Good morning, ladies and gentlemen, and welcome to the Henry Schein First Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this call is being recorded. I'd now like to introduce your host for today's conference, Carolynne Borders, Henry Schein's Vice President of Investor Relations. Please go ahead, Carolynne.

Thank you very much, Holly. And my thanks to each of you for joining us to discuss Henry Schein's results for the first quarter of 2020. With me on the call today are Stanley Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein; and Steven Paladino, Executive Vice President and Chief Financial Officer. Before we begin, I would like to state that certain comments made during this call will include information that is forward-looking. As you know, risks and uncertainties involved in the company's business may affect the matters referred to in forward-looking statements. As a result, the company's performance may materially differ from those expressed in or indicated by such forward-looking statements. These forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's filings with the Securities and Exchange Commission, including in the Risk Factors section of such filings. In addition, all comments about the markets we serve, including end market growth rates and market share are based upon the company's internal analysis and estimates. Our conference call remarks will include both GAAP and non-GAAP financial results. We believe the non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business, enable the comparison of 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. These reconciliations can be found in the Supplemental Information section of our Investor Relations website and in Exhibit B of today's press release, which is available in the Investor Relations section of our website. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast May 5, 2020. Henry Schein undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Please limit yourself to a single question and a follow-up during Q&A to allow as many listeners as possible to ask a question. With that said, I would like to turn the call over to Stanley Bergman.

Good morning. And thank you, Carolynne. And thank you everyone for joining us. As we gather on this call today to discuss Henry Schein's first quarter 2020 results, we face an unprecedented public health and economic crisis from the COVID-19 pandemic. It was only a few months ago when we last spoke with investors during our year-end call and of course at the Chicago Dental Society Midwinter Meeting, yet so much has changed during that time. Over the last several weeks, our leadership team supported by our Board of Directors has had to make some very difficult decisions. The company has maintained focus on three key priorities: protecting the health and welfare of our Team Schein members and the well-being of the Team Schein families; assisting with business continuity for our customers and our suppliers; and third, sustaining the financial health of the business amidst this uncertain macroeconomic landscape and of course positioning the company for the future. Beginning in mid-March, most of Henry Schein's dental customers worldwide began to suspend operations except for emergency procedures. Dental sales were approximately 65% of Henry Schein's total sales last year for the year 2019. Therefore these closures had, and of course, continue to have a meaningful impact on our business. Our Medical business, which serves physician offices; urgent care centers; ambulatory care sites; emergency medical technicians; dialysis centers; large enterprises such as group practices and integrated delivery networks amongst other providers, represented approximately 30% of our total sales in 2019. As the COVID virus spread, many physician offices limited patient flow due to social distancing guidelines. In turn, as we moved into the second quarter, individuals increasingly sought critical care in hospital settings or interacted with their physicians online through telemedicine for example. Many ambulatory care centers were converted into COVID-19 treatment units. In the United States, following the Dental Association's guidance recommending that U.S. dental practitioners suspend seeing patients for elective procedures issued on March 16, 2020, we were guided by the Federal Emergency Management Agency, FEMA to direct critical personnel products to medical healthcare professionals and institutions. In our Medical business, PPE was in high demand throughout the quarter. As COVID rapidly gained momentum, we worked with our suppliers to expand availability and to prioritize the delivery of critical PPE as well as brought to market rapid test solutions for healthcare professionals. Relative to our Henry Schein One dental software business, lower sales associated with reduced transactional services and fewer patient visits were partially offset by dental practices leveraging our software communications tools to stay connected with their patients. Our medical and technology and value-added services businesses both performed better than our dental business in the first quarter. In the face of revenue headwinds, we have taken swift and decisive actions to preserve cash. Cash is really important for us now, but more importantly, positioning ourselves for the future including reducing our own cost structure to best position Henry Schein through this crisis and beyond; to ensure that we remain well-positioned to face any ongoing business challenge and of course for the future. The difficult decisions we have made to reduce costs have impacted all Team Schein members across the company, all 19,000. We have not made these decisions lightly. Team Schein is our company's number one asset and a critical constituent in our mosaic of success, the constituents that make up the Henry Schein mosaic of success. Keep in mind that we continue to assess our cost reduction plans and adapt as required. We will do this in a very agile way. In an effort to preserve cash, we reduced or eliminated all nonessential capital expenditures. In early March, we temporarily suspended our acquisition activity and share repurchase program. While we have provided intense focus on managing the impact of COVID-19 on our business, we simultaneously view the critical responsibility we have to help guide our customers through this extremely challenging time. Our customers are really facing unprecedented challenges. As most of our dental and medical practices began to suspend operation, we focused on helping our customers build a roadmap to navigate through the disruptions to their practices. We are working closely with our customers to assist with business continuity planning for today. The key is to keep our customers economically afloat so that when patients go back to the practices they are ready; and in anticipation of all of this ensuring that our customers' practices are ready when patients start returning. Let me take this opportunity to offer my sincere thanks to our team for the valiant work and support during this extremely difficult time and offer my deep gratitude for the sacrifices our team is making. Most are working from home, and the systems are working. There are a huge number working in our distribution centers. These distribution centers are functioning normally; many, many orders, very frequently small orders for PPE that are frequently reordered because of availability. The product comes in and goes out. At this time, I'd like to hand the call over to Steven to discuss our financial performance. Then I'll provide some additional commentary on our view of our current business conditions. Steven, please.

