Henry Schein, Inc. Price & Performance (HSIC)

We believe the non GAAP financial measures provide investors with useful supplemental information about the financial performance of the business. Enable the comparison of financial results between periods where certain items may vary independently of business performance and allow for greater transparency with respect to key metrics used by management in operating our business. These non GAAP financial measures are presented solely for informational and comparative purposes, and should not be regarded a replacement for corresponding GAAP measures. Reconciliations between GAAP and non GAAP measures are included in Exhibit B of today's press and can be found in the financials and the financials and filings section of our Investor Relations website under the supplemental information heading. And in our quarterly earnings presentation also posted in our Investor Relations Relations website. [indiscernible] content of this conference call contains time sensitive information that is accurate only as of the date of the live broadcast, 02/25/2025. ReShine undertakes no obligation to revise or update any forward looking statements to reflect events or circumstances after the date of this call. Lastly, during today's Q and A session, And with that, I'd like to turn the call over to Stanley Bergman. Thank you, Greg.

Morning, everyone. Thank you for joining us this morning. I hope that the new time is appreciated by analysts and investors and if not, you would like to go back to a later time, please be in touch with Graham. And we will take your thoughts into account The financial results and guidance being provided today are consistent with the preliminary financial results and guidance provided on January 29. Our fourth quarter financial results reflect relatively stable dental and medical end markets We continue to make progress as we sunset our 2022 to 2024 Bolt Plus Once which is now completed. Our key goal of and the major target in the plan of '20 by 2024, generating 40% of our worldwide operating from high growth, high margin businesses And let me remind our investors, there's another 10% or so of our profits that are coming from our own brands. So well over half of our profits are today coming from high growth, high margin and own brand products. We have confidence in the I underlying fundamentals of our business and look forward to advancing the opportunities contained in our updated 25 to '27 Bow plus one strategic plan. KKR announced its investment to become our largest non index shareholder recognized as they recognize the potential We expect 2025 to be the base year from which to grow and achieve our previously provided long term goal of high single digit to low double digit cyber incident now, in the rear mirror.

As part of the launch of the updated twenty five seven hundred and seven plus one strategic plan, we have simplified our organizational structure and appointed Andrea Albertini to have responsibility for our global distribution and value added services group, as well as our global technology group Global Distribution and Value Added Services Group includes distribution to the global dental and medical markets of national brand and corporate brand merchandise as well as equipment and related technical services This group also includes value added service such as practice transitions, continuing education consulting, financial and other services The Global Technology Group includes development, marketing [indiscernible] of practice management software, e services And other products and related services. We also appointed Tom Pope to lead our global specialty products group. Which includes manufacturing, marketing, sales of dental implant and biomaterial products, endodontic, orthodontic, and orthopedic products and other health care related products and services as well as management of our corporate brand offering, which is essentially distributed through our distribution group. We expect that these complementary businesses will drive growth by leveraging our current product portfolio across our entire customer base providing new products and services to our customers and growing our e commerce I think the relationship between each of our groups and the driving of synergies will of course grow sales We are also today announcing A change to our portable segments.

This was also requested by investors during our investor survey some time ago, and have now prepared financial statements in accordance with these reports on the segments and are aligned with our management reporting and provide more meaningful information to investors on the business performance. Connor will detail the performance of each of these three groups, in his prepared remarks. Will continue to provide information on our high growth high margin products and services but these are now included in each of our reportable segments. And which and of course, it's a key metric for us to drive high growth and high margin profits sales and profits, very important metric.

For our 2025 to twenty twenty seven strategic plan We'll provide you with separate data on that. Now let's turn to review of our key Let me start by reporting on the global distribution and value added service During the fourth quarter, we continued to see relatively stable patient traffic Market growth for dental and medical products continue to be below the long term guidance range we provided at our Investor Day. Partially as a result of customer migration to value price products. Now if we look specifically at The U. S. Dental merchandise growth, which was strong excluding sales of PPE, personal protective equipment, and impacted by a low prior year comparable offset by the mid week timing of Christmas. Ron again will give you specifics as we made in the call. On The U. S. Dental equipment sales, which increased double digit and benefited from deferral last year of some sales in the fourth quarter of 'twenty three into the first quarter of 'twenty four as a result of the cyber incident. We achieved strong growth in traditional equipment and parts and technical service, Digital equipment sales also increased with unit growth quite good offsetting [indiscernible] On The U. S. Medical business results reflect a late start of the flu season and lower sales of vaccines PPE and COVID tests.

Our Homa Solutions business performed particularly well during the fourth quarter In January, we strengthened the business as we completed the tuck in acquisition of Excentis, This is adding to our offering of continuous glucose monitors [indiscernible] they were quite bullish about. Now we've increased the annual run rate in this OPEAR solutions business that we entered a couple of years ago. To approximately 400,000,000 significant amount of that time. $400,000,000 coming from internal growth Let's take a look now at our international dental merchandise sales. Which grew strongly with good growth in Canada and Canada now is included in the international [indiscernible] Dental Group strong growth in Canada, Europe, Brazil, slightly softer growth in Australia, New Zealand and Asia, International equipment sales growth was solid. With stronger growth in traditional equipment compared to digital equipment [indiscernible] Guys, Units, But Digital Was Impacted By Pricing. All Similar To The U. S. A global trend. But overall, our equipment business was quite good this quarter. Right. Now let's turn to a review of the global which had solid growth in dental implants, biomaterials and endodontics. The core businesses in this group did well. Our new entry into the orthopedics arena last year [indiscernible] Well, we did have some orthopedic products before, but the significant investment we made last year also performed well.

