Henry Schein, Inc. (HSIC) Earnings Call Transcript & Summary

Hello, everybody. You'll be hearing from Stanley Bergman, who has been the Chairman and Board CEO of Henry Schein since 1989. It's a Fortune 500 company and the world's largest provider of health care products and services to office-based dental and medical practitioners.

Good afternoon. Well, I'm so excited to be here today. This is Henry Schein's passion, combining investing with social responsibility. So thank you all for being here. Thank you to the CECP team for inviting us. Henry Schein has had a long commitment, actually, since Henry and Esther opened the store almost 90 years ago of combining business with the needs of society, our customers, our team and our suppliers. So thank you for listening to our story. Before I continue, let me just put up the customary safe harbor provisions. And of course, the details are available on our website. So Henry Schein is the largest provider of health care products and related services to office-based health care practitioners. That's dentists and physicians in their private practice. And we also provide service -- products and services to alternate care sites where health care is provided. We have about 1 million -- just over 1 million customers. That means we service about 1.5 million dentists and physicians. We are committed to helping our customers operate a better organization for the providing of health care so that our customers can provide better health care. So we are committed to helping our customers with the business aspects of their practice. We had $10 billion of sales last year. Over 19,000 what we call Team Schein Members, TSMs. We've been on the Fortune 500 list for 15 years and on the S&P for the past 4 years. Henry Schein has been recognized as a Most Admired Company by Fortune 500 and in our category has either been 1 or 2 but generally 1 -- listed #1 for actually most of the period that we've been on the list for the last 19 years. We have been ranked as an Ethicon -- Ethisphere member, listing for the past 8 years. And I'm very proud with our 100% ranking for the Corporate Equality Index and have been on that index also for 5 years. And for the past 4 years, ranked by Forbes magazine as one of the best places to work. Two recent awards were the Higher Ambition Company of the Year in 2018 and Fortune Change the World list in 2018 as well. So from a market position point of view, we are the largest provider of dental products and related services, including technology, software-type systems, in the world. And we are the #2 provider in the United States of products to physicians and alternate care sites. Our financial results have been pretty stable. In other words, we've grown by a track record of something like 15% -- just over 15% in compounded annual sales growth since we went public 25 years ago, 14% in EPS growth, and our market cap has grown at 16% compounded annual growth since the -- we went public 25 years ago. We do purchase back, and I'll talk about that later, stock each year. So despite the purchase back of our stock, we're the -- market cap has grown by 16% on a compounded annual growth rate since we went public 25 years ago. What is very often not quite understood by Henry Schein, of course, we are viewed as a distributor, but we do a lot more than that. Of course, we believe we have the finest supply chain network in the markets we serve. But it's the value-added services that are really what distinguishes us and helps us create value for our customers. We wish to help run their business, their practice, their organization and at the same time position them to provide great clinical care. And our focus is therefore on the delivery of health care in the practice -- or positioning our customers to deliver the health care in their practice, in other words, providing our customers with the tools so that they can operate their practice efficiently. If you look at just the last 3 years, over the last 3 years, our sales have grown at a compounded annual growth rate of about 5%, our operating income at about 4% and our EPS at about 10%. We did spin off a significant part of our business, our Animal Health business, a year and change ago. And so we do have some stranded costs that have impacted our cost structure, but we expect that to be flushed through the system in another year or so. So if you look at the megatrends impacting our industry. The big trend is digitalization, like in many other industries. Both our customers are using more technology to deal with their day-to-day operations of the practice but also using digital technology to undertake the clinical parts of their practice, including, for example, in dentistry, the digitalization of prosthetics. In other words, crown or bridge can now be digitally milled and even chairside while the patient is in the practice. This is having a profound impact on our customers' offices. Customer consolidation is occurring quite rapidly. In the medical world, it's much faster than in the dental world, but it's also occurring in the dental world, group practices are emerging, and we've been a leader in this part of the industry for decades. The aging population in the middle class, the baby boomers are, of course, bigger users of the kinds of services that our customers provide. And at the same time, the middle class is growing throughout the world, and the middle class is seeking the kinds of services that our customers provide. There is an increasing awareness of prevention and wellness. A key part -- a key thesis behind our business is to put our customers in a position where our customers can drive wellness and prevention in their offices amongst their patients. And if you look at dentistry in the last decade or so, there's been significant studies that show a direct correlation between good oral care and good health care. Prevention is key, and we have decided to focus a big part of our business on putting our customers in a position to provide wellness and prevention-type activities to patients, prevent people from getting sick rather than treating people when they are sick. And this is a key thesis behind our business and has helped us, in fact, grow the business now for a while, and we anticipate this as a trend going forward. Of course, the moving of procedures from the acute care setting to the alternate care setting, to the physician office, to the urgi centers, et cetera, is also a key trend. Demographics of our customers has changed rapidly. Go to any graduation