漢瑞祥 (HSIC) 2021 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Henry Schein Third Quarter 2021 Earnings Conference Call. (Operator Instructions)

As a reminder, this call is being recorded. I would now like to introduce your host for today's call, Graham Stanley, Henry Schein's Vice President of Investor Relations and Strategic Financial Project Officer. Please go ahead, Graham.

Thank you, operator. And my thanks to each of you for joining us to discuss Henry Schein's results for the 2021 third quarter. With me on the call today are Stanley Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein; and Steven Paladino, Executive Vice President and Chief Financial Officer.

Before we begin, I would like to state that certain comments made during this call will include information that is forward-looking. As you know, risks and uncertainties involved in the company's business may affect the matters referred to in forward-looking statements. As a result, the company's performance may materially differ from those expressed in or indicated by such forward-looking 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, including 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 analysis and estimates. Our conference call 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 financials between periods, but certain items may vary independently of business performance and allow for greater transparency with respect to key metrics used by management in operating our business.

These non-GAAP financial measures are presented solely for informational and comparative purposes and should not be regarded as a replacement for corresponding GAAP measures. Reconciliations between GAAP and non-GAAP measures can be found in the supplemental information section of our Investor Relations website and in Exhibit B of today's press release, which is available in the Investor Relations section of our website.

Lastly, the content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, November 2, 2021. Henry Schein undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call.

(Operator Instructions)

With that said, I would like to turn the call over to Stanley Bergman.

Thank you very much, Graham, and congratulations on your appointment as Head of our Investor Relations. And of course, thank you for all you've done for the company over the last dozen-plus years.

So good morning to everyone, and thank you for joining us. Really, really happy today to report record third quarter financial results, driven by a keen focus on execution by the team. And the team has done a remarkable job since the virus -- the pandemic started back in March of 2020. And of course, there was a steady patient traffic pattern during this quarter, which also contributed to the very good and actually, the excellent results. And we have excellent momentum across the entire company.

So if we compare the results of sales a year ago, Henry Schein's worldwide internal sales that's in local currencies increased a robust 7.2%. But what's really important, if you exclude the sales of PP&E and COVID-19-related products, results are up 6.3%. That's the internal sales growth in local currencies.

We believe that patient traffic was generally similar to the previous quarter for our [dental] customers, that's in the United States and globally, small adjustments in different parts of the world, but not material. And definitely, the pattern is improving for our medical customers. We mentioned in previous calls that visits to physician offices had gone down compared to '19 and definitely in ambulatory surgical centers as well. We see this traffic as increasing again.

In mid-September, we announced important changes to our senior distribution business leadership structure. And let me comment on these changes before I review the third quarter performance for each of our business groups -- or actually, Steven will do that first and then I'll provide additional comments later.

We have been pursuing an umbrella strategy which we internally refer to as One Distribution as part of the continuous operational improvement of Henry Schein as a company. More tightly -- the strategy of One Distribution more tightly integrates the management of our distribution businesses globally. Our newly announced structure, which we've been working on for about 18 months, seeks to harness the benefits of consolidating the management of Henry Schein dental and medical distribution businesses in 2 regions, 2 geographies: North America, and the rest of the world, international.

One Distribution, will better position our management team to leverage functions, talent, processes, and yes, systems across Henry Schein's global distribution businesses. These changes are designed and expected to accelerate improved efficiency. And of course, that's been a goal of Henry Schein for decades to improve efficiency, but we're really focused on it now more than ever and actually doing a pretty good job at that. But I believe that this new management structure will advance our efficiency as an organization globally.

But also. And quite importantly, the new structure will allow us to enhance the customer experience by operating in a more efficient manner. There's just no question that COVID -- this period, this COVID period has increased customers' expectations on the customer experience, and we are committed to fulfilling those expectations. In fact, exceeding them. Furthermore, these changes recognize the fact that medicine and dentistry are both parts of the tariff continuum.

And we've been talking about this for years as well, but it's really coming much closer together, the notion that medicine and dentistry are aligned in prevention and wellness. And today, we have a small, but nevertheless, increasing the amount of overlap between the 2 customer sets. We're starting to see practices emerge that are servicing both sides, the industry and medicine. We're starting to see our electronic medical records in dental schools for dentistry and practices starting to connect in an interoperable way with medical records.

So this whole notion of the integration of oral care and medicine is advancing, and we are aligned in this whole area of wellness and prevention, which is so important to providing better quality of care at a more competitive price or a lower price so-called value health care chain.

Now our software specialty Products and practice services businesses are also reflective of Henry Schein's longstanding commitment to help customers operate more efficient practices and support clinical care. We are continuing to sharpen our focus on these faster-growing and higher-margin markets through organic growth, and as you'll hear later already, through some very interesting strategic acquisitions, which we made just this year, and we will add to that.

The whole notion that software, specialty products and practice service activities, those 3 business areas align with our One Distribution strategy, different management teams, different focus. The whole idea is to provide better customer service while at the same time driving up our margins, our operating margins as well.

