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Health care product distributor Henry Schein has redoubled its effort to provide in-kind donations and grants to disaster-stricken areas, as well as to work with NGOs to proactively supply vulnerable areas with medical and dental supplies—so supplies are there even if roads or airports become unusable. Its Global Product Donation Program has donated over $75 million in health care supplies to health centers and clinics since its 1998 inception. Henry Schein also provides $10,000 in cash grants and $25,000 in products through its Prepare to Care Program to each of five nonprofit partners committed to disaster-relief preparedness and immediate assistance in natural disaster-prone areas.

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CTW.1122.Henry Schein

As with many aspects of daily living, the standard dentist visit was not designed with much consideration for the needs of those with disabilities. For some, the experience may be physically inaccessible; for others, like those with developmental disabilities such as autism, the environment and experience—with its bright lights, buzzing noises, and close contact—can be terrifying and traumatic. Meanwhile, in part due to those challenges, people with disabilities suffer higher rates and more severe cases of periodontal disease, gum disease, and untreated cavities—all conditions that can lead to other health problems. Henry Schein, the dental and medical supply company, began work to address this disparity more than a decade ago, forging partnerships—like Project Accessible Oral Health—to increase training and adapt dental practices to better serve disabled people. The efforts have resulted in provision of specialized services to hundreds of thousands of children as well as a new dental school curriculum, developed with stakeholders like the American Dental Education Association.

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Founded by its namesake as a Queens, N.Y., pharmacy in 1932, the company is now one of the world's largest distributors of dental supplies and other medical goods, operating in more than 30 countries. An ever-present on Fortune's list of the <a href="https://fortune.com/worlds-most-admired-companies/">World's Most Admired Companies</a>, it is considered by many in its sector as a leader in social responsibility. With $10.1 billion in sales last year, Henry Schein moved up six spots on this year's Fortune 500 list.

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Long Island's largest public company by revenue, Melville, N.Y.-based Henry Schein globally distributes medical and dental supplies including vaccines, pharmaceuticals, financial services, and equipment. The company kicked off 2019 by spinning out its animal health unit in an attempt to focus on its core medical and dental businesses; it ended the year with the novel coronavirus pandemic eroding its business.

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19.CTW20.21.Henry-Schein

Five years ago, well before COVID-19 entered the lexicon, Henry Schein CEO Stan Bergman called on his peers at the World Economic Forum to think collectively about pandemic preparedness. It worried him that there was no organized emergency product list, and no directory of where to get such products when emergency struck. Soon after, Bergman’s dental and medical supply company became a founder and the private-sector lead of the Pandemic Supply Chain Network, a public-private partnership whose members include the World Health Organization, the World Bank, UPS, and more than five dozen health care manufacturers. 
 
The group created a platform to convene responders and exchange information. Says Bergman: “You can’t do it in the middle of a pandemic. You’ve got to exchange business cards well before.” The network functioned well in recent Ebola outbreaks, and in response to COVID-19, it has sourced more than $200 million worth of critical supplies, like masks, gowns, and swabs, so far.

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Henry Schein is a global health care services distributor of dental and medical supplies, business and supply-chain solutions, and tech-forward integrated care solutions. The nearly century-old company operates in over 30 countries and has developed more than 300,000 products, from diagnostics to surgical and orthopedics, including whitening strips, dental implants, patient communication services, and a dual-cuff blood pressure monitor. In early 2025 the company acquired Acentus, a national medical supplier of continuous glucose monitors, to expand its portfolio. Henry Schein has been named among the World’s Most Ethical Companies by Ethisphere for 13 consecutive years.

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Q3 2024

Henry Schein (HSIC): Company Profile, Stock Price, News, Rankings

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Henry Schein

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Good morning, ladies and gentlemen, and welcome to Henry Schein's Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. And as a reminder, this call is being recorded. I would now like to introduce your host for today's call, Graeme Stanley, Henry Schein's Vice President of Investor Relations and Strategic Financial Project Officer.

Thank you, operator, and thanks to each of you for joining us to discuss Henry Schein's financial results for the Q3 of 2024. With me on today's call are Stanley Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein and Ron Sells, 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 regard 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 could 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, November 5, 2024. Henry Schein undertakes no obligation to revise or update any forward looking statements to reflect events or circumstances after the date of this call. Lastly, during today's Q and A session, please limit yourself to a single question and a follow-up. And with that, I'll turn the call over to Stanley Bogan.

