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

Good morning, everyone. Thank you for joining us today. My name is Michael Cherny. I'm the Healthcare Tech and Distribution Analyst here at BMA Securities. Welcome to our now Virtual Healthcare Conference. Sorry, we all can't be in Las Vegas, but hope you're thrilled to join us for 3 days of packed action. Most importantly, we have the senior management team from Henry Schein. With us today, Stan Bergman, Chairman and CEO; Steve Paladino, Chief Financial Officer; and Carolynne Borders from the IR team. Before we kick off the fireside chat, I did want to turn it over to Steve for a few opening remarks, followed by a couple of other remarks from Stan.

Okay. Thank you, Michael. Good morning to everyone. As we continue this conversation, I'd just like to point out that certain comments made during the conversation may include forward-looking statements. And obviously, there are risks and uncertainties involved in the company's business that could impact those forward-looking statements, and all of the forward-looking statements are qualified by cautionary statements in Henry Schein's SEC filings as well as documents on our IR website. I just wanted to mention that, and I'll turn it over to Stanley for some opening remarks.

Thank you, Steven and thank you, Mike, for hosting us. And good morning, everyone. Obviously, like with every company and every individual on the planet, COVID-19 has created an unprecedented global health crisis and related economic crisis. For Henry Schein, we started out in the middle -- actually, the earlier part of March reacting. Our first priority was, of course, our team members' safety and their families. Then in parallel with that, working with our customers on methodologies to help them cope with the crisis, moving into, a little bit later, into an environment where we started developing plans also in parallel for the resumption of practices of business as practitioners came to work. Now the first location that was hit, obviously, was our Chinese business. And that business has started coming back a little bit. I would say that in China, the majority of dentists in one way or another are starting to see patients but a very moderate level. We then, of course, in parallel with that, started addressing the financial aspects of the business. Number one priority from the financial point of view is cash preservation, reducing costs. We can go into that in detail if people have a questions. Plenty published on that about us. And not only addressing cost per se, but cash flow, we stopped investing in fixed assets, put acquisitions on a temporary hold, stock buyback also on temporary hold. So we mentioned in our investor call that the sales run rate we expect in the second quarter, of course, very hard to guess. But we wanted to give some guidance with the global dental sales likely to be down somewhere in the 70% to 80%. A little bit, we feel, that it may be -- we have some conviction that it may be on the lower end of that for dental. Medical is somewhere around 20% to 30%, somewhere in the middle, probably. And the technology and value-added service is somewhere in the 30% to 40% range. We believe that we have a pretty strong moat around our business, specifically, of course, our service capabilities from a product point of view, a variety of products. And then, of course, the value-added services, many of those really are playing a key role in helping practitioners through this time. I think the model that we have which is a consultative sales model, is the model that is needed for this time, and I think bears out that e-commerce companies only are not what is needed by practitioners. The phones are ringing and we have more calls than ever before, smallish orders on PPE and things like that, but also questions on practice management. And our technology platform, our field sales representatives are all operating from home at this stage. Well, some are starting actually to go into the field very recently in the last few days. Our repair people, our service people, all of this, together with our practice management software and Henry Schein One platform are critical to our customers, and I think are appreciated in a major way. Our pricing of products is commensurate with the service and is very much appreciated by smaller practices who are really struggling right now and by the DSOs as well. So we believe that we are well positioned right now to ride out this virus over the next few months and be in a position to service our customers as they come back. While all this is going on, we're balancing the needs of all our constituents, our suppliers. We're working with our suppliers extremely closely, and it's been heartening to see how suppliers, specifically those in the PPE area have worked closely with us. We're working with our customers. The team is highly engaged, although significant numbers are on furlough. We do not terminate too many. We terminated some people that were likely to be part of our restructuring program. But in general, people are either on a furlough or reduced compensation, or in the case of our salespeople, reduced draws. And we are working closely with our Board. I want to provide investors as much information as we can. And we are committed to continuing and have been in supporting the NGOs that we work with, and so our commitment to ESG is still very much alive and well as we balance all of our constituents and advance our purpose-driven organization. So Steven, I think -- or Mike, those are some thoughts, and we're happy -- I don't know if, Steven, you are going to provide any further financial information. I think you are. So maybe you can do that, and then we'll handle some questions and answers.