Our customers increasingly rely upon Henry Schein's comprehensive offering of innovative solutions and services, along with our distribution network for their continued success in what is clearly a much more digital world than we went into in March of 2020. We believe we have a most accomplished leader team in place in our businesses across the world, both on the distribution side and in the software specialty products and practice services businesses side. They're ready to satisfy the needs of our customers, improve the experience, drive down costs and at the same time, therefore, provide an increased operating income and so create shareholder value.

With these opening comments, I'd like to hand the call over to Steven discuss our quarterly financial performance and guidance, which we are now providing for the remainder of 2021 and yes, for 2022 as well. Then I'll provide some additional commentary on the current business conditions and our markets. Steven, please?

Okay. Thank you, Stanley, and good morning to everyone. As we begin, I'd like to point out that I will be discussing our results from continuing operations as reported on a GAAP basis and also on a non-GAAP basis.

Our third quarter non-GAAP results for 2021 and 2020 and exclude certain items that are detailed in Exhibit B of today's press release as well as in the supplemental information section of our Investor Relations website. Please note that we have, again, included a corporate sales category for Q3 that represents the prior year sales to Covetrus under the transition services agreement, which concluded in the fourth quarter of 2020. While the agreement has ended, these sales are still reflected in the prior year comparative results.

Turning now to our financial results. Total net sales for the quarter ended September 25, 2021, was $3.2 billion, reflecting growth of 11.9% compared with the prior year period. Internally generated sales were up 7.2% in local currencies, and you can again see the details of our sales performance in Exhibit A of the earnings press release that was issued earlier this morning.

On a GAAP basis, our operating margin for the third quarter of 2021 was 6.63% and that's relatively flat, but represents an increase of 2 basis points compared with the prior year. On a non-GAAP basis, operating margin of 6.63% for the third quarter of 2021. That represents a decrease of 22 basis points compared with the prior year. Again, a reconciliation of GAAP operating margin to non-GAAP operating margin can be found in the supplemental information page on our website.

The year-over-year decline is due to higher expenses this quarter compared with Q3 2020, which reflected temporary expense reduction initiatives we put in place last year in response to the COVID-19 pandemic. This was partially offset by gross margin expansion compared with Q3 2020, mainly as a result of lower inventory adjustments in the current quarter.

Turning to our taxes. Our reported GAAP effective tax rate for the third quarter of 2021 was 23.9%. This compares with a 16.4% GAAP effective tax rate for the third quarter of 2020. On a non-GAAP basis, our effective tax rate for the third quarter of 2021 was also 23.9% and that compared with 16.7% in the third quarter of last year.

Remember, our prior year tax rate was favorably impacted by U.S. federal income tax settlement, which lowered income tax expenses by approximately $15.6 million or $0.11 per diluted share. Again, this is the prior year taxes. Excluding this impact, the effective tax rate last year would have been in the 25% range for both on a GAAP and non-GAAP basis.

You can also see the reconciliation of GAAP effective tax rate to non-GAAP effective tax rate on the Investor Relations page on our website. We expect our effective tax rate to continue to be in the 25% base range on both a GAAP and non-GAAP basis in the fourth quarter. And of course, that assumes no changes in tax legislation.

Moving on, GAAP net income from continuing operations attributable to Henry Schein for the third quarter of 2021 was $162.3 million or $1.15 per diluted share and included a gain on sale of an equity investment of $0.05 per diluted share. This compares with the prior year GAAP net income from continuing operations of $141.7 million or $0.99 per share.

On a non-GAAP basis, net income from continuing operations for the current year was $154.8 million or $1.10 per diluted share, and that compares to net income from continuing operations of $147 million or $1.03 per diluted share for the third quarter of 2020.

Amortization from acquired intangible assets for Q3 2021 was $30.5 million pretax or $0.13 per diluted share. This compares with $25.2 million pretax or $0.11 per diluted share for the third quarter of last year. And for the 9 months, our amortization, acquired intangible assets was $90.3 million pretax or $0.40 per diluted share and this compares with $76.8 million pretax or $0.34 per diluted share for the same period last year. I'll also note that foreign currency exchange positively impact our Q3 2021 diluted EPS and by approximately $0.01 per share.

Let me now provide some additional detail on our sales results for the third quarter. Our global dental sales of $1.8 billion increased 10.5% compared with the same period last year, with internal sales growth of 5.2% in local currencies. Global Dental merchandise internal sales increased by 2.9% in local currencies for the third quarter of 2021 versus the same period last year. And if we were to exclude PPE and COVID-19 related products, internal sales growth in local currencies increased by 4.8%.

Our North American dental internal sales growth in local currencies was 4.7% compared with Q3 2020, which is attributable primarily to stable merchandise growth and solid equipment growth. Our North American dental consumable merchandise internal sales in local currencies was 3.9% with Q3 2020 or 5.7% when excluding sales of PPE and COVID-related products.

If we look at our North American dental equipment, the internal sales growth in local currencies was 7.8% versus Q3 2020 with growth reflecting strong sales of high-technology equipment and modest growth of traditional equipment sales, which remain impacted by equipment manufacturing and office construction delays.