Thank you, Graham. Good morning, everyone, and thank you for joining us. Our businesses performed well during the Q3, driven by the successful implementation of our Bold plus 1 strategic plan that is resulting in growth and efficiency throughout Henry Schein and a strong contribution from high growth, high margin products and services. We believe we continue to steadily gain market share in our dental and medical distribution businesses following last year's cyber incident. Our dental equipment business is showing ongoing stability in North America and increased investment by customers across Europe, Australia and New Zealand.

Implant and endodontic products had good growth in Europe and Brazil, as well as in North America following the successful launch of the BioHorizons tapered pro conical implant in the United States. We're reporting another quarter exceeding our target of 40% of operating income generated by our high growth, high margin businesses, and we expect to exceed the target, this particular target or the 40% target for fiscal 2024. Acquisitions made during 2022 to 2024, during our strategic planning cycle, along with product launches, are delivering strong financial results and our restructuring plan is on target. We also continue to return capital to shareholders through our share repurchase program. We exceeded our financial expectations for the quarter.

So today, we are increasing our non GAAP EPS guidance range to $4.74 to 4.82 dollars We also launched our global e commerce platform in the UK and Ireland, that's the GET program, and expect to launch next year in the United States. So far, we've received rather positive feedback from our customers that have moved on to the new system. Now, let me turn to a review of our business units and start with the dental distribution business. Overall, 3rd quarter results for our dental distribution businesses generally reflect continued stable patient traffic globally. We believe the North American market for dental merchandise sales was consistent with last year with unit sales increasing low single digits, offset by PPE price declines and a shift in sales to lower cost brands and owned brand products.

We also believe that our North American dental merchandise market share grew sequentially last quarter compared to the 2nd quarter, reflecting a similar trend from the beginning of the year as we continue to recover from last year's cyber incident. Our 3rd quarter sales increased internationally in the dental merchandise arena and reflects solid growth in Germany, Austria, France, Brazil, Australia and New Zealand. So now let's turn to the equipment side. North American Dental equipment sales were consistent with the prior year, and we believe we continue to outperform the overall market. Sales of traditional equipment grew slightly, while digital equipment sales decreased.

Parts and services sales continued to grow strongly. We believe our North American digital equipment sales were impacted in part by the timing of DS World. It was a successful show for us, because it took place in the last week, but it took place in the last week of September. Sales from the show will mostly be recognized in the Q4 this year. On the international equipment side, sales growth was quite good in parts of Europe, Australia and New Zealand and that was across all categories.

Let's turn to the dental specialties. Our dental, implant and biomaterial sales as well as our endodontics sales grew mid single digits for the quarter. With continued above market growth in the United States and Europe. U. S.

Sales were fueled by the launch of BioHorizons tapered pro conical implant, driving mid single digit sales growth in the 3rd quarter against the backdrop of a North American market that is trending flat to slightly negative. Additionally, in the U. S, we launched the SmartShape Healers abutment product line at the end of the quarter in our implant business, which we expect to further attract new customers and drive implant sales. The product is being well received specifically by non BI Horizon's customers who feel we've got something that is a great interest to them. We are confident practitioners will value the product's benefits, including less share time, enhanced patient benefits and improved clinical efficiency.

Turning to our orthodontic business. We are in the midst of restructuring this business as well as transitioning to the Smilas brand clear aligner in the United States and in the European markets. This resulted in lower orthodontics sales for the quarter compared to the prior year. So now let's turn to the technology and value added services part of the business. During the quarter, sales of our practice management software and revenue cycle management products posted mid single digit growth.

This was driven by growth in the customer base of our Dentrix Ascend and Dentale cloud based solutions, which was up more than 20% year over year, with now approximately 8,600 installations worldwide at the quarter end. Now it's important to understand, our results are impacted by customers moving from on prem to SaaS based solutions. Revenue is recognized in a different way in a SaaS based model versus an on prem sales model. In addition, we recently introduced reserve with Google, eligibility, essentials and eligibility pro, each of which helps our customers grow their businesses and are well received. The numbers the number of claims processed by our revenue cycle management e claims business also increased by mid single digit percentages compared to last year.