of a dental school or medical school, and you'll see the majority of graduates today are women. This has changed the way in which our business -- our customers operate their businesses, and it's an area that Henry Schein has been involved with for decades. We've been a big proponent of diversity in the health care provider networks and have done a lot of work in that area. And of course, the big issue we're involved with is prevention of the spreading of disease. I will talk about that in a minute, and it's quite topical, obviously, because of the coronavirus. So if you look at our growth opportunities, you'll see that there's -- a key goal of ours is to increase penetration of our existing customers. We have a huge number of customers and a huge market share of customers in the markets that we're in, the developed world markets, and we wish to do more business with these customers, we're well positioned to do that, and also add new customers in the developing world. So there's a big focus on large customers as our customers grow and consolidate. Large group practices, IDNs, integrated delivery networks, adding customers, adding -- sorry, adding sites, consolidation in providers, and this is an area that we are focused on. A big, big area of focus for us is providing technological services to our customers, practice management software, electronic medical records and software-related to demand generation, driving patients into the dental office or the physician office. We are the largest provider of dental software in the world. Digitalization of dentistry, as I covered earlier on, is a big opportunity for us. And focusing on specialty areas, particularly areas of growth, are implants, bone regeneration type products, endodontic products and orthodontic products, wires and brackets and the new aligner products. So Henry Schein has a strategic plan like all of us do here in this room. We have been particularly focused on linking our strategic plan to sustainability, to the ESG-type areas, and this is something that's been part of our culture and part of our planning for a long, long time. So we have 3 big planks in our strategic plan. The first is to expand our core business, in other words, distribution in markets we're in and in markets that are emerging, the developing world markets; adding value-added solutions to help our customers operate a better enterprise so that they can provide better clinical care; and enhancing our own brand, including products that carry our own brands on them. So if you look at the core business, we are working on and have worked for years on providing access to oral care and access to prevention. This is an area that we believe is a direct alignment with the company's goals and the society's goals, the idea of adding prevention and wellness rather than dealing with people when they are sick. If you look at the value-added solutions, we are working with health care networks and our customers, in particular the smaller practice, to advance sustainability. And on the brand enhancements, we are driving purpose right through our network, whether it's to our customers or to our suppliers. What is very important for us is to help our customers link with us on advancing purpose and, in fact, finding ways to align with all of our constituents on adding to the needs of society and satisfying the needs of society. So we have believed in the Benjamin Franklin concept, really, since Henry and Esther opened the door. They don't call it this, but it's the Benjamin concept of enlightened self-interest, doing well by doing good. We, of course, in recent times, have used the concept of higher ambition. But this concept of higher ambition that we're speaking about, really, in the last decade or so has been part of our core business, really, since the beginning. So Henry and Esther started out doing a lot of philanthropic work in Queens. This moved along in the company. And so what we have done is we've figured a way to work with our suppliers, 3,500 different suppliers around the world, our 1 million-plus customers, 1.5 million practitioners, and they are, in turn, our customers, seeing about 1 billion patients in a particular year. We're figuring out and have figured out, actually, and are figuring out to a greater extent how we can advance our sustainability in that loop, our sustainability contribution helping our customers, in fact, provide more sustainable activities to their patients, whether it's how patients visit the practice or actually running the practice. So the 5 constituents that make up the Henry Schein Mosaic of Success are our suppliers, and for our suppliers, we want to be the best way for our suppliers to bring their products to market. Of course, today, we actually manufacture some of the products, and we want to figure out -- and we do, in fact, work on providing the best vehicles to bring our supplier products to market or our own products to market. At the same time, we're working with our customers to help our customers operate a better practice so that they can provide better clinical care. And at the heart of all of this is our #1 asset: Team Schein. We have been committed to a very, very strong value system, a value system where everybody in the company is treated equally. There's equal opportunity for everyone. Everyone is committed to working on programs to help society, advance the needs of society, mutuality, ethics. This is at the cornerstone of our value system. Although, it is clear that our culture has modified over the years because culture has to change and adapt to society's needs at the time. And so our values are constant, our culture modifies and molds to the needs of society as society progresses. On the other side, our investors. We are very clear with our investors and have been clear since our IPO 25 years ago. Our investors are critical. Our investors are entitled to a consistent growth in earnings. But our investors are one of the 5 constituents that make up the Henry Schein Mosaic of Success. And if you take that a little bit further, it's our fifth constituency, society, that is, I believe, the secret sauce that has motivated the company, motivated our constituents to work with us and has been at the heart of our consistent growth in earnings and at the heart of our growth in shareholder value. We believe that these ideas that we've had for 88 years, which we codified 19 years ago when we founded Henry Schein Cares. But prior to codifying and creating Henry Schein Cares, we were still committed