Henry Schein Inc (HSIC) — Q4 2024 Earnings Call Transcript

Thank you, operator, and thank you all for joining us to discuss Henry Schein's financial results for the fourth quarter of 2024. With me today is Stanley Bergman, our Chairman and CEO, and Ron South, our Senior Vice President and CFO. Before we begin, I want to highlight that some comments during this call may contain forward-looking information. The risks and uncertainties in our business may lead to actual performance differing materially from what is discussed in these forward-looking statements. These statements are fully qualified by the cautionary notes in our filings with the Securities and Exchange Commission, particularly in the Risk Factors section. Additionally, any comments about the markets we operate in, including growth rates and market share, are based on our internal analyses and estimates. Today's discussion will cover both GAAP and non-GAAP financial results. We believe that non-GAAP measures provide valuable supplementary information regarding our financial performance, facilitate comparisons of results across periods where certain items may differ from business performance, and improve transparency regarding key metrics used by management. These non-GAAP measures are presented for informational purposes and should not replace corresponding GAAP measures. Reconciliations between GAAP and non-GAAP measures can be found in Exhibit B of today's press release and on our Investor Relations website under the Supplemental Information section, as well as in our quarterly earnings presentation. Please note that the information in this call is timely and accurate only as of today's date, February 25, 2025. Henry Schein is not obligated to revise or update any forward-looking statements following this call. Finally, during the Q&A session, we ask that you limit yourself to one question and a follow-up. Now, I will turn the call over to Stanley Bergman.

