HSIC - NASDAQ

Good morning, ladies and gentlemen, and welcome to Henry Schein's First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this call is being recorded. And now, I would like to introduce you to your host for today's call, Graham Stanley, Henry Schein's Vice President of Investor Relations and Strategic Financial Project Officer. Thank you, Graham. Please go ahead.

Thank you, operator, and my thanks to you for joining us to discuss Henry Schein's financial results for the first quarter of 2023. With me on the call today are Stanley Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein; and Ron South, Senior Vice President and Chief Financial Officer. Before we begin, I'd like to state that certain comments made during this call 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 statements. These forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's filings with the Securities and Exchange Commission, and included in the Risk Factors section of those filings. In addition, all comments about the markets we serve, including end market growth rates and market share, are based upon the company's internal analysis and estimates. Today's remarks will include both GAAP and non-GAAP financial results. We believe that non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business, enable the comparison of financial results between periods where certain items may vary independently of business performance and allow for greater transparency with respect to key metrics used by management in operating our business. These non-GAAP financial measures are presented solely for informational and comparative purposes and should not be regarded as a replacement for corresponding GAAP measures. Reconciliations between GAAP and non-GAAP measures are included in Exhibit B of today's press release and can be found in the Financials & Filings section of our Investor Relations website under the Supplemental Information heading. For additional financial information, please refer to our quarterly earnings presentation also posted on our Investor Relations website. The content of this conference call contains time-sensitive information that secrete only as of the date of the live broadcast, May 9, 2023. Henry Schein undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Lastly, during the Q&A session, please limit yourself to a single question and a follow-up. And with that, I'd like to turn the call over to Stanley Bergman.

Thank you, Graham. Good morning, everyone. Thank you for joining us this morning. We are most pleased to report very good financial results for the first quarter of 2023 that are in line with expectations we provided at the beginning of the year, and reflect the good earnings momentum in our underlying core businesses. Market trends stayed consistent with those we discussed during the previous quarter's conference call compared to the fourth quarter of last year, where we saw a high number of flu cases patient traffic to dental offices around the world has recovered and is at or nearing pre-pandemic levels. Patient traffic through the physician practices has also normalized. As we anticipated, our results continued to be impacted by decreasing sales of PPE products and COVID test kits. Within the PPE credit category, the pricing focus was lower. Again, as we discussed, but pricing at this stage has stabilized on a sequential basis. COVID-19 test kits volume was lower. Excluding these product categories, we achieved strong internal growth companywide of 6.3% in local currencies. Our financial results were also adversely impacted by acquisition-related expenses as well as foreign exchange. With respect to acquisitions, our pipeline remains robust. In early April, we closed our acquisition of a majority stake in Biotech Dental a business with a market-leading portfolio of dental implants and clear aligners, and we also recently announced our plans to enter the large Brazilian implant market with the acquisition of S.I.N. Implant System, one of Brazil's leading manufacturers of dental implants and a complement to our successful resilient general dental consumables and equipment business. And we also announced the acquisition of Regional Healthcare Group entering the medical market in Australia and New

