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

Good morning, and welcome to Henry Schein 2020 Annual Meeting of Stockholders. I would like to hand the meeting over to Stanley Bergman, Chairman of the Board and Chief Executive Officer of the Henry Schein. Please, go ahead.

Thank you, operator. Good morning, everyone. I'm Stanley Bergman, Chairman of the Board and Chief Executive Officer at Henry Schein. It's my pleasure to welcome you to the company's 25th Annual Meeting of Stockholders, which is being conducted virtually via the Internet. This is, of course, our first virtual annual meeting due to the emerging public health impact of the coronavirus pandemic. And to support the health and wellbeing of our employees, directors and stockholders, we are not holding a physical meeting this year. This meeting is being held entirely online. My thanks to all stockholders voting today whether by a proxy or in advance of the meeting or online during the virtual meeting. I will act as Chairman of this meeting; and Michael Ettinger, Senior Vice President of Corporate and Legal Affairs, Chief of Staff and Secretary of the company will act as the Secretary of the meeting to record the minutes. On the website, in which you registered, you will find the rules of conduct for the Annual Meeting. To facilitate an orderly meeting, we ask that all participants abide by these rules. At this time, I would like to introduce the current directors of the company who are participating virtually beginning with our independent directors: Barry Alperin, retired Vice Chairman of Hasbro is on the line; Paul Brons, former President of Organon International is on the line; Shira Goodman, Advisory Director for Charlesbank Capital Partners and former CEO of Staples is on the line; Joe Herring, former CEO of Covance, is on the line; Kurt Kuehn, former CFO of United Parcel Services, is on the line; Philip Laskawy, retired Chairman and CEO of EY, formerly known as Ernst & Young and Lead Director of Henry Schein, is on the line; Anne Margulies, Vice President and Chief Information Officer of Harvard University, is on the line; Carol Raphael, senior adviser for Manatt Health Solutions and former President and CEO of the visiting Nurse Service of New York, is on the line; Dr. Dianne Rekow, Professor Emeritus and fellow at the King's College of London, is on the line; Dr. Bradley Sheares, former CEO of Reliant Pharmaceuticals, and former President of U.S. Human Health at Merck, is on the line; Gerald Benjamin, Executive Vice President and Chief Administrative Officer of Henry Schein, is on the line; Jim Breslawski, Vice Chairman and President of Henry Schein, is on the line; Mark Mlotek, Executive Vice President and Chief Strategic Officer of Henry Schein, is on the line; and Steven Paladino, Executive Vice President and Chief Financial Officer of Henry Schein, is also on the line. Also joining us online today from BDO USA, Henry Schein's independent registered public accounting firm are, Mark Gamo and Charles Costa. Joining us online from our outside legal counsel, Proskauer Rose's Stephen Krusenbaum and Michael Ellis. Please note that the floor is open for questions to be submitted now and during our formal remarks. We have allocated time to answer those questions later in the meeting. If you are unable to get to your question, please send an e-mail to [email protected], that's investor@henryschein, one word, .com. After the meeting so that we may follow-up with you. We will now turn the business before us -- we now turn to the business before us. Michael, please.

Thank you, Stanley. We will now begin the formal portion of the Annual Meeting. As stated in the rules of conduct, we ask that you restrict your questions to the items on the agenda that are before us today. During the meeting, shareholders who are allowed into the meeting using your 16-digit control number included in the notice of internet availability and proxy materials or on that proxy card, are welcome to submit questions through the virtual meeting platform by typing your question into the ask a question field and clicking submit. Question important to the meeting matters will be answered following the formal portion of the meeting, subject to time constraints. I place before the meeting a copy of the Annual Meeting of Stockholders and proxy statement dated April 7, 2020, and made available to all stockholders of record as of the close of business on March 23, 2020. I also place before the meeting the affidavit of distribution from Broadridge Financial Solutions, attesting to the distribution of the notice of internet availability of proxy materials, the notice of this meeting, and the proxy statement to all stockholders entitled to such documents. Stan, I turn it back to you.

Thank you, Mr. Ettinger. The Affidavit will be filed with the minutes of the meeting, together with the notice of Annual Meeting of Stockholders and the proxy statement. A list of registered stockholders as of March 23, 2020, duly certified by Continental Stock Transfer & Trust Company is available on the virtual meeting website for inspection by any stockholder during this meeting. Barry Shapiro of Carl T. Hagberg & Associates has been designated to act as Inspector of Election, and he has previously filed his oath as Inspector of Election at the Secretary. The polls will be open when the first matter is called to a vote and will then open until I announce the polls are closed. Stockholders who logged into the meeting using their 16-digit control number, included in the notice of internet availability of proxy materials or on their proxy card may vote their shares during the meeting by clicking the vote here button on the screen. If you previously voted, that will limit your right to vote online during the meeting through the virtual meeting platform, and your online vote will be superseded by the vote you submitted previously. No online votes, ballots or proxies or revocations or changes to online votes, ballots or proxies will be accepted after the polls are closed. I will announce the preliminary voting results on each matter after the voting is closed. I received a certificate of quorum from Inspector of Election, which states that on March 23, 2020, the record date, the number -- the total number of issued and outstanding shares of common stock of the company entitled to vote at that meeting was 142,756,052 share. It further states that there are present in person or by proxy at least 71,378,027 shares, which is a sufficient number of shares to constitute a quorum. First order business is the election of 15 Directors of the company for terms expiring in 2021, as set forth in proposal 1 of the notice of Annual Meeting of Stockholders. I will entertain a motion to nominate the 15 persons for whom proxies were solicited for election as director of the company, each to serve until the 2021 Annual Meeting of the Stockholders. They are in alphabetical order by last name: Barry Alperin, Gerald Benjamin, Stanley Bergman, James Breslawski, Paul Brons, Shira Goodman, Joseph Herring, Kurt Kuehn, Philip Laskawy, Anne Margulies, Mark Mlotek, Steven Paladino, Carol Raphael, Dr. Dianne Rekow and Dr. Bradley Sheares. Will someone please move the approval of this proposal?

I so move.

I second the motion.

Thank you very much, Mr. Ettinger and Ms. Ferrero. The second motion is to consider and act upon a proposal to amend and restate the company's amended and restated 2013 stock incentive plan to, among other things, increase the aggregate share reserve and extend the term of the plan to March 31, 2030. I would entertain a motion to approve the amendment and restatement of the company's amended and restated 2013 stock incentive plan to, among other things, increase the aggregate share reserve and extend the term of the plan to March 31, 2030. Will someone please move the approval of this proposal?

I so move.

I second the motion.

Thank you, Mr. Ettinger, and thanks, Ms. Ferrero. The third order business is the proposal to consider the approval by nonbinding votes of the 2019 compensation paid to the company's named executive officers, as defined the proxy statement commonly known as say-on-pay proposal. I would entertain a motion to approve by nonbinding vote, the 2019 compensation paid to the company's named executive officers. Will someone please move the approval of this proposal?

I so move.

Thank you, Mr. Ettinger. We need a seconder.

I second.

Thank you, Ms. Ferrero. The fourth and final order business is the proposal to ratify the selection of BDO USA as the company's independent registered public accounting firm for the fiscal year ending December 26, 2020. I will entertain a motion to approve the ratification of BDO USA as the company's independent registered public accounting firm. Will someone please move the approval of this proposal?

I so move.

I second the motion.

Thank you, Ms. Ferrero. At this -- as this was the last matter called to vote, with everyone now having had the opportunity to vote, I declare the voting closed. So I'll make a few brief remarks regarding Henry Schein's financial performance in 2019 as well as the first quarter of this year, 2020. Let me preface these remarks with the disclaimer that certain of the comments made in meeting may include information that is forward-looking, risks and uncertainties involved in the company's business met effect, the matters referred to in forward-looking statements. As a result, the company's performance may differ from those expressed or in -- in or indicated by forward-looking statements. Further, these forward-looking statements are qualified in their entirety by the cautionary statements and Risk factors contained in Henry Schein's Securities and Exchange Commission filings. So for 2019, Henry Schein delivered net sales of $10 billion, an increase of 6% compared to 2018, with 3.5% internal growth in local currencies, which excluding sales to Covetrus, the public company that resulted from the 2019 spin-off of our Animal Health business, which merged with Vets First Choice. GAAP diluted EPS included -- increase 67.5%, and non-GAAP diluted EPS growth was 10.7% year-over-year on a continuing operations basis. More recently, we reported financial results for the first quarter of 2020 with internally generated sales growth in local currencies of 2.1% and 1.8%, excluding sales to Covetrus. Sales in the month of January and February were generally in line with expectations, but experienced significant declines in mid-March due to COVID-19. GAAP diluted EPS for the first quarter increased 11.3% and non-GAAP diluted EPS growth was 17.5% year-over-year on a continuing operations basis. A reconciliation of GAAP and non-GAAP measures for 2019 and the first quarter of 2020 can be found in the supplemental information section of our Investor Relations website. I would like to spend a few moments on the COVID-19 pandemic, which has had a broad impact on people and economies around the globe as well as the response of Henry Schein to this outbreak. The COVID-19 pandemic is an unprecedented situation that continues to unfold day by day, and we cannot predict how long the situation will last. First and foremost, above all, our priority has been the health and wellbeing of team Schein members and always will be, our customers, of course, and our communities. We are also focused on maintaining a strong balance sheet and financial flexibility and have implemented significant cost reductions across the company to best position the company through these uncertain times. Henry Schein has a long history as a thought leader, problem solver and catalysts of public-private partnerships to address pressing a complex global health issues, specifically in the area of infection control. We have contributed our expertise and supply chain leadership along with our extensive network of supplier partners, health care professionals and international organizations to catalyze a public-private collaboration call the pandemic supply day network or commonly known as PSCN. Henry Schein serves as co-founder of PSDN along with the World Health organization, the UN World Food Program, the World Bank, UNICEF, the U.S. Centers for Disease Control and Prevention and the World Economic forum. The PSCN works to accelerate the delivery of critical supplies to frontline health care professionals by providing market visibility, needs, planning, production, capabilities and risk forecasting for health care supplies. As part of our commitment to delivering essential products to health care professionals fighting COVID-19 pandemic in the United States, Henry Schein is participant in the White House COVID-19 supply chain task force. The company has also worked with the strategic national stockpile to deliver Personal Protection Equipment to COVID-19 testing sites. And with the federal emergency management agency to deliver clinical supplies to health care professionals and institutions around the United States. We are doing similar work in other countries around the world. We view our leadership in developing innovative approaches to pandemic preparedness and responses as an important pathway to most effectively serve our customers and to make a critical contribution to society, while financial markets will react to this pandemic. [indiscernible] with respect to COVID-19. [indiscernible] Of course, we'll be happy to take questions [indiscernible] Michael [indiscernible]

[indiscernible] first question is from [indiscernible] health and safety [indiscernible] in response to COVID-19 pandemic [indiscernible] financial liquidity is critically important [indiscernible] what factors [indiscernible] nmanagement may consider [indiscernible] to resume the share repurchase program [indiscernible]

So Leon, thank you for your question. Very good question. [indiscernible] for the organization [indiscernible] First of all, our priority is the safety of our team [indiscernible] We said that [indiscernible] social distancing [indiscernible] competitive workers in those sectors. [indiscernible] additional thoughts on [indiscernible]

[indiscernible] can be prudent [indiscernible] forward.

[indiscernible] Steve to [indiscernible] and respond to stock buyback [indiscernible]

[indiscernible] methods to return cash to shareholders. We've been able to do that because we have a very strong balance sheet with low leverage. We suspended our stock buyback program in early March, really to be conservative because of the uncertainty regarding COVID-19. I think we would look at a few factors when we look to see if we want to continue with the program. The first would be our liquidity position and our leverage. We would look to see we continue to have a strong balance sheet when looking to continue to buy back stock. We also look at the stock price at that time as well as our company's business prospects going forward because clearly, the stock buyback is also an effort to create shareholder value for our shareholders. And lastly, I would say that we would look at other potential investments and prioritize of potential investments could be investing in the company in some other ways or acquisitions. So those would be the primary factors that we would look at in buying back our stock going forward.

Thank you, Mr. Paladino. Mr. Ettinger, is any other questions?

There is one more question. There is no name associated with it. But question is, is there an opportunity for a vaccine or testing in your company?

So it's also a better question. First of all, Henry Schein is not a manufacturer of vaccines. Having said that, we are one of the world's largest distributor of vaccines, in particular, to position offices and related centers and related facilities. We have outstanding cold chain expertise and would expect to make that available as needed in any particular jurisdiction that may call upon us to be the supply chain fulfillment house. We've done this for years in multiple ways, including satisfying local and federal government needs in the United States, but also in other countries as well. Number one. On testing, yes, Henry Schein, through our medical business, is very much focused on laboratory testing within the physician's office. So laboratory tests, points of care test in the physician office has been important for decades, and we are one of the leaders in providing that equipment and the related reagents to health care practitioners in their offices. At the same time, about 30 years ago, we got involved in what's called snap test, quick test, rapid test that do not require equipment, but simply a disposable device. And in that connection, about 3 months ago, we started looking for COVID type -- COVID-19 type snap test that do not require devices for use in our customers' offices. We have made some progress in that. Some of our traditional suppliers are providing some product, but essentially, not yet in a significant way. In the form of the disposable products we have one in the antibody test area that has to -- at the moment, only be used in the context of clear -- these are laboratories that are approved by the government in the United States for test work, and we can only sell to what's called complex labs at this point. And the sample is picked up in the doctor's office and sent to the lab. 2 of our -- 3 of our suppliers had filings with the FDA for antibody tests and one has for an antigen test that will be of the point of care, disposable, snap test, quick result in the doctor's office or in the field. We're hopeful that the FDA will approve those tests soon we believe we're on the cutting-edge of that. But in any event, our laboratory group, and particularly, in the United States, has a complete array of tests that are available to satisfy the needs of COVID. The problem is -- COVID-19, the problem is a lot of these test that we have available and then primarily test or all in tests require a piece of machinery. The problem with all of this is there are significant back orders from the suppliers today. So there is not adequate testing available yet, without practitioners' offices. As our -- as the offices come on board, we're hopeful that we'll be able to get supply of the traditional equipment test and the related reagents, and we hope hopeful that the FDA in the United States will approve our rapid snap tests, point-of-care test pretty soon. Michael, any other questions?

No, there are no other questions at this time.

I will now turn the meeting -- so if there are no further questions, we'll go on. I'll now turn the meeting back to the voting matters under consideration. I've received a preliminary report of Inspector of Election who have certified results of the voting to the time of the report. The results state that each of the 15 persons nominated as directors for the term expiring in 2021 have been duly elected. The company's amended and restated 2013 stock incentive plan, increasing in the aggregate share, reserve and extending the term of the plan to March 31, 2030, has been approved. The 2019 compensation paid to the company's named executive officers has been approved on a nonbinding basis. And the selection of BDO USA as the company's independent registered public accounting firm for the fiscal year ending December 26, 2020, has been ratified. Final voting results will be timely filed with the Securities and Exchange Commission on Form 8-K. The final results of inspector of elections will be filed with the records of this meeting. At this time, I will entertain a motion to adjourn the meeting.

I so move.

Thank you, Mr. Ettinger.

I second the motion.

Thank you, Ms. Ferrero. Motion is carried and the meeting is adjourned. Thank you very much for your interest. If you do have questions, please reach out to our Investor Relations team, who will be very happy to respond to your questions. Thank you very much, be safe, and hopefully, we will see investors at investor conferences in the future or in fact, at next year's stockholder meeting in person. So thank you.

This concludes today's conference call. You may now disconnect.