Henry Schein Inc (HSIC) — Q2 2024 Earnings Call Transcript

Thank you, operator, and my thanks to each of you for joining us to discuss Henry Schein's financial results for the second quarter of 2024. 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 include information that is 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 analyses 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 the 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 and in 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 of August 6, 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, join 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.

Good morning, and thank you, Graham. Thank you all for being with us today. We achieved solid financial results for the second quarter, including strong operating cash flow, which reflects stable end markets. Our gross margin continues to rise, thanks to our strategies to expand our high growth, high margin products and services, as well as the successful performance of our recent acquisitions. We are seeing improving sales trends in our distribution businesses. However, the recovery pace since last year's cyber incident has been slower than we expected. Given the tough economic environment in certain markets and the delay in recovery from the cyber incident, we are updating our full-year financial guidance for 2024. We remain dedicated to our long-term financial objectives through our BOLD+1 strategic plan, which has proven effective, supported by a strong balance sheet and a new restructuring plan. As we continue to achieve synergies by integrating our distribution businesses, specialty products, technology, and value-added services, we see strong complementary relationships among our various sectors. We are also introducing a restructuring plan to integrate recent acquisitions and optimize operations, aiming for annual savings of approximately $75 million to $100 million. We are confident that we will continue to see improved operating margins following the implementation of this restructuring plan. Simultaneously, we are increasing our repurchase authorization by an additional $500 million, following recent Board approval, as we aim to capitalize on our strong cash flow. Now turning to our business units, let’s start with dental distribution. In North America, patient traffic has remained generally flat compared to the previous quarter, with unemployment rates and dental insurance coverage staying consistent. We are witnessing improving sales trends in our dental distribution businesses and believe we gained market share in the quarter, focusing on retaining episodic customers post-cyber incident. However, the recovery pace remains slower than anticipated. We reported a year-over-year decline in merchandise sales, primarily due to slower recovery and reduced sales of PPE products, resulting from lower glove pricing. Membership in the THRIVE Signature program is on the rise, adding nearly 1,500 new members in the second quarter and bringing total membership to approximately 6,000 U.S. dental practices. This subscription-based program fosters customer loyalty and benefits our various businesses, including distribution, specialty products, and services. Our North American dental equipment sales displayed growth, reflecting positive trends across traditional equipment, digital imaging, CAD/CAM, and other products and services. International dental merchandise sales grew modestly, particularly in the DACH countries and Brazil, although dental equipment sales in France suffered due to changes in DSO legislation, a generally slow market in Italy, and the expiration of tax incentives last year in Australia, while other markets remained stable compared to last year. Given demographic trends, we anticipate patient demand will exceed the supply of dental services, which we believe will drive the need for greater efficiency in dental practices and positively impact the growth of our dental businesses, aligning with our BOLD+1 strategic plan. Now, shifting to our dental specialties. Sales growth in this segment was consistent with the first quarter's pace, with acquisitions and organic growth in Europe balancing out lower sales in North America. In Europe, our dental implant product sales showed solid growth as we continued to capture market share. In North America, we received FDA approval for the launch of the bone-level Tapered Pro Conical implant in mid-June, which was slightly behind schedule. We anticipate that this timing may have affected the quarter's sales growth, as some customers delayed purchases in anticipation of the new product. We expect sales growth for dental implants in North America to rebound in the third quarter supported by this new product. The Tapered Pro Conical positions us to offer an innovative and competitive product in the U.S. dental implant market. Customer feedback has been positive so far, and we look forward to updating our progress in future calls. Our endodontic business continued to grow, supported by a small acquisition we made in Latin America. Last quarter, our focus in orthodontics was the U.S. launch of the Biotech Smiler clear aligner. Our orthodontic business remains small in comparison to the overall specialty business. It's crucial for investors to note that we are aligning our dental sales teams, which has successfully deepened our penetration of the DSO segment last quarter across our specialties. The distribution side is effectively collaborating with specialty businesses and value-added services to create substantial value for our customers, thus enhancing Henry Schein's profitability. Now, let’s discuss technology and value-added services, specifically Henry Schein One, our dental software division. Our customer base for the Dentrix-Ascend and Dentally cloud-based solutions grew by over 25% year-over-year in the second quarter, with worldwide installations surpassing 8,000. It's important to understand that while we used to recognize revenue from on-premise software immediately, we are rapidly transitioning to cloud-based solutions, which are more profitable in the long term, though we do not fully recognize revenue at the time of sale. These cloud-based practice management software products form the foundation of Henry Schein One and also facilitate additional product sales and equipment merchandise at Henry Schein, driving specialty products through the increased sales of Nemotech Software. The number of claims processed by our revenue cycle management e-claims business increased by single-digit percentages compared to the previous year, despite some setbacks due to the Change Healthcare cyber