Thank you, Stanley, and good morning to everyone. As we start, I want to highlight that I will be discussing our results from continuing operations in both GAAP and non-GAAP formats. Our non-GAAP results for Q1 2020 and Q1 2019 exclude certain items detailed in today's press release and on our Investor Relations website. We have also included a corporate sales category for Q1 that reflects sales to Covetrus under transitional services agreements. As mentioned, our Q1 results for 2020 were adversely affected by COVID-19. While it's hard to measure the exact impact, we began noticing negative effects from March, especially as dental practices worldwide started suspending operations. In response to the pandemic, we rolled out a comprehensive cost reduction initiative that included measures such as payroll reductions through furloughs, reduced work hours, voluntary unpaid time off, suspension of our 401(k) match, and some job cuts. As we move through the year, we will be closely observing our business health and are ready to implement further cost-saving actions if needed. Before discussing our Q1 financial performance, I'd like to note that we recorded a non-cash asset impairment charge of around $6.1 million pre-tax tied to certain prepaid and intangible assets. We do not anticipate this impairment affecting our business operations, liquidity, cash flow from operating activities, or compliance with debt covenants in the future. Now, regarding our financial results, net sales for the quarter ending March 28, 2020, were $2.4 billion, which is a 2.9% increase compared to the first quarter of 2019, with internal sales growth in local currencies at 2.1%. COVID-19 had a negative impact on our global sales growth, as many dental and medical practices closed or limited patient visits. Dental office closures began in mid-March, starting in China, then in Europe, and finally in the U.S. Details of our sales growth can be found in Exhibit A of our earnings press release issued this morning. On a GAAP basis, our operating margin for Q1 2020 was 7.2%, which is a decrease of 15 basis points compared to Q1 2019. Our non-GAAP operating margin was 7.4%, also contracting by 15 basis points year-over-year. A reconciliation of GAAP to non-GAAP operating margins is available on the Supplemental Information page of our Investor Relations website. The margin contraction this quarter was mainly due to a decrease in global dental sales starting in March from the COVID-19 impact, along with the $6.1 million pre-tax non-cash impairment charge. Our reported GAAP effective tax rate for Q1 2020 was 22.4%, compared to 24.6% for the same period in 2019. Our non-GAAP effective tax rate was 22.5%, down from 25.4% a year prior. You can find a reconciliation of these rates on our Investor Relations website. Our GAAP net income from continuing operations attributable to Henry Schein Inc. in Q1 2020 was $130.5 million, or $0.91 per diluted share, compared to $118.4 million or $0.78 per diluted share the previous year. Our non-GAAP net income for Q1 2020 was $134.1 million, or $0.94 per diluted share, versus $120.6 million or $0.80 per diluted share in Q1 2019, reflecting growth rates of 11.3% and 17.5%, respectively. Due to the challenging economic conditions brought on by COVID-19, we recorded an additional bad debt reserve for our global dental business of about $10 million pre-tax for the quarter, representing approximately 20% of the existing reserve balance. This estimate is based on how quickly dental offices reopen and how fast patients return, which will require ongoing analysis and adjustments. Additionally, we recorded a net credit in stock-based compensation of $17.5 million pre-tax because we expect that none of our performance-based shares will vest owing to COVID-19's impact on our earnings results. As mentioned earlier, net income was also affected by the $6.1 million non-cash impairment charges. In terms of continuing operations, amortization from acquired intangible assets for Q1 2020 was $26.8 million pre-tax or $0.14 per diluted share, compared to $21.8 million or $0.11 per diluted share last year. I would also point out that in Q1 2020, foreign currency exchange negatively impacted our diluted EPS by approximately $0.01 per share. Now, I'll provide details on our sales results for the first quarter. Dental sales reached $1.5 billion, a decline of 4.6% year-over-year, with internal sales in local currencies down by 3.7%. North American dental sales met our expectations for January and February; however, March saw significant growth disruption due to practice