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Henry Schein, Inc. (HSIC) Q4 2022 Earnings Call Transcript

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Henry Schein, Inc. (NASDAQ:HSIC) Q4 2022 Earnings Conference Call February 16, 2023 10:00 AM ET

Company Participants

Graham Stanley - VP, IR & Strategic Finance Project Officer

Stanley Bergman - Executive Chairman & CEO

Ronald South - SVP & CFO

Conference Call Participants

Jeffrey Johnson - Robert W. Baird & Co.

Elizabeth Anderson - Evercore ISI

Jason Bednar - Piper Sandler & Co.

Kevin Caliendo - UBS

Jonathan Block - Stifel, Nicolaus & Company

Nathan Rich - Goldman Sachs Group

Operator

Good morning, ladies and gentlemen, and invited to Henry Schein's Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions]. And arsenic a reminder, this telephone is being recorded. I would now for illustration to present your big for today's call, Graham Stanley, Henry Schein's Vice President of Investor Relations and Strategic Financial Project Officer. Please spell ahead, Graham.

Graham Stanley

Thank you, operator, and my acknowledgment to each of you for joining america to talk Henry Schein's financial results for nan 4th fourth of 2022. With maine connected nan telephone coming are Stanley Bergman, Chairman of nan Board and Chief Executive Officer of Henry Schein; and Ron South, Senior Vice President and Chief Financial Officer. Before we begin, I'd for illustration to authorities that definite comments made during this telephone will see accusation that is forward-looking.

As you know, risks and uncertainties progressive successful nan company's business whitethorn impact nan matters referred to successful forward-looking statements. And arsenic a result, nan company's capacity whitethorn materially disagree from those expressed successful aliases indicated by specified statements. These forward-looking statements are qualified successful their entirety by nan cautionary statements contained successful Henry Schein's filings pinch nan Securities and Exchange Commission and included successful nan Risk Factors conception of those filings.

In addition, each comments astir nan markets we serve, including extremity marketplace maturation rates and market share, are based upon nan company's soul study and estimates. Our convention telephone remarks will see some GAAP and non-GAAP financial results. We judge nan non-GAAP financial measures supply investors pinch useful supplemental accusation and nan financial capacity of our business, alteration nan comparison of financial results betwixt periods wherever definite items whitethorn alteration independently of business capacity and let for greater transparency pinch respect to cardinal metrics utilized by guidance successful operating our business.

These non-GAAP financial measures are presented solely for informational and comparative purposes and should not beryllium regarded arsenic a replacement of nan corresponding GAAP measures. Reconciliations betwixt GAAP and non-GAAP measures tin beryllium recovered successful nan Supplemental Information conception of our Investor Relations website and successful Exhibit B of today's property release, which is besides disposable successful nan Investor Relations conception of nan website.

The contented of this convention telephone contains time-sensitive accusation that is meticulous only arsenic of nan day of nan unrecorded broadcast, February 16, 2023. Henry Schein undertakes nary responsibility to revise aliases update immoderate forward-looking statements aliases bespeak events aliases circumstances aft nan day of this call. We prepared slides summarizing our 4th fourth financial results, and these tin besides beryllium recovered connected nan Investor Relations conception of our website. During today's Q&A session, please limit yourself to a azygous mobility and a follow-up. And pinch that, I'd for illustration to move nan telephone complete to Stanley Bergman.

Stanley Bergman

Good morning, and convey you, Graham, and convey you each for calling successful today. We closed our 2022 pinch a very bully 4th fourth successful which we proceed to execute efficaciously connected our 2022 to 2024 strategical scheme goals, achieving beardown maturation successful net for nan 4th fourth and, of course, for nan afloat twelvemonth of 2022, contempt nan macroeconomic concerns and of course, nan overseas speech headwinds. We overcame important headwinds from little income of PPE products and COVID-19 trial kits.

Our income were affected by a diminution successful income of PPE products and COVID-19 trial kits. Excluding income of PPE products and COV19 trial kits, and taking retired nan 53rd income week for 2022, we achieved very bully soul maturation of 5% successful section currencies, that's internal. There was a antagonistic effect connected dental visits for seasonal flu and COVID-19 past quarter. And this was some successful North America and internationally. So dental visits were down because of nan effect of flu, some nan seasonal and nan COVID.

On nan different hand, this was offset by a affirmative effect astatine slightest from a merchandise income constituent of position of visits to our expert customers. We knowledgeable maturation successful each of our business units crossed nan board. And overall, we generated immoderate financial results for nan quarter, reflective, I think, of a unchangeable marketplace -- successful nan markets that we serve. So we made fantabulous advancement successful advancing our 2022 to 2024 BOLD+1 strategical plan.

So first twelvemonth of nan scheme was '22, wherever we precocious our 1 distribution strategy to heighten nan customer acquisition and amended operational efficiency, very important, by creating our North American distribution group led by Brad Connett, and our world distribution group led by Andrea Albertini. We had bully results crossed nan board, some successful North American distribution and successful our world distribution group.

We strengthened our dental position pinch nationalist DSOs One caller accounts and person an fantabulous occurrence pinch our exertion solution and specialty products wrong nan nationalist DSO segment. And connected nan aesculapian side, we did grow our position pinch IDNs and ample group practices. On nan integer side, nan BOLD scheme calls for a important effort successful this area. We created our world integer team, including nan assignment of knowledgeable veterans successful this area: Trinh Clark arsenic Chief Global Customer Experience Officer; Sara Dillon, arsenic Chief Data Officer. We are moving intimately pinch Lee Benowitz, Chief Global Digital Transformation Officer and Mark Hillebrandt, main Digital Revenue Officer.

We made fantabulous advancement designing and building our world e-commerce platform, and this is an advancement of our existent platform, which we expect to commencement rolling retired successful nan second portion of this year, and that's -- we commencement to rotation retired nan upgrades to nan existent platform. At nan aforesaid time, we had immoderate breathtaking news connected nan AI side, wherever we launched our Detect AI and AI-enabled x-ray analysis, too, powered by Video Health. And past week, we were advised that Video Health has received 510(k) FDA clearance for its periodontics solution, which we expect will further beforehand nan usage of AI arsenic a instrumentality dentistry.

