Good morning, ladies and gentlemen, and welcome to Henry Schein's Second Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's call, Graham Stanley, Henry Schein's Vice President of Investor Relations and Strategic Financial Project Officer. Please go ahead, Graham.

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 joining us today. We delivered solid second quarter financial results, including strong operating cash flow, that reflected stable end markets. Gross margin has continued to increase, driven by our strategies to expand our high growth, high margin products and services and by the successful performance of our recent acquisitions. We are experiencing improving sales trends in our distribution businesses. However, the pace of recovery since the cyber incident last year has been slower than anticipated. Now, given the challenging economic environment, which we'll talk about a little bit later, in certain markets as well as this delay in cyber incident recovery, we are updating our '24 full-year financial guidance. We remain committed to our long-term financial goals through our advancement of the BOLD+1 strategic plan, which has stood us well, supported by a strong balance sheet and new restructuring plan. As we continue to generate synergies by connecting our distribution businesses, specialty products and technology and value-added services, we continue to see great symbiotic relationships between our various businesses. We are also announcing a restructuring plan to integrate recent acquisitions and right-size operations, and further increase efficiencies, targeting somewhere between $75 million to $100 million annual savings. We are comfortable that we will continue after this restructuring plan is put in-place with improving operating margins. And we are increasing at the same time our repurchase authorization, following recent Board approval, an additional $500 million, as we expect to leverage the strong cash flow we have. So, let me turn to the various business units, dental distribution to start with. In North America, patient traffic was generally flat with the prior quarter, with unemployment rates and dental insurance coverage generally remaining consistent with prior periods. We are experiencing improving sales trends…

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…

Thank you, Ron. So, as we lead into the Q&A, I want to reiterate, we are confident in the prospects for our business, even in the face of challenging economic conditions. Although, we do believe markets are stable and that we can continue to gain market share through the recovery from the cyber incident, which is going in the good -- in a direction, but not as fast as we expected when we gave last guidance a quarter ago. And we also are comfortable that we will benefit from the trends in increased specialty procedures. I think we've rounded out the implant offering we have. We had a big gap. We've got that in-place in the United States, and in Canada soon. And we're also confident that the movement of medical procedures to alternate care settings will continue. We are generating good synergies connecting our distribution businesses, specialty products and technology and value-added services. While we focus on these opportunities, we're also taking action to increase shareholder value, as we've noted in the restructuring plan. We need to right-size the restructuring plan. The sales have not grown as rapidly as we thought. Some of that is attributable to the fact that inflation does not exist at the moment. We believe in our markets, very moderate, and may actually be going down slightly, as our customers are more price-conscious and moving to some alternative brands and owned brands. But we think from a gross profit point of view, this will be fine, in fact, maybe slightly accretive. And, of course, we will continue to buy stock. We anticipate spending the $500 million. And so, with that in mind, please, let's answer some questions. Operator?

[Operator Instructions] And the first question comes from the line of Jon Block with Stifel. Please proceed with your question.

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. The -- from midpoint to midpoint, we came down 4 points, right, but it is -- the math works to approximately what you have enumerated. If you -- going back and thinking about our original guidance and our -- even our amended guidance on sales from the first quarter, our Investor Day assumption go back 1.5 years ago was that long-term growth for dental was about 2% to 4% in terms of market growth. And our assumption this year was at the low-end of that range. And, of course, part of that growth would be coming from anticipated price increases as well. As we've progressed through the year, our view has shifted to more flat year-over-year market growth, which still reflects stable patient traffic environment. And I think others in the industry have even indicated flat to negative growth in the market, right? As the pricing itself has also remained fairly flat to the prior year and we see customers are frequently moving to some lower cost options, including our own corporate brand in some cases, which in general is positive for us from a gross profit perspective. Those conditions, and you couple it with the Company specific challenge of recovering from the cyber incident, which have been delayed, but are still showing sequential growth quarter to quarter, are the primary drivers to the reduction in our sales guidance, right? So, the fundamentals of the business remain intact. We believe we are once again gaining market share, working our way back to pre-incident market share and we expect that to continue over the balance of 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.