closures across the U.S. and other global markets. North American internal sales in local currencies declined by 3.9%, including a 4.2% drop in dental consumable goods and a 2.7% fall in dental equipment. In Q1, internal sales for high-tech equipment in North America grew by 4.7%, particularly in CAD/CAM equipment, which saw a 14.5% increase. This was countered by a 5.8% decline in traditional equipment sales and a 7.6% decrease in digital imaging sales. Internationally, dental sales fell by 3.4%, showing a 4% drop in dental consumable merchandise sales and a 1.2% decrease in dental equipment. Germany, along with parts of Australia and Brazil, were less affected by the pandemic; however, Germany, our largest dental market in Europe, saw a 2.1% decline in consumable merchandise sales, while dental equipment sales rose by 13.8%. In terms of dental specialty products, Q1 saw a 6.4% decrease in internal sales. These sales were notably impacted in the last month of the quarter as practices began closing. Dental specialty products constitute a smaller portion of our total sales but typically yield higher margins and have solid long-term growth potential. Medical sales totaled $800.7 million for the first quarter, marking a 17.1% increase, with internal sales in local currencies growing by 13.4%. This internal growth was driven by a 13.6% increase in North America and a 9% rise internationally, attributable to strong organic growth earlier in the quarter. Medical sales in January and February aligned with our expectations, followed by a significant uptick in PPE orders in March. Our Medical segment has been less impacted by economic conditions than Dental, primarily due to sustained demand for PPE. While some PPE items remain in limited supply, we are coordinating efforts with suppliers to meet demand and rebuild our inventory swiftly. Regarding Technology and Value-Added Services sales, these totaled $132.0 million in Q1, an increase of 14.2%, with internal growth in local currencies at 6.4%. COVID-19 had a later-quarter negative effect on this growth. North American internal sales growth in local currencies was 6.3%, showing solid performance until mid-March when we began to see declines linked to reduced patient traffic. Our North American financial services business in Q1 remained flat compared to last year, primarily due to lower dental equipment sales and associated financing towards the end of the quarter. We anticipate a more significant adverse impact on our technology and value-added services from COVID-19 in Q2, especially in the transactional aspects of the Henry Schein One products. International sales in this sector increased by 6.8% in local currencies, driven by strong recurring revenue trends in practice management and engagement solutions, alongside growth in financial services from practice brokerage in the U.K. In early March, we temporarily paused our share repurchase program to conserve cash due to COVID-19, having repurchased 1.2 million shares in Q1 at an average price of $61.49, totaling approximately $73.8 million. The effect of share repurchase on our diluted EPS in Q1 2020 was minimal. Currently, we have $201 million authorized for future stock repurchases. As mentioned, we also temporarily halted acquisition activities in early March to maintain liquidity. Henry Schein has a robust balance sheet with low debt levels. By the end of Q1, our debt-to-EBITDA leverage ratio was about 1.2 times. In April, we bolstered our liquidity with a new committed credit facility of roughly $700 million, providing $500 million in additional funding while letting some uncommitted facilities expire. We now have around $1.7 billion in liquidity, which offers us flexibility in this challenging environment. Our operating cash flow from continuing operations for the quarter was $90.8 million, down from $133.3 million in Q1 of last year, primarily due to decreased distributions from equity affiliates. As part of our ongoing restructuring initiative, we recorded a pre-tax charge in Q1 2020 of $4.8 million or $0.03 per diluted share, mainly for severance and facility closing costs, in line with our efforts to drive cost efficiencies. To conclude, regarding financial guidance, you may remember that in our February call, we provided guidance for 2020 non-GAAP diluted EPS from continuing operations, assuming no substantial supply chain disruptions tied to COVID-19. As the virus escalated into a global pandemic, we withdrew our guidance and, at this time, we are not issuing any financial guidance. I will now turn the call back to Stanley.