Thank you, Stanley, and good morning, everyone. As we begin, I'd like to point out that I will be discussing our results as reported on a GAAP basis and also on a non-GAAP basis. Our first quarter non-GAAP financial results for 2023 and 2022 exclude restructuring costs as well as amortization expense of acquired intangible assets. This is detailed in Exhibit B of today's press release. With respect to sales growth, I will focus on LCI sales growth, which is internally generated sales in local currencies compared to the prior year and excludes acquisitions. First quarter global sales of $3.1 billion reflected an LCI sales decrease of 3.7%. However, when excluding sales of PPE products and COVID-19 test kits, our LCI sales grew 6.3%. This sales growth benefited somewhat from the timing of our fiscal reporting calendar whereby the December 2021 holiday week was included in the first quarter of 2022, but Q1 2023 did not include a holiday week as it fell in the fourth quarter of 2022. In the first quarter of 2023, we sold $149 million in PPE products, a decline of approximately 35% year-over-year and $52 million in COVID-19 test kits, a decline of approximately 80% year-over-year. On a combined basis, PPE and COVID-19 test kits declined approximately 60%. As a reminder, our first quarter sales in both PPE and COVID-19 test kits were especially strong last year. Our GAAP operating margin for the first quarter of 2023 was 5.7%, a 196 basis point decline compared with the prior year GAAP operating margin. Our non-GAAP operating margin for Q1 was 7.7%, a 102 basis point decline compared with the prior year non-GAAP operating margin. This decline was mainly a result of lower gross profit dollars from PPE and COVID-19 test kit sales, which helped to cover our fixed costs as well as higher acquisition-related costs, partially offset by gross margin rate improvement. First quarter 2023 GAAP net income was $121 million or $0.91 per diluted share. This compares with prior year GAAP net income of $181 million or $1.30 per diluted share. Our first quarter 2023 non-GAAP net income was $161 million or $1.21 per diluted share. This compares with prior year non-GAAP net income of $200 million or $1.44 per diluted share. Several factors adversely impacted our GAAP and non-GAAP results this quarter. Specifically, the contribution from PPE products and COVID-19 test kit sales to diluted EPS decreased by an estimated $0.24 per diluted share relative to the prior year period. Acquisition-related costs impacted diluted EPS by $0.04 per diluted share this year compared with approximately $0.015 per diluted share last year. And note that these acquisition costs are operating expenses that we do not add back for non-GAAP reporting purposes. Additionally, foreign current exchange negatively impacted our first quarter diluted EPS by approximately $0.02 versus the first quarter last year. So turning to our first quarter sales results. Global Dental sales were $1.9 billion, and LCI sales increased by 4%. When excluding sales of PPE products, LCI sales growth was 7.4%. Global Dental merchandise LCI sales increased by 4%, but increased by 8.4% when excluding PPE products. We expected strong merchandise sales growth as last year's sales were impacted by the Omicron variant and timing of the reporting calendar, as I previously mentioned. North America dental merchandise sales increased 1.3% and by 6.6% when excluding sales of PPE products. International dental merchandise LCI sales increased by 8.1% or 11% when excluding sales of PPE products with strong sales growth in Central Europe, Australia as well as in Brazil. Global Dental equipment LCI growth was 3.9%. We had strong LCI sales growth for traditional equipment, and this was offset by a decrease in digital equipment LCI sales. Our North America dental equipment LCI sales increased 2.6%. International equipment LCI sales increased by 5.8% and were bolstered by tax incentives in Italy and the UK, which ended this quarter, and in Australia, which are due to expire at the end of the second quarter. Dental Specialty products include implants, bone regeneration materials, orthodontic products and endodontic products. Sales of these products were approximately $233 million in the first quarter with LCI growth of 4.4%. Global technology and value-added services sales during Q1 were $191 million, with LCI growth of 6.5%. Sales were again negatively impacted by a government contract, which expired early in the third quarter of 2022. LCI sales growth was 12.4% when adjusting for this contract. In North America, sales growth was driven by our practice management and revenue cycle management businesses. Growth internationally was driven by our Dentally cloud-based solution. Global Medical sales during the first quarter were $971 million, and LCI sales decreased 17.1% due to lower sales of PPE products and COVID-19 test kits. In North America, excluding sales of PPE products and COVID-19 test kits, LCI sales grew 4.2%, led by strong medical equipment and pharmaceutical sales