Henry Schein Inc (HSIC) — Q2 2025 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 2025. 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 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 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 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, August 5, 2025. 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. Thank you for joining us. We experienced strong sales growth in our global distribution group this quarter, but we saw lower margins in the U.S. compared to last year, mainly due to decreased glove pricing and some targeted sales initiatives. We are happy with the outcomes of these initiatives and have returned to usual promotional activity levels. Strong merchandise sales in July made us optimistic about these results. Our Specialty Products and Technology groups continue to perform well, primarily due to sales from innovative products, solutions, and cost efficiencies, with July sales remaining robust. We are keeping our full-year guidance, reflecting earnings that are expected to be weighted towards the latter half of the year. We anticipate 2025 to serve as a foundation for growth and achieving our long-term target of high single-digit to low double-digit earnings growth. We are collaborating with KKR's Capstone and have enlisted two leading global consulting firms to help enhance distribution gross margins, boost sales of our owned products portfolio, and support our ongoing initiatives aimed at increasing efficiencies. We expect these projects, which build on our BOLD+1 strategy, to begin yielding results by early 2026 and will assist in driving superior customer satisfaction while achieving our financial goals of high single-digit to low double-digit earnings growth. We aim for these initiatives to streamline processes, partly through the introduction of new technologies, including AI solutions, which will improve customer experiences and enhance efficiencies. Now, let’s highlight a few key points from the quarter that support our BOLD+1 Strategic Plan. We believe we are continuing to capture market share across our portfolio. Our customers greatly appreciate our price-value commercial model, which includes technical support, the industry's widest product range, corporate brand offerings, customer loyalty programs, value-added services, business analytics, and reliable next-day fulfillment. We generated over 45% of our non-GAAP operating income from high-growth, high-margin businesses this quarter, driven by sales growth and profitability in these sectors, which outpaced growth in the rest of the business. We remain on course to achieve our target of over 50% of our total non-GAAP operating income from these businesses, along with 10% or more from our corporate brands. In the U.S., our Medical business continued to perform strongly, particularly our Home Solutions platform, reinforcing our strategy of supporting patients in their homes. We are implementing initiatives to rightsize expenses in our distribution businesses and corporate functions while consolidating various manufacturing facilities. We now project savings to exceed $100 million by year-end, and we expect enhanced profitability starting in 2026 from our new value creation initiatives. After our team successfully launched our global e-commerce platform, henryschein.com, in the U.K. and Ireland, we have begun a phased rollout in North America, beginning with Canada and now proceeding into the U.S. for the fourth quarter. Reviewing our businesses, we achieved volume growth in our U.S. Dental Merchandise sector, though at lower average selling prices compared to Q2 of 2024, mainly due to glove pricing and targeted sales initiatives. We have also invested in sales talent and expect this investment, along with our initiatives, will foster merchandise growth, as indicated by our July sales. U.S. dental equipment sales were temporarily affected by market uncertainties about tariffs in the second half of the quarter. However, dentists are still investing in their practices, and order intake has returned to normal. There was a recovery in new office design activities in June, with our equipment backlog also recovering as some installations were deferred into Q3. Overall, this supports our belief that equipment sales will improve in the latter half of the year. We are witnessing good volume growth in digital equipment, though at a lower average selling price, primarily driven by entry-level intra-oral scanners. As for our U.S. Medical business, sales increased in the mid-single digits this quarter, with patient traffic rising steadily. Our sales reflect robust growth in medical products and pharmaceuticals, bolstered by new accounts and strong performance from our Home Solutions division. International Dental Merchandise sales growth was steady, although April was affected by the timing of Easter. Brazil saw particularly strong sales growth. International Dental Equipment sales flourished in Canada and Europe, especially in traditional equipment, with additional momentum from this year's International Dental Show in Cologne. Digital Equipment volumes grew, although with lower average selling prices. Parts and service sales both in the U.S. and internationally continue