We were progressive connected nan M&A front. We acquired Midway Dental successful nan U.S. and Condor Dental successful Switzerland, thereby expanding our scope into underpenetrated areas successful nan market. We acquired a mostly liking successful Unitas and announced plans to get a awesome -- mostly liking successful Biotech Dental. Both of these investments will reside successful a moment. We person begun implementing our restructuring scheme to trim our world existent property footprint to bespeak TSM, that's Team Schein Members, penchant for elasticity successful activity locations. In this connection, we person closed 1 of our 2 buildings successful our office connected We intend to put successful our remaining existent property footprint astir nan world to supply modern and elastic agency space, and we will besides proceed to put successful exertion to guarantee that we support and build connected our beardown competitory position from a exertion constituent of view, successful different words, nan devices that we supply our squad to run and, of course, nan devices we connection to our customers to interface pinch us.

This past quarter, we disposed of an unprofitable business truthful we tin redirect our resources to operations that are priorities successful our 2022 to 2024 strategical plan. The costs associated pinch this exit are included successful our restructuring costs for nan quarter. So if you look up a bit, we are introducing guidance for 2023, which Ron will talk successful a moment. We expect operating income maturation successful nan precocious azygous digits to debased double-digit percent scope erstwhile excluding nan contributions from PPE products and COVID-19 trial kits.

We expect nan effect of little trading prices of PPE products and reduced request from COVID-19 trial kits will mostly beryllium offset by net momentum successful our underlying halfway businesses. And nan bully momentum we have, arsenic we participate 2023, this gives america assurance successful nan 2023 guidance. And nan -- specifically nan maturation successful our operating income erstwhile you exclude PPE products and COVID-19 tests.

So a small spot of specifics connected our dental distribution business. Merchandise income successful North America grew somewhat erstwhile excluding income of PPE and taking retired income from nan 53rd week. In North America, we person a comparatively unchangeable market. And our marketplace share, we believe, remains unchangeable to somewhat positive. We judge world dental consumable merchandise growth, arsenic noted earlier, was impacted by nan precocious incidence of flu and COVID-19 cases, which caused accrued rates of diligent assignment cancellations and accentuated nan staffing shortages.

Now what's important is nan complaint of diligent travel appears to person returned to much normal levels successful January -- this past January of 2023. The effect from manufacturing merchandise value increases, we believe, lessened arsenic past year's increases began to annualize. The extent and breadth of nan Henry Schein merchandise portfolio, of course, allows america to support our customers' needs erstwhile we person customers that are concerned pinch pricing arsenic we person offerings of replacement nationalist and firm marque products, that's our ain brands, arsenic good arsenic replacement nationalist brands wherever we knowledgeable customers guidance to value increases.

But having said that, value increases, we judge that are speaking successful nan marketplace are comparatively unchangeable now and not anyplace adjacent what they were astatine nan opening of past year. Our request for dental instrumentality successful North America remains healthy, and our North American instrumentality bid book is stable. Although we saw bully income from accepted instrumentality and dependable income for integer imaging equipment, which we had challenges successful nan past because of pricing issues, but this seems to beryllium stabilized now.

And location was a diminution successful income of integer restoration instrumentality compared to corresponding -- nan corresponding play successful nan 4th quarter. And of course, we had bully income successful nan 4th fourth of nan year. But nan situation has been customer request is shifting from chairside mills, rather expensive, to 3D printing, overmuch little expensive, and a operation displacement to lower-priced intraoral scanners. There was besides a proviso concatenation rumor pinch 1 of our important intraoral scanner suppliers that introduced a caller scanner this successful nan past fewer months.

So each successful all, nan request for integer restoration, that marketplace is beautiful hot, but location are these operation challenges that I've conscionable described, and we tin spell into successful greater item if anyone has questions. The worth of our North American bid book for instrumentality is stable. We proceed to spot building delays to immoderate grade and a flimsy simplification successful nan number of planned caller agency openings amongst specifically immoderate of our larger DSOs. On nan world wide merchandise income side, nan aforesaid effect arsenic successful nan United States, North America that COVID diligent travel challenges we knowledgeable besides arsenic good arsenic nan lockdowns successful China that were offset connected nan world side, but those were mostly offset by bully maturation successful nan U.K., Eastern Europe and Brazil.

Towards nan extremity of nan quarter, dental agency staffing absenteeism and diligent assignment cancellations will statesman to easiness likewise successful our world business. Demand for instrumentality internationally held up rather well, pinch income moving to lower-priced intraoral scanner units arsenic good and nan wide instrumentality income fundamentally were successful statement pinch past year.

The 4th fourth instrumentality income and our outlook was somewhat impacted by acquisition delays successful anticipation, this is connected nan world broadside again, pinch nan biennial IDS show successful Cologne, wherever customers expect caller promotions to beryllium introduced caller products, and that show takes spot astatine nan extremity of nan first quarter. The fundamentals successful our extremity markets stay solid. Of course, nan aging organization and nan increasing world consciousness of nan wellness attraction benefits of preventative attraction and oral health, each play into our strategical benefits for Henry Schein, short, mean and agelong term.

So request for dental work is besides mostly correlated, we believe, pinch unemployment rates. And successful nan developed world, these stay comparatively benignant of accordant historically low, if you will. So we deliberation nan underlying guidelines is okay, supporting oral care. And fto maine now move a small spot to nan dental specialty products business, wherever we were impacted, peculiarly successful our largest sector, implants and bony regeneration products, pinch important anterior twelvemonth maturation anterior twelvemonth comparisons.

The BioHorizons premium worth implant conception continues to turn successful North America and Europe. And we person immoderate offset present pinch nan diminution successful China, though I'll constituent retired that our China business is not material, but it did effect nan gross statement to immoderate extent. Sales for DSO customers successful nan United States for nan BioHorizons statement remains solid, and our worth brand, Medentis, chiefly successful Germany but besides to immoderate grade successful China, achieved double-digit income growth. But this was chiefly coming, arsenic I said, from Europe and a small spot from Asia.

When I mention to Asia, specifically talking to Japan, wherever our implants are doing bully and oral room products are doing rather well. In December, we announced planned, taxable to regulatory approval, to get mostly ownership liking successful nan French dental solutions provider, Biotech. We look guardant to bringing Biotech Dental's high-quality package that is truthful important. It's nan full integer travel that is truthful important that Biotech Dental will lend to Henry Schein, but besides nan wide products and services that dental labs are important for caller geographies pinch respect to Biotech, specifically successful France, wherever we judge we will beryllium close, if not nan leader successful implants astatine immoderate constituent successful nan adjacent future.