offset by lower point of care diagnostics revenue. Keep in mind, this is against a difficult comparison as North American medical LCI sales growth, excluding PPE and COVID-19 test kits was approximately 15% in Q1 of 2022, driven by higher office visits related to the Omicron variant. Regarding stock repurchases, we repurchased approximately 1.2 million shares of common stock in the open market during the first quarter buying at an average price of $81.70 per share for a total of $100 million. Turning to our balance sheet and cash flow. We continue to benefit from significant liquidity, providing our businesses with the financial flexibility and stability to execute on our organic growth initiatives and strategic acquisitions, while continuing to return capital to our stockholders. Operating cash flow for the first quarter was $27 million compared with $93 million last year, with the decrease primarily due to lower income from PPE and COVID-19 test kits as well as restructuring expenses incurred in the quarter. Those restructuring expenses in Q1 were $30 million or $0.16 per diluted share and were incurred as part of our previously disclosed restructuring initiative. These expenses mainly relate to severance benefits and costs related to the exit of facilities. We expect to continue to record restructuring charges during the remainder of 2023. Let me conclude my remarks with our 2023 financial guidance. At this time, we are still unable to provide estimates for costs associated with integration and restructuring for 2023. Therefore, we are not providing GAAP guidance. We are updating our guidance for 2023 non-GAAP diluted EPS attributable to Henry Schein to a range of $5.18 to $5.35 per share, reflecting growth of negative 4% to negative 1% compared with our 2022 non-GAAP diluted EPS of $5.38. This guidance now includes $0.05 to $0.10 of estimated dilution for the Biotech Dental acquisition, primarily due to acquisition accounting adjustments for inventory and integration-related expenses. Our outlook for the remainder of the business remains consistent with our prior guidance. Our guidance for 2023 assumes total sales growth of approximately 1% to 3% over 2022, with sales of COVID-19 test kits now expected to decline by approximately 65% to 70% from sales in 2022 as compared to our previous 2023 guidance of a decline of 35% to 40%. Additionally, PPE product sales are expected to decline about 20% to 25%, consistent with our original 2023 guidance. Note that our sales growth guidance reflects one less selling week in 2023 than in 2022. The impact on 2023 non-GAAP diluted EPS from lower sales of PPE products and COVID-19 test kits is still estimated to be $0.35 to $0.40. We expect the impact of the steeper-than-anticipated decrease decreases in COVID-19 test kit sales in 2023 to be offset by slightly higher-than-anticipated gross margins on PPE sales relative to our original guidance. These headwinds are anticipated to be largely offset by earnings momentum in our underlying core businesses, and we expect non-GAAP operating income will grow in the high-single-digit to low double-digit range when excluding the contribution from PPE products and COVID-19 test kit sales and acquisition-related expenses. We expect lower non-GAAP operating margin of 10 to 15 basis points below the 2022 non-GAAP operating margin of 8.2% and this was largely a result of lower PPE products and COVID-19 test kit sales and profits. Our guidance reflects non-GAAP operating margin expansion when excluding income from PPE products and COVID-19 test kit sales and acquisition-related expenses. Our 2023 guidance includes higher interest expense that in 2022 as a result of higher interest rates and higher borrowings along with higher minority interest from our higher growth businesses such as Henry Schein One. We also expect an effective tax rate in the 23% range, assuming no changes in tax legislation. Our guidance for 2023 diluted EPS is for current continuing operations as well as completed acquisitions and does not include the impact of future share repurchases, other announced or potential future acquisitions or integration and restructuring expenses. While the recently closed Biotech Dental acquisition is now reflected within our guidance, our recently announced acquisition of S.I.N. Implant System is not. Guidance also assumes that foreign currency exchange rates are generally consistent with current levels and that end markets remain consistent with current market conditions. To summarize, although we are updating our financial guidance for the year, we are maintaining expectations for the underlying business and continue to anticipate steady growth trends in both dental and medical markets. And we do expect that the second quarter will continue to have some headwinds from PPE and COVID-19 test kits, but we do expect good income growth in the second half of the year as some of the year-over-year comparatives already covered on this call should normalize. With that, I'll now turn the call back to Stanley.