In conclusion, the dental our dental business is an important proxy is an important priority for our Bold plus 1 growth strategy. And it's in this area that the L in the BOLD is important for leveraging our strong customer relationships across our product portfolio. We are providing integrated solutions that strengthen customer relations, driving software, driving distribution and driving specialty sales, especially with our large customer segment. For example, we had a number of dental distribution DSOs customers switch their implants to BioHorizons and their technology to Dentrix Ascend and Jarvis Analytics. We have also had multiple successes with customers that have switched to Henry Schein for their merchandise and equipment purchases as a result of our differentiated offering and the excellent value added services provided by Buy Horizons and Henry Schein 1.

Each of these successes has resulted in coordination in our go to market strategy and accordingly incremental sales. Let me conclude my remarks with a review of our Medical Group. During the Q3, we believe we continue to increase market share sequentially compared to the Q2, again reflecting a similar trend from the beginning of the year as we continue to recover from last year's cyber incident. Sales reflected less demand for respiratory diagnostic products and flu and COVID vaccines this quarter, and therefore, along with related medical products. Sales were also impacted by the ongoing migration to generic alternatives for certain branded injectable pharmaceuticals.

We continue to have good growth in our Home Solutions business. So let me now turn the call over to Ron to review our quarter 3 financial results and our 2024 guidance. Ron, please.

Thank you, Stanley, and good morning, everyone. Turning to our Q3 sales results, I will provide details on total sales, total sales growth as well as LCI sales growth, which has internally generated sales in local currencies compared with the prior year and excludes acquisitions. Global sales were $3,200,000,000 with sales growth of 0.4% compared with the Q3 of 2023. This reflects 3.2% growth from acquisitions and a 0.2% decrease from foreign currency exchange rates. LCI sales for the quarter decreased 2.6% for the quarter, which includes a 0.4% decrease from lower PPE sales.

As Sam noted, our underlying sales for the quarter reflect continued improving sales trends in our distribution businesses. Our GAAP operating margin for the Q3 of 2024 was 4.94%, a 140 basis point decline compared with the prior year GAAP operating margin. On a non GAAP basis, operating margin for the 3rd quarter was 7.64 percent, a 45 basis point decline compared with the prior year non GAAP operating margin. We had good operating income growth in our dental specialties and technology and value added services businesses offset by a decrease in our distribution businesses resulting from lower sales following last year's cyber incident. 3rd quarter 2024 GAAP net income was $99,000,000 or $0.78 per diluted share.

This compares with prior year GAAP net income of $137,000,000 or $1.05 per diluted share. Our Q3 2024 non GAAP net income was $155,000,000 or $1.22 per diluted share. This compares with prior year non GAAP net income of 170 $3,000,000 or $1.32 per diluted share. Our 3rd quarter GAAP and non GAAP results include a remeasurement gain resulting from the purchase of a controlling interest of a previously held non controlling equity investment. This business has performed well since we made our initial investment.

And as a result of our decision to take majority ownership, we recognized a remeasurement gain of $19,000,000 pre tax or $0.11 per diluted share in the quarter. This is similar to a remeasurement gain of $18,000,000 pre tax or $0.10 per diluted share that we recorded in the Q2 of 2023. We regularly make non controlling investments in companies with high growth potential as part of our strategic plan. Leveraging our expertise, we have helped these businesses grow and become more profitable. The foreign currency exchange impact on our Q3 diluted EPS was unfavorable by approximately $0.01 versus the prior year.

Adjusted EBITDA for the Q3 of 2024 was $268,000,000 compared to the Q3 2023 adjusted EBITDA of $278,000,000 Turning to our Q3 sales results. Global Dental sales were $1,900,000,000 with sales decreasing 1.6%. LCI sales decreased 1.6% or 1.0% when excluding PPE sales. Global Dental Merchandise LCI sales decreased 2.5% versus the prior year with an LCI decline in North America of 4.9% and international LCI sales growth of 0.9%. Note that when excluding PPE products, global dental merchandise LCI sales decreased 1.9%, North America merchandise LCI sales decreased 4.0% and international merchandise LCI sales growth was 1.0%.

We believe the overall dental market continues to be generally flat with a shift in sales to lower cost products and lower PPE pricing. We also believe we had a sequential improvement in market share in the Q3 compared to the Q2. Our global dental equipment LCI sales increased 1.8% with flat sales in North America and 5.6% growth internationally. We expect modest overall equipment sales growth for the year in both North America and internationally. Dental specialty product sales were approximately $258,000,000 and grew slightly compared to the prior year.