Yes. I'll be brief because I think they want to get to questions. I would say that we also suspended guidance, obviously, because of the uncertainty of COVID-19. But we have done a lot, Stanley touched on it. We have done a lot in reducing expenses as well as cash preservation. We feel like we are very well positioned as we go through this pandemic. We have a very strong balance sheet, and we have access to $1.7 billion of cash or liquidity, which is secured on a committed basis. So we feel like we're in a good position financially. But there's still a lot of uncertainty as to how long this will last as well as when dentists start coming back to their practices, which is beginning; how quickly patients will also feel comfortable going back to their dentists. So maybe I'll leave it there, Mike. And we can -- you can go through some Q&A.

Yes. No, that sounds great. And you gave a lot of color there, a lot of color on your call last week. I did want to jump a little bit into how you think about that pace of recovery. Clearly, you have a lot of day-to-day direct contact with your customers, not only on the dental side, but on the medical side. You also provide a very important, both support service but also, Stanley, you mentioned the sales of PPE. And so as you think about positioning your business, how do you think about what it'll take to get volumes back to normal in terms of how long some of the gating factors? And are your customers talking to you yet about what they see in terms of a reboot of purchasing tied to any level of deferred volumes and how they think about volumes coming back into their practices, both on the dental and medical side?

Yes. Mike, there's a lot in your question. I'll try to answer part of it. And then if there's part that you want clarification, please ask further questions. So I think our customers want and are ready to go back into practice. I'm talking about the solo practitioners or the small practice, the midsize and the large. It's very regional. If we can use some countries that are more advanced than others in the process, as an example, it is quite encouraging. China, as I mentioned, practitioners are significantly open but with lower volumes. And it's actually quite interesting. We -- not that it's material to our numbers, we did get some nice orders for implants for China. So it's indicative of the fact that the dentists are ready to go back. Germany, I would say, of the developed countries is the most advanced; a little bit in Austria, it's a smallish country; and the Netherlands. Practices are coming back, are open. We actually introduced, and this is not material to the whole of Schein, a new line of implant products in Germany, and it was a bit of a promotion with it. But I think it was mostly the new product, and we had a very good sales day, I think one of our best sales days in Germany recently. So I would say that, that is all very, very encouraging. Australia, I think they've got their call, Stage 1. They're through that and expect to be in Stage 2, which is slowly going to allow practices to open up. So that's encouraging. Then we have the news in the United States, which I think every investors know about, which is regional. And yes, we've noticed, purchases our product. The challenge will, of course, be PPE and, in particular, the N95s. Dentists have historically not bought N95s, so they're not part of that supply chain. And so we need to get N95s to customers. There is a possibility of getting K95s from China. Having said that, the FDA has recently reduced the capacity for those kinds of products because of some clarification on regulations. But PPE, in general, is going to be very tight, I estimate, in May and June, likely July, maybe August. And then it will start freeing up as the government encourages movement from the acute care setting into the alternate care setting from a PPE point of view. We're optimistic that we're going to resolve some of these PPE issues. But of course, there are significant challenges from a supply chain point of view. And from now, an export from China as the government in China is inspecting shipments from China of PPE products as well. So we are seeing lots of interest in our value-added services, those that connect with rebooting the practice, lots of interest. I would say that plus the calls we're having, the various webinar type calls, a lot of interest. And they are moving significantly towards PPE or infection control and towards hard-won deals with the financial aspects of the practice during the soft early period. So it is encouraging. I feel a little bit more encouraged today, I don't have a barometer for that, on our conference call a few days ago. So we have to just be careful that we do this in a very, very careful way that practitioners have PPE, that patients have PPE or we'll have a slight back-in to another crisis. So that's sort of at a very high level, Mike.

Thanks, and along those lines, you made just an interesting comment about how your dental practices typically have not been in the N95 supply chain. It seems like that's not something that's going to be in focus for the long-term. What are some of the other long-term implications that you see about this coronavirus outbreak changing about -- the way that Henry Schein goes to market and the way that your customers rely on you as a key trusted supplier?