This offset this growth was offset by a decrease in the orthodontic sales and we're addressing that through restructuring largely a result of a product, an important product going on patent. We have a new product coming Actually, we have it in place now and it's gaining some traction.

In the orthodontics field, Implants and biomaterial sales in Europe continue to be [indiscernible] Especially in the DUC region, that's the German speaking region, [indiscernible] continue to grow well While the launch of [indiscernible] pro conical implants in The U. S. Is proceeding well The initial sales are largely coming product conversions with existing customers [indiscernible] resulting in modest incremental sales. But we expect the paper proclonic pro conical implants to be a way to generate business from new customers in our implant business.

Overall, our sales of dental implants in the value segment posted very The SI Ed product line posted solid double digit growth in Brazil roll out the brand across The U. S. To serve the value segment in the market. Our endodontic sales growth was strong as a result of our expanded through our U. S. Distribution sales channel of the Edge product offering as well as some new product introductions. A little bit more on the Ortho orthopedic business. Which continues to perform well including our TriMed acquisition which is complementary to our medical focus on ASCs and specialty customers new products in both upper and lower extremities as well as good momentum with a new dedicated sales team in foot and ankle Sales growth.

So this whole area of specialty is working well for us. We will deal with the orthodontic Challenge. But overall, take that out. The performance is quite good. Now if you look at the technology group, while overall sales growth was low, we had strong operating growth in the business. Sales continued to perform well in cloud based practice software, That's it. A management practice management software and revenue cycle management also did quite well partially offset by the sunsetting of certain brands. The whole idea here is to towards common brands for each type of application We lose a little bit of business along the way. But we can provide better service and of course greater margins We now have over 9,000 customers subscribed to Dentrix as Ascend and Intelli with year on year growth of approximately 6.5% It's very important to understand that this is a shift from an on prem sale to a SaaS model which creates short term headwinds on the revenue side which is outweighed by longer term benefits from higher recurring subscription revenues This model is working quite well Cost efficiencies in the business are there that [indiscernible] [indiscernible] as we merge brands and this is driving technology operating margin up This trend we expect to continue.

Now let me turn the call over to Ron to review our fourth financial results and our 2025 guidance. Ron, please.

Thank you, Stanley, and good morning, everyone.

As Stanley mentioned, we are also today announcing a change to our reportable segments align with management reporting and provide more meaningful information for investors on the business.

The results being reported today reflect this change in a recast of prior comparative segment information has been provided in Exhibit D of today's press release.

Turning to our fourth quarter sales results, I will provide detail on total sales total sales growth as well as LCI sales growth which is internally generated sales in local currencies compared with the prior year and excludes acquisitions. Global sales were $3,200,000,000 with sales growth of 5.8% compared to the fourth quarter of twenty twenty three. This includes 0.7% growth from acquisitions and a 0.4% decrease attributable to foreign currency exchange. Please note that sales in the fourth quarter of twenty twenty three were negatively impacted by the cyber LCI sales increased 5.5% for the quarter or six when excluding lower PPE sales and clothing test kits. Our GAAP operating margin for the fourth quarter of twenty twenty four was 4.8 a three fifty eight basis point improvement compared with the prior year GAAP operating margin. On a non GAAP basis, operating margin for the fourth quarter was 7.4 a two sixty basis point improvement compared with the prior year non GAAP operating margin. In the prior year, both the GAAP and non GAAP operating margins negatively impacted by the cybersecurity incident. In the fourth quarter of twenty twenty, four, our operating margin benefited from lower operating expenses year over year as we as as we are starting to realize cost savings from our restructuring initiatives.

We also continue to experience year over year gross margin primarily as a result of acquisitions we have made to advance our Bold Plus One strategy. For the full year, we achieved 41% of our total operating income, high growth high margin businesses. Fourth quarter twenty twenty four GAAP net income was $94,000,000 or $0.74 per diluted share This compares with prior year GAAP net income of $18,000,000 or $0.13 per diluted share. Fourth quarter twenty twenty four non GAAP net income $149,000,000 or $1.19 per diluted share. This compares with prior year non GAAP net income $86,000,000 or $0.66 per diluted share.

The foreign currency exchange impact on our fourth quarter diluted EPS was unfavorable by approximately $0.01 versus the [indiscernible] Adjusted EBITDA for the fourth quarter of twenty twenty four was $270,000,000 compared to fourth quarter of twenty twenty three adjusted EBITDA of $172 Turning to our fourth quarter sales results. We are updating the breakdown of sales as detailed in Exhibit A of today's press release to reflect the updated reportable segments. As well as other internal management responsibilities. Of note, we are now reporting U. S. Distribution sales instead of North America distribution sales, This means Canada is now being reported as part of international. As a point of reference, Canada has approximately $400,000,000 of annual revenues. Approximately two thirds of those revenues are merchandise sales as equipment sales. Global distribution and value added services Group sales were $2,700,000,000 with sales growth of 5.9 Sales were positively impacted by a soft comparison to the prior year. Excluding PPE and COVID test kits, LCI sales growth was 7.3%. Our U. S. Versus the prior year, with LCI growth in dental merchandise of 4.8% or 6.5% growth when excluding PPE products [indiscernible] equipment OCI's sales growth of 10%. U. S. Equipment sales growth was driven by both traditional and digital equipment, with digital equipment unit growth offsetting some pricing declines.