incident. Normally, we would have expected more significant growth, but this incident has slowed our progress. We continue to serve our customers without interruption, but there are cash collection challenges due to the way payments are processed through Change. Some dental practices face cash flow issues due to reimbursement delays. We view this as a temporary challenge, expected to resolve eventually. While this hasn't significantly impacted our receivables collections, it poses challenges for some practices that aren't receiving checks as frequently as before. The collaboration between Henry Schein One and our distribution and specialty products businesses fosters highly integrated solutions, strengthens customer relationships, and creates multiple touchpoints between Henry Schein and our dental customers, driving growth, especially in the DSO segment. As we work toward our 2025 strategic plan, we will extend these synergies to smaller accounts. Many high-quality leads for Dentrix products and services originate from our U.S. dental field sales representatives, and this is also true in Canada and internationally. Further, our Nemotech specialty software, developed in France, is now integrated with our Dentrix practice management software in the U.S., providing a streamlined digital workflow for implants and orthodontics, which has garnered attention from significant DSOs. We plan to implement this further with larger DSOs and will gradually advance our offerings to smaller practices. Additionally, we enhanced our solutions by pairing Dentrix Detect AI, our clinical AI system powered by VideaHealth, with Curodont, an early caries treatment product, and we are seeing early success with the launch of Reserve with Google, all positively received by larger DSOs. We are optimistic that the Videa-Curodont solution will become a standard practice over time. These examples highlight the unique strengths of our combined platform, from which we continue to derive benefits and value through interconnectedness across our business, all aligned with our strategic planning. Now, turning to our medical group. Sales in the second quarter were also affected by the slower recovery from the cyber incident, along with ongoing migration to generic alternatives for certain branded pharmaceuticals, particularly in the injectables market, where we hold a strong position. Sales of PPE products have declined primarily due to lower pricing. Similar to dental distribution, we are regaining episodic medical customers, particularly large accounts that had shifted their prescription drug business to other distributors. As these customers recognize our unique logistics capabilities, they are returning to us. While this process is taking longer than anticipated, we are confident they will return. Excluding the impact from point-of-care diagnostic tests affected by flu seasonality, we have observed sequential improvements in medical sales growth. Our home solutions business performed well, with double-digit percentage sales growth during the quarter, primarily driven by Shield Healthcare and Prism Medical businesses. We are particularly pleased with Shield, which has been well-received since our majority stake acquisition last October. Although our overall home care sales volumes are still modest, this market holds strategic importance for us, presenting significant growth opportunities alongside the transition of procedures to Ambulatory Surgical Centers (ASC). To conclude my opening remarks, we believe we have delivered solid second-quarter financial results, including strong operating cash flow. While we expect short-term impacts from the challenging economic conditions in some markets, we have experienced similar fluctuations in dentistry over the years. This situation appears to be slightly more challenging, and the recovery from the cyber incident has been steady but slower. Each month, we see improvements, and we remain optimistic about the business's prospects overall. We will provide more details shortly, but first, I will hand over to Ron to discuss our quarterly financial results and '24 guidance in greater detail. Thank you, everyone. 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. All items excluded from our second quarter non-GAAP financial results for 2024 and 2023 are detailed in Exhibit B of today's press release. A reconciliation of our GAAP to non-GAAP income statement is also available in our quarterly earnings presentation on our website. With respect to sales, I will provide details on total sales, total sales growth as well as LCI sales growth, which is internally generated sales in local currencies compared with the prior year and excludes acquisitions. Turning to our second quarter results. Global sales were $3.1 billion, with sales growth of 1.1%. This reflects 4.0% sales growth from acquisitions, a 0.5% sales decrease resulting from foreign exchange rates, a 0.5% sales decrease from lower sales of PPE, which is primarily the result of lower glove pricing and the pace of recovery from the cyber incident late last year. LCI sales for the quarter decreased 2.4%, which includes a 0.5% decrease from lower PPE sales. As noted by Stan, our underlying sales growth for the quarter reflects improving sales trends in our distribution businesses. However, the pace of recovery in these businesses since the cyber incident late last year has been slower than anticipated. Our GAAP operating margin for the second quarter of 2024 was 5.09%, a 137 basis point decline compared to the prior year GAAP operating margin. On a non-GAAP basis, operating margin for the second quarter was 7.75%, a 41 basis point decline compared to the prior year non-GAAP operating margin. Consistent with our BOLD+1 strategic plan, gross margin expanded by 101 basis points, primarily due to a greater contribution from high growth, high margin products and services. Operating expenses were higher as a percentage of sales, primarily due to recent acquisitions and lower sales at our distribution businesses. Second quarter 2024 GAAP net income was $104 million, or $0.80 per diluted share. This compares with prior year GAAP net income of $140 million or $1.06 per diluted share. Our second quarter 2024 non-GAAP net income was $158 million or $1.23 per diluted share. This compares with prior year non-GAAP net income of $173 million or $1.31 per diluted share. The foreign currency exchange impact on our second quarter diluted EPS was unfavorable by approximately $0.01 versus the prior year. Adjusted EBITDA for the second quarter of 2024 was $268 million compared with the second quarter 2023 adjusted EBITDA of $279 million, with EBITDA growth