Good morning, everyone, and welcome to Henry Schein's Fourth Quarter 2022 Earnings Conference Call. This call is being recorded. I would now like to introduce your host for today's call, Graham Stanley, Vice President of Investor Relations and Strategic Financial Project Officer at Henry Schein. Please go ahead, Graham.

Thank you, operator, and my thanks to each of you for joining us to discuss Henry Schein's financial results for the fourth quarter of 2022. 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. And 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. 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 and 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 of the corresponding GAAP measures. Reconciliations between GAAP and non-GAAP measures can be found in the Supplemental Information section of our Investor Relations website and in Exhibit B of today's press release, which is also available in the Investor Relations section of the website. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, February 16, 2023. Henry Schein undertakes no obligation to revise or update any forward-looking statements or reflect events or circumstances after the date of this call. We prepared slides summarizing our fourth quarter financial results, and these can also be found on the Investor Relations section of our website. During today's 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.

Good morning, and thank you, Graham, and thank you all for joining us today. We concluded 2022 with a strong fourth quarter, successfully implementing our strategic plan goals for 2022 to 2024, which resulted in significant earnings growth for both the fourth quarter and the entire year, despite macroeconomic challenges and foreign exchange pressures. We successfully navigated the decline in sales of PPE products and COVID-19 test kits. When excluding these items and accounting for the extra sales week in 2022, we achieved solid internal growth of 5% in local currencies. We saw a decline in dental visits due to seasonal flu and COVID-19 last quarter, affecting both North America and internationally. However, this was somewhat offset by increased product sales resulting from visits to our physician customers. We made noteworthy progress in all our business units, evidencing stable market conditions in the sectors we operate. Our 2022 to 2024 BOLD+1 strategic plan has advanced well. In its first year, we focused on enhancing the customer experience and improving operational efficiency by forming our North American and international distribution groups. Both groups delivered positive results. We strengthened our dental market share with national DSOs and saw success with our technology solutions and specialty products in this segment. On the medical front, we expanded our presence with IDNs and large group practices. We also established a global digital team, positioning experienced leaders in key roles to advance our digital initiatives, including the launch of our global e-commerce platform, expected to begin rolling out later this year. We recently debuted our Detect AI and AI-enabled x-ray analysis tool through Video Health, which has gained FDA clearance for its periodontics solution, advancing the use of AI in dentistry. On the M&A side, we acquired Midway Dental in the U.S. and Condor Dental in Switzerland to expand our market reach. Additionally, we obtained a majority stake in Unitas and plan to acquire a majority stake in Biotech Dental, which we'll address shortly. We've initiated a restructuring plan to reduce our global real estate footprint, closing one of our headquarters buildings to provide modern and flexible office space while investing in technology to maintain our competitive edge. We exited an unprofitable business to focus our resources on our strategic priorities, and the costs from this exit are reflected in our restructuring expenses this quarter. Looking forward to 2023, we anticipate operating income growth in the high single digits to low double digits, excluding contributions from PPE products and COVID-19 test kits. We expect that declining selling prices for PPE and reduced demand for