Q3 sales of high-tech equipment was helped by DS World this year as this year's event was more impactful than the virtual event held in 2020. U.S. manufacturers of traditional equipment in North America expect to continue to see delays until the second half of 2022. The pipeline for equipment orders remained strong, and we regard this delayed equipment installations into next year as a timing issue rather than any decrease in demand. DS World also has contributed to our strong backlog of orders going into the fourth quarter. Just as a reminder, we recognize sales for equipment and capital equipment orders at the time the equipment is installed rather than when the order is placed.

Our international dental internal sales growth in local currencies was 5.9% versus Q3 of 2020. Our international dental consumable merchandise sales in local currencies increased 1% versus Q3 2020 or 3.5% growth, excluding PPE and COVID-related products. We also reported strong equipment sales growth of 28.1% in our international markets, which are not experiencing any supply chain issues of any significance at this time.

In local currencies, internal sales increased 23.9%, compared with Q3 2020. Our sales of dental specialty products was approximately $225 million in the third quarter with internal growth of 10.3% in local currencies versus the prior year. In North America, internal sales growth in local currencies grew 8.5% over Q3 2020, and I'll note that Q3 2020 was also a strong quarter. And internationally, internal sales of dental specialty products grew at 15.3% in local currencies.

Growth was strong in each of our dental specialty categories, namely oral surgery, implants, bone regeneration, endodontics, orthodontics, with all of these businesses doing well in both North America and internationally. Our global medical sales during Q3 was $1.2 billion and increased 15.5% compared with the same period last year. Internal sales growth was 13.1% in local currencies. Our internal sales growth increased 13.6% in North America versus the prior year, while international sales of our Medical business declined 7.5% year-over-year. North American medical sales experienced particularly strong growth across the board versus the third quarter of last year, including growth in COVID-19 test kits, equipment, laboratory product sales and pharmaceuticals.

If you were to exclude PPE and COVID-related products, global medical internal sales growth in local currencies increased 8.3% versus Q3 2020. I'll also note, we sold approximately $206 million in COVID-19 test kits in the third quarter of 2021. That includes about $28 million in multi-assay flu and COVID-19 combination test. This compares with $75 million in test kits in the second quarter of this year and $180 million in the first quarter of 2021. The increase in test kits was the result of the surge in demand related to the Delta variant, and we expect sales of test kits to moderate from these levels in the upcoming quarters.

Technology and Value-Added Services sales during Q3 were $168.6 million, an increase of $21.9 million compared with the prior year, and that includes internal growth of 6.3% in local currencies. In North America, tech and value-added services internal sales growth was 5% in local currencies and this growth was primarily driven by Henry Schein One's Dentrix Ascend subscriptions as well as Dentrix technical support revenue and our practice services value-added businesses.

Internationally, technology and value-added services internal sales increased by 15.3% in local currencies compared with the prior year, driven primarily by Henry Schein One with particular strength in software excellence business driven by the reopening in the U.K.

We continue to repurchase common stock in the open market during the third quarter, buying approximately 650,000 shares at an average price of $76.77 per share for a total expenditure of approximately $50 million. The impact of these repurchases of shares in the third quarter was immaterial to diluted EPS. I'll also note, at the end of the quarter, Henry Schein had approximately $350 million authorized and available for future stock repurchases.

If you take a look at our balance sheet, as well as cash flow, we have access to significant liquidity, providing flexibility and financial stability. Operating cash flow from continuing operations for the third quarter of 2021 was $211.2 million, and that compared to $261.3 million for the third quarter of last year.

I'll note also as part of our previously disclosed restructuring initiative, we have a small pretax credit in Q3 2021 of $175,000 and of course, that did not have a material impact on our diluted EPS.

I'll conclude my remarks by updating our 2021 non-GAAP diluted EPS guidance as well as introducing 2022 guidance. At this time, we are not providing 2021 GAAP diluted EPS guidance as we are unable to provide, without unreasonable effort, an estimated costs related to the ongoing restructuring initiative, including the corresponding tax effect.

On a non-GAAP basis, we expect EPS from continuing operations to be $4.27 to $4.35, reflecting a 44% to 46% growth for 2020 non-GAAP diluted EPS from continuing operations. Turning to next year, we are introducing preliminary guidance for 2022 non-GAAP diluted EPS from continuing operations.

Also at this time, we're not providing guidance for 2022 GAAP diluted EPS for the same reason as we are unable to provide without unreasonable estimate and estimate of restructuring costs for 2021 and 2022 as well as the corresponding tax impact. We expect growth in 2022 non-GAAP diluted EPS from continuing operations to be in the mid- to high single digits over 2021 non-GAAP diluted EPS from continuing operations.

Our guidance for both 2021 and 2022, non-GAAP diluted EPS is for current continuing operations as well as any completed or previously announced acquisitions, but does not include the impact of future share repurchases, potential future acquisitions, if any, or restructuring expenses. Guidance also assumes that foreign currency exchange rates are generally consistent with current levels, that the end markets remain stable and are consistent with current market conditions, and there are no material adverse market changes associated with COVID-19.