U. S. Medical distribution LCI sales grew 4.5% compared to Q4 of twenty twenty Excluding sales of PPE products in COVID test kits, LCI sales grew 7.3% Sales of point of care diagnostics and back by the timing of the flu season.

Our Home Solutions business had another strong quarter growing 8% year over year. Our international dental distribution LCI sales grew 7.3% versus the prior year. With LCI growth in dental merchandise of 7.9% or 8% growth excluding PPE products, And equipment LCI's LCI sales growth was 6%. Finally, global value added services sales grew 8.1% versus the prior year, with an LCI sales decrease of 0.7%. We achieved strong sales growth in eAssist and financial services, offset by lower sales at large practice sales as a result of the timing of closing of some practice transition services sales Turning to the Global Specialty Products Group, which includes our dental specialty products, orthopedic, and other products. Sales were $368,000,000 with sales growth of 7.2% including LCI growth of 5%. This segment includes the orthodontic business, which is being reorganized for future profitable growth It also includes certain expenses relating to managing our own brands that support sales in the distribution business and provide a headwind to the segment's operating margin. Global Technology Group sales during the fourth quarter were $160,000,000 with total sales growth of 2.4% and LCI sales growth of 2.1%.

This was driven by revenue cycle management, and practice management software. With double digit growth in Ascend, and internationally led by our Dentali cloud based practice management solution offset by lower revenues of certain patient experience modules and as Stan mentioned, a headwind to revenue growth as a result of the movement a SaaS model. Restructuring expenses in the fourth quarter were $37,000,000 or $0.23 per diluted share. These expenses mainly relate to severance benefits and costs related to exiting facilities.

Our restructuring activities in the third and fourth quarters are estimated [indiscernible] over $80,000,000 in annual run rate savings. We continue to expect savings from this plan to be $75,000,000 to $100,000,000 of aggregate annual run rate savings by the end of twenty twenty five.

Our fourth quarter GAAP results include $20,000,000 in pre tax proceeds as part of our cyber insurance claim. Which are excluded from our non GAAP results. As of the end of the year, we collected approximately $40,000,000 All items excluded from our fourth quarter non GAAP financial results for 2024 and 2023 are detailed in Exhibit B of today's press release. A reconciliation of GAAP to non GAAP results is also available in our quarterly earnings presentation on our website. Regarding share repurchases, we repurchased approximately 1,100,000.0 shares of common stock in the open market during the fourth quarter at an average price of $71.35 per share for a total of $75,000,000 For the full year, we invested $385,000,000 to repurchase 5,400,000.0 shares. At fiscal year end, we had approximately $380,000,000 authorized and [indiscernible] future stock repurchases. [indiscernible] additional $500,000,000 of share repurchase was authorized by our Board of Directors on 01/27/2025, including a commitment to repurchase $2.50 $50,000,000 in shares under an authorized accelerated share repurchase program. Turning to our cash flow.

We have strong operating cash flow of $2.00 $4,000,000 for the quarter. Which compares with operating cash flow of negative $32,000,000 last year. Operating cash flow for the full year in 2024 was $848,000,000 which is $348,000,000 more in 2023. Our strong operating cash flow for the quarter and the year was driven by lower working particularly lower customer receivables which we've been focused on throughout the year. Turning to our 2025 financial guidance. At this time, we are not able to provide without reasonable effort an estimate of restructuring costs of with the new restructuring plan for 2025. Although we expect this to primarily include severance pay and facility related Therefore, we are not providing GAAP guidance. Our 2025 guidance is for continuing our current continuing operations as well as acquisitions that have closed and does not include the impact of restructuring and integration expenses item described in our press release. Guidance assume modest improvement in the dental and medical markets is supported by strategic initiatives outlined in our strategic plan and recent acquisitions as well as a positive contribution from our restructuring plan. This is partially offset by investments in technology, and a return to historical levels of incentive compensation.

We also assume that foreign currency exchange rates remain generally consistent with 2024 levels. Our 2025 total sales growth is 2020 For 2025, we expect non GAAP diluted EPS attributable to Henry Schein, Inc. To be in the range of $4.8 4.9 which reflects growth of 1% to 4% compared with 2020 of $4.74 per share. 2025 non GAAP diluted EPS is expected to be more heavily weighted to the second half of the year. This guidance assumes there is no net impact from the issuance of new shares to KKR which is expected to be offset by an accelerated share repurchase program. It also assumes an estimated non GAAP effective tax rate of 25%. Our 2025 adjusted EBITDA is expected to grow in the mid single digits versus 2024 adjusted EBITDA of $1,100,000,000 We expect adjusted EBITDA to grow faster than non GAAP diluted EPS due to higher depreciation expense primarily related to the global e commerce platform. With that, I'll now turn the call back to Stan.