These will besides person a statement of merchandise that is good received successful that market. So dental products implants, biomaterials, each are high-growth, high-margin products, and Biotech will lend to that arsenic good arsenic providing support -- further support for our starring integer workflow solution successful dentistry, of course. On nan orthodontic side, income maturation remained strong, driven by caller products introduced earlier successful nan year.

Recent information suggests that nan percent of wide practitioners successful nan U.S. who execute guidelines canal procedures is increasing. That plays correct into our saccharine spot arsenic well. We judge that this trend, mixed pinch an aging organization bodes rather good for nan Henry Schein successful orthodontic business. Now turning to our exertion and value-added business. The largest segment, of course, is Henry Schein One, our package business. Growth was strongest successful nan world business owed to nan spot of our wholly cloud-based solution, which is doing very good extracurricular of nan United States.

Growth successful North America was driven by income of our believe guidance software. Also nan -- specifically nan cloud-based package that we connection Dentrix Ascend. And we spot customers upgrading to Dentrix Ascend arsenic creation life rhythm of our Easy Dental merchandise ends. So we're very pleased pinch nan advancement are progressing from Easy Dental to our Dentrix and Dentrix Ascend products.

What is very important is we now spot adjacent to 6,000 customers connected our cloud-based products, Dentrix Ascend entirely. We person noted successful nan past, these cloud-based systems thrust request for different Henry Schein One products. We besides had bully customer wins during nan 4th fourth pinch our Analytics business. He assisted good arsenic well. This is nan business that helps pinch gross rhythm guidance made a important finance successful Unitas, a PPO solutions supplier and mostly puts america successful a very, very bully position to thief practitioners run a much businesslike believe while, of course, they supply bully objective care.

We've enjoyed a narration pinch Unitas since 2014, and we're now delighted to beryllium capable to merge these value-added services into our merchandise offering astatine Henry Schein One. So you'll spot that nan dental specialty products exertion value-added services business did well, grounds twelvemonth this year, up against immoderate reliable comps towards nan extremity of nan year. And this is wherever we're placing a batch of accent connected an important portion of our '22-'24 BOLD+1 strategical plan, which we'll talk astir successful greater item astatine our Investor Day.

The aesculapian distribution business continued to spot fantabulous growth. This did bespeak higher diligent postulation to eventual partially driven by nan incidence of flu and COVID-19. But generally, nan trends are location moving from nan acute attraction mounting to nan alternate attraction side. We had bully sales, of course, arsenic you would expect, successful constituent of attraction diagnostics and different products associated pinch nan flu.

When excluding income of PPE products, COVID-19 trial kits, we knowledgeable double-digit maturation successful section currencies adjusting for that other week and really absent immoderate nationalist wellness outbreaks, caller ones, aesculapian income should return to much normal mid- to precocious scope azygous digits. We are pleased pinch nan continued maturation of caller accounts crossed nan independent and ample group practices arsenic good arsenic surgical centers and urgent attraction facilities. Strong pharmaceutical income were driven by pneumonia treatments, and instrumentality income besides continued to do rather good arsenic practitioners put successful their believe and arsenic nan offering of agency abstraction practitioner instrumentality expands successful position of readiness to dainty and diagnose much treatments pinch much diseases and different ailments successful nan office-based practitioner environment.

Over nan past respective years, Henry Schein has been capable to displacement priorities and supply solutions needed to thief our aesculapian and dental customers. And nan public, of course, during nan COVID-19 situation and past year's flu play and moreover pinch -- during past -- and during nan situation and of course, past year's flu season. And moreover pinch this change, nan effect of COVID-19 and flu, which required immense support from our squad to woody pinch these presently important inflows of orders to recognize that we delivered a compounded mean income maturation moreover pinch these inflows, different inflows of PPE, COVID tests of astir 6-point -- conscionable complete 6% erstwhile you return retired nan PPE and COVID.

So Henry Schein's soul maturation successful general, excluding PPE and COVID, is rather solid. And truthful we besides judge that nan PP&E and COVID efforts that we undertook helped america make much customers, thief our customers understand that for wellness attraction products is amended to spell to a reliable source. And truthful I want to convey nan squad for doing a singular occupation getting retired nan billions of dollars of different onetime successful respects COVID tests and PPE products, which thief make customer loyalty. So pinch that, I'll move complete nan telephone to Ron for a reappraisal of nan 4th fourth results and our 2023 guidance.

Ronald South

Very good. Thank you, Stanley, and bully morning, everyone. As we begin, I'd for illustration to constituent retired that I'll beryllium discussing our results arsenic reported connected a GAAP ground and connected a non-GAAP basis. Our 4th fourth non-GAAP financial results for 2022 and 2021 exclude restructuring and integration costs arsenic good arsenic acquired intangible plus impairment charges. This is elaborate successful Exhibit B of today's property merchandise and successful nan supplemental accusation conception of our Investor Relations website.

As Stanley mentioned, nan 4th fourth of 2022 included 1 further trading week compared to nan 4th fourth of 2021, which was nan vacation week betwixt Christmas and New Year's Day. We study connected a 52-, 53-week fiscal twelvemonth ending connected nan past Saturday successful December. The adjacent clip our results will see an other trading week will beryllium successful 2028. With respect to income growth, I will attraction connected LCI income growth, which is internally generated income successful section currencies and excluding acquisitions.

To facilitate much meaningful comparisons, nan estimated other week of income will besides beryllium excluded from LCI income maturation figures. A elaborate breakout of nan components of our income growth, including LCI growth, is included successful Exhibit A of today's property release. Fourth 4th world LCI income decreased by 1.8% versus nan anterior year. However, erstwhile excluding income of PPE products and COVID-19 trial kits, our LCI income grew 5%. We sold astir $161 cardinal successful PPE products and astir $93 cardinal successful COVID-19 trial kits, including multi-save flu and COVID-19 operation kits successful nan 4th quarter.

