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

Hello, everyone. It's time for our next session, which is Henry Schein. Thanks for joining us. I'm John Kreger. I'm the research analyst here at Blair who covers Schein. I am required to inform you that you can obtain a complete list of research disclosures or potential conflicts of interest at williamblair.com. As we're going to -- the way we're going to handle the next 30 minutes is it will be primarily a fireside chat. If any of you have questions, please send them to me through the chat function, and I will do my best to pass them over to management, time permitting. With us from the company is Stan Bergman, CEO; Steve Paladino, CFO; and Carolynne Borders, Head of IR, is also taking part. Before we jump into remarks, let me turn it over to Steve to provide forward-looking statement commentary. Steve?

Sure. Thank you, John. As we begin, I'd like to state that certain comments made during this call may include forward-looking statements. The company's performance may differ from those expressed in or indicated by such forward-looking statements. So all of these forward-looking statements are qualified by the cautionary statements contained in Henry Schein's SEC filings, as well as certain documents included on the Henry Schein Investor Relations website. So with that, I'd like to turn the call over Stan Bergman for some opening remarks.

Thank you, Steven, and good afternoon from New York. John, it's good to be here with you again. I always love to come to the William Blair conferences. It was our very first conference we went to as a public company 26 years ago. So fond memories. So I think most people that are probably on this call know that Henry Schein is the largest provider of products and related services to office-based dentists and physicians. COVID presented us with a huge challenge, literally, within a few weeks. About 80% of our customers were no longer operating out of their practices. So we pretty quickly adopted a plan. We, of course, had an emergency plan set up, but nothing of this kind of complexity. The first thing we dealt with was the security of our team, family members. The second area we focused on was our customers, and in 2 broad categories: those customers that were closing down their practices; and those customers that were still in business, many of them focused on the front line. So we had to work with them on how to power down the practice and prepare for eventual opening. And the third area we focused on, of course, was the financial stability of the company. Henry Schein has always had a pretty good balance sheet, low leverage. But we decided to undertake a couple of key initiatives. One, to reduce expenses, we furloughed a significant number of the team throughout the world, some receiving government support in different parts of the world and others, unfortunately, were on unemployment. But we maintained benefits throughout this period and have that in place right now. At the same time, we reduced nonessential expenditure, limited or actually eliminated capital expenditure, stock buybacks, M&A. We put on hold all of these temporarily and got to work in focusing on servicing those customers that were in business, dealing with PPE. I'd be happy to talk about that, if there's a question. A significant challenge. We are part of the White House task force dealing with distribution supply assets, 6 of them. The other 5 large health care distributors in the United States have taken a similar kind of work throughout the world and a focus on PPE testing for the areas that we worked on during this period. In our last conference call, investor call, which was in February, we indicated that we expected in the second quarter for our Dental business to be down somewhere around 70% to 80%; our Medical, somewhere 20% to 30%; and our Technology, 30% to 40%. It's not been that bad. I think this is the third investor call conference that we attended in the last few weeks, and we've indicated already to our investors that it's not been as bad. In fact, quite a bit better than we planned for. Of course, the big caution that we have to express is that things are getting much better, I would say. In a significant part of the world, dentists are back in practice, started out of China, Australia, New Zealand, Germany, Austria, The Netherlands, big chunks of the United States. Having said that, we all need to be aware that there could be a W of some form, whether it's small or large, and so we need to make sure that we are ready to sustain any challenges that come our way. At the same time, we've had significantly successful programs in helping our customers get back into business. We can discuss those programs with people who have questions. So John, the business proposition of Henry Schein is very much intact: our strategies, value-added services, efficient distribution, large variety of products under one roof in our markets, the various software programs in place, the specialty programs. Actually, the specialty businesses, in particular, implants and endo, have done okay, come back a little faster than we thought. And so the business model is very much in place. John, if you have questions, we're here to answer them, of course.