Yes, I would say most people on this call were not in business when the last time we had a similar situation, wasn't exactly the same, in the late '80s and early '90s as a result of the response to HIV and AIDs. When actually, Henry Schein was the first of the dental distribution companies to come up with a manual on sterilization of the practice and all the products that are needed. If you remember at that time, dentists and those of whom can remember did not wear masks, gloves, did not clean between patients, sterilize between patients. We introduced that as the practice. For a period of time, practitioners didn't go -- the public didn't go into practices. Practitioners adopted the sterilization infection control protocol and the public slowly became confident and practitioners became confident. I see a key role for the industry and I think Henry Schein is a leader. We were the leader in establishing OSAP, which is the infection control body. It's an NGO that focuses on dental practices and infection control. I think we're going to be viewed as a key player in that area. I just hope that dentists are very, very careful as to what product they're buying in the marketplace because there is a lot of product out there that is not very good. And I think we are very cautious, by the way, in what products we actually bring to market. You can never be perfectly sure but we are doing all sorts of work on the quality control side and then on the regulatory side to make sure that only the best product -- that only qualified product is brought to the market that withstands the quality side and the regulatory tests. So I believe that this will provide, our role in this area will be very comforting to dentists will, in fact, result in dentists focusing on quality and the services that we provide. By the way, Michael, one that we didn't discuss is our medical business. Our medical business, part of it, it is doing exceptionally well, those that are dealing with first line providers including our North American rescue business. But those that are dealing with elective-type surgery or elective visits, that's in the same category as dentists and they are also starting to come back into the practice setting and so I am somewhat optimistic about that group as well. And again, they view Henry Schein as key in helping them with infection control and helping them get their practices up and running again.

And along those lines, there's a part one which is dynamic of the COVID outbreak but then clearly we've moved into a recessionary environment with the job loss. As you think about your organization, how do you think about the far side in terms of the exposure to the recessionary dynamic and maybe kind of, Steve, you clearly have been around for a number of cycles. Can you talk about the way that Henry Schein has both seen customer demand shift as well as some other reactions that you've made as an organization in past recessionary environments?

Sure, a couple of things to note. One is this is really not like other recessionary environments but what we typically see as we come out of a recession that consumable sales will come out and grow faster than equipment sales. When we looked at 2008, 2009 equipment sales lagged a little bit longer before they got back to normal levels as dentists and dental practices were just wanting to confirm that the patient flow was there to support the equipment purchases. I would say that also there is a couple of when you look at the overall market, there is a couple of positives and minuses that are likely going forward. A positive is that on PPE products, the volume of products that practitioners both dental and medical practitioners will use will probably be up relatively significantly because not only will they be using products for the clinicians but even that administrative and office staff will probably be wearing masks and gloves and disinfecting more frequently and things like that. So that's a positive. I also think that there may be some pent up demand as practices begin to reopen. That can be helpful. But on the negative side is it's also probably likely that practices will not be able to see the same number of patients in the same time period because of new procedures that they will have to do with disinfecting and sterilizing and things like that. Maybe the last point that I'll make is that we have developed what we call a practice recovery program for our customers which really is a number of different things. It explains how you should go about reopening your practice, how you should be communicating with patients. We have some unique communication tools that they can use for their patients. It advises them on what PPE products they should be using and buying. There's financing alternatives for the practice. So it's really a manual on restarting back up and we think that that will be very well received. We are just launching it now or it's in the process of being watched and we think it will be very well received because it is very comprehensive. And most dental practices really, they don't have really any insight on how to again resume normal practices.

And Steve, I think there was a comment from the call last week about providing financing support for customers as well. Can you just maybe go into a little bit more details about what you're doing and how that differs or is similar to some of the equipment financing that Henry Schein has long been known for?

Sure, so we're still offering equipment financing that we have worked some special programs with our banking sources for customers for working capital loans and other loans to help the practice on starting back up. Some of those relationships with banks are exclusive so we feel like we're in good shape although other companies are offering programs too, but we think we're really leading with the whole comprehensive nature of not just financing, but everything around re-opening your practice. And again, we have certain tools on the technology side for patient communications that are unique and exclusive to us. But at this point I am also working on a selective basis with customers to try to help them but the primary goal is to be using these third party financing sources that have been very effective so far.

Perfect. And in thinking again taking a step past COVID, you talk a lot about some of the communications tools, some of the IT tools that you have. A lot of this dovetails into your strong historical practice management solutions now built into that Henry Schein One offering. Can you give a sense on how you see that business evolving in this dynamic especially when there is an important focus on better virtual communication with the patients, better interaction across the entire supply chain for these dental practices? Alone