Thank you, Ron. Operator, we are ready to respond to questions.

Thank you. We'll now be conducting a question and answer session. One moment please for our first question. Our first question today comes from the line of Jay Please proceed with your question. [indiscernible] Hey, good morning everyone. Thanks for all the detail here in the recast financials. I appreciate that's not an easy undertaking. I want to start with if I could, revenue guidance and just some of the underlying assumptions you have there. You're calling for 2% to 4% reported revenue growth as it's based in part upon improvement in both dental and medical end markets. Versus last year. Just I understand why your business can continue to outperform the broader market with your investments, the initiatives you have in motion, but it does seem like your market view is slightly more optimistic than what we've heard from some of your peers. So is there something you're seeing today that gives you kind of call it better relative comfort on the market outlook? And then if you're able, can you give us a sense of how you're forecasting organic growth for each of your new really just in the context of that company wide guide.

Yes, sure Jason. I think that we do see modest growth in the markets, right?

If you think back to the Investor Day two years ago, we said then we thought core dental could grow 2% to 4% I think we're still looking at market but there's market growth We think the 2% could be challenging. So it's probably somewhere that 0% to two Price appreciation is also limited So there's not a lot of price appreciation in our revenue guidance. And you mentioned too kind of inorganic versus organic. Our M and A activity was a little lower than most years in 2024. So we're not getting there's a very limited amount of acquisition growth that overall revenue growth as well.

Okay. Ron, I guess, in the second part of that, any breakdown on or how you want to thinking about under your new reporting structure the global distribution, U. S. Versus international thoughts within there. Global specialty, global tech. And then maybe just as a follow-up, you on the bottom line, you seem pretty confident just in the outlook of getting back to high single digit growth once we get past '25 Is that a function of 25 investments tapering in 2026? Or is it a belief we're going to see better natural leverage coming through the P and L?

I think it's a combination of the latter part of your question it's a combination of that, right? It's the it's the ongoing benefits we would get from some of the restructuring we're doing at some point some recovery in markets and perhaps some better price appreciation going forward as well. In terms of going back to your question on the reportable segments, I think that within the Within each of those, we are looking at kind of market growth that that continues to be lower than we would normally anticipate and lower than what we communicated on Investor Day two years ago. So for example, I think we said that medical growth rates were in the 4% to 7%. We think that right now we expect that market growth to still be slightly below that 4%. Dental specialties were in that 5% to 8% range. So there are pockets of dental specialties that could be in that range, but there's also especially on the what I'll call kind of the sub premium side it's we still think it's lower than 5%. So there are some aspects of the market that are going to be lower than what those market growth rate scores that we we assumed a couple of years ago.

All right. Very helpful. Thank you.

Our next questions are from the line of Jeff Johnson with Baird. Please proceed with your questions.

Thank you. Good morning, guys. Know we're two months into 2025, but I just want to go back to the fourth quarter.

For one second Henry, if I could. I mean, when you pre released last month the $3,200,000,000 in revenue for 4Q, we frankly had hoped that was a rounded down numbered and up in today's release that was a rounded up number.

When I look at just kind of relative to your third quarter updated guidance that you provided on the third quarter, sorry, for 2024, you fell short in the fourth quarter by 500 basis points in the fourth quarter on a revenue basis at the low end of the guidance 700 plus basis points at the midpoint. So what happened in fourth quarter, I guess, that drove those revenues 500 basis points below the low end of the guidance, 700 basis points below the midpoint of the guidance, just relative to a guidance that was issued a month into the fourth quarter.

Sure, Jeff. I'll address your rounding question I mean, we did say $3,200,000 I think revenues of 3.191 So you're right, we rounded up $9,000,000 So but we did round that to 3.2. In terms of the of the lower revenues than expected As we mentioned, we did have it was relatively flat patient traffic in the quarter. In the quarter and also a really kind of a slow end of the quarter given the timing of Chris which we underestimated the impact of that. So the quarter did end much more slowly than when what we may have anticipated. On the medical side, the timing of the flu season resulted in much lower medical revenues than we had than we had anticipated as well.

Okay. And if I look at the dental numbers and a little bit hard to compare to our old models, obviously, but you gave us some historical restatements to help. But that U. S. Number up mid single digits on consumer on a negative 8% to 10% comp depending on how we cut the numbers. So on a stack basis, still negative. We talked about the market being pretty flat and you guys have recovered a decent amount of your cyber share loss. I mean talk to me maybe just about share dynamics in the fourth quarter and share dynamics expected in 2025? Do you feel like you're holding your own? Do you feel like you're maintaining that share? Are you losing share at this point just help me understand kind of that stat comp still negative on the consumables side in the fourth quarter? Thank you.

Yes. In the fourth quarter, we did see share stabilize. We had been getting a little bit of additional market share quarter to quarter sequentially over the course of '24 Our Q4 share was relatively flat to our Q3 share.

There could be a number of reasons for that. But we're so confident we can continue to get some market share as we get into 2020. '5 as well.