Great. Well, that's a great summary, Stan. Thank you very much. Wanted to clarify one thing you just said about a W-type of recovery. We've been pondering that as well. When you say that, are you thinking a W in the context of maybe a second wave, perhaps in the second half of the year, as temperatures get colder? Or are you thinking more about pent-up demand sort of causing a recovery to go quickly initially and then sort of slow down again?

No, no, no. Definitely the first. I don't see that there is some demand right now of customers buying to restock. I wouldn't say that, that is significant because, essentially, we've always had a stockless inventory kind of program for our customers. There's some stocking up with PPE, maybe there wasn't as much available in the first 3 weeks or so of May. There's a little bit more available towards the end of May than there was now. There's quite a bit of more. I'm not talking about that. I'm talking about a significant public health situation. I'm not expecting it per se, but I think when you see the relatively good performance we've had, and we've mentioned this in public settings before, we can tend to be optimistic. And we are optimistic. Having said that, we have to be aware that there could be a recurrence. Having said that, in company -- countries that are ahead of us, we haven't seen anything significant. Australia has even -- really, it's in a steady recovery. China, there have been reported cases, isolated cases in China. I mean, this is all public on the news. And of course, in Germany, it's been pretty good. And I would say, a good indicator to me is what's happened at CAMLOG. In fact, dentists are really back in business. Yes, there of course is a continuation of COVID, but it's not serious. And at the moment, we have not seen any of the W potential effect on the health care side. Having said that, I think it is appropriate for all of us to recognize this could happen.

Great. That's helpful. I'm guessing that as your customers reopen and restart their offices, the PPE demand is going to be much, much higher than precrisis. How is that supply chain holding up? Do you have enough PPE available to satisfy orders?

Well, PPE has been somewhat lumpy. I would say that if I look around and compare what we've done compared to our competitors, it's pretty good. I have to caution one thing, and we've been saying this for a while, there's a lot of product out there that is not necessarily good product, are not in a regulatory -- product that's not conformative to regulatory compliance. I'm not talking about the U.S. only. Yes, this is the case, but throughout the world. So I would say that we had a slight challenge back in April -- into March, April. We were asked by FEMA to take some of our supplies, a big chunk of it, and focus it on the hot spots, hospitals and the like, which we did. It's in the nation's interest. We've done this in a number of markets throughout the world. But at the same time, we've been able to work with a number of our manufacturers throughout the world in replenishing our inventory. Having said that, there are times -- there were times when we didn't have inventory. And the big issue, of course, is the N95s, or the Chinese equivalent, the KN95s. Dentists and physicians largely did not use these products. So this was brand-new to us. So traditional suppliers of our PPE products were not really selling them to us and to dental distributors and the physician distributors. We have found alternative suppliers. We're working on it. There is a bit of a hand to mouth, but there's a bit of product for everyone. We actually worked with the American Medical -- Dental Association to get FEMA to give a small allocation to dentists, and they are doing this now. In fact, going through distribution. It's been sort of handed out from FEMA through the ADA. So there is some shortage, yes, but it's -- we indicated it will be better at the end of May, early June. And it is better, but it's not perfect yet. And we expect the demand, the cost, to increase significantly, but we're not sure exactly. Will it be in KN95s or will it be more in flat masks? And this is going to be a huge issue for our industry to face.

Interesting. Okay. Any other surprises? As we've all learned a lot more about COVID-19, how have your customers reacted? And is it -- was it sort of in a way that was predictable to you? Or does anything really stand out that you would like to call out to us?

Yes. Well, I would say that in early March, it was pretty scary. We were thinking the worst, and yes, because we were -- we're in the hospital. We're not -- we're selling to customers, physicians that are affiliated with hospitals. So it was a pretty scary time. So we planned for really the worst. It was -- and I'm not dealing with people's lives now because it's tragic, what occurred. I'm dealing with the economics. I assume that's the question you're asking. So I would say we were a little bit, maybe a little bit more than a little bit, pleasantly surprised with the fact that our customers hung in and the recovery has been better than we thought. So I would say that, that -- it is a pleasant surprise. The other pleasant surprise is it's really working, having the team, a big chunk of the team work at home. We've had very little challenges from a technical point of view, and it's really worked. And if you had to ask, which I know you're not asking, what is the outcome of one of the lessons that are going to be learned out of COVID is that working at home is going to be an alternative. And so that's something that has been a pleasant surprise. And also, another pleasant surprise is the amount of activity at Henry Schein One relative to demand generation software, staying in touch with patients. That has been very, very interesting, and there's a lot of good activity going on in that area.