With that summary, let me turn the call back over to Stanley.

Thank you very much, Steven. So let's provide some thoughts on each of our businesses. Third quarter dental revenue growth was solid, as you heard. Overall gains in consumable merchandise and equipment sales in North America and international markets reflect the continuing recovery. And as noted, this is coupled with keen focus on execution by Team Schein.

North American dental consumable merchandise internal growth in local currencies with and without PP&E and COVID-19-related products also was quite solid in the third quarter. Consumable merchandise sales continue to improve, which we believe was bolstered by a steady flow of patient traffic.

Here in the U.S., the most recent American Dental Association data shows patient traffic is currently at about 90% of pre-pandemic levels, and Henry Schein One billings associated with dental claims processing are, once again, about 100% and of pre-pandemic levels, a little over. These statistics are similar to those we reported in the second quarter, and we believe the market to be sequentially stable, tilting slightly through improvement.

Similar kind of data around the world. Some countries are a little ahead, some a little behind, but on balance, pretty stable on the dental side. You may recall that many of the international markets we serve posted a quick recovery in sales and consumable merchandise in the third quarter of last year when we recorded, at that time, record sales. This comparison resulted in slightly lower sales growth than we have seen in prior quarters. Most markets are back to normal, as I noted, with some modest weakness in the U.K., although it is better. And in Australia and New Zealand, for a very short period of time, to the main cities were on lockdown. But the market, the lockdown has been largely lifted and Australia and New Zealand are back to normal right now. But we had a dip in the third quarter.

Last quarter, we discussed some of the delivery and installation delays facing the U.S. traditional dental equipment business. Overall, our equipment business is performing very well, and equipment demand is strong as demonstrated by the third quarter sales we are reporting today. We expect the impact of those delays to be pronounced in the fourth quarter with manufacturing lead times returning to normal towards the second half of next year.

As such, the traditional equipment manufacturers' delays, along with delays in office construction are creating some timing differences in our reported sales between quarters. Again, these manufacturing delays are primarily impacting delivery and installation of traditional equipment in North America, namely the U.S.. Canada is quite stable. Manufacturers seem to be able to provide us with adequate product, although we do have longer installation times even in Canada, but not as bad as in the U.S.

That said, dentists continue to invest in technology solutions that promote more accurate diagnosis and treatment planning as well as workflow efficiency. This is really important. Dentists are focusing on digitalization of their practices. We remain extremely bullish about the future of digital dentistry and the long-term prospects and trends we believe will flow from advancements in the digitalization of dentistry.

Among the dental equipment highlights each year is with Dentsply, DS World, which took place at the end of September in Las Vegas right at the end of the quarter. This event was virtual in 2020. So it was exciting for Henry Schein to be on site and meeting in person, once again, with current and prospective customers. We are very pleased with the results from the show, which did have somewhat of a modest positive impact on our sales in the third quarter, but we expect much more of an impact in the fourth quarter.

It's important to note that DS will features high technology equipment, and we believe the supply chain challenges I discussed do not generally, in fact, at the delivery and installation of these products here in the United States.

So we expect the good results from the equipment side, specifically digital and other Dentsply products to flow through in the fourth quarter with a challenge remaining on the traditional chairs, units and lights, which are manufactured largely in the United States by other manufacturers who fill the slack from one of our large manufacturers exiting the market last year.

Now look, we've received lots of questions and comments have been written about pricing for dental, merchandise and equipment. So we expect that prices may increase for certain items in the near term. as some manufacturers work through a scarcity of raw materials as well as higher transportation and labor costs.

Unfortunately, this can result in higher pricing for our customers as we typically pass on these increases. However, what's very important, and we're communicating this to our customers, Henry Schein is committed to working with our suppliers to improve supply chain efficiencies and to limit these price increases as best we can and to alerting our customers to upcoming price changes. We are doing all we can to mitigate this inflationary impact resulting from raw material shortages, higher transportation issues, mitigate that for our customers.

So now turning to the dental specialties. Sales of our dental specialty product performed extremely well during this quarter with double-digit internal sales growth in local currencies versus the prior year. Remember, the prior year, we did have good sales in the specialty category as well. So this is pretty good compounding. Approximately 2/3 of our dental specialties revenues are from our oral surgery, implant-based tooth replacement products business. That includes the implants and the bone regeneration products.

Our success share is driven largely by our premium value, BioHorizons and Camlog implants and bone regenerations lines, where we also saw strong growth versus the prior year. Our leadership position in the oral surgery, that's both in implant and bone regeneration market as well as in endodontic and orthodontics includes both proven solutions and a commitment to delivering new solutions as we further penetrate key dental specialty markets. At any given time, we have a number of product launches underway, which typically takes us 12 to 18 months for a full rollout. The pipeline was rich and remains rich, and we continue to bring exciting new products to market in all 3 categories.