Jeff, let me just add that moving to the segment reporting, and changing the way we've reported in the past is just not easy to comprehend. We provided a lot of data in the exhibits There's no way these changes could be understood an hour and a half. So I'm not sure if there was a better way to do this This is the best way we thought to providing this information But I think if analysts yourself have a few more hours to look at the schedules, that we provided, it will make a lot more sense. But this is a one time move in twenty nine years that we as a public company from one way of describing our business to another the description follows reporting internal management reporting, which is required by the SEC. And there's a lot of information that is contained in these attachments and we'd be happy to clarify We do understand specifically for yourself and for others that have covered us for many, many years that this is a significant change and it's very difficult to comprehend all the nuances in an hour and a half [indiscernible] Eight a. M. New segment reporting all thrown together But we're available to provide more information but I think the attachments will be Helpful.

But you will need time to analyze them. Understood. Thank you, Stanislaus. The next question is from the line of Alan Lutz with Bank of America.

Please proceed with your questions.

Good morning. Thanks for taking the questions and thank you, Paul.

For all the updates so far. I want to go to Slide eight in the presentation. Specialty operating margins are up pretty nicely year over year, but there may be a little bit below where we thought they would be. Can you talk a little bit about the opportunity to raise those margins over time?

So just on the specialty side, The specialty margins this is the reporting segment As it relates to reporting, our management So within that segment, there are some lower margin businesses, for example, our Pro Repair handpiece business. It's good. But it's about [indiscernible] of the margin compared to the implant business and our endodontic We had a challenge with the author business which we are addressing And that segment also includes expenses for management of our corporate brand products would essentially distribute it through our distribution business. So it's not a pure margin for the implants and Endo it includes other components as well. But it does follow the requirements of all the businesses and all the functions reporting to Tom Popeak. So we can provide further information We will over time but this is the reporting as it relates to management reporting rather than products that are implants, bone regeneration And endodontics. Yes, we do expect the gross operating margin in this segment to grow over time That is a key focus. But it's not a pure number relating to implants, bone regeneration, and endodontics. And affect orthopedics. Which have higher margins.

Thanks, Stanley. And then one for Ron. Is there any way frame how fast dental implants grew in 4Q then as we look to 2025, a large Medicare Advantage payers talked covering implants in 2025. Wondering if there's any change to growth you're seeing through the first two months of the year what's embedded in the guide for North American implant growth.

Yes. With reference to implant growth, we're still seeing relatively healthy growth in in Europe, more so than in The U. S. In The U. S, we're still getting some value implant growth more so than [indiscernible] And U. S. Is a slightly tougher market right now with them But in Europe, our our HamLog subsidiary that focuses primarily in Germany, Austria are really in that kind of low to mid single digit growth range, which we're pleased with because it's a difficult market.

Thank you. And there was a second part of your question, Al, I'm sorry. It was Just around 2025, a large MA payer stopped covering implants, wondering if that had any impact through the first couple months of the year? No.

I mean, it's not a what I would call a significant part of the kind of end market for us. So we have an We haven't seen anything that we would point to that would what we would be able to directly attribute that to impact on the business in Great. Thanks, Ron.

The next questions are from the line of John Stansell with JPMorgan. Please proceed with your questions.

Great. Thanks for taking my question. I want to go back to the KKR agreement. I think in the agreement, there's commentary around a value creation plan. Using KKR Capstone. Can you just speak to what areas they'll be looking at? Is this purely in an advisory capacity? And then maybe a little bit more broadly, are there things that KKR is pretty extensive dental portfolio can do to work together maybe that haven't happened previously? Yes. So as it relates to KKR, They're not on the board yet. That's to clear the hardscott Rudina before they can get deeply involved We will of course engage with their team are a number of areas that they feel they can help us with that we really believe they can. But Our focus in the areas our focus to our strategic plan and the areas that KKR has capabilities aligned very nicely but we can't really get to work in any significant or meaningful way until the filing is cleared. We're still in the preliminary stage of the filing. We haven't received any further commentary So we're hopeful that we'll clear the and then we can get to work with [indiscernible] But they're not on the board yet.

And they cannot really get engaged I don't expect much of the relationship with one of our large customers it is definitely a Chinese war between the two. Sides and different people involved.

Great. And then just one maybe for Ron. You talked about that share gain versus kind of the beginning of twenty twenty four exiting 2024. I think about that and potentially the flu season pushing into the first quarter, seems like you would think that growth might be weighted more to the 25% versus the back half at the top line. Can you help me just balance that versus the back half weighting of just EPS by what the factors are that kind of might create that dichotomy?

Well, it does assume kind of ongoing regain some market share over the course of the year. And also [indiscernible] as we get some greater momentum on the implant side, for example, with the taper [indiscernible] and some of the newer products that launched in the back half of 2024 that would give us momentum into 2025.

And then that spreads just referenced to the top line. And then bottom line is this ongoing reduction in expenses as we execute on the restructuring plan. That would get us to some to more I would expect more earnings growth in the back half of the year than in the first half of the year.

Keep in mind too one other thing John has said.

