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

All right, guys. We are back live now. So good afternoon, everyone. I think we'll get started here. Hopefully, as many of you know on the call, my name is Jeff Johnson. I'm the Senior Medical Technology Analyst at Baird, and our next presentation this afternoon is from Henry Schein, a leading global distributor of dental and medical supply products. With us today from Schein, we're pleased to have Chairman and Chief Executive Officer Stanley Bergman; Executive Vice President and Chief Financial Officer, Steve Paladino; and Vice President of Investor Relations, Carolynne Borders. Steve, I'll turn it over to you. I think you had a couple of things you wanted to say, and then we'll move right into Q&A.

Sure. Thank you, Jeff, and good afternoon to everyone. As we begin, I just wanted to state that certain comments made during this presentation may include forward-looking statements. And these forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's filings with the SEC including the Risk Factors section as well as the cautionary statements on our Investor Relations site. So with that, I'd like to turn the presentation over to Stanley.

Thank you, Steven. Thank you, Jeff, for hosting us. I'll be very brief, so we can spend most of our time on Q&A. So over the past 2 months or so, 6 weeks, we've seen a significant increase in patient traffic in both dental and medical offices. Of course, back in April, dental offices were essentially out of business, except for emergency need and a significant number of physician offices were down. Patient volume, we believe, is still below pre COVID-19, but recovering quite well. Having said that, we mentioned in our call that business was ahead of last year. Specifically, that on the dental side, we were in the mid-single-digit percentage range growth in July. That growth has continued. We still see quite strong demand for our products. We'll get into more detail later. Medical sales for July experienced solid double-digit growth. The technology value-added side, single-digit percentage decline. But generally, the markets are -- that we are servicing, the office-based dental and medical practitioner markets are recovering. People are going to the practices, and we're seeing, I would say, a disproportionate demand for our products and services ahead of the growth in the practice revenue per se. I believe part of that, of course, is due to demand for PPE. I think we, as a company, have done quite well in procuring PPE, not always easy because of regulatory issues. Lots of product out there. We want to make sure that the product -- at least we want to make sure that the product that we sell is of high quality and regulatory compliant -- reg compliance -- reg compliant. And so we have done a pretty good job in securing product along the way. Same, I think, with tests on the Medical side. So I think it's fair to say we're cautiously optimistic, both on the dental side, Medical side, consumables, equipment, North America, outside of North America. We still believe that our model -- still we believe our model is a good model, that of full service -- providing full service, consumables, equipment sales, service, various kinds of value-added services in the practice management operation arena. These are all high sticky ideas. We've added a significant volume of specialty products to our portfolio in the last decade, all doing quite well, orthodontics, endodontics, oral surgery. And so I think, Jeff, I could speak longer, but I think that's a good place to start taking questions.

Yes. No, that's helpful, Stanley. And obviously, some interesting updates there from you, especially on the August trends. It's what we heard on the dental side from Patterson as well, talking about mid-single digits for them continuing into August. It sounds like you're kind of saying the same. It's interesting. I think some of us do a lot of survey work. I know we've done quite a few surveys here in the last several months. The ADA has continued to do their survey. So in dental, I think we have a good, our arms around volumes in a pretty robust way. And those volumes may be down 15%, if you believe, our survey is a little worse than that, if you believe, ADA, but somewhere in there. Obviously, PPE, as you said, is adding, our map, 10 points or so your growth in North American Dental. I know Steve and I have debated that point a little bit here, but somewhere in that range. Where do you see the difference between maybe your business ex PPE, let's say, it's flat to down a bit versus volumes down 15% to 20%? Is -- can you sustain Dental revenue growth above volume growth over the next few quarters? Or does there have to be a convergence between volumes and revenue over time?