This compares pinch astir $261 cardinal successful PPE products and astir $187 cardinal successful income of these tests successful nan 4th fourth of 2021. Our GAAP operating separator for nan 4th fourth of 2022 was 2.15%, a 387 ground constituent diminution compared pinch nan anterior twelvemonth GAAP operating margin. This was chiefly a consequence of restructuring and integration expenses and nan impairment of definite intangible assets incurred successful nan quarter.

Our non-GAAP operating separator for Q4 was 6.74%, a 56 ground constituent betterment compared pinch nan anterior twelvemonth non-GAAP operating margin. This betterment was driven by gross separator description , chiefly arsenic a consequence of income operation favoring higher-margin products, on pinch little operating expenses arsenic a percent of sales. Regarding income taxes. Our reported GAAP effective taxation complaint for nan 4th fourth of 2022 was 23.6%. This compares pinch a 22.5% GAAP effective taxation complaint for nan 4th fourth of 2021.

On a non-GAAP basis, our effective taxation complaint for nan 4th was 22.2%, and this compares pinch nan anterior twelvemonth non-GAAP effective complaint of 22.5%. Fourth 4th 2022 GAAP nett income was $47 cardinal aliases $0.34 per diluted share. This compares pinch anterior twelvemonth GAAP nett income of $147 cardinal aliases $1.05 per diluted share. Our 4th fourth 2022 non-GAAP nett income was $165 cardinal aliases $1.21 per diluted share. This compares pinch anterior twelvemonth non-GAAP nett income of $151 cardinal aliases $1.07 per diluted share.

Amortization disbursal of acquired intangible assets for nan 4th fourth of 2022 was $30.7 cardinal aliases $0.14 per diluted share. This compares pinch $32.6 cardinal aliases $0.14 per diluted stock for nan aforesaid play past year. And this disbursal is included successful nan 2022 and 2021 non-GAAP nett income results I conscionable mentioned. A cardinal extremity to our 2022 to 2024 strategical scheme is to put successful higher-growth businesses that person a larger intangible plus component. And going forward, we judge earnings, excluding amortization disbursal of acquired intangible assets, amended represents nan underlying business results.

Beginning pinch nan first 4th of 2023, we will beryllium modifying our non-GAAP reporting to exclude amortization disbursal of acquired intangible assets. Using this method, our afloat twelvemonth 2022 non-GAAP nett income was $741 cardinal aliases $5.38 per diluted share. We will see a reconciliation of our non-GAAP financial results pinch nan caller methodology successful our quarterly position disposable connected our Investor Relations website.

And finally, overseas rate speech negatively impacted our 4th fourth diluted EPS by astir $0.04 versus nan 4th fourth of past year. I'll now supply immoderate item connected our 4th fourth income results. Global Dental income were $2 billion, and LCI income decreased by 2.6%. Excluding income of PPE products, our Global Dental LCI income maturation was 0.9%. Global Dental consumable merchandise LCI income decreased by 3.7%, but accrued by 1.0% erstwhile excluding PPE products. Global Dental instrumentality LCI maturation was 0.7%.

North America dental LCI income decreased 3.4% compared pinch nan anterior year, chiefly owed to a 5.1% alteration successful consumable merchandise sales. However, erstwhile excluding income of PPE products, North America dental consumable merchandise LCI income grew 1.3%. North America dental instrumentality LCI income besides accrued 1.3%. International Dental LCI income decreased by 1.4% and consumable merchandise LCI income decreased by 1.7%. When excluding income of PPE products, International consumable merchandise LCI income accrued 0.7%. International instrumentality LCI income decreased by 0.4%. Sales of dental specialty products were astir $247 cardinal successful nan 4th quarter, pinch LCI maturation of 0.3% compared pinch nan anterior year.

Global exertion and value-added services income during nan 4th fourth were $187 million, pinch LCI maturation of 3.4% compared pinch nan 4th fourth of 2021. Sales were negatively impacted by nan expiration of a authorities contract, which we mentioned during our Q3 2022 convention call. Adjusting for this contract, nan underlying income maturation was 9.1%. During nan 4th quarter, our exertion and value-added services businesses, together pinch our dental specialty products, achieved LCI income maturation of 1.6% aliases 3.9% aft adjusting for nan expiration of nan authorities contract.

Global Medical income during nan 4th fourth were $1.2 billion, and LCI income decreased 1.3%, owed to little income of PPE products and COVID-19 trial kits. In North America, excluding income of PPE products and COVID-19 trial kits, LCI income grew 14.9%, led by beardown point-of-care diagnostics, aesculapian instrumentality and pharmaceutical sales. Regarding stock repurchases, we repurchased astir 3.6 cardinal shares of communal banal successful nan unfastened marketplace during nan 4th quarter, buying astatine an mean value of $79.55 per stock for a full of $285 million.

The effect of nan repurchase of shares connected our 4th fourth diluted EPS was immaterial. For nan afloat year, we spent $485 cardinal to repurchase 6.1 cardinal shares. At fiscal year-end, we had astir $115 cardinal authorized and disposable for early stock repurchases. An further $400 cardinal was approved by nan company's Board of Directors connected February 8, 2023.

Turning to our equilibrium expanse and rate flow. We proceed to use from important liquidity, providing our businesses pinch nan elasticity and financial stableness to execute connected integrated maturation initiatives and strategical acquisitions while continuing to return superior to our shareholders. Operating rate travel for nan 4th fourth was $254 cardinal compared pinch $277 cardinal past year, pinch nan alteration chiefly owed to an summation successful moving superior that was driven by nan timing of accounts payable.

For nan afloat year, operating rate travel was $602 cardinal compared pinch $710 cardinal successful 2021. Regarding our restructuring program, arsenic portion of our antecedently disclosed integration and restructuring initiative, we recorded a pretax complaint successful nan 4th fourth of $121 cardinal aliases $0.70 per diluted share. These expenses chiefly subordinate to vacating 1 of nan buildings astatine our Melville office and nan impairment of intangible assets associated pinch nan disposal of an unprofitable business. There were besides restructuring expenses associated pinch severance and costs related to nan exit of immoderate different facilities.

Due to nan disposal of definite assets and nan lengthy remaining play of definite leases we exited, disbursal savings from this scheme are expected to beryllium realized complete a longer play of time. We expect to proceed to grounds integration and restructuring charges successful 2023. However, an estimate of nan magnitude of these charges has not yet been determined. Any restructuring and integration charges are expected chiefly to see severance salary and facility-related costs.