As Stan mentioned earlier, this was driven by solid dental implant, biomaterials and endodontic sales globally, offset by sales weakness in our orthodontic business resulting from restructuring of the business and the transitioning of our clear aligner business from Reveal to Smilers, a product developed by Biotech Dental which we acquired last year. Note that our dental specialty acquisitions that we completed last year have now all annualized as of this quarter. So our total sales growth is equal to internal sales growth. Global technology and value added services sales during the Q3 were $221,000,000 with total sales growth of 5.1%. The LCI sales decline of 1.1% included a 3.1% decline in North America and 13.4% growth in North America and 13.4% growth internationally.

Our value added services revenue was bolstered by the LPS acquisition. This is a leading transaction advisory services business that we purchased in August

the acquisition of the Action Advisory Services business that we purchased in August of 2023. The timing of revenues recorded by LPS distorted internal sales growth numbers during the quarter and we believe that total sales growth of 5.1% for the technology and value added services segment is most reflective of the growth of the business. For the Q3, specialty products, technology and value added services businesses contributed over 40% of total non GAAP operating income. Global medical sales during the Q3 were $1,100,000,000 with sales growth of 2.9% and a decrease in LCI sales of 4.8%. Excluding sales of PPE products, LCI sales decreased 4.6%.

As Stan noted, our sales reflected less demand for respiratory diagnostic products and flu and COVID vaccines along with related products. Sales were also impacted by the ongoing migration to generic alternatives for certain branded pharmaceuticals. Our home solutions business had strong growth, which was driven by our strategic acquisitions. Restructuring expenses in the Q3 were $48,000,000 or $0.26 per diluted share. This includes $12,000,000 incurred as part of the plan announced in the Q3 of 2022, which was completed on July 31, 2024 and $36,000,000 incurred as part of the 2024 2025 restructuring initiative announced last quarter.

These expenses mainly relate to severance benefits and costs related to exiting certain facilities. Actions approved in the Q3 under the new initiative are estimated to provide over $50,000,000 in annual run rate savings And we believe this indicates strong progress towards our goal of $75,000,000 to $100,000,000 in annual run rate savings by the end of 2025. Our Q3 GAAP results include $10,000,000 in pre tax proceeds as part of our cyber insurance claim, which is excluded from our non GAAP results. At the end of the quarter, we had already collected $20,000,000 and anticipate collecting most of our $60,000,000 claim by the end of this year. Regarding share repurchases, we repurchased approximately 2,000,000 shares of common stock in the open market during the Q3 at an average price of $69.09 per share for a total of $135,000,000 We had $455,000,000 authorized and available for future stock repurchases at the end of the quarter.

We expect to continue to repurchase shares

Q4. Turning to our cash flow. We had good operating cash flow of $151,000,000 for the 3rd quarter, which compares with operating cash flow of $231,000,000 last year. Year to date, operating cash flow was $644,000,000 which is $112,000,000 more than last year. Turning to our updated 2024 financial guidance.

At this time, we are not able to provide without unreasonable effort an estimate of restructuring costs associated with the new restructuring plan for 2024, although we expect this to primarily include severance pay and facility related costs. Therefore, we are not providing GAAP guidance. Our 2024 guidance is for current continuing operations as well as acquisitions that have closed It does not include the impact of potential future acquisitions or future share repurchases. Guidance also assumes that foreign currency exchange rates are generally consistent with current levels and the end markets remain consistent with current market conditions. Our 2024 total sales growth is now expected to be 4% to 5% over 2023 compared to prior guidance of 4% to 6% growth.

For 2024, we are increasing non GAAP diluted EPS attributable to Henry Schein Inc. To be in the range of $4.74 to $4.82 compared with prior guidance of $4.70 to $4.82 and reflects growth of 5% to 7% compared with 2023 non GAAP diluted EPS of $4.50 as a result of better than expected results in the Q3. This guidance reflects an estimated non GAAP effective tax rate of 25%. Consistent with prior guidance, we continue to expect our 2024 adjusted EBITDA to grow in the low double digit percentages versus 2023 adjusted EBITDA of $984,000,000 We expect adjusted EBITDA to grow faster than non GAAP diluted EPS because of higher interest expense, a higher effective tax rate and higher depreciation as a result of the strategic investments we have made to execute on our strategic plan. I will conclude my remarks with some comments on 2025.