expected to accelerate in the second half of the year. Turning to our second quarter sales results. Global dental sales were $1.9 billion, with sales decreasing 1.7%. LCI sales decreased 2.1% or 1.7% when excluding PPE sales. Global dental merchandise LCI sales decreased 2.6% versus the prior year, as the pace of our recovery in merchandise sales following last year's cyber incident is taking longer than anticipated. Regarding dental equipment, although our global LCI sales decreased 0.4%, our North American equipment LCI sales grew 2.9%, with solid growth in our traditional equipment category, digital imaging, CAD/CAM, as well as our parts and service business. Overall, digital equipment sales were up slightly from the prior year. Our international equipment LCI sales decreased 5.5%. And as Stan noted earlier, this was the result of sales decreases in France, Italy and Australia, with sales in other markets in line with last year. Changes in French legislation limiting DSOs negatively impacted equipment investment in France, while the overall equipment market in Italy was slow. In addition, the end of tax incentives last year in Australia and the U.K. provide a difficult year-on-year comparisons in these markets. We expect modest overall equipment sales growth for the remainder of the year in both North America and internationally. Dental specialty product sales were approximately $279 million, with growth of 7.2% driven by strong dental implant and biomaterial sales in Europe as well as endodontics sales globally. Global technology and value-added services sales during the second quarter were $214 million, with total sales growth of 10.8%. LCI sales growth of 3.9% included 2.9% LCI sales growth in North America and 10.5% LCI sales growth internationally. In North America, while sales growth is still recovering from the Change Healthcare disruption, we have solid growth in our value-added services, revenue cycle management and Dentrix-Ascend practice management businesses. International growth was driven by our Dentally cloud-based solution. Global medical sales during the second quarter were $1.0 billion, with sales growth of 5.0%, and LCI sales decreased 4.3%, reflecting the slower pace of recovery from the cyber incident as well as lower PPE sales as a result of lower glove pricing and ongoing migration to generic alternatives for certain branded pharmaceuticals. Excluding PPE sales, LCI sales decreased 3.6%. Our home solutions business had strong growth driven by recent acquisitions. As Stan noted, we also benefited the first quarter this year from strong point-of-care diagnostic test sales driven by flu seasonality. Regarding stock buybacks, we repurchased approximately 1.4 million shares of common stock in the open market during the second quarter, buying at an average price of $70.64 per share for a total of approximately $100 million. We had approximately $90 million authorized and available for future stock repurchases at the end of the quarter. An additional $500 million of share repurchases was authorized by our Board of Directors on July 31. We expect to repurchase approximately $175 million in shares in the second half of this year, with this new authorization providing us the flexibility to repurchase more. Turning to our cash flow, we have strong operating cash flow of $296 million for the second quarter, which exceeded operating cash flow of $274 million last year. Year-to-date operating cash flow was $493 million, driven by lower working capital and $192 million more than last year. Restructuring expenses in the second quarter were $15 million, or $0.08 per diluted share and were incurred as part of our previously disclosed restructuring initiative. That specific initiative was completed on July 31, 2024, and these expenses mainly related to severance benefits and costs related to exiting certain facilities. As Stan mentioned, we also announced today a new restructuring initiative that we expect to continue over the next 18 months, targeting $75 million to $100 million in annual run rate savings. Our second quarter GAAP results include $10 million in pre-tax proceeds as part of our cyber insurance claim. As we have previously mentioned, this policy has a $60 million claim limit on after-tax losses, with a $5 million retention. We expect to continue to receive payments over time. The $10 million of proceeds received in the second quarter is not included in our non-GAAP results and is detailed along with other non-GAAP adjustments in Exhibit B of today's press release. I'll conclude my remarks with our updated 2024 financial guidance. At this time, we are not yet able to provide without unreasonable efforts an estimate of the restructuring costs associated with the new restructuring plan for 2024, although we expect this to primarily include severance pay and facility-related costs. Therefore, we are not providing GAAP guidance. Our 2024 guidance is for continuing operations as well as acquisitions that have closed and does not include the impact of 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. Our 2024 total sales growth is now expected to be 4% to 6% over 2023 versus our previous guidance of 8% to 10% growth. The previous guidance anticipated a stronger economy as well as a faster recovery from the cyber incident. This sales guidance also includes sales from the acquisitions we have completed to date. For 2024, we now expect non-GAAP diluted EPS attributable to Henry Schein, Inc. to be in the range of $4.70 to $4.82, which compares with previous guidance of $5.00 even to $5.16 and reflects growth of 4% to 7% compared to 2023 non-GAAP diluted EPS of $4.50. This guidance reflects an estimated non-GAAP effective tax rate of 25%. As a result of the timing of implementing our restructuring plans, we expect year-over-year growth in diluted EPS to be higher in the fourth quarter than in the third quarter. Our 2024 adjusted EBITDA is expected to grow in the low double-digit percentages versus 2023 adjusted EBITDA of $984 million and compares with prior guidance of more than 15% growth. We expect adjusted EBITDA to grow faster than non-GAAP diluted EPS because of higher interest expense, a higher effective tax rate, and higher depreciation as a result of the investments we have made to execute on our strategic plan. Through the second quarter, our specialties products, technology and value-added services contributed to 38.5% of total non-GAAP operating income. We continue to believe that we will achieve our goal of exceeding 40% operating income contribution from these products and services for the full year. With that, I'll now turn the call back to Stanley.