Thank you, Steven. Let’s review our business performance from the first quarter and recent weeks, starting with dental. As we noted, sales of dental consumable merchandise in North America met expectations in January and February. The business was performing well but faced significant challenges due to U.S. dental office closures following the American Dental Association's guidance issued in mid-March. Similarly, in Canada, most provinces recommended halting dental practice operations except for emergencies, which affected sales in the last weeks of March. Internationally, sales growth in dental consumables and equipment was also in line with expectations in January and February but faced significant declines in March due to social distancing measures that closed practices and limited hours across almost all markets we serve, including China and Europe. The situation was different in Germany, where dental practices were not broadly mandated to close for general dentistry, although they had to follow strict infection control guidelines. Sales in Australia and Brazil did not decline as severely as in other countries since the COVID-19 impact began later there, with government restrictions implemented only in late March. Currently, we are seeing some dental clinics reopening in China, although at a gradual pace, with patient numbers being limited. As restrictions ease globally, we expect dental practices to begin resuming operations, though we cannot predict the exact timing for each country or state in the U.S. or province in Canada. Due to COVID-19's ongoing impact, we estimate that global dental sales have decreased by approximately 70% to 80% year-over-year. With only data from April to gauge the situation and a little from March, this estimate remains challenging but represents what we believe is happening. We are working with our customers on programs to assist them during this downturn, focusing on financial options and emergency services, ensuring that equipment is serviced and operational before practices reopen. Our recovery planner helps customers identify management opportunities for adjusting schedules and improving daily procedures to enhance productivity as they resume operations. Looking ahead, we face two uncertainties: when practices will fully reopen and when patients will fully return. While we cannot predict these developments, we are committed to helping our customers prepare for both scenarios through our services and by leveraging third-party financing options. We aim to keep struggling practitioners afloat during this challenging time. Our Henry Schein One software solutions are also helping clinicians engage with patients and prospect for new ones as operations restart. In the meantime, while practices manage emergency patients under new protocols, our patient engagement tools create virtual waiting rooms for patients to complete forms online and notify the practice of their arrival, ensuring they wait until the dentist is ready. This innovative software is a recent development from Henry Schein One. Now, turning to our Medical business, January and February were consistent with typical patterns, although we saw positive sales from the flu season. This was followed by the surge in orders in March due to COVID-19, as customers needing emergency supplies, including PPE, increased their purchases. The influenza season this past winter was quite severe, positively impacting consumable merchandise and seasonal rapid tests. Instead of winding down at the year's end, demand for influenza-related products remained strong into the first quarter, especially in January and February. At present, we estimate our Medical sales have decreased by about 20% to 30% year-over-year. This estimate is also hard to determine precisely because of COVID-19's ongoing effects. Henry Schein is dedicated to supplying essential products to healthcare professionals fighting the pandemic, focusing on those at the front lines, including both physicians and dentists who help reduce the influx of patients into hospital emergency rooms. Early in this crisis, we recognized the need for PPE, which we discussed in our previous conference call. We acknowledged the potential shortages and took action to address them, understanding healthcare professionals' need for PPE to ensure their safety and that of their patients. Additionally, we have been focusing on rapid diagnostic tests. Henry Schein has a long history of providing various tests, including rapid diagnostics, to office-based practitioners. We quickly collaborated with global suppliers to ensure essential products were available, prioritizing quality and regulatory compliance amidst changing regulations worldwide. Henry Schein is also engaged in the White House COVID-19 supply chain task force, working with the Strategic National