Thank you, Graham. Good morning, everyone. Thank you for joining us this morning. I hope that the new time is appreciated by analysts and investors. And if not and you would like to go back to a later time, please be in touch with Graham and we will take your thoughts into account. The financial results and guidance provided today are consistent with the preliminary financial results and guidance provided on January 29. Our fourth quarter financial results reflect relatively stable dental and medical end markets. We continue to make progress as we sunset our 2022 to 2024 BOLD+1 Strategic Plan which is now completed. We exceeded our key goal and the major target in the plan of generating 40% of our worldwide operating income from high-growth, high-margin businesses by 2024. Let me remind our investors, there's another 10% or so of our profits that are coming from our own brands. So well over half of our profits are today coming from our high-growth, high-margin and own brand products. We have confidence in the underlying fundamentals of our business and look forward to advancing the opportunities contained in our updated '25 to '27 BOLD+1 Strategic Plan. KKR announced its investment to become our largest non-index shareholder, recognizing the potential of Henry Schein. We expect 2025 to be the base year from which to grow and achieve our previously provided long-term goal of high single-digit to low double-digit earnings growth with the cyber incident now in the rearview mirror. As part of the launch of the updated '25 to '27 BOLD+1 Strategic Plan, we have simplified our organizational structure and appointed Andrea Albertini to have responsibility for our Global Distribution and Value-Added Services Group as well as our Global Technology Group. The Global Distribution and Value-Added Services Group includes distribution to the global dental and medical markets of national brand and corporate brand merchandise as well as equipment and related technical services. This group also includes value-added services such as practice transitions, continuing education, consulting, financial and other services. The Technology Group includes development, marketing and sales of practice management software, e-services and other products and related services. We also appointed Tom Popeck to lead our Global Specialty Products Group which includes manufacturing, marketing, sales of dental implant and biomaterial products, endodontic, orthodontic and orthopedic products and other health care-related products and services as well as management of our corporate brand offering which is distributed through our distribution group. We expect that these complementary businesses will drive growth by leveraging our current product portfolio across our entire customer base, providing new products and services to our customers and growing our e-commerce business. I think the relationship between each of our groups in driving synergies will grow sales and related profits. We are also announcing a change to our reportable segments. This was also requested by investors during our investor survey some time ago. We have now prepared financial statements in accordance with these reported segments and aligned with our management reporting to provide more meaningful information on business performance to investors. Ron will detail the performance of each of these three groups in his prepared remarks. We will continue to provide information on our high-growth, high-margin products and services, but these are now included in each of our reportable segments and are key metrics for us to drive high-growth, high-margin profits, sales, and profits, a very important metric for our '25 to '27 strategic plan. We will provide you with separate data on that. Now, let's turn to a review of our key business units. Let me start by reporting on the Global Distribution and Value-Added Services Group. During the fourth quarter, we continued to see relatively stable patient traffic. Market growth for dental and medical products continues to be below the long-term guidance range we provided at our Investor Day, partially as a result of customer migration to value-priced products. Now if we look specifically at the U.S. dental merchandise growth, excluding sales of PPE, we have strong growth offset by the midweek timing of Christmas. Ron will give you specifics later in the call. On the U.S. dental equipment sales, which increased double digits and benefited from deferring some sales from last year into this year as a result of the cyber incident, we achieved strong growth in traditional equipment and parts and technical service. Digital equipment sales also increased with unit growth offsetting some price declines. On the U.S. medical business, results reflect a late start of the flu season and lower sales of vaccines, PPE, and COVID tests. Our Home Solutions business performed particularly well during the fourth quarter. In January, we strengthened this business as we completed the tuck-in acquisition of Acentus, adding to our offering of continuous glucose monitors in the home care market that we're quite bullish about. We increased the annual run rate in this home care solutions business we entered a couple of years ago to approximately $400 million, a significant amount of which is coming from internal growth. Our international dental merchandise sales grew strongly with good growth in Canada, Europe, Brazil, slightly softer growth in Australia, New Zealand, and Asia. International equipment sales growth was solid. Stronger growth in traditional equipment compared to digital equipment. Overall, our equipment business performed quite well this quarter. Now let's turn to a review of the Global Specialty Products Group which had solid growth in dental implants, biomaterials, and endodontic. We have experienced growth in this group's core business. Our new entry into the orthopedics arena last year performed well, offsetting some of the orthodontic sales decline, which we are addressing through restructuring largely due to an important product going off patent. We have a new product now that is gaining traction in the orthodontics field. Implanted biomaterial sales in Europe continued to be strong, especially in the DACH region, where our BioHorizons Camlog products continue to grow well. While the launch of BioHorizons Tapered Pro Conical implants in the U.S. is proceeding well, initial sales are largely from product conversions with existing customers resulting in modest incremental sales. However, we expect the Tapered Pro Conical implants to generate business from new customers in our implant business. Overall, our sales of implants in the value segment posted strong quarterly growth. The S.I.N. product line posted solid double-digit growth in Brazil, and we continue to roll out the brand across the U.S. to serve the value segment of the market. Our endodontics sales growth was strong due to our expanded sales focus through our U.S. distribution sales channel of the Edge product offering, coupled with some new product introductions. Regarding the orthopedic business, it continues to perform well, including our TriMed acquisition, which is complementary to our medical focus on ASCs and specialty customers. New products in both upper and lower extremities, along with good momentum from a new dedicated sales team in foot and ankle, helped drive sales growth. This whole specialty area is working well for us. We will address the orthodontic challenge; however, overall, without that, the performance is quite good. Now if we look at the Technology Group, while overall sales growth was low, we experienced strong operating growth in the business. Sales continued to perform well in cloud-based practice software and revenue cycle management, offset by the sunsetting of certain brands. The idea here is to move towards common brands for each type of application, which results in reduced business but improved service and greater margins. We now have over 9,000 customers subscribed to Dentrix Ascend and Dentally, with year-on-year growth of approximately 6.5%. This transition from an on-prem sale to a SaaS model creates short-term headwinds on the revenue side, which are outweighed by longer-term benefits from higher recurring subscription revenues. This trend is expected to continue. Let me now turn the call over to Ron to review our fourth quarter financial results and our '25 guidance. Ron, please.