to grow well in the mid-single digits. Value-Added Services sales growth was again hindered this quarter by lower sales in our Practice Transitions business due to a challenging comparison with the previous year's figures. This business tends to fluctuate significantly from quarter to quarter, but we have a solid pipeline of transactions we expect to close throughout the rest of the year. Moving on to our Global Specialty Products Group, which includes implants, biomaterials, endodontic, orthodontic, and orthopedic products. Sales in the second quarter showed accelerated growth in dental implants, biomaterials, and endodontic consumables. Profits were also enhanced by the recent consolidation of manufacturing facilities. We are pleased with the growth of our Implants business, which grew in the mid-single digits in constant currencies, and we believe we are gaining market share in the implant and bone regeneration sectors. Specifically, we witnessed double-digit growth in value implants, driven by our S.I.N. and BioTech Dental Implant Systems, with low single-digit growth in our premium brand BioHorizons Camlog. U.S. implant sales grew in the low single digits and reflected the continued rollout of the BioHorizons Tapered Pro Conical implant, which is gaining traction. Sales of the SmartShape Healer abutment also continued to expand, aided by our evolving BioHorizons sales force in the U.S. European implant growth this quarter was affected by the Easter timing, but momentum picked up in the latter part of the quarter, and the business is performing well in Q3. Orthodontics remains a smaller part of our Specialty Products business, and we are working to enhance this sector. Finally, our Global Technology Group saw accelerated sales growth this quarter, driven by our Core Practice Management System Solutions business, particularly cloud-based platforms like Dentrix Ascend in North America and Dentally outside of North America, as well as strong growth in our revenue cycle management offerings, including e-claims, electronic billing, and patient messaging. Consequently, we are seeing growth in annual recurring SaaS subscription revenues and a rise in the adoption of transactional services. Practice Management Software growth was in the mid-double digits, supported by a 20% year-over-year increase in cloud-based customers. We now have over 10,000 customers using the Dentrix Ascend and Dentally systems. Our One Schein marketing approach fosters greater customer adoption of the Henry Schein One platform and provides us with a unique competitive edge. This platform distinguishes us by seamlessly integrating workflows through technology to create significant operational efficiencies. Our workflow integration enhances customer engagement and reinforces our capacity to deliver scalable, recurring solutions and revenue growth. Overall, our technology business and our own brand divisions are performing well. As I prepare to retire as CEO at the end of the year while remaining Chairman of the Board, I reflect on the incredible journey of the past 45 years. I’m proud of what Team Schein has achieved, transforming from a small mail-order dental distribution business into a global provider of products and services for the dental community and alternate care sectors. We have made many changes along the way, expanding our product offerings and strengthening our management team. It has been especially rewarding to work alongside the dedicated and talented Team Schein members who have redefined Henry Schein's role from a product delivery and logistics company to one dedicated to helping over a million healthcare professionals operate better, allowing them to focus on providing exceptional clinical care. I extend my gratitude to each Team Schein member for your vital contributions to our unique company, as well as to our investors for their nearly 30 years of support as a public company, with the full 30-year milestone approaching this November. Through our succession planning over the years, the company has prioritized developing the next generation of leaders and earlier this year simplified our operations into three divisions, each with exceptional leadership. I am confident that Andrea Albertini, CEO of the Global Distribution Group, who also oversees our Global Technology Group, and Tom Popeck, CEO of the Global Specialty Group, along with the executive management committee, will elevate Henry Schein to new heights, continuing to advance the BOLD+1 strategy alongside KKR's value creation initiatives and a broad employee ownership program. Guided by our purpose-driven mission, we have built an agile company that meets the evolving needs of our customers, with much more to come. We have also generated significant shareholder value and positioned Henry Schein for ongoing growth and success. I remain deeply committed to Team Schein and look forward to working with the Board to identify my successor and ensure a smooth transition. I am dedicated to this process. Meanwhile, our team remains focused on advancing our BOLD+1 strategy to create value for our customers and shareholders. Now, I will hand the call over to Ron to review our second-quarter financial results and discuss our 2025 financial guidance. Ron, please.

Thank you, Stanley, and good morning, everyone. As usual, I will review the financial highlights for the quarter and remind investors that our Investor Relations website has a financial presentation with additional detailed information. Starting with our second quarter sales results, I'll provide details on total sales growth as well as constant currency sales growth compared to the prior year. Global sales reached $3.2 billion, marking a 3.3% increase over the second quarter of 2024. Constant currency sales grew by 2.7%, with 0.6% from foreign currency exchange and 0.8% growth from acquisitions. Our GAAP operating margin for the second quarter of 2025 was 4.67%, down 42 basis points from the prior year. On a non-GAAP basis, the operating margin was 6.96%, a decrease of 79 basis points from the prior year, primarily due to lower gross margins in our U.S. Distribution business because of reduced glove pricing and initiatives aimed at accelerating market share growth. Additionally, operating income was affected by higher operating expenses compared to last year, which were due to acquired companies, foreign exchange, increased investments in technology and marketing for the launch of henryschein.com, and non-income tax credits from the previous year that did not recur. We are continually enhancing operational efficiency through the integration of acquisitions, restructuring, and the execution of our new value creation programs. In the second quarter of 2025, GAAP net income was $86 million or $0.70 per diluted share, compared to $104 million or $0.80 per diluted share in the prior year. Non-GAAP net income for the second quarter was $135 million or $1.10 per diluted share, down from $158 million or $1.23 per diluted share in the prior year. Adjusted EBITDA for the second quarter of 2025 was $256 million, compared to $268 million in the second quarter of 2024. Turning to our sales results, the components of sales growth for the second quarter are available in Exhibit A of this morning's earnings release. I will highlight the main sales drivers for each reporting segment, starting with our Global Distribution & Value-Added Service group. U.S. Dental Merchandise sales fell 1.2%, influenced by increased volume but offset by lower product pricing. U.S. Dental Equipment sales decreased by 4.7% due to economic uncertainty beginning in May, affecting both traditional and digital equipment sales. As Stan mentioned, we saw a rebound in new office design activity in June, and we expect equipment sales to increase in the second half of the year. We're pleased to report that sales in our U.S. Medical Distribution business grew by 6.3%, reflecting increased patient traffic and a strong performance from our Home Solutions business. International Dental Merchandise sales rose by 1.9% or 0.5% in constant currency, influenced by the timing of Easter. Sales of international dental equipment increased by 12.1% or 9.1% in constant currency, driven by notable sales growth in Canada, Germany, and Australia and New Zealand. Global Value-Added Service sales increased by 3.6%, although this growth was somewhat hampered by lower sales in our Practice Transitions business, partially due to tough comparisons from the previous year. In the Global Specialty Products Group, sales advanced by 4.2% or 3.3% in constant currency. Our Implant and Biomaterial business showed solid growth in the second quarter, including double-digit growth in value implants and low single-digit growth in premium implants. Our orthodontic business saw year-over-year sales declines, but at a slower rate than in previous quarters. This business is being restructured to support future profitable growth. We also recorded strong results in the Global Technology Group, with total sales growth of 7.4% or 6.6% in constant currency. In the U.S., growth was driven by Revenue Cycle Management and Practice Management software, particularly double-digit growth in Ascend. Internationally, growth primarily came from our Dentally Cloud-Based Practice Management solutions, along with strong sales in Canada. Regarding restructuring, our expenses in the second quarter amounted to $23 million or $0.13 per diluted share, mainly due to severance benefits. We now anticipate annual run rate savings exceeding $100 million by the end of 2025, coinciding with the completion of the current restructuring plan. As Stan mentioned, we have initiated two key value creation projects aimed at improving distribution gross margins, which include accelerating sales of our own product portfolio and company-wide initiatives to increase efficiencies. We will provide further updates on these initiatives during our upcoming third quarter earnings call. During the second quarter of 2025, the company repurchased approximately 3.7 million shares of common stock at an average price of $70.88 per share for a total of $259 million. This included roughly 3.1 million shares under the previously announced accelerated stock repurchase plan at an average price of $71.60 per share, totaling $223 million. This followed the company’s sale of 3.3 million shares at an average price of $76.10 per share for a total of $250 million to KKR. The ASR plan was completed in July. Additionally, the company repurchased around 0.5 million shares at an average price of $67.36 for a total of $36 million. The effect of these share repurchases on second quarter diluted EPS was minimal. At quarter's end, we had $432 million authorized and available for future stock repurchases, plus an additional $27 million authorized under the ASR, which has since been completed. In terms of cash flow, we generated operating cash flow of $120 million in the second quarter of 2025. We continue to expect operating cash flow to surpass net income for the full year. This quarter, we increased our inventory in the U.S. to mitigate the effects of tariff increases. Our accounts receivable also saw a slight uptick in line with sales growth. As a reminder, working capital was returning to normal levels in the second quarter of the prior year, following the cyber incident, leading to stronger-than-normal cash flow. I will conclude my remarks with a discussion of financial guidance. Currently, we cannot provide an estimate of restructuring costs associated with the plan for 2025 without unreasonable effort, hence we are not offering GAAP guidance. We are maintaining our financial guidance for 2025. To recap, we expect non-GAAP diluted EPS attributable to Henry Schein, Inc. to range from $4.80 to $4.94. Adjusted EBITDA for 2025 is anticipated to grow in the mid-single digits compared to 2024's adjusted EBITDA of $1.1 billion. Total sales growth for 2025 is projected at 2% to 4% over 2024, with a non-GAAP effective tax rate of around 25%. Our guidance assumes stable foreign currency exchange rates in line with current levels, manageable tariff effects, and includes expected remeasurement gains related to acquiring controlling interest in previously held noncontrolling equity investments, consistent with our business strategy. Our guidance for 2025 reflects current continuing operations and includes closed acquisitions but excludes impacts from restructuring expenses and other items detailed in our press release. With that, I'll turn the call back to Stanley.

Thank you, Ron. Thank you, everyone, again, for calling in. So we believe Henry Schein is well positioned to accelerate growth. Of course, we're happy to answer any questions that investors may have. With respect to our Distribution business, we are pleased with the results from the time-limited targeted sales initiatives, which, together with the rebound in Equipment orders and momentum in our Medical business, sets us up well for growth for the second half, third and fourth quarter. The results from our Technology, Value-Added Services, and Specialty businesses are strong, and we look forward to this continuing into the second half of the year as well. We are also excited about the significant opportunities from our new value creation initiatives, and we are optimistic about returning to high single-digit, low double-digit earnings growth. So with that overview, operator, we're ready to take questions from investors.

Stan, a big congrats on your announced retirement. You've had such an enormous impact over the years in the dental community, the investor community, your employees; you're going to be missed around here. For my first question, I did want to start with the Dental business. And hoping to touch on a couple of topics. One, you referenced a good July for Merch without those above normal promotions continuing. Maybe you can give a bit more color on what you're seeing with respect to patient traffic, spending in the dental office, and just the confidence you have on the sustainability of these better trends that you were seeing in July? And then two, can you talk about the customer conversation around price increases from tariffs and how you're navigating these discussions to both retain share and protect margins?

Thank you, Jason, for your compliments on my years here at Henry Schein and on the retirement. I have to say it's been a pleasure working with the analysts that cover us. I mentioned to our team earlier on as we prepared for this call, this is my 119th call with investors. And although every quarter is a challenge, never easy in a public company, I've really enjoyed working with the investment community very much. July trends? July trends at Henry Schein are positive. We're quite pleased with the momentum. In fact, I spent a little time last night with our senior dental sales team who are in town for a strategic meeting, and they feel very strong. There were customers we had that had left us during the cyber incident, and these promotions got many of them back. I think our customers understand the value that we provide. As they test us, the ones that left, and as they test our systems, not only for consumables but for equipment and the value-added services. So across the board, we're having a good July from a sales point of view and from a general understanding by our customers of the services that we offer. As it relates to patient traffic, we generally believe that in the markets that we serve, now there are parts of dentistry that we don't really serve in a significant way. But in the segments that we service, we believe that patient traffic is relatively stable. Of course, there are some challenges in specific countries, but there are also other countries where maybe it's a little positive, but we are doing very well. Overall, we believe that patient traffic in our Dental Distribution businesses continues to be flat globally. So that's traffic per se, but as we noted, we continue to believe that we are either maintaining or actually growing market share across the board. We believe in the U.S. for the dental merchandise sales, which is flat, we have some price increases relating to tariffs, but generally, there is not much price increase from manufacturers. And because of the tariffs, customers are concerned with pricing, leading them to move towards our owned brands. I have to say also to brands, to manufacturers, who are prepared to provide customers with moderate prices. These include second-tier manufacturers. But I would also say some of the national brand manufacturers are also offering us opportunities to sell their products in a way that mitigates any potential tariff increases. So the U.S. dental market growth is still impacted by staffing challenges and remains challenging to recruit hygienists. Office support is also challenged, but not as bad as it was, say, a year ago, and practice productivity is going up. Dentists are investing in devices to increase productivity. For us, it's leaning flat to slightly positive, with opportunities and I think results in the specialty areas, in our medical business, in the software field. Clearly, customers are investing in software to increase productivity. Overall, I think we can report a relatively stable dental patient traffic market. I think that dentists are in good shape. They're buying; they're paying. Cash flow is okay. Of course, there are all sorts of concerns, particularly in the last half of this quarter, there was a pullback on buying of equipment. Many dentists didn't want shipments because of the potential tariff situation. I think that has eased a bit. The backlog is pretty good again. Interest rates are not an issue; we thought they would be about a year ago, but customers are accustomed to the interest rate now. As it relates to tariffs, I would say our customers fully understand that there are going to be tariff increases and that we can't absorb these tariff increases. Generally, where we have passed on the tariff increases, they've stuck. Some customers will look to find alternative options, particularly on products, and we are there with our own brands. One little wrinkle is the area of gloves; that's become highly competitive. However, I believe that's going to be an area where Henry Schein will do okay because our brands are very good, and we service all various price offerings in gloves. This has been a market that's been up and down for years, and we continue to gain market share in the glove area. Sorry for the long answer, but that's a bit more of our take on what's happening.

I appreciate it, Stan. And just if I could just ask one quick follow-up. I know it's early days, but anything you can talk about with the current state of the engagement and review with the outside consulting firms? I think there's revenue and cost opportunities for sure. But can you give us a teaser at all as what's being emphasized or deemphasized? What are the savings opportunities that may have already been identified on top of the value creation projects that you already have underway?

You are correct in your observation. There are two key opportunities. One involves the restructuring we underwent, which has exceeded $100 million. We anticipate seeing more benefits in the third quarter and will provide additional information at that time. Regarding our collaboration with KKR, it began shortly after their investment in the business and has included conversations with the Capstone group, who have been instrumental in guiding us in two key areas that align with our overall strategy. The first area is enhancing gross profit. I want to clarify that this is not simply about raising prices; it's about delivering value to our customers while improving our margins. This involves reviewing our pricing, especially in relation to owned brands and specific manufacturers who recognize the value we provide and are willing to collaborate with us to offer better deals to our customers, which in turn will boost our margins. This initiative has been ongoing since we launched it in Europe several months ago with positive results, and we are currently partnering with a large consulting firm to apply this strategy in the United States, leveraging KKR’s Capstone Group expertise. Our corporate overhead restructuring is in progress and has been productive. With support from KKR’s Capstone Group and the consulting firm, we are utilizing their experience in managing complex organizations like ours to create global services rather than just localized ones. We see significant opportunity here, and we are hopeful for positive outcomes by 2026. Although we are not ready to share specific numbers yet, we are optimistic that our restructuring plan will take us beyond the $100 million threshold alongside our initiatives for margin improvement and managing operating expenses. Many of these opportunities are structural, with numerous AI applications that these firms can facilitate for us. Overall, we feel very positive about these engagements. The discussions with Capstone have been continuous since their involvement began. Our team is highly motivated and recognizes the value of this initiative. I recently encountered our dental sales management team working on this project, and I believe the value we will generate here will significantly benefit the company and, consequently, our investors.

Stan, congratulations. It's been a pleasure, and I wish you best in your retirement and your new role as Chairman. Maybe switching to the questions, and this may be part of the question for Ron too. If we think about where we are in the year, we're halfway done and sort of thinking about the traditional EPS cadence in the back half of the year. I realize you said that there's $25 million more of the BOLD+1 initiatives, plus obviously the $75 million to $100 million you talked about before. So how do we think about the EPS cadence in the back half of the year just vis-a-vis your guidance and sort of the year-to-date performance?

Thank you for the question, Elizabeth. We indicated in our guidance that we expected stronger performance in the second half of the year compared to the first half. We anticipate that EPS will grow in the third quarter and possibly exceed that growth in the fourth quarter as well. We're encouraged by the momentum we have as we enter July, following our targeted sales initiatives. We have expanded our distribution sales team, which we believe will enhance our ability to reach customers more effectively. Despite the macroeconomic uncertainty that affected equipment sales in the second quarter, we feel confident in our backlog and anticipate momentum in Dental Equipment during the latter half of the year. We believe we can sustain the progress in our Specialty Products and Technology groups. The Tapered Pro Conical has shown strong sequential growth this year, and we expect that to continue into the third and fourth quarters, contributing to our overall growth. Regarding the restructuring plan, we have achieved some cost savings, which will help us identify further savings through our value creation initiatives, in collaboration with consultants. Lastly, our guidance incorporates remeasurement gains, similar to previous years, which may add some variability to our results. We will provide investors with an analysis of the impact of these remeasurement gains when we report our earnings for the back half of the year.

Got it. That's super helpful. If we think about sort of the ortho turnaround that you guys have been in the process of implementing. Can you tell us sort of the most recent update on sort of where we are with the integration of the different clear aligner brands and how you would sort of define the orthodontic environment more broadly? Obviously, you called out a little bit of weakness in the quarter, but just trying to triangulate whether that was macro or a result of your transition, and that could also happen with the help with the second half gains?

Elizabeth, first of all, thank you for your nice comment at the beginning of your question. Second, on orthodontics, it is very small. It's under $100 million business. There are two aspects. There's traditional. There's a particular product offering there that is of interest to customers, but it's very small. It had generic competition a year ago, and for the past 2, 3 years, we started facing that and we've now stabilized that with an upgraded product. The traditional part is doing well; it is doing better, but we reduced our sales organization, our costs, and our marketing, and it's now moving into a positive environment in the traditional area. Again, it's not significant. On the aligner side, we've moved the aligners to one facility in France. That's working quite well. Still, it's very small. We reduced our sales and marketing expenses, and it's not a significant area for Henry Schein other than with some DSOs who we've made arrangements with, who try to buy most of their products from Henry Schein. I would not say that we are indicative of the growth of the market or the challenges of the market. We have our internal areas we're working on. The goal there is to offer very good products on the traditional side, unique niche products, increase the margin and on the aligners have an offering that is unique, that is integrated with some software we have. I would say this is not a big strategic area for Henry Schein, but there are some profits there, and we're turning around the business and making it more profitable. Again, it's very small, around $100 million or so out of almost $13 billion of sales. It's not material, but we'll give you updates as they materialize.

Stan, you mentioned July sales were good and you've returned to normal merchandise pricing. I guess a question for Ron here. How should we think about the gross margins in the Distribution business in the second half of the year? If you've returned to normal merchandise pricing, can they go back to where they were a year ago? And then, related to that, around Capstone, should we view the gross margin initiatives as accretive to last year's gross margins as a starting point?

Allen, on the Distribution side, there are some very competitive areas. We did see some pressure in glove pricing. On that side, it has stabilized. I think sequentially, we can stabilize those margins. However, versus last year, you're still going to see some slightly lower gross margins, and that's just the reality of the market, especially as it relates to a product category as important as gloves that is seeing relatively competitive pricing out there. Nevertheless, we are seeing some stabilization in the glove pricing as we enter the third quarter. Overall, as we look at margins, we're happy with the growth we're seeing in technology, which, given the margins in technology, gives us an overall lift in gross margins as well as the growth we're seeing in Specialty Products. Within Specialty, we did see a tick down in gross margin because we saw better growth in value implants than we did in premium implants. The value implants typically yield a slightly lower gross margin than premium. Thus, the growth in value implants has taken a slightly larger piece of the pie, contributing to a decrease in that segment's gross margin. But nevertheless, that's obviously accretive to our overall gross margin. So product mix will provide us some benefit going forward, but certain product categories such as gloves will continue to put a bit of pressure on gross margins in distribution, but we believe we're seeing some stabilization sequentially.

Yes. I think we're pretty consistent with the message of last quarter. The DSOs, in general, are moving in a positive direction. I think they're getting funding. If they trade, I'm not sure they're trading at as high a multiple as maybe a couple of years ago. But generally, the ones that are in the business have funding and are investing, some are even investing in traditional equipment, but dental technology, the digital side is where I would say there's quite a bit of movement, and they're all investing one way or another in software. So I think it's pretty stable to maybe leaning even positive. There are a couple of places in the world where there's a challenge. France passed some laws that are a challenge. However, I would say even internationally, they are growing, they can get funding and they're investing. We did not have any big sales this quarter, but generally, every couple of quarters, there's a big sale to a DSO, and that's continuing, both here and abroad. Overall, I would say it's positive and funding is available.

I want to add to what Stanley said there, Allen. In the U.S., we look at new office design projects. Every month this year, with the exception of one month, we have seen double-digit year-over-year growth in announced new office design projects. That one month where we didn't see that growth was in May, where we had double-digit negative growth, indicating some hesitation due to the uncertainty in the market. But every other month, we have seen double-digit growth year-over-year.

Can you just size potentially the targeted sales impact on the second quarter? And then just as we think back to the first quarter call, what changed that led you to want to pursue this targeted sales initiative and produce the positive impacts that you're seeing now in July?

Thank you. I will address the second, and Ron can provide some thoughts on sales. I don't know what exactly we're providing to investors. It's not that we want to hide anything, but for competitive reasons, we need to be careful. We saw an opportunity with a group of customers, in particular, who had been buying from Henry Schein and had returned to buy exclusive products, perhaps were cherry picking with us and used to buy in a more steady way higher numbers. We felt it was an opportunity, a hole in the bucket, if you will; sales we lost over the last 18 months. We wanted to go to those customers with an equivalent of a frequent flyer and affinity program, and I think it has been well received. I don't think there is a need for this any longer, maybe in such an aggressive way, but this high-octane opportunity was just a hole that we felt we could go through and it has been relatively successful. This is not a general offering to all our customers, but it's particularly targeting customers that we felt had left us, who didn't understand us, didn't get the value-added services, and it gave our field sales representatives a reason to go into the office and allowed our telesales representatives an opportunity to advocate for us on the values we bring. I think our team went through that hole in the bucket and filled it.

And John, regarding the first half of your question, we mentioned earlier the two items that put pressure on those margins, one being lower glove pricing and the other being our targeted initiatives. There is a bit of an overlap there. Some of those targeted initiatives were on gloves because it's a very important product category. It's difficult to assess exact dollar amounts and provide them to each of those individual items. What's important to note is that we are pleased with the results we're seeing in July coming out of those targeted initiatives and the stabilization of glove pricing. We consider it to be a successful campaign, which gives us confidence as we go into the back half of the year.

Great. And then there's been some discussion around one of your larger customers RFPing a portion of their business. Can you just comment generally on what you're seeing in the competitive balance as customers potentially RFP, especially on the DSO side? And maybe Stanley, if you would indulge us in a bit of a retrospective about how these have changed? What customers are looking for has changed over time. So that would be helpful.