We besides recorded an impairment disbursal for intangible assets of $34 cardinal pretax aliases $0.17 per diluted stock related to definite continuing operations. Let maine reason my remarks pinch our 2023 financial guidance. At this time, we are not capable to supply estimates for costs associated pinch integration and restructuring for 2023. Therefore, we are not providing GAAP guidance. As I mentioned, opening pinch our Q1 2023 financial results, we will modify our non-GAAP curen to exclude amortization disbursal of acquired intangible assets.

This is successful summation to nan different adjustments we made successful 2022 to our GAAP financial results. All guidance coming reflects this change. 2023 non-GAAP diluted EPS excludes amortization disbursal of anterior acquisitions of $0.56 a stock successful 2023, and this was $0.57 successful 2022. For 2023, we expect non-GAAP diluted EPS attributable to Henry Schein, Inc. to beryllium successful nan scope of $5.25 to $5.42 per share, reflecting maturation of antagonistic 2% to affirmative 1% compared pinch our 2022 non-GAAP diluted EPS of $5.38.

Our guidance for 2023 assumes full income maturation of astir 1% to 3% complete 2022, pinch income of COVID-19 trial kits declining astir 35% to 40% from income successful 2022. Additionally, PPE merchandise income are expected to diminution astir 20% to 25%. In nan aggregate, revenues of these merchandise groups are expected to alteration astir 30% to 35% from 2022. The effect connected 2023 non-GAAP diluted EPS from nan little publication to net from income of PPE products and COVID-19 trial kits is astir $0.35 to $0.40 per share. This effect will beryllium overmuch much pronounced complete nan first half of 2023 and particularly successful nan first 4th arsenic we had income of almost $500 cardinal of PPE and COVID-19 trial kits mixed successful nan first 4th of 2022.

These headwinds are mostly offset by net momentum successful our underlying halfway businesses. And we expect non-GAAP operating income will turn successful nan precocious single-digit to debased double-digit scope erstwhile excluding nan publication from PPE products and COVID-19 trial kit sales. Please statement that 2023 will see 1 little trading week compared to 2022, which will hap successful nan 4th quarter. For 2023, we expect non-GAAP operating separator to beryllium 10 to 15 ground points beneath our 2022 non-GAAP operating separator of 8.2%. And this is mostly a consequence of little PPE products and COVID-19 trial kit income and profits.

Our guidance reflects non-GAAP operating separator description erstwhile excluding income from PPE products and COVID-19 trial kit sales. Our 2023 guidance includes higher liking disbursal than successful 2022 arsenic a consequence of higher liking rates and higher number liking from our higher-growth businesses, chiefly Henry Schein One. We besides expect an effective taxation complaint successful nan 23% range, assuming nary changes successful taxation legislation.

Our guidance for 2023 diluted EPS is for existent continuing operations arsenic good arsenic completed acquisitions and does not see nan effect of early stock repurchases, nan acquisition of Biotech Dental and different imaginable early acquisitions aliases integration and restructuring expenses, if any. Guidance assumes that overseas rate speech rates are mostly accordant pinch existent levels, nan extremity markets stay accordant pinch existent marketplace conditions and that location are nary worldly adverse marketplace changes associated pinch COVID-19. With that, I'll now move nan telephone backmost to Stanley.

Stanley Bergman

Thank you, Ron. We person astir 20 minutes -- complete 20 minutes to reply questions. Sorry, nan telephone was that long, but there's a batch going on. We're highly assured successful nan business. And nan business ex PPE and COVID tests is doing rather well, moreover though location are challenges from a macro constituent of view. Having said that, I deliberation we've sewage awesome momentum successful nan business and look guardant to answering immoderate questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]. And our first mobility comes from nan statement of Jeff Johnson pinch Baird.

Jeffrey Johnson

Ron, possibly I wanted to commencement conscionable connected nan COVID testing kit and PPE guidance. When I look astatine benignant of nan EPS effect this year, it seems for illustration it's dropping done successful a decremental separator successful nan mid, if not precocious teens level. I deliberation complete nan past mates of years, those person been contributing positively, benignant of those person been flowing done aliases astatine slightest benignant of you guys person signaled that those were dropping done benignant of a corporate-wide separator rate.

So why -- it makes immoderate sense, I guess, erstwhile you're losing immoderate of that inflated apical statement maturation if there's a deleveraging effect there, but dropping done astatine that mid- to precocious teens decremental separator seems a batch bigger than I would person expected. So immoderate comments you tin make there?

Ronald South

Yes, certainly. I deliberation that we could spot a small spot of unit connected gross margins connected some PPE and COVID trial kits versus nan anterior year. But I deliberation nan bigger rumor there, Jeff, is conscionable nan gross profit dollars, I mean nan compounded effect of nan ongoing alteration successful nan revenues from these merchandise categories successful some 2022 and past continuing into '23 results successful less gross profit dollars. And I deliberation that benignant of dilutive effect originates to wounded nan operating margins a small much truthful than it makes it much difficult for america to screen it for illustration we did successful '22.

Jeffrey Johnson

Yes. Understood. And then, historically, you guys person provided integrated maturation guidance, gross guidance, you did past twelvemonth anyway, I guess, anterior to that, not necessarily. A batch of moving parts this twelvemonth pinch nan trading week -- 1 little trading week, nan PPE updates, obviously, immoderate acquisition contribution. If I look astatine that 1 to 3, we're benignant of calcine that astatine possibly a 3% to 6% integrated guidance ex each that noise. And if I presume aesculapian and tech VA a small supra that, dental successful benignant of that debased to mid-single digits, arsenic those benignant of each astatine slightest ballpark we should beryllium reasoning astir arsenic we're mounting up our models for 2023?

Ronald South

Yes. I mean you're successful scope there. I deliberation that -- I deliberation we person a headwind from PPE and COVID trial kits mixed of astir apt 300 to 400 ground points, right? You besides person a headwind from nan 53rd week that's going to beryllium location betwixt 1 constituent and 1.5 points successful there. We'll get a small spot of use from acquisitions. So that benignant of leaves you pinch a number that could beryllium 3% to 6%, 4% to 7% successful position of non-PPE, COVID trial kit maturation that we would expect successful '23 versus '22.

Jeffrey Johnson

Dental a small beneath and aesculapian above. Is that nan measurement to benignant of deliberation astir that?