Thank you, Stanley, and good morning everyone. As Stanley mentioned, we are also announcing a change to our reportable segments to align with management reporting and provide more meaningful information for investors on the business. The results being reported today reflect this change, and a recast of prior comparative segment information has been provided in Exhibit B of today's press release. Turning to our fourth quarter sales results, I will provide detail 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. Global sales were $3.2 billion with sales growth of 5.8% compared to the fourth quarter of 2023. This includes 0.7% growth from acquisitions and a 0.4% decrease attributable to foreign currency exchange. Please note that sales in the fourth quarter of 2023 were negatively impacted by the cybersecurity incident. LCI sales increased 5.5% for the quarter or 6.6% when excluding lower PPE sales and COVID test kits. Our GAAP operating margin for the fourth quarter of 2024 was 4.86%, a 358 basis point improvement compared with the prior year GAAP operating margin. On a non-GAAP basis, operating margin for the fourth quarter was 7.46%, a 260 basis point improvement compared to the prior year non-GAAP operating margin. In the prior year, both the GAAP and non-GAAP operating margins were negatively impacted by the cybersecurity incident. In the fourth quarter of 2024, our operating margin benefited from lower operating expenses year-over-year as we are starting to realize cost savings from our restructuring initiatives. We also continue to experience year-over-year gross margin expansion in the fourth quarter, primarily as a result of acquisitions we have made to advance our BOLD+1 strategy. For the full year, we achieved 41% of our total operating income from high-growth, high-margin businesses. Fourth quarter 2024 GAAP net income was $94 million or $0.74 per diluted share. This compares with prior year GAAP net income at $18 million or $0.13 per diluted share. Fourth quarter 2024 non-GAAP net income was $149 million or $1.19 per diluted share. This compares with prior year non-GAAP net income of $86 million or $0.66 per diluted share. The foreign currency exchange impact on our fourth quarter diluted EPS was unfavorable by approximately $0.01 versus the prior year. Adjusted EBITDA for the fourth quarter of 2024 was $270 million compared to fourth quarter of 2023 adjusted EBITDA of $172 million. Turning to our fourth quarter sales results, we are updating the breakdown of sales as detailed in Exhibit A of today's press release to reflect the updated reportable segments and other internal management responsibilities. Of note, we are now reporting U.S. distribution sales instead of North American distribution sales. This means Canada is now being reported as part of international. As a point of reference, Canada has approximately $400 million of annual revenues. Approximately two-thirds of those revenues are merchandise sales, with the remaining one-third as equipment sales. Global Distribution and Value-Added Services Group sales were $2.7 billion with sales growth of 5.9%, including LCI growth of 5.8%. Sales were positively impacted by a soft comparison to the prior year. Excluding PPE and COVID test kits, LCI sales growth was 7.3%. Our U.S. dental distribution LCI sales grew 5.9% versus the prior year, with LCI growth in dental merchandise of 4.8% or 6.5% growth when excluding PPE products. U.S. equipment sales growth was driven by both traditional and digital equipment, with digital equipment unit growth offsetting some pricing declines. U.S. medical distribution LCI sales grew 4.5% compared to Q4 of 2023. Excluding sales of PPE products and COVID test kits, LCI sales grew 7.3%. Sales of point-of-care diagnostics and vaccines were negatively impacted by the timing of the flu season. Our Home Solutions business had another strong quarter growing 8% year-over-year. Our international dental distribution LCI sales grew 7.3% versus the prior year, with LCI growth in dental merchandise up 7.9% or 8.0% growth when excluding PPE products and equipment LCI sales growth was 6.0%. Finally, global value-added services sales grew 8.1% versus the prior year, with an LCI sales decrease of 0.7%. We achieved strong sales growth in e-Assist and financial services, offset by lower sales at large practice sales as a result of the timing of closing some practice transition services sales. Turning to the Global Specialty Products Group, which includes our dental specialty products, orthopedic, and other products. Sales