During the third quarter, we launched our Progressive Conelog implants with multiunit prosthetics addressing the full arch market in North America. And during the fourth quarter, we expect to launch our Fusion implant solution to enhance our offering of the value price segment of the implant market. Our priority in orthodontics is our Reveal Clear Aligner with global reach now into more than 2 dozen countries. In the U.S., we are in the process of launching an update to our software, Studio Pro 4.0, which features advanced treatment planning and visualization tools. We expect to launch the software in certain international markets next year. So overall, we're very pleased with the performance of our Dental business globally, our Dental Specialty businesses, and we'll talk now about our Medical Distribution business.

Turning now to our Medical business. Internal sales growth in local currencies for the third quarter was, once again, very strong. But what's important to recognize, the strength was -- in terms of growth, was strong both measured with and without sales of PP&E and COVID-19 related products.

Trends in the physician office, ambulatory surgery center, alternate care markets, as noted in my opening remarks are all quite positive. We believe traffic in U.S. physician offices and ambulatory surgery centers is generally improving, as we approach more normalized practice operations for elective procedures that were deferred over the past 18 months, although we're still not back to normal, but the trend is good.

We also have increased the number of accounts we serve. I think the medical group has done a very good job in expanding accounts and also penetrating existing accounts. Sales of COVID-19-related products should be lumpy, as you know, all year, with strength in the first quarter, falling off in the second quarter and picking up again in the third quarter. Pretty lumpy, as noted.

In addition, pricing for COVID tests has also declined quite a bit. These volatile sales trends reflect the unpredictable spread of the Delta variant with upticks in cases and testing services being seen between quarters and within various geographies. We continue to expect price volatility for COVID-19 test to continue.

This year's third quarter also included the sale of flu diagnostic products, whereas a year ago, we sold very few of these tests. In fact, we are selling the combination flu COVID-19 test to our physician office-based customers to help differentiate these 2 viruses that result in somewhat overlapping symptoms. Tests are important in the office-based practitioner environment in the office, although as noted, the volatility of the particular price per unit can be quite sharp.

We are optimistic, I would say, extremely optimistic about the future of our medical group as medical procedures continue to move to alternate care settings, coupled with our belief that we are well positioned to continue to grow our market share. Also, as noted, elective procedures that patients have put off for 18 months are now being scheduled.

But putting that even aside, I think the structural market shift from the acute care setting to the physician office and the ultimate care setting, particularly the ambulatory surgical center is something that is moving in our direction, and we are well positioned to process this new business that is emerging.

So one closing remark regarding our distribution businesses. As we have previously discussed, we believe we have entered a new normal for the use of personal protection -- protective equipment products, excuse me, by both dental and medical practitioners. We envisage demand for PP&E products continued -- continuing at an elevated level for the foreseeable future, driven by new health care protocols. We do not expect that the demand -- the unit demand for PPE will revert to pre-pandemic usage levels. However, we expect price volatility for PP&E products to continue.

So now looking at the performance of our technology and value-added services businesses during the quarter. Henry Schein One, the largest contributor to the sales in this segment, once again recorded record high quarterly revenue. As Steven noted, we saw solid North American sales growth in Dentrix technical support. That's the support we provide to our existing customers. and really exciting, our Dentrix Ascend Cloud Solutions' business is growing.

Remember, historically, the systems we sold, we would book a sale for the product and the total value of the software we sold would be recognized as a sale. Now the Dentrix Ascend Cloud solution is subscription-based software, which means it's a continuous reoccurring revenue, and this is doing very well. Dentrix Ascend is doing well with small customers, midsized customers and growingly now with some of the larger DSOs. Also, our Software Excellence business in the U.K. had a good quarter. The Software business in the U.K. had challenges while the U.K. dentists were in lockdown or largely on lockdown.

We continue to focus on the migration to the cloud and our cloud-based solutions to create flexible, scalable services to drive practice efficiency and patient engagement and a more stable reoccurring revenue stream, as I noted, for these services.

Short term may impact sales in that we do not book the full sale of the software upfront, but this recurring revenue is really very good business. And growingly the percentage of our business in the reoccurring revenue field of the total Henry Schein One sales is growing. So overall sales growth was accelerated also by acquisitions we made over the past year in software analytics in particular. And in particular, the services offered by Jarvis are being well received by our customers. This is a great business that takes data, a lot of it from our Dentrix systems and provides analytics to customers, small and large customers.

Lastly, our Practice Services businesses are key components of the value added we provide our customers. And we were especially pleased with the strong growth this quarter, also driven by incremental investment that practices are making in their businesses. We are expanding the range of practice solutions or part of the strategic thinking we've shared with our investors.

In this connection, we acquired eAssist Dental Solutions late in the second quarter, and I'm really happy to report that this virtual dental outsourced billing business is performing well. It's been well received by our customers. And of course, the goal is to reduce the administrative effort required of our customers for their collections.

I'd like to spend the closing part of my remarks on ESG, environmental, social and governance arena. As we've discussed during past quarterly calls, environmental, social and governance, or ESG is an area of important focus for Henry Schein and an important topic all of us as we find new and innovative ways to create shared value for society as well as for our company, our businesses and for our investors.