And we referenced this on the call, we will have a difficulty equipment comp in the first quarter of of twenty twenty four I'm sorry, 2025 As last year, the first quarter benefited from some deferral of equipment installations coming off the cybersecurity incident. So when we report Q1 and talk about equipment, we'll also be looking at it as we're looking at it internally, we kind of look at that a six month period Q4 to Q1, how is that business doing versus last year. Given that disruption to the timing last year on the equipment installation as well.

Great. Thanks.

Our next questions are from the line of John Block with Stifel.

Please proceed with your question.

Hey guys, good morning.

Ron, I think this one is probably for you. Just the 2025 EPS growth at a high level basically amount of revenue growth I just think about like mix shift, debt pay downs, stock repo, ongoing restructuring, maybe some past accretion targets from those deals that were done in prior quarters. Can you talk to why we're not seeing some slightly higher leverage on the bottom line versus the top? Even in a year where there's a lot of moving parts or what you seem to be alluding to as like a rebasing type year There's a couple of things and we've kind of touched on some of challenges on the revenue side. I would say two things that are specific We have talked about some ongoing investment in ITs specifically in our global e commerce platform, which we'll be launching in The U. S. [indiscernible] in this summer, but we have begun depreciating that system because we did launch it on a test basis in Europe late in 2024. So we are going to get a full year of depreciation on that. And then also as we referenced in the call kind of a return to what we'll call hopefully more normal incentive compensation expense as we the last couple of years between cyber and the softer markets have not had what I consider to be normal expense level there.

So there are some internal headwinds related to this Some of this is offset by some of the cost savings we're achieving. But there are some top line challenges out there still that that I touched on in referencing the revenue guidance.

Okay. Thanks. And maybe just to shift gears. Stanley, in the past, I think you've alluded to the need for call it accelerating innovation from partners or investments in new product Henry we are shortly coming up on IDS next month. So I'm just curious on how you see the pipeline from some of your partners and do you see some of that innovation call it like incremental innovation working its way through, nothing's overnight, but that might give you more comp [indiscernible] Yes, Rob. Thank you. Very important question [indiscernible] some marginal incremental advancements at IDS. I think particularly in the digital space and the digital materials. And I think on the consumables, the basic consumables, hopefully we'll see some advances. But at the moment, Not much. There are, of course, always manufacturers that are coming out with something [indiscernible] but I don't think very much And on the traditional side, not very much either. The imaging But the digital side, yes, And I think that may lead to more movement towards a second tier potentially and maybe corporate brand type products.

Of course, I'm not talking about the specialty side, It continues to be good innovation, owning on the implant side, Little bit on the endodontic. We'll see what happens next month. Don't expect that these big surprises.

Our next question comes from the line of Kevin Caliendo with UBS. Please proceed with your questions. Ron, I just want to dive a little bit more into the margin. Question. I appreciate you saying you have $75,000,000 to $100,000,000 of savings. There's offset from IT, offsets from the incentive program normalizing again next year. I guess if you're talking about flat operating margins, is that completely offsetting the $75,000,000 to $100,000,000 in savings And like if we were to break that apart, What's happening with the margins on the segments ex these sort of cost savings against the one timers that our company specific that are offsets. I'm just trying to understand what's driving the margin, specifically either segment or cost savings against one timers. Certainly, Kevin. I'll try to I think I understand your question. For example, in distribution and something we've touched on, you're seeing some movement to to lower priced items While those gross margins can be can be beneficial from an operating margin standpoint. We were seeing relatively relative stability as it relates to that shift to merchandise. We are seeing some we've mentioned some of the pricing pressure on digital equipment that can put a little bit of pressure on margins as well.

So those are more kind of market phenomenon that we're trying to manage. You mentioned some of the company specific items that that we are investing in. And those are items quite frankly that were long term investment plans Regardless if we were doing the restructuring or not. So some of that is is you could argue is a reinvestment of the restructuring savings and some of it is if we were going to perhaps this falls out. Once you get past distribution, you get into specialty, we do see a little more of a shift for example, at implants to value implants versus premium that has a slightly different margin profile We are working to improve the orthodontic business, which right now is creating a little bit of a drag for us. On that operating margin. So there's a couple of things within specialty as well. That we believe once we kind of get beyond 25% and get to a more normal run rate with those businesses, we'll begin to see operating margin expansion. Contribution from that portion of the business. And in technology, the technology team has done a very good job of of reducing costs, of consolidating some brands on the patient experience side, We saw some good operating margin expansion in technology in the back half of twenty twenty four.

Now the challenge will be to try to maintain that type of operating margin going Great. And if I can ask a follow-up to Stan. When you partnered with KKR, in this way, I know you have a longstanding relationship with Henry Schein One Henry.

Did you view them as a strategic partner or did you think that they would come in more and help operationally? Like, take me through what you think The benefits you're going to get from having a stronger relationship with KKR as going forward? Yes.

It's good. I think there will be a very strong strategic partner They do care about the medical space, but particularly the dental space.