Thank you, Ron. As we move into the Q&A, I want to emphasize that we are confident in the prospects for our business despite the challenging economic environment. We believe that markets are stable and that we can continue to gain market share as we recover from the cyber incident, although the recovery is progressing slower than we anticipated a quarter ago. We also feel assured that we will benefit from the growing trend of increased specialty procedures. Our implant offerings have improved, closing a significant gap in the U.S., and will soon be available in Canada. Additionally, we expect the shift of medical procedures to alternate care settings to persist. We are realizing good synergies by connecting our distribution businesses, specialty products, technology, and value-added services. While we concentrate on these opportunities, we are also taking steps to enhance shareholder value, as highlighted in our restructuring plan. We must adjust the restructuring plan since sales growth has not met our expectations, partly due to the current absence of inflation. Our markets are very moderate and might even slightly decline, as our customers are being more price-conscious and shifting towards alternative and private-label brands. However, we believe this will not negatively impact our gross profit and could even be slightly beneficial. We will continue our stock buyback program, anticipating spending the $500 million. With that in mind, let’s move on to questions. Operator?

Thanks, guys, and good morning. Maybe I'll just stick to the same topic. Ron, the 2024 sales growth expectation is now 5% at the midpoint, down from 9%. So, I think we're looking at roughly $0.5 billion of a step-down. Maybe you can just talk about what of that is coming from, call it, the more conservative approach to your distributor recapture versus that of the slower economy, that you also allude to in the press release. And I'll just stop there, and then I'll ask my follow-up on the same topic.

