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

All right. Good afternoon. Thanks, everybody, for joining us. Welcome to the Jefferies 2020 Virtual Global Healthcare Conference. I'm Brandon Couillard. I cover the dental space here at the firm. Very happy to have Henry Schein with us at the conference this year. And joining us from the company are 2 men that need no introduction, but CEO, Stanley Bergman; as well as CFO, Steven Paladino. I will turn it over initially to Steve, I think, for an initial disclosure. And then Stanley will make a few opening comments, and then we'll jump into Q&A. For anyone that's on the line or on the webcast that has any questions, please feel free to submit those to me or on the portal, and we'll do our best. Steven?

Okay. Thank you, Brandon. I'd like to say as we begin that certain comments made during this conversation may include forward-looking statements. Our actual performance may differ from those forward-looking statements that are expressed today. And therefore, all of the forward-looking statements are qualified in their entirety by the cautionary statements included in our SEC filings as well as certain documents included on our Investor Relations website. So with that, I'd like to turn it over to Stanley for some opening remarks.

Thank you, Steven. And Brandon, thank you for hosting us. I hope everybody is okay. Well, these are unprecedented times, of course, both from an economic point of view and from a healthcare point of view. Henry Schein, the largest provider of products and related products to office-based dentists, physicians and related professionals, we offer, we believe, the widest variety of consumables equipment, pharmaceuticals equipment, software and everything that is needed to drive an office-based practice and also service alternate care sites, such as renal dialysis, oncology centers, urgi centers, ambulatory surgery centers and the like. Our customers have just been through a very challenging period, as you can imagine. Over 80% of our customers had to close their offices. So that was a challenge on the one side. But on the other side, about 20% of our customers were involved in emergency work. In other words, first-line responder-type activities. So when the COVID crisis started emerging in March, we made 3 key decisions: one, of course, like practically every company, to focus on the health and well-being of our team and family; second, of course, was to focus on how we could help our customers deal with the situation, specifically those still providing services and providing them with products, and those that were out of business temporarily, helping them go plan through this period of being out of business and at the same time, preparing those customers for a return to business; and the third, of course, was to ensure that we put the appropriate financial plans into place, key of that which was to preserve cash. We, of course, had to reduce our payroll significantly, a big part of our expense side of the equation, including furloughing that terminates sadly a few people, not many. But in addition to furloughing, we put in place salary reduction programs, a program to defer contributions to retirement plans in certain parts of the world, and at the same time, virtually stop expenditure on capital expenses and stock buybacks. At the time of our last investor call, we did give an indication that global dental sales, we expect it to be down in the 70% to 80% range; medical sales, somewhere around 20% to 30%; and technology somewhere around 30% to 40% reduction from the previous year. As we mentioned in a couple of other calls recently, the numbers have not been as severe as we contemplated. There is a return to work at a little bit faster rate in perhaps parts of the world and the country, the United States much faster than we anticipated. In addition, the PPE area has been significant in terms of sales. Shortages to be sure, but Henry Schein has had some decent programs. I would say that if you look at the different parts of the world, China, not significant Henry Schein, but an indicator of what is happening, has returned to work to some extent. I would say in most parts of China, you can visit a dentist today, maybe not for as many hours as was the case before, but dentists are available. If you move towards the West, in Germany, Austria, Switzerland, the Netherlands, things have gotten much better. In fact, our dental implant business in Germany is doing okay. We've had some days that have actually been higher than in -- significantly, actually, higher than in previous years. Yes, we did have some new products. But there are challenges in Europe as well, to be sure. Italy and Spain are significantly challenged, and U.K. has not really returned to work from a dental point of view. Australia and New Zealand, on the other side, are almost back to where they were. Not perfect, but almost. And then you come to the United States. We're very much dependent on the states. But 2 or 3 weeks ago, several states opened up. And now in the United States, many of the ZIP codes are opened up. Not all, but many. Again, at lower volumes because dentists have to be very careful with social distancing and administering PPE programs between patients. So overall, I would say we're in a much more comfortable place than the place we were. Having said that, the challenge is still quite dramatic. Our customers had challenges, not seeing patients. Many of them had financial challenges. We're helping them through that. We have a program that we have unveiled to help customers open their practices, a practice recovery program in our dental businesses and our medical businesses offering a wide variety of services, value-added services, to help the practitioner reinstate their business. Whether it's recalls using software or programs to help practitioners control -- manage the flow of patients into the office or simply improving on the equipment installation, moving it around in some instances, et cetera. A lot of this recovery is significantly dependent on PPE. PPE availability has increased somewhat for dentists in May. We had a little bit more extra available in April for -- and we were asked by FEMA to offer those to the medical arena, but we've slowly been able to bring more PPE into play for the dental practices and expect to have a lot more as the month progresses. So Brandon, with that in mind, happy to answer questions.