COVID-19 test kits will be offset by growth in our core business. Our momentum as we enter 2023 strengthens our confidence in our guidance, particularly in operating income excluding PPE and COVID products. In our dental distribution business, merchandise sales in North America grew modestly, excluding PPE and the extra sales week. We believe our market share remains stable or slightly positive, although global dental consumable merchandise growth was affected by high flu and COVID-19 cases, leading to increased patient appointment cancellations and staffing shortages. Fortunately, patient flow appears to have returned to normal levels as we moved into January 2023. Last year's merchandise price increases have begun to stabilize. Our comprehensive product portfolio allows us to address customer pricing concerns with various options, including our own brands and alternative national brands. Price increases in the marketplace have remained stable and are not as pronounced as they were at the start of the previous year. Demand for dental equipment in North America is robust, with a stable order book. While traditional equipment sales performed well, sales of digital restoration equipment declined compared to the previous year's fourth quarter due to shifts in customer demand and supply chain issues with an important intraoral scanner supplier. Overall demand for digital restoration remains strong, albeit with certain challenges in product mix. We continue to observe some construction delays and a slight decrease in planned new office openings among larger DSOs. Internationally, we faced similar challenges with COVID-related delays but saw growth in regions like the U.K., Eastern Europe, and Brazil. Staffing issues and appointment cancellations began to ease towards the end of the quarter. Demand for international equipment sales remained steady, although influenced by customer expectations around the biennial IDS show in Cologne. The fundamentals of our target markets remain strong, with demographic trends favoring our strategic position. In the dental specialty products sector, factors like prior year growth comparisons affected implants and bone regeneration sales. The BioHorizons implant segment continues to grow in North America and Europe, while sales to U.S. DSO customers remain solid. Our value brand, Medentis, reported strong growth, particularly in Germany and Japan. We announced plans to acquire a majority stake in Biotech Dental, which will enhance our digital offerings and products essential for dental labs, particularly in France. The orthodontic segment has also shown robust growth due to new product introductions. In our technology and value-added services, Henry Schein One, our software business, saw significant growth globally, especially with our cloud-based solutions. Sales of our practice management software in North America were fueled by customers transitioning to Dentrix Ascend. We now have nearly 6,000 customers using our fully cloud-based products, which have also driven demand for additional services. Our Analytics business experienced customer wins this past quarter, supporting revenue cycle management solutions. The medical distribution business showed excellent growth linked to increased patient traffic due to flu and COVID-19. Excluding PPE and COVID-19 test kits, we noted double-digit growth in local currencies, and absent public health outbreaks, sales should trend toward normal single-digit increases. We are pleased to see continued growth of new accounts across varied medical practice settings. Our pharmaceutical sales rose, particularly for pneumonia treatments, and equipment sales remained strong. Henry Schein has effectively adapted to customer needs during the pandemic and flu seasons, maintaining a strong average sales growth. The loyalty gained during the pandemic reinforces our value as a reliable healthcare product source. I want to commend our team for their exceptional efforts in managing the extraordinary demand for COVID tests and PPE, which bolstered our customer loyalty. I will now hand over the call to Ron for a review of our fourth quarter results and 2023 guidance.