That's great. A follow-on to that is, I'm curious, as you get a client, let's say, a dental office that's shut down, as it reopens, what sort of throughput reduction are you seeing? And similarly, in your warehouses, are you seeing a throughput reduction that you're going to have to deal with over the next year or two?

Well, obviously, it is much -- takes much longer to see a patient than in the past because you've got to -- pre-COVID because you would change gloves, mask. But now there's a lot more that practitioners go through much more in the form of infection control than in the past. So that's slowing down the practice. Also, you can't have a lot of people in the waiting room. And you can't have multiple patients sort of next to each other, lined up, for example, in the orthodontic office. So all of this is slowing things down. And I expect that we'll have procedures in place, over time, in the workflow that will deal with this. The other area that practitioners are coming to terms with now is the air flow in the practice. And we, of course, are offering machinery in that regard, whether it's systems that deal with the mechanics in the room or deal with the saliva that may come out of handpiece usage, the whole area of dental hygiene management. All of these are challenges. They are slowing things down. But dentists are now working very, very long hours and so are hygienists. So I mean, we -- obviously, we're not back to normal because big parts of the country have just opened up. And I'm not talking about the U.S. and other parts of the country that have not opened up, and in parts of the world like the U.K. that are virtually closed still, I mean, I think they're coming up in the next few days. So I would say that it's slower to practice dentistry. Dentists are working longer. And we're working our way through infection control in terms of protocol, but also in terms of supplies. So this is taking time. But to answer your first question, I'm far more optimistic today, and I think you can ask Steven for his thoughts, than we were in those very dark days right at the beginning of the COVID crisis.

That's great. For either one of you, what about the warehouses? Can the warehouses operate at roughly the same sort of throughput lines that you were able to do pre-COVID?

I don't think the production of orders is going to be the issue. I will tell you that we did furlough a few more team members than we thought we should. And so for about a week or so, I don't know, about 3 weeks ago, we had -- instead of getting all orders out by 5:00, depending on the area, it's taken us a little longer. But we worked well with our carriers, and we are current. I don't expect this to be an issue at all, not the warehouses. And the systems are working well, computers are working well. Obviously, I think we're going to see more activity on our websites. So that's both exciting but will require investing. And it's one of the areas we are going to invest, we are investing, is to make it just easier to use the website because I think people are going to be far more comfortable doing that. They didn't give many orders to the salespeople, but I think that's going to be a better way going forward than maybe even calling the telecenter. And so it could be interesting. People are going to the website for much more information today than ever.

Great. Steve, how are you handling customer billing? Are you extending terms? Are you seeing any deterioration in collections?

No. Collections have been good. Obviously, not as good as in pre-COVID days but also very good. We've offered a few programs for our customers to access third-party financing for consumables as well as equipment. So we've gotten a lot of take-up on that. On a case-by-case basis, if the customer needs a little bit more time, we're trying to work with them, but we haven't done anything really formal in that respect. So overall, I would say, collections are better than, I think, one would have expected during this time. I'd also say that we've had good success in a lot of our suppliers in getting access to extended payment terms. So it's balancing off a little bit. We're working very diligently to make sure our suppliers know that they absolutely will get paid but to give us a little bit of additional time at this time since we're getting the same from our customers. And I think when you work with the supplier and speak to them, generally, you get positive reaction. And not with everyone, but generally, you get a positive reaction.

Great. Excellent. Changing the subject, what do you guys think of the telemedicine options that have been broadly embraced? A, do you participate in that? And, b, is it a useful solution in dentistry as much as it appears to be in the doctor's office?