Stockpile to deliver PPE to initial COVID testing sites and collaborating with FEMA to supply critical medical products to institutions we don’t typically serve. We co-founded the Pandemic Supply Chain Network in 2015 with organizations such as the World Health Organization to enhance the efficiency of global PPE supplies. However, the supply chain for PPE has been under considerable stress, causing global product shortages, complicated by shifting government restrictions affecting both PPE exports and internal distributions. There are many challenges concerning shortages, export restrictions, and the necessity for regulatory compliance across different countries. Our dedicated outsourcing team is working tirelessly to procure high-quality products for our customers, and we are optimistic about an influx of PPE suppliers entering the market in late May, depending on potential export restrictions. We expect tight supply for specific PPE products in the second quarter, but we anticipate improvements in the third quarter as production ramps up. Now, regarding testing, we face a significant public health challenge with COVID-19 affecting lives and economies. Finding effective strategies to combat the virus is essential to protect lives and support economic resilience. We believe testing is critical, having specialized in providing laboratory tests, including rapid diagnostic tests for office-based practitioners for four decades. Recently, we introduced two rapid point-of-care test kits that detect COVID-19 antibodies in as little as 15 minutes without the need for machine equipment, which provide quick results at a low cost and can be deployed widely. Currently, these tests are under an FDA emergency enforcement policy but have not received independent FDA review. They're available at limited certified sites, and we are working towards obtaining an EUA for broader site access. It’s important to note that these tests require healthcare professionals for proper use and clinical assessment to make informed decisions. Henry Schein also sees the potential for public health officials to utilize these tests to track the disease spread. We continue to work on bringing more tests and PPE to market and addressing shortages in other critical areas, such as nasal swabs for COVID-19 testing. Our subsidiary, ACE Surgical, is collaborating with a dental supplier to produce 3D-printed nasal swabs using our sterilization and packaging services. We want to ensure that our customers and dental practices are fully prepared to treat patients when they are able to reopen, meeting suggested protocols despite facing supply limitations. Now, focusing on our Technology and Value-Added Services sectors, January and February were consistent with positive trends in these areas, particularly with our Henry Schein One practice management, patient engagement, and dental software solutions. However, as U.S. offices closed in mid-March, COVID-19 began to impact sales and new system installations significantly. Our DentalPlans.com and financial services businesses have also felt this impact. We are actively working with practices to promote tools for patient engagement during this critical time as they realize the importance of maintaining communication with their patients. Our solutions help practices inform patients about reopening dates, safety measures, and facilitate rescheduling appointments, aiding a faster return to normal operations. Our offerings include patient reminders, two-way texting, rescheduling portals, virtual waiting rooms for emergencies, marketing email campaigns, and online billing. We believe Henry Schein’s range of software service offerings is unmatched in the industry. We estimate that our Technology and Value-Added Services sales have declined approximately 30% to 40% year-over-year, though this figure is also difficult to ascertain accurately. In addition to managing our product supply chains during this downtime, we are providing COVID-19 education centers, offering symposiums, webinars, and resources to help customers manage their operations, staffing, and financial planning for the future. Before we take questions, I want to emphasize that Team Schein members across our businesses are dedicated to supporting our customers through this crisis and are ready to assist with reopening when the time is right. I would like to express my sincere appreciation for our team, who have risen to the occasion remarkably. Many have faced compensation reductions, yet their commitment to our mission is inspiring. The hard work and dedication of our colleagues worldwide give me great confidence in our future. I am truly impressed by their efforts, and I am proud of how our team is upholding our values while supporting our suppliers and customers. With that, operator, we are ready to take questions.