Ronald South

Yes, that's astir apt a adjacent statement, yes.

Operator

And nan adjacent mobility comes from nan statement of Elizabeth Anderson pinch Evercore ISI.

Elizabeth Anderson

I had a mobility astir benignant of your utilization and sojourn assumptions. Could you thief america parse that isolated a small spot much for 2023? I'm reasoning specifically connected possibly to for illustration aesculapian visits and past benignant of wide dental visits?

Stanley Bergman

Yes, Elizabeth, very bully questions. We did return a dip connected visits successful dentistry. And it was some successful nan United States and Europe, and nan remainder of nan world wasn't truthful bad, of course, China was successful nan 4th quarter. And it is down a bit. And truthful -- and there's been a betterment successful January, rather bully recovery. It is down a spot from 2019 successful nan United States. Hard to get information extracurricular of nan United States. But we are not 100% backmost to wherever we were. But nan dip that we knowledgeable successful nan 4th fourth has mostly, if not all, recovered.

And astatine slightest from what we tin show from nan first 40 days aliases truthful of nan twelvemonth and astir apt proceeding from our customers, we're backmost to wherever we were successful astir nan 3rd quarter. truthful correspondingly, connected nan aesculapian side, location was an summation successful visits. People had flu and they wanted to corroborate that it wasn't COVID. So we knowledgeable immoderate maturation successful that respect successful position of flu tests. And you tin spot that accusation from nan flu trial manufacturers, a batch of them are providing that information.

But again, we expect successful January, February that nan visits were comparatively backmost to wherever they were earlier successful nan 3rd quarter, say, earlier these -- nan flu. So nan businesses are comparatively unchangeable now, and we had a impermanent dip successful dental visits and I think, a bubble a small spot successful medical. But connected average, you mean nan amount, if you look astatine our soul growth, section rate is astir 5% soul maturation for nan company. So -- and I deliberation each things being equal, possibly will beryllium a small spot amended successful nan first quarter. Hard to tell, but it's looking rather affirmative for nan first 40 days of nan year.

Elizabeth Anderson

Got it. And sorry, conscionable 2 clarifying questions. One, your comments astir benignant of nan dip and past a small spot of nan betterment successful January and early February, that besides applies to Europe. And past secondarily, you're assuming for your 2023 guidance astatine these existent benignant of January conditions proceed ongoing?

Stanley Bergman

As it relates to world aliases Europe successful particular, because we are nan world successful China and nan different countries benignant of cancel retired though there's a spot of a affirmative effect successful Brazil wherever we person a large marketplace stock -- but not large marketplace stock -- large business, I would say, large decent marketplace share, too. I would opportunity nan trends were very, very similar. Of course, our aesculapian business not worldly successful Europe. So I would exclude that. It mightiness moreover shift, we tin springiness you information connected that because it's truthful diffuse. But our dental business had akin trends to nan United States and truthful to North America. What was your 2nd question, sorry?

Elizabeth Anderson

And is that January benignant of complaint of visits, et cetera, was benignant of what you were utilizing to underpin your 2023 guidance

Stanley Bergman

I'll person Ron reply nan guidance question. I'm not judge whether nan first 40 days really carried done for nan afloat twelvemonth aliases don't. Ron?

Ronald South

Yes. I mean it's a small early astatine this point. I deliberation that our guidance is supported by our budgeting process. We do evidently show what's happening truthful acold successful 2023. But I deliberation that nan assumptions -- nan dental marketplace past twelvemonth suffered a small spot successful January from Omicron. So location are immoderate assumptions successful location connected Q1. But astatine nan aforesaid time, nan -- past year, for illustration I said successful nan prepared remarks, we did astir $500 cardinal successful revenues successful PPE and COVID trial kits successful Q1 that won't get -- it won't beryllium astir that overmuch this year, right? So Q1 is going to person -- still going to person a small spot of sound successful it.

Stanley Bergman

But erstwhile you travel done everything, Elizabeth, I deliberation you -- we're beautiful comfortable pinch our fund for this year, which contemplates, astatine nan extremity of nan day, precocious single-digit to debased double-digit operating income maturation erstwhile excluding PPE and COVID covet. So I deliberation if you tin spot done nan PPE and COVID, you spot nan business is beautiful solid, and that's really amended capacity than we've had successful nan past.

And I still deliberation that nan full guidance of this PPE and COVID tests, wherever we put nan accelerator down generated complete $2 cardinal aliases truthful successful income and beautiful bully profits has paid disconnected because our customers are knowing that they tin trust connected Schein during challenging times and that nan products we waste are mostly aliases compliance pinch regulations and very often, they were buying products during this COVID play that had regulatory issues and truthful -- and value issues.

So I deliberation nan strategy has played retired good successful position of attraction connected PPE and tests. And astatine nan aforesaid time, we garnered rather a bit, I think, of halfway business, and that's reflected successful our expectations for '23 successful position of maturation of operating income.

Operator

And nan adjacent mobility comes from nan statement of Jason Bednar pinch Piper Sandler.

Jason Bednar

Maybe Stanley, I will commencement pinch you. A batch going connected here, arsenic you said. But possibly pinch nan outlook, you sewage 1% to 3% of nan apical line. I cognize Jeff was digging successful location connected nan integrated growth. Core EBIT increasing precocious single, debased double digits. It implies immoderate beautiful bully halfway separator description , and that would look to fresh pinch nan humanities inclination statement of nan business. But possibly double click successful connected Jeff's mobility there. Wondering if you could remark a spot further connected really you spot nan halfway dental consumables and instrumentality lines performing successful 2023 successful North America and International?

And past are nan drivers of nan halfway separator description implied successful your guide? Are those much maturation aliases operating that you're consenting to remark there?

Stanley Bergman

Yes. Let maine woody pinch nan first part. And I deliberation it's champion for Ron to respond to nan guidance from a mathematics constituent of view. As noted, successful nan prepared remarks, we judge nan dental marketplace successful nan developed world, certainly, is rather stable. We judge that, generally, we're increasing immoderate marketplace share. There are puts and takes here, namely nan seasonal accommodation because of flu successful nan 4th fourth and a small spot of a rebound successful -- aliases backmost to normal successful nan first quarter.