That's a great overview. I appreciate all that color and detail. I'm curious. Since you mentioned many of those other geographies, I think one of the biggest questions in the U.S. as far as a normalization in the dental office is this concern around hygiene procedures and aerosols. I'm curious if there is a similar mindset internationally around that concern and if the same level of, let's say, capacity in the dental office being restricted just because it takes longer between patients is similar elsewhere as well?

Yes. I think one of the interesting advantages to being a global distributor, and I think we really are the only one that is global in our field, has been the best practices that we've been able to learn. Different parts of the world are handling PPE differently and, in particular, the management of airflow in the office. And we've been able to gather good information that we've been able to pollinate between different parts of the world. No particular country has a lock on this. The whole world of infection control is emerging for the COVID-19 response. Of course, I don't know how many people on your -- participating today will have been in this field in the '80s. I happen to have been in the field when it was alleged for the first time that a dentist contracted AIDS, HIV AIDS, from a patient. And we put in programs. There were some concerns in the marketplace for 2 or 3 months, but then we put infection control, sepsis control programs in place. We are going through that now. I think Henry Schein has a pretty good program in place, but it's going to mold much further as we become more aware of the challenges of the disease. But I will say that most parts of the world, in fact, every part of the world that we're in, is fully aware of the issues and there is machinery or airways controlling for -- aerosol controlling. And there is, of course, the PPE that practitioners and their staff and hygienists have to wear. This is all something that is emerging. The ADA has ideas. The CDC has ideas. There's an industry group called OSHA that has been around since the AIDS, HIV AIDS, epidemic. And these procedures are all being developed. But I would say that practitioners are much -- are quite aware of these issues. This gives me a lot of confidence that patients will go back to the dentists because I think dentists are trusted when it comes to PPE and infection control, and I might add the physicians in the office setting as well.

One of the other biggest debates in areas of uncertainty, it's just around the dental equipment demand outlook. We realize it may be somewhat early to draw any conclusions from any international markets that went into the freeze sooner, but I guess number one, how much of your equipment business would you characterize as replacement as opposed to expansion or new technology adoption? And number two, you've talked about more financing programs, maybe looser payment terms. But I'm curious if and when you or your competitors start to use the pricing lever to stimulate demand?

I will let Steven think about it while I'll give you some high-level thoughts. So first of all, there's no way to know exactly when we'll return to where we are. But I have been personally pleasantly surprised with physicians and dentists, in particular, wanted to invest in their practice. Clearly, same-day dentistry will get a boost, reduce the number of visits to the practice is going to get a boost. So we're seeing very interesting questions being asked. We're having seminars on digital dentistry with high attendance. So I would expect that, that's an area that we'll see increased demand, and we're already seeing it, pretty soon. I also think that dentists are looking around their practice and want their practices to look as modern as possible given the environment, the concerns with infection control. So dentists are investing, believe it or not. We are receiving quite a few orders in newer-type equipment that is -- gives the impression that really substantively provides better tools for the dentist to conduct their practice. So these -- the equipment business, I'm not sure it's going to be back too quickly to where it was, but I am a lot more optimistic than I was, say, when we had our conference call back in March of this year. Steven, I don't know if you have -- by the way, it's very similar on the medical side, where there is a desire to invest in testing equipment. Having said that, for the moment, the availability of testing equipment is rather limited because the government has bought most of the capacity, but this is starting to ease up. Steven?

Yes. Brandon, there's no perfect data on how much does replacement versus new equipment that a practice buys. But maybe an easy way of looking at it is to look at the 2 categories: high-tech equipment and traditional equipment. And if you look at high tech equipment, which probably runs 25%, 30% or so of our overall equipment, depending on the market, I would say that, that's largely people adding these new technologies to their practice. Not 100%, but largely due to that. And I think when you look at the balance, the traditional equipment, it's largely the opposite. It's largely a replacement market, although there are still some practices and some large DSOs that are opening practices. So some of it is new equipment, but again, largely replacement on the traditional.

Would you put intraoral sensors in the traditional bucket or the high-tech bucket? Just curious.

We currently classify it as high-tech and that's, like I said, largely on both because there's a lot of replacement on intraoral sensors.

Yes, yes. Okay. Stanley, I'm curious. At a high level, what impact will COVID have on the role of a traditional dental sales rep? And have you, as an organization, started to think about the level of resources that you allocate there? And how do you envision that role perhaps evolving in the new environment?