Thank you, Ron. Graham, if we can now open the call to questions. We'll be happy to answer any questions investors may have.

Thank you, sir. We will now be conducting a question-and-answer session. [Operator Instructions]. Thank you. Our first question comes from the line of Jason Bednar with Piper Sandler. Please proceed with your question.

Hey there, thanks. Good morning, everyone. Ron, wanted to start on the margin performance in the quarter, really a couple entertaining questions here. First, the gross margins hit a multiyear high in the first quarter. Hoping you could expand upon maybe the drivers of the margin performance in the quarter, especially considering your higher-margin high-tech equipment sales were down year-over-year. And then I'm sure there's questions out there regarding the lack of drop-through from that gross margin upside looks like some maybe above normal SG&A spend and as fixed cost absorption wasn't as great because of the PPE dynamics you mentioned. Just wondering if you could talk about any other puts and takes that impacted SG&A spend in the quarter is really, we think, through gross and operating margin cadence for the rest of 2023?

Hi, Jason. I think the -- on the margin question and as you mentioned, the specialty businesses perhaps did not grow as much, but they did grow, and this is a year or a quarter, I should say, were year-over-year we actually had some contraction in reported sales. So that growth still takes on a greater mix, right? So we're getting the benefits of a greater mix from our specialty products and the growth that we experience on the technology and value-added services side. And that mix is favorable to the gross margin. I think, too, that while within the distribution sector, we tend to get slightly better gross margins in dental and the growth we had in dental versus medical and the growth we had in dental versus medical I think also contributes to that particular margin performance being as high as it was. On SG&A, I think that we have a fair number of expenses that are fixed. So the operating margin itself is going to come down some as those gross profit dollars are lower from the lower contribution from PPE and COVID test kits. So I think that's what we're seeing primarily the drag on the operating margin. I think -- from an SG&A standpoint, we had -- we did have a little bit of an increase in costs, but some of those are related to the acquisition costs that we incurred during the quarter. We've got a very robust pipeline, the nature of these transactions that we've been doing, as you can see from the last couple of implant transactions that we announced require a little more work on the acquisition side. And so I think that, that was a bit of a drag on SG&A as well.

Okay. That's helpful. Maybe I'll actually use your response there as a bit of a segue to the next question. If we look at the guidance adjustment, modest reduction you're making today for EPS, you were pretty transparent with the Biotech deal that was going to be dilutive from some of those one-time costs. How should we think about the recognition of that headwind throughout the year does that higher cost inventory from inventory step-up, mostly flow through your model of the 2Q and 3Q. And then I know the recent S.I.N. transaction is a bit smaller than Biotech, but maybe just to be clear, we should expect another kind of one-time impact from inventory step-up once this deal closes? And then can you confirm each of these deals are accretive in year one when excluding these inventory accounting adjustments? Thank you.

Yes. So I'll start with kind of the effect of the inventory adjustments. And your typical implant business will turn inventory, say, a couple of times a year. So that means it's going to take us about six months to work through that inventory step-up value that will kind of be a drag on the gross margin for that period of time. So yes, Q2, Q3, as we work through the inventory step-up. And we're still working on finalizing what that actual. We have some estimates. We don't have a final number on that inventory step-up. In terms of the remainder part of Biotech, there are going to be some costs incurred this year that are what I'm calling integration-related costs, it's really -- we bought a company that has multiple sites, multiple locations, and it was a privately run business. So you have to spend some money to get it ready to be part of a public company, right? So we're going to incur some expenses in that respect. But we do expect Biotech to be accretive post 2023. We think once we get into 2024, it will definitely be accretive for us. With reference to S.I.N., the deal that we just announced, that deal has not closed yet. And it's going through the process of being reviewed by the Brazilian regulatory body. So we're not sure when that's going to close. I think in our press release, we just basically said the latter half of 2023 because we don't have a strong estimate of when that will close. So we don't really know the effect on the current year because, again, of that inventory step-up that we'll have to manage, but we also believe S.I.N. once we get through those inventory adjustments, and we get into -- and hopefully, we can close it earlier in 2023 rather than later because then when we get into 2024, it should be accretive for us in 2024 as well.

And the next question comes from the line of Nathan Rich with Goldman Sachs. Please proceed with your question.

Great. Good morning. Thanks for the questions. Ron, maybe just a clarification. Have you sized the sales benefit of 1Q not having -- not starting with that holiday week in terms of impact on the dental consumables business? And then maybe more at a high-level, it sounds like you feel like patient demand has been pretty stable through the first quarter. I guess kind of any puts and takes that you're seeing from an end market standpoint, especially since the international consumables number in particular, continue to look pretty strong.