But generally, I deliberation nan marketplace is stable. I deliberation specialty products are stable. You should not needfully publication thing into our specialty income per se because we had an exceptional 4th fourth for implants and bony regeneration products successful '21. But generally, I would opportunity nan consumable markets successful nan developed world are comparatively stable. There are a fewer markets but down successful a fewer markets wherever it's spot up. But generally, it's stable.

On nan instrumentality side, accepted instrumentality is okay. We haven't rather tally disconnected nan backlog and it's beautiful stable. The area that successful nan past, I was a small spot much concerned astir is nan imaging. I deliberation it's comparatively unchangeable now. The prices are not going down arsenic they did, and nan units, nan request is beautiful good. The area wherever there'll beryllium tons of ups and downs is successful nan integer area.

There's tremendous liking successful integer dentistry. I've not seen nan liking this side. I deliberation erstwhile it comes to nan scanners, I deliberation we're good beyond nan first tally of innovative-type buyers and into modular of usage buyers. There are galore caller entrants into this market. There are little priced products, for sure. And that's wherever nan marketplace is heading, but nan request for units is very strong. I would opportunity that we were challenged a bit, and I deliberation it's going to beryllium that measurement for a fewer quarters pinch nan caller merchandise from our starring supplier of scanners.

But I don't deliberation we'll suffer those orders, they'll come. On nan different side, nan mill marketplace has really almost travel to a halt. We're still trading mills. But dentists, they were looking astatine mills are now looking astatine 3D printing. We sewage a spot of a boost location successful nan United States. The ADA has now provided a billing code. And truthful dentists, they whitethorn not bargain nan 3D printer correct away, but they're surely looking astatine it. And I deliberation that, that marketplace is going to do well. It's a method usage possibly for nan front, I'm utilizing it later for nan beforehand teeth is not cleanable yet, but this is simply a awesome opportunity for us, and we're doing good and we expect to do moreover better, though it's not covering nan simplification successful mill demand, and now I'm dealing pinch nan dentists.

On nan laboratory side, nan mills are doing rather well. And truthful generally, that's what's happening successful nan instrumentality business. I deliberation it's rather a bully marketplace connected nan traditional. On nan 3D printing, mills are a challenge, and there's a flimsy rumor successful Europe because of nan IDS that occurs astatine nan extremity of March. And truthful I deliberation group are waiting to spot what developments occur, but I don't deliberation that's going to effect nan full twelvemonth sales. So that's conscionable possibly a flimsy dip and up tick.

But generally, I would opportunity dental is stable. On nan aesculapian side, we proceed to spot nan migration from nan acute attraction mounting and myself I'm having a partial knee replacement. And I'm told I'll beryllium retired connected nan aforesaid day. That was not nan rumor -- not nan situation, possibly 1.5 years ago. So location is simply a migration, and we are benefiting from that.

Ronald South

And Jason, pinch reference to your mobility connected operating margin, yes, I do deliberation that -- for illustration we said, we judge operating income is increasing successful nan precocious azygous digits, debased double digits erstwhile excluding nan resistance from PPE and COVID trial kits. And yes, that should connote benignant of a pro forma operating separator description , arsenic you inferred. I deliberation it's a -- really shows that nan benefits of having nan benignant of wide merchandise portfolio we person of not conscionable being a supplier but besides having nan specialty products, besides having being successful nan aesculapian business, besides being successful nan exertion business that we tin we tin proceed to benignant of offset immoderate of these marketplace conditions that person adversely affected america a small bit, whether it beryllium successful PPE aliases COVID trial kits pinch nan equilibrium of nan business.

Jason Bednar

Got it. Just truthful Ron, conscionable arsenic a speedy follow-up there. You're suggesting operating separator description full to get that. Is it gross separator driven aliases OpEx driven? And acknowledgment for nan broad answer. I'll hop backmost successful queue aft that.

Ronald South

It's -- fixed that nan merchandise operation facet of it would beryllium chiefly gross separator driven

Operator

The adjacent mobility comes from nan statement of John Block pinch Stifel.

Jonathan Block

Ron, possibly conscionable going connected a akin path, nan precocious azygous digit to debased double digit 2023 non-GAAP EBIT maturation for nan halfway business. Can you talk to really overmuch that benefits from nan restructuring successful nan backmost portion of 2022? I cognize you guys usually do restructuring. Just seems a small spot bigger than normal. And erstwhile we deliberation astir going forward, much importantly, is nan precocious azygous digit to debased double digit, a bully practice of nan business longer word erstwhile nan PPE, COVID headwinds abate?

And past possibly successful nan liking of time, I'll conscionable inquire some upfront. Stanley, connected nan implant side, nan dental specialties, I cognize you guys had a very difficult comp. But I deliberation conscionable -- possibly successful nan backmost portion of '23, implants mightiness beryllium flattish, telephone it, successful to which '22 year-over-year to propulsion a dart. Just would emotion your thoughts connected really that compares to marketplace growth? And if you consciousness for illustration you guys are still taking stock there?

Ronald South

Yes. John, I deliberation successful position of nan -- and if I'll paraphrase your mobility and show maine if I person it wrong, it's really benignant of nan sustainability of continued maturation successful nan precocious azygous to debased double digits successful nan equilibrium of nan business. And we do person immoderate assurance location that we tin proceed pinch that. I deliberation that you whitethorn beryllium alert that we person an Investor Day coming up connected February 27, and we'll supply much benignant of -- immoderate benignant of midterm assumptions astatine that constituent successful clip successful position of what we are expecting beyond '23.

But this is, again, benignant of partially driven by nan operation of nan business and nan truth that we're increasing immoderate aspects of nan business faster than others and whether it beryllium successful specialties aliases successful technology. Did that reply your question?

Operator

The questioner has dropped off. The adjacent mobility comes from nan statement of...

Stanley Bergman

Just to respond quickly to nan specialty products. The implants and bony regeneration products are doing very well. We're very pleased pinch our soul maturation successful that area. I deliberation nan Biotech acquisition will help. So that business continues to beryllium strong, peculiarly successful our halfway markets, which is nan United States and Germany, a mates of nan Germanic countries and Japan.

On nan endo products, we're doing well. Continue besides location for illustration an implants, bony regeneration to judge we are gaining marketplace share. The aligners are truthful small, but I deliberation we will get a boost pinch nan Biotech acquisition. We will person definite synergies that I deliberation will thief thrust much sales, but it's a very mini business.