were $368 million with sales growth of 7.2%, including LCI growth of 5.0%. This segment includes the orthodontic business, which is being reorganized for future profitable growth. It also includes certain expenses relating to managing our own brands that support sales in the distribution businesses and provide a headwind to the segment’s operating margin. Global Technology Group sales during the fourth quarter were $160 million with total sales growth of 2.4% and LCI sales growth of 2.1%. This was driven by revenue cycle management and practice management software with double-digit growth in Ascend and internationally led by our Dentally cloud-based practice management solution, offset by lower revenues of certain patient experience modules, and as Stan mentioned, a headwind to revenue growth as a result of the movement to a SaaS model. Restructuring expenses in the fourth quarter were $37 million or $0.23 per diluted share. These expenses mainly relate to severance benefits and costs related to exiting certain facilities. Our restructuring activities in the third and fourth quarters are estimated to provide over $80 million in annual run rate savings. We continue to expect savings from this plan to be $75 million to $100 million of aggregate annual run rate savings by the end of 2025. Our fourth quarter GAAP results include $20 million in pre-tax proceeds as part of our cyber insurance claim, which are excluded from our non-GAAP results. As of the end of the year, we collected approximately $40 million. All items excluded from our fourth quarter non-GAAP financial results for 2024 and 2023 are detailed in Exhibit B of today's press release. A reconciliation of GAAP to non-GAAP results is also available in our quarterly earnings presentation on our website. Regarding share repurchases, we repurchased approximately 1.1 million shares of common stock in the open market during the fourth quarter at an average price of $71.35 per share, for a total of $75 million. For the full year, we invested $385 million to repurchase 5.4 million shares. At fiscal year-end, we had approximately $380 million authorized and available for future stock repurchases. An additional $500 million of share repurchases was authorized by our Board of Directors on January 27, 2025, including a commitment to repurchase $250 million in shares under an authorized accelerated share repurchase program. Turning to our cash flow, we had strong operating cash flow of $204 million for the fourth quarter, which compares with operating cash flow of negative $32 million last year. Operating cash flow for the full year in 2024 was $848 million, which is $348 million more than in 2023. Our strong operating cash flow for the quarter and the year was driven by lower working capital, particularly lower customer receivables which we've focused on throughout the year. Turning to our 2025 financial guidance, at this time, we are not able to provide without reasonable effort an estimate of restructuring costs associated with the new restructuring plan for 2025, although we expect this to primarily include severance pay and facility-related costs. Therefore, we are not providing GAAP guidance. Our 2025 guidance is for continuing operations as well as acquisitions that have closed and does not include the impact of restructuring and integration expenses and other items described in our press release. Guidance assumes modest improvement in the dental and medical markets during the year and is supported by strategic initiatives outlined in our strategic plan and recent acquisitions as well as a positive contribution from our restructuring plan. This is partially offset by investments in technology and a return to historical levels of incentive compensation. We also assume that foreign currency exchange rates remain generally consistent with 2024 levels. Our 2025 total sales growth is expected to be 2% to 4% over 2024. For 2025, we expect non-GAAP diluted EPS attributable to Henry Schein, Inc. to be in the range of $4.80 to $4.94, which reflects growth of 1% to 4% compared with 2024 non-GAAP diluted EPS of $4.74 per share. 2025 non-GAAP diluted EPS is expected to be more heavily weighted to the second half of the year. This guidance assumes there is no debt impact from the issuance of new shares to KKR, which is expected to be offset by an accelerated share repurchase program. It also assumes an estimated non-GAAP effective tax rate of 25%. Our 2025 adjusted EBITDA is expected to grow in the mid-single digits versus 2024 adjusted EBITDA of $1.1 billion.