Yes. I think I'll start with the fiscal calendar question, Nathan. I think that it's probably worth -- it's worth a couple of points to us of growth in the quarter, right? It can kind of vary market-to-market. It's more pronounced internationally than it is in the U.S. You do -- we had some international markets where dental practices, they close that week between Christmas and New Year's, right? So you get very limited sales. So it's more pronounced in some markets than others, but I think overall, globally, it's worth probably a couple of points on that merchandise. When I say a couple of points, I'm talking about specifically on the dental merchandise number. In terms of patient traffic, I think we're seeing pretty steady patient traffic at this point. I think it's a fairly normalized market in that respect in that we're not seeing the fluctuations in patient traffic. We're not hearing about this from our customers as much as we have historically. So I think that -- and I think that continued into April as well where patient traffic was fairly consistent with what we saw in the first quarter.

Great. And then can you talk maybe about how you expect the specialties business to trend throughout the year? Because I think if I caught the number right, it was about 4% in the quarter. I think you had talked about maybe mid to high-single-digit growth for the year. I know comparisons for that business get a little bit easier. But just from a demand for implants and orthodontic procedures, can you just maybe talk about what you're seeing and how that -- you expect that to trend over the rest of the year? Thank you.

Yes. I mean as you mentioned, we think the comps will get a little easier for this dental specialty products in the back half of the year versus the first half of the year. But even like within implants, as we mentioned in the prepared remarks, in Europe, we had double-digit growth in implants. But in the U.S., it was a much tougher comp. Last year, the U.S. had double-digit growth in implants. So it was a tougher comp when we saw -- as a result, we saw lower growth there. Endodontic products are still doing very well; very steady for us and growing kind of in high-single-digits. So that's -- there are pockets of really, really good performance. And we think that as we progress into the back half of the year and those comps get easier, we expect that growth to become a little more robust.

And the next question comes from the line of A.J. Rice with Credit Suisse. Please proceed with your question.

Hi, everybody. First, I thought I'd ask you about the conference in Cologne. I know that's a big event. Did you -- and you mentioned last quarter that you were watching to see whether it had any impact on sales? Does that -- is there any impact that you've seen in Q1? Or do you think there would be any spillover benefit in Q2? And then obviously, you've got a European market where there's some concern about the economy. Did you walk away with any takeaways regarding the equipment market because of what you picked up at the conference?

Yes, thank you, A.J. Cologne -- the Cologne Show was good for us. Remember, it's primarily focused on Germany and Austria from a selling point of view. And overall, it was as good as previous years. The equipment market in Europe is quite stable. And yes, there's a slight issue in France. There was a strike in April, but that doesn't really have significant impact on the whole business. We'll call that out if it is. But generally, I would say the European and international equipment market from our point of view is stable. There are puts and takes. The traditional equipment is a little bit better. And there is some deflation in units pricing for the DS -- the DI products. Mills are starting to be stable again. And there's some growth you can expect from 3D printing. But I think generally, the market is pretty stable now.

Okay. Maybe just a follow-up on the medical ex the test in PPE, you did about 4% -- a little better than 4% this quarter. Is that what's sort of embedded in your expectations for the rest of the year? I know there's this whole debate about people coming back to the health care system, et cetera, and maybe that's adding some incremental demand? Are you seeing any of that? Do you think you might see more of that as we progress through the year?

Yes. There are some device companies that were much more impacted by the ups and downs. We were only slightly impacted because there were a lot more visits last year because of -- early part of the year because of whether it was COVID or flu, different kinds of flu. But we had pretty high comps there, but I think it starts getting better as the year goes by. And our businesses continue to be steady when you really take out the test. I would say that PPE is -- we're pretty normalized now. But the test, obviously, for -- COVID tests are going down. And I don't know if that will continue. We've tried to give you best guidance, but the medical business is quite stable and doing quite well, actually, growing nicely.

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

Thank you. Good morning, guys. Let me start, I guess, just to see if I can get any more color out of you Ron or Stanley, on the specialty business, the 4.5% growth in the quarter year-over-year. One, did that get the benefit, the same 2-point benefit from the timing? Just wondering on that. But more importantly, it sounds like you said, I think, Ron, endo was up high-single-digits. If I kind of assume away the ortho business, which I know is growing in the Clear Aligner space, but it's still probably the smallest of the three. Would that put implants closer to flat year-over-year in the quarter? Just trying to kind of gauge between those three business lines within the specialty business. Thank you.