Jon, thank you for that question. Let's start with Ron giving you the basics, and I'm happy to fill-in further.

Certainly. Hi, Jon. From midpoint to midpoint, we came down 4 points, but the math aligns with what you mentioned. Reflecting on our original guidance and even our updated sales projections from the first quarter, our Investor Day assumption from 1.5 years ago was that long-term growth for dental would be around 2% to 4% in market growth, and we set this year’s expectation at the low end of that range. Part of that growth was anticipated from price increases as well. As the year has progressed, our outlook has adjusted to a more flat year-over-year market growth, which still indicates a stable patient traffic environment. Others in the industry have noted flat to negative growth in the market. Pricing has remained relatively flat compared to the previous year, and we see customers frequently opting for lower-cost options, including our own corporate brand, which is generally beneficial for our gross profit. These conditions, combined with our specific challenge of recovering from the cyber incident—though delayed, we're still seeing sequential growth quarter to quarter—are the main reasons behind the reduction in our sales guidance. The fundamentals of the business remain strong. We believe we are regaining market share and working our way back to pre-incident levels, and we expect this trend to continue throughout the year.

Thank you, Ron. I think you've covered it quite well, actually. If there are any specifics, Jon, or anyone has with respect to any particular market, any particular sector, I think we could answer that. But that's the broad overview. Thank you, Ron.

Okay. And just as a follow-up or tack on to that to push you guys a little bit. You talked about the recapture being slower than you would anticipated so far. But you still expect to get this business back. And, I guess, my question is, like, why? Why do you still expect to get that business back? Here we are, almost nine months, 10 months post-cybersecurity incident. I would think it's like a hot lead and either you get them back with incentives, or they might move, especially, if they're episodic to a different platform that they're somewhat content with. So, maybe you can talk about your conviction on getting those customers back and the strategy to do so? And thanks for your time.

That is an important question, and I'm glad you asked it. Our month-over-month reduction of the gap has been progressing well, although more slowly than we would like. We need our field sales team to focus on smaller customers again, as they have been primarily targeting larger ones, which has been successful. It's essential for them to engage with the smaller accounts as well. Additionally, we need to reactivate our telesales team fully, which was affected by the fallout from the cyber incident. Although the customers ended up being okay after we resolved the issues, our call centers have been quite busy. It's only in the last couple of months that they have started making outbound calls. We’ve received a positive response, and I recently attended the launch of our new distribution business in Texas, where our field sales consultants are now visiting smaller accounts for the first time. They reported that customers are pleased to see them but were curious about their absence in recent months, which was due to the focus on larger clients who typically buy more from us. We are confident that over time, we will continue to gain market share, building from where we left off at the end of 2023. While it may be difficult to determine exactly how much of our share gain is due to overall market growth, the effectiveness of the sales team, and the recovery process, we are optimistic about our ability to grow. The question remains about the pace of that growth, and we've provided guidance on our expectations, which are key, though we cannot predict every quarter's results precisely. Your question is indeed crucial.

Hi, good morning, everyone. A lot, definitely, we could cover here in the second quarter, the balance of '24. But I actually want to fast forward a bit to 2025. And apologies up front, I'm going to pack a few in here. We've got a lot of moving parts here this year. The story, though, should be a little cleaner exiting this year, as we'll have lapped the cybersecurity impacts and the PPE headwinds. Where do you see organic growth for the business once we emerge from all the noise? What's the right underlying growth rate and the margin profile we should be using as a jumping off point as we start thinking about 2025? And then, within all of that, can you give us a bit of color as to the phasing of the savings assumed in the restructuring program? It sounds like some of that's coming here in the fourth quarter of '24, some of the benefit. But how much of that should we expect to see in the fourth quarter versus the contribution in 2025?