First of all, I would never want to get into a debate between you and Steven. I'm not sure -- it'd be worth watching, by the way, but I wouldn't want to be in that debate. So of course, there is some catch-up. People haven't been to the dentists and the same thing for the physician in a while. I know myself, I'm catching up. And I think that's the case with everyone. So there's some catch-up, there's some PPE. But I think what is going to happen is the gap between what -- between patient volume in 2019 and going forward will narrow. And as that narrows, so there will be more demand for current visits versus catch-up. So I think the catch-up will eventually, I suppose, by definition, catch up in the next months. But then the regular visits will increase. And I think there may be some pressure on the kinds of procedures, perhaps less expensive procedures, look at products like implants, maybe the lower-priced version versus more expensive. But in general, I think we're going to sometime in 2020 be back to more or less the same visits, maybe less billing per visit, but we'll be getting there. And that will require a product. And as the 2 come together, I think we will probably, we're not predicting right now, see a stabilized market in 2021.

Yes. And 2021, then regardless of whether it's a little above or below 2019 levels from a volume and expenditure standpoint from a dental standpoint, I would assume that should be a good base for you to grow off from there. We all seem to be so focused on '21 versus '19. And that should we really be just changing our focus to, hey, '21 is going to be a good baseline, and we can think about your earnings power over the next several years off that kind of normalized baseline in '21?

Yes. We're not -- of course, give you projections now, and I would not want to be predicting because we really don't know whether we're going to have -- we're going to have a W, a second wave or whatever. But all things being equal, I think we should, in my mind, view 2020 as a bit of a lost year from a growth point of view, pick up the pieces from 2019 and grow from there into 2021. I think that's more or less the thinking. And I could tell you from a Henry Schein point of view, most of our key initiatives are back in swing. We did lose 4, 5 months. There's no question about it, maybe 6 months. But our strategies are back again, the areas where we're going to invest in are more or less back again. A little bit of a difference probably in emphasis in one area versus another. But the basic strategy is value-added services advancing some of our own brands, technology. These are the area -- investing in technology. These areas are all back again being focused on. So bar a W, bar a resurgence, I think '21 should be a decent year.

Okay. And are you that confident outside the U.S. as well, Stanley on the Dental side? Or are you seeing anything that changes your view in U.S. versus international?

Generally, I would say that Asia is doing okay. They've weathered the storm to some extent, much better than the rest of the world. So Australia, not that New Zealand is material, they've handled it pretty well. And parts of Europe, certainly, Switzerland, Germany and The Netherlands. I would say, even France have done okay. Spain and Italy, a little bit shaken. Having said that, I was talking to a big investor that's based in Madrid yesterday, Steve was on the call with me, and he said, the newspapers make it sound much worse than it really is in Spain. So I think outside the U.S. is stable. Assuming again, there's no W. And even Brazil, with all its issues, yes, there's some market dynamics and that a couple of our competitors probably didn't have access to credit. But even I would say Brazil is quite stable. And now we're talking about consumables. On the equipment side, there are several areas that practitioners are going to invest in. I think same-day dentistry, less visits to the practice are going to be areas that people are going to invest in. There is some aerosol-type machinery that people are going to invest in. So sitting with you today, I would say I'm quite bullish. Of course, the world can change, markets can change, we can have a deep recession even worse than we have today. But as we're sitting here today, I'm quite optimistic about 2021.

Good. And then I want to come back to a couple of things on Dental including some dental equipment point you just made there, Stanley. But as I said, we feel like we have our arms around kind of the volume picture, at least from a U.S. dental perspective with our survey work, with the ADA work. I'm a little less clear on the Medical side. The double-digit growth there, obviously, getting helped by PPE as well. But where do you think patient visits are? Are they down similar to what we're seeing in Dental, down maybe 10%, 15%, 20%? Or if patient visits in the medical offices that you serve, the IDNs and what have you, have they come back better, worse or about the same as Dental?