I think on the implant, it's really -- you got to look at the kind of the specific markets. Like we were saying before, in Europe, our implant business grew quite well, actually grew about double-digits. And in the U.S. we had growth, but it was much more tepid than that. It was just a click of growth that we got in the U.S. But again, the U.S. was coming off, I think, a much tougher comp than what we had in Europe last year. Yes, endo has been -- that's been steady. I mean endo quarter-to-quarter has been steady in that mid to high-single-digits. Ortho is really hard for us to pick out a trend. It's just such a low base for us that we have had some -- we felt like we had very good growth in Clear Aligners in the quarter. That's mostly through our relationship with some DSOs there, but it's still off a very low base.

All right. And I guess just to help me out here, if U.S. was kind of flat to up a bit in implants, Europe up strongly. I think you said upper single-digits and endo up high-single-digits. I mean your Camlog business in Germany, obviously, the number one, number two player there is a big business. I would think that means your Global Implants were somewhere at least kind of 3% to 4% and endo high-single-digits, how does the whole specialty business end up just 4%, 4%? I still can't reconcile that math.

Well, I think that keep in mind; implants are about 60% of that category, right? So they carry the most weight when doing that math. And while ortho -- while they had decent sales, ortho is about 10% of that category, endo being the balance of 30%. So I think that it's the -- you're right. I mean, the implants had about a 3% to 4% global growth, and then that tends to drive the overall number because of the weighting of them in the -- within the category.

Fair enough. And then just one clarifying question on the model. So when you started excluding amortization, at the start of this year on deals, you don't include -- or don't exclude, I'm sorry, any kind of inventory step even if you have to go and do some restructuring yourself, that stuff stays in your model. So those are costs on future deals that we'd assume to stay in the EPS, we don't exclude those, just to clarify that.

Yes. Well, let's clarify your question, though, because inventory step-up will be -- is very different from restructuring, right? So to the extent we have to incur restructuring costs in our transactions, as we incur those restructuring costs, we will add them back. Inventory step-up, we will reference inventory step-up. So people are aware of the impact it will have on earnings, but we are not adding back inventory step-up as a non-GAAP adjustment, nor are we adding back the costs we incur when doing our deals. We see it as an integral part of our business, acquisitions is a very important part of our strategy and the costs we incur doing the deals, we do not add back of non-GAAP adjustments. But when we have a quarter such as this quarter, when we have an unusually high volume of acquisition expenses, we want to make sure we reference it, so people understand the impact it has on operating income as it is a component of operating expense.

Yes, that's very helpful. Thank you.

You're welcome.

Jeff, just to be clear, our North American implants sales were flattish, and that's because we had significant growth last year. Our implant business outside of the United States, outside North America had high single-digit growth.

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

Thanks, guys. Good morning. Stanley, maybe for you, just any more details on the U.S. Hi-Tech equipment environment. I know you had some commentary. But maybe at a high-level, what's working well and less well. And then the pricing pressure in iOS? I'm just curious, I feel like that's been going on for a couple of quarters now. So I get it. It's a year-over-year headwind, but has that stabilized of late and it is starting to level off the pricing pressure more Q-over-Q?

A very good question. I'm glad that was asked. Yes. I think the year-over-year pricing on intraoral scanners and iOS has stabilized. When you look at our numbers, you will see that iOS sales and units went up quite nicely in the first quarter. What was down was the DSO business because we had some significant sales in iOS in the first quarter of 2022. So I would say the iOS units are good, the pricing has stabilized. And I think the mills now have also stabilized. Of course, the 3D printing is being viewed at as an option. But I think we've gotten back some momentum in the mills and expect to do well with the 3D printing for the remainder of the year as well.

Great. Thanks for that color. And then the second one is just a quick clarification. Ron, the revenue guide unchanged, I believe, reported. So COVID comes down. I don't know your exact FX assumption. Biotech comes in. Sometimes, there's other small little deals. But I guess just to clarify; did anything change organic maybe to help offset the COVID sales step down? Or is that just Biotech and some other nickels and dimes? Thanks guys.