John, that's very interesting. Telemedicine has obviously advanced significantly on the medical side. But I would say that, in dentistry, it is now viewed as something that can be used to communicate with patients. So we do have a system. We sold it. But I would expect in the future that dental practices will invest in teledentistry and tie that in to procedures, for example, in the orthodontic field. So there is going to be far greater use and greater acceptability. And I would expect that Henry Schein One systems eventually will just include telemedicine as a standard option.

Okay. That's helpful. What about -- a little bit more broadly, does your long-term strategy change at all? As you kind of think about coming out of the crisis, do you rethink the value-added proposition across Henry Schein?

I think the crisis has really emphasized what is important to us and has -- sorry, what has been important and magnifies our strategy. First of all, digitalization will be critical. Same-day dentistry will be important, very important. So those have been on the dock for a while, and that's going to be magnified. Of course, PPE will be very, very important. Henry Schein played a key role in the late '80s, where it was alleged for the first time that a dentist contracted AIDS from a patient. Then we came out with our manuals on infection control. We got involved in a number of initiatives in infection control, sepsis control. That will continue, and it will be magnified. Of course, we're going to have to adapt to the new kinds of medical science that is going to come out of this, and it's moving fast. So that's going to be important. But efficiency will continue to be something that we'll focus on. Efficient ordering, efficient interface with customers will all be very, very important. And that's a key strategy. Henry Schein One, well, I think our cloud-based system options got a big boost. People really like those systems. They're far more efficient. You can move your computers from the office to home. You can move it around with you. So I think that investment we made in our cloud-based systems will really be important, not only for the small practices, but for the big practices. Digital appointments will be important. The whole flow of the office will be important from a Henry Schein One point of view. Calling, sending a text to a patient saying you can now come up versus just the patient just walking in, digital check-in, all of that is going to be -- these are all tools we had but are now going to be key. And I think that the focus on our specialties will also be important. We have been much more focused on premium products at a lower price point, in our specialties, orthodontics, endodontics, bone regeneration, the whole aligner area, et cetera. High-quality, top-of-the-line, better, competitive pricing, I think these are all going to be important going forward. So I would say our strategy of focusing on distribution, value, digital and Henry Schein One and the areas of specialty will all be important as we navigate going forward.

Good stuff. Okay. What do you think about the trend we've been watching for the last 5 or so years towards consolidation among your customers into these sort of larger chains, PE-owned, many times? Do you think that speeds up or slows down as we come out of the pandemic?

Yes. I think the movement towards mid-sized practices, mid-sized to large, will continue. It's going to be very hard for dentists to operate in a solo practice, given, I think, the investment in technology that is going to now start -- that's got a boost and it's not going to get accelerated. So I think it will continue. But I'm also quite sure that the value of having a relationship with a company like Henry Schein, versus just using a digital supply platform, was greatly appreciated during this time. We were there for our customers. Right now, we're there for our customers as our customers are getting back in practice, as they need to get their equipment ready to go, as they need to quickly upgrade some of the systems in their office, either software or dental chairs, different kinds of air systems. You want to talk to a consultant right now. And so the value of our consultants has really gone up, I think. It was always great, but it's gotten additional focus. So I think that the concept of a value-added service provider in this field has really been understood. I even think that our manufacturers now are saying, "Wow, we are happy to be working with a full-service distributor since they have tools and expertise that we don't." We should focus on manufacturing, coming up with solutions, and our distribution channel should focus on installing those solutions and educating the customers on the use of them.

Great. You mentioned Henry Schein One, I would like -- just like to dig into that a little bit more. A couple of years ago, you did some very interesting moves to sort of, the way we perceived it was, to boost your value-add proposition to your customers. Can you give us a report card on how those moves have worked? And are there more things that you'd like to do over the next few years to continue to boost the offering?