Yes. Unfortunately, there's no average Dental and Medical, right, because it depends on which part of medicine you're practicing in. So of course, it depends on which part. But for our basket of providers, I think it's come back. The whole notion of procedures moving out of the acute care setting to the nonacute care setting, whether it's the physician office or the ASC, ambulatory surgical center, I think, got a boost with COVID. If something can be done outside of the acute care setting from an infection control point of view, we've always said, it's safer to do that outside. But I think that COVID magnified that. So I think the movement outside from the acute care setting to the alternate care setting is -- was accelerated. Of course, there is pent-up demand now. People miss the medical appointments. But I'm as optimistic today as ever that the strategy we have in the particular part of the medical market we serve is a good one, essentially devoted to prevention and wellness, which is what our customers are undertaking. In other words, keeping people out of the hospital, treating them outside of the hospital, preventing it from being -- getting sick rather than treating them only when they're sick. So this whole prevention and wellness part that we've been focused on is a good area. And I'm quite optimistic about that part of the business. It's -- we have a great team, arguably one of the best in the industry, if not the best, and they are doing very well. I think back on the Dental side, a lot of customers learn that you need to be affiliated with a well-run company. You maybe get an odd product here or there at a lower price, but you do want to rely on a full-service distributor that has a financial balance sheet that's good and has good services and is reliable.

Okay. That's helpful. And Steven, maybe you and I have talked about this a couple of times in the past, but your updated thoughts on PPE as far as the sustainability of the tailwind, whatever that tailwind is, does pricing come down? I would think as you access more product, there's probably a little more demand on the volume side. It could still grow even from here, but volume is up a little bit, pricing down. Just how do those 2 factors play off each other in the next few quarters? And then the sustainability, I would assume we're always in a new era of using more PPE in these offices, I would think.

Yes. I think that PPE will stay at elevated levels compared to pre COVID for a long time, maybe indefinitely. We've internally talked about an analogy when back in the, I think, early or mid-'80s, when dentists weren't even wearing examination gloves and then there was the HIV scare, and that became a new norm. I think you'll see something similar with facemask and other PPE for dentists and medical offices. The thing that's hard to tell, Jeff, is how much of the current levels are people stockpiling versus for ordinary use. I don't know if we know that really right now. But if you go into any dental or medical office, it's not only the health care providers that are wearing masks and gloves, it's the entire staff, the administrative staff, the front office, every one. And I think that will stay at elevated levels. Pricing was crazy initially because a very high percentage of facemasks were manufactured in China. And for a while China's production was down and then China did not ship outside its own borders for a little while, and that caused a significant supply shortage. But that's starting to come around and pricing is starting to normalize. So I think pricing will come down to more normal levels. But also, I think, it will be a nice tailwind for the industry because I think these levels of PPE will definitely continue.

Okay. I want to ask one more question on the Medical side, and then I've had a couple of questions coming through e-mail as well. But let me ask my Medical question first. Steve, obviously, you talked about the PPE tailwinds [Technical Difficulty] drove that double-digit growth in -- I think it was just in July in your North American Medical business or in your Medical business, but sustainability there, I would assume this is going to be probably one of the biggest flu vaccine years you've seen in a number of years. Is that something that you can titrate around or you can ratchet up or down? Or is your supply your supply? So one, what happens with flu vaccine is a bigger contributor this year in the 3Q and 4Q than most years? And then what about on some of the COVID testing? Is that helping yet some of the Veritor and other testing, is that a contributor at this point? And then I have one more question, but I'll leave it at that for now.

Yes, the COVID testing has been a benefit to our Medical group. It's not a huge benefit, but certainly, we saw a fair amount of COVID tests in Q2 and that continued into Q3. So that should continue. On the other part of your question, which was what Jeff, it's...

I'm trying to remember now, Steve. I think it was flu vaccine.

Yes. I think flu vaccine will be a strong season this year. We are looking at trying to get more supply because we already have locked in prior to this the purchases that we will be getting. So really, getting additional supply will be more on the spot market. But as you probably know, flu and COVID have very similar symptoms. So I think a lot of people will get a flu shot this year. I think it will be a slight uplift for our Medical group because also more and more flu vaccine is being done in pharmacies and other retail outlets. So our core customer will continue to do flu shots. But -- and I think there will be a lift, but I'm not expecting it to be a huge lift at this time.

Okay. That's interesting. On the COVID testing, is there anything -- obviously, there's so many different variations of testing in one company versus another, saliva based or not, and all these different moving parts on testing. Is there anything within your business that inflects higher or lower over the next 1 to 3 to 6 months as far as preference for testing or style of testing or anything, access that you have for one company versus another? Just how to think about how that could change over the next couple of few quarters.