I think they're interested in advancing their platform on consumables equipment, software, synergy between all of those specialty area, they have very good capabilities with the Capstone area, So I think there are a lot of opportunities. And the good news is the areas they see as opportunities align with the areas that we have identified in our 2022 to 2024 strategic plan that have now magnified in the '25 to '27 strategic plan. The high growth, high margin opportunities the opportunities relating to advances in efficiency on our distribution side, driving customer satisfaction, the areas of leveraging between our businesses and of course the technology area, the whole bold area are areas that they align. They've And in two, we're very fortunate directors who had a lot of experience in the markets that we serve. We've added a third new Director who has very good experience in the device field So I think They will add a lot The people that we've met are people that really are interested in our business and the long term Players in this field this is not buying the stock driving it up and exiting, this seems like a long term play Doesn't seem that's what the assurances have given.

So we're very, very excited with the opportunity to partner with Tektar in advancing our Bold plus one strategic plan.

Thank you very much.

The next question is from the line of Brandon Vasquez with William Blair.

Guys. Thanks for taking the question. Two quick ones that are a little bit clarification. One, when you were talking, Ron, about sales structure normalizing in 2025, just to be clear, can you clarify that there is there a change in the sales incentives or the structure of the sales incentive packaging? Or is it simply a normalization of what you think comp will be because things are normalizing? And then the other clarification question is simply around tariffs. With the Trump admin saying now again that the Mexico and Canada tariffs might be going on soon, And then, of course, China has gone on. Just talk to us about what is and isn't included Within the $25,000,000 guidance that's been given.

Yes. Just to clarify, Brandon, first on the compensation question you have, it was with reference really to management incentive compensation, not not on the sales side. We have made we've also made some changes in the in the sales commission structure, which we think can help us drive growth and improve perhaps improve margins going forward. I was referring to specifically was when you look at stock based compensation and other related expenses going forward, we would to the extent we can get the business back to more normal growth rates, we can start to expect an increase in those expenses and that's reflected here. Regarding tariffs, we have [indiscernible] like for example with China, The one product category that is most affected by China historically would be [indiscernible] And over the course of 'twenty four, we were able to shift a lot of our supply chain to other Southeast Asian countries, Vietnam, Malaysia as an example. We continue to have supplier relationships in China. We can have them supply our European businesses without having to manage the tariff side of it. Beyond that, in Canada, Canada is a large producer of anesthetics for the dental industry.

To the extent that there's an increase in cost of anesthetics, it won't only affect us, it'll affect everybody because that's where most anesthetic dental anesthetics come from. And regarding Mexico, we rely very little on on supply from Mexico. I think that that's those are really the areas of focus right now that we believe we're well positioned to manage through any situation that would arise as it relates [indiscernible] Thank you. And maybe one big higher bigger picture I'm not sure we've ever gotten a stat like this from you before, but maybe can you talk about guys obviously have your own product portfolio of Henry Schein branded products.

What percentage of customer needs do you guys think you can fulfill with your current portfolio [indiscernible] portfolio actually get over the coming years and how much line of sight do you have in your current customer accounts to grow that business? [indiscernible] So of course, we are committed to our brand and [indiscernible] It's a hybrid model. [indiscernible] the brand and manufacturers have an offering that provides the price that satisfies the pricing needs of our customers We will work with the brand and manufacturers. But essentially, For most products on the consumable side, we do have an alternative, whether it's as the brand is as well recognized or not that's a different story. But I think the Henry Schein corporate brand has moved over the last five or six years to much more of a versus a white box But essentially, on the dental side, we have most of the products, if not almost all, We do not have private brand dental traditional [indiscernible] I'm not sure there's a need for that. We have adequate sources of supply. And in that area, manufacturers are working with us to meet the value needs of our customers, whether they are DSOs, or smaller practices, On the medical side, a lot of we have a lot of the products, not everything.

And certainly, we don't have our own brand of generic drugs. [indiscernible] we do have all products that purchased by medical customers and are available generically available under a generic brand.

But we don't have our own brand of generics most of our pharmaceuticals anyway are injectables and vaccines For vaccines, the big one flu there's adequate supply not exactly generic, but equivalent products and on injectables generally, where something is available, So generic, we have access to that. At very competitive pricing. So we have complete portfolio as needed. We're always adding new products of course. But we're always improving on our brand image to match the quality of the product. But generally, our corporate brand has very good potential Having said that, we are always working with our branded manufacturers and this hybrid model works well and we are expecting to increase our gross profit margin because of specialty products, but also because of our own brand and because of the support from certain of our manufacturers, national brand manufacturers So we do expect gross profit to increase this year and in the future.

Thank you. We have time for one last question coming from the line of Elizabeth Anderson with Evercore ISI. Please proceed with your questions.

Hi, guys. Good morning and thanks so much for the question.

I had maybe two follow-up sentiments. One, I appreciate all your comments on the tariff guidance. Or tariff impact or potential tariff impact. Can you just remind us, maybe I missed this, like what exactly you would included in the guidance or whether you just think it's sort of incremental, but not necessarily something that you're was worried about given some of the sourcing changes? And then two, maybe Stanley, can you talk about the transition within the orthodontic market? Are you I appreciate what you said was sort of temporary in nature, but I just want to make sure I understand the dynamics as that sort of patent comes off and you re ramp both in the broader orthodontics business and also the clear aligner business? Thank you.