Mike, that's an excellent question. And the reason we created Henry Schein One was to combine both the practice management and electronic medical record component with the demand generation part of the business. Henry Schein's strength was the practice management platform and electronic medical record. Internet Brands' strength was the demand generation, the various interfaces with the consumer, Henry Schein did not have experience in dealing with the consumer. This business has now been created. One platform is coming together for all of these applications. And I think we'll be in an ideal position to help practitioners relate to their customers or their patients in this new environment. And I think one key takeaway from COVID-19 is that there'll be far more digital connection between people, whether it's telemedicine or simply finding out information on the website of a practitioner versus calling the office. Henry Schein One has already launched some new products, one of which is a product which is a communication tool between the practice and the patient, providing for instructions for when the patient should come into the waiting room versus waiting outside the practice, either in the car or if it's in a city, in the street. So these kinds of tools, I think, will be very, very helpful as practitioners now understand the new world of infection control, social distancing and communicating in general with patients, including through teledentistry. So I think a lot of planning we put in place for Henry Schein One is showing to be of value now, not that we, of course, anticipated this particular way in which Henry Schein One would be of value. But I think the business has -- continues to have great potential, and we have a great management team that I think will execute on that potential.

And tying back to the organization, Steve, you made a comment about the liquidity of the company. Typically, you've historically had a pretty balanced capital deployment strategy, heavy focus on consolidating businesses that can benefit from the scale of Henry Schein. As you think about the COVID outbreak and the recovery on the far side, how do you think that alters that approach towards capital deployment? Or does it not? And I guess, maybe more importantly, at some point, would it create a greater opportunity for you to ramp up some of the incremental investments you've made in outside businesses beyond Henry Schein?

Sure. Yes. I think it will be a competitive advantage. I think it's premature, but if you look at things like M&A activity, we'll still be well positioned to do M&A. It's premature though to be doing that now because there's a little too much uncertainty to start that. I think some of our competitors, especially the mid to smaller ones may struggle financially. They may not have access to capital. That could help us out also. I think we'll be able to continue to make investments to grow the business that others may struggle to make. And I just would remind you, Mike, that the way we did cost reduction provides a significant amount of flexibility. So we utilized things like furloughs for people intentionally because we know we want to bring people back at some point. We don't know exactly when we'll be bringing them back. But the furloughs allow us to bring back people earlier than estimated or later, depending on market conditions. So we really like that flexibility because no one has a perfect crystal ball on exactly when patients will return to practices and at what level. So that flexibility, I think, was important for us.

And jumping back into one other question on the business, I know it's come up a lot. Henry Schein was 1 of the earlier companies that was offering coronavirus tests. Obviously, as an organization, you have a long history with flu vaccines. Can you give us a sense on the position that, as an organization, you're in right now to branch out, support some of this testing that's happening? And is it -- how much support you're providing beyond just the distribution and dispensing of the tests?

Yes. Mike, Henry Schein, through our medical group, has had a laboratory support business for decades. It's essentially focused on office-based practitioners and community health centers, where we provide both the equipment and the reagents and the disposable, the quick tests for these facilities. We have a wide variety of products. We work with multiple suppliers. The equipment that a number of manufacturers have launched initially was focused on providing -- the manufacturers of providing that equipment to governments. And I'm not talking about the large labs, the off-site labs, that's a different business. We don't focus on that at all. But a number of suppliers of ours came out -- have come out with some equipment and related reagents. And those are slowly being made available to us. Some of the equipment is small. Some of it's large. The area that we focused on, and we had to work with relatively small suppliers, is the point-of-care, yes, same as equipment; disposable, rapid test that can provide results relatively quickly. And we identified a number of suppliers for that kind of product, specifically in the antibody test area. We are offering some of these -- some of this equipment already with reagents. And really, on the stand-alone quick test point-of-care, there is nothing in the PCR that we have. There are not many tests, if at all, in that area. We are offering tests already. And those tests, unfortunately, at this stage, can only be used by large laboratories, Clear laboratories, sophisticated laboratories. We are waiting for the FDA to review these tests and come back to us and give us the authority to ship those to smaller nonsophisticated labs. And we're hopeful that, that will be done. But at this point in time, these tests are not available to the nonsophisticated Clear labs providers. But

That's helpful color and...

Our test business is doing, of course, better than it would have done in the past, including in the first quarter, we did have significant sales of the traditional flu tests, which was snap -- essentially snap-on tests.

Got it. And I think -- I apologize for that interruption, but I think we are officially out of time. But Stan, Steve, Carolynne, really want to thank you for participating in our conference today. And also the heavy work that Henry Schein is doing in supporting your customers.

Thank you, Mike.

Thank you, Michael.

Have a great day, everyone.