Absolutely. Our first question is going to come from the line of Jon Block, Stifel.

Great. Thanks, guys. Good morning. Stanley, the down 70% to 80% comment for Dental I believe that was a global metric. And I know this is a bit detailed but is there a way to view how that looked for the end of April versus the beginning of the month? And then sort of part two of that same question is just for China. Is there an estimate of where that market is relative to normal as we sit here in April? Because people are looking at that as, call it a leading indicator for future markets. And then I've just got a follow-up.

Yes. Maybe Steven has that data. I don't have it with me right now. Steven?

Yes. Jon, the variance between the end of April and beginning of May was not really that significant on a global Dental basis. It was all within that range. Specifically with China, since the outbreak started in China, we are seeing gradual improvement there. We see many dental offices that were closed a little while ago are now reopening. So we do see that occurring, and that's optimistic for what could occur in the rest of the world.

Okay. And then second question, Stanley for you. Just would love your thoughts on the long-term ramifications of COVID. In other words, what does it mean for PPE at dental practices and other practices? And is that a long-term positive for you? Does it accelerate the pace of dental consolidation because some practices unfortunately won't make it out of this? I'd just love to get your thoughts on these longer-term structural changes in the industry. Thanks, guys.

That's a great question. It's still early in the COVID timeline, but I believe dentistry will recover. The main issue is timing. I anticipate that 2021 won't fully return to 2019 levels but will be much closer. On the specialty side, I expect strong demand for products, although there may be some downward pressure on prices at the dentist level. The key challenge will be navigating the period between now and mid-2021. Looking back at the HIV/AIDS crisis in the '80s, dentists started wearing gloves and masks after public awareness of infection concerns grew. It took a couple of years for patients to return to practices, and during that time, gloves and masks transformed from a minor product for dental distributors into a significant category. I believe the dental business will recover, though I can't predict how close to normal it will get, but we should see progress in 2021. Additionally, the demand for personal protective equipment will rise. However, I see a potential reduction in regulatory compliance standards allowing products to be introduced, but those standards will need to be tightened. I think there will be a push for products to be produced domestically, not just in the U.S. but globally, increasing product prices and adding financial pressure on dentists. In countries with government support for dentistry, reimbursements are likely to increase, and insurance providers elsewhere will need to adjust reimbursements as well. I'm very optimistic about the future of dentistry; we just need to get through the remainder of this year and into the middle of next year for practitioners to recover. Regarding consolidation, I expect some to take place. While some dental service organizations have strained balance sheets, mid-sized practices that have received PPP funding may be well-positioned to expand and consolidate. The trend of moving from solo practices to mid-sized and then to large practices will continue, but not all mid-sized and large practices are in strong financial positions. This is just some abstract thinking. I have the same level of access to information as you do since much of this is publicly available. It's about gauging market trends and public sentiment, but I do believe patients will return to dental offices.

Thank you. Our next question will come from the line of John Kreger with William Blair.

Hi, thanks very much. Stan just to follow up on some of those very helpful stats you gave us towards the end of the call. For a typical U.S. dental customer, is it reasonable to assume that emergency care would be on the order of 20% of what you would normally be doing for that customer? Or would you give a different stat?

I'm not entirely certain; it's quite challenging to assess. There's a lack of available information, but some practices are more active while others are significantly less so. It's difficult to determine the precise mix at this moment, although many practices are offering emergency services today, not all of them are. Quite a few practices might be doing almost nothing. Thus, figuring out that mix accurately is tough. I think the basic statistics we provided regarding expectations for all three of our business segments are reasonable to consider, even though it's hard to predict the future direction. We suggested that Dental could be down 70% to 80%, Medical 20% to 30%, and Technology 30% to 40%. However, the Dental side might be leaning closer to the 70% mark rather than the 80% right now, of course, as states begin to reopen, there’s potential for improvement, but we can't be certain. There's a possibility of a second wave, so if that doesn't happen, we may actually surpass those predictions. Nevertheless, we must proceed with caution since we are unsure how states reopening will affect the situation concerning COVID-19.

Thank you. That's helpful. One quick clarification on your technology businesses: if I am a typical Dentrix kind of client server customer am I able to use some of the virtual tools that you now offer under Henry Schein One? Or do I have to convert to the cloud system? Thank you.

That's a good question. I'm pretty sure it's available to Dentrix users. We will confirm that. I don't know if you know, Steven.

Yes, I'm pretty sure also that it is available both cloud and non-cloud systems.

Thank you. Our next question will come from the line of Jeffrey Johnson, Baird.

Thank you. Good morning guys. Stanley, I just want to say thanks for all you guys do as a company, in response to COVID. But also for all these earthquakes and hurricanes in that you're always putting emergency services out there. It's well appreciated. We don't talk about it enough on these calls. So thank you. Steve, wondering if I could push you a little bit on Jon Block's question about China, you didn't give a percentage. We've heard a percentage from others that China is back to 20% or 40% or 60%. Could you put a number on that? And maybe it’s something similar on Germany as well? My gut is that the German market would be a better predicate for the U.S. market just given small practices versus hospital care in China. So any numbers you could put on Germany as well would be helpful. Thank you.

Yes. Thank you, Jeff. Thanks for that comment earlier. Yes, I'm not sure it makes sense to be very specific on the percentages, because I'm not sure that they will translate into other countries or not. It's still rather fluid. So I'd rather not give specifics. Well, Germany I think was impacted less from the beginning for whatever reason they had less cases of COVID-19. That's why the market in Dental held up much better than in other areas like Italy and other places. But I'd rather not give specific numbers at this point because it is very fluid and it does change quite quickly.