We plan to issue 2025 guidance as usual on our Q4 earnings call this coming February. As you have heard today, we expect modest improvement in the dental and medical markets next year and we expect to continue to grow faster than the markets supported by some of our recent investments, new product launches and focused execution and continued cyber recovery. We are on target to achieve our restructuring goal and this should help offset headwinds from higher depreciation expense resulting from our global e commerce platform and additional investments in technology. We expect this e commerce platform to accelerate growth once fully launched in the United States. With that, I'll now turn the call back to Stanley.

Thank you, Ron. Operator, we're ready to answer any questions that investors may have.

Thank you, Stanley. We will now be conducting a question and answer session. And the first question comes from the line of Elizabeth Anderson with Evercore ISI. Please proceed with your question. And the first question comes from the line of Elizabeth Anderson

with Evercore ISI. Please proceed with your question.

Hi, guys. Thanks so much for the question. I have just maybe a 2 part question. One, can you sort of comment on the overall health of the dental and medical trends as we kind of get through October and into November? And then 2, it seems like you have a bunch of one time items.

I think you talked about sort of the generic impact and some other things in medical and the respiratory season. And then in dental, you talked about like DS World pushing some sales into the Q4 and some other things. Like how like I guess in terms of how we think about the Q3 results versus the guidance, if we have some sort of push outs into the Q4, how do we think of that visavis full year guidance on the revenue side coming down a little bit? Is that just conservatism? Are there other trends that we should think about as we think about the Q4?

Any comments there would be very helpful. Thank you.

Elizabeth, I'll give you a few thoughts on the current market. And Ron will talk about the guidance. He's been working on that with the team. So the market is pretty stable, we think. There is a shift on the consumable side, at least in the United States, towards lower priced alternative brands and our own brands.

This doesn't really impact our profitability, but it may impact and does impact the sales. We also think the units have gone up in low single digits. So with lower single digits and movement of merchandise units to lower priced alternative brands, including national brands and own brands, you see a stable to slightly reduction in dollar sales in the dental market in the United States. Our October having said that, our October merchandise sales trends in our distribution businesses were generally consistent with September of 2024. So it's pretty stable.

Having said that, October sales growth in implants and biomaterials are strong, driven by SIN, Biotech Dental and in Europe, of course, our Camlog business. And we are seeing continuing good adoption of the BI Horizon's tapered pro conical implant in the U. S. So this is all taken into account by Ron as he works with the team on the guidance. And Ron can give you specifics.

But I think we can report a pretty stable market. And from our point of view, we are gaining back market share that we lost during the cyber incident, albeit at a slowish rate. But the rate continues in a positive direction really since the beginning of 2024 and consecutively improving. Of course, you've got to take into account for us glove sales where there has been a significant reduction in the price of units of gloves. And we think we may be seeing the bottom right now, but we will call that out separately because that's a business where we don't really control the selling price at all.

It's a commodity. So Ron, maybe you want to give some input on how you've worked on the guidance. Certainly, Stanley.

Elizabeth, we took into consideration a lot of the trends that Stanley just articulated in terms of how did we see Q3 ending, how did we see October. Markets are relatively stable. There is a market dynamic out there, perhaps a little bit of a shift to some lower cost products. With reference to equipment, we did as we mentioned in the prepared remarks, we do expect perhaps a little bit of a benefit from the timing of DS World in terms of how that will benefit Q4. Having said that, equipment tends to be Q4 tends to be the most important quarter for equipment.

So all those things were taken into consideration and then ongoing growth that we experienced on the implant side as well for the Q4. So those are all specific factors. On the medical side, we're really closely monitoring what's happening with the timing of the flu season, as we did see some softness in the sales of diagnostic kits in the Q3. And so we're monitoring some of the information that comes from the CDC and taking that into consideration in our guidance. So those are all things that could impact the Q4 as we go forward.

And the next question comes from the line of Jeff Johnson with Baird. Please proceed with your question.

Thank you. Good morning. Ron, maybe just one clarifying question on what you said about 2025 and then one question on EPS this quarter. But on 2025, you talk about maybe some modest margin market improvement and expect to gain a bit of share, things like that. The Street sitting at just over 4%, almost 4.5% revenue growth next year and 11% EPS growth or nearly 11%.

Relative to your comments, those both sound a little bit high. And you don't usually comment, I know, on the Q3 call about 2025, but you did kind of bring it up and open the door a little bit. It just feels like to me maybe, were your comments specifically kind of asking us to sharpen our pencils and maybe bring those 2 sets of numbers down a little bit for next year? Thanks.