I think it is quite clear as we emerged on COVID and hopefully, we're starting the emerging part now, certainly in the developed world. But it's clear that the business of business is no longer only business and the private sector has an important role to play in addressing the critical issues that face the world. This was expected of business now more than ever. But let me stress, although we didn't call it ESG, ESG has been part of the Henry Schein DNA for decades, as we balance the needs of our customers, suppliers, investors, society at large and the well-being of our team members.

To that end, we continue to engage our more than 21,000 Team Schein Members as ESG champions to advance the ESG efforts as we find new and innovative ways to create shared value for society as well as for our company. Henry Schein is committed to -- already, I think our shareholders should be aware of this, to reporting in accordance with GRI and SASB standards next year in 2022. We've also committed to issuing our initial task force on climate-related financial disclosures report next year, and we will set science-based targets.

With specific respect now to the environmental side, we aim to operate more efficiently and reduce our carbon footprint as well as working towards our goal to achieve net 0 global emissions by 2050. Of course, this will be gradual towards that date -- gradual and cumulative.

We participate in the World Economic Forum Alliance of CEO Climate Leaders and have signed the business ambition for 1.5 centigrade and the Race to Zero campaign, the 1.5 C and the Race to Zero campaign, which seeks to catalyze leadership and tangible action from the private sector for a healthy, resilient 0 carbon recovery and we will continue to do our part for a healthier planet. Again, these are areas that Henry Schein has been committed to for a long time, but we're now disclosing and visualizing what we're doing.

Regarding our work under social or Team Schein Members, our Team Schein Members are our, of course, greatest assets. We are committed to creating a culture of wellness, including very important mental health, which has become a big issue during COVID, providing our team with resources, education and hosting open dialogues, which allow for a meaningful connection on related topics.

We have what we referred to internally as a holistic approach to diversity and inclusion, D&I, recognizing that D is important, but I is very important, maybe more important, inclusive part that encompasses talent, culture, marketplace and society, increasing the representation of underrepresented groups, including women in leadership roles, and pay equity are a particular area of focus for us as is providing access to the health care service to historically underrepresented populations. We have been, again, committed to this for a long time.

We have a long-standing commitment to pandemic and disaster preparedness and response and helping to build a stronger, more resilient health care supply chain. And this was manifested in our being a founding member and private sector lead for the pandemic supply chain network, Happy if any investor has questions on that to provide more information. The PSCN network, I think, played an important role during COVID and is ready to continue to help with pandemic preparedness. Our commitment to ethical corporate governance starts with our largely independent and diverse Board of Directors and our nominating and governance committee, who provide oversight over our ESG programs.

In addition, Team Schein Members, in partnership with our customers, suppliers and NGO partners drive a culture of ethics and compliance through our Team Schein values, worldwide business standards and global supplier code of conduct. So that's a lot. But I think it's important to understand that we are committed to ESG, have been committed to alignment with the needs of society, doing well by doing good, as Benjamin Franklin referred to over 200 years ago. We've been committed to that for decades and believe that this is one of the reasons why we, as a company, have provided increased shareholder value each year for decades.

So with that in mind, Steve and I are ready to answer any particular questions that investors may have.

(Operator Instructions) Your first question will come from John Kreger with William Blair.

Can you just elaborate a little bit more on the One Distribution plan? Does that mean you're going to move to sort of a shared footprint across your distribution networks? And is that going to be global?

And I'll just ask my follow-up now and get off. The second question, Steve, is for you. I think the guidance implies a little bit of a sequential step down in earnings. Should we think about that as just because of basic equipment being lower? Or is there something else going on in Q4?

Steven will address the second part -- the second question. So we have shared services in a number of areas already. Our distribution systems, our telesales customer service, for example, inventory management has been a shared service.

But there are many other parts of our business, particularly the front end. For example, management of customer contracts, equipment service, financial services, order processing, the front end order processing. Some of it is already corporate-wide and others -- parts of it are specific related to medical and dental. These areas, I think, operating under common management to drive out costs and provide better customer service.

The big area that we are preparing for is our new digital front end, our global e-commerce platform that we'll launch in the middle of next year in the U.K. and then will be rolled out throughout the company carefully. We need common management, because that system is geared towards digital interfacing with our customers, dental and medical.

So to cut a long story short, our very large customers and our midsized customers are going through a lot of experiences that our medical team already undertook and went through a decade plus ago. So there's a lot of learning and these are learnings that our dental team can provide our medical team.

So we've broken up our business into 2, our North American business, led by Brad Connett, who's run our medical business for decades; and Andrea Albertini, internationally, who's been with us also for about a decade and has significant experience in manufacturing as well and distribution. And they are all working very closely with David Brous, who's responsible together with René Willi for our Specialty businesses. So internally, it works very, very well to advance our strategic plan that will be unfolding in -- for 2022 to 2024.

Okay. I'll tackle the second part of your question, John. So Q4 guidance. First, I'll note that our guidance is up, for the year, quite significantly. Remember, we gave a floor of $3.85 for the full year, and now we're at $4.27to $4.35. But specific to Q4, we wanted to consider a few things that I'll enumerate.