Very good. Thank you, Stanley, and good morning, everyone. As we begin, I'd like to point out that I'll be discussing our results as reported on a GAAP basis and on a non-GAAP basis. Our fourth quarter non-GAAP financial results for 2022 and 2021 exclude restructuring and integration costs as well as acquired intangible asset impairment charges. This is detailed in Exhibit B of today's press release and in the supplemental information section of our Investor Relations website. As Stanley mentioned, the fourth quarter of 2022 included one additional selling week compared to the fourth quarter of 2021, which was the holiday week between Christmas and New Year's Day. We report on a 52-, 53-week fiscal year ending on the last Saturday in December. The next time our results will include an extra selling week will be in 2028. With respect to sales growth, I will focus on LCI sales growth, which is internally generated sales in local currencies and excluding acquisitions. To facilitate more meaningful comparisons, the estimated extra week of sales will also be excluded from LCI sales growth figures. A detailed breakout of the components of our sales growth, including LCI growth, is included in Exhibit A of today's press release. Fourth quarter global LCI sales decreased by 1.8% versus the prior year. However, when excluding sales of PPE products and COVID-19 test kits, our LCI sales grew 5%. We sold approximately $161 million in PPE products and approximately $93 million in COVID-19 test kits, including multi-salve flu and COVID-19 combination kits in the fourth quarter. This compares with approximately $261 million in PPE products and approximately $187 million in sales of these tests in the fourth quarter of 2021. Our GAAP operating margin for the fourth quarter of 2022 was 2.15%, a 387 basis point decline compared with the prior year GAAP operating margin. This was primarily a result of restructuring and integration expenses and the impairment of certain intangible assets incurred in the quarter. Our non-GAAP operating margin for Q4 was 6.74%, a 56 basis point improvement compared with the prior year non-GAAP operating margin. This improvement was driven by gross margin expansion, mainly as a result of the sales mix favoring higher-margin products, along with lower operating expenses as a percentage of sales. Regarding income taxes, our reported GAAP effective tax rate for the fourth quarter of 2022 was 23.6%. This compares with a 22.5% GAAP effective tax rate for the fourth quarter of 2021. On a non-GAAP basis, our effective tax rate for the quarter was 22.2%, and this compares with the prior year non-GAAP effective rate of 22.5%. Fourth quarter 2022 GAAP net income was $47 million or $0.34 per diluted share. This compares with prior year GAAP net income of $147 million or $1.05 per diluted share. Our fourth quarter 2022 non-GAAP net income was $165 million or $1.21 per diluted share. This compares with prior year non-GAAP net income of $151 million or $1.07 per diluted share. Amortization expense of acquired intangible assets for the fourth quarter of 2022 was $30.7 million or $0.14 per diluted share. This compares with $32.6 million or $0.14 per diluted share for the same period last year. This expense is included in the 2022 and 2021 non-GAAP net income results I just mentioned. A key goal of our 2022 to 2024 strategic plan is to invest in higher-growth businesses that have a larger intangible asset component. We believe earnings, excluding amortization expense of acquired intangible assets, better represent the underlying business results. Beginning with the first quarter of 2023, we will be modifying our non-GAAP reporting to exclude amortization expense of acquired intangible assets. Using this method, our full year 2022 non-GAAP net income was $741 million or $5.38 per diluted share. We will include a reconciliation of our non-GAAP financial results with the new methodology in our quarterly presentation available on our Investor Relations website. Finally, foreign currency exchange negatively impacted our fourth quarter diluted EPS by approximately $0.04 versus the fourth quarter of last year. I'll now provide some detail on our fourth quarter sales results. Global Dental sales were $2 billion, and LCI sales decreased by 2.6%. Excluding sales of PPE products, our Global Dental LCI sales growth was 0.9%. Global Dental consumable merchandise LCI sales decreased by 3.7%, but increased by 1.0% when excluding PPE products. Global Dental equipment LCI growth was 0.7%. North America dental LCI sales decreased 3.4% compared with the prior year, primarily due to a 5.1% decrease in consumable merchandise sales. However, when excluding sales of PPE products, North America dental consumable merchandise LCI sales grew by 1.3%. North America dental equipment LCI sales increased by 1.3%. International Dental LCI sales decreased by 1.4% and consumable merchandise LCI sales decreased by 1.7%. When excluding sales of PPE products, International consumable merchandise LCI sales increased by 0.7%. International equipment LCI sales decreased by 0.4%. Sales of dental specialty products were approximately $247 million in the fourth quarter, with LCI growth of 0.3% compared with the prior year. Global technology and value-added services sales during the fourth quarter were $187 million, with LCI growth of 3.4% compared with the fourth quarter of 2021. Sales were negatively impacted by the expiration of a government contract, which we mentioned during our Q3 2022 conference call. Adjusting for this contract, the underlying sales growth was 9.1%. During