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

Welcome back to day 1 of our MS Healthcare Conference. My name is Edmund Tu, and I'm on the Lifescience Tools and Diagnostics team here at MS. Before we begin, I would like to read our disclaimer language. Please note that this webcast is for Morgan Stanley clients and appropriate Morgan Stanley employees only. This webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For more important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to our Morgan Stanley sales representative. And with that, I'm very pleased to have the management team of Henry Schein with me today. Please allow me to introduce Stanley Bergman, Chairman and CEO; along with Steven Paladino, Executive VP and CFO. Thank you guys for joining us today. Before I begin, I would like to hand this off to Steven for a comment about their forward-looking statements language and then pass over to Stanley for some brief opening remarks before we begin the Q&A. Steven?

Okay. Thank you, Edmund. As we begin, I'd like to state that certain comments made during this call may include information that is forward-looking. The company's performance may materially differ from those expressed in or indicated by such forward-looking statements and it's important to note that these forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's SEC filings, including the Risk Factors section of such filings as well as on our Investor Relations website. So with that, I'll turn the call over to Stanley, who will give some brief opening remarks.

Thank you, Steven. Thank you, Edmund, for hosting us. Good afternoon, everyone. I will not speak widely at the moment, rather leaving time for Q&A if that's okay. Henry Schein is the largest provider of products and related services to office-based dentists and physicians. We service ambulatory surgical centers, ERG centers, most of the ultimate care area other than the long-term care facility in the drugstore. We have over 1 million customers around the world, 1.5 million physicians, health care practitioners that we serve. We have a wide variety of products, practically all the products that practitioners may need: consumables, equipment, pharmaceuticals, specialty products and equipment. We have a significant business that provides practice management software and related services. And we are committed to what we call a full-service approach where we have field sales representatives in the field that we call consultants. Their job is to help the practitioners, consulting advice on how to actually operate a more efficient practice, so the practice -- practitioners and focus on clinical care. The past 4 months have been quite difficult for Henry Schein, like with most in the economy. In January -- in April, we -- first week of April, we powered down most of our business, 80% of the dentists were not seeing patients. And then in June, we started powering up the business as dentists went back into business of seeing patients. Similar trends in the medical world, about 1/3 of our business is outside of the United States. We experienced similar trends. The trends are just explained in other countries. Having said that, these countries were further downtrend. Countries like China and Germany are more or less back to business pre-2019 levels, not quite there, maybe actually around that number. Some of our businesses like our dental specialty businesses, they're ahead. So basically, it's been a very challenging period, but we feel comfortable with the direction we're heading, actually we're quite optimistic. We're prepared for much worse situation. From a cash management point of view, of course, we reduced our expenses rapidly in anticipation of actually a situation that turned out to be much less of a challenge in the end. And by the first week of October, we expect most of the team that are going to be coming back to be back, practitioners are, by and large back in business. And we also experienced a challenging period with PPE. There's plenty of PPE available but high-quality and regulatory compliance was in shortage. I think we did very well satisfying our customers with PPE as well as with point-of-care tests. We're quite a big player in servicing for the physician market with Phoenix point-of-care testing. And we've done quite well in that area. Of course, we had more access to tests we do better, but we're getting more and more tests each day. So Edmund, those few remarks, happy to -- Steve and I would be happy to answer any questions. You're on mute.

I actually have a bunch of questions flowing in online. But before we get to those, I think given what you just said about the COVID pandemic, from a bigger picture, a higher level, what have you learned through the pandemic? Anything in terms of your value proposition strategy, your go-to-market strategy or even from your cost savings initiatives? Is there anything that you plan on carrying out into the future, even post pandemic?

Well, I think like most companies, if you said -- can be said that what would have taken perhaps months, years and decades from a digitalization to be developed and implemented, got compressed literally in days. And as it relates to us, our website was heavily used. Our practice management systems advanced from a usage point of view to a particular demand generation software. I think it is fair to say that the value of our consultants escalated during this period. Our field sales consultants they were used extensively to help practitioners understand how to power down the practice, preserve cash, out supply for funding and how to bring back the practice when practice is open, and specifically, in connection with infection control, sepsis control, dentists have always had very clear guidance on at -- since the mid-80s for infection control during the early days of HIV and AIDS. And so we're accustomed to working in an infection control environment, but this pandemic resulted in some additional infection control needs, mainly related to aerosol. And so our consultants were significantly brought into practices to consult on these issues in addition to the financial issues of powering down, powering up, the whole way in which the workflow was to take place in the dental office, our people were valued. And generally, I think it's fair to say that the value of our representatives was appreciated to a greater extent during the pandemic period. I think it's also fair to say that the fact that we are financially stable with a significant footprint in supply chain is also valued by our customers during this period. So of course, this is the usual stuff of work from home and the implications of that, which are widely read and known. But I would say the biggest takeaway from the COVID period is greater digitalization, whether it's on our website or the use of same-day dentistry, digital equipment, all the way to the knowledge of our field salesforce was highly appreciated during this period.

I didn't know. That's very helpful color. I'm seeing a lot of questions flow in, in regards to COVID-19 point-of-care testing. When investors can expect an announcement from you guys revolving your COVID vaccine distribution efforts? And similarly, your revenue opportunity from these COVID tests. Any color you can give on this would be very helpful for investors, I believe?