It's more the latter. It's more that we pick up a little bit of additional acquisition growth. But I think that the -- we still think the core underlying business can grow kind of mid-single-digit in sales up towards approaching high-single-digits in sales.

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

Hi guys, thanks so much for the question and all the details. I appreciate what you -- all the details that you're giving us on sort of the equipment growth in the different categories. It was nice to see on a stack basis that the equipment comps actually improved sequentially. Can you talk about sort of -- for people who are worried about kind of like that continued demand environment? Can you talk about sort of how the backlog stands? I know you've given us some helpful details on that in the past? And then also sort of how has the environment been if we think about the end of the quarter and maybe into April, if you can comment?

Yes, certainly, Elizabeth. I think with reference to the backlog, I mean, during the quarter, we actually saw a bit of a tick down in backlog sequentially, but the backlog at the end of the first quarter this year is still greater than the backlog at the end of the year last year. And it's still quite a bit higher than the backlog levels we had pre-pandemic. And that is principally traditional equipment, right? And so that's helping with the growth and gives us, I think, some optimism in terms of our ability to continue to sell traditional equipment at pretty good growth rates going forward. Now that's in North America. Internationally, we've seen the backlog come down a little bit. And -- but it still is ahead of pre-pandemic levels. So while the backlogs are working down a little bit more internationally, there's still a fairly healthy backlog there.

Okay. And sorry. And just in terms of the comment of how sort of the end of March, if you can comment on April, trended sort of post some of the recent financial turmoil?

You said -- I'm sorry, I didn't quite understand what you said at the beginning of that, Elizabeth.

Oh, sorry. So I was just talking about if you could comment on sort of the demand environment in equipment. If we think about the end of March post the start of some of the financial turmoil and if you could talk about April as well, if that's possible?

Yes. I think the trends we have in April have been really a continuation of what we saw in the first quarter. I wouldn't say there's been anything that's coming out of the financial markets. That's been a significant disruptor to that.

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

Thanks. In the context of just the cadence, if you had this benefit in Q1, is there any falloff at the end of the year or anything else we should contemplate? And just thinking about cadence in terms of earnings for the year, any color or guidance you can provide us?

Kevin, when you say benefit in Q1, can you be more specific which benefits?

Oh, I'm sorry, the calendar benefit.

Oh, the calendar benefit, okay.

Is there any falloff in Q4, anything that we should think about the rest of the year from a calendar perspective that might be off or different --?

No, I don't think -- I think the balance of the year should be -- other than the fact that our Q4 this year will be 13 weeks versus 14 weeks last year, right? But outside of that, I don't expect the calendar to have a significant effect on the cadence. I do think where you could see some lumpiness still in our quarterly numbers is that the headwinds that we are dealing with as it relates to PPE and COVID test kits are more pronounced in the first half of the year than they are in the second half of the year and most pronounced in the first quarter as was evidenced by the $0.24 headwind we reported this quarter. But that headwind will be greater, just the math of it is that, that headwind will be greater in the second quarter than it is in the third and the fourth quarter. So we'll continue to have a little bit of a hill to climb in Q2 that we think levels off for us as we get into Q3 and Q4.

And just a follow-up on the backlog question, if I just want to make sure I understand. Is backlog like quarter-over-quarter flat or down on the equipment side? And would that be related to core equipment or digital equipment? Like how should we think about that?

The backlog is principally standard equipment, right? So it's chairs, units and lights, and we really kind of analyze it more sequentially what was it at the beginning of the quarter versus the end of the quarter. And that's what I was saying before that the North American equipment backlog remains -- it did come down some over the course of the quarter, but it's higher than where it was last year at the end of the first quarter. So it's still a fairly healthy backlog and well higher than where the kind of backlog levels we had prior to the pandemic. Internationally is kind of the same story. We're seeing a bit of a work down quarter-to-quarter. But their backlog versus last year's first quarter is also a little lower. And that's how it differs from North America.

Thank you very much.