the fourth quarter, our technology and value-added services businesses, together with our dental specialty products, achieved LCI sales growth of 1.6% or 3.9% after adjusting for the expiration of the government contract. Global Medical sales during the fourth quarter were $1.2 billion, and LCI sales decreased by 1.3%, 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 by 14.9%, led by strong point-of-care diagnostics, medical equipment, and pharmaceutical sales. Regarding share repurchases, we repurchased approximately 3.6 million shares of common stock in the open market during the fourth quarter, buying at an average price of $79.55 per share for a total of $285 million. The impact of the repurchase of shares on our fourth quarter diluted EPS was immaterial. For the full year, we spent $485 million to repurchase 6.1 million shares. At fiscal year-end, we had approximately $115 million authorized and available for future share repurchases. An additional $400 million was approved by the company's Board of Directors on February 8, 2023. Turning to our balance sheet and cash flow. We continue to benefit from significant liquidity, providing our businesses with the flexibility and financial stability to execute on organic growth initiatives and strategic acquisitions while continuing to return capital to our shareholders. Operating cash flow for the fourth quarter was $254 million compared with $277 million last year, with the decrease primarily due to an increase in working capital that was driven by the timing of accounts payable. For the full year, operating cash flow was $602 million compared with $710 million in 2021. Regarding our restructuring program, as part of our previously disclosed integration and restructuring initiative, we recorded a pretax charge in the fourth quarter of $121 million or $0.70 per diluted share. These expenses mainly relate to vacating one of the buildings at our Melville headquarters and the impairment of intangible assets associated with the disposal of an unprofitable business. There were also restructuring expenses associated with severance and costs related to the exit of some other facilities. Due to the disposal of certain assets and the lengthy remaining period of certain leases we exited, expense savings from this plan are expected to be realized over a longer period of time. We expect to continue to record integration and restructuring charges in 2023. However, an estimate of the amount of these charges has not yet been determined. Any restructuring and integration charges are expected primarily to include severance pay and facility-related costs. We also recorded an impairment expense for intangible assets of $34 million pretax or $0.17 per diluted share related to certain continuing operations. Let me conclude my remarks with our 2023 financial guidance. At this time, we are not able to provide estimates for costs associated with integration and restructuring for 2023. Therefore, we are not providing GAAP guidance. As I mentioned, beginning with our Q1 2023 financial results, we will modify our non-GAAP treatment to exclude amortization expense of acquired intangible assets. This is in addition to the other adjustments we made in 2022 to our GAAP financial results. All guidance today reflects this change. 2023 non-GAAP diluted EPS excludes amortization expense of prior acquisitions of $0.56 a share in 2023, and this was $0.57 in 2022. For 2023, we expect non-GAAP diluted EPS attributable to Henry Schein, Inc. to be in the range of $5.25 to $5.42 per share, reflecting growth of negative 2% to positive 1% compared with our 2022 non-GAAP diluted EPS of $5.38. Our guidance for 2023 assumes total sales growth of approximately 1% to 3% over 2022, with sales of COVID-19 test kits declining approximately 35% to 40% from sales in 2022. Additionally, PPE product sales are expected to decline about 20% to 25%. In the aggregate, revenues of these product groups are expected to decrease approximately 30% to 35% from 2022. The impact on 2023 non-GAAP diluted EPS from the lower contribution to earnings from sales of PPE products and COVID-19 test kits is approximately $0.35 to $0.40 per share. This impact will be much more pronounced over the first half of 2023 and especially in the first quarter as we had sales of almost $500 million of PPE and COVID-19 test kits combined in the first quarter of 2022. These headwinds are largely offset by earnings momentum in our underlying core businesses. We expect non-GAAP operating income to grow in the high single-digit to low double-digit range when excluding the contribution from PPE products and COVID-19 test kit sales. Please note that 2023 will include one less selling week compared to 2022, which will occur in the fourth quarter. For 2023, we expect non-GAAP operating margin to be 10 to 15 basis points below our 2022 non-GAAP operating margin of 8.2%. This is 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. Our 2023 guidance includes higher interest expense than in 2022 as a result of higher interest rates and higher minority interest from our higher-growth businesses, mainly 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, the acquisition of Biotech Dental and other potential future acquisitions or integration and restructuring expenses, if any. Guidance assumes that foreign currency exchange rates are generally consistent with current levels, the end markets remain consistent with current market conditions, and that there are no material adverse market changes associated with COVID-19. With that, I'll now turn the call back to Stanley.