Thank you, Ron. Operator, we're ready to respond to questions.

Thank you for the detailed information in the recast financials. I know that's a challenging task. To begin with, I would like to discuss revenue guidance and some of the underlying assumptions you have. You are projecting a 2% to 4% increase in reported revenue, which is partly based on improvements in both dental and medical end markets compared to last year. I understand why your business may continue to exceed the broader market, given your investments and ongoing initiatives. However, it seems your market perspective is a bit more optimistic than what we've heard from some competitors. Is there something currently happening that provides you with more confidence in the market outlook? Additionally, can you provide insights into how you are forecasting organic growth for each of your new reporting segments in light of the overall company guidance?

Yes, we do see modest growth in the markets. Looking back to our Investor Day two years ago, we projected that core dental could grow by 2% to 4%. Currently, we believe this market growth estimate is a bit optimistic, and it may actually fall in the range of 0% to 2%. We do anticipate some modest growth within that framework. Additionally, price appreciation is limited, which is reflected in our revenue guidance. Regarding inorganic versus organic growth, our M&A activity was lower than in most years for 2024, so there is very little acquisition growth factored into our overall revenue growth.

Okay. Ron, could you provide a breakdown or guidance on the global distribution under your new reporting structure, specifically regarding the U.S. compared to international, as well as insights into global specialty and global tech? Additionally, as a follow-up, you appear quite confident about returning to high single-digit growth after 2025. Is this expectation tied to a reduction in investments in 2026, or do you believe we will experience improved natural leverage in the profit and loss statement?

I think it's a mix of factors. We're benefiting from some of the restructuring we're implementing, a potential recovery in the markets, and maybe some improved price appreciation in the future. Regarding your question about the reportable segments, within each of those, we are observing market growth that remains lower than our previous expectations and what we communicated on Investor Day two years ago. For instance, we indicated that medical growth rates were in the 4% to 7% range, but currently, we anticipate market growth to be slightly below 4%. Dental specialties were expected to be in the 5% to 8% range, and while some areas may fall within that, particularly in dental specialties, we still believe that many segments, especially on the sub-premium side, will remain below 5%. Thus, some aspects of the market are performing below our initial growth rate assumptions from a couple of years back.

I know we're 2 months into 2025 but I just want to go back to the fourth quarter for one second here, if I could. I mean, when you pre-released last month the $3.2 billion in revenue for 4Q, we frankly had hoped that was a rounded down number. It ends up in today's release that was a rounded up number. And when I looked at just kind of relative to your third-quarter updated guidance that you provided on the third quarter, for 2024, you fell short in the fourth quarter by 500 basis points in the fourth quarter on a revenue basis at the low end of the guidance, 700-plus basis points at the midpoint. So what happened in fourth quarter, I guess, that drove those revenues 500 basis points below the low end of the guidance, 700 basis points below the midpoint of the guidance, just relative to guidance that was issued a month into the fourth quarter?

Sure, Jeff. I'll start with your question about rounding. We reported $3.2 billion, and our actual revenues were $3.191 billion, so we rounded it up by $9 million. As for the lower revenues than expected, we experienced relatively flat patient traffic during the quarter, and there was a slow finish to the quarter due to the timing of Christmas, which we underestimated. Therefore, the quarter ended much slower than we anticipated. Additionally, the timing of the flu season led to significantly lower medical revenues than we expected.

Okay. And if I look at the dental numbers and a little bit hard to compare to our old models, obviously, but you gave us some historical restatements to help. But that U.S. number, up mid-single digits on consumables, I think, somewhere in the neighborhood of a negative 8% to 10% comp depending on how we cut the numbers. So on a stack basis, still negative. We talked about the market being pretty flat and you guys have recovered a decent amount of your cyber share loss. I mean, talk to me maybe just about share dynamics in the fourth quarter and share dynamics expected in 2025. Do you feel like you're holding your own? Do you feel like you're maintaining that share? Are you losing share at this point? Just help me understand kind of that stack comp still negative on the consumables side in the fourth quarter.

Yes. In the fourth quarter, we did see share stabilize. We had been getting a little bit of additional market share quarter-to-quarter sequentially over the course of '24. Our Q4 share was relatively flat to our Q3 share. There could be a number of reasons for that. But we're still confident we can continue to gain market share as we move forward.

Jeff, let me just add that moving to the segment reporting and changing the way we've reported in the past is just not easy to comprehend. We provided a lot of data in the exhibits. There’s no way these changes could be understood in 1.5 hours. So I'm not sure if there was a better way to do this. This is the best way we thought to provide this information. But I think if analysts, yourself, have a few more hours to look at the schedules that we provided, it will make a lot more sense. But this is a one-time move in 29 years that we've moved as a public company from one way of describing our business to another. The description follows reporting internal management reporting which was required by the SEC and there's a lot of information contained in these attachments. We would be happy to clarify. We do understand, specifically for yourself and for others that have covered us for many, many years, that this is a significant change and it's very difficult to comprehend all the nuances in 1.5 hours. Perfect storm in reporting and new segment reporting all thrown together. But we're available to provide more information. But I think the attachments will be helpful but you will need time to analyze them.

I want to go to Slide 8 in the presentation. Specialty operating margins are up pretty nicely year-over-year, but they may be a little bit below where we thought they would be. Can you talk a little bit about the opportunity to raise those margins over time?