So, Jon, that is a very important question. I'm glad you did ask it. Look, our sequential month-over-month reduction of the gap has been quite good. It's going slower. We need to get our field sales force visiting again with smaller customers. They've been focused on the big ones, and that's been pretty good. They need to focus on the smaller ones. And we need to kick our tele sales team back into full action. They had a deal with the fall-out of the cyber incident. There were many issues that had get resolved. Yes, customers were okay, in the end that we resolved it. But our call centers have been very busy. And only in the last couple of the months, actually the last six or so weeks, are they doing outbound calls. So, we are well received. I just happen -- we happen to have an opening of our new distribution business in Texas, and I was with some of our FSCs, our field sales consultants, who had been -- who -- many of them have gone back now for the first time into the smaller accounts and they reported that the customers are very happy to see them. They just wondered why they were not there in the last couple of months. They were not there because people were focused on dealing with the larger customers and the customers that are the better customers, where they buy a bigger market wallet from us. So, we are confident that over time, we will continue to gain market share. We are gaining market share from where we left off at the end of '23. It's going to be hard to split exactly what's market share growth because of general market share growth, effectiveness of the sales force and what's the result of the recovery. But I think overall, we're confident that we'll be able to continue to gain market share. And the question is exactly at what pace? We've given you guidance of what we expect. And that's really the key facts. I mean, there's nothing more we can add to that. We have a pretty good track record, and we expect to deliver. Will we be off a couple of quarters, one way or the other? Hard to give you the exact number. But I think you're asking a very important question.

And the next question comes from the line of Jason Bednar with Piper Sandler. Please proceed with your question.

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, again, let Ron give you some thoughts on specifics that have been baked in to the extent we can give you that information baked into our assumptions. But in general, we believe the consumable market in the United States and Canada is relatively stable. Yes, there's been a shift, I think, to more price-conscious opportunities. I don't think that necessarily impacts our gross profit. It may depress our sales slightly. And we believe we can gain market share on the pure distribution of products. Adding to the profitability, I think, continues to be our specialty businesses, in particular, implants, bone regeneration, that's material. And we think we are well-positioned globally in that area. We don't really have exposure to China. We're selling very little there. There's going to be ups and downs there, Asia generally. But the market that we're the strongest in is the DACH region in Europe, and I think we're very well-positioned. We are, I think, well-positioned in the United States, specifically with the implant dentist that is looking for high value, but a branded product. We are hopeful and expect that as the year goes by, this year, we will be able to get some market share in that area. I think, the endodontics not as big as implants, continues to move in a positive direction. And the medical business, yes, there have been some anomalies there, the pharma side, the whole point of care switching between one quarter and another. But I think the movement to the alternate care side, the Ambulatory Surgical Center, the home care, those are all positive, good ways in which for us to sell our own brands. And I think we will recover in that area. We've done okay with the large customers. The smaller ones, the same as…

Yes, Jason, I will say, too, you were kind of talking about balance of year and then kind of going into '25. We have announced a new restructuring initiative. We do expect, as you inferred, that we will get some benefits this year. I mean, that -- we can take some immediate actions that will provide some short-term benefits for us, as -- in this quarter as well as next quarter. There will be, I'll call them kind of other more complex actions that I think will take us over the course of 2025 to complete. I think it's important to note that as we -- we've done a lot of building under the B of our BOLD+1 strategy in the last year or so, 1.5 years, and there's going to be some integration opportunities there. And something that might fly under the radar a little bit this year is that we've also invested this year a little over $200 million in buying out shareholder partners in certain subsidiaries where we had a minority partner. And this kind of increased ownership also provides us with very good opportunities to combine certain operations, further leverage our One China approach with customers. And so, but those, as you can appreciate, are a little more complex, not the kind of thing you can do overnight. So, those will likely spill into '25 for some time. But that's the -- that's part of the plan, and that's -- and we've baked that into the balance of the guidance what we think we can achieve this year. And then, when we provide '25 guidance, we'll be able to address that.