Jason, let Ron share some specific details based on our assumptions. Generally, we find that the consumable market in the United States and Canada remains quite stable. There has been a noticeable shift towards more price-sensitive options, which might slightly affect our sales but should not significantly impact our gross profit. We believe we can increase our market share in product distribution. Our specialty businesses, particularly in implants and bone regeneration, significantly contribute to profitability, and we feel well-positioned globally in this area. Our exposure to China is minimal, and while there may be fluctuations in Asia, we are strongest in the DACH region of Europe, where we have a solid position. In the United States, we believe we are also well-positioned, particularly with implant dentists seeking high-value branded products, and we are optimistic about gaining market share this year. The endodontics sector is smaller than implants but is showing positive progress. The medical business has experienced some irregularities, especially in the pharmaceutical sector, but the shift towards alternate care, including Ambulatory Surgical Centers and home care, presents good sales opportunities for our brands. We have performed well with larger customers, but we need to increase our engagement with smaller customers through our sales force, tele sales, and e-commerce teams. We remain optimistic about the equipment sector in the United States, where we have seen decent growth. Despite an unusual situation with scanners due to a significant sale last year, we are generally in a positive growth phase. We are gaining market share, though we face challenges abroad; for example, our large market share in France has been affected by legislation, Italy's market conditions are not favorable, and Australia experienced challenges this quarter due to expiring tax benefits. However, we anticipate performing well in that market as we move into 2025. Overall, we expect growth in the equipment market. It’s worth noting that there’s a focus on pricing, as dentists are prioritizing value. Some manufacturers recognize this trend, while others are adjusting accordingly. Although the average unit price may decrease slightly, our profit margins should remain stable, especially as our clinical workflow initiatives take effect. On the Henry Schein One side and with our value-added services, we anticipate they will contribute positively to profitability this year and more so in 2025. Ron, do you have any macro insights to share regarding your guidance?

Yes, Jason, I want to mention that you were discussing the balance of this year and what’s ahead for 2025. We’ve announced a new restructuring initiative and we anticipate gaining some short-term benefits this year, particularly in this and next quarter. There are also more complex actions that will extend into 2025. It’s important to highlight that we’ve made significant progress under the BOLD+1 strategy over the past year and a half, and there will be integration opportunities as a result. This year, we have invested over $200 million to buy out minority shareholders in certain subsidiaries, which enhances our ownership and creates good opportunities to streamline operations and strengthen our One China approach with customers. However, these changes are more complex and won't happen overnight, so they will likely carry over into 2025. This is part of our plan and we've included these expectations in our guidance for this year. When we outline our guidance for 2025, we will address these factors.

Okay. All right. That's helpful. As a follow-up, I want to shift gears a little bit and discuss what came up on a conference call last week from one of your manufacturing partners. I'm sure you've anticipated this question. But just wanted to see if you can discuss what your position is with respect to the relationship with your manufacturing partners and maybe address the status of your particular agreement with Dentsply Sirona? When specifically if you can share it as your contract come up for renewal? And can you discuss how you're proceeding now that you're aware that your main distribution competitor received a non-renewal notice on their contract?

Yes, we haven't specifically discussed our relationships with Dentsply because it's generally not advisable. However, I recently spoke with Simon, the CEO of Dentsply, and we both confirmed that our relationship is strong. I believe we are their largest customer, and they rank as one of our top global suppliers. We collaborate with them in nearly every country, though there are a couple we don't. They are a critical supplier for us. The company has undergone some management changes over the years, but the current team seems to understand what needs to be accomplished. They have been working effectively with our team, particularly in North America and Canada, as well as Europe. It's slightly more complex in Europe, which is one of their largest markets and ours. We have a strong partnership, particularly in Germany, France, Spain, the U.K., and Italy. They have committed to enhancing their sales capabilities, which will be beneficial for us. There are competing products from other suppliers, and we will always prioritize what's best for our customers. Nonetheless, we maintain strategic relationships, and I consider Dentsply one of those. We don't have a formal contract, but we do have a memorandum of understanding, though I need to check on its status. Overall, it's a positive relationship, and we generally have good ties with all our suppliers. I understand there are rumors about selling directly in the dental industry, but specialty products like implants and orthodontics are sold directly to some degree. We must offer a full range of those products, and we've made progress on that front. In today's market, various products are available, and if manufacturers provide good pricing that meets customer needs, we are ready to include their products. For our private corporate brand needs, we have solutions in place. Generally, we enjoy solid relationships with our suppliers. As for the specific issue concerning a particular distributor, that's not something we're going to address. I'm aiming to be as clear and straightforward as I can.

Good morning, guys. Thanks so much for the question. I was wondering, maybe Stanley going back to what you were mentioning before, could you comment specifically on the growth rate for implant in 2Q maybe in North America and then, specifically, globally? And sort of what your expectations are, particularly, for implants for the back half of the year?