Certainly, Jeff. Well, as you stated, we haven't provided 2025 guidance yet. We are looking at both what's happening in terms of market trends as well as on our own recovery of and gains in market share. And so those are factors that will be taken into consideration when we provide that guidance in February of next year. Beyond that, a lot of this is just what kind of momentum can we take from Q3 into Q4 and sustain from Q4 into 2025.

So we just need to kind of see how the balance of the year plays out and all that will be taken into consideration in the 2025 guidance.

All right. And then just on Q3 EPS itself, you had the $0.11 remeasurement gain in there. Obviously, you had kind of a $0.10 remeasurement gain in 2Q last year. I think the net in 2Q last year was closer to a $0.05 benefit because you also had some of the Syn and Biotech kind of higher than normal acquisition costs you called out in that Q2 last year for kind of a netting that to a $0.05 benefit. But if I adjust for both those factors, both the remeasurement this quarter, the net of those factors in 2Q last year, your first half EPS this year was down about 5% and with your core consumables in both medical and dental down 4% to 5 percent.

I think that makes sense. This quarter, if I take the $0.11 out and there wasn't really anything in 3Q last year, I don't believe your EPS would have been down closer to mid teens year over year. So what where was that extra ten points, if you will, of adjusted basis fall off in earnings growth this quarter versus the first half of the year? That's the one hole I can't plug. Thanks.

I think it's the ongoing recovery of market share in our distribution businesses more than anything else, Jeff. We're pleased with the some there's some pockets of very positive news in terms of what we're seeing on equipment, what we're seeing in implants. But I think the ongoing recovery in distribution would be the primary contributor to that gap that you've identified.

And the next question comes from the line of Kevin Caliendo with UBS. Please proceed with your question.

Thanks. Thanks. I appreciate you getting me in. Ron, this is sort of a math question here, but how do we think about the restructure savings, the $75,000,000 to $100,000,000 by the end of 'twenty five relative in size and scope to the higher depreciation costs? Like do they does one offset the other?

And I guess my point is, if we think about those two factors, other than mix, with revenues growing sort of above market next year, is there any reason beyond the restructuring costs versus the depreciation that margins shouldn't improve next year?

Well, we would expect margins to improve. I mean, obviously, the increase in depreciation expense would put some pressure on that. But I do believe the benefits that we gain in lower OpEx from the restructuring actions we are taking that we've already taken in the Q3 that we're taking now in the Q4 and that we'll continue to take throughout 2025 will more than offset the increase in depreciation expense. So we should see some benefit to operating margin as a result of that. Key to that obviously is growth in revenues, especially in the distribution business given the fixed cost nature of that operating base.

So if we can achieve ongoing market recovery in distribution, be successful in executing on our restructuring initiatives, we should be able to see some operating margin expansion in 2025. But we need to see what kind of momentum we have we can complete this year before we can commit to that.

And just a quick follow-up. So thinking about the share that was recaptured in 3Q, the magnitude of that and how it's progressing in 4Q, if you can should it is it fair to assume that based on where you are now that you still expect to have a tailwind in consumables or share from lapping lower share in the first half of next year? Like are you at that point where you feel comfortable that at least for the first half knowing where you are now that there will be a benefit? Or is that still relatively insignificant?

Yes. By definition, like we've said, we believe that sequentially this year, we have picked up some market share as we recover from the cyber incident from Q1 into Q2 into Q3. And so we do expect that our existing market share when we go into 2025 on the distribution side will be higher than when we went into 2024. Now as we have stated in previous calls that pace of recovery has been lighter than we originally expected. So we're still working on what we believe that incremental market share will be as we think through the 2025 results.

But yes, by definition, one would expect that market share to be slightly higher.

And the next question comes from the line of Jon Block with Stifel. Please proceed with your question.

Thanks guys and good morning. Stanley and Ron, maybe I'll just start pretty big picture. I think in the comments you said next year you expect the dental and medical markets to get a bit better and then you think you'll take share of that improvement. The improvement in the end markets, I'd say, has proven to be somewhat elusive over the past handful of quarters. And so maybe you guys can just talk to your conviction there.

What are the drivers? Is it a lower interest rate environment that leads to the improvement, notably on equipment? Is it consumer confidence? Is it lower financing on higher ASP procedures? What's really driving your improvement outlook,

you expect it to be more acute in either dental and or medical? Thanks.