Thank you, Ron. We have approximately 20 minutes available to answer questions. I apologize for the length of the call, but there's a lot to discuss. We are very confident in our business. The segments outside of PPE and COVID tests are performing quite well, despite some macroeconomic challenges. Nevertheless, I believe we have strong momentum in the business and I look forward to addressing any questions. Operator?

Our first question comes from Jeff Johnson with Baird.

Ron, I wanted to start by discussing the COVID testing kit and PPE guidance. When I consider the EPS impact this year, it seems to be reflecting a decremental margin in the mid to upper teens. Over the past couple of years, these products have contributed positively and have been reflected in a corporate-wide margin rate. It makes sense that with the loss of some of that inflated top-line growth, there would be a deleveraging effect, but a mid- to upper teens decremental margin impact seems larger than I anticipated. Could you provide any insights on this?

Yes, certainly. I think that we could see a little bit of pressure on gross margins on both PPE and COVID test kits versus the prior year. But I think the bigger issue there, Jeff, is just the gross profit dollars, I mean the compounded effect of the ongoing decrease in the revenues from these product categories in both 2022 and then continuing into '23 results in fewer gross profit dollars. I think that kind of dilutive effect begins to hurt the operating margins a little more so than it makes it more difficult for us to cover it like we did in '22.

Yes, I understand. Historically, you have provided organic growth and revenue guidance, which you did last year. This year involves many variables, including one less selling week, updates to PPE, and contributions from acquisitions. If I consider the 1 to 3 range, I estimate around 3% to 6% for organic growth, excluding those factors. If I assume that medical and technology are slightly higher, and dental is in the low to mid-single digits, are these the figures we should use as we prepare our models for 2023?

Yes, I believe you are within the expected range. We anticipate a headwind from PPE and COVID test kits combined that could impact us by approximately 300 to 400 basis points. Additionally, the 53rd week is expected to create another headwind of about 1 to 1.5 points. While we will see some benefits from acquisitions, this leads us to anticipate non-PPE and COVID test kit growth in the range of 3% to 6% or possibly 4% to 7% for 2023 compared to 2022.

Dental a little below and medical above. Is that the way to kind of think about that?

Yes, that's probably a fair statement, yes.

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

I had a question around sort of your utilization and visit assumptions. Could you help us parse that apart a little bit more for 2023? I'm thinking specifically on maybe to like medical visits and then sort of overall dental visits?

Yes, Elizabeth, those are very good questions. We saw a decline in dental visits both in the United States and Europe, although other regions were not as affected, with China included in the fourth quarter showing a slight decrease. Fortunately, there has been a nice recovery in January. While visits are still a bit lower than they were in 2019 in the U.S., getting data from outside the U.S. has been challenging. We are not completely back to our previous levels, but it seems the decline we saw in the fourth quarter has mostly recovered based on our observations in the first 40 days of this year. We believe we are roughly at the same level we experienced in the third quarter. On the medical side, we observed an increase in visits as people were checking for flu to ensure it wasn’t COVID; this led to growth in flu testing. Manufacturers of flu tests are providing relevant data. We anticipate that visits in January and February should be approximately back to pre-flu levels seen in the third quarter. Overall, the businesses have stabilized now after the temporary drop in dental visits and a slight spike in medical visits. When looking at our internal growth in local currency, the average is around 5%, and we expect it to potentially improve in the first quarter. While it's difficult to predict, the outlook for the first 40 days of the year appears quite positive.

Got it. And sorry, just two clarifying questions. One, your comments about sort of the dip and then a little bit of the recovery in January and early February, that also applies to Europe. And then secondarily, you're assuming for your 2023 guidance at these current kind of January conditions continue ongoing?

Regarding international markets, particularly Europe, we are heavily focused on China, but there is some positive impact from Brazil, where we have a significant business, though I would say our market share is decent rather than huge. The trends we are seeing are quite similar across these regions. Our medical business isn't substantial in Europe, so I would set that aside. The data could vary since it is quite spread out. However, our dental business is following trends similar to those in the United States and North America. What was your second question, sorry?

And is that January sort of rate of visits, et cetera, was sort of what you were using to underpin your 2023 guidance?

I'll have Ron answer the guidance question. I'm not sure whether the first 40 days really carried through for the full year. Ron?

It's a bit early to make definitive statements. I believe our guidance is supported by our budgeting process. We are closely monitoring developments in 2023. Last year, the dental market faced some challenges in January due to Omicron, which influences our assumptions for Q1. Additionally, as I mentioned earlier, we generated around $500 million in revenues from PPE and COVID test kits in Q1 last year, which will not be replicated this year. Therefore, Q1 will still experience some fluctuations.

When you flow through everything, Elizabeth, I think we're pretty comfortable with our budget for this year, which contemplates, at the end of the day, high single-digit to low double-digit operating income growth when excluding PPE and COVID. If you can see through the PPE and COVID, the business is solid, and that's actually better performance than we've had in the past. I still think that the whole management of this PPE and COVID tests, where we put the accelerator down, generated over $2 billion or so in sales and pretty good profits has paid off because our customers are understanding that they can rely on Schein during challenging times, and the products we sell generally meet regulatory compliance. They were buying products during this COVID period that had regulatory issues and quality issues. The strategy has played out well in terms of focus on PPE and tests. At the same time, we garnered quite a bit of core business, and that's reflected in our expectations for '23 in terms of growth of operating income.

And the next question comes from the line of Jason Bednar with Piper Sandler.