And we also think that the digital side from a pricing point of view has stabilized, and we're seeing good growth on the units.

And the next question comes from the line of Brandon Vazquez with William Blair. Please proceed with your question.

Hi, thanks for taking the question. I'll just ask both of them upfront since they're somewhat related. The first is just you guys have obviously been more acquisitive, curious if there's any notable pipeline or -- sorry, any notable gaps in your portfolio that you're kind of focused on going forward from an M&A standpoint? And the follow-up kind of related question is, as you become more acquisitive and I'm looking at Biotech Dental, for example, there might be areas where you have a little bit of overlap in portfolio, right? You have a Reveal and now you have another Clear Aligner. What's kind of the thought process do you kind of keep both of those running separately? Do you combine them into one brand greater efficiency as it grows? Curious your thoughts on integrating businesses like that. Thanks.

Brandon, thank you for that question. As we indicated early on, our pipeline remains quite good. Our bold strategic plan calls for us to continue to advance those businesses that are high margin, high growth through organic growth and through acquisition growth. There are parts of the portfolio that we could add to, of course. I don't think we have much overlap. But we are very much committed to advancing our high-growth, high-margin businesses, and there's no deviation from that. We outlined that quite clearly in our Investor Day, and we're executing. As it relates to brand alignment, I think we've always been pretty good at that. We will, over time, align brands. We've done that with Camlog and BioHorizons, I think, quite well. We never lost any business when we aligned the brands. We have a combined BioHorizons Camlog brand today in many parts of the world, certainly all the big markets in a few parts of the world where each of the particular brands is distributed through different distributors. We may keep it. But generally, in the big market, we keep them separate in the big markets, we're aligning have aligned for the last two or three years in a single brand. We will keep both the line of brands going. It goes to different markets. But I would imagine, over time, we will align brands. But more important, we're aligning the production, the -- all the administrative activity, which should be accretive, of course. So we are very, very careful with brand alignment. We've done a good job of that over the years, and we'll continue to do that.

We have time for one last question coming from the line of Erin Wright with Morgan Stanley. Please proceed with your question.

Okay. Thanks. I just have one question here on the DSO side. Are there any anticipated changes in DSO relationships in the 2023 guide? And have you been -- or how have you been performing across the DSO market segment? And any growth rates you can give us across that segment that you're seeing and anything to call out there? Thanks.

Yes. That's a good question also. Our DSO business remains a good grower. It's pretty stable. We've continued to add DSOs specifically in the mid-market area. A couple of our larger DSO customers have made some good acquisitions and taken us along and included our -- the purchases of products from us. I think we're making good progress on the specialty side in the DSO world. Of course, on the equipment side, it can be lumpy. I mentioned earlier on that on the iOS side, we had a very good significant sale in the first quarter of last year. So it impacted us in terms of units a bit. That will occur. I don't think we've lost any, I'm sure we've lost some smaller ones, but I think, on the big side, we're doing well. And on the midsized ones we're gaining as well customers. So overall, it's a growing business. And of course, the goal is to advance the high-growth, high-margin products, specifically our software, where I think we are appreciated and our additional value-added services. So the growth continues quite nicely is pretty stable, and we have very good relations with our large and midsized DSOs.

Okay. So thank you, everyone, for calling in. I realize there are a couple of complexities in this quarter. But if you peel out the PPE and the tests and you understand that the accounting regime for acquisitions on inventory step-up, takes those expenses relating to the step-up and runs them through the operating income against operating income, likewise, some M&A expenses are run through operating income. If you take all of that out, you'll see our core business is doing quite well, good internal sales growth. Gross profit is doing quite well, moving it a bit higher, all on with our strategic plan. And I think you will see that the business is quite stable. We anticipate operating income to continue to grow as Ron outlined in our guidance and we're happy with the business. So of course, if you have questions, Graham and Ron are available. And we're optimistic about the business. So I appreciate all the questions and look forward to our next call in a couple of months' time. And I think we're going to be at some conferences and happy to provide more color on the business. But overall, we're very pleased with the performance of the business and nothing really unexpected at this time. So thank you very much.