So just on the specialty side. The specialty margins reported relate to management reporting. Within that segment, there are some lower-margin businesses, such as our pro repair handpiece business, while solid, is less profitable compared to our implant business and our endodontic business. We had a challenge with the orthodontic business, which we are addressing. That segment also includes expenses for managing our corporate brand products, which are essentially distributed through our distribution business. So it's not a pure margin for the implants and endo; it includes other components as well. However, we do expect the operating margin in this segment to grow over time. That is a key focus, but it’s not a pure number related to implants, bone regeneration, and endodontics, but also orthopedic products that have higher margins.

And then, one for Ron. Is there any way to frame how fast dental implants grew in 4Q? And then as we look to 2025, a large Medicare Advantage payer stopped covering implants in 2025. Wondering if there's any change to growth you're seeing through the first two months of the year. And what's embedded in the guide for North American implant growth?

Yes. With reference to implant growth, we're still seeing relatively healthy growth in Europe, more so than in the U.S. In the U.S., we're still getting some value implant growth more so than perhaps on the premium side. The U.S. market is a slightly tougher environment for implants right now. However, in Europe, our Camlog subsidiary, primarily focusing on Germany, Austria, Switzerland, is in that low to mid-single-digit growth range, which we're pleased with given the difficult market. Regarding the second part of your question about the Medicare Advantage payer, it's not a significant portion of the end market for us, so we haven't seen anything that we could directly attribute that as an impact on the business at this point.

I want to go back to the KKR agreement. I think in the agreement, there's commentary around the value creation plan using KKR Capstone. Can you just speak to what areas they'll be looking at? Is this purely an advisory capacity? And then maybe a little bit more broadly, are there things that KKR's pretty extensive dental portfolio can do to work together that haven't happened previously?

Yes. As it relates to KKR, they are not on the Board yet. We have to clear the Hart-Scott-Rodino before they can get deeply involved. We will, of course, engage with their team. They feel they can help us in a number of areas, which we believe they can. However, our focus through our strategic plan and the areas that KKR has capabilities align very nicely, but we can’t get to work in any significant or meaningful way until the filing is clear. We are hopeful that we will clear the Hart-Scott soon and then we can begin to collaborate with KKR. They are not on the Board yet and cannot engage deeply at this time. I don't expect much benefit from the relationship with one of our large customers; there is definitely a Chinese wall between the two sides with different people involved.

Great. And then just one, maybe for Ron. You talked about that share gain versus exiting '24. I think about that and potentially the flu season pushing into the first quarter. Seems like you would think that growth might be weighted more to the first half of '25 versus the back half at the top line. Can you help me just balance that versus the back half weighting of adjusted EPS, what the factors are that kind of might create that dichotomy?

Well, it does assume some ongoing recovery in market share over the course of the year. Additionally, as we gain momentum on the implant side, especially with the Tapered Pro Conical and newer products that we launched in the back half of 2024, that should provide momentum into '25. In terms of the top line, the expectation is that we will see more earnings growth in the back half of the year than in the first half. Do keep in mind, we will have a difficult equipment comparison in Q1 of 2025 as last year the first quarter benefited from the deferral of equipment installations due to the cybersecurity incident.

Ron, I think this one is probably for you. Just the 2025 EPS growth, at a high level, essentially in line with revenue growth. I just think about like mix shift, debt paydown, stock repurchase, ongoing restructuring, and maybe some past accretion targets from those deals that were done in prior quarters. Can you talk to why we're not seeing some slightly higher leverage on the bottom line versus the top, even in a year where there are a lot of moving parts or what you seem to be alluding to is like a rebasing type of year?

There are a couple of things and we've touched on some challenges on the revenue side. I would say two specific ones. First, we are making ongoing investments in IT, specifically in our global e-commerce platform which we will be launching in the U.S. this summer. We've begun depreciating that system because we did launch it on a test basis in Europe late in 2024. So we are going to encounter a full year of depreciation on that. Additionally, we referenced in the call a return to what we hope is a normal incentive compensation expense. Over the last two years, due to the cyber incident and softer markets, these expenses were not normal. These internal headwinds offset the cost savings we are achieving. However, there are still challenges on the top line as I mentioned when discussing revenue guidance.