Yes, John, that's an extremely good question. So let's deal with the easier parts. And the easier parts are dental equipment sales in the United States. I think there is a deep interest in practitioners investing in their practices. They're quite busy.

In fact, Ron was telling me he's having a problem getting an appointment with his dentists locally. The dentists are busy and they're feeling good about their practices and they do know that if they invest in digital technology, they will do better. So the whole area of the clinical workflow, digital devices, tying that into the software, electronic medical record, all of that is moving in a very good direction. Obviously, it's lumpy. This quarter, we had the situation of 1 of our biggest suppliers of scanners having to show slightly different time to last year.

So this is a good market, yes. If interest rates come down 100 basis points or more, I think that could move the needle. 200 basis points, even better. So but there's a conviction to invest. In the units, it seems like on the consumable side, units are positive.

But there is this movement towards shopping for lower priced branded products. And if you can get the same product or similar product, you'll move to a lower priced product. It does impact our margins a little bit, but that's balanced by a movement towards our own brand products, which sell at a higher price. I think the implant market has stabilized, at least from our point of view. The higher end is still challenged.

But I think from the market that we participate in, which is the value in plant side, I think the market is reasonably stable to leaning positively. The outlook in Europe is a little bit better now than it was even a year or so ago, maybe 2 years ago with the instability with Ukraine, etcetera. I think that's sort of calmed down a little bit or at least bottomed out. So Europe is leaning towards a positive. The rest of the world, Australia, New Zealand, for us, Brazil, it went down quite a bit, but it's also relatively positive compared to the bottom.

So I think it's hard to tell exactly, particularly where the election ends up and how people feel. But I think we've bottomed out to slightly positive on both the consumable side and on the equipment side with a leaning towards positive on the equipment side. And from our point of view, I think we will continue to do okay with implants, endodontics and a very small orthodontic business that will start, I think, providing positive growth once we've moved our Smiler brand globally. And so just a smaller side, on the medical side, at the margin, we're doing okay, but it's very much dependent on 2 factors. 1 is flu seasons, when they do they move from one way one year, one way another another year.

And of course, generics in the area of particularly injectables. And then you've got to take into account the price of gloves either way, but factor that out. And I think this will give you more or less a good view of our view of the market. Practitioners are investing in software. We are doing okay on the software side, pretty good, but we've moved from SaaS from on prem sale to SaaS subscription, and that has to be taken into account.

So that's sort of an overview of the various markets that we participate in. Home care is doing well from our point of view. I think in general it's doing well. And the orthopedic business for us, the new one, is also leaning quite nicely because there is a reasonable amount of movement to ambulatory surgical centers, which is where we're doing well.

Okay, great. That was very helpful, Stanley. Thanks for that. And then maybe just a quicker follow-up. Implants, impressive North American performance, pretty clear you're taking share.

But it's hard to believe that that would all be from the tapered pro conical alone, recent introduction. So any more details on the contribution from that offering? And maybe more importantly, is it the Conoco having, call it sort of a halo effect on the overall implant portfolio? Thanks, guys.

Yes. I think it's also a good question. I think our sales people are feeling confident that the work they've done over the last 2, 3 years, talking to customers about our exciting offering, now turns into a reality. And we are seeing customers that are interested in our product, which is a reasonably priced product, high quality, supported by very good KOLs and now an expanded market opportunity for us. All of that adds up well.

And we are talking about the United States. As it relates to Europe, we continue to do very well, particularly in our big market, Germany, likewise in Brazil and France. Then you can have a couple of 100 basis point movement one way or the another due to export sales. But generally, the fundamental state of our business in the United States is very, very solid when it comes to buy horizons and is gaining momentum as a result of the work that the team has done over the last couple of years. And I would think that the appreciation of our product line by DSOs has also helped very nicely.

And Europe, Germany, in particular, where we have the big market share, we tend to continue to pick up a little bit of market share each quarter. And then the rest of the world, as I said, it's very much it's not that material, but it could move market share 1 quarter or another depending on exports and depending on how we do in markets like Japan. We do not participate much in Germany, although we have some sales for the very low end price wise, high quality product, but and then of course, Brazil and France.

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

Hey, good morning. Thanks for taking the questions. Maybe want to unpack a bit more, some of the prior questions, just some follow ups here. Maybe if you wouldn't mind first bifurcating some of the assumptions around the growth performance expectations for 2025. If the market next year is showing modest growth, is it right to think that this mostly volume and pricing is flat?