Maybe Stanley, I will start with you. A lot going on here, as you said. But maybe with the outlook, you got 1% to 3% of the top line. I know Jeff was digging in there on the organic growth. Core EBIT growing upper single, low double digits implies some pretty nice core margin expansion, and that would seem to fit with the historical trend line of the business. But maybe double click in on Jeff's question there. Wondering if you could comment a bit further on how you see the core dental consumables and equipment lines performing in 2023 in North America and International? And then are the drivers of the core margin expansion implied in your guide? Are those more growth or operating that you're willing to comment there?

Yes. Let me deal with the first part. I think it's best for Ron to respond to the guidance from a mathematics point of view. As noted, in the prepared remarks, we believe the dental market in the developed world is quite stable. We believe that, generally, we're gaining some market share. There are elements of seasonal adjustment because of flu in the fourth quarter and a little bit of a rebound in the first quarter. Generally, I think the market is stable. I think specialty products are stable. You should not necessarily read anything into our specialty sales per se because we had an exceptional fourth quarter for implants and bone regeneration products in '21. Generally, the consumable markets in the developed world are relatively stable. There are a few markets that are down and a few that are a bit up. But generally, it's all stable. On the equipment side, traditional equipment is okay. We haven't quite run off the backlog, and it's pretty stable. The area that in the past, I was a little more concerned about is the imaging. I think it's relatively stable now. The prices are not going down as they did, and the units, the demand is pretty good. The area where there'll be lots of ups and downs is in digital. There's enormous interest in digital dentistry. I think when it comes to the scanners, we are now in standard use buyers. There are many new entrants into this market. There are lower-priced products, for sure, and that's where the market is heading, but the demand for units is very strong. We were challenged a bit, and I think it's going to be that way for a few quarters with the new product from our leading provider of scanners. But I don't think we'll lose those orders; they'll come. On the other side, the mill market has really almost come to a halt. We're still selling mills. But dentists, they were looking at mills are now looking at 3D printing. We got a bit of a boost there in the United States. The ADA has now provided a billing code. Dentists may not buy the 3D printer right away, but they're looking at it. That market is going to do well. It may be a technical use for the front. I'm using it later for the front teeth, as it is not perfect yet; this is a great opportunity for us, and we expect to do even better even though it's not covering the reduction in mill demand. I'm referring to lab mills, which are doing quite well. So generally, I'd say dental is stable. On the medical side, we continue to see the migration from the acute care setting.

Yes, in response to your question about operating margin, I believe that operating income is increasing in the high single digits to low double digits when we exclude the impact from PPE and COVID test kits. This suggests a potential expansion in operating margin, as you pointed out. Our growth is largely driven by having a diverse product portfolio that includes not only distribution but also specialty products within the medical and technology sectors. This diversification helps us to mitigate some of the market challenges that have impacted us, particularly in PPE and COVID test kits, through the strength of our overall business.

Got it. Just so Ron, just as a quick follow-up there. You're suggesting operating margin expansion total to get that. Is it gross margin driven or OpEx driven? Thanks for the comprehensive answer. I'll hop back in queue after that.

It's important to note that the product mix aspect would be primarily driven by gross margin.

The next question comes from the line of Jonathan Block with Stifel.

Ron, could you explain the impact of the restructuring from late 2022 on the projected high single digit to low double digit growth in non-GAAP EBIT for the core business in 2023? It appears to be more significant than usual. Additionally, is this growth outlook a reliable indicator of long-term performance once the challenges from PPE and COVID are resolved? Also, Stanley, regarding implants in the dental specialties segment, I understand the tough comparison you faced, but do you think implants might show flat year-over-year growth by the end of 2023? I would appreciate your insights on how that compares to market growth and whether you believe you are still gaining market share in that area.

Yes, John, I believe your question pertains to the sustainability of ongoing growth in the high single to low double digits across our business. We are confident that we can maintain this growth. As you may know, we have an Investor Day scheduled for February 27, where we will share midterm expectations for what we foresee beyond 2023. This is influenced by the mix of our business, as we are experiencing faster growth in certain areas, such as specialties and technology. Did that answer your question?

Just to respond quickly to the specialty products, the implants and bone regeneration products are doing very well. We're very pleased with our internal growth in that area. I think the Biotech acquisition will help. So that business continues to be strong, particularly in our core markets, which are the United States and Germany and a couple of the Germanic countries and Japan. On the endo products, we're doing well. We continue there like in implants and bone regeneration; we believe we are gaining market share. The aligners are so small, but I think we will get a boost with the Biotech acquisition. We will have certain synergies that I think will help drive more sales, but it's a very small business.