It's a good question, Brandon, because obviously, we've been thinking about this. But top of mind is the field sales consultant is going to have to be capable of delivering information on PPE and the workflow in the practice to ensure that maximum sterility, maximum infection and sepsis control is taking place. That's a lot of work in the initial few meetings between a practitioner and a FSC in the field, also some of our people over the phone. I do think our team will also have to be more adverse -- more versed with financial management because our customers have 1 year or 2 to get through dealing with the bulge in debt that they're going to occur -- that is going to occur as they bring their practices up again. These are areas that our field sales representative working with Henry Schein Financial Services will have to focus on. Then of course, digital dentistry will be big. Then, of course, how Henry Schein One products and Henry Schein One as the most efficient practice management system in place that can help the practitioners with emergence, reemergence into the practice, dealing with demand generation, all the way to website management. These are all areas that our field sales consultants were familiar with and will have to become more familiar with. I would also say that teledentistry not top yet, but has gotten a boost and will become part of this equation. So practice management, financing the practice, understanding these new PPE products and equipment, airway management, all of this will be important in addition to the digitalization of dentistry. I was speaking to our orthodontic people yesterday, and they are working on ways to reduce the number of visits that a patient has to make. These kinds of activities will all become key, and to be sure, they will need a field sales representative to work through these issues with individual dentists and, of course, group practices.

Steven, in terms of the cost structure, you've taken some temporary actions. But on the call, you alluded to leaving the door open for more additional measures if needed. When will you have enough information to make that call? What types of cost actions are on the table or a consideration? And how do you balance wanting to be prepared for a recovery versus one that may be more prolonged of a soft patch?

Sure. It's a good question, Brandon. We took an approach that is very flexible. And on the cost side, we utilized furloughs pretty significantly. And furloughs allow the flexibility where if a person is initially on furlough for, make up a time, 3 months, the company has the option of bringing that person back earlier if the market picks up quicker than expected, or deferring it a bit if the market does not pick up as quickly as expected. Similarly, with certain things like stock buyback, we've suspended our stock buyback program. We probably won't restart that until we're quite sure that the market is back to normal or close to normal. We suspended M&A activities for a similar reason. So no one really knows how quickly things will come back. And whether that come back will be sustained or not because there's a number of pluses and minuses. At least right now, there may be a backlog of patient demand. So that could be a positive. I think the amount of supplies that dentists will need, especially PPE and disinfectant and other type of supplies will be greater per procedure than historically. I think that will continue. But the amount of patients that a dentist can see will be reduced. So that will be an offset going the other way. And also, how quickly will patients feel comfortable in returning to their dentists? That's also something that's unknown at this time. So there's a lot of moving parts. And our plan has a lot of flexibility to address it that we could adjust as time proceeds.

One other thing coming off the first quarter, you know you have a pretty healthy balance sheet. I mean, you put a pause on buybacks. You said you paused M&A. How do you think you can leverage the balance sheet, use the balance sheet, to win back more business?

Well, a number of our customers, it's not that they're necessarily asking for deferred payments, but some of them just can't afford to pay as quickly as they typically do. So we're working with customers on that. We have third-party financing also to allow customers to either finance their past consumable supplies or current equipment purchases. When we do come out of this, we can be aggressive on stock buyback and acquisitions. I would say that right now, the price of some of those acquisitions probably is lower than what it was before COVID-19 just because everything is like that. So I think there's a lot of things that we can do. And remember, no one knows how long this will last. We seem to be in a good position now as the country and other countries are coming back and reopening, as it's so called. But no one knows if there will be another episode of infections and we'll have to pull back a little bit, and this may be a process that goes plus and minus for a little while now. So having that strong balance sheet is important. I also think it will allow us to take up market share because there are some smaller players that probably can't sustain a long-term downturn in the business.

Yes. Brandon, I think it's very important to understand that we are pretty enthusiastic right now with the rate at which practitioners have come back to work. So that's good. But as Steven noted, we have to be prepared for the W [ curve ]. Hopefully, it will never come, but it could come. And it could come in selective markets. So we are fully aware of that, and we are preserving our balance sheet with such a challenge. Obviously, we are also making plans to recommence acquisitions, but we are not actually closing on them now until we march further down the road on our understanding of the public health aspects of this pandemic.

Lastly, in the 2 minutes we have left, you discussed the likelihood of seeing consolidation in the dental landscape as a result now, really accelerated. How do you offset adverse price and mix dynamic there? Are you still able to maintain comparable operating margins relative to independent practitioner and sort of what are the longer-term sort of implications of that change in mix?

Yes, that's a very good question, Brandon. I think we just continue with our programs and our programs contemplate more efficient distribution, a focus on higher-margin products, specifically our own brand manufactured products in the specialty areas, implants, orthodontics, endodontics. By the way, these are all seem be coming back a little bit quicker than we thought. And of course, our focus on value-added services, such as Henry Schein One. I think Henry Schein One will get a significant boost, in particular with our cloud-based software solutions and the various demand generation software tools we have. You take that all into account and what we need to do is continue to execute on our strategy of internal growth, moving towards higher-margin products and related services and at the same time, the specialty businesses and adding acquisition opportunities, which we -- which were very significant before, but are probably going to increase now going forward.

Very good. Well, unfortunately, that's all the time we have, but that was very helpful and insightful. Thank you both for being here, wherever that is, and look forward to speaking again soon.

Thank you, Brandon.

Have a great day, everybody.

Thank you. Bye-bye.