Okay. And maybe just to shift gears. Stanley, in the past, I think you've alluded to the need for accelerating innovation from partners or investments in new products. And here we are shortly coming up on IDS next month. So I'm just curious how you see the pipeline from some of your partners. Do you see some of that innovation, perhaps incremental, starting to work its way through? While nothing may be overnight, perhaps it gives you more confidence as you look out over the next 12 to 18 months in your equipment line.

Yes, Jon, thank you. Very important question. I do think we will see some marginal incremental advancements at IDS, especially in the digital space and digital materials. I think on the consumables side, we hope to see some advances. However, presently, not much is expected. There are, of course, always manufacturers that are coming out with something new, but not major innovations at this stage. Traditional equipment advancements appear minimal, while we do expect progress in the digital side leading to potential movement towards second-tier and corporate brand-type products. Of course, on the specialty side, good innovation continues, especially with the implant side, and a little on the endodontics. We'll see what happens next month, but I don't expect any big surprises this time.

Ron, I just want to dive a little bit more into the margin question. I appreciate you saying you have $75 million to $100 million of savings. There are offsets from IT investments, and incentives normalizing again next year. I guess if you're talking about flat operating margins, is that completely offsetting the $75 million to $100 million in savings? And like if we were to break that apart, what's happening with the margins on the segments excluding the cost saving against the one-timers that are company-specific? I'm just trying to understand what's driving the margin specifically, either segment or cost savings against one-timers.

Yes, certainly, Kevin. I think I understand your question. In distribution, we’re noticing a trend towards lower-priced items. While these can help with gross margins, operating margins have remained relatively stable despite this change. We've also seen some pricing pressure on digital equipment, which adds some strain on margins. These are market dynamics we are working to manage. You pointed out some company-specific factors, and those are investments we planned regardless of restructuring, which may offset some of the restructuring savings. This is part of the normal business operations. Beyond distribution, in specialty, we are observing a shift towards value implants instead of premium ones, which have different margin profiles. We are focused on improving the orthodontic business, which is currently affecting our overall operating margin. In technology, we have effectively consolidated some brands and reduced costs in the patient experience area, positively impacting our operating margin in the latter part of 2024. One ongoing challenge is to maintain that operating margin moving forward.

Great. And if I can ask a follow-up to Stan. When you partnered with KKR in this way, I know you have a long-standing relationship with Henry Schein One. Did you view them as a strategic partner? Or did you think that they would come in more and help operationally? Can you take me through what you think the benefits of having a stronger relationship with KKR will be going forward?

Yes. I think they will be a very strong strategic partner. They do care about the medical space, but particularly the dental space. They're also interested in advancing their platform on consumables, equipment, software, and synergies between all of those specialty areas. They have very good capabilities with Capstone. There are many opportunities, and the areas they see as opportunities align with our '22 to '24 strategic plan magnified in the '25 to '27 strategic plan: the high-growth, high-margin opportunities, efficiencies on our distribution side, driving customer satisfaction, leveraging opportunities between our businesses, and technology. The BOLD aspects align well. They are adding two new directors with extensive experience in our markets and a third new director with strong device field experience. We believe they will add significant value. The people that we’ve interacted with are genuinely interested in our business and are long-term players in this field. They have assured us this is a long-term commitment, not a short-term gain. Therefore, we are excited about our opportunity to partner with KKR in advancing our BOLD+1 Strategic Plan.

Two quick ones that are a little bit of clarification ones. When you were talking, Ron, about sales structure normalizing in 2025, just to be clear, can you clarify that there - is there a change in the sales incentives or the structure of the sales incentive packaging? Or is it simply a normalization of what you think comp will be because things are normalizing? And then, the other clarification question is simply around tariffs. With the Trump administration now saying that the Mexico and Canada tariffs might be imposed soon and then, of course, with China tariffs having been imposed. Can you talk to us about what’s included within the ’25 guidance that’s been provided?