Yes sure, understood. Fair enough. On the cost-cutting side, Steve or Stanley, obviously you guys have been very aggressive. Can you talk about maybe what the flow-through then from some of these revenue declines should be decremental margin-wise or however you could couch it for us? Another part of that question, just your largest competitor on the Dental side anyway, doesn't seem to be making nearly the aggressive cuts that you guys are. They have a couple years ago gone through some of that. But how does this position you competitively coming out of a downturn? Any concerns there? Or is the industry just changing that some of these maybe changes on the sales force side that you're making probably would have been necessary over time anyways? Thank you.

Steven?

Yes. We have made significant cost-cutting efforts. The primary reason for this is the uncertainty regarding the duration of the impact on our Dental segment. We have implemented strategies such as furloughs, allowing us to extend them if necessary or reduce expenses in the short term if needed. This approach gives us flexibility in managing costs, as the timeline is unclear. Some of the cuts are related to outcomes like supplier rebates, which people are aware of. Our gross margin was slightly down in Q1 due to performance-based supplier rebates. Currently, we do not expect to earn much from those unless we renegotiate the performance criteria. Additionally, our cash flow adjustments for stock-based compensation were $17.5 million for the quarter. We have the necessary flexibility, and I believe we are positioned as the strongest player in the industry, with the best balance sheet and access to liquidity. Our cost-cutting measures will enable us to emerge from this pandemic in a smarter and stronger position.

Thank you.

Thank you. Our next question will come from the line of Steven Valiquette, Barclays.

Hi. Thanks for the time here and I'd echo the comments thanking you guys for everything you're doing to help everyone who's really in need today. First, I wanted to ask about PPE. I appreciate the comment about PPE supply ramping up to be hopefully at a better level later in May, but I wonder if you could take that and play that a little bit further out and say, how long does it take to get to the level of PPE that you need to supply your medical customers and dental customers at the level that they're really looking for? And how close do you think the first quarter growth rate in Medical is to being a reasonable barometer for growth in Medical if we had that level of supply?

So regarding the second part of your question, I'll turn it over to Steven. To address the first part, we are seeing growth in output, specifically within the PPE product category. However, there are challenges with transporting products globally. Various governments are imposing export restrictions and creating obstacles with paperwork and customs, which complicates the distribution of our products. Production levels are increasing significantly, surpassing pre-COVID figures. The challenge lies in logistics, which are being affected by these constraints. Additionally, the cost of air freight from China has skyrocketed compared to just a few weeks ago, and this capacity is being utilized for both PPE and other goods. Meanwhile, we anticipate an increase in product capacity within the U.S. for specific items, primarily to support U.S. government needs, including replenishing stockpiles and supplying certain states. There’s a shared understanding within the U.S. government and globally about the significance of alternate care sites, such as dental and physician offices, which are doing important work to keep patients out of emergency rooms. All these factors will influence supply allocation and availability in the second, third, and possibly fourth quarters. Looking ahead to next year, we expect to see greater capacity and availability. However, keep in mind that restaurants and other public venues, once social distancing measures are lifted, will also be substantial consumers of gloves and masks, potentially competing for the available supply. These dynamics need to be factored into our considerations. Ultimately, from Henry Schein's sales perspective, there's likely to be more opportunity to expand the PPE category, similar to trends we saw in the 1980s. Nevertheless, we will face competition for products that meet our quality standards, and we want to ensure that manufacturers are compliant with current regulations, which are expected to evolve and become more stringent. Many elements are at play here, but I believe the sales category will continue to grow.

Yes. Regarding your question about Medical sales, the estimate of a 20% to 30% decline year-over-year in Medical sales is net. This figure accounts for some benefit from PPE products, although we are being cautious about that benefit due to uncertainty around product availability. However, it is included in the 20% to 30% estimate.

Thank you for the clarification. I have a quick follow-up question regarding your ambitions for testing. You are well positioned to supply various offices with rapid tests, so I'd like to focus on identification tests, specifically. For example, China provides rapid antigen tests for flu, but I am curious about how you plan to expand your product lineup to meet the growing demand for both rapid antigen and rapid molecular testing in dental and medical office settings. Thank you.