Sure. Elizabeth, on the tariffs essentially, there is no we're not contemplating any impact to our bottom line. A big imported product offering is the gloves And yes, there's some nitrile gloves that we have to [indiscernible] in tariff countries I think everybody is to some extent reliant on that. But other than that, we've been able to shift our product needs around we should acquire on gloves, for example, adequate inventory from Malaysia not aware of any tariff implications on Malaysia And as it relates to China, some of the product that we need comes from China, we can use that in Europe.

And satisfy The U. S. Demand elsewhere Not much else We've been moving product around now for a while. We've contemplated this tariff for a while.

Not believe it will impact our bottom line As Ron mentioned, the big one is dental anesthetic from Canada For the moment, we have adequate inventory to get us through for a while. But if there is a tariff on dental anesthetic from Canada it will impact the entire industry because you can't just move dental anesthetic around maybe a little bit more will come from France but a huge percentage will come from [indiscernible] So I don't think from our bottom line point of view, Tariffs are implemented, it will impact sales positive way, but I don't think the bottom line will have will be impacted in any material way or in any way really As it relates to orthodontics, it's a small part of our business. But the infrastructure we had in place for the traditional orthodontics was built for a much larger business We're now to rightsizing [indiscernible] Yes, we lost [indiscernible] on an important product in the orthodontic space So we lost money in that space Operating income in 2024 that has been adjusted as it relates to aligners we make the aligners in The U. S. And in France to our biotech business [indiscernible] synergizing those all aligners will come out of the French factory.

It's actually a very good Alaina but we have been losing money on aligners and we expect to turn this all around in 2024.

By the time we get to the third or fourth actually more the fourth quarter start making money again in a very small orthodontic space which has been a drag on our specialty earnings '24. As we get to the I meant to the end of twenty twenty five, think you'll see in profitability in the orthodontic business, but it is small. We did lose some money in 2024.

I think We are at the end now.

Yes, Mr. Berg, I want to turn the floor back over to you for closing comments.

Yes. So thank you everyone for calling in.

Really appreciate it.

I am aware that the movement to the new segment accounting is a bit of a challenge. I don't know of another way. I'm sure it were other ways in which we could have advised our investors office change.

We did alert investors in our last call that we would be doing this.

We did consult with our advisors and do apologize we're hitting our investors with too much new information all at once while at the same time having an early call. So that's number one. Number two is our team are ready to address questions of course, all in compliance with Graham and Susan Ron available I will take calls from any investors too.

I just want to emphasize and maybe it didn't come across clearly, We are quite bullish about the business. I think the business is running well. We have very good management in our segments. Each one of the segments is run by capable [indiscernible] experienced people, not only heading up, not only Andrea and Tom, but the teams underneath them are very, very solid. Both in The United States Dental business in The United States medical business, our Canadian Brazilian business our European business and our Asian businesses. So I think we've got as good a team as anyone else in our industry. I think we are continuing to gain market share. If you peel the onion, maybe there's some areas where we haven't grown market share. This quarter.

Very interesting dynamics as to cutoff when Christmas fell what was moved between twenty three last quarter and twenty four first quarter the comparables these are all areas and I'm hopeful that $25,000,000 will be an easier year to understand and we'll be we're well set up for an outstanding, I think, '26 Review '25, as we've noted a couple of times, as a base year upon which we will return to our corporate model for growth high single digits, low double digits EPS. The cash flow in the business is good.

The investments that we've made to advance our strategic plan are doing well. The big ones are doing extremely well. And our advances on all sides of the strategic plan, the Bold Plus one plan are doing well. You've got a slide in the investor presentation covering the bead build the operational operationalization of our distribution business, the O The leveraging is doing well with lots of opportunity. And we're making very good progress on the digital side.

The gift system that we launched in The UK and Ireland is working quite well in that market and will come to The States later in the [indiscernible] I am quite comfortable that that product will generate much more business It's not doing it now, although right now we do have to recognize that quite well in advancing our clinical workflow with advancing AI in the business We're doing I think the things we should be doing But I do realize from an investor point of view, there's been a lot of change The change started with the COVID up and down [indiscernible] after COVID and as things were settling down, we did have the cyber incident. But we have I believe, fully stabilized the cyber incident, was just at our Medical International sales meeting Our sales organization is ready not only ready, but a going out again getting new business I would say '24 was a year, most of '24 was a year in which we were focused on our existing customers Getting them through the cyber incident retained a lot of most of our customers, if not all, except for some of the episodic customers, we're getting them back doing a lot of work on the whole area of e commerce to attract those customers back.

The episodic that left us, And I would say the business is quite stable today. And the strategic plan that we executed for 'twenty two and 'twenty four will have very good momentum into 'twenty five to 'twenty seven's plan led by, I think, a great team.

So with that in mind, again, sorry about the way in which segment accounting changes came out but I'm not sure there's any good way of really presenting the significant change and having a call right after the press release goes out an hour and a half. But anyway, we will listen to investors. We'll take your ideas very seriously we're open to all dialogue with investors and of course, we're very, very excited about the addition of Teike R to our investor base and the three new board members we have.

So look forward to seeing people at conferences, Ron Graeme, [indiscernible] to some conferences I think next week. And please feel free to reach out to us We will answer your questions also, of course, in compliance with FDA Thank you very much.

This concludes today's teleconference. May disconnect your lines at this time. Thank you for your participation.