Sure, Elizabeth. Implants. The easiest and most straightforward market is Europe, with DACH being our largest area, which includes Germany, Austria, and some business in Switzerland. Overall, we are performing very well with a comprehensive product line and an exceptional sales team developed over many years. While we are not yet the largest player in Germany's bone regeneration sector, we are experiencing significant growth since entering the market about three or four years ago. In terms of implants, we are doing well and expect to continue this trend across European markets, although our market share is relatively small, except in France, where we hold the top position despite facing challenges. Although you asked a specific question, I generally won't provide detailed information about individual countries, but our growth in France is notable. Biotech is also growing organically and performing well with its implants, likely positioning them as the number one. Europe is our most straightforward market. In Latin America, our S.I.N. joint venture, while classified as acquisition growth, is steadily increasing its market share. Fortunately, this venture was not affected by the unfortunate weather conditions in parts of Brazil, and overall, it is performing well. The BioHorizons segment faces some challenges due to instability in certain Latin American countries, but they had limited involvement in the Brazilian market, and we mainly view Latin America through S.I.N. Regarding the U.S., we were significantly gaining market share until last year, and our sales were strong. This year, however, the market seems somewhat stagnant for us due to our new product introduction, with our sales team and customers aware of it. We expected FDA approval around March or April but received it in mid-June. It's going to take some time to ramp up, but we are confident in our prospects for this new product, which has been positively received by DSOs, including both BioHorizons and Henry Schein DSOs. While our sales did decline, it's difficult to determine the exact impact on market share in the United States due to a lack of readily available data. We continue to excel in the U.S. bone regeneration market. Canada is relatively stable. Overall, I'm quite pleased and confident in our progress in both the implant and biomaterials sectors.

Thank you for all that color. That was super helpful. Just maybe as a follow-up. Can you comment specifically, and this is maybe just not just related to implants, but more broadly how you're thinking about trends in July and sort of so far in the third quarter, sort of, are they similar to what you saw in 2Q, better, worse?

Yes, specifically regarding the distribution businesses, we've seen growth from Q1 to Q2 as we regain some market share. Although this recapture hasn't been as significant or fast as initially hoped, it has continued into July, and we anticipate that it will persist throughout the third quarter and into the fourth quarter. Particularly in the U.S. distribution business, we feel optimistic about the ongoing trends. Other products may exhibit more variability, especially with the upcoming European holiday season, but we remain confident in the distribution sector's performance.

Great. Thanks for taking my question. Just wanted to dig in a little bit on the medical side. Can you just speak in a little bit more detail about the effects from some of your larger customers, potentially ordering away with the pharmaceutical distributors? And then what your expectation is for that return process over the back half? Thanks.

Thank you, John. Generally, our large customers have come back. We have one large customer that just came back for the pharmaceuticals, hasn't come back for the med surg, although I think, the practitioners are going to ask why. On the other hand, we've picked up some larger customers along the way. So, it's a give and take. The area is not the large customers. I think, we're doing okay there. We're doing okay with the ASCs. In fact, I think we're doing very well with ASCs. We're growing. It's these smaller practices, the derms, that are in private practice, the aesthetic people in private practice, the ones where our sales people just have not had the time to go back, and our tele sales people have been mostly focused, in-bound, but are now being focused externally, too. Excuse me. So, overall, I think, the recovery is good. It's not what as fast as we wanted. There is some depression, as we noted in the price of injectables. As the market moves generic, I think, there's a movement also to corporate brands in medical, and the whole point of care diagnostics flips from one quarter to another, including flu vaccine shipments.

Great. And then, just on the potential kind of the shift towards owned brands that you've called out here, is that embedded in your guidance? Does that kind of persist through the back half? And is this kind of a more sticky shift to private label brands for you, or do you expect that to revert at some point?

We are assessing the run rate on corporate brands, and it is included in our guidance. It's challenging to address it broadly since we are experiencing some price pressure on gloves, which is a significant brand for us. However, apart from gloves, we are noticing relatively strong demand as there seems to be increased awareness of costs among our customers right now.