One is North American equipment and availability of product. We have estimates for product being delayed into 2022. But there was still a little bit of volatility and uncertainty as to exactly how much product we'll get in Q4 for North America. And this is really the traditional equipment. So we're being conservative there.

We also have seen a fair amount of volatility on 2 product items that we're trying to be a little bit conservative on. One is COVID test kits. You can see it's been jumping around. We had a very strong Q3. But we do expect COVID test kits to moderate -- sales to moderate a bit in Q4 as well as PPE pricing. We do expect PPE pricing to also moderate a bit in Q4. So there's some conservatism built into the Q4 numbers. I'll also note that if you compare the EPS to the EPS of last year, remember, last year, we had that tax settlement that was $0.11 per share, and that obviously was nonrecurring.

And finally, I'll say because there's been some notes and thought on inflationary. Obviously, any price inflationary items are fully considered, both in our 2021 and 2022 guidance.

The next question is from Jeff Johnson with Baird.

Steve, maybe following up on your last point there. I mean you talked about these price increases in dental and your efforts to maybe hold those in check. But can you talk about your ability to pass those price increases from the manufacturers through to your end users? I know you've alluded to it a couple of times. But we hear that you've raised rates here in the last few weeks, may or may not be able to fully pass price increases through to your end customers. So just on both those topics would be helpful.

Sure, Jeff. So again, our guidance assumes what we believe is a reasonable estimates of inflation. To give a little bit of detail, in pre-pandemic times, pricing inflation was probably in the low single digits, 2%, maybe to 3%. Right now, pricing is coming in for 2022, and it's a bit higher than that. It's probably in the 4% to 5% range.

Generally, we try to pass through pricing to the end user, to the customer. But as Stanley said in his prepared remarks, we're also working with manufacturers to see how much we can limit those price increases and do other things. With respect -- I know there were some questions earlier this -- last week, actually, on specific customers. And on that, we're not going to comment on specific terms and conditions for specific customers for competitive reasons.

But again, we feel like inflation is a little bit higher, and it's not just on product costs, it's also on labor and other things. And all of that is baked into our guidance, best we can do at this time.

All right. That's helpful. And just a quick follow-up. Just -- you talked about dental volumes kind of globally and in North America being fairly stable. We're 1 month into 4Q. How was October? And just any color on a very high level on kind of -- are you still seeing that stability here at mid the fourth quarter?

Sure. I would say that specific to dental, October continued to show good results, strong results. I'd be careful, though, for everyone on the line. It's very common to see a strong month and then sometimes, it changes because of ordering patterns of customers. But we definitely saw a very continued progression of the market conditions in October for the company.

The next question will come from Jon Block with Stifel.

Maybe just a near term and then a more high level. So just on the near term, it's certainly a solid quarter, big, broad top line and bottom line be. Maybe the only thing to pick on was gross margins, down roughly 100 bps sequentially and below our estimates. Steve, maybe if you can just talk to that, what was that from? Was it all mix? Was it the big medical number and PPE. And do we expect that to bounce back sort of into the fourth quarter and trajectory into '22?

Yes. The gross profit, first of all, we had a significant increase in the gross profit year-over-year and that was primarily driven by lower inventory adjustments. I would say it's a little bit of mix. And the second thing I would point to in impacting the gross margin is pricing on PPE products. PPE products continue to have pricing declines.

So while -- it's not as big an impact on margins, it does impact the absolute dollars as well as the mix because it is now not contributing as much to the mix. So it's primarily mix, Jon. And we do think that these pricing issues in PPE will be behind us, certainly during Q4. They've moderated a lot in Q3, but there still seems to be a little bit more to go. And going forward, we expect -- our goal is also to continue to drive towards higher-margin businesses, those technology and specialty sales products, which carry a higher margin. And the goal is to help improve the margin with a positive mix shift.

That's helpful. Probably a good segue into the next one. Stanley, just M&A, now that the COVID environment has seemingly hopefully started to stabilize. Maybe your, just, appetite going forward for M&A. What do the multiples look like in the industry? And just as COVID alter your wants in one industry versus the other from what we've all experienced the past 18 months or so.

Yes, Jon, our strategy on M&A continues to be the same, namely to add products to our -- businesses to our distribution platform, parts of the world where we're not as strong as we would like to be. And at the same time, advancing our specialty areas, namely software, the specialty products area and services. And maybe multiples to increase to some extent.

But there's lots of opportunity for us to create synergies and to bring new value-added services to our customer base. So we remain quite optimistic about the M&A area. Obviously, there's no deal until there's a deal. And our pipeline remains quite full. Having said that, again, we cannot commit to any particular quarter. And I think you heard from Steven's guidance that there's nothing in these numbers for M&A that is not announced.

We do have time for 1 final question, and that question will come from Jason Bednar with Piper Sandler.

Steve, I'd like to start with you on a couple of items related to guidance. First, I'd be curious in your level of confidence here today and margin expansion for the business next year and really trying to take into account the items that were impacting here real time in the quarter with respect to things like business mix and a step-up in stock comp.