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 manufactured 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. Jason, first of all, we have never really spoken about specific relationships with Dentsply, but -- because generally, it's not a good idea. But yesterday, I did have a call with the CEO of -- Simon of Dentsply, and we confirmed to each other that our relationship is good. I believe we are the biggest customer. They're one of our biggest global suppliers. We work with them practically in every country; I mean, there's one or two that we don't. And they're very important supplier of ours. The company has had some management changes over the years. Seems like the current management team is in place, understands what needs to get done. I believe that they are working well with our team here, particularly in North America and Canada, also in Europe. It's a bit more complex in Europe, one of the biggest markets for them -- for us. We work well, by the way, I think in Germany, France, Spain, U.K. and Italy too. And, yes, they have committed to adding more sales power to their organization, which can only be helpful to us. They had products, and we'd like to get them in front of our customers. On the other hand, there are other suppliers that have competing products. And we will always do what's best for our customers. But at the same time, we have strategic relationships. I would view them as one of the strategic relationships. We do not have a formal contract with them. I think we have a memorandum of understanding in one way or another. I don't know when it -- whether it expires or not. I haven't -- actually, I was going to look at that. But, in general, it's a good relationship. And we have good relationships with all of our suppliers. And then, I'm sure the next question is selling direct, and that rumor has been going around in dentistry for years. Specialty products are sold direct, implants, orthodontics, to some extent, endodontics. We need to be in a position to offer the entire offering of all those products. We are in that position today where we had gaps, we couldn't get products. We entered into the manufacturing. Those are the specialty products we've discussed. And we're doing well. And like in any industry, there's owned brand, corporate brand products. And where manufacturers are ready to provide good pricing that meets the customers' needs, we're happy to take the manufacturers' products in, where we need to have a private corporate brand. We have that, like in any industry. And in general, I think we have good relationships with our suppliers. As it relates to their specific issue with a specific distributor, that's not for us to comment. So, I'm trying to be as transparent as possible.

And the next question comes from the line of Elizabeth Anderson with Evercore ISI. Please proceed with your question.

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. So, the easiest, the purest, would be Europe. And the biggest market for us is DACH. That is Germany and Austria, and a little business in Switzerland. In general, we continue to do very well. We have a complete line. We have an outstanding sales force, built over many years. We have what's needed. We are not the biggest player in Europe yet on -- in Germany on bone regeneration, but we're growing very nicely. We only enter that market about three years or four years ago. But on implants, we're doing very well and continue to expect to do well. And in the other European markets, we will continue, I think, to do well. But we have relatively small market share, except in France, where we're the number one player. And with all the challenges in France. And just because you're asking such a specific question, I will answer, but generally, we're not going to provide specific information on specific countries, but we are growing in France. Biotech is growing organically and doing quite well with its implants. I think they are the number one. So, Europe is the easiest, the purest. As it relates to Latin America, our S.I.N. new joint venture, although it's viewed as acquisition growth, continues to gain market share. Fortunately, they were not hit by the sad situation in that part of Brazil that got a lot of rain, but overall, it's doing well. The BioHorizons part of the equation is a bit challenged because of a couple of the countries of instability in Latin America, but they were not a participant, really, in the Brazil market. And our view to Latin America is primarily through S.I.N. As it relates to the U.S., until last year, we were gaining significantly in market share. Our sales were good. This year, the market is a little bit frozen for us because of our introduction, our customers, our sales force are aware of the new product. We were supposed to get it around March, April, but we got the FDA approval in the middle of June. It's going to take a little time to fire up, but we're quite confident that we will do well in -- with our new product, which I think is also well received by DSOs, whether they are BioHorizons DSOs or Henry Schein DSOs. Bringing the S.I.N. product into the U.S. will also be helpful. So, we did go backwards in terms of our sales, but I'm not sure in terms of market share in the United States, it's hard to tell. Data is not readily available. We do extremely well in the bone regeneration field in the United States. Canada is kind of flattish. And just off of top of my head, that's where we are. And I'm quite happy and confident with the progress we're making in the implant arena as well as the biomaterials arena.

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. I mean, specifically, Elizabeth, I'll address the distribution businesses first, because I think that's probably of the most interest to people. We have experienced from Q1 into Q2 growth in our distribution businesses as we recapture some market share. As we said before, that recapture has not been as high or as at the pace that we had originally desired. But we are recapturing share and that has continued into July and we expect it to continue for the balance of the third quarter and then, of course, into the fourth quarter as well. So, that's with distribution. I think with the other products, it's a -- they can be a little choppier. You get into the kind of the European holiday season now with distribution there. But I would say within the -- especially within the U.S. distribution business, we feel very good about the ongoing trends there.

And the next question comes from the line of John Stansel with JPMorgan. Please proceed with your question.

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 medsurg, 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?

No, I mean, we are taking a look at the run rate on corporate brands, John, it is considered in our guidance. It's a little difficult to talk to it in broad terms, because we are still seeing a little bit of price pressure on gloves, and gloves is a very important Company brand for us. So -- but outside of gloves, we're seeing relatively good demand because there is -- there does seem to be a greater kind of consciousness around costs in the customer base right now.

And the next question comes from the line of -- my apologies. The last question comes from the line of Dane Reinhardt with Baird. Please proceed with your question.

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's -- this is where it gets a little fuzzy because it is difficult to assess. Like you said, we -- based on [indiscernible] and based on other data we had, you get a feel for the, so-called, recovery from cyber. Those customers are very sporadic though, they're very episodic with their purchasing habits. And some that you recapture, you might not see again for a while. Then you get somebody else. So, they have not been as consistent. And that's where it gets kind of difficult to put a number behind the actual percentage of recapture there. For us, it's important that we not only focus on recapturing our old customers, but also gaining other new customers. So, the focus of the business really is on gaining market share, whether it be former customers or new customers. That's really the focus of the business, as it should be, under the just ordinary course of business. In terms of what we're seeing in dental and medical, I would say that the effect has been -- is relatively the same across the two. I don't think it's slightly -- it could be a little more accentuated with dental, but I would say it would only be slightly more in terms of that, so called, recapture rate. And again, we have to use a lot of assumptions to determine what is that real recapture rate, right? And I forgot the last part of your question. You had a 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. So, in terms of the back half guide, it does -- we expect to maintain the momentum we have in terms of recapture of market share, although, again, not at the pace we had originally anticipated. But we anticipate regaining -- and gaining market share into Q3, into Q4, and that'll help drive some of that increase. We also expect the back half of the year to be better in specialty. We have the new product launch in North America on the implant. So, we also -- we do expect specialty to be better. And we expect the technology business to bounce back a little better in the second half as well. So, all of those would be contributors to that. In terms of your question around brand, I do think that the -- we are seeing -- like I said, we see some move towards corporate brands. Those are better margins for us. It doesn't quite show up on the top-line, so it does help contribute a little bit to some of that gross margin favorability you see out there.

Let me -- Ron, thank you. Let me just add one other thing. The larger accounts are growing at a faster rate than the very small ones. The larger ones are more conscious of alternative brands where they can get better pricing. As I noted early on, it's not bad for our gross profit, it's actually quite good. So, just because large customers are growing at a faster rate than the smaller ones, alternate options of brands are featured to a greater extent in the buying patterns of our large customers. And this is shifting to certain manufacturers or to manufacturers that are prepared to give price discount for large contracts, larger contracts. And it does depress our sales a little bit, but it's certainly good for gross profit. Okay. Is that it? Yes. So, we are now four minutes late. Let me end by thanking everyone for participating. I realize it is a complex quarter from a math point of view. Ron, Graham, Susan are ready to meet with you. Of course, I will make myself available as well. The business is solid. It's been that way for decades. Have we had bumps along the way? Yes, we had. We had the cyber incident. Before that, we had the COVID period. Like 2008-'09, we had some challenges also because of the economy. Doesn't feel like it's as bad this time. But we have to make sure that we respond accordingly. Although our sales are not where we wanted them to be from the economic point of view. I think, there is a little bit more shopping on price. I don't think it's between us necessarily our competition between brands. We can, I think, cover that well, whether it's on the consumables or the equipment side. And we just have…

Ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.