to -- we were committed to this notion of balancing the needs of the 5 constituents that make up the Henry Schein Mosaic of Success. We're, of course, very, very pleased that in 2018, Larry Fink sent out his letter -- '19, the Business Roundtable, and of course, in 2020, the Davos Manifesto, and we're quite active at the World Economic Forum. But we believe that it is really important for the 5 constituents to be balanced because that, in the end, creates trust. When all 5 constituents are working together, it is the best way to create trust and advance change in any industry. And we have been a change in this -- agent in the industry -- in the markets that we support and the industries that we're in, the dental and medical industry. We believe that this trust creates brand value, consumer loyalty, ethical behavior, employee retention and sustainability. And in fact, we believed in the sustainability idea way before it became fashionable. So what have we done on the ESG journey? Informally, we've been -- had a commitment to ESG to all 3 letters, E-S-G. But over the last few years, we have, in fact, codified the ESG work through our strategic philanthropy, transparency and accountability on sustainability activities and other kinds of metrics in the ESG world and integrated that with our sustainability work. We subscribe to, and have been working towards, the SASB metrics. Our sustainability activity is under the aegis of our Board, and particularly, our Governance and Nominating Committee play a key role in providing oversight in this area. Our board members have been committed to social responsibility, really, since the day they joined our board. We've always sought board members that are committed to a broader idea of social responsibility and caring about society because we found that this is the way in which we've been able to generate shareholder value. When you look at the E, I can give you -- there some -- a lot of examples. By the way, this presentation with a little bit more is -- will be posted on the website. There's not going to be time to go through all of this. But on the E side, it would suggest that I give 2 examples. And here are 2 examples. The one is the work we're doing in reducing the network -- our transportation network and building network. In carbon emissions, we are working with our top 20 customers on the reduction in carbon emission and have worked on a number of initiatives in this regard, in particular, with our carrier, UPS. A lot of work has gone on in this area. At the same time, on the health care side, we have worked on ways in which to advance sustainability in health care in general and particularly in sites outside of the hospital. On the sustainability side, we have implemented a number of activities over the last few years with regards to diversity and inclusion. We have what we call our pods -- our D&I pods: We have a Women's Leadership Network. We have a PRIDE & ALLIES ERG network. In the marketplace, we have worked very closely with the major dental and medical societies in advancing diversity, both in terms of women and minorities, in health care, sponsoring the American Dental Association's leadership -- minority leadership institute (sic) [ Institute for Diversity in Leadership ]. And wherever we have an opportunity in this area, we have been active. 20 years ago, we called a summit at LaGuardia Airport of dentists from all parts of the dental community to kick off a diversity in leadership of the dental profession. So we have done a huge amount of work in this diversity inclusion area. And on the global health care leadership side, we have worked with multiple organizations, including U.S. -- UPS, BD, the World Health Organization, the World Food Programme, the CDC, to alert the world, over the last couple of decades, on the importance of pandemic planning. And in 2015, we're instrumental in launching the Pandemic Supply Network (sic) [ Pandemic Supply Chain Network ]. This is a network of companies and public policy groups, including the World Health Organization, that have been pretty active in understanding what products are needed to respond to a pandemic and where these products can be found. And so obviously, quite timely at this point in time. And on governance, we have a strict, strict policy on ethics. This is not something that we just created in the last few years, but it's been part of our culture, really, since before we went public 25 years ago. 50% of our independent directors are diverse candidates, and 40% are, in fact, minority. We have a Regulatory Compliance Committee, which is part of our board committee structure. Not required, but it's something we implemented. We have Cybersecurity Committee. And our directors hold regular meetings -- an executive session with the CEO -- without the CEO, and we are a company that has always believed in the combination of Chairman and CEO in one position, but all major decisions are made by the independent directors. So in summary, our goal, going forward, is to grow by about 1% to 2% faster organically than the markets. Of course, we add acquisitions to that. We have made about 250 acquisitions since we went public. We do about 10 acquisitions a year. Our goal is also to drive non-GAAP EPS to around mid- to high-single digits. Although, obviously, we aim for a higher number, and we aim to turn our profits into cash, and we've done more than that in recent times. So capital allocation, we generate a lot of cash. Goes 3 ways. We buy stock, about 1/3 of it or so; 1/3 of it we plow back into the business; and about 1/3 of it is used for M&A. And in that regard, we are always looking to add products and services to our platform. So going forward, ESG platform alignment with the needs of our key constituents is very, very important. Multiple organic and strategic growth opportunities abound within the dental and medical businesses. There's no need to go beyond what we do today. We do have a proven track record. We have a pretty stable management team, which is quite experienced in the worlds that we are in. Having said that, we are not shy to add expertise each year from industries outside of our field where we can find executives that bring us talent. So I've gone through this as quickly as possible because I'd like to allow for opportunity for Q&A. But the track record stands on its own. Everything I've said here is available on the website and with some more, of course. So thank you very much for listening. And I look forward to answering any questions.