Yes. So John, it's really -- it's 2 years now that we brought together what was the largest installed base of practice management software and electronic medical records in dentistry. That was Henry Schein One. We did have some demand generation software, but we were by no means the largest. Then we merged that with Internet Brands' demand generation software platform, of course, different kinds of ways to communicate with customers, website production for customers, e-claims processing, credit card processing, all the digital parts of dentistry. That has now come together and is moving rapidly towards the cloud. Although we expect that to go faster, but there's still a lot of customers that are not ready for the cloud. But I think, as I said earlier on, that COVID is giving the cloud a boost. This whole program, and particularly around helping practitioners connect with their patients, demand -- what we call demand generation, has gotten magnified, I think, in terms of importance. The venture has come together quite nicely. We are now integrating it even tighter. We had to put together a common management team that is now in place. And the whole area of interfacing between the practice and the patient will be very, very important, and we have the tools to get that done. Of course, our connection with WebMD and the ability to make appointments through WebMD digitally will all be very, very important. So we're quite pleased with this venture, very optimistic, and we expect this to be a big, big creator of shareholder value in the years to come. Maybe, Steven, you have some particular thoughts on how this has all come together financially?

Sure. So it's hard to judge the initial model because of COVID-19, but I would say that we're just as excited on the business plan and the opportunities for Henry Schein One as we were 2 years ago. We think there's just as much opportunities, maybe more, in working closer with the Henry Schein distribution business. The services seem to be even more in demand than back 2 years ago because of COVID-19. Even simple things, John, like we have the technology that will allow patients to wait outside the office, they may be in their car in the parking lot or something, and be notified when it's time for them to come up in the office. So patients won't have to wait in a crowded waiting area, and they'll feel more comfortable with that. So hopefully, that will help also. But ultimately, we feel very good about Henry Schein One. And we got a little bit delayed because of COVID-19, but I think we'll be ahead of where we expected in the next few years.

Excellent. Sounds good. I think we only have about 1 or 2 more minutes. So I'll ask one last one, Stan, to you, which is our view is distribution is at the core of what Henry Schein does and does very well. But you've certainly pivoted to owning more products over the last decade. Just give us, in the next decade, how much farther do you want to take that trend? Do you envision having a significantly larger chunk of revenue or earnings from owned brands longer term?

No. I think owned brands are important, but they're only important where we cannot access what we need, which is high-quality at a competitive price directly from manufacturers. So for example, in the early days, we couldn't access an anesthetic that was of high quality and low price. That was generically. So we invested in the anesthetic business. We didn't need to own that because there was a great partner that came along, and we sold the business. Likewise, dental chairs, we could not get access to a good quality dental chair at a good price, so we made it. We sold it, scanners, all sorts of things like that. Having said that, we have invested significantly in the specialty areas, and that's an area that I don't think we're going to subcontract out. I think we will continue to be very much focused on the oral surgeon from an implant and bone regeneration point of view, the endodontist from the high-quality competitive side, and of course, the orthodontics and particularly the aligners. Having said that, our private brand is a significant brand in dentistry. We will continue to grow it. But we will focus on the branded product probably if we can get a branded manufacturer that will work with us. And we have many categories like that. I do not think, for example, we will be manufacturing dental equipment. For example, imaging machines, chairs, units, lights, same-day dentistry activity, there's plenty out there, we have great suppliers in that area, and we'll work with them. So where there is a need, we will fill it. Where we can work together with manufacturers, we will. There is a significant number among that. Significant. There are several manufacturers that are covering a wide variety of our needs, and we're working very, very closely with those manufacturers. So it's going to be a balance. And the key at the end of the day is to provide high-value product, price and service to our customers. And we want to be the one that provides the integration between the manufacturers and the customer from a device point of view. The total solution, so our customers can rely on us to run their businesses, we take care of the business. That's [ the brand's ] practice.

That's great. Well, we're a minute over. So let's cut it off there. Thank you both for your time. Great to catch up. And thanks to all of you who tuned in. All right. Take care.

Thank you, John.

Thank you.

Thank you.