Yes. To clarify, Brandon, first on the compensation question, that was with reference to management incentive compensation, not on the sales side. We have made changes in the sales commission structure, which we believe can help us improve margins. However, I was referring specifically to stock-based compensation and related expenses. As for tariffs, we have been able to shift much of our supply chain to Southeast Asian countries, primarily Vietnam and Malaysia as examples. We continue to maintain relationships with suppliers in China, which allows us to serve our European business without managing the tariff aspect. Beyond that, Canada is a large producer of dental anesthetics; in the event of a tariff, it will affect everyone since most anesthetics come from Canada. We are well positioned to manage through any arising tariff situation.

I'm interested in understanding the larger picture. Have you shared a statistic like this before? Can you discuss the percentage of customer needs your Henry Schein-branded products can currently meet? I'm trying to gauge the potential growth of your product portfolio in the coming years and your level of insight into current customer accounts that might help expand that business.

Of course, we are committed to our branded manufacturers. We operate a hybrid model whereby branded manufacturers have an offering that satisfies the price needs of our customers. We will work with branded manufacturers; however, on the consumable side, we offer most, if not all products. Whether those brands are well recognized is another matter. The Henry Schein corporate brand has come a long way in recent years, transitioning from a white box model. On the dental side, we provide nearly all products needed, except for private label dental traditional equipment, which I don’t see a need for. We have adequate sources of supply, and manufacturers collaborate with us to meet the value needs of our customers, whether they're from dental service organizations or smaller practices. In the medical space, we have numerous products, not everything. In pharmaceuticals, we lack our own brand of generics but we have access to generic products at competitive pricing. Overall, we have a comprehensive portfolio and we're always adding new products and improving our brand image. We expect our corporate brand to have strong growth potential moving forward.

I have a couple of follow-up questions. First, I appreciate your insights on the tariff guidance and its potential impact. Can you clarify what you included in the guidance, or do you see it as more of an incremental concern, particularly in light of some of the sourcing changes? Secondly, Stanley, could you discuss the transition in the orthodontic market? I understand your comments suggest it is temporary, but I want to ensure I grasp the dynamics, particularly with your patent expiration and the reintroduction of products in both the broader orthodontics and clear aligners markets.

Yes, certainly. On the tariffs, we do not anticipate any bottom-line impact. The most significant import product is gloves, though we have sources in Malaysia that do not face tariffs. Other products we source from China can serve our European demands without issues. Beyond that, Canada provides a significant portion of dental anesthetics. Any tariff resulting from changes there will affect the entire industry as most anesthetics come from Canada. We currently have sufficient inventory but, should tariffs be implemented on dental anesthetics from Canada, it would impact the industry. However, I do not expect the tariffs to have a material impact on our bottom line. Regarding orthodontics, we are adjusting our infrastructure for traditional orthodontics, while we lost a patent on an important product, leading to losses in operating income in 2024. We expect to turn this around, particularly in the fourth quarter where we will start seeing profitability in what is a small sector but has been a drag on specialty earnings. By the end of 2025, we anticipate improvements in the orthodontic business, but it is still fairly small. Overall, we expect to overcome this challenge.

Yes. Thank you, everyone, for calling in. I really appreciate it. I'm aware that the movement to the new segment accounting is a bit of a challenge. I don’t know of another way. I’m sure there were other ways we could have advised our investors of this change. We did alert our investors in our last call that we'd be doing this and consulted our advisers. I apologize if our investors are encountering too much new information all at once while also having an early call. I want to emphasize that we're quite optimistic about the business. I think it is running well. We have capable management in our segments—each segment is led by experienced individuals. We believe we're gaining market share. If you consider recent dynamics concerning Christmas and other factors affecting our performance, we're hopeful that 2025 will provide clearer insights. We see 2025 as a foundational year to return to our corporate model for growth, targeting high single-digit to low double-digit EPS growth. The cash flow is strong, and investments to advance our strategic plan are performing well. The significant initiatives within the BOLD+1 plan are having a positive impact. We are implementing changes to our distribution, leveraging our capabilities, and advancing our digital offerings effectively. While we acknowledge the complications resulting from recent developments, we're confident that the team is ready to engage with our existing customers and recover from the cybersecurity incident. We expect a stable business going forward, and we believe our strategic plan will yield positive results from 2025 to 2027. Thank you very much.