So from the way we understand it, and we are quite close to, I believe, to the vaccine distribution channels in the United States. The government contracted with manufacturers, multiple manufacturers for the manufacturing of the COVID-19 vaccine, and arranged for a distributor to do 3PL work, not distribute the product per se, but to act as distributor the way we would think of it, but to ship the product on behalf of the government on a 3PL basis. That's the initial shipments of whatever vaccines are first to market. The way we understand it, and we've been talking to the major manufacturers, at some point after the initial purchases of product are shipped, the distribution of COVID-19 vaccines will return to the free market. And in that context, we've been talking to -- we're a significant distributor of vaccines, flu and other vaccines to the office-based practitioner. And it's in that context that manufacturers are talking to us about distributing the flu -- the COVID-19 vaccine actually in a similar way to the way in which we distribute the flu vaccine. There are some challenges that are not clear yet. Some vaccines will have to be distributed at a very low temperature; others were normal distribution to the way we distribute vaccines today. We will not necessarily distribute vaccines that have to be stored at very low temperature. Additionally, manufacturers are taking care of that on our behalf, we've been sales agent of those. But these vaccines are going to be distributed under different temperature constraints. And I think once the market has opened up, we expect to distribute the vaccines as we have with all other vaccines in the past.

Got it. And then I think the next most -- sorry for jumping around, but I think the -- this is coming in a lot as well. A lot of investors are asking you about the sustainability of your July sales growth trend discussed on the last earnings call, including the mid-high single digits rental consumable sales? And also a little more color in terms of the trends in your PPE sales in both the dental and the medical end markets. I think the supply constraints are mostly resolved now. But what are your views on the sustainability and durability of this revenue specifically on PPE?

Yes. So it's very hard to give you any one specific view as it relates to the short term. I think for a while, these trends will continue, but it will become more normalized. There's a number of elements in the July numbers that we spoke about. One is, of course, restocking of traditional products. But at the same time, more practices opened up in August. The second is selling PPE products, restocking, but also some of the product that we sold was at a higher price than is likely to be sold in the future. We did, by the way, absorb some of the price increases. We didn't pass those on to the customers because we felt it was our job to ensure that our customers had product. So I think the price is likely to stabilize, come down a bit. But from our point of view, the margins will likely go up as time goes by. But it is hard to tell how much of the product that is non-PPE is related to restocking and how much is related to ongoing trends. I don't know, Steven, if you want to provide any additional thoughts?

Yes. I'm sorry, Stanley. On PPE, I would say that we feel that the levels of PPE will continue at high levels going forward. We think that this level of demand will be new standard of care as we're seeing not only the health care providers, but the entire administrative staff utilizing PPE in the office. And not just mask but gloves, as well as sanitizing, disinfectants and other items. The pricing for PPE in Q2 was really all over the map with some people selling at very high prices to us. We did not pass all of that price increases on to customers. So it was a lower-margin product for us in Q2. But going forward, we would expect margins to be more normalized. So I think those are the additional color items I would add. Again, we think that PPE elevated levels of usage will become standard of care -- will stay standard of care for some time now.

Got it. And have you guys been seeing any, I guess, significant levels of fluctuation in terms of your dental demand in recent weeks?

Well, dental demand has been steadily increasing. So we feel good about that. When we did our projections back in April, all of our projections were significantly lower to where dental demand is right now. In the U.S., the ADA as well as another organization is estimating that procedure demand is probably somewhere in the 70% to 80% range. So it's not quite back to 100% of pre-COVID levels, but it's steadily increasing. Similarly, in Europe and outside of the U.S., and we're also seeing similar levels of increase in procedures. I would say that Europe, for the most part, has been ahead of the U.S. since COVID started earlier in Europe than in the U.S., and the recovery has also been earlier. Same thing is true in China and other markets that we have. So overall, on a global basis, we're seeing the demand increase. I think all practices, for the most part, are open now. They're dealing with the new protocols that slow them down a little bit as far as being able to see the same number of patients in the same period of time. But that efficiency is improving. And also, I think that will translate to higher demand for certain Bi-Tech equipment that can improve practice efficiency. So overall, there's an opportunity in high-tech equipment going forward also.

Sorry, it's getting turned off mute. Sorry, if I missed this part earlier. But back to the dental practices reopening and the constraints on the number of patients they can see in a day, I think they has noted that there could be a potential plateau. Is that something you guys are seeing? And is there a chance that like patients will change their behavior and stop going to the dentist every 6 months and drag that out to maybe a year on?

Well, I don't think people are going to stop going to the dentist. Surprisingly, it's come back a little faster than we anticipated. And the hygienists are seeing patients again, also with higher frequency than we thought. Dentists are trusted, but dentists have been, as I said, in the infection control arena, sepsis control since the mid 80s, and are trusted that from an infection control point of view. I don't think this per se will stop people from going to the dentists, this COVID. I think visits may be muted somewhat because of the recession. But I think it's more economic than the COVID per se. Of course, there will be people that will be concerned. But I think, dentists are essentially feeling comfortable with the volume of business they're getting. As it relates to the number of patients they'll see a day, I think efficiency will start improving. It already has. Number of patients being seen is growing. And I believe workflow will become more efficient, already has. I believe that the aerosol and other infection control equipment will be more readily available. There are very effective systems out there. It's just to shortage them right now. We can sell more than we can get. But I think it is a matter of time before all practices happen. I don't know, Steven, if you have anything more specific?

Yes, I'm not sure I have really a lot more specific than that. No. So what for -- let's keep going.

Great. And can you remind the investors online today that what is your current revenue market share of U.S. physician distribution business?

Steven?