Operator

Our adjacent mobility comes from nan statement of Nathan Rich pinch Goldman Sachs.

Nathan Rich

I'll inquire some upfront arsenic good and some are related to nan intraoral scanner market. Stanley, wherever would you opportunity we are successful nan displacement to lower-priced products? And tin you conscionable spell into a small spot much item connected benignant of what you're expecting from that marketplace successful 2023? Do we commencement to possibly spot immoderate signs of stabilization conscionable successful position of ASP and mix?

And past could you spell into a small spot much specifications connected nan proviso issues you mentioned from that 1 supplier conscionable successful position of erstwhile -- if you person immoderate visibility into benignant of erstwhile that would perchance resoluteness aliases conscionable what you're looking for location and what's assumed successful nan outlook?

Stanley Bergman

Yes. On nan side, connected nan scanners, I don't deliberation we've seen nan bottommost yet successful position of operation change. I deliberation nan pricing comparative to peculiar manufacturers whitethorn person stabilized. But location are entrants into this marketplace that person very bully products that possibly we didn't moreover waste overmuch of successful nan past that we're not carrying and selling. So it's much of a operation to lower-priced products alternatively than deflation of a peculiar manufacturer's existing products, though location could beryllium immoderate of that.

As it relates to -- and by nan way, I deliberation we estimate astir 20% to 25% of successful nan developed world person 1 of these devices, and we deliberation that's going to beryllium modular of attraction wrong nan adjacent mates of years. So we're very optimistic astir units successful that area And besides these newer entrants that we're moving pinch are doing rather good pinch us. As it relates to nan shaper that has a proviso concatenation issue, it's not a nationalist company. I can't talk astir it, but they person a caller product. It's really connected nan precocious extremity that has done rather well. And that conscionable goes to a small spot of a contradiction to what I said early on.

For manufacturers that person unsocial technology, location is simply a request for paying more, but that's not mostly for nan full market. The full market, nan 75% of group that don't person a device, they're willing much successful a lower-priced merchandise that has capable features for them. But nan 1 that immoderate backmost bid is connected nan higher extremity of features, and we don't expect that to resoluteness for 3 quarters.

Operator

And we person clip for 1 past mobility coming from nan statement of Kevin Caliendo pinch UBS.

Kevin Caliendo

Can you quantify successful immoderate measurement nan effect of nan 3D printing that you called retired successful nan merchandise and connected nan call? Like successful position of numbers and marketplace stock and nan like, -- because I cognize you've talked astir it successful nan past, but I deliberation this is nan first clip really called it retired successful nan property merchandise is impacting nan business.

And conscionable arsenic a follow-up, each this, and I admit each nan colour connected nan inventories and nan instrumentality and IOS and nan like. But your backlog grew successful 3Q, and you judge you said it grew sequentially done nan quarter. What is nan anticipation for instrumentality sales? And wherever does your backlog beryllium now comparative to wherever you were astatine nan extremity of 3Q?

Stanley Bergman

Let maine woody pinch nan backlog first. It is successful North America, akin to what it was astatine nan extremity of nan 3rd quarter. So I don't deliberation overmuch has changed. I can't springiness you nan nonstop timing. A batch of that is nan consequence of accepted equipment, but we look to beryllium topping up immoderate we ship. And truthful that marketplace seems to beryllium rather beardown successful Europe. It's dipped slightly, but we deliberation that's to immoderate grade because of nan IDS because group are holding back. But we nan separator here. So it's not material.

The bottommost statement is nan backlogs are bully successful some North America and internationally, and nan instrumentality is strong. As it relates to mills, I would opportunity nan mill marketplace has importantly travel down. And I'm referring to arsenic I know, chairside mills, that's conscionable not doing well. I'm not referring to laboratory mills. We are nan largest supplier of products to dental laboratories. And that marketplace seems to beryllium comparatively strong.

The move to nan 3D printing is not occurring 1:1 yet. What's happening is there's a batch of dentists that are saying, I request to find retired much astir this. And I expect that complete nan adjacent mates of quarters, our squad will beryllium retired location educating dentists connected nan opportunity for 3D printing. I fishy it will consequence a small spot successful mills going up again because correct now, it's a business wherever we dentists want to understand much astir what's going on. And 3D printing is going to beryllium important, but not substitute wholly for chairside milling.

The marketplace is just, I think, travel to a small spot of an acquisition stumble. But I deliberation nan mills will travel backmost again, but not to wherever they were. And 3D printing is astatine a comparatively early stage. But I deliberation we're doing very good successful position of increasing our world marketplace share, nan income that are retired there. 3D printing will amended arsenic various materials travel to marketplace and arsenic nan aesthetics improve.

But I deliberation nan connection is that integer restorations, a basking product, dentists liking successful investing, our occupation is to make judge that we amended nan dentists connected nan due devices for their believe and past adjacent connected sales.

Kevin Caliendo

And if I tin ask, Ron, a really speedy follow-up. I conscionable wasn't judge if I heard. Is nan guidance see aliases exclude Dental Biotech? And what was nan effect of that?

Ronald South

The guidance does not see Dental Biotech. I deliberation that erstwhile we put nan merchandise retired of Dental biotech, we said it would beryllium somewhat dilutive to 2023 erstwhile excluding amortization expense.

Stanley Bergman

Okay, everyone Thank you very overmuch for calling in. The connection I deliberation we want to communicate, I cognize we want to pass is that our halfway business is successful bully shape. We expect decent soul maturation rates, section currency, of course, successful 2023, we'll screen this successful much successful item astatine our Investor Day. We expect our soul maturation -- sorry, our operating income to proceed to turn rather nicely, precocious azygous digits, debased double digits. And bottommost statement is nan business is successful bully style successful markets that are doing well.

There are nuances that request to beryllium understood. We're happy to woody pinch that and further item astatine nan Investor Day. So if anyone wants to scope out, Graham, connected nan Investor Relations side, he'd beryllium happy to supply further clarity connected our remarks. So convey you very much. And hopefully, we'll spot everyone connected nan telephone astatine our Investor Day successful New York City, nan pursuing week. Thank you very much.

Operator

This concludes today's teleconference. You whitethorn disconnect your lines astatine this time. Thank you for your participation, and person a awesome day.

Editor: Naga



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