And how we should be thinking about those items when it comes to operating margins for '22? And then also kind of within that guidance discussion, do you have an estimate on what the currency headwind you're assuming in earnings growth guidance for next year?

Sure. You asked a lot of questions. Let's see if I can hit all of them. By the way, I just wanted to note that when I -- in the prepared remarks, when I was describing the technology sales growth, I inadvertently said $21.9 million sales growth when I meant 21.9% growth. So just to correct that.

With respect to guidance, there's a couple of things. We're not assuming any major change in foreign exchange because of guidance. We do have a preliminary budget, so our 2022 guidance is based off of that preliminary budget.

When you look at the Q3 stock compensation expense, it was higher than normal because of the overperformance in Q3 as well as the full year. So Q3, we caught up based on that new projection on some of the stock-based compensation expense. That will be normalized in 2022.

And like I said, we're trying to be a little bit conservative on 2022 also, because of some of the uncertainty on test kits. We'll also see the benefit of the timing, Q4 timing on traditional equipment will be a headwind for us, but it'll be a tailwind in 2022 as those orders that can't get installed in Q4 get installed sometime in 2022.

Did I cover, Jason, the bulk of your questions? Because you had a lot of sub-questions in there or something else that you want me to answer?

Yes. Sorry, no, I think you did. I mean, it was -- really trying to get the confidence in margin expansion for next year, but I think you did there.

And then just coming back to one other point you were making there, Steve, just on hitting on the basic equipment challenges here near term, but it also sounds like this issue, before it's fully resolved, it may be extend a bit deeper into '22 than what you were alluding to a few months ago. I guess just at a high level, is there a point where you'd look to maybe procure product from elsewhere, bring in some international suppliers? I guess, just anything you can proactively do on your end to help mitigate this challenge from really dragging on deep into '22?

Yes. Maybe I'll make a comment and then pass it to Stanley. So this is what we're hearing from the impacted manufacturers right now. So remember, we don't see the insides of all of the detail. But what they're telling us is it won't be fully normalized until second half of 2022. We are doing a lot of different things to see if we can bring another product and get more product to fulfill demand as quickly as possible. But maybe I'll turn it to Stanley to give a little bit more comment on that.

Yes. Thank you, Steven. Jason, we are talking about traditional equipment in the United States, chairs, units, lights. All the other equipment is readily available and chairs, units and lights are available outside of the United States. So we're dealing with a particular situation where a significant manufacturer of ours exited the chairs, units and lights market.

Other manufacturers have scaled up their capacity. This also happened simultaneously with an increase in demand for equipment, traditional equipment, whether it's a direct result of our gaining market share or actually practitioners and/or practitioners investing in their practice. This business will not be lost.

Coincidentally, there is a delay in construction. I think this is a general economy issue. So even if we had the equipment, there would be several practices, quite a few that would not be ready to take them. So I don't think this is a need to add additional chairs, units and lights manufacturers to our mix. We're very happy with the major manufacturers that supply us with these products here.

It's not an international -- or non-U.S. issue where the manufacturers in general are providing us with product. And it certainly doesn't impact products like imaging, digital equipment, et cetera. There, we're experiencing a steady flow of product. Perhaps we can't get everything we want right away, but we're not talking about significant delays.

So in general, we are happy with our manufacturers of equipment. We don't have our own private brand equipment line. We do not intend to have that for the large equipment. And so we are happy that our major manufacturers will supply us with the equipment we need.

On the consumable side, there is some dislocation. And there, we are moving some product around. If a manufacturer can't give us what we need, we'll move it to another manufacturer. But overall, equipment will be satisfied, and we expect, even with the increase in demand, for us to be back to normal as we're hearing -- as we've been given this information by manufacturers mid-next year.

So Steven, I think we are 7 minutes over, but we went a little bit on with the prepared remarks, which I apologize to the participants. But let me just end by saying thank you very much for calling in. Thank you for spending a few more minutes with us than was scheduled.

As you can tell from our prepared remarks and from the answers, we remain extremely optimistic about our business, feel there is great momentum across the board, whether it's dental, medical, our specialty businesses, our value-added services in the software arena, the various kinds of services that we sell, that we build for all of these are going well.

Of course, there are always challenges. This is not an easy time. Supply chain disruption is there. There's no doubt about it. And -- but we're working through these issues. Our team is committed. There were lots questions or lots of writings about the stability of our sales force. It's as stable as it's ever been. We are slightly moving the sales force around to more specialty features, featured salespeople.

But generally, we did implement a new compensation program in the U.S. for our dental program -- dental sales people, relatively well received. We did not lose people because of that. There's lots and lots -- it's been written, lots of rumors. Bottom, bottom line, we have 3,500 field sales representatives, consultants around the world, of which well over -- almost 3,000 are in the North America, the other -- the rest are -- sorry, half in North America and half internationally. We are pretty stable in this area. And I'm quite optimistic that our sales organization remains highly motivated.

So thank you very much for participating in this call today. If you have any questions, please reach out to Steven or to Graham in Investor Relations, and I look forward to speaking to everybody when we report our fourth quarter numbers. Thank you.

Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect.