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

Thanks, guys. Good afternoon. Continuing to move forward with the dental portion of the 2020 Jaws & Paws Conference. Really pleased to have Henry Schein joining us this afternoon. And from Schein, we have Stanley Bergman, Chairman and CEO; and Steven Paladino, Executive Vice President and CFO. What I'm going to do first is I'm going to hand the call over to Steve and Stanley. They're going to make some opening remarks. And then following management's comments, we'll go back and get into Q&A. So Steven, over to you.

Okay. Thank you, Jon. Good afternoon to everyone. I just wanted to state as we begin that this conversation may include certain forward-looking statements. And of course, the company's performance may differ from those forward-looking statements, and all of the forward-looking statements are qualified by the cautionary statements contained in Schein's SEC filings as well as certain documents on our Investor Relations website. So with that, I'm going to turn the call over to Stan Bergman who will provide some opening remarks.

Thank you, Steven. Thank you, Jon, for hosting us, and good afternoon, everyone. I need not say that COVID-19 has created an unprecedented global public health and economic crisis. As we mentioned on our conference call and previous press releases, our top priority in March as the virus spread around the world was our team members, their families, and of course, assisting our customers in building a road map to navigate through this disruption and prepare for resumption of procedures. I think we've planned well, and we executed well on those items. Of course, we took swift and decisive action to reduce our costs and preserve cash flow through this -- during the crisis period and to ensure that we're well positioned as the company comes out of the crisis with the rest of the world. I think we've spent -- we've mentioned in the past that we have a pretty good balance sheet, low debt-to-EBITDA ratio going into this and with just over $1.5 billion in liquidity available, reported on our first quarter earnings. I think it's -- that information is all available. We had a very good January and February and then a challenge in the middle part of March. We indicated on the May 5 call that the global dental sales likely would be down somewhere between 70% and 80%. Our number has been somewhat better than that. And of course, it has been different in different parts of the world. But there are certain parts of the world that things are going much better than we anticipated, China, Germany, Austria, The Netherlands, for example, and Australia, New Zealand, all seem to have done a lot better. And parts of the U.S. and Canada are also starting to come back, perhaps a little bit ahead of what we thought. Of course, it was very hard to get a precise number. But overall, we get a sense that the practices are coming back. Opening is occurring in a lot more places than we really anticipated. Obviously, we can't provide specifics at this time. And this information I'm providing is more indicative than precise. On the Medical side, we thought we would be down somewhere between 20% and 30%. Again, I think we're doing a little bit better than we thought. Although there are still, on the Dental side and on the Medical side, many practices that are closed. But there's an indication that these practices are starting to prepare to come back in general in many parts of the markets that we're in. We had a call today actually with our Brazilian team. It's not material, but it's indicative. And in big parts of Brazil, there are challenges, of course, in the big cities, but outside the big cities, people are going to the dentist. And on the Technology and Value-Added side, we also thought we're down 30% to 40%, also doing a little bit better than that. I will leave it at that for the moment. Our model, I think, is still very much intact. We believe in the full-service dental model, one where we provide services through field sales consultants, value-added services like practice management solutions, all sorts of inventory management and financial services, equipment sales and services. Essentially, we believe that the model is very much intact. Our specialty businesses, actually, several of them are doing okay right now compared to what we thought. I would say the implant business in Germany came back a little bit faster than we thought. But there are markets that remain challenged, of course, as well. Also, the endodontic business is also looking just a tad better than we thought. But of course, many endodontists and oral surgeons and orthodontists are still not in practice. So we remain confident that we have a good plan. We're executing to it. Of course, we have a lot of the team that are on furlough, and we're confident that we will stop bringing people back in the months ahead. So I'll leave it at that. And Jon, perhaps it's best just to have questions.

That's great. Perfect. Thanks very much, Stanley, great overview. I'm going to start -- and look, I want to be clear, I certainly don't expect precise numbers, but I want to ask questions that hopefully you'll be able to answer just from a regulatory standpoint. So I'll brand one of our pieces. We had a big dental survey out yesterday. We got to 40, 50 GP practices. And so what do we see? We identified about 80% of dental practices open here in the U.S. And of those, Stanley or Steve, about 2/3 were performing elective procedures. So that would say roughly half of all the practices here in the U.S. now performing elective procedures. We did the survey over the past week or so. Maybe we can start there. Stanley, you alluded to in your comments several times the market coming back, not roaring back, but maybe a little bit better than what you would have thought 3 or 4 weeks ago during your earnings call. Do you think 80% of practices are open? Do you think half of all dental practices in the U.S. are now performing elective procedures? Just would love your high-level thoughts there.

Jon, I wish I could answer that question precisely. There is a lot of data out there. It's published. American Dental Association publishes data. There are lots and lots of surveys that are being conducted. A lot of practices are open. There's no question about it. Some of them are doing elective procedures, a lot more, I would say, than we even thought. But right now, people are being very cautious. They're not allowing that many people into the practice at the same time, obviously. And I think, the fact that people are back in the practice and that people -- dentist professionals, physicians, even, are actively practicing is encouraging. But we -- they are doing this slowly. Most practitioners are very careful. They've been super careful with PPE, which is still heavily in short supply. So I would say the encouraging part of it is the mindset is pretty good in the dental community. The volume, that is hard to tell because we're into this thing now for 2 or 3 weeks, maybe 2 weeks since people have come back. But I will say that, for example, in Germany, we had a call earlier on today, actually, with our -- we had our global dental review. A lot of implant dentists are back in business now much slower. They're being very careful, but it's all very encouraging.

So then, Stan, let me move away from the specific numbers for a moment. One of your manufacturing partners on one of their earnings calls, talked about, hey, dentists are reopening, but then another battle is going to be getting the consumer back into the chair, right? They've got maybe the consumer some concerns, perceptions around a dental practice, sterility, et cetera. What can the industry do, if anything, to try to alleviate some of those fears from a consumer standpoint and help facilitate getting that consumer back into the dental office for an elective procedure?

Yes. I'm probably one of the few people on this call today that actually lived through that 1985, '86, '87, HIV/AIDS crisis. And there was a period of time when the public was scared to go into the dentist's office. I think it was in '86 there was a 60 Minutes show in which it was alleged for the first time that a dentist had contracted AIDS from a patient and it froze the market for a few months. People came back. And I think we're in that period right now. What can people do? Well, dentists, obviously, have to show to their patients that they care, and the dental community is doing that. They need to ensure that they have the appropriate PPE, not so easy to get right now, but -- although -- and it's pretty uncomfortable to wear some of these masks, but they have to show they're going to do that, and I think they will do that. They need to be careful in how many [indiscernible] into the practice at once. And in that connection, I think we have a program that will work very, very well. For our Dentrix and Easy Dental customers, they can stage when the patient should come up, if they're in a large building to the office or when -- if there's a parking lot, when to walk into the practice. I think a lot of that is important. A lot of those kinds of procedures, of caution and protocol. And if the public see that this is taking place, I think the public will come back. Having said that, we're not going to get back to where we were for months, obviously, because people need to make sure that they're comfortable, that there's not a second wave and things like that. So I think the mindset is good, but this is not going to be an on/off switch.

Yes. Okay. And in that work, it did seem pretty consistent amongst the dentists that they did expect more of that, call it, protracted return, that U or L, certainly not a V specific to the dental industry. Stanley, I'm going to stick with you for a moment, and then Steve, I'll jump over to you for the next question. But just, Stanley, on the equipment, you guys have a very broad equipment portfolio, and I think investors are all struggling with the overall appetite for dental equipment in this environment. And so I'd love to hear your thoughts on equipment. And more importantly, if there is a desire to spend from the dentists, where are they focused? Is it on the lower-priced items that might be around sterility? Or is it on the higher ASP initiatives to increase office efficiencies and maybe limit multiple visits like DI or CAD/CAM?

Yes. Also a very good question. Now on -- there are certain air management systems that are going to have to be bought. Look, this is early stage. One manufacturer says they have a better system than the next. We have to be careful what we sell, going to make sure it works. But there's got to be money spent initially on 2 areas in dentistry. One is PPE, and it's very expensive right now, and the second is the small equipment for air management and the like. So that's one. Two, I do think same-day dentistry will get a boost. Why? Because it's 1 less -- it's maybe 2 less visits to the practice. So I think that's going to get a boost, and we've seen some of that. But the area that is interesting, and I would never have thought of it is what we're starting to hear. Practitioners want to give the impression to their patients that they have clean, modern-looking facilities. So I think if a practitioner has a chair, then maybe they were thinking of upgrading a chair units alike, they may go for it a little sooner now to make sure that they are showing their patients that they have modern-day equipment and that practice is a practice that is being invested in. So I think that as well will get a boost. But I do think, of course, that price will be important to many dentists, especially in the early period of time now. And financing will be important. We, I think, have done reasonably well in arranging financing programs for our customers. We're ready for that. And generally, the whole protocol of the office management, having good software to do that will all be important. I think we've experienced some uptick in demand for new software systems, brand-new packages. I'm not saying we're selling them, but we're getting a lot of calls. People are looking to invest in the efficiency of their practice. And so that, software-wise, equipment-wise, will be important.

Okay. Great. Very helpful, Stan. I'll jump -- Steven, I'm going to jump over to you for a moment. And it's not necessarily kind of a COVID question, so we can get away from that for a moment. But pre-COVID, we saw a consistent theme for you guys where your dental specialty business was growing faster than call it underlying consumables. You got a nice portfolio over there, implants being the biggest. And you also gave some metrics where I think, again, pre-COVID, dental specialties was about 15% of your overall dental consumables. I want to make sure that 15% number was -- is a good one. And then Steven, if you don't mind, can you talk about the relative margin differential? And I know you've said specialty is higher. But maybe if you could put some guardrails around just how much higher, that would be very helpful.

Sure. So it does run in that 15% range. Now obviously, all the metrics during COVID-19 are a little bit different because we're selling a lot more PPE than ever before. So that's distorting things. We haven't given specific numbers other than we have said, for example, on the dental implant business, which is the largest portion of our specialty business. We're very comparable to some of the stand-alone public companies that are dental implant-only or substantially-only profitability. So it's very high margins, but we haven't given a specific number, Jon, on that. We do believe that there's a big opportunity for us to continue to grow the specialty business at a faster rate. It's good for a lot of reasons, a faster-growing segment of dentistry, higher-margin business. Plus, there's a lot of general practitioners who want to do some dental specialty procedures. And so we want to serve both the general practitioner as well as the specialist in doing those procedures. If I could, I'd just like to add one other thing on the COVID conversation. Even though practices are reopening, just remember that at least this time, the number of patients that a practice could see in a day is less than what it was pre-COVID-19. That's because they're doing more sterilization, they're seeing -- they don't want patients congregating in the waiting room, and other factors. Now hopefully, efficiencies will come in that area, too. But right now, the number of patients that the dentists will see in an 8-hour a day is less than pre COVID-19.

And I'm happy you brought it up, Steve. We've been doing a lot of these COVID conference calls in dental panels, and we just had a general dentist earlier today. And he's alluded to that. What sort of numbers are you guys hearing? Is it, hey, appointments right now x percent longer, so even if demand was there, we might be able to fill 50% of the day, 70% of the day? Or is it still too early to start getting sort of a signal out of that?

Yes, Jon, it's much too early. The CDC and ADA are working now, they just set some new guidelines put out last week or -- can't remember the days of this week. No one knows exactly how this is going to work from a time and efficiency point of view, so we don't even know exactly whether dentists are all going to want N95s or KN95s, maybe they will, maybe they'll be satisfied with a shield and an L2 mask. These are things that are being worked out now. It's much too soon, I think, to get this right. I know in the AIDS period, it took months and months during in the '80s to figure out exactly what PPE or what they used infection -- what they called infection control products at that time. So it's -- I think we're a little early for that.

Okay. Let me ask a question, Stanley, where -- or maybe we can look back and give a better number. Obviously, the past 2 to 3 months has been incredibly scary for a lot of us, just even from a global perspective. And Stan, one of the things you talked about early on was one of the initiatives at Henry Schein was let's keep our practices afloat, let's make sure that they're still there. And there were some scary scenarios 2 or 3 months ago when you think about these practices and overhead and narrow margins and maybe they have no revenue for 2 to 3 months, just the sheer number of dental practices that could close. I would want to get your updated thoughts there. I mean it sounds like you feel better, fast forward today, with the way these practices are reopening and maybe some government initiatives around PPP, that a better percentage have stayed afloat, Stan, than maybe you would have thought 1 to 2 months ago. Is that a fair statement?

I think you're correct that we had planned for somewhat of a worse situation. So I think that is correct. The big challenge is PPE and I think as probably most people know, the government sucked up a huge part of the PPE from the private sector. It's still going on. The priority was to give it to hospitals. And there is a shortage right now of PPE product going into the private sector, office-based practitioner world. Yes, we're working on that. Yes, we expect more product availability, but it's -- that's the -- right now is a key gating issue. Will we get enough of that product to get these practitioners up and running? So yes, it is true that it is a little bit better. The thought process, when we had our investor call, was a little bit more disconcerting at that time. And things are a little bit better, maybe a lot better in certain parts of the world. And yes, we were really worried about would specialties come back, and we've seen people going to the specialist. So I would say we are -- hard to give you a precise number. But would say, directionally, we are much more optimistic than we were on our call in early May. So -- but more than that, it's much too soon to tell. Clearly, we do know that the public likes the dentist. We do know that. They call and they want to go back. So I think dentistry is clearly recognized as important by the public. Will all the elective stuff or the cosmetic stuff be done? Will it be done at a lower price? Probably, for a period of time, like you would expect during any economic times, challenging times. But I would say, Steve and I are more optimistic than we were in May -- early May, I meant.

Okay. One or two more questions and then I want to get in a couple of questions on Medical, certainly, if time allows. But one of the dynamics we heard on our doctor panel earlier today is hygiene. And obviously, there's some trepidation about bringing back hygiene because of aerosols and fears of spreading the virus. And so Stan, can you talk to us on what that means when we look out a couple of months. In other words, what I've heard pretty consistently is, hey, the practices have come back, they've turned on the lights, there seems to be some good demand. And some of that might be backlog, right, of some procedures that need to be done from a pain perspective, maybe from a client -- a patient standpoint. But hygiene in many practices is the lead generator for restorative work that's done 1 to 3 months further down the road. So is that the right way to think about it, Stan? We need better conviction that hygiene is truly up and running in this industry to feel better on what restorative looks like 1 to 3 months out.

What you just said is something pretty logical that you need the one to move to the other. I think that is ideal. Having said that, hygienists are in a very high-risk category. We need to make sure that they are protected. We do not necessarily have all the PPE. We need to do that. This will come. It will happen. So I don't believe -- I mean, I believe, sorry, that people going to the dentists now are only going -- are not only going because of pain. They're going because they want to take care of their teeth. Dentists may have to also do a little bit more hygiene work. Hygienists are quite, I wouldn't say scared, but are very concerned. And if there's a limited number of supplies and only the dentist gets it, the hygienist may have to wait. We will get the supplies. They will come in at some point. But this is a careful balance, but I'm actually sure that people are not only going to the dentist today because of pain, clearly not. Otherwise, we wouldn't be selling implants. And when I refer to selling implants, I'm talking about Germany as a start, even China, Austria, The Netherlands. So they are just a few months ahead of the U.S. There are going to be bumps in the road. There's not going to be any perfect answer to all of this, but we will get the hygienist back to work. We need the PPE to do that.

Okay. Great. 4 or 5 minutes left. Let me jump over to Medical for a moment. And maybe you can just talk about the Medical business. I think, Stan, you alluded to some part of the Medical business that's sort of more first-line versus elective and clear that first-line would seem to have much more favorable growth rates in the near term. Stan or Steven, is there a way to put some numbers to it? What percent of that business is more first-line versus elective in nature? And then the tack-on question of that would be just how we think about PP&E opportunity within Medical longer term?

I'll give you direction, maybe Steven has numbers, I'm not sure. But directionally, clearly, the first-line responders needed product, and we got it to them. We actually were pretty good at that. I would say that the elective part of medicine is coming back, but the first-line responders bought more. And by the way, this was on the heels of a flu season for the first quarter, some of that extended a little bit, where a lot more supplies and tests were sold. So I think that over time, we will have similar trends to dental on the elective side of medicine, and people are going to go back to work. And they are in certain parts of the country, for sure. But again, it's much too early, from my point of view, to give you precise numbers. But Steven may have some historical numbers that could be helpful. I just don't know.

Yes. I also don't have precise numbers, but if I were to ballpark it, it must be greater than 20% of our Medical business is elective. Something in that range. I'm not trying to be precise, but I think it's certainly something greater than 20%. When we deal with, for example, dermatologists and other specialties, that is more elective. But I guess the other way of saying is the bulk of what our customers are, are nonelective, and that's why that business is holding up so much better than Dental. So we feel good that the Medical business is serving the communities well. Just on the PPE, while there's still limited demand -- limited supply on PPE, this is something -- face masks and gloves is not product that is very complex to manufacture. So I do believe that in the not-too-distant future, there will be adequate supply, say, people hoarding product, because it is a product that you can build up manufacturing capabilities generally relatively quickly. Again, the unknown is how much customers are just building their inventories and hoarding products.

Okay. Okay. A couple of quick miscellaneous questions. Where do you guys think inventory is with the practices? I believe normal for you with the dentists would be around 4 to 5 weeks of inventory. But we've also heard, obviously, throughout the pandemic, they were doing whatever they could to preserve cash flow, right, the dentists themselves. And so I would think that maybe they took that down pretty low now that they're reopening their practices, maybe they have to go ahead and change that. But do you think that's gotten pretty low, Stan or Steve, in terms of inventory down only a couple of weeks amongst the dentist community?

Yes, Jon, I don't think Henry Schein customers generally carry a lot of inventory. I mean they may get a promotion or something, but I believe it's more or less a stockless inventory system. We have 99% fill rates. So I'm not sure if it was run down. But clearly, practitioners are buying now in anticipation, to some extent, of opening the practice again. So I don't think it's material. PPE maybe, because I think people are now buying whatever they can because they are nervous that there'll be a run again. So -- but on general products, I don't believe there's much inventory. There's more or less enough, and I'm not sure enough to service the customers. I'm not sure whether people really ran down a lot of inventory. I don't think that's a big, big issue. Maybe for some of the large groups, I don't know, but not for the general GPs.

Okay. Great. Well, look, guys, we're going to conclude there. I thanked you privately, but I want to thank you publicly as well. I really appreciate you taking the time to join the conference. As I mentioned to you, it's great to have a leader in the industry like Henry Schein join. So thanks very much for taking the time. I wish you best of luck for the balance of the year. And obviously, I'll speak to you guys shortly in coming weeks and again on the earnings call. Thanks very much.

Thanks, Jon.

Thank you, Jon.