Or would you characterize the pricing environment as slightly positive or negative as you're seeing manufacturer schedules roll out here for 2025? And then if you also wouldn't mind just commenting on how you've seen specialty and non specialty parts of the market fitting into your overarching comments on the dental market, that'd be great.

So Jason, as a distributor, if we move more towards manufacturers that want to compete a little bit more aggressively, and that tends to be the 2nd tier manufacturers, and there's a movement towards own brand, it could impact sales a little bit, all things being equal, but our profits are solid. So we can't tell exactly on the consumable side, but I would imagine that, particularly with some of the larger accounts, our suppliers will want to be competitive. As it relates to equipment, specifically in Europe, there is a movement towards high quality, lower priced equipment units. And that has resulted in good sales for us. Margins are not bad.

And I think the manufacturers will all of them really in the end will understand that there has been consumer resistance as a result of the increase in pricing in the post COVID period. So I think from our point of view, the profitability point of view, I think we're okay. Obviously, on the distribution side, regaining customers on the as a result of the cyber incident is going to continue to be important. And we have repositioned our sales force accordingly. Our sales team was very much engaged until a few months ago in making sure that the customers that were impacted by the cyber incident are okay and safely embedded within ReShine.

Now these smaller periodic customers, we do not spend a lot of time with those customers. Our salespeople are focused on that. Our telesales team has been reorganized to focus on that, more resource put into these smaller accounts that we seem to have had challenge or we did have challenges with in the post cyber incident. And that's the focus. And then our website, which was down, had some challenges in regaining customers.

I think we've got a lot of very good e commerce activity going on there, social media type stuff, and we are recovering. So I think those items are very much going to impact us. And we see more or less a continued stable market with us driving our sales in the areas that I've mentioned and of course focused on high growth, high margin businesses that now account for just over 40% of our operating income and another 10% or so from our corporate brand, private brand product offering. So it's about half the business that we have to make sure that we continue to grow.

Okay. Thanks, Ben. And then just as a follow-up, Ron, you mentioned in the prepared remarks, the press release having already influenced cost savings of 50,000,000 dollars Can you give maybe a bit more detail on just where you're seeing these cost savings, maybe outside of the orthodontic business you referenced during your prepared remarks? Some of the consolidation or cost efforts on I think, the endodontic business that you fully acquired. Are there other revenue impacts or disruptions we need to think about as we look ahead to 2025 beyond just orthodontic?

No, I would say that we obviously proceed carefully such that the reductions we make minimize or have very little effect if any on revenues. We have given the decline in distribution revenues, some of the restructuring initiatives have been in the distribution businesses. We've also we have not had quite the revenue growth as originally expected in some of the technology areas. We did do some cost reductions there. But I do think that we are able to continue to invest in new products and we're bullish on 25 that we can go into 25 lean and with an opportunity to reinvest in those businesses as necessary.

So that would be part of that. I think in terms of other things we're looking at for 'twenty five, as we said back on our Investor Day, we expect dental markets to be growing on normal and say in the 2% to 4% range. That 2% next year is probably a closer barometer than 4%. But there's a lot of things that can influence this. As Selene mentioned earlier, the lower interest rates could encourage more investment.

We could more de novos. An expansion of the supply of dentistry would be very beneficial for us. So if we can see some increased investment in the build out of practices, we think that would be something that would influence the number more than anything else in 2025.

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

sense of intra quarter trends within medical and beyond that, how are you seeing your different end markets, the ASCs, doctors' offices, myDNs, how they're behaving both from customer and competitor perspective, what you're seeing just generally in the competitive balance for medical right now?

Yes. So if you look at the medical market for Henry Schein, you put aside the ups and downs of the flu season, whether it's vaccines, COVID and general flu vaccine, and those may shift up or down slightly and from 1 quarter to another. And you ex out the impact of respiratory challenges, are people worried about that? Are they going to doctor more or less? You take that out.

The business is pretty stable. We are recovering from the cyber incident. We did lose some customers, specifically lost some to drug wholesalers. And I think the customers in our sector understand that we provide a very different service and they're coming back. So that's the core distribution business, which I think will if you ex out these respiratory and flu challenges and you take out the glove ups and downs, it's a pretty stable business with us growing market share as a result of the recovery.

Henry Schein (HSIC) Q3 2024 Earnings Call Transcript

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