Sure, that's a good question. We typically do not comment on contracts with specific customers. However, it is normal for some of our larger customers to issue RFPs every 3 or 4 years or so. To some extent, they want to see what our margins are, but they are also negotiating with manufacturers because in the dental space, we actually perform the GPO function. We work on behalf of our customers in obtaining pricing specifically related to them, and then we put our markup on top of that. I think this kind of activity is quite normal. It has not been as aggressive as we would have expected, largely because we've worked well with our larger customers to find alternative options for product sourcing where there is a significant tariff issue, moving to other markets and manufacturing that can absorb part of the tariff. I think generally, we remain a very trusted supplier and are partnering with our customers quite well. From a large customers' point of view, we continue to gain market share, thanks to our comprehensive offering, including our supply chain capabilities. We believe it is best in the market. Every competitor will say the same about theirs, but we work to ensure that we provide best-in-class service. Our customers recognize not just our consumables, but also their equipment and service. Our national service capability is outstanding in the United States and globally. This is being recognized, and further, with our software and various revenue cycle management opportunities, we can often save customers more money or bring them more profits than perhaps small discounts on products. I think the market is relatively stable from a large and midsized customers' perspective. Everyone is collaborating to understand tariffs and finding ways to mitigate them. I see this as a strong collaborative effort with our customers.

Stanley, I think I met you in 2002 at our Growth Stock Conference in Chicago. We were both a lot younger then, but I've appreciated your steady hand and your consistent leadership over the years. So thank you and good luck in the future. I was hoping I could start maybe, Ron, a question for you on gross margin. Just as you said, glove prices have stabilized, which sounds encouraging, but maybe going to be sequentially stable at these levels. How much of the 110 basis points of gross margin pressure this quarter in Q2 was glove-related, and how much was a result of promotional activity that's now gone away, and maybe core pressures elsewhere? It would be helpful to try to model out the back half of this year by understanding these factors.

Yes, it's like I was saying earlier; it's hard to isolate the programs when gloves are part of the programs. For us, it's easier to look at the product categories. The product category for gloves probably attributed to about a third of the margin pressure year-over-year, just gloves alone. The balance comes from competitive pricing and other competitive promotions that we've conducted. As I mentioned, we are comfortable that in the back half of the year, we will see stability in both gloves and other areas.

All right. That's helpful. And then just my final question. You talked about the two new initiatives. It sounds like we'll get more detail next quarter on those two initiatives in conjunction with KKR Capstone. My question is whether you think these initiatives might yield chunkier cost savings, some big cost savings initially in the first year or two, guiding 2026, 2027, with notable earnings jumps, or should we view the efforts with KKR as leading you back to a more consistent upper single to low double digits growth over the next several years?

Thank you, Jeff. Yes, it has been a quick 23 years. Of course, I wish you and all the other analysts that cover us the best and hope that you stay with the dental market. It's a great market, offering cash flow consistently. Yes, as it relates to the work of Capstone, there will be efficiencies over time, some short-term and some that will bolster our performance in 2026 and 2027. However, that's just one element. The other is our BOLD+1 Strategic Plan when we announced it. We have over 30% of our operating income coming from high-growth, high-margin businesses. This quarter was 45%. You add to that about 10% coming from our corporate brands. We're well over 50% of our earnings coming from high-growth, high-margin businesses. Two things are going to happen: One, our cost of doing business will decrease, largely due to increased efficiencies, particularly with technological innovation and AI. There's a lot of opportunity here that we are learning about. This operational efficiency will affect '26 and '27, complemented by high-growth, high-margin business growth. The direction we've been on has executed quite well. Don't forget the leverage element of our strategy, where we can utilize engagements from affiliated companies. We are significant players in the digitalization of dentistry. Dentists find it difficult as their sales growth in specific countries may fluctuate, but they focus on enhancing practice efficiency while delivering better clinical care. I believe we have great opportunity in this regard and anticipate good performance outcomes. I think the senior team has never been in better shape. Each one of our areas, whether it's our business units or our infrastructure units, has very good leadership. It's a good time for me to hand over the reins to someone else because the team is really in place, and the momentum in the company is good. Clearly, we have retained a national recruiting firm to work on the appointment of the next CEO. We're looking at internal candidates and external candidates. It’s better to announce my retirement early in the process rather than letting rumors spread. I think as a public company, we need to consider internal and external candidates as best practices. The team is enthusiastic about Capstone's value creation initiatives. The morale is quite good, with our team understanding the competitive nature from a pricing point of view but also from the customer experience perspective. We are working on improving the value for our customers, yielding value creation opportunities for the company. I remain optimistic about the future of Henry Schein. Thank you all for calling in, and we'll be back in 3 months' time. Thank you.