Yes, also a good question. I noted in my call earlier on that Henry Schein has been focused on laboratory testing, both traditional and I'm talking about in-office testing; as well as places like urgent centers and community-type health care clinics. We've been involved in that for years both the equipment the reagents and the disposable snap test. I think we're one of the biggest providers of these products in the world. We are continuing to focus on that. We have a great and knowledgeable group of people that focus on identifying products and then of course selling them. We have people both in the field and on the telephone, and of course are capable of putting up very good marketing material. We examine all these sources that have presented to us. Some of our traditional sources, manufacturers of equipment right now are in back order with us, because a lot of the product that they are producing equipment and the fluids, the reagents and the like are going to the government. This business is primarily a U.S. business for us, a small part in Europe but primarily going to the government or directed by the government to go to certain sites, and primarily acute care sites. We have not had a lot of availability, but we expect that availability to increase. We offer, as I said, a wide variety of these products and will add to the offering as time goes by.

Thank you. We have time for one final question. That question will come from the line of Elizabeth Anderson, Evercore.

Hi. Good morning, everyone. Thank you for taking my question. Regarding ordering patterns, have you noticed any changes as practices were closing or reopening? Are there any signs of fluctuations, like pre-buying of PPE? Are practices slowly placing orders as they resume, or are they making larger orders? Could you provide some insights on that? Also, could you remind us what percentage of sales PPE represents for the Dental and Medical business, both before and after COVID?

Yes. The demand has, of course, been significant from about the middle of March, in the United States, for example, earlier in other parts of the world. But we've been on an allocation method basically around the number of practitioners in a practice, and really based on the size of the practice. It's not a precise science, but the allocation has been in place. So it's really not a matter of any particular practice spiking, because their allocation has been based on historical purchases. So I would not say there has been a particular loading in anticipation of practices returning either. We are selling at a continuous pace all along. Of course, the volume is much greater than it was last year, but not a huge amount more, a lot more but not a huge amount more. We expect that Dental volume will go up as we have availability, which we discussed already and as dental practices start opening up in the various states over the next month or so. Steven, I don't think we provide information on any product category other than consumables and equipment as broad categories, right?

Yes, that's right. And PPE, it's also difficult to answer because the definition of what is in PPE is also different something like an examination glove. We've always sold a lot of examination gloves. It's always been one of our top SKUs, but things like gallons we don't sell as much because we're not in the acute care setting. But we do sell some on the Medical side. So again definitionally what's in PPE everyone has a slightly different definition.

Okay. That's helpful. And then have you had a change in sort of practitioners? I know you've said about the $10 million of bad debt expense reserve but have you seen a change in people asking for payment terms or discounting or anything that we should take into consideration?

Yes, people are paying slower. It depends on the practice. Some are paying on time. We have certain third-party financing options for people to get practice loans to be able to pay off their debt whether it's to us or other people. Customers are also eligible for the government PPP program which should help but we are seeing generally slower payments from customers.

I believe we have exceeded the time we allocated for this call because we anticipated a higher volume of questions. Thank you for joining us. I want to emphasize that this is undoubtedly a challenging time for businesses, particularly in the healthcare sector. This situation is clearly represented in the news and across social media. We remain dedicated to delivering exceptional customer service and enhancing operational efficiencies in our business. We must adapt our services as practices are functioning differently than before, while also being mindful of our need to conserve cash, which means operating more efficiently than ever. It's reminiscent of the 2008 crisis when we successfully preserved cash, allowing us to be well-positioned when the situation improved. As Steven mentioned, we have a robust balance sheet and are well-prepared to access capital for the foreseeable future. We believe we are equipped to navigate this economic uncertainty, and we anticipate opportunities arising from COVID-19 that will enable Henry Schein to meet public healthcare needs through our practitioners. Our resilience has faced numerous tests in the past, and I am confident that our team will rise to meet the challenges again. We have an excellent management team and a dedicated workforce of 19,000 Team Schein members. I believe our customers have faith in us, and we are fortunate to have a highly committed and experienced Board that understands the complexities of healthcare. As we conclude this call, I remain very optimistic about the future of Henry Schein, even as we prepare for some difficult times ahead. Our organization is strong and led by a capable team. Thank you for your participation, and to our investors, we appreciate your trust. Thank you.

Thank you. That will conclude today's Henry Schein Conference Call. We appreciate your participation and you may now disconnect.