Hi, guys. Thanks for taking the questions this morning. I guess just one to kind of follow-up even on Jon's first question here. I mean, I thought last quarter, you guys had kind of touched on a 96%, 97% recapture rate in the distribution business. And I guess if you're kind of trailing your original expectations, are you kind of already expecting to be back at 100%? And then, is there any variation in there between your medical and dental? And then, I guess just last one to follow-up on that. Within the dental business, I mean, if you are recapturing a slightly greater percent of that lost share from last year. I mean, it seems like on a comp adjusted basis, your North American distribution business did kind of slow with merchandise. So, is there anything else in there? I mean, you mentioned patient volumes, kind of, flat. So, has that mix shift to kind of lower-priced branded options really accelerated here more meaningfully than what you were expecting?

Hi Dane, it's Ron. It becomes a bit unclear because it's challenging to evaluate. As you mentioned, from the available data, we have a sense of the recovery from cyber issues. However, the purchasing behavior of those customers has been quite irregular; they order sporadically and occasionally disappear for a while. Hence, they lack consistency, making it hard to quantify the exact percentage of customer recapture. For us, it’s crucial not only to win back our former customers but also to attract new ones. The primary focus of the business is on increasing market share, whether that involves previous customers or new clients, which is a standard objective for us. Regarding the trends we observe in dental and medical sectors, the effects seem to be quite similar. While the recapture rate might be slightly higher in dental, the difference isn't significant. We have to make several assumptions to figure out the actual recapture rate. I also missed the last part of your three-part question.

Yes, sorry. I think, like, on a comp adjusted basis, your growth in North America distribution consumables, dental seemed to slow a little bit. So, is that just reflective of the more shift to the lower priced branded consumables products? And then, I'll just kind of add my last one here. I mean, I think with the EPS guide, I think your midpoint for the back half of the year is kind of in that $2.42 range. And I think historically, your second half EPS tends to be around 49% to 50% of the full year. So, just how do we think about that kind of $2.42 back half guide and think about that for a jumping off point for next year? Thanks.

Yes. In the second half, we expect to maintain our momentum in regaining market share, though not as quickly as we initially expected. We foresee an increase in market share in Q3 and Q4, which should contribute to overall growth. Additionally, we anticipate improvements in specialty sales, especially with the new product launch in North America related to implants. We also expect the technology business to perform better in the latter half of the year. All these factors will play a role in our overall performance. Regarding brands, we've noticed a shift towards corporate brands, which yield better margins for us. While this doesn't significantly impact our top-line revenue, it does contribute positively to our gross margins.

Let me thank you. I just want to add one more point. Larger accounts are growing faster than the smaller ones. The larger accounts are more aware of alternative brands that offer better pricing. As I mentioned earlier, this trend positively impacts our gross profit. While large customers are expanding more quickly than smaller ones, they are increasingly considering alternative brands in their purchasing decisions. This shift is favoring certain manufacturers who are willing to provide discounts for larger contracts. Although this may slightly lower our sales, it is beneficial for our gross profit. Now, we are running a bit behind schedule. I want to thank everyone for participating. I understand it has been a challenging quarter from a mathematical perspective. Ron, Graham, and Susan are prepared to meet with you, and I will also make myself available. The business remains strong, as it has been for decades. Yes, we have faced challenges like the cyber incident and the COVID period, and we also encountered difficulties during the 2008-2009 recession. However, the current situation does not feel as severe. We need to ensure our response is appropriate. Although our sales are not quite where we would like them to be in light of the economic conditions, there seems to be a greater focus on price. I believe we can manage this well on both consumables and equipment. We just have to ensure that our expense structure aligns with our gross profits, allowing us to continue growing both gross and operating profits. We are competent in executing this strategy. While I can't guarantee the timing month by month, I am confident we will achieve our goals in the medium to long term. We are pleased with our strategic direction, and we will share more details on our finalized '25 to '27 strategic plan. It is not a change but will highlight different aspects of our business, with more focus on certain parts. We are comfortable with the business and our senior management team, and we remain optimistic. We have shared our insights on the company's mathematical outlook. Our team has a proven track record, and even with some changes due to retirements, the core team has been stable. Ron and Graham have done well in managing these transitions. Thank you again, and the team is ready for any questions. Please reach out to them to schedule time. Thank you very much, everyone.