Thank you all. Again, if you are listening through webcast, remember, you can submit a question through Slido. Is there anybody in our room that has a question? A lot of them over here. Here first.

Thank you for -- you've got an amazing track record in leading with purpose and ESG tenets in your business. I'm [ Chris Peterson ] from Ernst & Young. And my question is, as you strive to create, as you said, a purpose-driven value, are you measuring yourself differently? Are you including different kinds of metrics sets to your investors? Is your investor communication different now to portray those different types of purpose-driven value?

Well, I'm going to answer with a bit of humor to start with, if you don't mind. And I learned though -- Steve Paladino, our CFO, is here. In our original IPO, I tried to say something funny when we started, and investors didn't laugh, and that was the last time I did anything funny with investors. But in any event, let me just tell you the history. 25 years, when we went public, we had a slide on purpose and values. And at that time, we were asked by our bankers to take it out. So that will answer the change in the world. It was 25 years ago, not so long ago. Bottom line is we do measure. We issue a sustainability report. We have codified our giving through Henry Schein Cares, which is an NGO. We do not give money just as a donation. We give money where our team can be involved. And yes, we measure results. But I will say that we're only publishing these results in the last few years because there's been no interest. So it's been internal. And we do hold ourselves accountable.

Given that we had so many questions from over here also...

Sorry, can I just add just one last thing?

Oh, yes, of course.

And we issue -- we have a survey every 2 years amongst our team. And one of the questions -- or, actually, group of questions relates to the social responsibility of the company and engagement, and we ask the team to judge the company on purpose.

Back here.

What are the main adjustments that you make when distinguishing between GAAP and non-GAAP earnings? And what do you say to people who think that companies are obscuring the results rather than informing their investors when they make those adjustments? I'm very sympathetic to making adjustments. I want to hear how you defend yourself against the inevitable [ projections ]...

Okay. Well, in fact, I think we're more purist than most. Because we report our earnings on an accrual basis, taking into account depreciation and amortization. We do report cash basis earnings, but we hold ourselves accountable to fully loaded accrual-based earnings, taking into account goodwill and amortization. I believe there are very few companies that do that. Having said that, the adjustments relate to, primarily, restructuring, which may occur every few years. And we take those out, and that's permitted, and we show what they are, and we hold ourselves accountable for how much money we put into restructuring and the benefits that shareholders get, but I believe we are quite transparent in our reporting of our earnings and, in particular, in the difference between non-GAAP and GAAP.

Do we have any from that side of the room?

And there's tons of this on the website and lots and lots of analyst reports.

A question right here. Okay.

If we could just spend a few minutes on the G part of the discussion. So can you speak a little bit about how the Board is thinking about the refreshment process...