin, I don’t think there are any major investments to bring S.I.N. to the U.S. They already had approval at the time we acquired or invested in the actually acquired the business. Of course, there’s educating the salesforce in the United States. S.I.N. has a specialty salesforce, and I don’t think that they’re going to have to invest much more than the income that they generate from expanding their sales in the United States – we expect that to be accretive. There is some work going on that’s costing us money in the alignment of the aligners between Biotech and Henry Schein orthodontics. We will be merging facilities and moving around the world, different sites for the manufacture of the aligners and operating under one brand, so there’s some investment in that. There’s a lot of investment in the recovery of systems from an operational standpoint; that’s all baked into our numbers and not material in the context of the entire Henry Schein business. By the way, Shield will be totally accretive; that whole healthcare homecare business is a very nice business for us and certainly not a drain on earnings. Sorry.

That’s super helpful. And how is the underlying demand for your specialty dental business versus maybe your expectations? You’ve touched on implants and endodontics a little bit, but also curious to hear about how clear aligners are doing. I know that business is relatively small still, but I guess what needs to happen outside of macro getting better to maybe see some accelerated growth in your specialty business overall?

Our specialty business is doing quite well, particularly with DSOs where we provide very good value. It’s doing quite well in France and several European countries, but again, it’s relatively small, and I wouldn’t expect this to significantly affect corporate numbers, other than enabling us to go into a customer and offer all the products and related services the customer may need. So it’s a good product offering, particularly for DSOs. Several large ones are quite happy with our software business and that’s with our aligner business and the software in that field; it’s growing nicely, but it’s really an adjunct to our specialty business. Thank you very much for calling in. I know these numbers are complex. Graham and Ron stand by to clarify any of the questions you may have and answer those. We remain confident in the business and quite enthusiastic about the relatively quick recovery in the latter part of the fourth quarter and into the first quarter. Of course, we had some challenges with the flu in the first quarter, but it’s recovered in February. Our medical doctors did okay with additional flu visits so far in the quarter. I think the recovery is going well. We have to remember that our team was entirely focused on servicing customers, not sales, for most of the fourth quarter, and that our equipment team was really servicing customers but not really going out and selling much in the fourth quarter. I don’t think we missed a lot of business, but we now have to sell again, and I think we’ll do fine in the equipment area as well, both here and internationally. Our European business is stable; Australia, New Zealand is stable. Brazil is slightly challenged due to the economy, but we’re still growing. Our software business is great. We are very impressed with how quickly our team at Henry Schein One responded to the challenge of the major clearinghouse in claims, managing to service claims through alternative methodologies so quickly. I think our customers will appreciate that, and I expect us to garner some new customers in that process. Our specialty businesses are doing well, and we believe we continue to grow market share, particularly on the implant side in a market that is relatively stable to slightly growing. We expect strong growth on the endodontic side as equipment systems are fully restored. The orthodontic side will grow, as well. I remain very enthusiastic about a strong 2024. Thank you very much.