Our next question comes from the line of Nathan Rich with Goldman Sachs.

I have two related questions about the intraoral scanner market. Stanley, can you share your thoughts on the transition to lower-priced products? What are your expectations for that market in 2023? Are we beginning to see any signs of stabilization in terms of average selling price and product mix? Additionally, could you provide more details about the supply issues with the supplier you mentioned? Do you have any insights on when these might be resolved and what you are anticipating in the outlook?

Yes. On the side, on the scanners, I don't think we've seen the bottom yet in terms of mix change. I think the pricing relative to particular manufacturers may have stabilized. But there are entrants into this market that have very good products that perhaps we didn't even sell much of in the past that we're not carrying and selling. It's more of a mix of lower-priced products rather than deflation of a particular manufacturer's existing products, although there could be some of that. I estimate about 20% to 25% of the developed world have one of these devices, and we think that's going to be standard of care within the next couple of years. We are optimistic about units in that area, and also these newer entrants that we're working with are doing quite well with us. Regarding the manufacturer that has a supply chain issue, it's not a public company. I can't talk about it, but they have a new product that has done quite well. That goes a little contradicts what I said; as manufacturers that have unique technology, there is a demand for paying more. But that's not generally for the whole market. The whole market, the 75% of people that don't have a device are interested in more lower-priced products that have enough features for them. The one that is on back order has higher-end features, and we don't expect that to resolve for three quarters.

And we have time for one last question coming from the line of Kevin Caliendo with UBS.

Can you quantify in any way the impact of the 3D printing that you called out in the release and on the call? Like in terms of numbers and market share and the like, because I know you've talked about it in the past, but I think this is the first time really called it out in the press release is impacting the business. Just as a follow-up, I appreciate all the color on the inventories and the equipment and IOS and the like. But your backlog grew in Q3, and you believe you said it grew sequentially through the quarter. What is the expectation for equipment sales? And where does your backlog sit now relative to where you were at the end of Q3?

Let me deal with the backlog first. It is in North America, similar to what it was at the end of the third quarter. I don't think much has changed. I can't give you the exact timing. A lot of that is traditional equipment, but we seem to be topping up whatever we ship. The market seems to be quite strong in Europe. It's dipped slightly, but we think that's somewhat because of the IDS because people are holding back. We have the margin here. The bottom line is our backlogs are good in both North America and internationally, and equipment is strong. Regarding mills, I would say the mill market has significantly come down. I'm referring to chairside mills; that's just not doing well. I'm not referring to lab mills. We are the largest provider of products to dental laboratories, and that market seems to be relatively strong. The switch to 3D printing is not occurring 1:1 yet. There are a lot of dentists that are saying they need to find out more about this. I expect that over the next couple of quarters, our team will educate dentists on the opportunity for 3D printing. I suspect it will result a little bit in mills going up again because right now, it's a bit of a situation where dentists want to understand more about what's happening. 3D printing is going to be important, but not substitute completely for chairside milling. The market has come to a little bit of an educational struggle, but I think the mills will come back again, but not to where they were, and 3D printing is at a relatively early stage. We're doing very well in terms of growing our global market share, the sales that are out there. 3D printing will improve as various materials come to market and as the aesthetics improve. The message is that digital restorations are a hot product, and the interest from dentists in investing is key. Our job is to ensure we educate dentists on the appropriate devices for their practice and then close on sales.

Just to follow up, Kevin, the guidance does not include Dental Biotech. The impact of that will be slightly dilutive to 2023 when excluding amortization expense.

Thank you very much for calling in. The message we want to communicate is that our core business is in good shape. We expect decent internal growth rates in local currency for 2023, and we will cover this in more detail at our Investor Day. We expect our operating income to continue to grow quite nicely in the high single digits, low double digits. The business is in good shape in markets that are doing well. There are nuances that need to be understood. We're happy to deal with that and further detail at the Investor Day. If anyone wants to reach out to Graham, on the Investor Relations side, he'd be happy to provide further clarity on our remarks. Thank you very much, and hopefully, we'll see everyone on the call at our Investor Day in New York City, the following week.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.